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, 2007.

Operations: The Corporation operates primarily in one reportable segment, banking, providing financial services through offices in six Ohio counties. Primary products include checking, savings, term certificates, residential mortgages, commercial loans, and installment loans.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Decline: Net income decreased 17.4% to $1.259 million from $1.525 million in Q1 2006. Earnings per share dropped from $0.27 to $0.23.
• Net Interest Margin Compression: The net interest margin declined to 4.17% from 4.51% in the prior year. While total interest income increased 7.8% due to higher yields on loans and securities, total interest expense surged 40.3% due to rising rates on interest-bearing liabilities.
• Loan Portfolio Growth: Net loans increased by $9.491 million (1.7%) from year-end 2006, driven by growth in residential real estate, commercial real estate, and commercial/agricultural loans. Conversely, the consumer loan portfolio continued to decline.
• Asset Quality: Non-accrual loans increased by $2.683 million to $10.259 million, primarily due to three customer relationships being placed on non-accrual status. However, net charge-offs decreased by $305,000 compared to the prior year.
• Deposit Mix: Total deposits decreased slightly ($1.459 million) from year-end 2006. Noninterest-bearing deposits fell $3.974 million, while interest-bearing deposits rose $2.515 million.

Guidance, Outlook, and Risks

• Management Commentary: Management attributes the decline in consumer loans to customers consolidating debt into home equity lines or mortgages at other institutions. The company is examining new consumer lending products to offset this trend.
• Interest Rate Strategy: To mitigate rising interest expense, the company secured two long-term Federal Home Loan Bank (FHLB) advances totaling $30 million at fixed rates (4.78% and 4.66%) to replace higher-cost overnight funding. Additionally, a high-rate trust preferred issuance (8.96%) was replaced with a lower-rate issuance (6.95%).
• Capital Resources: All capital ratios exceed regulatory minimums. Tier 1 Risk-Based Capital was 10.2% and Total Risk-Based Capital was 13.8% as of March 31, 2007.
• Stock Repurchase: The company announced a stock repurchase program in Q4 2006 authorizing the purchase of up to 5.0% of outstanding shares. In Q1 2007, 26,000 shares were repurchased at an average price of $19.88.
• Risks: Primary market risk is interest-rate risk. The company maintains an asset-sensitive gap position in certain scenarios but notes that an inverted yield curve and increased usage of borrowed funds have decreased the base level of net portfolio value. No derivative financial instruments are currently held.

Investor Verification Checklist

• Non-Accrual Loan Concentration: Verify the specific nature and collateral coverage of the three customer relationships that drove the $2.7 million increase in non-accrual loans.
• Consumer Loan Strategy: Assess the effectiveness of new consumer lending products introduced late in 2006 to reverse the decline in the installment loan portfolio.
• Interest Rate Sensitivity: Review the impact of the inverted yield curve on future net interest income, given the company's increased reliance on borrowed funds.
• Dividend Sustainability: Confirm the ability to maintain the $0.29 per share dividend given the 17.4% drop in net income and the cash outflow for dividends ($1.584 million) exceeding net income ($1.259 million) for the quarter.