CIVB

Business Context and Reporting Period

Company: First Citizens Banc Corp (Note: Metadata listed "Civista Bancshares," but the filing text identifies the registrant as First Citizens Banc Corp).

Reporting Period: Quarterly period ended March 31, 2003.

Business Overview: The Corporation operates primarily in the banking sector through offices in seven Ohio counties. It provides financial services including checking, savings, and term certificates, as well as residential mortgage, commercial, and installment loans. The company operates several subsidiaries, including The Citizens Banking Company, The Farmers State Bank of New Washington, and specialized entities like SCC Resources (item processing) and Mr. Money Finance Company (sub-prime financing).

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability: Net income increased 30.4% to $1.85 million, driven by higher net interest income and noninterest income.
• Interest Income/Expense: Total interest income rose 11.5% due to increased average earning assets, despite a lower yield (5.68% vs 6.55%). Interest expense decreased 15.9% primarily due to lower rates on deposits and borrowings.
• Loan Portfolio Shift: Net loans increased 1.3%. Management shifted focus toward commercial real estate (up $19.8M) and commercial/agriculture loans (up $2.2M), while reducing residential mortgage and consumer loans to sell them on the secondary market.
• Noninterest Income: Increased 52% to $2.14 million, largely due to a $289,000 gain on the sale of securities and higher service charges.
• Noninterest Expense: Increased 33.5% to $5.57 million, attributed to higher salaries (due to branch expansion and merger integration), occupancy costs, and franchise taxes.
• Capital Structure: The company issued $7.5 million in new trust preferred securities in March 2003, increasing total borrowed funds.

Guidance, Outlook, and Risks

• Management Commentary: Management notes a strategic shift to commercial lending to improve portfolio yield and reduce interest rate risk. The company sold fixed-rate residential loans rather than holding them, reinvesting proceeds into commercial assets.
• Capital Adequacy: All capital ratios exceed regulatory minimums for "Well Capitalized" status. Tier 1 Risk-Based Capital was 12.3% and Total Risk-Based Capital was 16.4% as of March 31, 2003.
• Liquidity: The company maintains federal funds borrowing lines of $48.76 million and FHLB availability of $77.34 million. Most of the securities portfolio is classified as "available for sale," providing liquidity.
• Risks: Primary market risk is interest rate risk. The company utilizes gap analysis to manage this, maintaining a laddered gap position. Approximately 57.7% of the loan portfolio reprices annually. There is no exposure to foreign currency or commodity price risk.
• Contingencies: Off-balance-sheet commitments (lines of credit, letters of credit) totaled $73.3 million. Management does not anticipate material losses from these instruments.

Investor Verification Checklist

• Loan Quality: Verify the trend in charge-offs, which doubled to $637,000 in Q1 2003 compared to $297,000 in Q1 2002, despite a stable allowance for loan losses ratio (1.40%).
• Expense Growth: Confirm the sustainability of the 33.5% increase in noninterest expenses, particularly salaries and occupancy, relative to revenue growth.
• Securities Portfolio: Review the $289,000 gain on sale of securities; determine if this is a recurring revenue stream or a one-time event driven by specific market conditions.
• Capital Issuance: Assess the impact of the new $7.5 million trust preferred securities issuance on future interest expense and capital ratios.
• Merger Integration: Evaluate the ongoing costs and benefits associated with the integration of the ICBC merger (completed April 2002) and the Castalia Banking Company merger (January 2003).