January 13, 1999
Dear Shareholder:
FC Banc Corp is pleased to report that its 1998 net income increased 11
percent from $902,000 in 1997 to $1,001,000 in 1998. Fully diluted earnings
per share also increased 11 percent from $1.40 in 1997 to $1.55 in 1998.
These numbers are adjusted to reflect a 2:1 stock split on August 14, 1998.
Return on equity (ROE) increased from 8.22 in 1997 to 8.73 in 1998. Return on
assets (ROA) declined slightly from 1.16 in 1997 to 1.14 in 1998 as a result
of the growth the company experienced.
Our priorities have been and continue to be quality, profitability and
growth. Over the past two years the company has made progress in all three
areas. The quality of our assets has improved, as on December 31, 1996,
nonperforming loans were $1,119,000 while on December 31, 1998 there were
- -0-. Our loans 30 days and more past due were 3.8 percent on December 31,
1996 and had improved to .03 percent by December 31, 1998 In November, 1998
the bank introduced First Class Banking TM with its three guarantees: quality
products, exceptional service and fair pricing.
During 1998 your company experienced significant growth, with assets
increasing 19% to $93,685,000, loans up 14% to $45,649,000 and deposits
growing 23% to $81,311,000. As part of this growth our Cardington Bank opened
on January 26, 1998 and has had outstanding results. Our staff and Cardington
directors are to be congratulated for their leadership and hard work.
We are now less than a year to the millennium and your company has invested
considerable time and money to insure it will be a nonevent. We are on
schedule and are confident our systems will operate as they should. From time
to time there are rumors about Year 2000 and we encourage you to contact us
with your questions.
For the past 15 consecutive quarters, Farmers Citizens Bank has enjoyed a 5
Star rating from Bauer Financial Reports, Inc. This is the highest rating
Bauer gives and demonstrates the financial strength of the bank. We continue
to be proud of this recognition.
At the beginning of 1998 FC Banc Corp shares were selling at $22.00 per share
(adjusted for the August 14, 1998 two for one split). At December 31, 1998,
the most recent trade had been at $27.00 per share. This increase plus the
dividend represent a 25.4% return on your investment in 1998. The overall
market capitalization increased by approximately $3,200,000 in 1998.
The automatic dividend deposit program has been well received with 36% of our
shareholders participating. We would like to pay dividends quarterly and
implement a dividend reinvestment program but will need greater
participation. Let us thank you who are participating and encourage others
to participate.
Our annual meeting will be on March 24, 1999 at the Youth Building, Crawford
County Fairgrounds at 1:30 p.m. preceded by a luncheon at 12:00 noon. We will
announce the first recipients of the Farmers' Citizens Scholarships. We have
planned a meeting you will enjoy and we encourage your attendance.
Finally, on behalf of the directors, we want to thank our shareholders,
customers, and employees for their support in 1998.
Sincerely,
/s/ Robert D. Hord /s/ G.W. Holden
- ------------------------- ---------------------------
Robert D. Hord G.W. "Bill" Holden
Chairman President & CEO Banc Corp
<PAGE>
<TABLE>
<CAPTION>
FC Banc Corp
Five-Year Consolidated Financial Summary
/S/ <C> <C> <C> <C> <C>
In thousands, except per common share 1998 1997 1996 1995 1994
amounts and ratios
Years Ended December 31,
Statements of Income
Interest Income $6,380 $5,573 5,619 $5,564 $5,448
Interest Expense 2,541 2,164 2,277 2,442 2,281
----- ------ ----- ----- -----
Net interest income 3,839 3,409 3,342 3,122 3,167
Provision for loan losses (75) 27 0 204 1,015
Net interest income after provision ------ ----- ----- ------ ------
for loan losses 3,914 3,382 3,342 2,918 2,152
Non-interest income (A) 633 556 543 487 582
Non-interest expenses 3,215 2,732 3,064 2,906 2,515
----- ----- ----- ----- -----
Income before income taxes 1,332 1,206 821 499 219
Income tax expense 331 304 140 (34) (116)
------ ------ ----- ----- -----
Net income $1,001 $ 902 $ 681 $ 533 $ 335
====== ====== ===== ===== =====
Per Common Share
Net Income
Basic $1.56 $1.40 $1.04 $0.80 $0.50
Diluted 1.55 1.40 1.04 0.80 .50
Dividends declared 0.60 0.60 0.60 0.58 0.57
Stockholders' equity 18.19 17.42 16.41 16.16 14.75
Stock price range 27.00-22.00 22.00-22.00 22.00-20.25 21.00-20.00 20.50-16.00
</TABLE>
<TABLE>
<CAPTION>
Selected Consolidated Balance Sheet Data at December 31,
/S/ <C> <C> <C> <C>
Assets $93,685 $78,628 $81,445 $83,698 $83,264
Investment securities 37,319 32,460 32,194 33,869 37,409
Loans (B) 45,649 40,029 41,043 37,179 34,918
Deposits 81,311 66,092 70,074 70,891 71,781
Borrowed funds - 641 119 1,525 1,250
Shareholders' equity 11,547 11,195 10,667 10,760 9,818
Ratios (C)
Per $100 of average assets
Net Interest Income (tax-equivalent basis) $4.51 $4.50 $4.27 $4.01 $4.04
Provision for loan losses (0.09) 0.03 - 0.25 1.23
---- ---- ---- ---- ----
Net interest income after provision
for loan losses 4.60 4.46 4.27 3.76 2.80
Non-interest income 0.72 0.72 0.67 0.60 0.71
Non-interest expense 3.66 3.52 3.76 3.56 3.06
---- ---- ---- ---- ----
Income before income taxes 1.66 1.66 1.17 0.80 0.45
Income tax expense 0.52 0.50 0.34 0.15 0.04
---- ---- ---- ---- ----
Net income $1.14 $1.16 $0.84 $0.65 $0.41
Leverage (D) 7.66x 7.07 7.67 7.79 7.74
Return on average shareholders' equity 8.73% 8.22 6.42 5.08 3.15
Average shareholders' equity to average assets 13.05% 14.14 13.03 12.84 12.93
Dividend payout ratio 38.26% 42.68% 57.27% 72.98% 114.33%
Tier 1 capital ratio at December 31 22.19% 24.14 21.87 22.61 24.10
Tier 1 and Tier 2 capital ratio at December 31 23.47% 25.41 23.13 23.88 25.38
Leverage ratio 12.61% 14.14 13.11 13.04 12.89
</TABLE>
(A) Includes gains (losses) from securities transactions of $11 in 1998, $3 in
1997, ($13) in 1996, $3 in 1995, and $38 in 1994.
(B) Net of unearned income.
(C) Based on average balances and net income for the periods.
(D) The ratio of average assets to average shareholders equity.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
FC Banc Corp. (the "Holding Company" or "Corporation") is a bank holding
company engaged in the business of commercial and retail banking through its
subsidiary The Farmers Citizens Bank (the "Bank" or "Farmers Citizens"), which
accounts for substantially all of its revenues, operating income, and assets.
The following discussion is intended to focus on and highlight certain
financial information regarding FC Banc Corp. and should be read in
conjunction with the financial statements and related notes which have been
prepared by the management of FC Banc Corp. in conformity with generally
accepted accounting principles. The Audit Committee of the Board of Directors
engaged Robb, Dixon, Francis, Davis, Oneson and Company, independent auditors,
to audit the financial statements. The auditors' report is included as a part
of the 1998 Annual Report. To assist in understanding and evaluating major
changes in the Holding Company's financial position and results of operations,
two, three and five year comparisons are provided in tabular form for ease of
comparison.
Forward-Looking Statements
In addition to the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the operations of the Bank, and the
Holding Company's actual results could differ significantly from those
discussed in the forward-looking statements. Some of the factors that could
cause or contribute to such differences are discussed herein, but also include
changes in economic conditions in the Corporation's (or Bank's) market area,
changes in policies by regulatory agencies, fluctuations in interest rates,
demand for loans in Farmers Citizens' market area and competition, that could
cause actual results to differ materially from historical earnings and those
presently anticipated or projected.
1. Management's determination of the amount of the allowance for loan
losses as set forth under the captions "Financial Condition,"
"Comparison of Results of Operations for the Years Ended December 31, 1998
and 1997;"
2. Management's discussion of the liquidity of Farmers Citizens' assets and
regulatory capital of Farmers Citizens as set forth under "Effects of
Inflation/Changing Prices" and "Liquidity and Interest Rate Sensitivity
Management;" and
3. Management's analysis of the interest rate risk of Farmers Citizens as
set forth under "Effects of Inflation/Changing Prices" and "Liquidity
and Interest Rate Sensitivity Management."
The Corporation does not undertake, and specifically disclaims any
obligation, to publicly revise any forward-looking statements to reflect
events or circumstances after the date of such statements or to reflect the
occurrence of anticipated or unanticipated events.
Financial Condition
The Corporation's consolidated total assets amounted to $93.7 million at
December 31, 1998, an increase of $15.1 million or 19.21%, over the $78.6
million in total assets at December 31, 1997. Such increase in assets was
funded primarily by the $15.2 million net increase in deposits and $618,000
in undistributed net earnings being offset by $641,000 decrease in borrowed
funds.
Loan Portfolio Loans, as a component of earning assets, represent a
significant portion of earning assets. At December 31, 1998, the Bank's real
estate loans secured by 1-to-4 family residential properties were
$16,402,000. Loans secured by farmland and loans to finance agricultural
production and other loans to farmers were $11,580,000. As noted
<PAGE>
in Note D, of the Notes to Consolidated Financial Statements, the Bank also
was a creditor for $2,195,000 of loans from related parties.
<TABLE>
<CAPTION>
Loan Information
/S/ <C> <C> <C> <C> <C>
In thousands, except ratios 1998 1997 1996 1995 1994
Loans at December 31,
Commercial $ 4,336 $ 6,025 $ 6,893 $ 7,118 $ 7,569
Agricultural 4,253 4,596 5,856 6,331 7,333
Real estate
Secured by 1-4 family residential properties 16,402 9,211 8,861 5,790 5,533
Secured by other properties 15,335 14,595 13,749 11,217 7,518
Consumer 5,075 5,310 5,356 6,344 6,627
Tax-exempt 237 281 315 378 334
All other 11 11 13 1 4
------- ------- ------- ------- -------
Total $45,649 $40,029 $41,043 $37,179 $34,918
======= ======= ======= ======= =======
Allowance for Loan Losses
Balance at beginning of year $1,480 $1,263 $1,297 $1,601 618
Provision for loan losses (75) 27 0 204 1,015
Charge-offs
Commercial and agricultural 1 405 98 538 125
Consumer 36 1 11 23 9
Credit card 22 12 7 13 4
Real estate 0 0 0 0 0
------ ------ ----- ------ -----
Total Charge-offs 59 418 116 574 138
------ ------ ----- ------ ------
Recoveries
Commercial and agricultural 361 598 73 54 98
Consumer 9 6 6 3 7
Credit card 9 4 3 2 1
Real estate 0 0 0 7 0
------ ------ ------ ------ -----
Total recoveries 379 608 82 66 106
------ ------ ------ ------ ------
Net charge-offs (320) (190) 34 508 32
------ ------ ------ ------ ------
Balance at end of year $1,725 $1,480 $1,263 $1,297 $1,601
====== ===== ====== ====== ======
Allocation of Allowance for Loan Losses
Commercial $1,358 $1,148 $ 749 $ 640 $ 950
Consumer 75 28 31 21 238
Real estate 71 106 224 315 402
Unallocated 221 198 259 321 11
------ ------ ------- ------- ------
Total $1,725 $1,480 $1,263 $1,297 $1,601
====== ====== ====== ====== ======
Credit Quality Ratios
Net charge-offs as a percentage of average loans (0.73)% (0.48)% 0.09% 1.41% 0.09%
Allowance for loan losses to
Total loans at year end 3.78% 3.70% 3.08% 3.49% 4.59%
Net charge-offs (5.39) (7.79) 37.15 2.55 50.03
Provision for loan losses to average loans (0.17)% 0.07% 0.00% 0.56% 2.93%
Earnings coverage of net charge-offs (3.93) (6.49) 24.15 1.38 38.56
</TABLE>
Average loans increased 10.40% in 1998 to represent 53.78% of average
earning assets compared to 56.14% in 1997 and 50.05% in 1996. Year-end total
real estate loans of $31,737,000 represent approximately 69.52% of the total
loans outstanding compared to 59.47% for the previous year-end. As the total
dollars outstanding of loans fluctuated, decreasing during 1993 and 1994 and
then increasing through 1998, real estate loans had remained relatively
constant at 33% prior to 1994, when they increased to 42.67%, 43.05%, and
55.09% at year-end 1994, 1995 and 1996, respectively. Installment loans to
individuals have continued to decline steadily since 1990 from 18.77% of loans
<PAGE>
outstanding to 11.12% at December 31, 1998. The dollar amounts of commercial
loans have also decreased from 21.68% of loans outstanding at year-end 1994 to
9.503% at December 31, 1998. The Loan Information table provides a five year
loan history.
In addition to the loans reported in the Loan Information table, there
are certain off-balance sheet products such as letters of credit and loan
commitments which are offered under the same credit standards as the loan
portfolio. Since the possibility of a liability exists, generally accepted
accounting principles require that these financial instruments be disclosed
but treated as contingent liabilities and thus, not reflected in the
accompanying financial statements. Management closely monitors the financial
condition of potential creditors throughout the term of the instruments to
assure that they maintain credit standards. Refer to Note J and K for
additional information on off-balance sheet financial instruments.
Non-Performing Assets While the Bank had experienced increases in
non-performing assets in prior years, at December 31, 1998, there were no
loans accounted for as non-accrual and accruing loans which are contractually
past due 90 days or more. Management believes that the Allowance for Loan
Losses is adequate to cover any potential losses in the loan portfolio at
December 31, 1998. Refer to the section entitled "Provision for Loan
Losses" for additional detail.
The Non-performing Assets table provides a five year summary of
non-performing assets which are defined as: loans accounted for on a
non-accrual basis, accruing loans that are contractually past due 90 days or
more as to principal or interest payments, renegotiated troubled debt, and
other real estate obtained through loan foreclosure.
A loan is placed on non-accrual when payment terms have been seriously
violated (principal and/or interest payments are 90 days or more past due,
deterioration of the borrower's ability to repay, or significant decrease in
value of the underlying loan collateral) and stays on non-accrual until the
loan is brought current as to principal and interest. The classification of a
loan or other asset as non- accruing does not indicate that loan principal and
interest will not be collectible. The Bank adheres to the policy of the
Federal Reserve that banks may not accrue interest on any loan when the
principal or interest is due and has remained unpaid for 90 days or more
unless the loan is both well secured and in the process of collection.
A loan is considered restructured or renegotiated when either the rate is
reduced below current market rate for that type of risk, principal or interest
is forgiven, or the term is extended beyond that which the Bank would accept
for loans with comparable risk. Property obtained from foreclosing on loans
secured by real estate are adjusted to market value prior to being capitalized
in an "Other Real Estate" account for possible resale. Regulatory provisions
on other real estate are such that after five years, or ten years under
special circumstances, property must be charged-off. This period gives the
Bank adequate time to make provisions for disposing of any real estate
property.
<TABLE>
<CAPTION>
Non-performing Assets and 90-Day Past Due Loans
/S/ <C> <C> <C> <C> <C> <C>
In thousands 1998 1997 1996 1995 1994 1993
At December 31,
Non-accrual loans - $ 23 $ 692 $ 327 $ 285 $ 697
Restructured loans - - - - - -
----- ----- ----- ----- -----
Total non-accrual
and restructured loans - 23 692 327 285 697
Other real estate owned - - - - - -
----- ----- ----- ------ -----
Total non-performing assets - 23 692 327 285 697
Loans past due 90-days or more - - 427 13 97 158
---- ----- ----- ----- ------ ------
Total non-performing assets
and 90-day past due loans - 23 1,119 340 382 855
==== ===== ====== ===== ======= ======
Impaired loans $ - $ 360 $1,340 $1,151 N/A N/A
==== ===== ====== ======
</TABLE>
*Excludes non-accrual and restructured loans
<PAGE>
Loans accounted for as non-performing (non-accrual, restructured, past
due 90-days or more, and impaired) loans decreased $830,000 as of year-end
1998. There were no non-performing assets at December 31, 1998. This
represents a decrease of $23,000 in non-accrual loans and $360,000 in impaired
loans from December 31, 1997. Refer to the "Non-performing Assets and 90-Day
Past Due Loans" table for a six year summary.
This decrease is attributable to both the amount of loans charged-off in
1998, 1997 and 1996, or $59,000, $418,000 and $116,000, respectively, coupled
with the amount of recoveries on charged-off loans which amounted to $379,000,
$608,000 and $82,000 in 1998, 1997 and 1996, respectively. Please refer to
the following section entitled "Provision for Loan Losses" for additional
explanation.
Allowance for Loan Losses The allowance for loan losses was established
and is maintained by periodic charges to the provision for loan loss, an
operating expense, in order to provide for losses inherent in the Bank's loan
portfolio. Loan losses and recoveries are charged or credited respectively to
the allowance for loan losses as they occur.
The allowance/provision for loan losses is determined by management by
considering such factors as the size and character of the loan portfolio, loan
loss experience, problem loans, and economic conditions in the Bank's market
area. The risk associated with the lending operation can be minimized by
evaluating each loan independently based on criteria which includes, but is
not limited to, (a) the purpose of the loan, (b) the credit history of the
borrower, (c) the borrower's financial standing and trends, (d) the market
value of the collateral involved, and (e) the down payment received.
Management utilizes an internal loan review procedure to provide for
analysis of operating data, tax returns and financial statement performance
ratios for all significant commercial loans, regulatory classified loans, past
due loans and internally identified "watch" loans. The Bank's examiners and
independent auditors will periodically perform independent credit reviews of
the Bank's borrowers and evaluate the adequacy of the allowance for loan
losses account based upon the results of their review and other factors.
The results of the quarterly credit reviews in conjunction with
independent collateral evaluations are used by management and the board of
directors in determining the adequacy of the allowance for loan loss account
on a quarterly basis.
Approximately 90% of the Bank's total loans are secured by deeds of trust
on real property, security agreements on personal property, or through the
full faith and credit of government agencies.
Investments The investment portfolio represents the second largest use of
financial resources. The Bank's investment portfolio includes United States
securities, state and municipal obligations, other equity securities, and
equity securities of the Federal Reserve Bank.
Investment securities classified as "held-to-maturity" are those
investment debt securities which the Bank has the ability and intent to hold
to maturity. These securities are stated at cost adjusted for amortization of
premium and accretion of discount, computed by the interest method.
Investment securities classified as "available-for-sale" are those investment
debt and equity securities which the Bank has the ability to sell (for
liquidity or other purposes) prior to their maturity, and are carried at the
lower of cost or market value.
Securities categorized as "available-for-sale" can and will be sold prior
to maturity to meet liquidity or other funding needs. It is management's
intent to hold those securities categorized as "held-to- maturity" until their
maturity unless they are subject to an earlier redemption via a "call
feature". At December 31, 1998 the Bank's entire investment portfolio was
classified as available-for-sale.
Average investments increased by $5,984,000 during 1998 from an average
of $29,728,000 during 1997 to $35,712,000 during 1998, or an increase of
20.13%. During the same period, the average balance of the federal funds sold
increased by 50.62% from $1,375,000 in 1997 to $2,071,000 in 1998. Federal
funds sold are consistently maintained at levels that will cover the
short-term liquidity needs of the Bank. Because of changes in interest rates,
the related increase in local loan demand, the purchase of loans on the open
market, and the significant increases of deposit liabilities, a portion of the
excess available funds were invested in federal funds. Average cash and due
from bank balances also increased by $14,000 during 1998.
<PAGE>
The Bank utilizes a number of outside sources to analyze, evaluate, and
obtain advice relative to the management of its investment portfolio. The
Bank does not invest in any one type of security over another. Funds
allocated to the investment portfolio are constantly monitored by management
to ensure that a proper ratio of liquidity and earnings is maintained.
The Bank's investment portfolio includes approximately $2.0 million of
agency structured notes (step-ups, dual-indexed bonds, and a p.s.a. indexed
bond) which represents cash flows dependent on one or more indices in ways
that create risk characteristics similar to forwards or options. The risks
inherent in these types of securities include secondary liquidity risk (that
is, inability to resell the securities if needed for liquidity), price
volatility due to the uncertainty and unpredictability of the cash flow from
the investment, and interest rate risk. Specific goals and objectives for
investments of this type, have been included in the investment policy of the
Bank.
Deposits The Consolidated Average Balance Sheets and Related Yields and
Rates table highlights average deposits and interest rates during the last
three years. Average deposits in 1998 have increased by approximately
$9,962,000, or 15.23% from 1997 averages which had decreased $4,322,000, or
6.20% compared to 1996. The average cost of deposits for the bank was
approximately 3.89% for the year ended December 31, 1998 compared to 3.87% and
3.75% for 1997 and 1996, respectively.
Shareholders' Equity Maintaining a strong capital position in order to
absorb inherent risk is one of management's top priorities. Selected capital
ratios for the last five years, presented in the Five-Year Consolidated
Financial Summary, reveals that the Bank has been able to maintain an average
equity to average asset ratio of greater than 12% for the past five years.
It should be noted that this ratio has decreased by 109 basis points (100 basis
points equals one percent) in 1998 to 13.05% and increased by 111 basis points
in 1997. It should also be noted that the return on average assets decreased
in 1998 two basis points to 1.14% from 1.16% after increasing in 1997 by 32
basis points from 0.84% in 1996. This is due primarily to the increase in
earning assets coupled with a seven basis point decline in the net interest
margin in 1998. The increase in 1997 was primarily attributable to the 31
basis point increase in net interest margin coupled with the reductions
experienced in operating expenses.
The yield (interest expense) on interest earning liabilities increased
more than the yield (interest income) on interest earning assets, resulting in
a decrease in the bank's interest margin in 1998. The rate paid on interest
costing liabilities was 3.90% in 1998 compared to 3.87% in 1997, while the
yield on interest earning assets declined one basis point to 7.96% in 1998.
As a result, the net interest margin declined from 4.92% in 1997 to 4.85% in
1998, after showing improvements in both 1997 and 1996. As indicated earlier,
management believes that the overall quality of the loan portfolio has
continued to improve in 1998 as it did in both 1997 and 1996.
Banking regulations in 1989 established minimum capital ratios for
banks. The primary purpose of these requirements is to assess the riskiness
of a financial institution's balance sheet and off balance sheet financial
instruments in relation to adjusted capital. A minimum total qualifying
capital ratio of at least 8% with at least 4% of capital composed of Tier I
(core) capital had to be maintained. Tier I capital includes common equity,
non-cumulative perpetual preferred stock, and minority interest less goodwill
and other disallowed intangibles. Tier II (supplementary) capital includes
subordinate debt, intermediate term preferred stock, the allowance for loan
losses and preferred stock not qualifying for Tier I capital. Tier II capital
is limited to 100% of Tier I capital. At December 31, 1998 the Bank's
risk-based capital ratio for Tier I and Tier II capital is 22.19% and 23.47%,
respectively, thus meeting the required 4% and 8% for Tier I and Tier II
capital. The Five-Year Consolidated Financial Summary table and Note Q to
Consolidated Financial Statements summarizes the Bank's risk-based capital,
leverage components and ratios.
Comparison of Results of Operations for the Years Ended December 31, 1998 and
1997
General Net income for the year ended December 31, 1998, amounted to
$1,001,000, an increase of $99,000, or 10.98%, over the $902,000 in net income
in 1997. The increase in net income resulted primarily from a $430,000
increase in net interest income, a decrease of $102,000 in provision for loan
losses and an increase of $77,000 in noninterest income, which was offset by
increases in noninterest expense of $483,000 and federal income tax expense of
$27,000.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Average Balance Sheets and Related Yields and Rates*
1998 1997 1996
----------------------------- ---------------------------- ----------------------------
Interest Interest Average Interest Average
Average Income/ Yields/ Average Income/ Yields/ Average Income/ Yields
In thousands, except ratios Balance Expense Average Balance Expense Rates Balance Expense Rates
- ---------------------------- ------- ------- ------- ------- ------- ----- ------- ------- -----
/S/ <C> <C> <C> <C> <C> <C> <C>
Cash and due from banks $ 3,284 $3,270 $ 2,808
Federal Funds sold 2,071 107 5.17% 1,375 75 5.45% 1,987 108 5.44%
Investment securities
Taxable debt securities 27,420 1,684 6.14% 23,308 1,431 6.14% 26,398 1,609 6.10%
Tax-exempt debt securities 7,976 473 5.93% 6,324 387 6.12% 9,179 533 5.81%
Equity securities 316 17 5.38% 96 6 6.25% 75 4 5.33%
------ ----- ------ ----- ------ -----
Total Investment securities 35,712 2,174 6.09% 29,728 1,824 6.14% 35,652 2,146 6.02%
Loans
Real Estate 16,536 1,504 9.10% 15,198 1,314 8.65% 15,404 1,362 8.84%
Consumer 5,003 518 10.35% 4,942 487 9.85% 5,282 515 9.75%
Commercial
(includes real estate) 22,417 2,201 9.82% 19,675 1,955 9.94% 17,029 1,623 9.53%
------ ----- ------ ----- ------ ------
Total loans 43,956 4,223 9.61% 39,815 3,756 9.43% 37,715 3,500 9.28%
Total earning assets 81,739 6,504 7.96% 70,918 5,655 7.97% 75,354 5,754 7.64%
Allowance for loan losses (1,578) (1,247) (1,304)
Other assets 4,443 4,285 4,553
------- ------- ------
Total assets $87,888 $77,226 $81,411
======= ======= =======
Liabilities and Shareholders'
Equity
Noninterest-bearing deposits 10,265 9,679 9,565
Interest-bearing deposits
NOW accounts 12,626 278 2.20% 9,681 241 2.49% 10,826 273 2.52%
Money market accounts 3,350 125 3.73% 1,480 41 2.77% 2,193 55 2.51%
Savings accounts 18,608 501 2.69% 18,745 544 2.90% 20,543 571 2.78%
Time deposits 30,534 1,631 5.34% 25,836 1,331 5.15% 26,616 1,357 5.10%
------ ----- ------ ----- ------ -----
Total interest-bearing deposits 65,118 2,535 3.89% 55,742 2,157 3.87% 60,178 2,256 3.75%
Borrowed funds 97 6 6.19% 104 7 6.73% 405 21 5.19%
------ ----- ------ ----- ------ -----
Total interest-bearing liabilities 65,215 2,541 3.90% 55,846 2,164 3.87% 60,583 2,277 3.76%
Other liabilities 941 740 654
Shareholders' equity 11,467 10,961 10,609
------ ------ ------
Total liabilities and
shareholders' equity $87,888 $77,226 $81,411
====== ====== ======
Net interest income
(tax-equivalent basis) $3,963 $3,491 $3,477
===== ===== =====
Yield spread 4.06% 4.10% 3.88%
Net interest income to earnings assets 4.85% 4.92% 4.61%
Interest-bearing liabilities to earning assets 9.78% 78.75% 80.40%
</TABLE>
*Interest income/expense and yield/rates are calculated on a tax-equivalent
basis utilizing a federal incremental tax rate of 35% in 1998, 1997 and 1996.
Non-accrual loans and the related negative income effect have been included in
the calculation of average rates.
Net interest income Net interest income totaled $3.96 million (on a
tax-equivalent basis) for the year ended December 31, 1998, an increase of
$472,000 or 13.52%, over the $3.49 million recorded in 1997, due primarily to
an increase in the average balance of the loans outstanding of $4.14 million,
or 10.40%, coupled with an increase of 18 basis point (100 basis points equals
one percent) increase in yield from 9.43% in 1997 to 9.61% in 1998.
Interest income on investment securities increased by $350,000 (on a
tax-equivalent basis), or 19.38%, due primarily to a $5.98 million, or 20.13%,
increase in the average balance of investment securities coupled with a
decrease of 5 basis point in the weighted-average yield year-to-year, from
6.14% in 1997 to 6.09% in 1998. Interest income on federal funds sold
increased by $32,000 for the year ended December 31, 1998.The average balance
<PAGE>
invested in federal funds sold increased by $696,000, or 50.62%, compared to
1997. The yield on federal funds sold decreased by 28 basis points to 5.17%.
Interest expense on deposits increased by $378,000, or 17.52%, during
1998, due primarily to an increase in the average balance of deposits
outstanding of $9.38 million, or 16.79%, coupled with an increase in the
weighted-average rate from 3.87% to 3.90% in 1998. Interest expense on
short-term borrowings decreased by $1,000, or 14.29%, primarily due to the
decrease in average balance outstanding from $104,000 to $97,000, coupled with
a decrease in the weighted-average rate from 6.73% in 1997 to 6.19% in 1998.
As a result of the forgoing changes in interest income and interest
expense, net interest income increased by $472,000 (on a tax-equivalent
basis), or 13.52%, during 1998, as compared to 1997. The interest rate
spread decreased by 4 basis points to 4.06% for 1998 as compared to 4.10%
for 1997, while the net interest margin decreased by 7 basis points to 4.85%
for year 1998.
<TABLE>
<CAPTION>
Consolidated Income Summary
In thousands 1998 Change 1997 Change 1996 1995 1994
/S/ <C> <C> <C> <C> <C> <C> <C>
Interest income (tax-equivalent) basis) $6,504 15.01% $5,655 (1.72)% $5,754 $5,723 $5,598
Interest expense 2,541 17.42% 2,164 (4.96)% 2,277 2,442 2,281
----- ----- ----- ----- -----
Net interest income 3,963 13.52% 3,491 0.40% 3,477 3,281 3,317
Provision for loan losses (75) (377.78)% 27 - 204 1,015
------ ----- ----- ----- -----
Net interest income after provision
for loan losses 4,038 16.57% 3,464 (0.37)% 3,477 3,077 2,302
Non-interest income 633 13.85% 556 2.39% 543 487 525
Non-interest expense 3,215 17.68% 2,732 (10.84)% 3,064 2,906 2,458
----- ----- ----- ----- -----
Income before income taxes 1,456 13.04% 1,288 34.73% 956 658 369
Income tax expense 331 8.88% 304 117.14% 140 (34) (116)
Tax-equivalent adjustment 124 51.22% 82 (39.26)% 135 159 150
----- ----- ---- ----- ----
Net income $1,001 10.98% $ 902 32.45% $ 681 $ 533 $ 335
===== === === === ===
</TABLE>
Provision for Loan Losses Farmers Citizens maintains an allowance for loan
losses in an amount which, in management's judgement, is adequate to absorb
reasonably foreseeable losses inherent in the loan portfolio. The provision
for loan losses is determined by management as the amount to be added to the
allowance for loan losses, after net charge-offs have been deducted, to bring
the allowance to a level which is considered adequate to absorb losses
inherent in the loan portfolio in accordance with generally accepted
accounting principles ("GAAP"). The amount of the provision is based on
management's regular review of the loan portfolio and consideration of such
factors as historical loss experience, generally prevailing economic
conditions, changes in size and composition of the loan portfolio and
considerations relating to specific loans, including the ability of the
borrower to repay the loan and the estimated value of the underlying
collateral. Although a variety of factors, including the performance of
Farmers Citizens' loan portfolio, the economy, changes in real estate values
and interest rates and regulatory requirements regarding asset
classifications. As a result of its analysis, management concluded that the
allowance was adequate as of December 31, 1998. There can be no assurance
that the allowance will be adequate to cover future losses on non-performing
assets.
Farmers Citizens had net recoveries of $320,000 and $190,000 during the
years ended December 31, 1998 and 1997 respectively, and net charge-offs of
$34,000 during the year ended December 31, 1996. Farmers Citizens' charge-off
history is a product of a variety of factors, including Farmers Citizens'
underwriting guidelines and the composition of its loan portfolio. An
analysis of the Allowance for Loan Losses is presented in the Loan Information
table.
There was a negative provision for possible loan losses during 1998 of
$75,000 as compared to a $27,000 provision recorded in 1997 and no provision
recorded in 1996. The amount of provision was based upon the results of the
management's quarterly reviews of the loan portfolio to identify problem and
potential problem loans and to determine appropriate courses of action on a
loan by loan basis. Collection procedures are activated when a loan becomes
past due.
<PAGE>
The entire allowance for loan losses is available to absorb any
particular loan loss. For analytical purposes, the allowance could be
allocated based upon net historical charge-offs of each type of loan for the
last five years. However, the primary criteria used to determine the
percentage allocation is based upon the losses experienced, the type and
market value of the collateral securing the loan portfolio, and the financial
standing of certain borrowers due to economic trends in their related
businesses or farming operations. Please refer to the Loan Information table
for the allocation of the allowance.
Management believes significant factors affecting the allowance are being
reviewed regularly and that the allowance is adequate to cover potentially
uncollectible loans as of December 31, 1998. The Bank has no exposure from
troubled debt to lesser developed countries.
The allowance to loans outstanding at year-end ratio increased to 3.78%
in 1998 from 3.70% and 3.48% in 1997 and 1996, respectively. This increase
was due primarily to the increase in the loan portfolio coupled with the
recovery on loans previously charged off. An analysis of the Allowance for
Loan Losses is presented in the Loan Information table.
Other Income and Other Expense Total other income is comprised
of operating income attributed to providing deposit accounts for bank
customers, the disposition of investment securities prior to their maturity
(which are classified as available for sale), increases in the cash surrender
values of life insurance policies, and fees from banking services.
Total other expense is comprised of operating expense attributed to
staffing (personnel costs), operation and maintenance of bank buildings and
equipment, banking service promotion, taxes and assessments, and other
operating expenses. The "Income Statement Data" table, contains a summary of
these items for the five years ended December 31, 1994 through 1998.
Income Taxes The provision for federal income taxes totaled $331,000 for
the fiscal year ended December 31, 1998, an increase of $27,000, or 8.88%, over
the provision in fiscal 1997. The effective tax rates were 24.8% and 25.2%
for the years ended December 31, 1998 and 1997.
Impacting the tax provisions for the three years covered in this report
is the level of the provision for possible loan losses (negative provision $
75,000 in 1998, $ 27,000 in 1997, and $ 0 in 1996) and the level of tax-exempt
income on securities which was $349,000, $305,000 and $398,000 for the years
1998, 1997, and 1996, respectively. Due to the continued improvement in
credit underwriting standards, the values of collateral securing the loan
portfolio, the financial standing of certain borrowers in their related
businesses or farming operations, and the current economic trends combined
with the amount of recoveries on previously charged-off loans, management
elected to reduce the Bank's provision for possible loan losses during the
fiscal year ended December 31, 1998.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard (SFAS) No. 109, "Accounting for Income Taxes" requiring a
liability approach to accounting for income taxes as opposed to a deferred
approach. The liability approach places emphasis on the accuracy of the
balance sheet while the deferred approach emphasizes the income statement.
Under the liability approach, deferred taxes are computed based on the tax
rates in effect for the periods in which temporary differences are expected to
reverse. An annual adjustment of the deferred tax liability or asset is made
for any subsequent change in tax rates.
Effects of Inflation/Changing Prices The effects of inflation on
operations of the Bank occurs through increased operating costs which can be
recovered through increased prices for services. Virtually all of the Bank's
assets and liabilities are monetary in nature and can be repriced on a more
frequent basis than in other industries. Every effort is being made through
interest sensitivity management to monitor products and interest rates and
their impact on future earnings.
<TABLE>
<CAPTION>
Income Statement Data
1998 Over 1997 1997 Over 1996
------------------------------- --------------------------------
In Thousands Volume Yield/Rate Total Volume Yield/Rate Total
/S/ <C> <C> <C> <C> <C> <C>
Changes in Tax Equivalent Interest Income*
Interest Income
Time Deposits $ - $ - $ - $ (2) $ - $ (2)
Federal funds sold 38 (6) 32 (33) - (33)
Investment securities 367 (17) 350 (351) 31 (320)
Loans 390 77 467 195 61 256
--- --- --- ---- --- ----
Total 795 54 849 (191) 92 (99)
--- --- --- ----- --- ----
Interest expense
Interest-bearing deposits 363 15 378 (126) 27 (99)
Borrowed funds - (1) (1) (18) 4 (14)
--- --- --- ----- --- -----
Total 363 14 377 (144) 31 (113)
--- --- --- ----- --- -----
Net interest income $432 $40 $472 $(47) $ 61 $ 14
</TABLE>
*Changes in the average balance/rate are allocated entirely to the yield/rate
changes
<TABLE>
<CAPTION>
Analysis of Selected Non-Interest Expenses
1998 % Change 1997 % Change 1996 1995 1994
/S/ <C> <C> <C> <C> <C> <C> <C>
Salaries and benefits
Salaries $1,124 31.00% $ 858 (22.63)% $1,109 $ 950 $ 856
Benefits 366 28.42% 285 (34.18)% 433 417 369
------ ------ ----- ------ ------
Total $1,490 30.36% $1,143 (25.88)% $1,542 $1,367 $1,225
====== ====== ====== ====== ======
Occupancy and equipment
Depreciation $ 354 32.09% $ 268 (1.83)% $ 273 $ 247 $137
Maintenance and repairs 179 13.29% 158 (1.86)% 161 102 89
Real estate taxes 15 0.00% 15 0.00% 15 10 10
Insurance 29 20.83% 24 14.29% 21 27 22
Utilities and other 42 27.27% 33 (5.71)% 35 54 47
------ ------ ------ ----- ----
Total $ 619 24.30% $ 498 (1.39)% $ 505 $ 440 $305
====== ====== ====== ====== ====
Other expenses
Advertising $ 81 (3.57)% $ 84 (7.69)% $ 91 $ 88 $ 98
ATM fees 39 34.48% 29 16.00% 25 25 27
Bank charges 40 14.29% 35 (7.89)% 38 36 35
Credit card fees 45 7.14% 42 (2.33)% 43 51 49
Deposit insurance 8 (55.56)% 18 (14.29)% 21 91 156
Directors' fees 72 2.86% 70 (16.67)% 84 53 58
Legal and professional 202 (28.62)% 283 30.41% 217 162 23
State franchise tax 165 42.24% 116 (26.58)% 158 164 163
Postage, freight & courier 65 32.54% 49 25.64% 39 56 58
Supplies 110 (2.65)% 113 14.14% 99 99 80
Travel 40 (9.09)% 44 51.72% 29 39 19
Other 239 14.90% 208 20.23% 173 176 162
------ ------ ------ ------ ----
Total $1,106 1.37% $1,091 7.28% $1,017 $ 1,040 $928
====== ====== ====== ====== ====
</TABLE>
<PAGE>
Liquidity and Interest Rate Sensitivity Management Management utilizes
several tools currently available to monitor and ensure that liquid funds are
available to satisfy the normal loan and deposit needs of its customers while
taking advantage of investment opportunities as they arise in order to
maintain consistent growth and interest income. Cash and due from banks,
marketable investment securities with maximum one year maturities, and federal
funds sold are the principal components of asset liquidity. The "Interest
Rate Sensitivity" table, indicates that the Bank is in a liability sensitive
position which is more beneficial in a period of declining interest rates
since liabilities can be repriced at lower rates. In periods of rising
interest rates, interest sensitive assets are more favorable since they allow
adjustment of interest sensitive assets prior to maturing interest sensitive
liabilities. The three month category of interest sensitive liabilities
includes approximately $34,581,000 consisting of Savings, NOW accounts, and
insured earnings which can be adjusted in any one category at any time to
offset any positive gap in a declining rate environment.
<TABLE>
<CAPTION>
Interest Rate Sensitivity
Repricing or Maturing
Over Over Over
Within 3 Months 1 Year 3 Years After
In thousands, except ratios 3 Months to 1 Year to 3 Years to 5 Years 5 Years Total
/S/ <C> <C> <C> <C> <C> <C>
Loans $ 4,324 $ 5,288 $ 8,088 $ 6,147 $21,802 $45,649
Investment securities 4,584 3,825 5,089 3,475 20,346 37,319
Other earning assets 3,505 3,505
Other assets 7,212 7,212
------ ------ ------- ------- ------- -------
Total assets $12,413 $9,113 $13,177 $9,622 $49,360 $93,685
======= ====== ======= ======= ======= =======
Noninterest-bearing deposits $10,517 $10,517
Interest-bearing deposits $ 48,548 $13,807 $ 7,046 $ 1,393 - 70,794
Borrowed funds -
Other liabilities and equity 12,374 12,374
-------- -------- ------- ------ ------- --------
Total liabilities and equity $ 48,548 $ 13,807 $ 7,046 $ 1,393 $ 22,891 $93,685
======== ======== ======= ======= ======== =======
Gap* $(36,135) $(4,694) $ 6,131 $ 8,229 $ 26,469
Cumulative gap (36,135) (40,829) (34,698) (26,469) -
Cumulative gap as a percent
of total assets (38.57)% (43.58)% (37.04)% (28.25)% 0.00%
*Assets - (liabilities + equity)
</TABLE>
Management utilizes variable rate loans (on a limited basis) and
adjustable rate deposits to maintain desired net interest margins. A
procedural process has been developed to monitor changes in market rates on
interest sensitive assets and liabilities with appropriate action being taken
when warranted. Please refer to the "Interest Rate Sensitivity" and the
"Other Balance Sheet Data" tables for additional information.
<PAGE>
<TABLE>
<CAPTION>
Quarterly Condensed Consolidated Financial
Information
1998 Quarters 1997 Quarters
------------------------------------ --------------------------------------
In thousands, except per common
shares and ratios Fourth Third Second First Fourth Third Second First
/S/ <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $1,667 $1,636 $ 1,583 $ 1,494 $ 1,465 $ 1,339 $ 1,358 $ 1,351
Interest expense 640 646 651 604 572 539 531 522
Net interest income 1,027 990 932 890 893 860 827 829
Provision for loan losses (25) (25) (25) - - - 7 20
Non-interest income 175 159 168 131 179 126 131 120
Non-interest expense 846 863 772 734 703 669 667 693
Income before income taxes 381 311 353 287 369 317 284 236
Income tax expense 100 74 89 68 100 82 70 52
Net income $ 281 $ 237 $ 264 $ 219 $ 269 $ 235 $ 214 $ 184
Per Common Share
Net income
Basic $0.44 $0.37 $0.41 $0.34 $ 0.42 $0.37 $0.33 $0.28
Diluted 0.44 0.36 0.41 0.34 0.42 0.37 0.33 0.28
Dividends declared 0.30 - 0.30 - 0.60 - - -
Shareholders' equity 18.18 18.20 17.77 17.77 17.36 7.49 16.99 16.60
Stock price range
High 27.00 27.00 22.00 22.00 22.00 22.00 22.00 22.00
Low 27.00 27.00 27.00 22.00 22.00 22.00 22.00 22.00
Tax-equivalent Yields and Rates
Federal funds sold 4.84% 5.63% 5.46% 5.45% 5.72% 5.32% 4.65% 5.36%
Investment securities 5.39% 6.00% 6.14% 6.66% 6.19% 6.50% 6.11% 6.00%
Loans 9.86% 9.80% 9.74% 9.02% 9.84% 9.68% 9.16% 9.13%
Total earning assets 7.71% 8.06% 7.98% 7.97% 8.16% 8.33% 7.81% 7.73%
Interest-bearing deposits 3.72% 3.92% 3.92% 4.03% 4.06% 3.99% 3.80% 3.64%
Borrowed funds N/A 6.25% 6.17% N/A 12.50% N/A 7.84% 4.49%
Total interest-bearing liabilities 3.72% 3.92% 3.94% 4.03% 4.06% 3.99% 3.82% 3.64%
Yield spread 4.00% 4.14% 4.04% 3.94% 4.10% 4.34% 4.00% 4.09%
Net interest income to earning assets 4.76% 4.94% 4.77% 4.81% 4.99% 5.18% 4.82% 4.85%
Ratios
Return on assets 1.22% 1.07% 1.18% 1.07% 1.37% 1.24% 1.12% 0.94%
Leverage 7.91x 7.69x 7.81x 7.24x 7.00x 6.83x 7.07x 7.29x
Return on average shareholders'
equity 9.68% 8.21% 9.25% 7.75% 9.59% 8.47% 7.92% 6.87%
Average Assets
Cash and due from banks $ 1,987 $ 2,984 $ 5,391 $ 2,772 $ 3,649 $ 4,239 $ 2,478 $ 2,711
Federal funds sold 4,216 1,280 659 2,130 2,658 1,578 516 746
Investment securities 36,970 36,524 38,712 30,643 30,083 26,919 30,558 31,353
Loans 45,600 45,095 41,532 43,597 39,285 39,943 39,805 40,227
------ ------ ------ ------ ------ ------ ------
Total earning assets 86,786 82,899 80,903 76,370 72,026 68,440 70,879 72,326
Allowance for loan losses (1,646) (1,564) (1,572) (1,531) (1,278) (1,180) (1,269) (1,259)
Other assets 4,658 4,460 4,458 4,195 4,160 4,262 4,320 4,398
------- ------- ------- ------- ------- ------ ------- --------
Total average assets $91,785 $88,779 $89,180 $81,806 $78,557 $75,761 $76,408 $78,176
======= ======= ======= ======= ======= ======= ======= =======
Average Liabilities and Shareholders'
Equity
Noninterest-bearing deposits $10,508 $10,305 $10,508 $9,739 $10,178 $ 9,778 $ 9,246 $ 9,516
Interest-bearing deposits 68,848 65,865 65,842 59,917 56,317 54,001 55,432 57,217
Borrowed funds - 64 324 - 32 - 204 178
Other liabilities 821 1,004 1,092 845 814 886 714 546
Shareholders' equity 11,608 11,541 11,414 11,305 11,216 11,096 10,812 10,719
------ ------ ------ ------ ------ ------ ------ ------
Total average liabilities
and shareholders' equity $91,785 $88,779 $89,180 $81,806 $78,557 $75,761 $76,408 $78,176
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Other Balance Sheet Data
In thousands, except ratios
Maturity of Total Investment Securities (a)
Carrying Value
1-5 Years 5-10 Years After 10 Years Total
Within 1 year Amount/Yield Amount Yield Amount/Yield Amount/Yield
------------ ------------ ------------ ------------- ------------
/S/ <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
At December 31, 1998
Investment securities
available-for-sale:
U.S. Government Agency $ 502 5.90% $ 2,927 4.91% $ 4,307 5.55% $ 1,874 6.68% $ 9,610 5.91%
State and Municipal Obligation (b) 1,274 5.07% 3,541 5.77% 500 5.88% 3,450 4.76% 8,765 5.27%
Mortgage-backed securities 399 6.02% 2,112 6.63% 2,389 6.46% 12,125 6.34% 17,025 6.39%
Corporate securities 495 6.11% 1,103 5.39% 5.40% 1,598 5.61%
Equity 325 325
------ ------ ------ ------- ------
Total investment securities $ 2,670 5.56% $ 9,683 5.65% $ 7,196 5.88% $17,774 6.05% $37,323 5.96%
====== ===== ===== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Within 1-5 After
Maturity of Loans 1 Year Years 5 Years Total
/S/ <C> <C> <C> <C>
Fixed Rate
Commercial $ 2,770 $ 2,726 $ - $ 5,496
Installment loans to individuals 1,541 3,218 - 4,759
Residential/Commercial real estate 1,745 8,191 21,801 31,737
All other 326 0 326 320
------- ------- ------- -------
Total $ 6,382 $14,135 $21,801 $42,318
======= ======= ======= =======
Floating interest rates
Commercial 3,330 - - 3,330
------ ------- ======== ========
Total $ 9,712 $14,135 $21,801 $45,648
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Within 3-12 1-2 2-3
Maturity of Time Deposits of $100,000 or more 3 Months Months Years Years Total
/S/ <C> <C> <C> <C> <C>
Certificates of deposit and other time $ 3,281 $ 5,441 $ 909 $ 432 $10,063
======= ======== ===== ===== =======
</TABLE>
<TABLE>
<CAPTION>
Deposits at December 31, 1998 1997 1996 1995 1994
/S/ <C> <C> <C> <C> <C>
Noninterest-bearing deposits $10,517 9,708 11,296 10,766 11,320
Interest-bearing deposits
NOW and money market accounts 18,670 10,972 12,397 13,609 14,196
Savings accounts 18,639 18,063 20,208 21,541 22,395
Certificates of deposit 33,485 27,349 26,173 24,975 23,873
------- ------- ------ ------ ------
Total deposits $81,311 $66,092 $70,074 $70,891 $71,784
</TABLE>
(a) Based on contractual maturities
(b) The yield on state municipal securities is increased by the benefit of tax
exemption, assuming a 34% federal income tax rate. For the year ended
December 31,1998, the amount of the increases in the yields for these
securities and for total securities is 1.51% and .34%, respectively.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
FC Banc Corp
Bucyrus, Ohio
We have audited the consolidated balance sheets of FC Banc Corp and
subsidiary as of December 31, 1998 and 1997, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of FC
Banc Corp and subsidiary as of December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
Robb, Dixon,
Francis, Davis, Oneson
& Company
Granville, Ohio
January 18, 1999
<PAGE>
CONSOLIDATED BALANCE SHEETS
==============================================================================
(Dollars in thousands)
December 31,
1998 1997
---- ----
ASSETS
Cash and cash equivalents
Cash and amounts due from banks $ 3,964 $ 3,567
Interest-bearing deposits with banks 5 0
Federal funds sold 3,500 0
------ ------
Total cash and cash equivalents 7,469 3,567
Investment securities, available-for-sale 37,319 32,460
Loans 45,649 40,029
Allowance for loan losses (1,725) (1,480)
Net loans 43,924 38,549
Premises and equipment, net 1,489 1,416
Accrued interest receivable 711 733
Cash surrender value of life insurance 2,385 1,470
Deferred income taxes 316 285
Other assets 72 148
------- -------
TOTAL ASSETS $93,685 $78,628
LIABILITIES
Deposits
Noninterest-bearing $10,517 $ 9,708
Interest-bearing 70,794 56,384
------- -------
Total deposits 81,311 66,092
Borrowed funds 0 641
Accrued interest payable 188 182
Other liabilities 639 518
------ ------
TOTAL LIABILITIES 82,138 67,433
SHAREHOLDERS' EQUITY
Preferred stock of $25 par value; 750 shares
authorized, no shares issued and outstanding 0 0
Common stock of no par value;
1,000,000 shares authorized, 665,632 shares issued 832 832
Additional paid-in capital 1,370 1,370
Retained earnings 10,079 9,461
Treasury stock, at cost; 30,703 and 23,256 shares (685) (484)
Accumulated other comprehensive income (49) 16
------ -------
TOTAL SHAREHOLDERS' EQUITY 11,547 11,195
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $93,685 $78,628
======= =======
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
===============================================================================
<TABLE>
<CAPTION>
(Dollars in thousands)
Years Ended December 31,
1998 1997 1996
---- ---- ----
/S/ <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $4,218 $3,756 $3,500
Interest and dividends on investment securities 2,055 1,742 2,009
Interest on federal funds sold 107 75 108
Interest on bank deposits 0 0 2
----- ----- ------
TOTAL INTEREST INCOME 6,380 5,573 5,619
----- ----- -----
INTEREST EXPENSE
Interest on deposits 2,535 2,157 2,256
Interest on borrowed funds 6 7 21
----- ----- -----
TOTAL INTERST EXPENSE 2,541 2,164 2,277
----- ----- ------
NET INTEREST INCOME 3,389 3,409 3,342
Provision for loan losses (75) 27 0
----- ----- -----
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,914 3,382 3,342
OTHER INCOME
Service charges 411 368 336
Gains from sales of investment securities, net 11 3 (13)
Life insurance buildup 75 73 74
Other income 136 112 146
--- --- ---
TOTAL OTHER INCOME 633 556 543
=== === ===
OTHER EXPENSES
Salaries and employee benefits 1,490 1,143 1,542
Net occupancy and equipment expenses 619 498 505
Advertising and public relations 81 84 91
Directors fees 72 70 84
Legal and professional 202 283 217
State taxes 165 116 158
Supplies 110 113 99
Other expenses 476 425 368
----- ---- -----
TOTAL OTHER EXPENSES 3,215 2,732 3,064
NET INCOME BEFORE FEDERAL INCOME
TAX EXPENSE 1,332 1,206 821
Federal income tax expense 331 304 140
----- ---- ------
NET INCOME $1,001 $ 902 $681
EARNINGS PER SHARE:
Basic $1.56 $1.40 $1.04
Diluted $1.55 $1.40 $1.04
</TABLE>
See accompanying notes
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
================================================================================
<TABLE>
<CAPTION>
(Dollars in thousands)
Years Ended December 31, 1998, 1997 and 1996
Accumulated Total
Capital Other Share-
Common Paid-in Retained Treasury Comprehensive holders'
Stock Capital Earnings Stock Income Equity
----- ------- -------- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 $832 $1,370 $8,653 $ 0 ($95) $10,760
Comprehensive Income
Net income 681 681
Other comprehensive income,
net of tax:
Change in unrealized
gain (loss) on securities
available-for-sale, net
of deferred income tax of $35 (69) (69)
----
612
----
Dividends declared - common
($.60 per share) (390) (390)
Purchase 15,592 shares of
treasury stock (315) (315)
----- ----- ------ ----- ------ ------
Balances at December 31, 1996 832 1,370 8,944 (315) (164) 10,667
Comprehensive Income
Net Income 902 902
Other comprehensive income,
net of tax:
Change in unrealized
gain (loss) on securities
available-for-sale,
net of deferred income tax of $89 180 180
---
Total comprehensive income 1,082
-----
Dividends declared - common
($.60 per share) (385) (385)
Purchase 7,664 shares of
treasury stock (169) (169)
--- ----- ----- ----- --- ------
Balances at December 31, 1997 832 1,370 9,461 (484) 16 11,195
Comprehensive Income
Net Income 1,001 1,001
Other comprehensive income,
net of tax:
Change in unrealized
gain (loss) on securities
available-for-sale,
net of deferred income tax of $31
Total comprehensive income (65) (65)
------ ------
936
-------
Dividends declared - common
($.60 per share) (383) (383)
Purchase 7,447 shares of
treasury stock (201) (201)
-------
---- ----- ------- ----- ----- -------
Balance at December 31, 1998 $832 $1,370 $10,079 ($685) ($49) $11,547
==== ====== ======= ====== ===== =======
</TABLE>
See accompanying notes.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
(Dollars in thousands)
Years Ended December 31,
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
/S/ <C> <C> <C>
Net income $ 1,001 $ 902 $ 681
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses (75) 27 0
(Gain) loss on sales of available-for-sale securities, net (11) (3) 13
Gain from sale of loans held-for-sale (10) 0 (23)
Income accrued on life insurance contracts (75) (73) (74)
Origination of loans held-for-sale (1,287) 0 (1,074)
Proceeds from sale of loans held-for-sale 1,297 0 1,097
Depreciation 357 268 273
Deferred income taxes 0 147 (20)
Investment securities amortization (accretion), net 134 77 114
Net change in:
Accrued interest receivable 21 104 (68)
Accrued interest payable 7 (4) (26)
Other assets 76 35 234
Other liabilities 120 119 89
----- ----- -----
Net cash provided by operating activities 1,555 1,599 1,216
----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available-for-sale (22,287) (10,835) (9,256)
Proceeds from sales of securities available-for-sale 6,065 3,363 2,420
Proceeds from maturities of securities available-for-sale 11,144 7,402 8,280
Purchase of loans 0 0 (2,889)
Net (increase) decrease in loans (5,300) 1,203 (972)
Purchases of premises and equipment (429) (208) (343)
Purchases of life insurance contracts (840) 0 0
-------- ------- --------
Net cash provided by (used in) investing activities (11,647) 925 (2,760)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in:
Noninterest-bearing, interest bearing, demand,
and savings deposits 9,084 (5,140) (2,015)
Certificates of deposit 6,135 1,158 1,198
Net increase (decrease) in short-term borrowed funds (600) 600 (1,525)
Proceeds from note payable 0 0 119
Payments on note payable (41) (78) 0
Purchase of treasury stock (201) (169) (315)
Cash dividends paid (383) (385) (390)
------ ------- -------
Net cash provided by (used in) financing activities 13,994 (4,014) (2,928)
------ ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
EQUIVALENTS 3,902 (1,490) (4,472)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,567 5,057 9,529
------ ------ -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 7,469 $ 3,567 $ 5,057
====== ====== =======
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for interest $ 2,534 $2,168 $ 2,304
Cash paid during the year for income taxes 197 181 (106)
See accompanying notes.
<PAGE>
Notes to Consolidated Financial Statements
================================================================================
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
FC Banc Corp (the Bancorp) is a bank holding company whose principal activity
is the ownership and management of its wholly-owned subsidiary, The Farmers
Citizens Bank, (the Bank). The Bank generates commercial (including
agricultural), mortgage and consumer loans and receives deposits from
customers located primarily in Crawford County, Morrow County and the
surrounding areas. The Bank operates under a state bank charter and provides
full banking services. As a state bank, the Bank is subject to regulations by
the State of Ohio Division of Financial Institutions and the Federal Reserve
System through the Federal Reserve Bank of Cleveland (FRB).
Basis of Consolidation
The consolidated financial statements include the accounts of FC Banc Corp,
and its wholly-owned subsidiary, The Farmers Citizens Bank, after elimination
of all material intercompany transactions and balances.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. In connection with the
determination of the estimated losses on loans, management obtains independent
appraisals for significant collateral.
The Bank's loans are generally secured by specific items of collateral
including real property, consumer assets, and business assets. Although the
Bank has a diversified loan portfolio, a substantial portion of its debtors'
ability to honor their contracts is dependent on local economic conditions in
the agricultural industry.
While management uses available information to recognize losses on loans,
further reductions in the carrying amounts of loans may be necessary based on
changes in local economic conditions. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the estimated
losses on loans. Such agencies may require the Bank to recognize additional
losses based on their judgments about information available to them at the
time of their examination. Because of these factors, it is reasonably
possible that the estimated losses on loans may change materially in the near
term. However the amount of the change that is reasonably possible cannot be
estimated.
Investment Securities
All debt securities are classified as available-for-sale. Securities
available-for-sale are carried at fair value with unrealized gains and
losses reported in other comrpehensive income. Realized gains (losses)
on securities available-for-sale are included in other income (expense)
and, when applicable, are reported as a reclassification adjustment, net
of tax, in other comprehensive income. Gains and losses on sales of securites
are determined on the specific-identification method.
Loans are stated at unpaid principal balances, less the allowance for loan
losses.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments received on such
loans are applied as a reduction of the loan principal balance. Interest
income on other nonaccrual loans is not recognized until all principal
payments have been made in full.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level which, in management's
judgment, is adequate to absorb credit losses inherent in the loan portfolio.
The amount of the allowance is based on management's evaluation of the
collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific impaired
loans, and economic conditions and other risks inherent in the portfolio.
Allowances for impaired loans are generally determined based on collateral
values or the present value of estimated cash flows. Although management uses
available information to recognize losses on loans, because of uncertainties
associated with local economic conditions, collateral values, and future cash
flows on impaired loans, it is reasonably possible that a material change
<PAGE>
could occur in the allowance for loan losses in the near term. However, the
amount of the change that is reasonable possible cannot be estimated. The
allowance is increased by a provision for loan losses, which is charged to
expense, and reduced by charge-offs, net of recoveries. Changes in the
allowance related to impaired loans are charged or credited to the provision
for loan losses.
Premises and Equipment
Land is carried at cost. Other premises and equipment are recorded at cost
net of accumulated depreciation. Depreciation is computed using the
straight-line method based principally on the estimated useful lives of the
assets. Maintenance and repairs are expensed as incurred while major
additions and improvements are capitalized.
Other Real Estate Owned
Real estate properties acquired through or in lieu of loan foreclosure are
initially recorded at the lower of the Bank's carrying amount or fair value
less estimated selling cost at the date of foreclosure. Any write-downs based
on the asset's fair value at the date of acquisition are charged to the
allowance for loan losses. After foreclosure, these assets are carried at the
lower of their new cost basis or fair value less cost to sell. Costs of
significant property improvements are capitalized, whereas costs relating to
holding property are expensed. The portion of interest costs related to
development of real estate is capitalized. Valuations are periodically
performed by management, and any subsequent write-downs are recorded as a
charge to operations, if necessary, to reduce the carrying value of a property
to the lower of its cost or fair value less cost to sell.
Postretirement Benefits
Postretirement health care and life insurance benefits are charged to salaries
and employee benefits expense when paid. In December, 1990, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
(SFAS) No. 106, Employers' Accounting for Postretirement Benefits Other Than
Pensions. Under SFAS No.106, beginning in 1995, postretirement benefits other
than pensions were accounted for in a manner similar to current standards for
accounting for pensions. SFAS No. 106 requires that the accumulated
postretirement benefit obligation be either charged in the income statement as
a cumulative effect of a change in accounting in the period of adoption or
delayed and amortized over future periods as part of future postretiremnt
benefits costs.
Off-Balance Sheet Financial Instruments
In the ordinary course of business the Bank has entered into off balance sheet
financial instruments consisting of commitments to extend credit, commitments
under credit card arrangements, and standby letters of credit. Such financial
instruments are recorded in the financial statements when they become payable.
Advertising
Advertising cost are charged to operations when incurred.
Income Taxes
Income taxes are provided for the tax effects reported in the financial
statements and consist of taxes currently due plus deferred taxes related
primarily to differences between the basis of available-for-sale securities,
allowance for loan losses, accumulated depreciation, income on nonaccrual
loans, deferred compensation, and accretion income. The deferred tax assets
and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. Deferred tax assets and liabilities are
reflected at income tax rates applicable to the period in which the deferred
tax assets and liabilities are expected to be realized or settled. As changes
in tax laws or rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes. The Bancorp files
consolidated income tax returns with its subsidiary.
Reclassifications
Certain amounts in 1997 and 1996 have been reclassified to conform with the
1998 presentation.
NOTE B - RESTRICTION ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserve funds in cash or on deposit with the
Federal Reserve Bank. The required reserve at December 31, 1998 and 1997, was
$736,000 and $582,000, respectively.
<PAGE>
NOTE C - INVESTMENT SECURITIES
The amortized cost of securities and their approximate fair values are as
follows:
</TABLE>
<TABLE>
<CAPTION>
Available-for-sale
(Dollars in thousands)
December 31, 1998 December 31, 1997
------------------------------------------------ --------------------------------------------------
Gross Gross Gross Gross
Amortized unrealized unrealized Fair Amortized unrealized unrealized Fair
cost gains losses value cost gains losses value
-------- ---------- ---------- ----- -------- ---------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government $ 0 $ 0 $ 0 $ 0 $ 3,085 $ 14 $ 0 $ 3,099
Federal agencies 9,692 4 (86) 9,610 11,037 33 (66) 11,004
State &
municipal
securities 8,669 118 (22) 8,765 6,349 104 (25) 6,428
Mortgage-backed
securities 17,102 39 (116) 17,025 11,170 46 (81) 11,135
Corporate
debt securities 1,608 0 (10) 1,598 492 0 (2) 490
Equity
securities 321 0 0 321 304 0 0 304
------- ---- ----- ------- ------- ---- ------ -----
Total $37,392 $161 ($234) $37,319 $32,437 $197 $(174) $32,460
======= ==== ====== ======= ======= ==== ======
</TABLE>
The amortized cost and estimated fair value of securities available-for-sale
at December 31, 1998, by contractual maturity, are as
follows:
(Dollars in thousands)
Amounts maturing in : Amortized Fair
Cost Value
--------- -----
One year or less $ 2,265 $ 2,271
After one year through five years 7,561 7,571
After five years through ten years 4,818 4,807
After ten years 5,325 5,324
Mortgage-backed securities 17,102 17,025
Equity securities 321 321
------ ------
Total $37,392 $37,319
======= =======
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations without call or prepayment
penalties.
During 1998, the Bank sold securities available-for-sale for total proceeds of
approximately $6,065,000 resulting in gross realized gains of approximately
$12,000 and gross losses of approximately $1,000. During 1997, the Bank sold
securities available-for-sale for total proceeds of approximately $3,363,000,
resulting in gross realized gains of approximately $7,000 and gross losses of
approximately $4,000. During 1996, the Bank sold securities available-for-sale
for total proceeds of approximately $2,420,000 resulting in gross realized gains
of approximately $2,000 and gross losses of approximately $15,000.
<PAGE>
Investment securities with a carrying value of approximately $11,775,000 and
$10,095,000 were pledged at December 31, 1998 and 1997 to secure certain
deposits.
NOTE D - LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans at December 31, 1998 and 1997 are summarized as follows:
(Dollars in thousands)
1998 1997
---- ----
Loans secured by real estate:
Construction $ 517 $ 210
Farmland 7,327 5,407
1-to-4 family residential properties 16,402 9,211
Nonfarm nonresidential properties 7,491 8,978
Agricultural production 4,253 4,596
Commercial and industrial 4,336 6,025
Consumer 5,075 5,310
Municipal 237 281
Other 11 11
------- -------
Total $45,649 $40,029
======= ========
1998 1997 1996
---- ---- ----
Allowance for loans losses:
Balance, beginning of year $1,480 $1,263 $1,297
Provision for loan losses (75) 27 0
Recoveries on loans 379 608 82
Loans charged off (59) (418) (116)
------ ------ ------
Balance, end of year $1,725 $1,480 $1,263
====== ====== ======
At December 31, 1998 and 1997, the total recorded investment in impaired
loans, all of which had allowances determined in accordance with SFAS No. 114
and No. 118, amounted to approximately $0 and $360,000, respectively. The
average recorded investment in impaired loans amounted to approximately
$175,000, $531,000 and $1,245,000 for the years ended December 31, 1998, 1997
and 1996, respectively. The allowance for loan losses related to impaired
loans amounted to approximately $0 and $180,000 at December 31, 1998 and
1997, respectively. No interest income on impaired loans was recognized for
cash payments received for the years ended December 31, 1998, 1997 and 1996.
The Bank has no loans which have been modified.
The Bank has entered into transactions with certain directors, executive
officers, significant shareholders, and their affiliates. Such transactions
were on substantially the same terms, including interest rates and collateral,
as those prevailing at the time of comparable transactions with other
customers, and did not, in the opinion of management, involve more than a
normal credit risk or present any other unfavorable features. The aggregate
amount of loans to such related parties at December 31, 1998 was $2,195,000.
During the year ended loans made to such related parties amounted to $815,000
and payments amounted to $1,297,000.
<PAGE>
NOTE E - PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 1998 and 1997 follows:
(Dollars in thousands)
1998 1997
---- ----
Land $ 221 $ 221
Buildings 1,251 1,250
Equipment 1,607 1,701
Construction in process 349 22
------ ------
3,428 3,194
Accumulated depreciation (1,939) (1,778)
------ -----
Total $1,489 $1,416
====== ======
NOTE F - CASH SURRENDER VALUE OF LIFE INSURANCE
The Bank is the beneficiary of insurance on the lives of four of its past and
present officers. At December 31, 1998 and 1997, there were no notes payable
to the insurance company.
NOTE G - DEPOSITS
Deposit account balances at December 31, 1998 and 1997, are summarized as
follows:
(Dollars in thousands)
1998 1997
---- ----
Noninterest bearing $ 10,517 $ 9,708
Interest-bearing demand 18,670 10,972
Savings accounts 18,639 18,063
Certificates of deposit 33,485 27,349
------ ------
Total $81,311 $66,092
====== ======
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $10,063,000 and $5,297,000 at December 31, 1998
and 1997.
Certificates maturing in years ending December 31, as of December 31, 1998:
(Dollars in thousands)
1999 $26,437
2000 5,655
2001 1,391
2002 0
2003 and thereafter 2
------
Total $33,485
======
<PAGE>
The Bank held related party deposits of approximately $553,000 and $206,000 at
December 31, 1998 and 1997, respectively.
Overdrawn demand deposits reclassified as loans totaled $10,000 and $11,000 at
December 31, 1998 and 1997, respectively.
NOTE H - BORROWED FUNDS
Borrowed funds balances at December 31, 1998 and 1997 are summarized as
follows:
(Dollars in thousands)
1998 1997
---- ----
Federal funds purchased $ 0 $600
Note payable 0 41
--- ----
Total borrowed funds $ 0 $641
=== ====
NOTE I - FEDERAL INCOME TAXES
The consolidated provision for income taxes for the years ended December 31,
1998, 1997 and 1996 consist of the following:
(Dollars in thousands)
1998 1997 1996
---- ---- ----
Income tax expense
Current tax expense $331 $157 $160
Deferred tax expense 0 147 (20)
---- ---- ----
Total $331 $304 $140
==== ==== ====
The consolidated provision for federal income taxes differs from that
computed by applying federal statutory rates to income before federal income
tax expenses, as indicated in the following analysis:
<TABLE>
<CAPTION>
(Dollars in thousands)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Federal statutory income tax at 34% $453 34.0% $410 34.0% $279 34.0%
Tax exempt interest (130) (9.8%) (104) (8.6%) (142) (17.3%)
Life insurance income (25) (1.9%) (25) (2.1%) (25) (3.0%)
Interest and other non-deductible expenses 24 1.8% 20 1.7% 19 2.3%
Other 9 0.7% 3 0.2% 9 1.0%
---- ----- ---- ---- ---- -----
Total $331 24.8% $304 25.2% $140 17.0%
==== ==== ==== ==== ==== =====
</TABLE>
<PAGE>
A cumulative net deferred tax asset is included in other assets at December
31, 1998 and 1997. The components of the
asset are as follows:
(Dollars in thousands)
1998 1997
---- ----
Differences in available-for-sale securities $ 24 $ (7)
Differences in depreciation methods (33) (83)
Differences in accounting for loan losses 271 297
Differences in nonaccrual loan interest 0 4
Differences in accrued expenses and benefits 97 82
Differences in discount accretion (16) (22)
Other (27) 14
----- -----
Total $316 $285
==== ====
Deferred tax assets $392 $397
Deferred tax liabilities (76) (112)
---- ----
Net deferred tax assets $316 $285
==== ====
NOTE J - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business, the Bank has outstanding commitments and
contingent liabilities, such as commitments to extend credit and standby
letters of credit, which are not included in the accompanying consolidated
financial statements. The Bank's exposure to credit loss in the event of
nonperformance by the other party to the financial instruments for commitments
to extend credit and standby letters of credit is represented by the
contractual or notional amount of those instruments. The Bank uses the same
credit policies in making such commitments as it does for instruments that are
included in the consolidated balance sheets.
Financial instruments whose contract amount represents credit risk were as
follows:
(Dollars in thousands)
1998 1997
---- ----
Home equity lines of credit $ 818 $ 410
Credit card lines 900 935
Other commitments to extend credit 3,288 1,902
Standby letters of credit 613 608
----- -----
$5,619 $3,855
====== ======
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount and type of
collateral obtained, if deemed necessary by the Bank upon extension of credit,
is based on management's credit evaluation. Collateral held varies but may
include accounts receivable, inventory, property and equipment, and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Standby letters of
credit generally have fixed expiration dates or other termination clauses and
may require payment of a fee. The credit risk involved in issuing letters of
<PAGE>
credit is essentially the same as that involved in extending loan facilities
to customers. The Bank's policy for obtaining collateral, and the nature of
such collateral, is essentially the same as that involved in making
commitments to extend credit.
The Bank has not been required to perform on any financial guarantees during
the past three years. The Bank has not incurred any losses on its commitments
during the last three years.
The Bank maintains bank accounts at five banks. Accounts at each institution
are insured by the Federal Deposit Insurance Corporation (FDIC) up to
$100,000. Cash at one of these institutions exceeded federally insured
limits. The amount in excess of the FDIC limit totaled $2,272,000.
NOTE K - COMMITMENTS AND CONTINGENT LIABILITIES
The Bancorp and Bank periodically are subject to claims and lawsuits which
arise in the ordinary course of business. It is the opinion of management
that the disposition or ultimate resolution of such claims and lawsuits will
not have a material adverse effect on the consolidated financial position of
the Bancorp.
The Bank is in the process of building a new branch office in Cardington. The
total estimated cost to complete the construction is approximately $508,000.
At December 31, 1998, the Bank was still committed to approximately $508,000
of the total estimated amount.
NOTE L - RESTRICTION ON DIVIDENDS
The Bank is subject to certain restrictions on the amount of dividends that it
may pay without prior regulatory approval. The Bank normally restricts
dividends to a lesser amount. At December 31, 1998, retained earnings of
approximately $1,713,000 was available for the payment of dividends without
prior regulatory approval.
NOTE M - PENSION PLAN
In 1989, the Bank initiated a 401(k) retirement savings plan, with all
employees eligible for inclusion in the plan. Participants may make salary
savings contributions up to 15% of the compensation, a portion of which will
be matched by the Company. Contributions by the Bank charged to operations
were $21,000, $14,000 and $20,000 for the years ended December 31, 1998, 1997
and 1996, respectively.
The Bank also has a profit sharing plan that covers employees who have one
year of service and have attained the age of 21 and have at least one year of
service. Contributions to the plan are at the discretion of the Board of
Directors. Contributions by the Bank charged to operations were $27,000,
$23,000 and $0 for 1998, 1997 and 1996 respectively.
The Bancorp recently implemented a director retirement plan. The director
retirement plan provides that any director with 15 years of continuous service
will receive an annual retirement benefit equal to that director's board fees
in the year before retirement. The annual retirement benefit will be paid for
15 years. No expenses have been incurred as this program was set up in late
1998.
The Corporation has a deferred compensation program for the President of the
Corporation. Under this program, the Corporation agrees to pay the President
a ceratin sum annually for fifteen years upon his retirement or, in the event
of his death, to his designated beneficiary. A benefit is also paid if he
terminates employment (other than by his voluntary action or discharge for
cause) before he attains age 65. In that event, the amount of the benefit
depends on his years of service with the Corporation. Full benefits are paid
only if he retires at age 65. The Corporation has purchased an individual
<PAGE>
life insurance contract with respect to this program. The Corporation is the
owner and beneficiary of the insurance contract. The President is a general
creditor of the Corporation with respect to this benefit. As this program was
set up in late 1998, no expense has been incurred.
NOTE N - POSTRETIREMENT BENEFITS
The Bank sponsors two defined benefit postretirement plans. One plan provides
health care coverage and the other provides life insurance benefits. Both
plans are noncontributory. The Bank's funding policy is to contribute as
billed with their normal health care plan. For 1998, 1997 and 1996, the
aggregate contributions were $23,000, $23,000 and $1,000, respectively.
The following table sets forth the plan's funded status reconciled with the
amount shown in the Bank's balance sheet at December 31, 1998 and 1997:
(Dollars in thousands)
1998 1997
---- ----
Accumulated postretirement benefit obligation:
Retirees $274 $269
Other active plan participants 39 31
Total 313 300
Plan assets at fair value 0 0
---- ----
Accumulated postretirement benefit
obligation in excess of plan assets 313 300
Unrecognized net loss from past experience
different from that assumed and effects of
any changes in assumptions (20) (8)
Unrecognized transition obligation,
net of amortization (139) (148)
---- ----
Accrued postretirement cost in the
balance sheet $154 $144
==== ====
Postretirement expense for 1998, 1997 and 1996 includes the following
components:
(Dollars in thousands)
1998 1997 1996
---- ---- ----
Service cost $ 4 $ 7 $31
Interest cost on accumulated benefit obligation 19 23 37
Amortization of transition obligation over 20 years 9 9 23
--- --- ---
Total $32 $39 $91
=== === ===
The health care cost trend rate assumption has a small effect on the amounts
reported. Increasing the assumed health care cost trend rates by one
percentage point in each year would increase the accumulated postretirement
benefit obligation as of December 31, 1998 by an immaterial amount.
For measurement purposes a 12.0% and 8.0% annual rate of increase in the per
capita of covered health care benefits for those under and over 65,
respectively, was assumed for 1999. The rate was assumed to decrease
gradually to 6.75% at 2013 and remain at that level thereafter.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 6.75%.
<PAGE>
NOTE O - STOCK OPTION PLAN AND INCENTIVE PLAN
The Bank has a fixed director and employee stock-based compensation plan.
Under the plan, the company may grant options for up to 65,004 shares of
common stock. The exercise price for the purchase of shares subject to a
stock option may not be less than 100% of the fair market value of the shares
covered by the option on the date of the grant. The term of stock options
will not exceed 10 years from the date of grant.
The Company applies APB Opinion 25 in accounting for its stock compensation
plan. Accordingly, no compensation cost has been recognized for the plan in
1998, 1997 and 1996. Had compensation cost been determined on the basis of
fair value pursuant to SFAS No. 123, net income would have been reduced as
follows:
(Dollars in thousands)
1998 1998 1996
---- ---- ----
Netincome
- ---------
As reported $1,001 $902 $681
Pro forma 987 902 681
The following is a summary of the status of the plan during 1998:
(Dollars in thousands)
Weighted
Average
Number of Exercise Price
Shares per share
-------- ---------
Outstanding at December 31, 1996 0 $0.00
Granted 31,550 $22.00
------ -------
Outstanding at December 31, 1997 31,550 $22.00
Granted 20,800 $22.00
Forfeighted (100) $22.00
------ ------
Outstanding at December 31, 1998 52,250 $22.00
====== ======
The following is a summary of the status of fixed options outstanding at
December 31, 1998:
Weighted
Average Weighted
Remaining Average
Exercise Contractual Exercise
Price Number Life Price
----- ------ ---- -----
$22.00 52,250 8 years and $22.00
8 months
<PAGE>
NOTE P - EARNINGS PER SHARE
The following data show the amounts used in computing earnings per share and
the effects on income and the weighted average number of dilutive potential
common stock. The number of shares used in the calculation for 1997 and 1996
reflect a 2-for-1 stock split in July 1998.
(Dollars in thousands)
1998 1997 1996
---- ---- ----
Net income $1,001 $ 902 $ 681
Weighted average number of common
Shares used in basic EPS 640,198 644,734 651,594
Effect of dilutive securities:
Stock options 6,411 0 0
------ ------- -------
Weighted number of common
shares and dilutive potential common
stock used in diluted EPS 646,609 644,734 651,594
======= ======= =======
NOTE Q - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
its primary federal regulator, the Federal Reserve System. Failure to meet
minimum capital requirements can initiate certain mandatory, and possible
additional discretionary actions by regulators that, if undertaken, could have
a direct material affect on the Bancorp and the consolidated financial
statements. Under the regulatory capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and
classification under the prompt corrective action guidelines are also subject
to qualitative judgements by the regulators about components, risk weightings,
and other factors.
Qualitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of: total risk-based
capital and Tier I capital to risk-weighted assets (as defined in the
regulations), Tier I capital to average assets (as defined). Management
believes, as of December 31, 1998, that the Bank meets all of the capital
adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification from the FRB, the Bank
was categorized as well capitalized under the regulatory framework for prompt
corrective action. To remain categorized as well capitalized, the Bank will
have to maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as disclosed in the table below. There are no conditions or
events since the most recent notification that management believes have
changed the Bank's prompt corrective action category.
<PAGE>
The Bank's actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Risk-Based Capital
(to Risk Weighted Assets) $12,240 23.5% $4,173 8.0% $5,216 10.0%
Tier I Capital
(to Risk Weighted Assets) 11,575 22.2% 2,086 4.0% 3,129 6.0%
Tier I Capital
(to Average Assets) 11,575 12.6% 2,754 3.0% 4,589 5.0%
As of December 31, 1997:
Total Risk-Based Capital
(to Risk Weighted Assets) $11,698 25.4% $3,683 8.0% $4,604 10.0%
Tier I Capital
(to Risk Weighted Assets) 11,111 24.1% 1,841 4.0% 2,762 6.0%
Tier I Capital
(to Average Assets) 11,111 14.1% 3,142 4.0% 3,928 5.0%
NOTE R - FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires
disclosure of fair value information about financial instruments, whether or
not recognized in the consolidated balance sheets. In cases where quoted
market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instruments.
Statement No. 107 excluded certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Bank.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments.
Cash and cash equivalents: The carrying amounts reported in the consolidated
balance sheets for cash and cash equivalents approximate those assets' fair
values.
Investment securities: Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying amounts.
The fair values for other loans (for example, fixed rate commercial real
estate and rental property mortgage loans and commercial and industrial loans)
are estimated using discounted cash flow analysis, based on interest rates
currently being offered for loans with similar terms to borrowers of similar
credit quality. Loan fair value estimates include judgments regarding future
expected loss experience and risk characteristics. Fair values for
<PAGE>
impaired loans are estimated using discounted cash flow analysis or underlying
collateral values, where applicable.
Deposits: The fair values disclosed for demand deposits are, by definition,
equal to the amount payable on demand at the reporting date (that is, their
carrying amounts). The carrying amounts of variable-rate, fixed-term
money-market accounts and certificates of deposit approximate their fair
values. Fair values for fixed -rate certificates of deposit are estimates
using a discounted cash flow calculation that applies interest rates currently
offered on certificates to a schedule of aggregated contractual expected
monthly maturities on time deposits.
Accrued interest: The carrying amounts of accrued interest approximate the
fair values.
Borrowed funds: The carrying amounts of short-term borrowings and notes
payable approximate their fair values.
The estimated fair values of the Bank's financial instruments are as follows:
(Dollars in thousands)
1998 1997
------------------ -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial assets:
Cash and cash equivalents $ 7,469 $ 7,469 $ 3,567 $ 3,567
Investment securities 37,319 37,319 32,460 32,460
Loans 43,924 44,960 38,549 38,856
Accrued interest receivable 711 711 733 733
Financial liabilities:
Deposits $81,311 $81,430 $66,092 $66,076
Borrowed funds 0 0 641 641
Accrued interest payable 188 188 182 182
NOTE S - PARENT COMPANY FINANCIAL INFORMATION
Balance Sheets
At December 31,
(Dollars in thousands)
1998 1997
---- ----
Assets
Noninterest-bearing deposit with subsidiary bank $ 2 $ 36
Investments in subsidiary bank 11,526 11,127
Other assets 19 32
------ ------
Total assets $11,547 $11,195
======= =======
Liabilities and Shareholders' Equity
Shareholders' equity $11,547 $11,195
======= =======
<PAGE>
Statements of Income
Years Ended December 31,
(Dollars in thousands)
1998 1997 1996
---- ---- ----
Income
Dividends from subsidiary bank $ 576 $ 445 $ 726
Expenses
Legal and professional fees 32 39 22
Organizational 11 11 11
Other 16 13 17
---- ---- ----
Total expenses 59 63 50
---- ---- ----
Income before income tax benefit and equity in undistributed
earnings of subsidiary 517 382 676
Income tax benefit 20 21 17
------ --- ---
Income before undistributed earnings of subsidiary 537 403 693
Equity in undistributed net income of subsidiary 464 499 (12)
------ --- ----
Net income $1,001 $902 $681
====== ==== ====
Statements of Cash Flows
Years ended December 31,
(Dollars in thousands)
1998 1997 1996
---- ---- ----
Cash Flows From Operating Activities
Net income $1,001 $902 $681
Adjustments to reconcile net income to net cash
flows from operating activities:
Equity in undistributed income of subsidiary (464) (499) 12
Change in other assets 13 139 51
------ ---- ---
Net cash from operating activities 550 542 744
------ ---- ---
Cash Flows From Financing Activities
Purchase of treasury stock (201) (169) (315)
Cash dividends paid (383) (385) (390)
------ ---- ----
Net cash used for financing activities (584) (554) (705)
------ ---- ----
Net increase (decrease) in cash and
cash equivalents (34) (12) 39
Cash and cash equivalents
Beginning of year 36 48 9
------ --- ---
End of year $ 2 $ 36 $ 48
====== ==== ====
------------------ o o 0 o o ------------------
<PAGE>
CORPORATE INFORMATION
================================================================================
Directors
Robert D. Hord, Chairman
President Hord Livestock Co., Inc.
G.W. Holden, President & CEO
Terry Gernert, Secretary & Treasurer
Attorney at Law
David Dostal,
President Auck-Dostal Insurance Agency, Inc.
Jerry Harrer,
Agri-Business, Spring Creek Farms
Charles W. Kimerline,
President Bucyrus Road Materials, Inc.
James Pigman,
President Pigman, Walter & Associates, PPL
John O. Spreng, Jr.
Vice Prsident Long Acre Farms, Inc.
Joan C. Stemen,
Retired
Executive Officer of FC Banc Corp
G.W. Holden President & CEO
Executive Officers of Farmers Citizens Bank
G.W. Holden President & CEO
Jeffrey Wise Assistant Vice President
& CFO
Annual Meeting
Wednesday, March 24, 1999, at 1:30 p.m.
Youth Building
Crawford County Fairgrounds
Whetstone Street
Bucyrus, Ohio
A copy of FC Banc Corp's Annual Report on Form10-KSB as filed with the
Securities and Exchange Commission, will be available at no charge to
shareholders upon request to:
Farmers Citizens Bank
105 Washington Square
Bucyrus, Ohio 44820
Attn: G.W. Holden, President
General Counsel
Kennedy, Purdy, Hoeffel & Gernert
107 Washington Square
Bucyrus, Ohio 44820-0181
<PAGE>
Honorary Directors
Fred Christman
Richard O. Kime
William D. Foulk
John O. Spreng
James Stemen
There were 634,929 common shares of FC Banc Corp outstanding on January 31,
1999, held of record by approximately 544 shareholders. The following
represents the high and low tranding prices and dividends declared during
each respective quarter since December 31, 1995.
Dividends
1996 HIGH LOW Declared
First quarter 22.00 20.25 0.00
Second quarter 22.00 22.00 0.00
Third quarter 22.00 22.00 0.00
Fourth quarter 22.00 22.00 0.60
1997
First quarter 22.00 22.00 0.00
Second quarter 22.00 22.00 0.00
Third quarter 22.00 22.00 0.00
Fourth quarter 22.00 22.00 0.60
1998
First quarter 22.00 22.00 0.00
Second quarter 22.00 27.00 0.30
Third quarter 27.00 27.00 0.00
Fourth quarter 27.00 27.00 0.30
Investor Information
Investors, analysts and other seeking financial information may contact:
G.W. Holden, President & CEO
FC Banc Corp
105 Washington Square
Bucyrus, Ohio 44820
(419) 562-7040
Independent Auditors
Robb, Dixon, Francis, Davis, Oneson & Co.
1205 Weaver Drive
Granville, Ohio 43023
<PAGE>
Officers and Employees
G. W. Holden
President & Chief Executive Officer
Donald Denney
Vice President & Chief Lending Officer
Brad Murtiff
Vice President & Mortgage Division Manager
Robin Davis
Assistant Vice President & Administrative Manager
Jeffrey Wise
Assistant Vice Prsident & Chief Financial Officer
Kelly LaRue
Auditor & Compliance Officer
Becky Landis
Assistant Vice President & Cardington City President
Shawn Carpenter
Assistant Vice President & Commercial Loan Officer
Eric Bogan
Assistant Vice Prsident & Consumer Loan Officer
Susan Sutherland
Bank Officer & Loan Administration Manager
Kelly Rinehart
Bank Officer & Data Processing Manager
Nancy Kalb
Bank Office & Training Coordinator
Michelle Bacon
Consumer Loan Officer
Eric Anglin
Bank Officer & Bank Manager
<PAGE>
Anne Spreng
Bank Officer & Bank Manager
Jennifer Ginery
Executive Secretary
Carrie Diebler
Accountant
Wilma Poorman
New Accounts Representative
Jennifer Massie
New Accounts Representative
Jennifer Eckert
New Accounts Representative
Carol Mosher
New Accounts Representative
Neeta Conant
Head Teller
Annette Lester
Head Teller
Amanda Rex
Head Teller
Teri Gray
Head Teller
Darla Hadsell
Accounting Clerk
Amy Cauvel
Assistant Data Processing Manager
Merri Jacobs
Loan Administrator
Molly Stump
Loan Documentation
Dawn Cooper
Assistant Operations Supervisor
Lisa Ward
Card Services Manager
Sharon Sanders
Account Services
<PAGE>
Anita Stewart
Account Services
Vicki Allen
Mortgage Assistant (PT)
Beth Kahle
Teller (PT)
Virginia Hammontree
Teller (PT)
Kimberly McGowan
Centralized Data Input (PT)
Monica Carle
Teller
Cindy Knecht
Receptionist
Angela Yant
Teller
Kari DeGray
Teller
Darla Johnson
Teller
Aaron Pinion
Teller (PT)
Scott Langenderfer
Teller (PT)
Kelly Burris
Teller
Renee Thomas
Teller
Jeremy Crall
Teller (PT)
Darla Sprauge
Teller (PT)
Candida Doubikin
Teller (PT)
<PAGE>
Banking Locations ------------------------------------------------------------
Main Office
105 Washington Square
Bucyrus, OH 44820
North Office
233 North Sandusky Ave.
Bucyrus, OH 44820
South Office
1605 Marion Road
Bucyrus, OH 44820
Cardington Office
103 East Main Street
Cardington, OH 43315
</TABLE>
