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).

Filing Type: Form 10-Q (Quarterly Report)

Reporting Period: Three months ended March 31, 2010.

Operations: The Corporation operates primarily in the banking sector through offices in nine Ohio counties. It provides checking, savings, and term certificate accounts, as well as residential mortgage, commercial, and installment loans. The company is a participant in the U.S. Treasury's Capital Purchase Program (TARP).

Key Financial Metrics

Note: All figures in thousands except per share data and percentages.

Material Changes vs. Prior Period

• Profitability Decline: Net income dropped 95.3% to $36,000 from $759,000 in Q1 2009. Net income available to common shareholders turned negative at $(254,000) due to preferred stock dividends of $290,000.
• Increased Loan Loss Provision: The provision for loan losses increased 78% to $3,740,000 from $2,102,000, driven by continued economic downturn and high unemployment in the market area.
• Asset Composition: Total assets increased slightly (0.3%) to $1.106 billion. Net loans decreased 1.0% from year-end 2009, while cash and cash equivalents increased significantly ($16.5 million) due to overnight federal funds sold.
• Deposit Growth: Total deposits increased $25.9 million (3.0%) from year-end 2009, primarily driven by a $20.6 million increase in public fund money market savings accounts.
• Nonperforming Assets: Nonperforming loans increased by $771,000, largely due to loans past due 90 days still accruing, though impaired loans decreased from $22.7 million to $18.0 million.

Guidance, Outlook, and Risks

• Management Commentary: Management attributes the increase in loan loss provisions to the local economic downturn. The decline in net loans is attributed to a decline in the housing market and a strategic decision to originate and sell most mortgage loans on the secondary market.
• Liquidity: The company maintains a conservative liquidity position with $43.4 million in cash and cash equivalents. It has $120.2 million in total credit availability with the Federal Home Loan Bank (FHLB), with $65.4 million outstanding.
• Capital Resources: All capital ratios exceeded regulatory minimums. Total Risk-Based Capital was 14.3% and Tier 1 Risk-Based Capital was 13.2% as of March 31, 2010.
• TARP Restrictions: As a participant in the Capital Purchase Program, the company is restricted from repurchasing common shares without U.S. Treasury approval for three years and faces limits on executive compensation and dividends.
• Market Risk: The primary market risk is interest-rate risk. The company does not use derivative financial instruments to hedge this risk. A 200 basis point increase in rates would decrease net portfolio value by approximately 5%.
• Legal Proceedings: No material pending legal proceedings were reported.

Investor Verification Checklist

• Loan Quality Trends: Verify the trajectory of nonperforming loans and the adequacy of the allowance for loan losses (2.17% of total loans) given the increased provision.
• Preferred Dividend Impact: Confirm the sustainability of net income available to common shareholders given the fixed $290,000 quarterly preferred dividend obligation under TARP terms.
• Deposit Stability: Assess the stability of the $20.6 million increase in public fund money market savings, which drove the majority of deposit growth.
• Asset Mix Shift: Review the strategic shift from loans to cash and federal funds sold and its impact on future net interest income.
• Regulatory Compliance: Monitor compliance with TARP restrictions regarding executive compensation and capital distributions.