Civista Bancshares - 10-Q quarterly report FY

The consolidated financial statements include the accounts of First Citizens Banc Corp (FCBC) and its wholly-owned subsidiaries, The Citizens Banking Company (Citizens), SCC Resources, Inc. (SCC), First Citizens Title Insurance Agency Inc. (Title Agency), First Citizens Insurance Agency Inc. (Insurance Agency), and Water Street Properties, Inc. (Water St.). Additionally, the consolidated financial statements include Citizens wholly-owned subsidiary, Mr. Money Finance Company (Mr. Money). The above companies together are referred to as the Corporation. Intercompany balances and transactions are eliminated in consolidation.

The consolidated financial statements have been prepared by the Corporation without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the Corporation’s financial position as of March 31, 2006 and its results of operations and changes in cash flows for the periods ended March 31, 2006 and 2005 have been made. The accompanying consolidated financial statements have been prepared in accordance with instructions of Form 10-Q, and therefore certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been omitted. The results of operations for the period ended March 31, 2006 are not necessarily indicative of the operating results for the full year. Reference is made to the accounting policies of the Corporation described in the notes to financial statements contained in the Corporation’s 2005 annual report. The Corporation has consistently followed these policies in preparing this Form 10-Q.

The Corporation provides financial services through its offices in the Ohio counties of Erie, Crawford, Huron, Marion, Ottawa, and Richland. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are residential mortgage, commercial, and installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. Other financial instruments that potentially represent concentrations of credit risk include deposit accounts in other financial institutions and Federal Funds sold. In 2006, SCC provided item processing for eight financial institutions in addition to Citizens. SCC accounted for 2.9% of the Corporation’s total revenues. Mr. Money provides consumer finance loans and real estate loans that the Banks would not normally provide to B and C credits at a rate commensurate with the risk and accounted for approximately 1.0% of the Corporation’s total revenue. First Citizens Title Insurance Agency Inc. was formed to provide customers with a seamless mortgage product with improved service. First Citizens Insurance Agency Inc. was formed to allow the Corporation to participate in commission revenue generated through its third party insurance agreement. Insurance commission revenue is less than 1.0% of total revenue through March 31, 2006. Water Street Properties, Inc. was formed to hold repossessed assets of FCBC’s subsidiaries. Water St. revenue was less than 1% of total revenue through March 31, 2006. Management considers the Corporation to operate primarily in one reportable segment, banking. To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the

amounts reported in financial statements and the disclosures provided, and future results could differ. The allowance for loan losses, fair values of financial instruments, and status of contingencies are particularly subject to change.

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

Employee compensation expense under stock options is reported using the intrinsic value method. No stock-based compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant.

Adoption of New Accounting Standards: The Corporation adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R “Accounting for Stock-Based Compensation” on January 1, 2006. The Corporation has elected to adopt SFAS No. 123R using the “modified prospective” method and accordingly will not restate prior period results.

SFAS No. 123R requires that compensation expense be recognized for all stock options granted after the date of adoption and for all stock options that become vested after the date of adoption. Prior to January 1, 2006, the Corporation accounted for its stock option plans under the recognition and measurement principles of Accounting Principles Board Opinion (“APB”) No. 25 “Accounting for Stock Issued to Employees” and related interpretations. Under APB No. 25, no stock-based employee compensation cost was reflected in net income as all options granted under the Corporation’s stock option plan had an exercise price equal to the market value of the underlying common stock on the grant date.

The Corporation did not grant any stock options during the first three months of 2006 and 2005. Additionally, no stock options became vested during the first three months of 2006 and 2005. The adoption of SFAS No. 123R on January 1, 2006 has had no impact on the Corporation’s net income for the first quarter of 2006. Additionally, since the Corporation did not grant any stock options during the first quarter of 2005 there is no pro forma stock-based employee compensation expense for the first quarter of 2005.

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

There were no options exercisable as of March 31, 2005.

The following table details stock options outstanding:

The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the market price of our common stock as of the reporting date.

Securities at March 31, 2006 and December 31, 2005 were as follows:

The amortized cost and fair value of securities at March 31, 2006, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Securities not due at a single maturity date, primarily mortgage-backed securities and equity securities are shown separately.

Securities with a carrying value of approximately $100,869 and $107,459 were pledged as of March 31, 2006 and December 31, 2005, respectively, to secure public deposits, other deposits and liabilities as required by law.

Securities with unrealized losses at March 31, 2006 and December 31, 2005 not recognized in income are as follows.

Unrealized losses on securities have not been recognized into income because the issuers’ bonds are of high credit quality, management has the intent and ability to hold these securities for the foreseeable future, and the decline in fair value is largely due to increase in market interest rates. The fair value is expected to recover as the securities approach their maturity date or reset date.

Loans at March 31, 2006 and December 31, 2005 were as follows:

A summary of the activity in the allowance for loan losses for the three months ended March 31, 2006 and 2005 was as follows:

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

Stock options for 13,300 and 13,900 shares of common stock were not considered in computing diluted earnings per common share for March 31, 2006 and March 31, 2005 because they were antidilutive.

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

The contractual amount of financial instruments with off-balance-sheet risk was as follows for March 31, 2006 and December 31, 2005:

Commitments to make loans are generally made for a period of one year or less. Fixed rate loan commitments above had interest rates ranging from 4.37% to 11.50% at March 31, 2006 and at December 31, 2005. Maturities extend up to 30 years.

The Banks are required to maintain certain reserve balances on hand in accordance with the Federal Reserve Board requirements. The average reserve balance maintained in accordance with such requirements for the periods ended March 31, 2006 and December 31, 2005 approximated $4,587 and $5,024.

Net periodic pension expense for:

Trusts formed by the Corporation, in March 2003 and March 2002, issued $7,500 of 4.41% floating rate and $5,000 of 5.59% floating rate trust preferred securities through special purpose entities as part of pooled offerings of such securities. The Corporation issued subordinated debentures to the trusts in exchange for the proceeds of the offerings, which debentures represent the sole assets of the trusts. The Corporation may redeem the subordinated debentures, in whole but not in part, any time prior to March 26, 2008 and March 26, 2007, respectively at a price of 107.50% of face value for those issued in 2003 and 2002. After March 26, 2008 and March 26, 2007, respectively, subordinated debentures may be redeemed at face.

Additionally, a trust formed in September 2004 by the Corporation issued $12,500 of 6.05% fixed rate for five years, then becoming floating rate trust preferred securities through a special purpose entity as part of a pooled offering of such securities. The Corporation issued subordinated debentures to the trusts in exchange for the proceeds of the offerings, which debentures represent the sole assets of the trusts. The Corporation may redeem the subordinated debentures, in whole but not in part, any time prior to September 20, 2009 at a price of 107.50% of face value. After September 20, 2009 subordinated debentures may be redeemed at face.

The following discussion focuses on the consolidated financial condition of First Citizens Banc Corp at March 31, 2006 compared to December 31, 2005 and the consolidated results of operations for the three-month period ending March 31, 2006 compared to the same period in 2005. This discussion should be read in conjunction with the consolidated financial statements and footnotes included in this Form 10-Q.

The registrant is not aware of any trends, events or uncertainties that will have, or are reasonably likely to have, a material effect on the liquidity, capital resources, or operations except as discussed herein. Also, the registrant is not aware of any current recommendation by regulatory authorities, which would have a material effect if implemented.

When used in this Form 10-Q or future filings by the Corporation with the Securities and Exchange Commission, in press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “believe,” or similar expressions are intended to identify “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The Corporation wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and to advise readers that various factors, including regional and national economic conditions, changes in levels of market interest rates, credit risks of lending activities and competitive and regulatory factors, could effect the Corporation’s financial performance and could cause the Corporation’s actual results for future periods to differ materially from those anticipated or projected. The Corporation does not undertake, and specifically disclaims, any obligation to publicly release the result of any revisions, which may be made to any forward-looking statements to reflect occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

Total assets of the Corporation at March 31, 2006 totaled $729,301 compared to $750,936 at December 31, 2005, which was a decrease of $21,635. This decrease was caused by the purchase of approximately 322,322 shares of common stock during a tender offer in the month of February. The tender offer, along with repurchases of additional treasury stock, and deposit runoff, reduced the amount of fed funds sold since December 31, 2005 of $21,005.

Within the structure of the assets, net loans have increased $5,128, or 1.0 percent since December 31, 2005. The commercial real estate portfolio increased by $7,385, the residential real estate portfolio increased $4,743, and the commercial and agriculture portfolio increased $221. Residential construction loans decreased $6,417 while consumer, leases, and other loans decreased $1,005. In the first quarter of 2006, the Corporation introduced two loan programs on a limited basis, one for commercial loans, and one for residential mortgages. Both programs

offered competitive rates as well as the waiving of certain fees on the loans added to the loan portfolio. Similar programs may be utilized in future periods. The decline in the installment loan portfolio is partially due to consumers consolidating their consumer loans with home equity lines of credit and/or first or second mortgages at other financial institutions or lending institutions. Also, with products such as same as cash loans, there are alternatives in the market place that are being used by consumers rather than the traditional consumer lending that the Corporation offers. In an effort to offset this decline in the installment loan portfolio, the Corporation has introduced new consumer lending products and expects to use these products to begin growing the consumer loan portfolio. With the new products being introduced, a new rate structure for consumer loans has been developed. This rate structure is designed to provide higher yields on the Corporation’s consumer portfolio in 2006.

The Corporation had no loans held for sale at March 31, 2006 or December 31, 2005. At March 31, 2006, the net loan to deposit ratio was 91.7 percent compared to 89.2 percent at December 31, 2005.

For the three months of operations in 2006, $270 was placed into the allowance for loan losses from earnings compared to $410 for the same period of 2005. The decrease in the provision was due to the reserve at FCBC. In 2005, FCBC placed $140 into its reserve for a participated loan in the first quarter of 2005. In the first quarter of 2006, this participated loan had been paid off, and no reserves were needed for the FCBC loan portfolio. The amount placed into Citizenswas equivalent to the amount placed into the reserve during the first quarter of 2005. An increase in net charge-offs of $632 was experienced from 2005 to 2006 due primarily to two reasons. Recoveries were greater in 2005 due to the Corporation having a $429 loan recovery. In 2006, the Corporation had an increase of $247 in loans charged-off. This increase was due to loans charged-off in the commercial loan portfolio. Non-accrual loans decreased $468 from December 31, 2005 to March 31, 2006. As of March 31, 2006, impaired loans have decreased $762 from December 31, 2005. Efforts are continually made to examine both the level and mix of the allowance by loan type as well as the overall level of the allowance. Management specifically evaluates loans that are impaired, or graded as doubtful by the internal grading function for estimates of loss. To evaluate the adequacy of the allowance for loan losses to cover probable losses in the portfolio, management considers specific reserve allocations for identified portfolio loans, reserves for delinquencies and historical reserve allocations. The composition and overall level of the loan portfolio and charge-off activity are also factors used to determine the amount of the allowance for loan losses.

Management analyzes commercial and commercial real estate loans on an individual basis and classifies a loan as impaired when an analysis of the borrower’s operating results and financial condition indicates that underlying cash flows are not adequate to meet its debt service requirements. Often this is associated with a delay or shortfall in payments of 90 days or more. Smaller-balance homogeneous loans are evaluated for impairment in total. Such loans include residential first mortgage loans secured by one- to four-family residences, residential construction loans and consumer automobile, boat, home equity and credit card loans. In addition, loans held for sale and leases are excluded from consideration as impaired. Loans are generally moved to nonaccrual status when 90 days or more past due. These loans are also often

considered impaired. Impaired loans, or portions thereof, are charged-off when deemed uncollectible. The March 31, 2006 allowance for loan losses as a percent of total loans was 1.70 percent compared to 1.76 percent at December 31, 2005.

At March 31, 2006, available for sale securities totaled $123,286 compared to $126,126 at December 31, 2005, a decrease of $2,840. The decrease in securities was due to paydowns, calls, and maturities of its portfolio. Funds not used to replace these securities were used primarily to fund the increase in the loan portfolio as a result of the two new loan programs described in an above section. Bank stocks increased $115 from December 31, 2005, due to Federal Home Loan Bank dividends received.

Office premises and equipment, net, have decreased $251 from December 31, 2005 to March 31, 2006. The decrease in office premises and equipment is attributed to new purchases of $143, depreciation of $245 and disposals of $149. In the first quarter, SCC Resources, Inc. sold a building that had been used for storage for SCC and Citizens. Intangible assets decreased $168 due to amortization of the core deposit premium.

Total deposits at March 31, 2006 decreased $10,178 from year-end 2005. Noninterest-bearing deposits decreased $4,773 from year-end 2005. Interest-bearing deposits, including savings and time deposits, decreased $5,405 from year-end 2005. The interest-bearing deposit decline was due primarily to a decline in savings balances, as customers have used funds from savings to invest in other, higher yielding financial instruments. The year to date average balance of total deposits decreased $44,809 compared to the average balance of the same period 2005. This decrease in average balance was due to declines in savings and time-deposit balances. The savings decrease was primarily due to the reason previously stated. Time-deposits decreased as customers continued to seek higher yielding time-deposit instruments in Citizens’ market area. Citizens offers competitive rates on their time-deposits, but generally will not pay an above-market-rate to prevent deposits from leaving Citizens. Also, Citizens did experience a decline in deposits as a result of the merger with FNB Financial Corporation in the fourth quarter of 2004, as it has experienced in previous acquisitions. The year to date 2006 average balance of savings deposits has decreased $18,904 compared to the average balance of the same period for 2005. The current average rate of these deposits was 0.43 percent at both March 31, 2006 and 2005. The year-to-date 2006 average balance of time certificates has decreased $16,490 compared to the average balance for the same period for 2005. Additionally, the year-to-date 2006 average balances compared to the same period in 2005 of demand deposits increased $4,508, while N.O.W. accounts decreased $2,792, and Money Market Savings decreased $11,002.

Total borrowed funds have decreased $3,263 from December 31, 2005 to March 31, 2006. At March 31, 2006, the Corporation had $30,503 in outstanding Federal Home Loan Bank advances compared to $30,539 at December 31, 2005, which was the result of scheduled pay downs of the outstanding advances. The Corporation had notes outstanding with other financial institutions totaling $7,000 at both March 31, 2006 and December 31, 2005. These notes were primarily used to fund the loan portfolio at Mr. Money Finance Company. Securities sold under agreements to repurchase, which tend to fluctuate, have decreased $1,226 and U.S. Treasury Tax Demand Notes have decreased $2,001 from December 31, 2005 to March 31, 2006.

Shareholders’ equity at March 31, 2006 was $77,939, or 10.7 percent of total assets, compared to $87,110 at December 31, 2005, or 11.6 percent of total assets. The decrease in shareholders’ equity resulted from earnings of $1,525, less dividends paid of $1,624, dividends declared of $1,531, purchases of treasury stock thru the tender offer of $7,413, additional treasury stock repurchases of $178, and the decrease in the market value of securities available for sale, net of tax, of $50. The Corporation paid a cash dividend on February 1, 2006 and February 1, 2005 at a rate of $.28 per share. Total outstanding shares at March 31, 2006 were 5,471,300 compared to 5,807,402 at March 31, 2005.

Three Months Ended March 31, 2006 and 2005

Net income for the three months ended March 31, 2006 was $1,525, or $.27 basic and diluted earnings per common share compared to $1,616 or $.28 basic and diluted earnings per common share for the same period in 2005. This was a decrease of $91, or 5.6 percent. The primary reasons for the changes are explained below.

Total interest income for the first three months of 2006 increased by $828, or 8.2 percent compared to the same period in 2005. The average rate on earning assets on a tax equivalent basis for the first three months of 2006 was 6.48 percent and 5.56 percent for the first three months of 2005. The increase in yield is due to the change in the interest rate environment in which the Corporation has operated in 2006. Interest rate increases in 2006 have had a positive effect on the Corporations earning asset portfolio. Total interest expense for the first three months of 2006 has increased by $744, or 28.3 percent compared to the same period of 2005. The increase of interest expense is due to the increase in the interest rates in 2006, which offset the decline in deposit balances from 2005. Interest on deposits increased $588 compared to 2005, as the average rate paid on deposits increased from 1.45% in 2005 to 2.07% in 2006, offsetting the decline in balance the Corporation experienced on its deposits. Interest expense on Federal Home Loan Bank borrowings decreased $17 compared to the first quarter of 2005. Interest expense on trust preferred securities increased $62 in the first quarter of 2006 compared to the first quarter of 2005. The increase is due to the rate increases experienced in 2006 compared to 2005. Interest on other borrowings increased $111 as rates increased during 2006. The average rate on interest-bearing liabilities for the first three months of 2006 was 2.41 percent compared to 1.68 percent for the same period of 2005. The net interest margin on a tax equivalent basis was 4.51 percent for the three-month period ended March 31, 2006 and 4.34 percent for the same period ended March 31, 2005.

Noninterest income for the first three months of 2006 totaled $1,830, compared to $2,516 for the same period of 2005, a decrease of $686. In the first quarter of 2005, the Corporation had a $766 gain on the sale of two branches. No branches were sold in 2006. In the first quarter of 2006, the Corporation sold a building that had been used as a storage facility for a $148 gain. Service charges paid to Citizens decreased $137 compared to 2005 due to two reasons. First, the

Corporation had fewer deposit accounts at March 31, 2006 compared to March 31, 2005. Secondly, the customer base has become more aware of overdrafts and the charges for these overdrafts. Revenue from computer operations decreased slightly in 2006, down $28 from first quarter of 2005 as the number of financial institutions for which processing was done for decreased. Net gain on sale of loans was $37 less than in 2005 due to the number of loans sold to FNMA declining in 2006, as the Corporation has moved to keeping more real estate loans in its portfolio. Trust fees grew $51 in the first quarter of 2006 compared to the same period in 2005 as the assets under Trust management continued to grow. Other non-interest income increased $76 compared to 2005, primarily due to two items. Losses sustained on the sale of OREO properties was $43 less in 2006 than in 2005, as well as a write-off of $52 that was made in the first quarter of 2006.

Noninterest expense for the three months ended March 31, 2006 totaled $6,907 compared to $7,232 for the same period in 2005. This was a decrease of $325, or 4.5 percent. Salaries and wages decreased $193, or 6.6 percent compared to the first three months of 2005. The decrease in salaries was attributable to the Corporation’s reorganization efforts completed in the third quarter of 2005. Benefits decreased $114, as the Corporations self-insured health plan costs decreased due to the reorganization completed in 2005. Net occupancy expense decreased $25 for the first three months of 2006, compared to the first three months of 2005. This decrease is primarily due two reasons. First, Mr. Money had a reduction of rental payments for a branch that was closed. Second, Citizens purchased a branch that had been rented in 2005. Equipment expense increased $23 as a result of an increase in costs for maintenance and installation of equipment at Citizens. Computer processing expense decreased by $65 compared to last year primarily due to the cost savings as a result of the reorganizing of the two banking subsidiaries of the Corporation into one bank. State franchise taxes decreased $52 compared to the first three months in 2005 as the equity position of Citizens decreased from previous year end. Professional services expenses increased for the first three months of 2006 compared to the same period in 2005 by $85. The primary cause of this increase is due to legal costs paid to complete the tender offer in the first quarter of 2006. The Corporation’s amortization of intangible assets increased slightly as did the courier expense compared to 2005. Citizens monitors ATM profitability, usage, and other factors to determine the effectiveness of our ATM’s. As a result of this analysis, some machines were taken out of service, which led to ATM expense decreasing $26 compared to 2005. Stationery and supplies decreased $67 from 2005. In the first quarter of 2006, the Corporation did not have to buy items such as letterhead, envelopes, teller stamps and other items as it did in 2005 due to a merger completed at the end of 2004. In 2005, bad check expense was high due to a $111 write-off of a fraudulent check. Finally, other operating expenses increased $200 from 2005 to 2006. Within other operating expenses, loan promotion expense increased $127 compared to 2005. This increase is tied directly to the loan programs run in the first quarter. As part of the program, closing costs and other fees on the loans were waived through the loan promotion account. The remaining difference in other expenses was due to a few miscellaneous adjustments, as well as an increase in education and training costs.

Income tax expense for the first three months of 2006 totaled $666 compared to $716 for the first three months of 2005. This was a decrease of $50, or 7.0 percent. The decrease in the federal income taxes is a result of the decrease in total income before taxes of $141. The effective tax

rates were comparable for the three-month periods ended March 31, 2006 and March 31, 2005, at 30.4% and 30.7%, respectively.

Shareholders’ equity totaled $77,939, at March 31, 2006 compared to $87,110 at December 31, 2005. All of the capital ratios exceed the regulatory minimum guidelines as identified in the following table:

The Corporation paid a cash dividend of $.28 per common share on February 1, 2006 and February 1, 2005.

Citizens maintains a conservative liquidity position. Within the security portfolio, all but $7 of securities are classified as available for sale. At March 31, 2006, securities with maturities of one year or less totaled $65,242, or 52.9% of the total security portfolio. The available for sale portfolio helps to provide the Corporation with the ability to meet its funding needs. The Consolidated Statements of Cash Flows contained in the consolidated financial statements detail the Corporation’s cash flows from operating activities resulting from net earnings.

Cash from operations for March 31, 2006 was $1,804. This includes net income of $1,525 plus net adjustments of $279 to reconcile net earnings to net cash provided by operations. Cash from investing activities was $18,297 at March 31, 2006, resulting from primarily a decrease in fed funds sold due to an increase in the loan portfolio and a reduction in deposits. Cash from financing activities in the first quarter of 2006 totaled $(22,656). This decrease in cash is primarily due to the decrease in deposits as well as the purchase of treasury stock thru the tender offer in the first quarter. Also, the payments of dividends decreased the amount of cash from financing activities. Cash from operating activities and investing activities was less than financing activities by $2,555, which resulted in a decrease in cash and cash equivalents to $17,706.

Future loan demand of Citizens may be funded by increases in deposit accounts, proceeds from payments on existing loans, the maturity of securities, the issuances of trust preferred obligations, and the sale of securities classified as available for sale. Additional sources of funds may also come from borrowing in the Federal Funds market and/or borrowing from the Federal Home Loan Bank (FHLB). Citizens, through its correspondent banks, maintains federal funds borrowing lines totaling $35,000. As of March 31, 2006, Citizens had total credit availability with the FHLB of $94,411 of which $30,515 was outstanding.

The Corporation’s primary market risk exposure is interest-rate risk and, to a lesser extent, liquidity risk. All of the Corporation’s transactions are denominated in U.S. dollars with no specific foreign exchange exposure.

Interest-rate risk is the exposure of a banking organization’s financial condition to adverse movements in interest rates. Accepting this risk can be an important source of profitability and shareholder value. However, excessive levels of interest-rate risk can pose a significant threat to the Corporation’s earnings and capital base. Accordingly, effective risk management that maintains interest-rate risk at prudent levels is essential to the Corporation’s safety and soundness.

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

The Federal Reserve Board, together with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, adopted a Joint Agency Policy Statement on interest-rate risk, effective June 26, 1996. The policy statement provides guidance to examiners and bankers on sound practices for managing interest-rate risk, which will form the basis for ongoing evaluation of the adequacy of interest-rate risk management at supervised institutions. The policy statement also outlines fundamental elements of sound management that have been identified in prior Federal Reserve guidance and discusses the importance of these elements in the context of managing interest-rate risk. Specifically, the guidance emphasizes the need for active board of director and senior management oversight and a comprehensive risk-management process that effectively identifies, measures, and controls interest-rate risk. Financial institutions derive their income primarily from the excess of interest collected over interest paid. The rates of interest an institution earns on its assets and owes on its liabilities generally are established contractually for a period of time. Since market interest rates change

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

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

Several ways an institution can manage interest-rate risk include selling existing assets or repaying certain liabilities; matching repricing periods for new assets and liabilities, for example, by shortening terms of new loans or securities; and hedging existing assets, liabilities, or anticipated transactions. An institution might also invest in more complex financial instruments intended to hedge or otherwise change interest-rate risk. Interest rate swaps, futures contracts, options on futures, and other such derivative financial instruments often are used for this purpose. Because these instruments are sensitive to interest rate changes, they require management expertise to be effective. Financial institutions are also subject to prepayment risk in falling rate environments. For example, mortgage loans and other financial assets may be prepaid by a debtor so that the debtor may refund its obligations at new, lower rates. The Corporation has not purchased derivative financial instruments in the past and does not intend to purchase such instruments in the near future. Prepayments of assets carrying higher rates reduce the Corporation’s interest income and overall asset yields. A large portion of an institution’s liabilities may be short-term or due on demand, while most of its assets may be invested in long-term loans or securities. Accordingly, the Corporation seeks to have in place sources of cash to meet short-term demands. These funds can be obtained by increasing deposits, borrowing, or selling assets. Also, FHLB advances and wholesale borrowings may also be used as important sources of liquidity for the Corporation.

The following table provides information about the Corporation’s financial instruments that are sensitive to changes in interest rates as of December 31, 2005 and March 31, 2006, based on certain prepayment and account decay assumptions that management believes are reasonable. The Corporation had no derivative financial instruments or trading portfolio as of December 31, 2005 or March 31, 2006. Expected maturity date values for interest-bearing core deposits were calculated based on estimates of the period over which the deposits would be outstanding. The Corporation’s borrowings were tabulated by contractual maturity dates and without regard to any conversion or repricing dates.

The relatively minor change in net portfolio value from December 31, 2005 to March 31, 2006, is primarily a result of two factors. The yield curve remains very flat after a parallel shift upward during the quarter. Short-term interest rates increased slightly more than long-term rates. As a result, the Corporation has seen a decrease in the base level of net portfolio value, due to a decrease in the fair value of loans, a decrease in the fair value of investments, partially offset by a decrease in the fair value of deposits.

The Corporation maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Corporation’s reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

As of the end of the period covered by this quarterly report, an evaluation was carried out under the supervision and with the participation of First Citizens Banc Corp’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure

controls and procedures (as defined in Exchange Act Rules 13a-14(e) and 15d-14(e) under the Securities Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are, to the best of their knowledge, effective to ensure that information required to be disclosed by First Citizens Banc Corp in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Subsequent to the date of their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that there were no significant changes in First Citizens Banc Corp’s internal control or in other factors that could significantly affect its internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

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

None

There were no material changes to the risk factors as presented in the Corporation’s annual report on Form 10-K for the year ended December 31, 2005.

During the first quarter of 2006, the Corporation purchased shares of common stock as follows:

None

None

None

(b) Exhibit No. 31.2 Certification of Chief Financial Officer pursuant Section 302 of the

Sarbanes-Oxley Act of 2002.

(c) Exhibit No. 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(d) Exhibit No. 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.