XNAS:FCZA First Citizens Banc Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                         to                     

Commission File Number: 0-25980

 

 

First Citizens Banc Corp

(Exact name of registrant as specified in its charter)

 

 

 

Ohio   34-1558688

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

100 East Water Street, Sandusky, Ohio   44870
(Address of principal executive offices)   (Zip Code)

Registrant's telephone number, including area code: (419) 625-4121

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common Shares, no par value, outstanding at August 13, 2012—7,707,917 shares

 

 

 


Table of Contents

FIRST CITIZENS BANC CORP

Index

 

PART I. Financial Information

  

Item 1. Financial Statements:

  

Consolidated Balance Sheets (Unaudited) June 30, 2012 and December 31, 2011

     3   

Consolidated Statements of Income (Unaudited) Three and six months ended June 30, 2012 and 2011

     4   

Consolidated Comprehensive Income Statements (Unaudited) Three and six months ended June  30, 2012 and 2011

     5   

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited) Six months ended June  30, 2012

     6   

Condensed Consolidated Statement of Cash Flows (Unaudited) Six months ended June 30, 2012 and 2011

     7   

Notes to Interim Consolidated Financial Statements (Unaudited)

     8-35   

Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     36-44   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     45-47   

Item 4. Controls and Procedures

     47-48   

PART II. Other Information

  

Item 1. Legal Proceedings

     49   

Item 1A. Risk Factors

     49   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     49   

Item 3. Defaults Upon Senior Securities

     49   

Item 4. Mine Safety Disclosures [Not Applicable]

     49   

Item 5. Other Information

     49   

Item 6. Exhibits

     49-50   

Signatures

     51   


Table of Contents

Part I – Financial Information

 

ITEM 1. Financial Statements

FIRST CITIZENS BANC CORP

Consolidated Balance Sheets (Unaudited)

(In thousands, except share data)

 

     June 30,
2012
    December 31,
2011
 

ASSETS

    

Cash and due from financial institutions

   $ 54,189      $ 52,127   

Securities available for sale

     211,224        204,633   

Loans held for sale

     899        598   

Loans, net of allowance of $21,931 and $21,257

     752,078        764,011   

Other securities

     15,524        15,388   

Premises and equipment, net

     17,630        17,774   

Accrued interest receivable

     3,712        3,787   

Goodwill

     21,720        21,720   

Other intangibles

     3,603        4,113   

Bank owned life insurance

     18,288        17,963   

Other assets

     10,505        10,863   
  

 

 

   

 

 

 

Total assets

   $ 1,109,372      $ 1,112,977   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits

    

Noninterest-bearing

   $ 187,466      $ 189,382   

Interest-bearing

     709,788        711,864   
  

 

 

   

 

 

 

Total deposits

     897,254        901,246   

Federal Home Loan Bank advances

     50,278        50,295   

Securities sold under agreements to repurchase

     16,110        19,029   

Subordinated debentures

     29,427        29,427   

Accrued expenses and other liabilities

     12,207        10,452   
  

 

 

   

 

 

 

Total liabilities

     1,005,276        1,010,449   
  

 

 

   

 

 

 

SHAREHOLDERS’ EQUITY

    

Preferred stock, no par value, 200,000 shares authorized, 23,184 shares issued

     23,159        23,151   

Common stock, no par value, 20,000,000 shares authorized, 8,455,881 shares issued

     114,447        114,447   

Accumulated deficit

     (16,488     (17,667

Treasury stock, 747,964 shares at cost

     (17,235     (17,235

Accumulated other comprehensive income (loss)

     213        (168
  

 

 

   

 

 

 

Total shareholders’ equity

     104,096        102,528   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,109,372      $ 1,112,977   
  

 

 

   

 

 

 

See notes to interim unaudited consolidated financial statements

 

Page 3


Table of Contents

FIRST CITIZENS BANC CORP

Consolidated Statements of Income (Unaudited)

(In thousands, except per share data)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2012      2011     2012      2011  

Interest and dividend income

          

Loans, including fees

   $ 10,047       $ 10,180      $ 20,437       $ 20,753   

Taxable securities

     1,215         1,448        2,488         2,846   

Tax-exempt securities

     459         405        886         831   

Federal funds sold and other

     36         12        64         28   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest income

     11,757         12,045        23,875         24,458   
  

 

 

    

 

 

   

 

 

    

 

 

 

Interest expense

          

Deposits

     998         1,293        2,061         2,715   

Federal Home Loan Bank advances

     393         396        787         808   

Subordinated debentures

     215         194        427         389   

Other

     5         9        10         21   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest expense

     1,611         1,892        3,285         3,933   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net interest income

     10,146         10,153        20,590         20,525   

Provision for loan losses

     1,465         2,700        3,865         5,700   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net interest income after provision for loan losses

     8,681         7,453        16,725         14,825   
  

 

 

    

 

 

   

 

 

    

 

 

 

Noninterest income

          

Service charges

     1,073         1,089        2,135         2,118   

Net gain on sale of securities

     42         3        40         3   

ATM fees

     439         465        883         898   

Trust fees

     544         520        1,069         1,072   

Bank owned life insurance

     161         170        324         304   

Computer center data processing fees

     71         64        142         133   

Other

     522         215        1,168         666   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total noninterest income

     2,852         2,526        5,761         5,194   
  

 

 

    

 

 

   

 

 

    

 

 

 

Noninterest expense

          

Salaries, wages and benefits

     5,434         4,889        10,396         9,445   

Net occupancy expense

     519         545        1,071         1,179   

Equipment expense

     306         396        604         717   

Contracted data processing

     242         204        459         412   

FDIC Assessment

     251         376        502         731   

State franchise tax

     252         300        505         541   

Professional services

     806         467        1,404         996   

Amortization of intangible assets

     232         291        510         581   

ATM Expense

     138         154        285         298   

Marketing

     192         191        387         383   

Other operating expenses

     2,023         1,670        3,535         3,388   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total noninterest expense

     10,395         9,483        19,658         18,671   
  

 

 

    

 

 

   

 

 

    

 

 

 

Income before taxes

     1,138         496        2,828         1,348   

Income tax expense (benefit)

     202         (27     599         72   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net Income

     936         523        2,229         1,276   

Preferred stock dividends and discount accretion

     294         293        588         587   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income available to common shareholders

   $ 642       $ 230      $ 1,641       $ 689   
  

 

 

    

 

 

   

 

 

    

 

 

 

Earnings per common share, basic and diluted

   $ 0.08       $ 0.03      $ 0.21       $ 0.09   
  

 

 

    

 

 

   

 

 

    

 

 

 

See notes to interim unaudited consolidated financial statements

 

Page 4


Table of Contents

FIRST CITIZENS BANC CORP

Consolidated Comprehensive Income Statements (Unaudited)

(In thousands)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2012     2011     2012     2011  

Net income

   $ 936      $ 523      $ 2,229      $ 1,276   

Unrealized holding gains on available for sale securities

     457        1,173        617        3,324   

Tax effect of unrealized holdings gains on available for sale securities

     (156     (399     (210     (1,130

Reclassification adjustment for gain recognized in income

     (42     (3     (40     (3

Tax effect of reclassification adjustment for gain recognized in income

     14        1        14        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income

     273        772        381        2,192   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 1,209      $ 1,295      $ 2,610      $ 3,468   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to interim unaudited consolidated financial statements

 

Page 5


Table of Contents

FIRST CITIZENS BANC CORP

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)

(In thousands, except share data)

 

     Preferred Stock      Common Stock                  Accumulated
Other
    Total  
     Outstanding             Outstanding             Accumulated     Treasury     Comprehensive     Shareholders’  
     Shares      Amount      Shares      Amount      Deficit     Stock     Income (Loss)     Equity  

Balance, January 1, 2012

     23,184       $ 23,151         7,707,917       $ 114,447       $ (17,667   $ (17,235   $ (168   $ 102,528   

Net Income

     —           —           —           —           2,229        —          —          2,229   

Other Comprehensive income, net of reclassification and tax effect

     —           —           —           —           —          —          381        381   

Accretion of discount on preferred stock

     —           8         —           —           (8     —          —          —     

Cash dividends ($.06 per share)

     —           —           —           —           (462     —          —          (462

Preferred stock dividend

     —           —           —           —           (580     —          —          (580
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2012

     23,184       $ 23,159         7,707,917       $ 114,447       $ (16,488   $ (17,235   $ 213      $ 104,096   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See notes to interim unaudited consolidated financial statements

 

Page 6


Table of Contents

FIRST CITIZENS BANC CORP

Condensed Consolidated Statement of Cash Flows (Unaudited)

(In thousands)

 

    

Six months ended

June 30,

 
     2012     2011  

Net cash from operating activities

   $ 9,229      $ 7,904   
  

 

 

   

 

 

 

Cash flows (used for) provided by investing activities

    

Maturities and calls of securities, available-for-sale

     39,120        30,788   

Purchases of securities, available-for-sale

     (59,169     (49,731

Security sales

     12,982        300   

Redemption of FRB stock

     —          83   

Purchases of FRB stock

     (136     (57

Purchase of bank owned life insurance

     —          (5,000

Net loan (origination) repayment

     7,798        (4,962

Proceeds from sale of OREO properties

     801        508   

Proceeds from sale of property

     6        48   

Purchases of office premises and equipment

     (599     (853
  

 

 

   

 

 

 

Net cash (used for) provided by investing activities

     803        (28,876
  

 

 

   

 

 

 

Cash flows used for financing activities

    

Repayment of FHLB borrowings

     (17     (16

Repayment of long-term FHLB advances

     —          (22,500

Proceeds from long-term FHLB advances

     —          22,500   

Net change in deposits

     (3,992     (12,164

Net change in securities sold under agreements to repurchase

     (2,919     (2,686

Repayment of U. S. Treasury interest-bearing demand note payable

     —          (349

Dividends paid

     (1,042     (579
  

 

 

   

 

 

 

Net cash used for financing activities

     (7,970     (15,794
  

 

 

   

 

 

 

Net change in cash and due from financial institutions

     2,062        (36,766

Cash and cash equivalents at beginning of period

     52,127        79,030   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 54,189      $ 42,264   
  

 

 

   

 

 

 

Cash paid during the period for:

    

Interest

   $ 3,328      $ 3,930   

Income taxes

   $ 300      $ 1,600   

Supplemental cash flow information:

    

Transfer of loans from portfolio to OREO

   $ 144      $ 580   

See notes to interim unaudited consolidated financial statements

 

Page 7


Table of Contents

First Citizens Banc Corp

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

(1) Consolidated Financial Statements

Nature of Operations and Principles of Consolidation: The Consolidated Financial Statements include the accounts of First Citizens Banc Corp (FCBC) and its wholly-owned subsidiaries: The Citizens Banking Company (Citizens), First Citizens Insurance Agency, Inc., and Water Street Properties, Inc. (Water St.). First Citizens Capital LLC (FCC) is wholly-owned by Citizens and holds inter-company debt. The operations of FCC are located in Wilmington, Delaware. First Citizens Investments, Inc. (FCI) is wholly-owned by Citizens and holds and manages Citizens’ securities portfolio. The operations of FCI are located in Wilmington, Delaware. The above companies together are referred to as the “Corporation”. Intercompany balances and transactions are eliminated in consolidation.

The consolidated financial statements have been prepared by the Corporation without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the Corporation’s financial position as of June 30, 2012 and its results of operations and changes in cash flows for the periods ended June 30, 2012 and 2011 have been made. The accompanying Consolidated Financial Statements have been prepared in accordance with instructions of Form 10-Q, and therefore certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been omitted. The results of operations for the period ended June 30, 2012 are not necessarily indicative of the operating results for the full year. Reference is made to the accounting policies of the Corporation described in the notes to the financial statements contained in the Corporation’s 2011 annual report. The Corporation has consistently followed these policies in preparing this Form 10-Q.

The Corporation provides financial services through its offices in the Ohio counties of Erie, Crawford, Champaign, Franklin, Logan, Madison, Summit, Huron, Union, Ottawa, and Richland. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are residential mortgage, commercial, and installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. There are no significant concentrations of loans to any one industry or customer. However, the customers’ ability to repay their loans is dependent on the real estate and general economic conditions in the area. Other financial instruments that potentially represent concentrations of credit risk include deposit accounts in other financial institutions and Federal Funds sold. First Citizens Insurance Agency, Inc. was formed to allow the Corporation to participate in commission revenue generated through its third party insurance agreement. Insurance commission revenue was less than 1.0% of total revenue through June 30, 2012. Water St. revenue was less than 1.0% of total revenue through June 30, 2012. Management considers the Corporation to operate primarily in one reportable segment, banking.

 

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Table of Contents

First Citizens Banc Corp

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

Use of Estimates: To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in financial statements and the disclosures provided, and future results could differ. The allowance for loan losses, impairment of goodwill, fair values of financial instruments, deferred taxes and pension obligations are particularly subject to change.

Income Taxes: Income tax expense is based on the effective tax rate expected to be applicable for the entire year. Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax basis of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation.

Adoption of New Accounting Standards:

In September 2011, the FASB issued ASU 2011-09, Compensation-Retirement Benefits-Multiemployer Plans (Subtopic 715-80): Disclosures about an Employer’s Participation in a Multiemployer Plan. The amendments in this Update will require additional disclosures about an employer’s participation in a multiemployer pension plan to enable users of financial statements to assess the potential cash flow implications relating to an employer’s participation in multiemployer pension plans. The disclosures also will indicate the financial health of all of the significant plans in which the employer participates and assist a financial statement user to access additional information that is available outside the financial statements. For public entities, the amendments in this Update are effective for annual periods for fiscal years ending after December 15, 2011, with early adoption permitted. The amendments should be applied retrospectively for all prior periods presented. This Update is not expected to have a significant impact on the Corporation’s financial statements.

Effect of Newly Issued but Not Yet Effective Accounting Standards:

In December 2011, the FASB issued ASU 2011-10, Property, Plant, and Equipment (Topic 360): Derecognition of in Substance Real Estate-a Scope Clarification. The amendments in this Update affect entities that cease to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary's nonrecourse debt. Under the amendments in this Update, when a parent (reporting entity) ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary's nonrecourse debt, the reporting entity should apply the guidance in Subtopic 360-20 to determine whether it should derecognize the in substance real estate. Generally, a reporting entity would not satisfy the requirements to derecognize the in substance real estate before the legal transfer of the real estate to the lender and the extinguishment of the related nonrecourse indebtedness. That is, even if the reporting entity ceases to have a controlling financial interest under Subtopic 810-10, the reporting entity would continue to include the real estate, debt, and the results of the subsidiary's operations in its consolidated financial statements until legal title to the real estate is transferred to legally satisfy the debt. The amendments in this Update should be applied on a prospective basis to deconsolidation events occurring after the effective date. Prior periods should not be adjusted even if the reporting entity has continuing involvement with previously derecognized in substance real estate entities. For public entities, the amendments in this Update are effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2012. Early adoption is permitted. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

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First Citizens Banc Corp

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The amendments in this Update affect all entities that have financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement. The requirements amend the disclosure requirements on offsetting in Section 210-20-50. This information will enable users of an entity's financial statements to evaluate the effect or potential effect of netting arrangements on an entity's financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments in the scope of this Update. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Corporation is currently evaluating the impact the adoption of the standard will have on the Corporation’s financial position or results of operations.

(2) Securities

The amortized cost and fair market value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:

 

June 30, 2012    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  

U.S. Treasury securities and obligations of U.S. government agencies

   $ 49,192       $ 302       $ (14   $ 49,480   

Obligations of states and political subdivisions

     69,564         6,330         (39     75,855   

Mortgage-backed securities in government sponsored entities

     83,134         2,384         (48     85,470   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities

     201,890         9,016         (101     210,805   

Equity securities in financial institutions

     481         —           (62     419   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 202,371       $ 9,016       $ (163   $ 211,224   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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First Citizens Banc Corp

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

December 31, 2011

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  

U.S. Treasury securities and obligations of U.S. government agencies

   $ 49,305       $ 399       $ —        $ 49,704   

Obligations of states and political subdivisions

     61,508         5,240         (12     66,736   

Mortgage-backed securities in government sponsored entities

     85,063         2,582         (128     87,518   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities

     195,876         8,221         (140     203,957   

Equity securities in financial institutions

     481         195         —          676   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 196,357       $ 8,416       $ (140   $ 204,633   
  

 

 

    

 

 

    

 

 

   

 

 

 

The fair value of securities at June 30, 2012, by contractual maturity, is shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Securities not due at a single maturity date, primarily mortgage-backed securities and equity securities, are shown separately.

 

Available for sale    Amortized Cost      Fair Value  

Due in one year or less

   $ 4,887       $ 4,931   

Due after one year through five years

     17,651         17,787   

Due after five years through ten years

     19,663         20,487   

Due after ten years

     76,555         82,130   

Mortgage-backed securities

     83,134         85,470   

Equity securities

     481         419   
  

 

 

    

 

 

 

Total securities available for sale

   $ 202,371       $ 211,224   
  

 

 

    

 

 

 

Proceeds from the sale of securities were $12,982 for the six-month period ended June 30, 2012. Included in those sales were gross gains of $99 and gross losses of $59. Proceeds from the sale of securities for the six-month period ended June 30, 2011 were $300. There were no gains or losses on the sales during the period ended June 30, 2011. Gains from securities called or settled by the issuer were $3 during the six-month period ended June 30, 2011. Proceeds from the sale of securities during the quarter ended June 30, 2012 were $7,610. Included in those sales were gross gains of $67 and gross losses of $25. No securities were sold during the quarter ended June 30, 2011. Gains from securities called or settled by the issuer were $3 during the quarter ended June 30, 2011.

Securities were pledged to secure public deposits, other deposits and liabilities as required by law. The carrying value of pledged securities was approximately $151,116 and $156,114 as of June 30, 2012 and December 31, 2011, respectively.

 

Page 11


Table of Contents

First Citizens Banc Corp

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

Securities with unrealized losses at June 30, 2012 and December 31, 2011 not recognized in income are as follows:

 

June 30, 2012

  

12 Months or less

   

More than 12 months

   

Total

 

Description of Securities

   Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
 

U.S. Treasury securities and obligations of U.S. government agencies

   $ 7,321       $ (14   $ —         $ —        $ 7,321       $ (14

Obligations of states and political subdivisions

     3,522         (37     482         (2     4,004         (39

Mortgage-backed securities in gov’t sponsored entities

     11,774         (48     —           —          11,774         (48

Equity securities

     481         (62     —           —          481         (62
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired

   $ 23,098       $ (161   $ 482       $ (2   $ 23,580       $ (163
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

December 31, 2011

  

12 Months or less

   

More than 12 months

   

Total

 
     Fair      Unrealized     Fair      Unrealized     Fair      Unrealized  

Description of Securities

   Value      Loss     Value      Loss     Value      Loss  

Obligations of states and political subdivisions

   $ 1,309       $ (10   $ 160       $ (2   $ 1,469       $ (12

Mortgage-backed securities in gov’t sponsored entities

     20,915         (128     —           —          20,915         (128
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired

   $ 22,224       $ (138   $ 160       $ (2   $ 22,384       $ (140
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

At June 30, 2012 there are twenty-four securities in the portfolio with unrealized losses. Unrealized losses on securities have not been recognized into income because the issuers’ securities are of high credit quality, management has the intent and ability to hold these securities for the foreseeable future, and the decline in fair value is largely due to market yields increasing across the municipal sector partly due to higher risk premiums associated with municipal insurers. The fair value is expected to recover as the securities approach their maturity date or reset date. The Corporation does not intend to sell until recovery and does not believe selling will be required before recovery.

 

Page 12


Table of Contents

First Citizens Banc Corp

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

(3) Loans

Loan balances were as follows:

 

     June 30,     December 31,  
     2012     2011  

Commercial and agriculture

   $ 78,060      $ 86,395   

Commercial real estate

     388,898        371,852   

Real estate – mortgage

     254,479        274,995   

Real estate – construction

     42,326        39,790   

Consumer

     10,246        12,236   
  

 

 

   

 

 

 

Total loans

     774,009        785,268   

Allowance for loan losses

     (21,931     (21,257
  

 

 

   

 

 

 

Net loans

   $ 752,078      $ 764,011   
  

 

 

   

 

 

 

(4) Allowance for Loan Losses

Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan losses, the Corporation has segmented certain loans in the portfolio by product type. Loans are segmented into the following pools: Commercial and Agricultural loans, Commercial Real Estate loans, Real Estate Mortgage loans, Real Estate Construction loans and Consumer loans. Historical loss percentages for each risk category are calculated and used as the basis for calculating loan loss allowance allocations. These historical loss percentages are calculated over a three-year period for all portfolio segments. Certain economic factors are also considered for trends which management uses to establish the directionality of changes to the unallocated portion of the reserve. The following economic factors are analyzed:

 

   

Changes in lending policies and procedures

 

   

Changes in experience and depth of lending and management staff

 

   

Changes in quality of Bank’s credit review system

 

   

Changes in nature and volume of the loan portfolio

 

   

Changes in past due, classified and nonaccrual loans and TDRs

 

   

Changes in economic and business conditions

 

   

Changes in competition or legal and regulatory requirements

 

   

Changes in concentrations within the loan portfolio

 

   

Changes in the underlying collateral for collateral dependent loans

 

Page 13


Table of Contents

First Citizens Banc Corp

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

The total allowance reflects management's estimate of loan losses inherent in the loan portfolio at the balance sheet date. The Corporation considers the allowance for loan losses of $21,931 adequate to cover loan losses inherent in the loan portfolio, at June 30, 2012. The following tables present by portfolio segment, the changes in the allowance for loan losses and the loan balances outstanding for the period ended June 30, 2012 and December 31, 2011. The allowance for Real Estate Construction loans was reduced not only by charge-offs, but also due to a decrease in both the loan balances outstanding and the historical charge-offs for this type. The net result of these changes was a reduction in the allowance for this loan type and is represented as a decrease in the provision. The allowance for consumer loans was reduced not only by charge-offs, but also due to a decrease in both the loan balances outstanding and the historical charge-offs for this type. The allowance related to the unallocated segment was also reduced.

 

     Commercial     Commercial     Residential     Real Estate                    
     & Agriculture     Real Estate     Real Estate     Construction     Consumer     Unallocated     Total  

For the six months ending June 30, 2012

              

Allowance for loan losses:

              

Beginning balance

   $ 2,876      $ 10,571      $ 5,796      $ 974      $ 719      $ 321      $ 21,257   

Charge-offs

     (418     (1,639     (1,469     (105     (125     —          (3,756

Recoveries

     100        175        161        113        16        —          565   

Provision

     (21     2,594        1,891        113        (348     (364     3,865   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 2,537      $ 11,701      $ 6,379      $ 1,095      $ 262      $ (43   $ 21,931   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Commercial     Commercial     Residential     Real Estate                    
     & Agriculture     Real Estate     Real Estate     Construction     Consumer     Unallocated     Total  

For the six months ending June 30, 2011

              

Allowance for loan losses:

              

Beginning balance

   $ 3,639      $ 9,827      $ 4,569      $ 2,139      $ 726      $ 868      $ 21,768   

Charge-offs

     (908     (2,216     (2,423     (778     (109     —          (6,434

Recoveries

     173        133        109        250        50        —          715   

Provision

     (83     2,969        3,929        (415     3        (703     5,700   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 2,821      $ 10,713      $ 6,184      $ 1,196      $ 670      $ 165      $ 21,749   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Page 14


Table of Contents

First Citizens Banc Corp

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

     Commercial     Commercial     Residential     Real Estate                     
     & Agriculture     Real Estate     Real Estate     Construction      Consumer     Unallocated     Total  

For the three months ending June 30, 2012

               

Allowance for loan losses:

               

Beginning balance

   $ 3,042      $ 10,970      $ 6,257      $ 857       $ 603      $ 295      $ 22,024   

Charge-offs

     (286     (863     (703     —           (81     —          (1,933

Recoveries

     65        151        109        52         (2     —          375   

Provision

     (284     1,443        716        186         (258     (338     1,465   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 2,537      $ 11,701      $ 6,379      $ 1,095       $ 262      $ (43   $ 21,931   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

     Commercial     Commercial     Residential     Real Estate                     
     & Agriculture     Real Estate     Real Estate     Construction     Consumer     Unallocated      Total  

For the three months ending June 30, 2011

               

Allowance for loan losses:

               

Beginning balance

   $ 3,509      $ 11,680      $ 5,971      $ 1,712      $ 690      $ 94       $ 23,656   

Charge-offs

     (724     (2,086     (1,711     (529     (38     —           (5,088

Recoveries

     119        66        23        250        23        —           481   

Provision

     (83     1,053        1,901        (237     (5     71         2,700   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending Balance

   $ 2,821      $ 10,713      $ 6,184      $ 1,196      $ 670      $ 165       $ 21,749   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

Page 15


Table of Contents

First Citizens Banc Corp

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

     Commercial
& Agriculture
     Commercial
Real Estate
     Residential
Real Estate
     Real Estate
Construction
     Consumer      Unallocated     Total  

June 30, 2012

                   

Allowance for loan losses:

                   

Ending balance:

                   

Individually evaluated for impairment

   $ 264       $ 3,092       $ 953       $ 74       $ 44       $ —        $ 4,427   

Ending balance:

                   

Collectively evaluated for impairment

   $ 2,273       $ 8,609       $ 5,426       $ 1,021       $ 218       $ (43   $ 17,504   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Ending Balance

   $ 2,537       $ 11,701       $ 6,379       $ 1,095       $ 262       $ (43   $ 21,931   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Loan balances outstanding:

                   

Ending balance:

                   

Individually evaluated for impairment

   $ 5,182       $ 15,570       $ 3,698       $ 331       $ 46         $ 24,827   

Ending balance:

                   

Collectively evaluated for impairment

   $ 72,878       $ 373,328       $ 250,781       $ 41,995       $ 10,200         $ 749,182   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

 

Ending Balance

   $ 78,060       $ 388,898       $ 254,479       $ 42,326       $ 10,246         $ 774,009   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

 

 

Page 16


Table of Contents

First Citizens Banc Corp

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

     Commercial
& Agriculture
     Commercial
Real Estate
     Residential
Real Estate
     Real Estate
Construction
     Consumer      Unallocated      Total  

December 31, 2011

                    

Allowance for loan losses:

                    

Ending balance:

                    

Individually evaluated for impairment

   $ 618       $ 3,094       $ 860       $ 239       $ —         $ —         $ 4,811   

Ending balance:

                    

Collectively evaluated for impairment

   $ 2,258       $ 7,477       $ 4,936       $ 735       $ 719       $ 321       $ 16,446   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance

   $ 2,876       $ 10,571       $ 5,796       $ 974       $ 719       $ 321       $ 21,257   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loan balances outstanding:

                    

Ending balance:

                    

Individually evaluated for impairment

   $ 5,258       $ 17,700       $ 3,846       $ 576       $ —            $ 27,380   

Ending balance:

                    

Collectively evaluated for impairment

   $ 81,137       $ 354,152       $ 271,149       $ 39,214       $ 12,236          $ 757,888   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Ending Balance

   $ 86,395       $ 371,852       $ 274,995       $ 39,790       $ 12,236          $ 785,268   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

 

Page 17


Table of Contents

First Citizens Banc Corp

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

The following table represents credit exposures by internally assigned grades for the period ended June 30, 2012 and December 31, 2011. The grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. Residential real estate loans with an internal credit risk grade include commercial loans that are secured by conventional 1-4 family residential properties. Real estate construction loans with an internal credit risk grade include commercial construction, land development and other land loans. The Corporation's internal credit risk grading system is based on experiences with similarly graded loans.

The Corporation’s internally assigned grades are as follows:

 

   

Pass – loans which are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral.

 

   

Special Mention – loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected.

 

   

Substandard – loans that have a well-defined weakness based on objective evidence and are characterized by the distinct possibility that Citizens will sustain some loss if the deficiencies are not corrected.

 

   

Doubtful – loans classified as doubtful have all the weaknesses inherent in a substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.

 

   

Loss – loans classified as a loss are considered uncollectible, or of such value that continuance as an asset is not warranted.

 

   

Unrated – Generally, consumer loans are not risk-graded, except when collateral is used for a business purpose.

 

June 30, 2012    Commercial
& Agriculture
     Commercial
Real Estate
     Residential
Real Estate
     Real Estate
Construction
     Consumer      Total  

Pass

   $ 68,583       $ 340,403       $ 88,941       $ 36,516       $ 773       $ 535,216   

Special Mention

     3,392         14,404         2,933         687         —           21,416   

Substandard

     6,085         34,091         13,350         2,559         11         56,096   

Doubtful

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance

   $ 78,060       $ 388,898       $ 105,224       $ 39,762       $ 784       $ 612,728   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2011    Commercial
& Agriculture
     Commercial
Real Estate
     Residential
Real Estate
     Real Estate
Construction
     Consumer      Total  

Pass

   $ 73,011       $ 319,084       $ 92,577       $ 31,697       $ 2,208       $ 518,577   

Special Mention

     4,358         15,321         5,071         702         —           25,452   

Substandard

     9,026         37,447         17,764         5,067         —           69,304   

Doubtful

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance

   $ 86,395       $ 371,852       $ 115,412       $ 37,466       $ 2,208       $ 613,333   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 18


Table of Contents

First Citizens Banc Corp

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

The following tables present performing and nonperforming loans based solely on payment activity for the period ended June 30, 2012 and December 31, 2011 that have not been assigned an internal risk grade. Payment activity is reviewed by management on a monthly basis to determine how loans are performing. Loans are considered to be nonperforming when they become 90 days past due. Nonperforming loans also include certain loans that have been modified in Troubled Debt Restructurings (TDRs) where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Corporation's loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower's sustained repayment performance for a reasonable period, generally six months.

 

     Residential
Real Estate
     Real Estate
Construction
     Consumer      Total  

June 30, 2012

           

Performing

   $ 148,623       $ 2,564       $ 9,442       $ 160,629   

Nonperforming

     632         —           20         652   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 149,255       $ 2,564       $ 9,462       $ 161,281   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Residential
Real Estate
     Real Estate
Construction
     Consumer      Total  

December 31, 2011

           

Performing

   $ 159,291       $ 2,324       $ 10,027       $ 171,642   

Nonperforming

     292         —           1         293   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 159,583       $ 2,324       $ 10,028       $ 171,935   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 19


Table of Contents

First Citizens Banc Corp

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

The following table includes an aging analysis of the recorded investment of past due loans outstanding as of June 30, 2012 and December 31, 2011.

 

                                               Past Due  
     30-59      60-89                                  90 Days  
     Days      Days      90 Days or      Total Past                    and  
June 30, 2012    Past Due      Past Due      Greater      Due      Current      Total Loans      Accruing  

Commericial & Agriculture

   $ 114       $ 153       $ 619       $ 886       $ 77,174       $ 78,060       $ 239   

Commercial Real Estate

     3,851         2,344         10,099         16,294         372,604         388,898         —     

Residential Real Estate

     2,385         1,328         5,262         8,975         245,504         254,479         20   

Real Estate Construction

     —           628         382         1,010         41,316         42,326         —     

Consumer

     126         38         20         184         10,062         10,246         20   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,476       $ 4,491       $ 16,382       $ 27,349       $ 746,660       $ 774,009       $ 279   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

                                               Past Due  
     30-59      60-89                                  90 Days  
     Days      Days      90 Days or      Total Past                    and  
December 31, 2011    Past Due      Past Due      Greater      Due      Current      Total Loans      Accruing  

Commericial & Agriculture

   $ 229       $ 174       $ 509       $ 912       $ 85,483       $ 86,395       $ 19   

Commercial Real Estate

     4,156         1,369         9,466         14,991         356,861         371,852         737   

Residential Real Estate

     3,614         1,182         6,504         11,300         263,695         274,995         511   

Real Estate Construction

     —           —           45         45         39,745         39,790         45   

Consumer

     89         16         2         107         12,129         12,236         2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,088       $ 2,741       $ 16,526       $ 27,355       $ 757,913       $ 785,268       $ 1,314   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 20


Table of Contents

First Citizens Banc Corp

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

Nonaccrual Loans: Loans are considered for nonaccrual status upon reaching 90 days delinquency, unless the loan is well secured and in the process of collection, although the Corporation may be receiving partial payments of interest and partial repayments of principal on such loans. When a loan is placed on nonaccrual status, previously accrued but unpaid interest is deducted from interest income.

The following table presents loans on nonaccrual status as of June 30, 2012 and December 31, 2011.

 

     June 30, 2012      December 31, 2011  

Commericial & Agriculture

   $ 576       $ 940   

Commercial Real Estate

     15,287         15,346   

Residential Real Estate

     10,668         8,915   

Real Estate Construction

     610         567   

Consumer

     11         —     
  

 

 

    

 

 

 

Total

   $ 27,152       $ 25,768   
  

 

 

    

 

 

 

 

Page 21


Table of Contents

First Citizens Banc Corp

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

Loan modifications that are considered troubled debt restructurings completed during the quarter and six month periods ended June 30, 2012 were as follows:

 

     For the Quarter Ended June 30, 2012  
     Number
of
Contracts
     Pre-
Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
 

Commericial & Agriculture

     1       $ 442       $ 442   

Commercial Real Estate

     —           —           —     

Residential Real Estate

     15         865         786   

Real Estate Construction

     —           —           —     

Consumer

     4         46         46   
  

 

 

    

 

 

    

 

 

 

Total Loan Modifications

     20       $ 1,353       $ 1,274   
  

 

 

    

 

 

    

 

 

 

 

     For the Six-Month Period Ended June 30, 2012  
     Number
of
Contracts
     Pre-
Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
 

Commericial & Agriculture

     4       $ 487       $ 479   

Commercial Real Estate

     3         1,206         1,206   

Residential Real Estate

     20         865         786   

Real Estate Construction

     —           —           —     

Consumer

     4         46         46   
  

 

 

    

 

 

    

 

 

 

Total Loan Modifications

     31       $ 2,604       $ 2,517   
  

 

 

    

 

 

    

 

 

 

Recidivism, or the borrower defaulting on its obligation pursuant to a modified loan, results in the loan once again becoming a non-accrual loan. Recidivism occurs at a notably higher rate than do defaults on new origination loans, so modified loans present a higher risk of loss than do new origination loans.

During the six-month period ended June 30, 2012, there were no defaults on any loans which were modified and considered TDRs during the twelve months previous to June 30, 2012.

 

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Table of Contents

First Citizens Banc Corp

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

Impaired Loans: Larger (greater than $350) commercial loans and commercial real estate loans, many of which are 60 days or more past due, are tested for impairment. These loans are analyzed to determine if it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance.

The following tables include the recorded investment and unpaid principal balances for impaired financing receivables with the associated allowance amount, if applicable, as of June 30, 2012 and December 31, 2011.

 

June 30, 2012

   Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

              

Commericial & Agriculture

   $ 4,907       $ 6,716       $ —         $ 4,102       $ 176   

Commercial Real Estate

     3,553         6,716         —           6,167         409   

Residential Real Estate

     1,259         1,694         —           1,849         124   

Real Estate Construction

     —           37         —           78         2   

Consumer and Other

     2         2         —           1         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     9,721         15,165         —           12,197         711   

With an allowance recorded:

              

Commericial & Agriculture

   $ 276       $ 286       $ 264       $ 270       $ 4   

Commercial Real Estate

     12,017         12,900         3,092         10,665         294   

Residential Real Estate

     2,438         3,670         953         2,161         121   

Real Estate Construction

     331         859         74         336         —     

Consumer and Other

     44         44         44         15         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     15,106         17,759         4,427         13,447         419   

Total:

              

Commericial & Agriculture

   $ 5,183       $ 7,002       $ 264       $ 4,372       $ 180   

Commercial Real Estate

     15,570         19,616         3,092         16,832         703   

Residential Real Estate

     3,697         5,364         953         4,010         245   

Real Estate Construction

     331         896         74         414         2   

Consumer and Other

     46         46         44         16         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     24,827         32,924         4,427         25,644         1,130   

 

Page 23


Table of Contents

First Citizens Banc Corp

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

December 31, 2011

   Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

              

Commericial & Agriculture

   $ 2,914       $ 3,010       $ —         $ 1,892       $ 217   

Commercial Real Estate

     3,804         4,739         —           3,678         343   

Residential Real Estate

     862         953         —           1,468         60   

Real Estate Construction

     —           —           —           914         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     7,580         8,702         —           7,952         620   

With an allowance recorded:

              

Commericial & Agriculture

   $ 2,344       $ 3,645       $ 618       $ 2,822       $ 264   

Commercial Real Estate

     13,896         16,534         3,094         9,851         925   

Residential Real Estate

     2,984         4,127         860         2,283         202   

Real Estate Construction

     576         1,103         239         448         17   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     19,800         25,409         4,811         15,404         1,408   

Total:

              

Commericial & Agriculture

   $ 5,258       $ 6,655       $ 618       $ 4,714       $ 481   

Commercial Real Estate

     17,700         21,273         3,094         13,529         1,268   

Residential Real Estate

     3,846         5,080         860         3,751         262   

Real Estate Construction

     576         1,103         239         1,362         17   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     27,380         34,111         4,811         23,356         2,028   

 

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Table of Contents

First Citizens Banc Corp

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

(5) Earnings per Common Share

Basic earnings per share are net income available to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share include the dilutive effect, if any, of additional potential common shares issuable under stock options, computed using the treasury stock method.

 

     Three months ended June 30,      Six months ended June 30,  
     2012      2011      2012      2011  

Basic

           

Net income

   $ 936       $ 523       $ 2,229       $ 1,276   

Preferred stock dividends and discount accretion

     294         293         588         587   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to common shareholders

   $ 642       $ 230       $ 1,641       $ 689   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding

     7,707,917         7,707,917         7,707,917         7,707,917   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per common share

   $ 0.08       $ 0.03       $ 0.21       $ 0.09   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

           

Net income

   $ 936       $ 523       $ 2,229       $ 1,276   

Preferred stock dividends and discount accretion

     294         293         588         587   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to common shareholders

   $ 642       $ 230       $ 1,641       $ 689   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding for basic earnings per common share

     7,707,917         7,707,917         7,707,917         7,707,917   

Add: Dilutive effects of assumed exercises of stock options and warrants

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Average shares and dilutive potential common shares outstanding

     7,707,917         7,707,917         7,707,917         7,707,917   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per common share

   $ 0.08       $ 0.03       $ 0.21       $ 0.09   
  

 

 

    

 

 

    

 

 

    

 

 

 

Stock options for 29,500 common shares that have a price range of $20.50 to $35 and warrants for 469,312 common shares that have a price of $7.41 were not considered in computing diluted earnings per common share for the six-month periods ended June 30, 2012 and June 30, 2011 because they were anti-dilutive.

 

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Table of Contents

First Citizens Banc Corp

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

(6) Commitments, Contingencies and Off-Balance Sheet Risk

Some financial instruments, such as loan commitments, credit lines, letters of credit and overdraft protection are issued to meet customers’ financing needs. These are agreements to provide credit or to support the credit of others, as long as the conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk of credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of commitment. The contractual amount of financial instruments with off-balance-sheet risk was as follows for June 30, 2012 and December 31, 2011:

 

     Contract Amount  
     June 30, 2012      December 31, 2011  
     Fixed      Variable      Fixed      Variable  
     Rate      Rate      Rate      Rate  

Commitment to extend credit:

           

Lines of credit and construction loans

   $ 10,110       $ 112,745       $ 6,913       $ 111,710   

Overdraft protection

     1,309         17,940         1,320         17,828   

Letters of credit

     200         431         200         424   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 11,619       $ 131,116       $ 8,433       $ 129,962   
  

 

 

    

 

 

    

 

 

    

 

 

 

Commitments to make loans are generally made for a period of one year or less. Fixed rate loan commitments included in the table above had interest rates ranging from 2.25% to 15.0% at June 30, 2012 and December 31, 2011, respectively. Maturities extend up to 30 years.

Citizens is required to maintain certain reserve balances on hand in accordance with the Federal Reserve Board requirements. The average reserve balance maintained in accordance with such requirements was $1,112 on June 30, 2012 and $998 on December 31, 2011.

 

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Table of Contents

First Citizens Banc Corp

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

(7) Pension Information

Net periodic pension expense was as follows:

 

     Three months ended
June 30
    Six months ended
June 30
 
     2012     2011     2012     2011  

Service cost

   $ 235      $ 211      $ 470      $ 423   

Interest cost

     229        204        458        408   

Expected return on plan assets

     (215     (207     (229     (414

Other components

     90        86        180        172   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

   $ 339      $ 294      $ 879      $ 589   
  

 

 

   

 

 

   

 

 

   

 

 

 

The total amount of contributions expected to be paid by the Corporation in 2012 total $1,355, compared to $1,152 in 2011.

(8) Stock Options

Options to buy stock could be granted to directors, officers and employees under the Corporation’s Stock Option and Stock Appreciation Rights Plan, which provided for issue of up to 225,000 options. The exercise price of stock options is determined based on the market price of the Corporation’s common shares at the date of grant. The maximum option term is ten years, and options normally vest after three years.

The Corporation did not grant any stock options during the first six months of 2012 or 2011, nor did any stock options become vested during the first six months of 2012 or 2011. The Corporation’s Stock Option and Stock Appreciation Rights Plan expired in 2010, and no further stock options or other awards may be granted by the Corporation under such plan.

 

Page 27


Table of Contents

First Citizens Banc Corp

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

A summary of the activity in the plan is as follows:

 

     Six months ended
June 30, 2012
     Six months ended
June 30, 2011
 
     Total options
outstanding
     Total options
outstanding
 
            Weighted             Weighted  
            Average             Average  
            Price             Price  
     Shares      Per Share      Shares      Per Share  

Outstanding at beginning of year

     29,500       $ 25.42         29,500       $ 25.42   

Granted

     —           —           —           —     

Exercised

     —           —           —           —     

Forfeited

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Options outstanding, end of period

     29,500       $ 25.42         29,500       $ 25.42   
  

 

 

    

 

 

    

 

 

    

 

 

 

Options exercisable, end of period

     29,500       $ 25.42         29,500       $ 25.42   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table details stock options outstanding:

 

     Outstanding Options  
            Weighted         
            Average      Weighted  
            Remaining      Average  
            Contractual      Exercise  

Exercise price

   Number      Life      Price  

$20.50

     19,500         0 mos.       $ 20.50   

$35.00

     10,000         9.5 mos.         35.00   
  

 

 

       

 

 

 

Outstanding at quarter-end

     29,500         3 mos.       $ 25.42   
  

 

 

       

 

 

 

The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the market price of our common shares as of the reporting date. As of June 30, 2012 and December 31, 2011, the aggregate intrinsic value of outstanding stock options was $0. A total of 19,500 stock options with an exercise price of $20.50 will expire on July 2, 2012.

 

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Table of Contents

First Citizens Banc Corp

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

(9) Fair Value Measurement

The Corporation uses a fair value hierarchy to measure fair value. The topic describes three levels of inputs that may be used to measure fair value. Level 1: Quoted prices for identical assets in active markets that are identifiable on the measurement date; Level 2: Significant other observable inputs, such as quoted prices for similar assets, quoted prices in markets that are not active and other inputs that are observable or can be corroborated by observable market data; Level 3: Significant unobservable inputs that reflect the Corporation’s own view about the assumptions that market participants would use in pricing an asset.

Securities: The fair values of securities available for sale are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). Management uses significant unobservable inputs to determine the fair value of one security (Level 3 inputs). These inputs include appraised values of the underlying collateral and estimated costs to sell the collateral. The value of the collateral has been discounted to represent the value in a distressed sale situation.

Equity securities: The Corporation’s equity securities are not actively traded in an open market. The fair values of these equity securities available for sale are determined by using market data inputs for similar securities that are observable. (Level 2 inputs).

Impaired loans: The fair values of impaired loans are determined using the fair values of collateral for collateral dependent loans, or discounted cash flows. The Corporation uses independent appraisals, discounted cash flow models and other available data to estimate the fair value of collateral (Level 3 inputs).

Other real estate owned: The fair value of other real estate owned is determined using the fair value of collateral. The Corporation uses appraisals and other available data to estimate the fair value of collateral (Level 3 inputs). The appraised values are discounted to represent an estimated value in a distressed sale. Additionally, estimated costs to sell the property are used to further adjust the value.

 

Page 29


Table of Contents

First Citizens Banc Corp

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

Assets measured at fair value are summarized below.

 

     Fair Value Measurements at June 30, 2012 Using:  
Assets:    Quoted Prices in
Active Markets for
Identical Assets
     Significant Other
Observable Inputs
     Significant
Unobservable
Inputs
 
     (Level 1)      (Level 2)      (Level 3)  

Assets measured at fair value on a recurring basis:

        

U.S. Treasury securities and obligations of U.S. Government agencies

   $ —         $ 49,480       $ —     

Obligations of states and political subdivisions

     —           75,370         485   

Mortgage-backed securities in government sponsored entities

     —           85,470         —     

Equity securities in financial institutions

     —           419         —     

Assets measured at fair value on a nonrecurring basis:

        

Impaired loans

   $ —         $ —         $ 20,400   

Other real estate owned

     —           —           494   

 

     Fair Value Measurements at December 31, 2011 Using:  
Assets:    Quoted Prices in
Active Markets for
Identical Assets
     Significant Other
Observable Inputs
     Significant
Unobservable
Inputs
 
     (Level 1)      (Level 2)      (Level 3)  

Assets measured at fair value on a recurring basis:

        

U.S. Treasury securities and obligations of U.S. Government agencies

   $ —         $ 49,704       $ —     

Obligations of states and political subdivisions

     —           66,219         517   

Mortgage-backed securities in government sponsored entities

     —           87,518         —     

Equity securities in financial institutions

     676         —           —     

Assets measured at fair value on a nonrecurring basis:

        

Impaired loans

   $ —         $ —         $ 22,569   

Other real estate owned

     —           —           1,097   

 

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Table of Contents

First Citizens Banc Corp

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

The fair value measurement for equity securities in financial institutions at December 31, 2011 was determined using Level 1 quoted market prices. No transactions have occurred since December 31, 2011 therefore the fair value of the equity securities in financial institutions at June 30, 2012 is measured using Level 2 observable market data inputs.

 

     Quantitative Information about Level 3 Fair Value Measurements
June 30, 2012    Fair Value
Estimate
    

Valuation Technique

  

Unobservable Input

  

Range

Investments

   $ 485       Appraisal of collateral    Appraisal adjustments    20% -30%
         Liquidation expense    8% - 12%

Impaired loans

   $ 20,400       Appraisal of collateral    Appraisal adjustments    10% - 30%
         Liquidation expense    0% - 10%
         Holding period    0 - 30 months
      Discounted cash flows    Change in interest rates    3% - 8.4%

Other real estate owned

   $ 494       Appraisal of collateral    Appraisal adjustments    10% - 30%
         Liquidation expense    0% - 10%

 

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Table of Contents

First Citizens Banc Corp

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

The carrying amount and fair values of financial instruments are as follows.

 

June 30, 2012    Carrying
Amount
     Total
Fair Value
     Quoted
Prices in
Active
Markets for
Identical
Assets
Level 1
     Significant
Other
Observable
Inputs
Level 2
     Significant
Other
Unobservable
Inputs
Level 3
 

Financial Assets:

              

Cash and due from financial institutions

   $ 54,189       $ 54,189       $ 54,189       $ —         $ —     

Securities available for sale

     202,371         211,224         —           210,739         485   

Other securities

     15,524         15,524         15,524         —           —     

Loans, available for sale

     899         899         899         —           —     

Loans, net of allowance for loan losses

     752,078         772,092         —           —           772,092   

Bank owned life insurance

     18,288         18,288         18,288         —           —     

Accrued interest receivable

     3,712         3,712         3,712         —           —     

Financial Liabilities:

              

Nonmaturing deposits

     627,755         627,757         627,757         —           —     

Time deposits

     269,499         272,021         —           —           272,021   

Federal Home Loan Bank advances

     50,278         53,679         —           —           53,679   

Securities sold under agreement to repurchase

     16,110         16,110         16,110         —           —     

Subordinated debentures

     29,427         26,917         —           —           26,917   

Accrued interest payable

     215         215         215         —           —     

 

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Table of Contents

First Citizens Banc Corp

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

     December 31, 2011  
     Carrying
Amount
     Fair Value  

Financial Assets:

     

Cash and due from financial institutions

   $ 52,127       $ 52,127   

Other securities

     15,388         15,388   

Loans, available for sale

     598         598   

Loans, net of allowance for loan losses

     764,011         785,900   

Bank owned life insurance

     17,963         17,963   

Accrued interest receivable

     3,787         3,787   

Financial Liabilities:

     

Deposits

     901,246         911,945   

Federal Home Loan Bank advances

     50,295         52,263   

Securities sold under agreement to repurchase

     19,029         19,029   

Subordinated debentures

     29,427         26,461   

Accrued interest payable

     258         258   

Cash and due from financial institutions:

The carrying amounts for cash and due from financial institutions approximate fair value because they have original maturities of less than 90 days and do not present unanticipated credit concerns.

Available-for-sale securities:

The fair value of securities are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for specific securities. Instead, this method relies on the securities relationship to other benchmark quoted securities (Level 2 inputs). For equity securities, management uses market information related to the value of similar institutions to determine the fair value (Level 2 inputs). Management uses significant unobservable inputs to determine the fair value of one security (Level 3 inputs). These inputs include appraised values of the underlying collateral and estimated costs to sell the collateral. The value of the collateral has been discounted to represent the value in a distressed sale situation.

Other securities:

The carrying value of regulatory stock approximates fair value based on applicable redemption provisions.

 

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Table of Contents

First Citizens Banc Corp

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

Loans, available-for-sale:

Loans held for sale are priced individually at market rates on the day that the loan is locked for commitment to an investor. Because the holding period of such loans is typically short, the carrying value generally approximates the fair value at the time the commitment is received. All loans in the held-for-sale account conform to Fannie Mae underwriting guidelines, with specific intent of the loan being purchased by an investor at the predetermined rate structure.

Loans, net of allowance for loan losses:

Fair values for loans, other than impaired, are estimated for portfolios of loans with similar financial characteristics. The fair value of performing loans has been estimated by discounting expected future cash flows of the underlying portfolios. The discount rates used in these calculations are generally derived from the treasury yield curve and are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate inherent in the loan. The estimated maturity is based on the Corporation’s historical experience with repayments for each loan classification. The off-balance-sheet items are based on the current fees or cost that would be charged to enter into or terminate such arrangements and are considered nominal. Changes in these significant unobservable inputs used in discounted cash flow analysis, such as the discount rate or prepayment speeds, could lead to changes in the underlying fair value.

Bank owned life insurance:

The carrying value of bank owned life insurance approximates the fair value based on applicable redemption provisions.

Accrued interest receivable and payable and securities sold under agreements to repurchase:

The carrying amounts for accrued interest receivable, accrued interest payable and securities sold under agreements to repurchase approximate fair value because they are generally received or paid in 90 days or less and do not present unanticipated credit concerns.

Deposits:

The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings and NOW accounts, and money market accounts, is equal to the amount payable on demand.

The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

The deposits’ fair value estimates do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market, commonly referred to as the core deposit intangible.

Federal Home Loan Bank advances:

Rates available to the Corporation for borrowed funds with similar terms and remaining maturities are used to estimate the fair value of borrowed funds.

 

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Table of Contents

First Citizens Banc Corp

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

Subordinated debentures:

The fair value of subordinated debentures is based on the discounted value of contractual cash flows of the underlying debt agreements. The discount rate is estimated using the current rate for a 30 year mortgage-matched secured borrowing from the FHLB.

(10) Participation in the Treasury Capital Purchase Program

On January 23, 2009, the Corporation completed the sale to the U.S. Treasury of $23,184 of newly-issued non-voting preferred shares as part of the Capital Purchase Program (CPP) enacted by the U.S. Treasury as part of the Troubled Assets Relief Program (TARP) under the Emergency Economic Stabilization Act of 2008 (EESA). To finalize the Corporation’s participation in the CPP, the Corporation and the Treasury entered into a Letter Agreement, dated January 23, 2009, including the Securities Purchase Agreement – Standard Terms attached thereto. Pursuant to the terms of the Securities Purchase Agreement, the Corporation issued and sold to Treasury (1) 23,184 Fixed Rate Cumulative Perpetual Preferred Shares, Series A, each without par value and having a liquidation preference of $1,000 per share (Preferred Shares), and (2) a Warrant to purchase 469,312 common shares of the Corporation, each without par value, at an exercise price of $7.41 per share. The Warrant has a ten-year term. All of the proceeds from the sale of the Preferred Shares and the Warrant by the Corporation to the U.S. Treasury under the CPP qualify as Tier 1 capital for regulatory purposes. Under the standardized CPP terms, cumulative dividends on the Preferred Shares will accrue on the liquidation preference at a rate of 5% per annum for the first five years, and at a rate of 9% per annum thereafter, but will be paid only if, as and when declared by the Corporation’s Board of Directors. The Preferred Shares have no maturity date and rank senior to the common shares with respect to the payment of dividends and distributions and amounts payable upon liquidation, dissolution and winding up of the Corporation.

On July 3, 2012, the U.S. Treasury completed the sale of all 23,184 of the Preferred Shares to various investors pursuant to a modified “Dutch auction” process. As a result of the U.S. Treasury’s sale of all of the Preferred Shares, the executive compensation and corporate governance standards which applied to the Corporation as a participant in the CPP, which standards were most recently set forth in the Interim Final Rule on TARP Standards for Compensation and Corporate Governance, published June 15, 2009, are no longer applicable to the Corporation.

 

 

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Table of Contents

First Citizens Banc Corp

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Form 10-Q

(Amounts in thousands, except share data)

 

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

The following discussion focuses on the consolidated financial condition of the Corporation at June 30, 2012 compared to December 31, 2011 and the consolidated results of operations for the three and six-month periods ended June 30, 2012, compared to the same periods in 2011. This discussion should be read in conjunction with the consolidated financial statements and footnotes included in this Form 10-Q.

Forward-Looking Statements

This Quarterly Report on Form 10-Q includes forward-looking statements by the Corporation relating to various matters, including, without limitation, anticipated operating results, business line results, credit quality expectations, prospects for new lines of business, economic trends (including interest rates) and similar matters. Such statements are based upon the current beliefs and expectations of the Corporation’s management and are subject to risks and uncertainties. While the Corporation believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could prove to be inaccurate, and accordingly, actual results and experiences could differ materially from the anticipated results or other expectations expressed by the Corporation in its forward-looking statements. Factors that could cause actual results or experiences to differ from results discussed in the forward-looking statements include, but are not limited to, regional and national economic conditions; volatility and direction of market interest rates; credit risks of lending activities; governmental legislation and regulation, including changes in accounting regulation or standards; material unforeseen changes in the financial condition or results of operations of the Corporation’s clients; increases in FDIC insurance premiums and assessments; and other risks identified from time-to-time in the Corporation’s other public documents on file with the SEC, including those risks identified in Item 1A of Part 1 of the Corporation’s Annual Report on Form 10-K.

The Corporation does not undertake, and specifically disclaims, any obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect occurrence of anticipated or unanticipated events or circumstances after the date of such statements, except as required by law.

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements, and the purpose of this section is to secure the use of the safe harbor provisions.

Financial Condition

Total assets of the Corporation at June 30, 2012 were $1,109,372 compared to $1,112,977 at December 31, 2011, a decrease of $3,605, or 0.3 percent. The decrease in total assets was mainly attributed to a decrease in loans, net of allowance offset by an increase in cash and due from banks and investment securities. Total liabilities at June 30, 2012 were $1,005,276 compared to $1,010,449 at December 31, 2011, a decrease of $5,173, or 0.5 percent. The decrease in total liabilities was mainly attributed to decreases in non interest-bearing deposits, interest–bearing deposits and securities sold under agreements to repurchase offset by an increase in accrued expenses and other liabilities.

 

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Table of Contents

First Citizens Banc Corp

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Form 10-Q

(Amounts in thousands, except share data)

 

Net loans have decreased $11,933 or 1.6 percent since December 31, 2011. The commercial real estate and real estate construction portfolios increased $17,046 and $2,536, respectively since December 31, 2011, while the commercial and agricultural, real estate and consumer loan portfolios decreased $8,335, $20,516 and $1,990, respectively. The current increase in commercial real estate loans is mainly due to increased opportunities from our larger markets and calling efforts by the commercial lending officers. The current increase in real estate construction is mainly due to an increase in the demand for construction loans. The current decrease in commercial and agricultural loans is the result of the pay down of loan balances on agricultural loans. The current decrease in real estate and consumer loans is mainly the result of the economic downturn and high unemployment rates in our market area, coupled with the Corporation’s decision to originate and sell the majority of mortgage loans in the secondary market.

Loans held for sale have increased $301 or 50.3 percent since December 31, 2011. At June 30, 2012, the net loan to deposit ratio was 83.8 percent compared to 84.8 percent at December 31, 2011. This ratio has declined in 2012 due to a decrease in loans.

For the six months of operations in 2012, $3,865 was placed into the allowance for loan losses from earnings, compared to $5,700 in the same period of 2011. The economic downturn and high unemployment rates in our market area continue to stress the ability of some customers to make payments on their loans. Although general reserves required increases compared to December 31, 2011, specific reserves declined during the same period. However, detailed analyses of potential losses in the loan portfolio indicated that a reduced provision was appropriate. Net charge-offs have decreased to $3,192, compared to $5,719 in 2011. For the first six months of 2012, the Corporation has charged off one hundred and twenty loans. Sixty real estate mortgage loans totaling $1,309 net of recoveries, twenty-one commercial real estate loans totaling $1,464 net of recoveries, seventeen commercial and agriculture loans totaling $317 net of recoveries, and one real estate construction loan totaling $8 net of recoveries were charged off in the first six months of the year. In addition, twenty-one consumer loans totaling $109, net of recoveries, were charged off. For each loan category, as well as in total, the percentage of net charge-offs to loans was less than one percent. Nonperforming loans have increased by $940, of which $444 was due to a decrease in loans past due 90 days but still accruing and $1,384 was due to an increase in loans on nonaccrual status. Each of these factors was considered by management as part of the examination of both the level and mix of the allowance by loan type as well as the overall level of the allowance. Management specifically evaluates loans that are impaired, or graded as doubtful by the internal grading function for estimates of loss. To evaluate the adequacy of the allowance for loan losses to cover probable losses in the portfolio, management considers specific reserve allocations for identified portfolio loans, reserves for delinquencies and historical reserve allocations. The composition and overall level of the loan portfolio and charge-off activity are also factors used to determine the amount of the allowance for loan losses.

 

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Table of Contents

First Citizens Banc Corp

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Form 10-Q

(Amounts in thousands, except share data)

 

Management analyzes commercial and commercial real estate loans, with balances of $350 or larger, 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. 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. Impaired loans, or portions thereof, are charged-off when deemed uncollectible. The allowance for loan losses as a percent of total loans was 2.84 at June 30, 2012 and 2.71 percent at December 31, 2011.

The available for sale security portfolio increased by $6,591, from $204,633 at December 31, 2011, to $211,224 at June 30, 2012. The increase is the result of additional securities purchases made in the first six months of 2012 above scheduled maturities and reinvestment of profits. The Corporation continued utilizing letters of credit from the Federal Home Loan Bank (FHLB) to replace maturing securities that were pledged for public entities. As of June 30, 2012, the Corporation was in compliance with all pledging requirements.

Bank owned life insurance (BOLI) increased $325 from December 31, 2011 to June 30, 2012 due to increases in the cash surrender value of the underlying insurance policies.

Office premises and equipment, net, have decreased $144 from December 31, 2011 to June 30, 2012, as a result of depreciation of $737 and disposals of $6, offset by new purchases of $599.

Total deposits at June 30, 2012 decreased $3,992 from year-end 2011. Noninterest-bearing deposits decreased $1,916 from year-end 2011, while interest-bearing deposits, including savings and time deposits, decreased $2,076 from December 31, 2011. The primary reason for the decrease in noninterest-bearing deposits was due to an increase in commercial accounts, which tend to fluctuate. The interest-bearing deposit decrease was due to an increase in savings accounts and interest-bearing demand accounts offset by decreases in time certificates and individual retirement accounts (IRA). Savings accounts increased $2,740 from year-end 2011, which included increases of $6,381 in statement savings and $1,162 in public fund money market savings, offset by a decrease in money market savings of $5,375. Interest-bearing deposits increased $13,678 from year end 2011, which included increases of $6,487 in interest-bearing checking accounts, $11,749 in interest-bearing public funds, offset by a decrease of $4,989 in NOW public funds. Time certificates, individual retirement accounts (IRA) and Certificate of Deposit Account Registry Service (CDARS) decreased $15,469, $1,785 and $1,234 respectively from year end 2011. The year-to-date average balance of total deposits increased $1,139 compared to the average balance of the same period in 2011. The increase in average balance is due to increases of $12,980 in demand deposit accounts, $9,426 in statement savings accounts and $3,382 in money market savings, offset by decreases of $14,343 in time certificates and $11,871 in CDARS accounts.

 

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Table of Contents

First Citizens Banc Corp

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Form 10-Q

(Amounts in thousands, except share data)

 

Total borrowed funds have decreased $2,936 from December 31, 2011 to June 30, 2012. At June 30, 2012, the Corporation had $50,278 in outstanding Federal Home Loan Bank advances compared to $50,295 at December 31, 2011. Securities sold under agreements to repurchase, which tend to fluctuate due to timing of deposits, have decreased $2,919 from December 31, 2011 to June 30, 2012.

Shareholders’ equity at June 30, 2012 was $104,096, or 9.4 percent of total assets, compared to $102,528, or 9.2 percent of total assets at December 31, 2011. The increase in shareholders' equity resulted from net income of $2,229 plus the increase in the fair value of securities available for sale, net of tax, of $381 less preferred dividends and common dividends paid of $580 and $462, respectively. Total outstanding common shares at June 30, 2012 and 2011 were 7,707,917.

Results of Operations

Six Months Ended June 30, 2012 and 2011

The Corporation had net income of $2,229 for the six months ended June 30, 2012, an increase of $953 from net income of $1,276 for the same six months of 2011. Basic and diluted earnings per common share were $.21 for the six months of 2012, compared to $0.09 for the same period in 2011. The primary reasons for the changes in net income are explained below.

Net interest income for the six months ended June 30, 2012 was $20,590, an increase of $65 from $20,525 in the same six months of 2011. Net interest income, the difference between interest income earned on interest-earning assets and interest expense incurred on interest-bearing liabilities, is the most significant component of the Corporation’s earnings. Net interest income is affected by changes in volume, rates and composition of interest-earning assets and interest-bearing liabilities. Total interest income for the six months ended June 30, 2012 was $23,875, a decrease of $583 from $24,458 in the same six months of 2011. Average earning assets decreased less than one percent from the six month period last year. Average loans, securities and interest-bearing deposits in other banks for the six months of 2012 increased 2.0 percent, 6.6 percent and 152.9 percent respectively compared to the six months of last year. These increases were offset by a decrease in average federal funds sold compared to the same period of 2011. The yield on earning assets decreased 12 basis points for the first six months of 2012 compared to the same period last year. The yield on loans and securities decreased 19 and 55 basis points respectively during the first six months of 2012 compared to the first six months of last year. These factors combined resulted in the decrease in total interest income for the first six months of 2012. Total interest expense for the six months ended June 30, 2012 was $3,285, a decrease of $648 from $3,933 in the same six months of 2011. Interest expense on time deposits decreased $392 or 17.9 percent in the first six months of 2012 compared to the same period in 2011. Average time deposits for the first six months of 2012 decreased 9.2 percent compared to 2011. The interest rate paid on time deposits during the first six months of 2012 also decreased as compared to the same period in 2011 by 13 basis points. The Corporation’s net interest margin for the six months ended June 30, 2012 and 2011 was 3.90% for both periods.

 

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Table of Contents

First Citizens Banc Corp

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Form 10-Q

(Amounts in thousands, except share data)

 

The Corporation provides for loan losses through regular provisions to the allowance for loan losses. The provision is affected by net charge-offs on loans and changes in specific and general allocations required on the allowance for loan losses. Provisions for loan losses totaled $3,865 for the six months ended June 30, 2012, compared to $5,700 for the same period in 2011. Although general reserves increased compared to December 31, 2011, specific reserves declined during the same period. Management believes the overall adequacy of the reserve for loan losses supported a reduced provision, compared to June 30, 2011.

Non-interest income for the six months ended June 30, 2012 was $5,761, an increase of $567 or 10.9 percent from $5,194 for the same period of 2011. Service charge fee income for the first six months of 2012 was $2,135, up $17 or 0.8 percent over the same period of 2011. Trust fee income was $1,069, down $3 or 0.3 percent over the same period in 2011. ATM fee income for the first six months of 2012 was $883, down $15 or 1.7 percent over the same period of 2011. BOLI contributed $324 to non-interest income during the six months ended June 30, 2012. Other non-interest income was $1,350, up $548 over the same period in 2011 as a result of the sale of loan collateral and gain on the sale of loans to the secondary market.

Non-interest expense for the six months ended June 30, 2012 was $19,658, an increase of $987, from $18,671 reported for the same period of 2011. Salary and other employee costs were $10,396, up $951 or 10.1 percent as compared to the same period of 2011. This increase is mainly due to an increase in staffing in the credit and special assets departments and higher insurance costs for the first six months of 2012. The number of full-time equivalent employees increased during the first six months of 2012 to 302.8, up 9.2, compared to the same period of 2011. Occupancy and equipment costs were $1,675 down $221 or 11.7 percent compared to the same period in 2011. This decrease is mainly due to decreases in utility, grounds maintenance and equipment depreciation expenses. The decrease in utility and grounds maintenance was the result of the mild winter weather. The decrease in equipment maintenance was the result of decreased depreciation costs as assets have aged. Contracted data processing costs were $459, up $47 or 11.4 percent compared to the same period in 2011. State franchise taxes decreased by $36 compared to the same period of 2011. Amortization expense decreased $71, or 12.2 percent from the same six months of 2011, as a result of scheduled amortization of intangible assets associated with mergers. FDIC assessments were down by $229 during the first six months of 2012 compared to the same period of 2011 as a result of a change in methodology used to calculate the assessment charged to banks. The change included both a new assessment base and a change in the assessment rate. Professional service costs were $1,404, up $408 or 41.0 percent compared to the same period in 2011. The increase is mainly due to consulting services for reducing communication expenses and streamlining the Corporation’s communication services and employment search firms. In addition, professional fees have increased due to expenses related to the U. S. Treasury’s auction of its preferred stock in the Corporation. Other operating expenses were $4,207, up $138 or 3.4 percent compared to the same period of 2011. The increase in other operating expenses is due to an allowance for loss on unused commitments posted in the second quarter of 2012. In addition, a majority of the Corporation’s other operating expenses declined compared to the first quarter of 2011.

 

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Table of Contents

First Citizens Banc Corp

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Form 10-Q

(Amounts in thousands, except share data)

 

Income tax expense for the six months ended June 30, 2012 totaled $599, up $527 or 731.9 percent compared to the same period in 2011. The increase in the federal income tax expense is mainly a result of an increase in taxable income, primarily due to reduced provision for loan losses, this year compared to last. The effective tax rates for the six-month periods ended June 30, 2012 and June 30, 2011 were 21.2% and 5.3%, respectively. The increase in the effective tax rate is the result of an increase in taxable income compared to last year.

Three Months Ended June 30, 2012 and 2011

The Corporation had net income of $936 for the three months ended June 30, 2012, an increase of $413 from net income of $523 for the same three months of 2011. Basic and diluted earnings per common share were $.08 for the quarter ended June 30, 2012, compared to $0.03 for the same period in 2011. The primary reasons for the changes in net income are explained below.

Net interest income for the three months ended June 30, 2012 was $10,146, a decrease of $7 from $10,153 in the same three months of 2011. Total interest income for the three months ended June 30, 2012 was $11,757, a decrease of $288 from $12,045 in the same three months of 2011. Average earning assets increased 1.5 percent during the quarter ended June 30, 2012 as compared to the same period in 2011. Average loans, securities and interest-bearing deposits in other banks for the second quarter of 2012 increased 1.9 percent, 5.2 percent and 127.4 percent respectively compared to the second quarter of last year. These increases were offset by a decrease in average federal funds sold compared to the same period of 2011. The yield on earning assets decreased 21 basis points for the second quarter of 2012 compared to the second quarter of last year. The yield on loans and securities decreased 17 and 60 basis points respectively during the second quarter of 2012 compared to the second quarter of last year. These factors combined resulted in the decrease in total interest income for the second quarter of 2012. Total interest expense for the three months ended June 30, 2012 was $1,611, a decrease of $281 from $1,892 in the same three months of 2011. Interest expense on time deposits decreased $190 or 17.9 percent in the second quarter of 2012 compared to the same period in 2011. Average time deposits for the second quarter of 2012 decreased 7.6 percent compared to the second quarter of 2011. The interest rate paid on time deposits during the second quarter of 2012 also decreased as compared to the same period in 2011 by 16 basis points. The Corporation’s net interest margin for the six months ended June 30, 2012 and 2011 was 3.88% and 3.93%, respectively. Net interest margin decreased 5 basis points as net interest income decreased 0.1 percent while average earning assets increased by 1.5 percent.

The Corporation provides for loan losses through regular provisions to the allowance for loan losses. The provision is affected by net charge-offs on loans and changes in specific and general allocations required on the allowance for loan losses. Provisions for loan losses totaled $1,465 for the three months ended June 30, 2012, compared to $2,700 for the same period in 2011. Although general reserves increased compared to December 31, 2011, specific reserves declined during the same period. Management believes the overall adequacy of the reserve for loan losses supported a reduced provision, compared to March 31, 2012.

 

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Table of Contents

First Citizens Banc Corp

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Form 10-Q

(Amounts in thousands, except share data)

 

Non-interest income for the three months ended June 30, 2012 was $2,852, an increase of $326 or 12.9 percent from $2,526 for the same period of 2011. Service charge fee income for the period ended June 30, 2012 was $1,073, down $16 or 1.5 percent over the same period of 2011. Trust fee income was $544, up $24 or 4.6 percent over the same period in 2011. The increase is related to a general increase in assets under management. ATM fee income was $439, down $26 or 5.6 percent over the same period of 2011. BOLI contributed $161 to non-interest income during the three months ended June 30, 2012. Other non-interest income was $635, up $353 over the same period in 2011 as a result of gain on sale of loans and gains on the sale of OREO.

Non-interest expense for the three months ended June 30, 2012 was $10,395, an increase of $912, from $9,483 reported for the same period of 2011. Salary and other employee costs were $5,434, up $545 or 11.2 percent as compared to the same period of 2011. This increase is mainly due to an increase in staffing in the credit and special assets departments and higher insurance costs for the quarter ended June 30, 2012. The number of full-time equivalent employees increased during the quarter ended June 30, 2012 to 304.9, up 9.5, compared to the same period of 2011. Occupancy and equipment costs were $825, down $116 or 12.3 percent compared to the same period in 2011. This decrease is mainly due to a decrease in equipment depreciation compared to the same period in 2011. Contracted data processing costs were $242, up $38 or 18.6 percent compared to the same period in 2011. State franchise taxes decreased by $48 compared to the same period of 2011. Amortization expense decreased $59, or 20.3 percent from the same three months of 2011, as a result of scheduled amortization of intangible assets associated with mergers. FDIC assessments were down by $125 during the first three months ended June 30, 2012 compared to the same period of 2011 as a result of a change in methodology used to calculate the assessment charged to banks. The change included both a new assessment base and a change in the assessment rate. Professional service costs were $806, up $339 or 72.6 percent compared to the same period in 2011. The increase is mainly due to consulting services for reducing communication expenses and streamlining the Corporation’s communication services and employment search firms. In addition, professional fees have increased due to expenses related to the U. S. Treasury’s auction of its preferred stock in the Corporation. Other operating expenses were $2,353, up $338 or 16.8 percent compared to the same period of 2011. The increase in other operating expenses is due to an allowance for loss on unused commitments posted in the second quarter of 2012.

Income tax expense for the three months ended June 30, 2012 totaled $202, up $229 compared to the same period in 2011. The increase in the federal income tax expense is mainly a result of an increase in taxable income, primarily due to reduced provision for loan losses. The effective tax rates for the three-month periods ended June 30, 2012 and June 30, 2011 were 17.8% and (5.4)%, respectively. The increase in the effective tax rate is the result of an increase in taxable income compared to last year.

 

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Table of Contents

First Citizens Banc Corp

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Form 10-Q

(Amounts in thousands, except share data)

 

Capital Resources

Shareholders’ equity totaled $104,096 at June 30, 2012 compared to $102,528 at December 31, 2011. The increase in shareholders’ equity resulted from $2,229 of net income and a $381 net increase in the unrealized gain on securities. This was offset by preferred dividends and common dividends paid of $580 and $462, respectively. All of the Corporation’s capital ratios exceeded the regulatory minimum guidelines as of June 30, 2012 and December 31, 2011 as identified in the following table:

 

     Total Risk
Based
Capital
    Tier I Risk
Based  Capital
    Leverage
Ratio
 

Corporation Ratios - June 30, 2012

     15.4     13.7     9.4

Corporation Ratios - December 31, 2011

     15.1     13.8     9.3

For Capital Adequacy Purposes

     8.0     4.0     4.0

To Be Well Capitalized Under Prompt Corrective Action Provisions

     10.0     6.0     5.0

The Corporation paid a cash dividend of $.03 per common share each on February 1, and May 1, 2012. The Corporation did not pay a cash dividend on its common shares during the first six months of 2011. The Corporation paid a 5% cash dividend on its preferred shares issued to the U.S. Treasury pursuant to TARP in the amount of approximately $290 each on February 15, and May 15, 2012 and February 15, and May 15, 2011.

Liquidity

Citizens maintains a conservative liquidity position. All securities are classified as available for sale. Securities, with maturities of one year or less, totaled $4,931, or 2.3 percent of the total security portfolio. The available for sale portfolio helps to provide the Corporation with the ability to meet its funding needs. The Consolidated Statements of Cash Flows (Unaudited) contained in the consolidated financial statements detail the Corporation’s cash flows from operating activities resulting from net earnings.

 

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Table of Contents

First Citizens Banc Corp

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Form 10-Q

(Amounts in thousands, except share data)

 

Cash from operations for the period ended June 30, 2012 was $9,229. This includes net income of $2,229 plus net adjustments of $7,000 to reconcile net earnings to net cash provided by operations. Cash provided by investing activities was $803 for the period ended June 30, 2012. The use of cash from investing activities is primarily due to securities purchases. Cash received from maturing, called and sold securities totaled $52,102. Cash also was received from loans made to customers, net of principal collected, of $7,798. This increase in cash was offset by the purchase of securities of $59,169. Cash used from financing activities for the first six months of 2012 totaled $7,970. The decrease of cash from financing activities is due to the net change in deposits, change in securities sold under agreements to repurchase and dividends paid. The net change in deposits was $3,992 for the first six months of 2012. The decrease in deposits was primarily due to decreases of $1,916 in non interest-bearing deposits, $15,469 in time certificates and $1,785 in individual retirement accounts (IRA), offset by increases of $2,740 in savings deposits and $13,678 in interest-bearing demand deposits during the first six months of 2012. Securities sold under agreements to repurchase decreased $2,919 and $1,042 was used to pay dividends. Cash and cash equivalents increased from $52,127 at December 31, 2011 to $54,189 at June 30, 2012.

Future loan demand of Citizens may be funded by increases in deposit accounts, proceeds from payments on existing loans, the maturity of securities, and the sale of securities classified as available for sale. Additional sources of funds may also come from borrowing in the Federal Funds market and/or borrowing from the FHLB. Through its correspondent banks, Citizens maintains federal funds borrowing lines totaling $20,000. As of June 30, 2012, Citizens had total credit availability with the FHLB of $99,026, of which $50,278 was outstanding.

 

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Table of Contents

First Citizens Banc Corp

Form 10-Q

(Amounts in thousands, except share data)

 

ITEM 3. 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 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 interest-rate risk can pose a significant threat to the Corporation’s earnings and capital base. Accordingly, effective risk management that maintains interest-rate risk at prudent levels is essential to the Corporation’s safety and soundness.

Evaluating a financial institution’s exposure to changes in interest rates includes assessing both the adequacy of the management process used to control interest-rate risk and the organization’s quantitative level of exposure. When assessing the interest-rate risk management process, the Corporation seeks to ensure that appropriate policies, procedures, management information systems and internal controls are in place to maintain interest-rate risk at prudent levels with consistency and continuity. Evaluating the quantitative level of interest rate risk exposure requires the Corporation to assess the existing and potential future effects of changes in interest rates on its consolidated financial condition, including capital adequacy, earnings, liquidity and, where appropriate, asset quality.

The Federal Reserve Board, together with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, adopted a Joint Agency Policy Statement on interest-rate risk, effective June 26, 1996. The policy statement provides guidance to examiners and bankers on sound practices for managing interest-rate risk, which will form the basis for ongoing evaluation of the adequacy of interest-rate risk management at supervised institutions. The policy statement also outlines fundamental elements of sound management that have been identified in prior Federal Reserve guidance and discusses the importance of these elements in the context of managing interest-rate risk. Specifically, the guidance emphasizes the need for active board of director and senior management oversight and a comprehensive risk-management process that effectively identifies, measures, and controls interest-rate risk.

Financial institutions derive their income primarily from the excess of interest collected over interest paid. The rates of interest an institution earns on its assets and owes on its liabilities generally are established contractually for a period of time. Since market interest rates change over time, an institution is exposed to lower profit margins (or losses) if it cannot adapt to interest-rate changes. For example, assume that an institution’s assets carry intermediate- or long-term fixed rates and that those assets were funded with short-term liabilities. If market interest rates rise by the time the short-term liabilities must be refinanced, the increase in the institution’s interest expense on its liabilities may not be sufficiently offset if assets continue to earn at the long-term fixed rates. Accordingly, an institution’s profits could decrease on existing assets because the institution will have either lower net interest income or, possibly, net interest expense. Similar risks exist when assets are subject to contractual interest-rate ceilings, or rate sensitive assets are funded by longer-term, fixed-rate liabilities in a decreasing-rate environment.

 

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Table of Contents

First Citizens Banc Corp

Form 10-Q

(Amounts in thousands, except share data)

 

Several techniques may be used by an institution to minimize interest-rate risk. One approach used by the Corporation is to periodically analyze its assets and liabilities and make future financing and investment decisions based on payment streams, interest rates, contractual maturities, and estimated sensitivity to actual or potential changes in market interest rates. Such activities fall under the broad definition of asset/liability management. The Corporation’s primary asset/liability management technique is the measurement of the Corporation’s asset/liability gap, that is, the difference between the cash flow amounts of interest sensitive assets and liabilities that will be refinanced (or repriced) during a given period. For example, if the asset amount to be repriced exceeds the corresponding liability amount for a certain day, month, year, or longer period, the institution is in an asset sensitive gap position. In this situation, net interest income would increase if market interest rates rose or decrease if market interest rates fell. If, alternatively, more liabilities than assets will reprice, the institution is in a liability sensitive position. Accordingly, net interest income would decline when rates rose and increase when rates fell. Also, these examples assume that interest rate changes for assets and liabilities are of the same magnitude, whereas actual interest rate changes generally differ in magnitude for assets and liabilities.

Several ways an institution can manage interest-rate risk include selling existing assets or repaying certain liabilities; matching repricing periods for new assets and liabilities, for example, by shortening terms of new loans or securities; and hedging existing assets, liabilities, or anticipated transactions. An institution might also invest in more complex financial instruments intended to hedge or otherwise change interest-rate risk. Interest rate swaps, futures contracts, options on futures, and other such derivative financial instruments often are used for this purpose. Because these instruments are sensitive to interest rate changes, they require management expertise to be effective. The Corporation has not purchased derivative financial instruments in the past and does not currently intend to purchase such instruments in the near future. 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 refinance its obligations at new, lower rates. 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. 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 were sensitive to changes in interest rates as of December 31, 2011 and June 30, 2012, based on certain prepayment and account decay assumptions that management believes are reasonable. The table shows the changes in the Corporation’s net portfolio value (in amount and percent) that would result from hypothetical interest rate increases of 200 basis points and 100 basis points and an interest rate decrease of 100 basis points at June 30, 2012 and December 31, 2011.

 

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First Citizens Banc Corp

Form 10-Q

(Amounts in thousands, except share data)

 

The Corporation had no derivative financial instruments or trading portfolio as of December 31, 2011 or June 30, 2012. Expected maturity date values for interest-bearing core deposits were calculated based on estimates of the period over which the deposits would be outstanding. The Corporation’s borrowings were tabulated by contractual maturity dates and without regard to any conversion or repricing dates.

 

     Net Portfolio Value  
     June 30, 2012     December 31, 2011  
Change in    Dollar      Dollar     Percent     Dollar      Dollar      Percent  

Rates

   Amount      Change     Change     Amount      Change      Change  

+200bp

     123,486         (6,914     -5     135,092         669         0

+100bp

     124,321         (6,079     -5     135,299         876         1

Base

     130,400         —          —          134,423         —           —     

-100bp

     156,614         26,214        20     153,916         19,493         15

The change in net portfolio value from December 31, 2011 to June 30, 2012, is primarily a result of two factors. The yield curve has shifted downward slightly and become slightly steeper, on the short end, since the end of the year. Additionally, both the mix and/or volume of assets and funding sources have changed. While the volume of assets is nearly unchanged, the mix has shifted away from loans toward securities and cash, which leads to greater volatility. Funding sources have increased while the funding mix shifted from CDs and borrowed money to deposits. The shifts in mixes led to the decrease in the base. Beyond the change in the base level of net portfolio value, overall projected movements, given specific changes in rates, would lead to generally larger changes in the value of assets. The change in the rates up scenarios for both the 100 and 200 basis point movements would lead to a faster decrease in the fair value of assets, compared to liabilities. Accordingly we would see a decrease in the net portfolio value. A downward change in rates would lead to an increase in the net portfolio value as the fair value of liabilities would increase much more slowly than the fair value of the asset portfolio.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of June 30, 2012, were effective.

 

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First Citizens Banc Corp

Form 10-Q

(Amounts in thousands, except share data)

 

Changes in Internal Control over Financial Reporting

There have not been any changes in the Corporation’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the Corporation’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

 

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First Citizens Banc Corp

Other Information

Form 10-Q

Part II—Other Information

Item 1. Legal Proceedings

Citizens has been engaged in a legal action with the Ohio Department of Agriculture ("ODA") over proceeds from the sale of grain that served as collateral for a loan made by Citizens. Most of the money that is the subject of the litigation is held in an account pending the outcome of the litigation. However, the ODA also claimed that Citizens received and applied some proceeds of earlier grain sales. Recently, the Common Pleas Court of Erie County rendered a decision that the ODA was entitled to approximately $163,000 in addition to the funds held in the account. Citizens believes that the court's decision is erroneous, particularly with respect to the amount determined to be due from Citizens, and is proceeding with an appeal of the decision.

Item 1A. Risk Factors

There were no material changes to the risk factors as presented in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2011.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

N/A

Item 5. Other Information

None

Item 6. Exhibits

 

31.1    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32.1    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101    The following materials from First Citizens Banc Corp’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2012, formatted in XBRL (eXtensible Business Reporting Language) pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of June 30, 2012 (Unaudited) and December 31, 2011; (ii) Consolidated Statements of Income (Unaudited) for the three and six months ended June 30, 2012 and 2011; (iii) Consolidated Comprehensive Income Statements (Unaudited) for the three and six months ended June 30, 2012 and 2011; (iv) Condensed Consolidated Statement of Shareholders’ Equity (Unaudited) for the six months ended June 30, 2012; (v) Condensed Consolidated Statement of Cash Flows (Unaudited) for the six months ended June 30, 2012 and 2011; and (vi) Notes to Interim Consolidated Financial Statements (Unaudited).*

 

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First Citizens Banc Corp

Other Information

Form 10-Q

 

* Pursuant to Rule 406T of SEC Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are furnished and not deemed filed or part of a registration statement or prospectus for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, and are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those Sections.

 

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First Citizens Banc Corp

Signatures

Form 10-Q

Pursuant to the requirements 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.

First Citizens Banc Corp

 

/s/ James O. Miller