Management's Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q
(Amounts in thousands, except share data)
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Introduction
The following discussion focuses on the consolidated financial condition of First Citizens Banc Corp at September 30, 2008 compared to December 31, 2007 and the consolidated results of operations for the three and nine month periods ending September 30, 2008 compared to the same periods in 2007. 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 its 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 on its liquidity, capital resources, or operations 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. Financial Condition
Total assets of the Corporation at September 30, 2008 were $1,099,745 compared to $1,119,257 at December 31, 2007, a decrease of $19,512, or 1.7 percent. The decrease in total assets was mainly attributed to a decrease in federal funds sold, offset by an increase in Federal Home Loan Bank advances and a decrease in total deposit. Other assets decreased primarily due to an FDIC settlement related to the assumption of Miami Valley Bank deposits. Additionally, accrued expenses and other liabilities decreased primarily due to dividends payable. The Board of Directors typically meets prior to the end of the quarter to declare the dividend for the following quarter. The timing of this Board meeting changed and, as a result, the fourth quarter dividend was not declared this quarter.

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First Citizens Banc Corp Management's Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q
(Amounts in thousands, except share data)
Net loans have decreased $1,660 or 0.2 percent since December 31, 2007. The commercial real estate and commercial and agricultural loan portfolios increased by $5,745 and $16,117, respectively. The residential real estate, real estate construction, other loan and lease portfolios decreased $16,486, $1,511, $2,290 and $13 respectively, while consumer loans decreased a total of $2,073. The current increase in commercial real estate and commercial and agriculture loans is mainly due to lines of credit being drawn upon and calling efforts by the commercial lending officers. The current decrease in residential real estate and consumer loans is mainly the result of a decline in the housing market. Mortgage loan activity is down and the Corporation is currently selling on the secondary market, the majority of mortgage loans originated.
The Corporation had no loans held for sale at September 30, 2008 or December 31, 2007. At September 30, 2008, the net loan to deposit ratio was 101.2 percent compared to 93.8 percent at December 31, 2007.
For the first nine months of operations in 2008, the provision for the allowance loan loss was $6,513, compared to $1,154 in the nine months of 2007. The larger provision was the result of changes to the following factors. Net charge-offs have increased significantly compared to 2007. Although the charge-offs were primarily due to loans already on the watch list, the fact that charge-offs are larger this year led to an increase in the charge-off experience factor, which in turn led to the need for greater provision for loan loss. Nonperforming loans have increased by $4,576, mostly due to increased loans on nonaccrual status and loans delinquent greater than 90 days. Impaired loans also increased, from $12,965 at December 31, 2007 to $14,790 at September 30, 2008. Each of these factors was considered by management as part of the examination of 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 historical losses and allocations for economic factors. 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 all commercial and commercial real estate loans, with balances of $350 or larger, 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. 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. Impaired loans or portions thereof, are charged-off when deemed uncollectible.

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First Citizens Banc Corp Management's Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q
(Amounts in thousands, except share data)
The September 30, 2008 allowance for loan losses as a percent of total loans was 1.07 percent compared to 0.93 percent at December 31, 2007.
Available for sale securities increased by $4,167 from $144,351 at December 31, 2007 to $148,518 at September 30, 2008. Other securities increased from December 31, 2007, due to Federal Home Loan Bank stock dividends received and the purchase of additional Federal Reserve Bank stock. In addition to securities, the Corporation also utilizes letters of credit from the Federal Home Loan Bank (FHLB) for pledging to public entities. As of September 30, 2008, the Corporation was in compliance with all pledging requirements. Bank owned life insurance (BOLI) increased $369 from December 31, 2007 due to income earned on the investment. The purchase of BOLI, in 2006, is an alternative to replacing maturing securities, and is being used to help recover costs associated with healthcare, group term life, and 401(k).
Office premises and equipment, net, have decreased $887 from December 31, 2007 to September 30, 2008. The decrease in office premises and equipment is attributed to depreciation of $1,484 and disposals of $128, offset by new purchases of $725.
Total deposits at September 30, 2008 decreased $63,214 from year-end 2007. Noninterest-bearing deposits decreased $8,357 from year-end 2007 while interest-bearing deposits, including savings and time deposits, decreased $54,857 from December 31, 2007. The interest-bearing deposit decrease was due primarily to decreases in savings, NOW and certificates of deposit. The decline in NOW and certificate of deposit accounts was mainly due to management's decision not to pay above market rates for deposits to maintain the Corporation's interest margin. The year to date average balance of total deposits increased $252,534 compared to the average balance of the same period 2007. This increase in average balance was due to the assumption of $56,448 in deposits in October 2007 and $234,252 in deposits acquired in a merger in December 2007.
Total borrowed funds have increased $50,185 from December 31, 2007 to September 30, 2008. At September 30, 2008, the Corporation had $107,630 in outstanding Federal Home Loan Bank advances compared to $64,470 at December 31, 2007. The FHLB borrowings increased as a result of declines in deposits since the end of 2007. In an effort to take advantage of reduced interest rates, the Corporation obtained a long-term FHLB advance in the first quarter of 2008 to replace two maturing advances. The new advance is a $5,000, eighty-four month advance that has a fixed rate of 2.84%, and is callable after thirty-six months. This advance replaced a $3,000 advance that matured on May 29, 2008 with a rate of 5.57% and a $2,000 advance that matured on September 4, 2008 with a rate of 5.36%. The Corporation also had notes outstanding with other financial institutions totaling $20,500 at September 30, 2008 compared to $21,500 at December 31, 2007. Securities sold under agreements to repurchase, which tend to fluctuate due to timing of deposits, have increased $7,056 since the end of 2007 and U.S. Treasury Tax Demand Notes have increased $969.

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First Citizens Banc Corp Management's Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q
(Amounts in thousands, except share data)
Shareholders' equity at September 30, 2008 was $122,298, or 11.1 percent of total assets, compared to $126,156 at December 31, 2007, or 11.3 percent of total assets. The decrease in shareholders' equity resulted from earnings of $2,648, less dividends paid of $5,858 and the decrease in the market value of securities available for sale, net of tax, of $648. The Corporation paid cash dividends totaling $.76 per common share during the first nine months of 2008, as compared to $.85 per common share during the same period of 2007. As a result of additional shares issued in the Futura acquisition, total outstanding shares at September 30, 2008 were 7,707,917 compared to 5,389,300 at September 30, 2007.
In the fourth quarter of 2007, the Corporation reaffirmed the stock repurchase program that was instituted in 2006. Under the program, the Corporation is authorized to buy up to 5.0 percent of the total common shares outstanding. Repurchases under the plan could be made from time to time in the open market, based on stock availability, price and the Company's financial performance, including capital levels. Therefore, no assurance can be given as to the level or to the timing of shares that could be repurchased.
In accordance with SFAS 142, management evaluates goodwill for impairment on an annual basis. Goodwill is impaired if the fair value of goodwill is less than the carrying value. Given the uncertainty in the financial markets, management has engaged an independent firm to perform the valuation for 2008. Although past goodwill valuations did not indicate impairment, should the valuation indicate the goodwill is impaired, the impact to the financial statements could be material.
Results of Operations
Nine Months Ended September 30, 2008 and 2007 Net income for the nine months ended September 30, 2008 was $2,648, or $.34 per basic and diluted share compared to $4,697 or $.87 per basic and diluted share for the same period in 2007. This was a decrease of $2,049, or 43.6 percent. The decrease in earnings per share is partly due to the greater number of shares outstanding at the end of the third quarter of 2008 compared to the same period in 2007. The Corporation issued 2,343,617 shares in connection with the acquisition of Futura Banc Corporation. Other reasons for the changes are explained below.
Total interest income for the nine months of 2008 increased by $10,860, or 29.6 percent compared to the same period in 2007. Net interest income, the difference between interest income earned on interest-earning assets and interest expense incurred on interest-bearing liabilities, is the most significant component of the Corporation's earnings. Net interest income is affected by changes in volume, rates and composition of interest-earning assets and interest-bearing liabilities. Average earning assets increased 40.1 percent from the first nine months of 2007 from a combination of organic growth and an acquisition. Average loans for the first nine months of 2008 increased 39.2 percent over the first nine months of 2007, mainly due to the acquisition Futura Banc Corporation. The Corporation's net interest margin for the nine months ended September 30, 2008 and 2007 was 4.20% and 4.23%, respectively.

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First Citizens Banc Corp Management's Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q
(Amounts in thousands, except share data)
Noninterest income for the first nine months of 2008 was $7,338, an increase of $1,890 or 34.7 percent compared to the same period in 2007. The change in non-interest income reflects the impact of acquisitions. Non-interest income growth was most significant in the service charges on deposit accounts, which recorded revenues of $3,559 during the first nine months of 2008, an increase of $987 or 38.4 percent from the same period in 2007. The increased revenues were primarily due to higher volumes in deposit accounts from acquisitions. Trust fee income for the first nine months of 2008 was $1,505, up $374 or 33.0 percent over the first nine months of 2007, primarily from an acquisition. Bank owned life insurance contributed $369 to non-interest income in the first nine months of 2008. ATM fee income for the first nine months of 2008 was $1,029, up $411 or 66.5 percent over the first nine months of 2007, primarily from an acquisition. Other non-interest income increased $140 for the first nine months of 2008 compared to the same period of 2007, primarily due to a gain of $183 in the first quarter of 2008, for the redemption of VISA stock. Losses sustained on the sale of OREO properties increased $112 in the first nine months of 2008 compared to the first nine months of 2007.
Noninterest expense for the nine months ended September 30, 2008 was $28,030, an increase of $8,617 or 44.4 percent, from $19,413 reported for the same period in 2007. Salaries and other employee costs were $13,291, up $3,305 or 33.1 percent as compared to the first nine months of 2007 mainly due to an increase of approximately 68 full-time equivalent employees compared to the first nine months of 2007. In addition, approximately $137 of severance cost relating to branch restructuring and loan production office closures were posted in the third quarter of 2008. Employees increased due to the acquisition of Futura Banc Corporation and the assumption of deposits of Miami Valley Bank in the fourth quarter of 2007. The Corporation subsequently purchased one of Miami Valley's branch banking offices, and retained the employees of that branch. Occupancy and equipment costs were $3,550, up $1,686 or 90.5 percent as a result of the acquisitions. Computer processing costs were $944, up $370 or 64.5 percent compared to the first nine months of 2007 as a result of conversion costs associated with acquisitions. State franchise taxes increased $298 compared to the first nine months of 2007 as a result of acquisitions as well. Amortization expense for the three quarters of 2008 increased $616 or 127.5 percent from the same period of 2007 due to the additional intangible assets acquired from the recent merger. Professional services expenses increased $389 or 37.5 percent from the three quarters of 2007 due to increased post merger legal and audit fees associated with lending activities and from consulting fees for employment searches. Finally, other operating expenses were $6,765, up $1,953 or 40.6 percent as compared to the three quarters of 2007, primarily a result of merger, integration and restructuring charges recognized from the acquisition of Futura Banc Corporation.

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First Citizens Banc Corp Management's Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q
(Amounts in thousands, except share data)
Income tax expense for the first nine months of 2008 totaled $691 compared to $1,924 for the first nine months of 2007. This was a decrease of $1,233, or 64.1 percent. The decrease in the federal income taxes is a result of the decrease in total income before taxes of $3,282 and a result of a decrease in the effective tax rate. The effective tax rates for the nine-month periods ended September 30, 2008 and September 30, 2007 were 20.7% and 29.1%, respectively. Non-taxable BOLI income and non-taxable security income led to lower taxable income, and therefore to the decrease in the effective tax rate. Three Months Ended September 30, 2008 and 2007 Net income for the three months ended September 30, 2008 was $1,230, a decrease of $237 or 16.2 percent from $1,467 for the same period in 2007. Basic and diluted earnings per common share was $.16 for the three months ended September 30, 2008 compared to $.27 for the same period in 2007. The decrease in earnings per share is partly due to the greater number of shares outstanding at the end of the second quarter of 2008 compared to the same period in 2007. The Corporation issued 2,343,617 shares in connection with the acquisition of Futura Banc Corporation. Other reasons for the changes are explained below. Total interest income for the third quarter of 2008 increased $2,914, or 23.2 percent compared to the same period in 2007. Average earning assets for the third quarter of 2008 increased 36.4 percent from the three months ended September 30, 2007, mostly due to an acquisition. The average rate on earning assets on a tax equivalent basis for the third quarter of 2008 was 6.40% and 7.11% for the third quarter of 2007. The decrease in yield in this year's third quarter is due to the change in the interest rate environment in which the Corporation has operated in 2008. Total interest expense for the third quarter of 2008 decreased $395, or 7.4 percent compared to the same period of 2007. Average interest-bearing liabilities for the third quarter of 2008 increased 39.9 percent from the three months ended September 30, 2007 due to an acquisition. The average rate on interest-bearing liabilities for the third quarter of 2008 was 2.34% and was 3.54% for the third quarter of 2007. The decrease in cost in this year's third quarter is due to the change in the interest rate environment.
Noninterest income for the three months ended September 30, 2008 was $2,429, an increase of $611 or 33.6 percent compared to the three months ended September 30, 2007. The change in non-interest income reflects the impact of acquisitions. Non-interest income growth was most significant in the service charges on deposit accounts, which recorded revenues of $1,235 during the third quarter of 2008, an increase of $361 or 41.3 percent from the same period in 2007. The increased revenues were primarily due to higher volumes in deposit accounts from acquisitions. Trust fee income for the third quarter of 2008 was $508, up $131 or 34.7 percent over the third quarter of 2007, primarily from an acquisition. Bank owned life insurance contributed $119 to non-interest income in the third quarter of 2008. ATM fee income for the third quarter of 2008 was $382, up $155 or 68.3 percent over the same period of 2007, primarily from an acquisition. In the third quarter of 2008, losses sustained on the sale of OREO properties increased $35 compared to the third quarter of 2007 and losses on the disposal of fixed assets increased $57 compared to the third quarter of 2007. In the third quarter of 2008, the Corporation closed two Loan Production offices, one in Marion, Ohio and the other in Maryville, Ohio, the closure resulting in writing off leasehold improvements.

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First Citizens Banc Corp Management's Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q
(Amounts in thousands, except share data)
Noninterest expense for the third quarter of 2008 was $9,006, an increase of $2,748 or 43.9 percent, from $6,258 reported for the same period in 2007. Salaries and other employee costs were $4,545, up $1,375 or 43.4 percent as compared to the same period in 2007 mainly due to an increase of approximately 68 full-time equivalent employees compared to the third quarter of 2007. Employees increased due to the acquisition of Futura Banc Corporation and the assumption of deposits of Miami Valley Bank in the fourth quarter of 2007. The Corporation subsequently purchased one of Miami Valley's branch banking offices, and retained the employees of that branch. In addition, approximately $137 of severance cost relating to branch restructuring and loan production office closures were posted in the third quarter of 2008. Occupancy and equipment costs were $1,144, up $528 or 85.7 percent as a result of the acquisitions. Computer processing costs were $239, up $46 or 23.8 percent compared to last year's third quarter as a result of higher processing costs associated with acquisitions. Amortization expense in the third quarter increased $198 or 123.0 percent from the same period of 2007 due to the additional intangible assets acquired from the recent merger. Professional services expenses increased $151 or 47.3 percent from the third quarter of 2007 due to increased post merger legal and audit fees associated with lending activities and from consulting fees for employment searches. Finally, other operating expenses were $2,055, up $476 or 30.1 percent as compared to the third quarter of 2007, primarily a result of the acquisition of Futura Banc Corporation.
Income tax expense for the third quarter totaled $396 compared to $615 for the same period in 2007. This was a decrease of $219, or 35.6 percent. The decrease in the federal income taxes is a result of the decrease in total income before taxes of $456 and a result of a decrease in the effective tax rate. The effective tax rates for the three-month periods ended September 30, 2008 and September 30, 2007, were 24.4% and 29.5%, respectively. Non-taxable BOLI income and non-taxable security income led to lower taxable income, and therefore to the decrease in the effective tax rate.

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First Citizens Banc Corp Management's Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q (Amounts in thousands, except share data) Capital Resources Shareholders' equity totaled $122,298 at September 30, 2008 compared to $126,156 at December 31, 2007. All of the Corporation's capital ratios exceeded the regulatory minimum guidelines as of September 30, 2008 and December 31, 2007 as identified in the following table: To Be Well Capitalized Under Prompt For Capital Corrective Corporation Ratios Adequacy Action 9/30/2008 12/31/2007 Purposes Provisions Tier I Risk Based Capital 7.9 % 7.3 % 4.0 % 6.0 % Total Risk Based Capital 11.2 % 10.3 % 8.0 % 10.0 % Leverage Ratio 5.9 % 7.7 % 4.0 % 5.0 %

The Corporation paid a cash dividend of $.28 per common share on each of February 1, and May 1, 2008, and a cash dividend of $.20 per common share on August 1, 2008, and $.29 per common share on each of February 1 and May 1, 2007, and a cash dividend of $.27 per common share on August 1, 2007. The decrease in the dividend paid on August 1, 2008 is due to the decrease in earnings the second quarter of 2008, balanced with management's desire to continue the practice of paying a strong dividend. The Corporation anticipates spreading the impact of the second quarter's decreased net earnings of several quarters. Liquidity
All securities are classified as available for sale. At September 30, 2008, securities with maturities of one year or less, totaled $7,603, or 5.1 percent 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 (unaudited) contained in the consolidated financial statements detail the Corporation's cash flows from operating activities resulting from net earnings.
Cash from operations for the nine months ended September 30, 2008 was $12,291. This includes net income of $2,648 plus net adjustments of $9,643 to reconcile net earnings to net cash provided by operations. Cash from investing activities was $6,300 for the nine months ended September 30, 2008. The use of cash from investing activities is primarily due to loans, securities and the change in federal funds sold. The Corporation had a net decrease in cash of $5,608 during the nine months ended September 30, 2008 due to the net growth of the loan portfolio. Cash received from maturing and called securities totaled $49,303. This increase in cash was offset by the purchase of securities of $54,378. Additionally, cash was increased by the net change in federal funds sold of $18,408. Cash from financing activities in the first nine months of 2008 totaled $(14,972). This decrease in cash is primarily due to the net change in deposits. Cash from operating activities and financing activities was more than cash from investing activities by $3,619. Cash and due from banks increased from $27,345 at December 31, 2007 to $30,964 at September 30, 2008, as a result of the increase in cash during the first nine months of 2008.
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 FHLB. Citizens maintains . . .