Civista Bancshares 10K 2006 Annual report | CIVB Filing

Exhibit 13.1

Five Year Consolidated Financial Summary


	2006			2005			2004			2003			2002
EARNINGS
Net Income (000)	$	6,160		$	6,659		$	4,813		$	5,567		$	7,127
Per Common Share⁽¹⁾
Earnings (basic)	$	1.12		$	1.15		$	0.92		$	1.11		$	1.48
Earnings (diluted)	$	1.12		$	1.15		$	0.92		$	1.10		$	1.48
Book Value	$	14.53		$	15.02		$	15.19		$	13.73		$	14.24
Dividends Paid	$	1.12		$	1.12		$	1.08		$	1.30		$	1.30

BALANCES
Assets (millions)		749.0			750.9			817.5			636.4			651.6
Deposits (millions)		564.6			577.1			647.0			510.2			539.9
Net Loans (millions)		549.7			514.8			556.2			462.9			415.7
Shareholders Equity (millions)		79.5			87.1			88.2			69.1			71.7

PERFORMANCE RATIOS
Return on Average Assets		0.83	%		0.85	%		0.71	%		0.87	%		1.12	%
Return on Average Equity		7.68	%		7.69	%		6.74	%		7.82	%		10.22	%
Equity Capital Ratio		10.61	%		11.60	%		10.79	%		10.86	%		11.00	%
Net Loans to Deposit Ratio		97.36	%		89.20	%		85.96	%		90.73	%		76.99	%
Loss Allowance to Total Loans		1.45	%		1.76	%		2.06	%		1.34	%		1.50	%


⁽¹⁾		Per share data has been adjusted for the business combination with FNB Financial Corporation in October 2004, and Independent Community Banc Corp. in April 2002.

Dear Shareholder:

The management of First Citizens Banc Corp feels an overriding responsibility to utilize our shareholders’ investment to provide a predictable and satisfactory return to the owners of our stock and to be responsible corporate citizens in the communities served by our bank. We believe we are achieving those goals but are striving to do even better.

An important objective is to increase our leverage which would lead to an increase in our return on equity or, more plainly said, a return on the dollars our shareholders have invested with us. To accomplish this goal, we need to increase our loans and deposits and reduce our shareholder capital as a percentage of our assets.

With the lack of projected economic activity in the markets we serve, internal growth will be achieved only from taking existing business away from other providers. Like all of our competitors, we are striving to accomplish that kind of growth without sacrificing profits. As evidenced by the 2006 financial statements, loan growth has been more achievable than deposit growth. During 2007, we have plans for products and marketing efforts that are targeted at improving our deposit base in a way that does not adversely affect profitability. An integral part of this effort was to understand customers’ and non-customers’ perceptions of Citizens Bank and using the information to develop branding, image and sales programs.

Other opportunities for significant growth may be available from additional acquisitions. This is an area of high priority for us. We believe our stock is a valuable currency with a price/earnings ratio of approximately 18 and a dividend return of over 5%. We are working with our investment bankers to find merger opportunities that would not dilute our existing shareholders’ interests.

In order to increase our leverage, we need to combine internal and acquisition growth with a stable-to-decreasing equity level. One method to accomplish this is our current dividend payout which is enhanced by the current tax treatment of dividends paid to shareholders. The other method is the use of stock buy-backs. For 2007, a repurchase of up to 5% of our stock has been authorized by your board of directors. The over-riding condition to any stock repurchase is that it has to be fair to our remaining stockholders.

An area of our company receiving considerable attention during 2007 is corporate governance and future leadership. Over the past few years, we have had the retirement of many fine people who, as directors, were responsible for the growth of First Citizens Banc Corp. The most recent retirement was that of George L. Mylander, who served as a director for over 40 years. During that period of time, the bank grew from one office and $30,000,000 of assets to the 16^th largest banking organization in Ohio, with 21 offices and over $740,000,000 in assets. George’s guidance and support will be missed, and fortunately he has agreed to serve as a Director Emeritus.

Under the leadership of Pat Murray, who was elected Chairman of First Citizens Banc Corp, a review was conducted to evaluate the Board of Directors in efficiency and effectiveness. Based upon that work, the Board of Directors has authorized a consolidation so that the same individuals will be members of the Citizens Banking Company and First Citizens Banc Corp boards. At the annual meeting (10:00 a.m. April 17, 2007 at the Cedar Point Center of Firelands College, Bowling Green State University), you will be asked to eliminate the staggered three-year terms for directors and, beginning in April 2008, elect 13 directors for a one-year term. We expect that these directors will serve both the bank and the holding company. This is being done to make directors more accountable to shareholders, reduce director fees and make the meeting schedule more efficient.

I am retiring as an employee at the end of 2007, and James O. Miller is expected to become the President and CEO of First Citizens Banc Corp. Jim has been with us for over 20 years and has been an integral part of the evolution of your company. Jim and I are part of a management group that understands our responsibilities to our shareholders. Over the years that group of people has grown as managers and has been augmented when appropriate. I can assure you that your investment is in good hands.

Regardless of governance and leadership changes, our fundamental tasks remain the same:

	•		Maintaining a high net interest margin;

	•		Increasing non-interest revenue;

	•		Reducing non-interest expense; and

	•		Returning earnings to our shareholders.

In last year’s annual report, I summarized the actions necessary to preserve our net interest margins by reducing the asset sensitivity of our balance sheet and increasing our loan-to-deposit ratio. These goals have been achieved by offering very competitive fixed rate commercial loans with prepayment penalties. Additionally, we have significantly improved our competitiveness in making fixed rate first mortgage residential loans and then maintaining them in our loan portfolio, as opposed to selling them. The merger of Mr. Money management and operations into the bank was instrumental to our success. The end result was an increase of approximately $40,000,000 or 8% in our loan portfolio and a reduction in the asset sensitivity. With interest rates projected to move lower later in 2007 and our interest rate sensitivity reduced, we are projecting earnings on loans will fall more slowly than cost of deposits, thus helping to preserve our attractive interest margin.

The other half of the interest margin equation is our cost of funding. If you were to compare us to other financial organizations, you would observe that our significantly above average interest margins have been driven by our lower cost of funds. This is attributed to a high percentage of core deposits (checking and savings). Like all banks, we are always striving to maintain as large a percentage of core deposits as we can. Success in accomplishing that is a function of our service, branch operations, products offered and rates. We are fortunate to have a very experienced, qualified and customer oriented workforce. During 2007, a continuing priority will be a re-evaluation of how we deliver service and the design of our products. Rates speak for themselves. We constantly monitor all of our competition and will remain appropriately competitive. With these efforts, we are striving to increase our existing level of core deposits and continue a net interest margin that exceeds peer comparisons.

Non-interest income is primarily made up of checking account service charges, ATM fees, overdraft fees and First Citizens Advisors income. While we are improving our checking account options with additional services and products that should attract depositors willing to pay service charges, this is an uphill battle with other financial organizations offering “free checking” as a loss leader to increase core deposits, on which they hope to attempt to generate service charges in the future. The growth in service charges will continue to be a real challenge for us.

Fees from overdrafts, a convenience product for some customers, and ATM fees derived from non-customers, produced approximately $2,000,000 in revenues in 2006. We are constantly monitoring the placement of ATM’s to develop an acceptable balance between service for customers and fee potential from non-customers. The growth component of non-interest income is the operation of First Citizens Advisors. Revenues from this segment grew again in 2006. Assets managed approached $200,000,000 at the end of 2006; a growth of over 20% from the end of 2005 and five times what we started with in 2002. In January 2007, The Citizens Banking Company completed the purchase of a 1/3 interest in an investment management company in Lorain County. The other owners are Buckeye Community Bank and Apex Investment Partners. The company is named Buckeye Advisors and is located in the Buckeye Bank Building. Besides participating in a well-run investment management company in an adjacent market, we feel there will be expanded opportunities for our trust operations from Buckeye Advisors.

When you compare our total non-interest income for 2005 of $7,838,000 against our non-interest income for 2006 of $6,670,000 there is a $1,168,000 reduction. The primary reasons for this are two extraordinary items. In 2005 our non-interest income was increased by $766,000 from the sale of the Richwood and Green Camp branches, while in 2006 our non-interest income was decreased by $407,000 from loss on the sale of two commercial properties acquired in loan defaults. In concluding my comments on non-interest income, it is important to understand that a larger percentage of increased revenue goes to profits due to the impact of fixed costs. It is because of this, we spend a considerable amount of time and effort trying to find new and better ways to increase those revenues.

We are pleased with the reduction of non-interest expense from $27,929,000 to $26,977,000, a decrease of $952,000 or 3.4%. However, in last year’s annual report, we had estimated savings in 2006 over 2005 from reductions in salaries and fringes at approximately $1,000,000. We did not accomplish that with salaries down $659,000 and fringe benefits up $435,000.

Our efficiency ratio is slightly over 70% from a peak of approximately 73%. By way of comparison, statistics indicate the average efficiency ratio for Ohio publicly traded banks is 67%. Each 1% drop in the efficiency ratio requires approximately $400,000 of increased revenue/decreased cost combination. Some of the actions we have taken to improve the ratio are:

	•		reducing our staffing level to 250 fulltime equivalents from a high of 310;

	•		employee contributions to health insurance have been increased;

	•		Defined Benefits Pension Plan has been frozen with a variable cost profit sharing component replacing it;

	•		two Plymouth branches have been combined into one; and

	•		all of the remaining components of Mr. Money have been consolidated into the bank and they no longer operate separate offices.

Professional fees, which saw large increases caused by the regulatory requirements of the Sarbanes Oxley Act, seem to have stabilized, and we hope that common sense will prevail and those costs can be reduced. While much has been done or is in process to reduce our efficiency ratio, much more needs to be accomplished in increasing our revenue and decreasing our expenses to achieve our goal of the mid- 60%.

In closing, it has been an honor to serve First Citizens Banc Corp and Citizens Banking Company. I have been blessed with great leadership at the director level and surrounded by talented co-workers. Together, we have accomplished something of which I am proud to be a part. If there is a legacy, it is the belief that we should return to our shareholders as much of our earnings as possible.

Your comments and questions are always welcomed.

Sincerely,

David A. Voight
President

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ANNUAL REPORT

CONTENTS


Five –Year Selected Consolidated Financial Data			1

Common Stock and Shareholder Matters			3

General Development of Business			3

Management’s Discussion and Analysis of Financial Condition and Results of Operations			4

Quantitive and Qualitative Disclosures about Market Risk			22

Financial Statements
Management’s Report on Internal Control of Financial Reporting			25
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Statements			26
Report of Independent Registered Public Accounting Firm on Financial Statements			27
Consolidated Balance Sheets			28
Consolidated Statements of Income			29
Consolidated Statements of Changes in Shareholders’ Equity			30
Consolidated Statement of Cash Flows			31
Notes to Consolidated Financial Statements			33

Five-Year Selected Consolidated Financial Data

(Dollars in thousands, except per share data)


	Year ended December 31,
	2006		2005			2004		2003		2002
Statements of income:
Total interest and dividend income	$	45,876	$	42,438		$	33,836	$	33,267	$	36,007
Total interest expense		15,615		11,591			8,163		8,417		11,724

Net interest income		30,261		30,847			25,673		24,850		24,283
Provision for loan losses		1,128		1,123			1,805		1,944		1,178

Net interest income after provision for loan losses		29,133		29,724			23,868		22,906		23,105

Security gains		—		(13	)		107		301		8
Other noninterest income		6,670		7,851			6,094		7,423		6,823

Total noninterest income		6,670		7,838			6,201		7,724		6,831

Total noninterest expense		26,977		27,929			23,332		22,925		19,893

Income before federal income taxes		8,826		9,633			6,737		7,705		10,043
Federal income tax expense		2,666		2,974			1,924		2,138		2,916

Net income	$	6,160	$	6,659		$	4,813	$	5,567	$	7,127


Per share of common stock:
Basic earnings	$	1.12	$	1.15		$	0.92	$	1.11	$	1.48
Diluted earnings		1.12		1.15			0.92		1.10		1.48
Dividends		1.12		1.12			1.08		1.30		1.30
Book value		14.53		15.02			15.19		13.73		14.24

Average common shares outstanding:
Basic		5,520,692		5,804,361			5,211,904		5,033,203		4,811,591
Diluted¹		5,520,692		5,805,681			5,216,557		5,041,877		4,812,664

Year-end balances:
Loans, net	$	549,665	$	514,770		$	556,188	$	462,878	$	415,682
Securities		119,398		136,674			163,451		116,733		161,962
Total assets		748,986		750,936			817,510		636,423		651,634
Deposits		564,551		577,105			647,045		510,172		539,899
Borrowings		96,754		81,402			78,322		53,529		36,692
Shareholders’ equity		79,472		87,110			88,213		69,125		71,689

Average balances:
Loans, net	$	530,409	$	532,620		$	499,284	$	439,261	$	424,947
Securities		126,645		150,184			120,088		140,418		138,062
Total assets		739,571		780,321			681,644		642,300		638,664
Deposits		566,584		609,564			539,635		530,801		533,869
Borrowings		87,825		80,056			68,110		36,766		30,983
Shareholders’ equity		80,182		86,586			71,422		71,192		69,767


¹		Prior to 2002, there were no additional potential common shares issuable under stock options.

Five-Year Selected Ratios

(Dollars in thousands, except per share data)


	Year ended December 31,
	2006			2005			2004			2003			2002
Net yield on average interest-earning assets		4.49	%		4.31	%		4.07	%		4.21	%		4.09	%
Return on average total assets		0.83			0.85			0.71			0.87			1.12
Return on average shareholders’ equity		7.68			7.69			6.74			7.82			10.22
Average shareholders’ equity as a percent of average total assets		10.84			11.10			10.48			11.08			10.92
Net loan charge-offs as a percent of average total loans		0.42			0.66			0.43			0.44			0.27
Allowance for loan losses as a percent of loans at year-end		1.45			1.76			2.06			1.34			1.50
Shareholders’ equity as a percent of total year-end assets		10.61			11.60			10.79			10.86			11.00

Stock holder Return Performance

Set forth below is a line graph comparing the five-year cumulative return of First Citizens Banc Corp (FCZA) common stock, based on an initial investment of $100 on December 31, 2001 and assuming reinvestment of dividends, with Standard & Poor’s 500 Index, the Nasdaq Bank Index and the SNL Bank Index. The comparative indices were obtained from Bloomberg and SNL Securities.

A copy of Form 10-K, as filed with the Securities and Exchange Commission, will be furnished, free of charge, to shareholders, upon written request to the Secretary of First Citizens Banc Corp, 100 East Water Street, Sandusky, Ohio 44870.

Common Stock and Shareholder Matters

The common shares of First Citizens Banc Corp trade on The NASDAQ Stock Market under the symbol “FCZA”. As of December 31, 2006, there were 5,471,300 shares outstanding held by approximately 1,220 shareholders of record (not including the number of persons or entities holding stock in nominee or street name through various brokerage firms). Information below is the range of sales prices for each quarter for the last two years.

2006

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

$19.50 to $22.64

$19.65 to $21.49

$19.14 to $20.63

$19.25 to $21.00

2005

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

$22.79 to $24.40

$18.10 to $23.98

$19.54 to $23.14

$18.87 to $22.00

Dividends per share declared by the Corporation on common shares were as follows:


	2006		2005
First quarter	$	.28	$	.28
Second quarter		.28		.28
Third quarter		.28		.28
Fourth quarter		.28		.28


	$	1.12	$	1.12

General Development of Business
(Dollars in thousands, except for per share data)

FIRST CITIZENS BANC CORP (FCBC) was organized under the laws of the State of Ohio on February 19, 1987 and is a registered financial holding company under the Gramm-Leach-Bliley Financial Modernization Act of 1999, as amended. The Corporation’s office is located at 100 East Water Street, Sandusky, Ohio. The Corporation had total consolidated assets of $748,986 at December 31, 2006. FCBC and its subsidiaries are referred to together as the Corporation.

THE CITIZENS BANKING COMPANY (Citizens), owned by the Corporation since 1987, opened for business in 1884 as The Citizens National Bank. In 1898, Citizens was reorganized under Ohio banking law and was known as The Citizens Bank and Trust Company. In 1908, Citizens surrendered its trust charter and began operation under its current name. In the third quarter of 2006, Mr. Money Finance Company (Mr. Money), a wholly-owned subsidiary of Citizens, was merged with and into Citizens. Citizens is an insured bank under the Federal Deposit Insurance Act. Citizens maintains its main office at 100 East Water Street, Sandusky, Ohio and operates two branch banking offices in Perkins Township (Sandusky, Ohio), two branch banking offices in Norwalk, Ohio, one branch banking office in Berlin Heights, Ohio, one branch banking office in Huron, Ohio, one branch banking office in Castalia, Ohio and one loan production office in Port Clinton, Ohio. Additionally, Citizens maintains offices in New Washington, Ohio; Shelby, Ohio; Willard, Ohio; Crestline, Ohio; and the Ohio villages of Chatfield, Tiro, Richwood, Green Camp, Greenwich, Plymouth, and Shiloh and also has a loan production office in Marion, Ohio. Citizens accounts for 99.3% of the Corporation’s consolidated assets at December 31, 2006.

SCC RESOURCES INC. (SCC) is organized under the laws of the State of Ohio. Begun as a joint venture of three local Sandusky, Ohio banks in 1966, SCC provides item-processing services for financial institutions, including Citizens, and other nonrelated entities. The Corporation acquired total ownership of SCC in February 1993. On June 19, 1999, SCC entered into an agreement with Jack Henry & Associates, Inc. (JHA), whereby SCC agreed to sell all of its contracts for providing data processing services to community banks to JHA. JHA agreed to pay SCC a fee based upon annual net revenue under a new JHA contract for each bank that signed a five-year contract with JHA by January 31, 2000. This subsidiary accounts for less than one percent of the Corporation’s consolidated assets as of December 31, 2006.

FIRST CITIZENS TITLE INSURANCE AGENCY INC. (Title Agency) was formed to provide customers with a seamless mortgage product with improved service. The Title Agency was dissolved in the third quarter of 2006.

FIRST CITIZENS INSURANCE AGENCY INC. (Insurance Agency) was formed to allow the Corporation to participate in commission revenue generated through its third party insurance agreement. Assets of the Insurance Agency are less than one percent of the Corporation’s consolidated assets as of December 31, 2006.

WATER STREET PROPERTIES (Water St.) was formed to hold properties repossessed by FCBC subsidiaries. Water St. accounts for less than one percent of the Corporation’s consolidated assets as of December 31, 2006.

Management’s Discussion and Analysis of Financial Condition and Results of Operations
-As of December 31, 2006 and December 31, 2005
and for the Years Ending December 31, 2006, 2005 and 2004

(Dollars in thousands, except per share data)

General

The following paragraphs more fully discuss the significant highlights, changes and trends as they relate to the Corporation’s financial condition, results of operations, liquidity and capital resources as of December 31, 2006 and 2005, and during the three-year period ended December 31, 2006. This discussion should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements, which are included elsewhere in this report.

Forward-Looking Statements

This report includes forward-looking statements by the Corporation relating to such matters as anticipated operating results, business line results, credit quality expectations, prospects for new lines of business, economic trends (including interest rates) and similar matters. Such statements are based upon the current beliefs and expectations of the Corporation’s management and are subject to risks and uncertainties. While the Corporation believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could prove to be inaccurate, and accordingly, actual results and experience could differ materially from the anticipated results or other expectations expressed by the Corporation in its forward-looking statements. Factors that could cause actual results or experience to differ from results discussed in the forward-looking statements include, but are not limited to, regional and national economic conditions; volatility and direction of market interest rates; credit risks of lending activities, governmental legislation and regulation, including changes in accounting regulation or standards; material unforeseen changes in the financial condition or

results of operations of the Corporation’s clients; and other risks identified from time-to-time in the Corporation’s other public documents on file with the Securities and Exchange Commission.

The Corporation 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. The Corporation is not aware of any current recommendations by regulatory authorities that would have such effect if implemented. The Corporation does not undertake, and specifically disclaims, any obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements, and the purpose of this section is to secure the use of the safe harbor provisions.

Financial Condition

At December 31, 2006, total assets were $748,986, compared to $750,936 at December 31, 2005. The decrease in assets is primarily due to the factors discussed in the following sections.

Net loans have increased $34,895, or 6.8% since December 31, 2005. The growth in loans is attributable to the growth in the commercial real estate and residential real estate portfolio. 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. During the remainder of 2006, the Corporation continued a modified residential mortgage program. This program, as well as the two used in the first quarter, enabled the Corporation to increase the size of our residential and commercial real estate portfolios. Similar programs may be utilized in future periods. The growth of these two portfolios’ of $50,034 offset declines in the commercial, consumer, and other loan portfolio’s of the Corporation. 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.

Year-end deposit balances totaled $564,551 in 2006 compared to $577,105 in 2005, a decrease of $12,554, or 2.2%. Savings accounts decreased by $18,713 from 2005 to 2006. Increases in interest demand and time deposit accounts of approximately $11,097 partially offset the decline in the savings portfolio. A primary factor of the decline in deposits, especially savings, can be attributed to the decline in the economy, as customers have been using savings to pay down their debt. Another factor for the decline in deposits the continued improvement in the stock market, as well as investors who are seeking higher yielding deposit products within Citizens’ market. Average deposit balances for 2006 were $566,584 compared to $609,564 for 2005, a decrease of 7.1%. Non-interest bearing deposits averaged $92,382 for 2006, compared to $98,228 for 2005, decreasing $5,846, or 5.9%. Savings, NOW, and MMIA accounts averaged $251,722 for 2006 compared to $279,568 for 2005. Average certificates of deposit decreased $9,288 to total an average balance of $222,480 for 2006.

Borrowings from the Federal Home Loan Bank of Cincinnati were $38,916 at December 31, 2006. The detail of these borrowings can be found in Note 9 to the consolidated financial statements. The increase of $8,377 from year-end 2005 was the result of overnight advances used to fund the loan portfolio growth.

The Corporation also has a borrowing agreement originally entered into for the purpose of funding loans originated by Mr. Money. FCBC has two borrowing arrangements from LaSalle Bank, NA consisting of a $5,000 line of credit and a $10,000 term note. At December 31, 2006, the Corporation’s $5,000 line of credit is undrawn. The total remaining principal on the Corporation’s term note was $6,000 at December 31, 2006 compared to $7,000 at December 31, 2005. During 2006, the Corporation made its $1,000 scheduled principal payment on the term loan. Note 11 in the consolidated financial statements provide further details regarding the borrowing arrangement.

Citizens offers repurchase agreements in the form of sweep accounts to commercial checking account customers. Total repurchase agreements in the form of sweep accounts totaled $23,403 at December 31, 2006 compared to $16,472 at December 31, 2005. Obligations of U.S. government agencies maintained under Citizens’ control are pledged as collateral for the repurchase agreements.

Securities available for sale, securities held to maturity and other securities, which consist of Federal Home Loan Bank, Federal Reserve Bank, Bankers Bancshares, Farmer MAC stock, and Norwalk Community Development Corporation stock, decreased a total of $17,276, or 12.6% from $136,674 on December 31, 2005 to $119,398 on December 31, 2006. U.S. Treasury securities and obligations of U.S. government agencies decreased $10,436, from $97,815 at December 31, 2005 to $87,379 at December 31, 2006. Obligations of states and political subdivisions available for sale decreased $5,838 from 2005 to 2006. The Corporation continued utilizing letters of credit from the Federal Home Loan Bank (FHLB) to replace maturing securities that were pledged for public entities. The use of the letters of credit has allowed the Corporation to use the proceeds from matured securities to fund the purchase of Bank Owned Life Insurance (BOLI), and to help fund increases in the loan portfolio. As of December 31, 2006, the Corporation was in compliance with all pledging requirements.

Mortgage-backed securities totaled $3,543 at December 31, 2006 and none are considered unusual or “high risk” securities as defined by regulating authorities. Of this total, $3,531 are pass-through securities issued by the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC) and $12 are privately issued and are collateralized by mortgage-backed securities issued or guaranteed by FNMA, FHLMC, or Government National Mortgage Association (GNMA). The average interest rate of the mortgage-backed portfolio at December 31, 2006 was 4.45%. The average maturity at December 31, 2006 was approximately 3.74 years. The Corporation has not invested in any derivative securities.

Securities available for sale had an estimated fair value at December 31, 2006 of $108,374. This fair value includes unrealized gains of approximately $215 and unrealized losses of approximately $598. Net unrealized losses totaled $383 on December 31, 2006 compared to net unrealized losses of $1,479 at December 31, 2005. The change in unrealized losses is primarily due to changes in market interest rates. Note 2 to the consolidated financial statements has more information on unrealized gains and losses.

In the second quarter of 2006, the Corporation purchased $10,000 of Bank owned life insurance (BOLI) with funds generated through the reduction in Federal Funds Sold and the decline in the security portfolio. The purchase of BOLI is an alternative to replacing maturing securities, and is being used to help recover costs associated with healthcare, group term life, and 401(k). The yield to be earned on the BOLI is expected to exceed what the Corporation could earn by replacing maturing securities.

Premises and equipment, net of accumulated depreciation, decreased $1,372 from December 31, 2005 to December 31, 2006. The decrease in office premises and equipment is mainly attributed to the reclassification of assets of $840 to office premises and equipment, net, held for sale. The remaining change of $532 was due to new purchases of $612, depreciation of $930 and disposals of $214. In the first quarter of 2006, SCC Resources, Inc. sold a building that had been used for storage for SCC and Citizens. In October 2006, Citizens sold two branch buildings in Plymouth, Ohio. Citizens consolidated the two sold branches into a new branch facility in Plymouth. Premises and equipment, net, held for sale totaling $840 at December 31, 2006 consisted of a closed branch in Norwalk, Ohio.

There was no change in Goodwill from year-end 2005 to year-end 2006. Other intangible assets decreased $673 from 2005 to 2006. This decrease was due to the amortization on intangibles in 2006.

Total shareholders’ equity decreased $7,638, or 8.8% during 2006 to $79,472. The decrease in shareholders’ equity resulted from earnings of $6,160, less dividends paid of $6,220, purchases of treasury stock through a tender offer of $7,413, additional treasury stock repurchases of $178, and the increase in the market value of securities available for sale, net of tax, of $724. The remaining change in shareholders’ equity consisted of SAB 108, net of tax adjustments of $755, FAS 158, net of tax adjustments of $1,729, and the change in the Corporation’s additional minimum pension liability, net of tax of $263. For further explanation of these items, see Note 1 and Note 14. The Corporation paid a cash dividend on February 1, 2006, May 1, 2006, August 1, 2006 and November 1, 2006, at a rate of $.28 per share. Total outstanding shares at December 31, 2006 were 5,471,300. The ratio of total shareholders’ equity to total assets was 10.6% at December 31, 2006 compared to 11.6% at December 31, 2005.

In the fourth quarter of 2006, the Corporation announced the implementation of a new stock repurchase program. Under the program, the Corporation is authorized to buy up to 5.0% of the total common shares outstanding. The Corporation expects that repurchases under the plan will be made from time to time in the open market, based on stock availability, price and the Company’s financial performance. It is anticipated that the repurchases will be made during the next twelve months, although no assurance can be given as to when they will be made or to the total number of shares that will be repurchased.

Results of Operations

The operating results of the Corporation are affected by general economic conditions, the monetary and fiscal policies of federal agencies and the regulatory policies of agencies that regulate financial institutions. The Corporation’s cost of funds is influenced by interest rates on competing investments and general market rates of interest. Lending activities are influenced by the demand for real estate loans and other types of loans, which in turn is affected by the interest rates at which such loans are made, general economic conditions and the availability of funds for lending activities.

The Corporation’s net income primarily depends on its net interest income, which is the difference between the interest income earned on interest-earning assets, such as loans and securities, and interest expense incurred on interest-bearing liabilities, such as deposits and borrowings. The level of net interest income is dependent on the interest rate environment and the volume and composition of interest-earning assets and interest-bearing liabilities. Net income is also affected by provisions for loan losses, service charges, gains on the sale of assets, other income, noninterest expense and income taxes.

Comparison of Results of Operations for the Year Ended December 31, 2006 and December 31, 2005

Net Income

The Corporation’s net income for the year ended December 31, 2006 was $6,160, compared to $6,659 for the year ended December 31, 2005, a decrease of $499 or 7.5%. The decrease in net income was the result of the items discussed in the following sections.

Net Interest Income

Net interest income for 2006 was $30,261, a decrease of $586, or 1.9% from 2005. The change in net interest income for 2006 was the result of two factors. The Corporation’s decrease in average balance on its interest earning assets offset some of the increase in yield on these assets. Second, the Corporation’s increase in rate paid on interest-bearing liabilities caused an increase in interest expense even though the

average balance on these deposits declined. The Corporation continues to examine its rate structure to ensure that its interest rates are competitive and reflective of the current rate environment in which it competes.

Total interest income increased $3,438, or 8.1% for 2006. The increase in income was a result of the increase in yield on the interest earning assets. Average loans decreased $5,550 from 2005 to 2006. However, interest earned on the Corporation’s loan portfolio grew as the increase of yield of 80 basis points offset the decline in average balance on the loan portfolio. The average balance of the securities portfolio for 2006 compared to 2005 decreased $23,539. Interest earned on the security portfolio, including bank stocks, decreased due to the decrease in volume offsetting a slight increase in rate earned on these assets. Average balances of Federal Funds sold and interest-bearing deposits in other banks decreased $14,727.

Total interest expense increased $4,024, or 34.7% for 2006 compared to 2005. The increase in interest expense can be attributed to an increase in the rate on average interest-bearing liabilities. Total average balance of interest-bearing liabilities decreased $29,365 while the average rate increased 82 basis points in 2006. Average interest-bearing deposits decreased $37,134 from 2005 to 2006. The increase in rate of approximately 61 basis points caused interest expense on deposits to increase $2,882. Interest expense on FHLB borrowings increased $419 due primarily to the increase in rate paid on the borrowings of 90 basis points, along with an increase in balance of $3,333. The average balance in trust preferred securities remained the same from 2005 to 2006, but the rate on these securities increased 88 basis points, resulting in an increase in expense of $229. Other borrowings increased in balance from $23,097 in 2005 to $27,533 in 2006. The rate on these borrowings also increased, resulting in an increase in expense of $494.

Refer to “Distribution of Assets, Liabilities and Shareholders’ Equity, Interest Rates and Interest Differential” and “Changes in Interest Income and Interest Expense Resulting from Changes in Volume and Changes in Rate” on pages 17 through 19 for further analysis of the impact of changes in interest-bearing assets and liabilities on the Corporation’s net interest income.

Provision and Allowance for Loan Losses

The following table contains information relating to the provision for loan losses, activity in and analysis of the allowance for loan losses as of and for each of the three years in the period ended December 31, 2006.


	As of and for year ended December 31,
	2006			2005			2004
Net loan charge-offs	$	2,280		$	3,617		$	2,153

Provision for loan losses charged to expense		1,128			1,123			1,805

Net loan charge-offs as a percent of average outstanding loans		0.42	%		0.66	%		0.43	%

Allowance for loan losses	$	8,060		$	9,212		$	11,706

Allowance for loan losses as a percent of year-end outstanding loans		1.45	%		1.76	%		2.06	%

Allowance for loan losses as a percent of impaired loans		48.13	%		67.39	%		75.86	%

Impaired loans	$	16,746		$	13,669		$	15,430

Impaired loans as a percent of gross year-end loans⁽¹⁾		3.00	%		2.61	%		2.72	%

Nonaccrual and 90 days or more past due loans as a percent of gross year-end loans⁽¹⁾		1.85	%		2.81	%		1.51	%


⁽¹⁾		Nonperforming loans and impaired loans are defined differently. Some loans may be included in both categories, whereas other loans may only be included in one category.

The Corporation’s policy is to maintain the allowance for loan losses at a level to provide for probable losses. Management’s periodic evaluation of the adequacy of the allowance is based on past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay, the estimated value of any underlying collateral and current economic conditions.

The provision for loan losses increased by $5 from $1,123 in 2005 to $1,128 in 2006. In 2006, the Corporation experienced a large increase in the loan portfolio. However, the Corporation also saw a substantial decline in net charge-offs during the year. In 2005, many problem loans were identified and charged-off. With these loans having been charged-off in 2005, the quality of the loan portfolio improved. Although impaired loans increased at year-end 2006 compared to year-end 2005, the percentage of nonaccrual and 90 day or more past due loans declined. With all of these factors considered, the calculation that management completes to determine the adequacy of the reserve resulted in the provision for loan losses of $1,128 in 2006. 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 pooling of loans, historical reserve allocations and 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 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.

Noninterest Income

Noninterest income totaled $6,670 in 2006 compared to $7,838 in 2005, a decrease of 14.9%. The significant items contributing to this change are as follows.

In the first quarter of 2005, the Corporation had a $766 gain on the sale of two branches, which it did not have in 2006. During 2006, the Corporation sold several other real estate owned properties. These sales resulted in losses in 2006 of $663 compared to sales in 2005 resulting in losses of $60. The losses in 2006 were primarily caused by two commercial properties sold by Water St. Properties. Service charges paid to Citizens decreased $340 compared to 2005 due to two reasons. First, the Corporation had fewer deposit accounts at December 31, 2006 compared to December 31, 2005. Secondly, customers are managing their accounts differently than in the past. Citizens completed updating its fee structure on deposit products in the third quarter of 2006 in efforts to increase its service charge revenue. Also, Citizens has developed new deposit products in an effort to increase the number of deposit accounts. These products were launched late in the fourth quarter. Net gain on sale of loans was $73 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 $197 in 2006 compared to the same period in 2005 as the assets under trust management continued to grow. In 2006, the Corporation had income from BOLI of $346, which was purchased during the second quarter of 2006.

Noninterest Expense

Noninterest expense totaled $26,977 in 2006, a decrease of $952, or 3.4% over 2005. The following discussion highlights the significant items that resulted in increases or decreases in the components of noninterest expense.

Salaries and wages totaled $11,246 in 2006 compared to $11,905 in 2005 for a decrease of $659. The decrease in salaries was attributable to the Corporation’s reorganization efforts completed in the third quarter of 2005. The Corporation’s self-insured health plan costs increased in 2006, as continued increases in medical costs were incurred. The Corporation’s pension plan expenses increased $306 in 2006 compared to 2005. This increase was primarily due to the increase in employees added to the plan from the merger completed in the fourth quarter of 2004. The continued increase in pension costs was one of the reasons that as of January 1, 2007, no new employees will be entering the defined benefit plan of the Corporation.

Net occupancy expense decreased $103 from $1,543 in 2005 to $1,440. 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. Third, the sale of two Plymouth branches and a storage building used by SCC reduced depreciation, maintenance and utility charges.

Equipment expense decreased $120 as a result of decreased costs for maintenance and installation of equipment at Citizens. Also, Citizens had reduced depreciation on its equipment as several assets passed their useful lives. Finally, in 2005, a branch in New Washington underwent a remodeling project, causing higher expense in 2005 that was not present in 2006.

Computer processing expense decreased by $486 compared to last year primarily due to the cost savings resulting from the reorganization of the two banking subsidiaries of the Corporation into one bank effective as of October 15, 2005.

State franchise taxes decreased $292 in 2006 compared to 2005. The primary reason for the reduction in taxes was due to Citizens paying a $15,000 dividend, in December 2005, to the holding company to help fund the tender offer of the Corporation.

Professional services expenses increased for 2006 compared to 2005 by $366. The primary cause of this increase is due to legal costs paid to complete the tender offer in the first quarter of 2006. Additional increases in legal costs were also recognized due to the restructuring of one commercial credit. Also, an increase in legal fee paid to handle an increase in foreclosure work at Citizens was experienced in 2006.

ATM expense and stationery and supplies decreased in 2006. 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 $43 compared to 2005. Stationery and supplies decreased $148 from 2005. In 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.

Other expense increased in 2006 compared to 2005 by $140. The primary reason for this increase was due to an increase of $110 in loan promotion expenses. These expenses were in relation to the loan programs Citizens’ ran in the first quarter of the year. Citizens waived various loan fees to grow its loan portfolio, which increased these expenses. Also, in 2006, education and training increased by $40. In an effort to improve lender and customer service representatives sales skills, intensive training courses were completed by these employees in the first half of 2006.

Income Tax Expense

Income before federal income taxes amounted to $8,826 in 2006 and $9,633 in 2005. The Corporation’s effective income tax rate for 2006 remained relatively unchanged from a year ago. The 2006 effective tax rate was 30.2%, compared to 30.9% in 2005.

Comparison of Results of Operations for the Year Ended December 31, 2005 and December 31, 2004

Net Income

The Corporation’s net income for the year ended December 31, 2005 was $6,659, compared to $4,813 for the year ended December 31, 2004, an increase of $1,846 or 38.4%. The increase in net income was the result of the items discussed in the following sections.

Net Interest Income

Net interest income for 2005 was $30,847, an increase of $5,174, or 20.2% from 2004. The change in net interest income for 2005 was the result of an increase in both the average balance and rate of the Corporation’s interest earning assets more than offsetting the increase in both average balance and rate of the Corporation’s interest-bearing liabilities. The balance increases that the Corporation experienced in 2005 were caused by the effect of the merger completed in late third quarter 2004. In 2004, the Corporation’s average balances only were affected by the increase in balances for three months compared to twelve months in 2005. The increase in rate on both assets and liabilities is directly linked to the continued increase in the interest rate environment in which the Corporation operates.

Total interest income increased $8,602, or 25.4% for 2005. The increase in income was a result of the merger as stated above, which led to an increase in average interest earning-assets of $84,350. Average

loans increased $37,627 from 2004 to 2005. This balance increase, along with an increase in yield earned on loans of 0.9% from 2004 to 2005, increased income earned on the loan portfolio $7,081 from 2004 to 2005. The average balance of the securities portfolio for 2005 compared to 2004 increased $30,096. Interest earned on the security portfolio, including bank stocks, increased due to the increase in volume offsetting an approximate 15 basis point decline in rate. Average balances of Federal Funds sold and interest-bearing deposits in other banks increased $16,627 which was the primary reason for the interest earned on these assets increasing $659 in 2005.

Total interest expense increased $3,428, or 42.0% for 2005 compared to 2004. The increase in interest expense can be attributed to both an increase in the volume of and the rate on average interest-bearing liabilities. Total average balance of interest-bearing liabilities increased $66,507 while the average rate increased 0.4% in 2005. Average interest-bearing deposits increased $54,561 from 2004 to 2005. This increase along with an approximate 24 basis point increase in rate of deposits caused interest expense on deposits to increase $1,942. Interest expense on FHLB borrowings increased $333 due primarily to the increase in rate paid on the borrowings of 73 basis points, along with an increase in balance of $4,294. In September 2004, a $12,500 trust preferred issuance was created to help fund the merger with FNB. The increase of average balance of $9,260 from 2004 to 2005, along with the increase of 135 basis points in yield, resulted in an increase in expense on subordinated debentures of $795. Other borrowings and Fed Funds Purchased decreased in balance from $24,705 in 2004 to $23,097 in 2005, but the yield increase on these borrowings offset this decrease in balance to result in $358 more in expense in 2005 compared to 2004.

Provision and Allowance for Loan Losses

The provision for loan losses decreased by $682 from $1,805 in 2004 to $1,123 in 2005. The decrease in the provision was primarily caused by two factors. First, the Corporation experienced a large decline in the loan portfolio in 2005. The decline in the overall loan portfolio resulted in a decrease in the amount to be provided into the allowance. Secondly, the Corporation had a decline in impaired loans in 2005. Along with the decline in impaired loans, the allowance for loan losses allocated to these loans also declined. 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.

Noninterest Income

Noninterest income totaled $7,838 in 2005 compared to $6,201 in 2004, an increase of 26.4%. The significant items contributing to this change are as follows.

During 2005, the Corporation recognized losses from calls and sales of securities of $13 compared to gains of $107 in 2004. In 2005, the calls and maturities of securities were utilized to offset the deposit run-off that the Corporation had in 2005.

As loan rates continued to rise in 2005, the customer demand for loan refinancing dramatically declined. This decline in refinancing was also experienced in 2004. Net gains on the sale of loans on the secondary market was comparable from 2004 to 2005, a decline of $58. Management anticipates rates to continue to increase in 2006, continuing the decline in the volume of loans sold. In December 2004, Mr. Money reclassified loans from its portfolio to the held for sale portfolio. When adjusting these loans to the lower of cost or market value, a pretax loss of $1,029 was recognized on the portfolio. These loans were sold in the first quarter of 2005.

Service charges by Citizens and First Citizens increased $177 from 2004 to 2005. This was primarily due to the Corporation’s Check Protect program. Check Protect, which is the Corporation’s courtesy pay program, generated $135 in additional service charge income in 2005 as a result of the increased customer base created from the merger in 2004. The customers acquired in the merger did use the Check Protect program before merger was completed. However, in 2004, the Corporation only had three months of fees from the additional customer base compared to twelve months in 2005. ATM fees increased $116 from 2004 to 2005. The Corporation again benefited from having additional customer base and additional branch ATM’s for a full twelve months in 2005 compared to only three months in 2004. Fees generated by the Trust Department continue to grow due to the continued increase in assets under Trust control. In 2005, the fees generated totaled $1,083, compared to $839 in 2004 as the department has continued to develop in its role of being the cornerstone of wealth management services provided by the Corporation. In the first quarter of 2005, First Citizens sold two of its branches, one located in Richwood and one in Green Camp. This sale of the two branches generated a gain of $766 for 2005. Computer center item processing fees decreased 23.7% in 2005 from 2004. The primary reason for this decline was the merger completed in 2004. First National Bank of Shelby (FNB) was a customer of SCC for nine months in 2004. Upon completion of the merger, the fees generated from FNB were eliminated as part of the consolidation policy of the Corporation, which reduced fees in 2005 compared to 2004. Finally, other fees decreased $244 from 2004 to 2005. The primary cause of the decline in other non-interest income was due to the sale of the Corporation’s appraisal company, Reynolds, in 2005. In 2004, the fees generated by the appraisal company totaled $284. In 2005, the fees generated before the sale was $99, a reduction of $185 in fee income.

Noninterest Expense

Noninterest expense totaled $27,929 in 2005, an increase of $4,597, or 19.7% over 2004. The following discussion highlights the significant items that resulted in increases or decreases in the components of noninterest expense.

Salaries and wages totaled $11,905 in 2005 compared to $9,556 in 2004 for an increase of $2,349. This increase can be attributed to the additional staff added with the 2004 merger. Benefits decreased $40, to total $2,665 in 2005 compared to $2,705 in 2004. Health insurance payments and other benefits paid at the Banks, and SCC increased slightly over 2004. This slight increase was caused by the additional employees at the Banks, offset by the reduction in claims paid by Mr. Money in 2005. Secondly, pension

expense decreased $61 in 2005 compared to 2004, as the expected return on plan assets offset the increase in service cost and interest cost. The details of these items are further disclosed in Note 14 to the consolidated financial statements. As a result of the merging of the two Banks into one, the Corporation went through a restructuring during the year. Thirty jobs collectively were eliminated during the third and fourth quarters. This restructuring has allowed the Corporation to eliminate duplicate job processes that were completed by the two Banks, which has increased the efficiency of the Corporation.

Net occupancy expense increased $169 from $1,374 in 2004 to $1,543. The primary cause of the increase was the expansion of the Corporation. The new branches acquired in the merger in 2004 were in full operation the entire year of 2005, while only in service for three months in 2004. Items included in occupancy expense include utility payments, real estate taxes, depreciation, and repair and maintenance costs. All these expenses increased due to the additional branches acquired.

State of Ohio franchise taxes were $1,026 in 2005 compared to $788 in 2004. The franchise taxes are based on the capital positions of the subsidiaries at the previous year-end, which were higher in 2004 than 2003.

Professional fees represent legal, audit and outside consulting fees paid by the Corporation. Professional fees totaled $1,166 in 2005 compared to $940 in 2004. During 2005, FCBC incurred increases in its legal and audit fees of $147. Some of the increases from 2004 to 2005 were in fees paid for audit and consulting fees, along with increased director fees as a result of additional directors. Also, legal fees charged for the assistance in the tender offer increased expense as well. The increase in fees for legal fees at the Banks increased $148 in 2005. There were three primary reasons for this increase. During 2005, legal fees were spent dealing with several large commercial loans that were on non-accrual status at First Citizens. Secondly, there were fees paid in 2005 for the merger completed in 2004. Finally, Citizens hired a consultant to review its non-interest income and expense items in an attempt to maximize these items.

Advertising expense increased slightly from $391 in 2004 to $448 in 2005. The slight increase is due to the increase in markets due to the merger in 2004. Newspaper, radio, direct mail and billboard advertising is used to promote the Corporation and its offices and any new products that are being offered.

Contracted data processing increased $424 from 2004 to 2005. With the merger in 2004, and the additional customer base created through the merger, processing fees for the entire year were larger, as was expected in 2005.

ATM expense and stationery and supplies increased slightly in 2005. With the increase in volume of ATMs created by the merger in 2004, the expenses to run the machines also increased. In 2004, the Corporation only had three months of additional ATM expense compared to twelve months in 2005. Stationery and supplies increased $48 primarily due to the additional branches created by the merger in 2004. In 2005, the Corporation had a full year of stocking the branches with supplies to allow the branches to operate fully compared to only three months in 2004.

In 2005, the equipment expense of the Corporation increased from $1,177 in 2004 to $1,334 in 2005. The primary reason of this increase was again due to the increase in branches and the expenses associated with the maintenance and purchasing of equipment needed for the additional branches. Also, in 2005, the New Washington branch underwent a remodeling in which new equipment, such as desks, chairs, computer equipment, were purchased to complete the project which increased depreciation charges.

Courier and other operating expenses totaled $4,720 in 2005, compared to $4,048 in 2004. The larger items that caused the differences are as follows. In 2005, First Citizens began to use a product known as Mobile Banking. This product is offered to commercial customers and involves a courier service going to the location of the customers business picking up or dropping off deposits. The increase in cost over 2004 was $215. Secondly, in the first quarter of 2005, a write-off for a fraudulent check that was cleared at one of the banks, as well as the increased write-offs with the additional customer base created by the merger in 2004 increased Check Protect loss and recovery expense in 2005 by $130. A third area of increase was

that of the general insurance paid by the Corporation, which increased $107 from 2004. This increase, as well as the $55 increase in telephone expense and the $65 increase in correspondent bank charges, can be attributed to the increase in branches and increase of employees when the merger in 2004 was completed.

Income Tax Expense

Income before federal income taxes amounted to $9,633 in 2005 and $6,737 in 2004. The Corporation’s effective income tax rate was 30.9% in 2005 compared to 28.67% in 2004. The increase in the effective tax rate resulted from the decline in the total of interest income on tax exempt securities compared to the level of income before taxes.

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Distribution of Assets, Liabilities and Shareholders’ Equity,
Interest Rates and Interest Differential

The following table sets forth, for the years ended December 31, 2006, 2005 and 2004, the distribution of assets, including interest amounts and average rates of major categories of interest-earning assets and interest-bearing liabilities (Dollars in thousands) :


	2006								2005								2004
	Average					Yield/			Average					Yield/			Average					Yield/
Assets	balance			Interest		rate			balance			Interest		rate			balance			Interest		rate
Interest-earning assets:
Loans (1)(2)(3)	$	539,241		$	40,637		7.54	%	$	544,791		$	36,710		6.74	%	$	507,164		$	29,629		5.84	%
Taxable securities (4)		106,942			4,113		3.56	%		126,240			4,015		3.18	%		92,806			2,999		3.24	%
Non-taxable securities (4)(5)		19,703			814		4.21	%		23,944			979		4.14	%		27,282			1,132		4.25	%
Federal funds sold		6,076			278		4.58	%		20,685			720		3.48	%		4,295			70		1.63	%
Interest-bearing deposits in other banks		592			34		5.74	%		710			14		1.97	%		473			6		1.27	%

Total interest-earning assets		672,554			45,876		6.82	%		716,370			42,438		5.92	%		632,020			33,836		5.37	%
Noninterest-earning assets:
Cash and due from financial institutions		16,956								22,239								21,402
Premises and equipment, net		11,841								12,189								10,639
Accrued interest receivable		4,703								4,448								3,712
Intangible assets		29,744								30,461								19,831
Other assets		6,248								6,785								1,920
Bank owned life insurance		6,357								—								—
Less allowance for loan losses		(8,832	)							(12,171	)							(7,880	)

Total	$	739,571							$	780,321							$	681,644


(1)		For purposes of these computations, the daily average loan amounts outstanding are net of unearned income and include loans held for sale.

(2)		Included in loan interest income are loan fees of $1,051 in 2006, $1,376 in 2005 and $988 in 2004.

(3)		Non-accrual loans are included in loan totals and do not have a material impact on the analysis presented.

(4)		Average balance is computed using the carrying value of securities. The average yield has been computed using the historical amortized cost average balance for available-for-sale securities.

(5)		Interest income is reported on a historical basis without tax-equivalent adjustment.

Distribution of Assets, Liabilities and Shareholders’ Equity,
Interest Rates and Interest Differential (Continued)

The following table sets forth, for the years ended December 31, 2006, 2005 and 2004, the distribution of liabilities and shareholders’ equity, including interest amounts and average rates of major categories of interest-earning assets and interest-bearing liabilities (Dollars in thousands) :


	2006							2005							2004
Liabilities and	Average				Yield/			Average				Yield/			Average				Yield/
Shareholders' Equity	balance		Interest		rate			balance		Interest		rate			balance		Interest		rate
Interest-bearing liabilities:
Savings and interest- bearing demand accounts	$	251,722	$	3,119		1.24	%	$	279,568	$	2,272		0.81	%	$	252,566	$	1,462		0.58	%
Certificates of deposit		222,480		7,973		3.58	%		231,768		5,937		2.56	%		204,209		4,805		2.35	%
Federal Home Loan Bank advances		34,518		1,420		4.11	%		31,185		1,002		3.21	%		26,891		669		2.49	%
Securities sold under repurchase agreements		19,000		769		4.05	%		14,085		371		2.64	%		12,004		128		1.07	%
Federal funds purchased		—		—		0.00	%		—		—		0.00	%		2,699		10		0.37	%
Notes payable		7,367		455		6.18	%		8,109		385		4.76	%		9,166		279		3.04	%
Subordinated debentures		25,774		1,823		7.07	%		25,774		1,594		6.19	%		16,514		799		4.84	%
U.S. Treasury demand notes payable		1,166		56		4.80	%		903		30		3.43	%		836		11		1.32	%

Total interest- bearing liabilities		562,027		15,615		2.78	%		591,392		11,591		1.96	%		524,885		8,163		1.56	%

Noninterest-bearing liabilities:
Demand deposits		92,382							98,228							82,860
Other liabilities		4,980							4,115							2,477

		97,362							102,343							85,337
Shareholders’ equity		80,182							86,586							71,422

Total	$	739,571						$	780,321						$	681,644

Net interest income and interest rate spread			$	30,261		4.04	%			$	30,847		3.96	%			$	25,673		3.81	%

Net yield on interest- earning assets						4.49	%						4.31	%						4.07	%

Changes in Interest Income and Interest Expense
Resulting from Changes in Volume and Changes in Rate

The following table sets forth, for the periods indicated, a summary of the changes in interest income and interest expense resulting from changes in volume and changes in rate.


	2006 compared to 2005								2005 compared to 2004
	Increase (decrease)								Increase (decrease)
	due to:								due to:
	Volume⁽¹⁾			Rate⁽¹⁾		Net			Volume⁽¹⁾			Rate⁽¹⁾			Net
	(Dollars in thousands)
Interest income:
Loans	$	(377	)	$	4,304	$	3,927		$	2,308		$	4,773		$	7,081
Taxable securities		(650	)		748		98			1,090			(74	)		1,016
Nontaxable securities		(183	)		18		(165	)		(123	)		(30	)		(153	)
Federal funds sold		(619	)		177		(442	)		501			149			650
Interest-bearing deposits in other banks		(3	)		23		20			4			4			8


Total interest- earning assets	$	(1,832	)	$	5,270	$	3,438		$	3,780		$	4,822		$	8,602


Interest expense:
Savings and interest- bearing demand accounts	$	(245	)	$	1,091	$	846		$	170		$	640		$	810
Certificates of deposit		(247	)		2,283		2,036			683			448			1,131
Federal Home Loan Bank advances		115			304		419			118			215			333
Securities sold under repurchase agreements		157			241		398			26			217			243
Federal funds purchased		—			—		—			(10	)		—			(10	)
Note payable		(38	)		108		70			(35	)		141			106
Subordinated debentures		—			229		229			531			264			795
U.S. Treasury demand notes payable		10			16		26			1			19			20


Total interest- bearing liabilities	$	(248	)	$	4,272	$	4,024		$	1,484		$	1,944		$	3,428


Net interest income	$	(1,584	)	$	998	$	(586	)	$	2,296		$	2,878		$	5,174


(1)		The change in interest income and interest expense due to changes in both volume and rate, which cannot be segregated, has been allocated proportionately to the change due to volume and the change due to rate.

Liquidity and Capital Resources

Citizens maintains a conservative liquidity position. Within the security portfolio, all but $4 of securities are classified as available for sale. At December 31, 2006, securities with maturities of one year or less totaled $46,234, or 42.7%, 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 2006 was $9,262. This includes net income of $6,160 plus net adjustments of cash from operating activities of $3,102 to reconcile net earnings to net cash provided by operations. The primary uses of cash in operations are from changes in interest receivable and deferred loan fees. The primary additions to cash from operating activities are from changes in accrued interest and other expenses and from depreciation. Cash from investing activities was $(650) in 2006. Security purchases, increases in loans and the purchase of bank owned life insurance were offset by security maturities and a decrease in fed funds sold. Cash used by financing activities in 2006 totaled $11,013. The primary uses of cash in financing activities include the run-off of deposits, the payment of dividends, the purchase of treasury stock and the payment of long-term FHLB advances. The cash from financing activities included short-term FHLB borrowings and changes in securities sold under repurchase agreements. Cash from operating and investing activities was less than cash used by financing activities by $2,401, which resulted in a decrease in cash and cash equivalents to $17,860.

Future loan demand of Citizens can 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). As of December 31, 2006, Citizens had total credit availability with the FHLB of $204,713 of which $38,916 was outstanding.

On a separate entity basis, the Corporation’s primary source of funds is dividends paid primarily by Citizens. Generally, subject to applicable minimum capital requirements, Citizens may declare a dividend without the approval of the Federal Reserve bank of Cleveland and the State of Ohio Department of Commerce, Division of Financial Institutions, provided the total dividends in a calendar year do not exceed the total of its profits for that year combined with its retained profits for the two preceding years. In 2006, Citizens paid $8,310 in dividends to the Corporation, which accumulate cash at the Corporation to be used for general corporate purposes including the repurchase of its common shares. Dividends from the affiliates can also be used to fund the payment on the line of credit at LaSalle Bank, NA. At December 31, 2006, Citizens is unable to pay dividends to the Corporation without obtaining regulatory approval. Management believes the future earnings of Citizens will be sufficient to support anticipated asset growth at Citizens and provide funds to the Corporation to continue paying dividends at their current level.

The Corporation manages its liquidity and capital through quarterly Asset/Liability Committee (ALCO) meetings. The committee discusses issues like those in the above paragraphs as well as others that will affect future liquidity and capital position of the Corporation. The committee also examines interest rate risk and the effect that changes in rates will have on the Corporation. For more information about interest rate risk, please refer to the “Quantitative and Qualitative Disclosures about Market Risk” section.

Capital Adequacy

The Corporation’s policy is, and always has been, to maintain its capital levels above the well capitalized regulatory standards. Under the regulatory capital standards, total capital has been defined as Tier I (core) capital and Tier II (supplementary) capital. The Corporation’s Tier I capital includes shareholders’

equity (net of unrealized security gains and losses) and subordinated debentures (subject to certain limits) while Tier II capital also includes the allowance for loan losses. The definition of risk-adjusted assets has also been modified to include items both on and off the balance sheet. Each item is then assigned a risk weight or risk adjustment factor to determine ratios of capital to risk adjusted assets. The standards require that total capital (Tier I plus Tier II) be a minimum of 8.0% of risk-adjusted assets, with at least 4.0% being in Tier I capital. To be well capitalized, a company must have a minimum of 10.0% of risk adjusted assets, with at least 6.0% being Tier I capital. The Corporation’s ratios as of December 31, 2006 and 2005 were 14.4% and 16.1% respectively for total risk-based capital, and 10.8% and 12.6% respectively for Tier I risk-based capital.

Additionally, the Federal Reserve Board has adopted minimum leverage-capital ratios. These standards were established to supplement the previously issued risk based capital standards. The leverage ratio standards use the existing Tier I capital definition, but the ratio is applied to average total assets instead of risk-adjusted assets. The standards require that Tier I capital be a minimum of 4.0% of total average assets for high rated entities such as the Corporation and a minimum of 5.0% of total average assets to be well capitalized. The Corporation’s leverage ratio was 8.5% and 9.2% at December 31, 2006 and 2005.

Effects of Inflation

The Corporation’s balance sheet is typical of financial institutions and reflects a net positive monetary position whereby monetary assets exceed monetary liabilities. Monetary assets and liabilities are those which can be converted to a fixed number of dollars and include cash assets, securities, loans, money market instruments, deposits and borrowed funds.

During periods of inflation, a net positive monetary position may result in an overall decline in purchasing power of an entity. No clear evidence exists of a relationship between the purchasing power of an entity’s net positive monetary position and its future earnings. Moreover, the Corporation’s ability to preserve the purchasing power of its net positive monetary position will be partly influenced by the effectiveness of its asset/liability management program. Management does not believe that the effect of inflation on its nonmonetary assets (primarily bank premises and equipment) is material as such assets are not held for resale and significant disposals are not anticipated.

Fair Value of Financial Instruments

The Corporation has disclosed the estimated fair value of its financial instruments at December 31, 2006 and 2005 in Note 19 to the consolidated financial statements. The fair value of the Corporation’s financial instruments generally increased relative to their carrying values in 2006 as a result of a decrease in the general level of longer-term interest rates. The fair value of loans at December 31, 2006 was 98.3% of the carrying value compared to 97.7% at December 31, 2005. The fair value of deposits at December 31, 2006 was 99.8% of the carrying value compared to 99.5% at December 31, 2005.

Contractual Obligations

The following table represents significant fixed and determinable contractual obligations of the Corporation as of December 31, 2006.


	One year		One to		Three to		Over five
Contractual Obligations	or less		three years		five years		years		Total
Deposits without a stated maturity	$	338,540	$	—	$	—	$	—	$	338,540
Certificates of deposit		164,908		56,334		1,966		2,803		226,011
FHLB advances, securities sold under agreements to repurchase and U.S. Treasury interest- bearing demand note		65,348		361		45		—		65,754
Subordinated debentures⁽¹⁾		—		—		—		25,000		25,000
Long-term debt		6,000		—		—		—		6,000
Operating leases		113		130		—		—		243


(1)		The subordinated debentures consist of $5,000, $7,500, and $12,500 debentures. See Note 12 for additional information.

The Corporation has retail repurchase agreements with clients within its local market areas. These borrowings are collateralized with securities owned by the Corporation. See Note 10 to the consolidated financial statements for further detail. The Corporation also has a cash management advance line of credit and outstanding letters of credit with the FHLB. For further discussion, refer to Note 9 to the consolidated financial statements. The long-term debt consists of borrowing from a secured borrowing agreement with LaSalle Bank, NA. See Note 11 to the consolidated financial statements for the terms of this borrowing.

Quantitative and Qualitative Disclosures About Market Risk

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. 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, 2006 and 2005, 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, 2006 or 2005. 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.

Net Portfolio Value


	December 31, 2006								December 31, 2005
Change in	Dollar		Dollar			Percent			Dollar		Dollar			Percent
Rates	Amount		Change			Change			Amount		Change			Change
+200bp	$	86,438	$	(15,369	)		-15	%	$	90,619	$	(15,108	)		-14	%
+100bp		95,100		(6,707	)		-7	%		100,427		(5,300	)		-5	%
Base		101,807		—			—			105,727		—			—
-100bp		106,590		4,783			5	%		108,052		2,325			2	%
-200bp		108,015		6,208			6	%		108,427		2,700			3	%

The Corporation has seen a relatively minor change in net portfolio value from December 31, 2005 to December 31, 2006, resulting primarily from two factors. First, the yield curve has moved from a very flat curve at year-end to an inverted curve at December 31, 2006. Short-term interest rates increased more than the parallel shift upward in long-term rates. The base also decreased due to a decrease in the fair value of cash and investments, which was partially offset by a decrease in the fair value of deposits. The difference shown from 2005 to 2006 for downward rate movements is mostly attributed to the increases in volume of fixed rate real estate loans added to the portfolio in 2006.

Critical Accounting Policies

Allowance for Loan Losses

The allowance for loan losses is regularly reviewed by management to determine whether or not the amount is considered adequate to absorb probable losses in the loan portfolio. If not, an additional provision is made to increase the allowance. This evaluation includes specific loss estimates on certain individually reviewed loans, the pooling of commercial credits risk graded as special mention and substandard that are not individually examined, and general loss estimates that are based upon the size, quality, and concentration characteristics of the various loan portfolios, adverse situations that may affect a borrower’s ability to repay, and current economic and industry conditions, among other items.

Those judgments and assumptions that are most critical to the application of this accounting policy are the initial and on-going credit-worthiness of the borrower, the amount and timing of future cash flows of the borrower that are available for repayment of the loan, the sufficiency of underlying collateral, the enforceability of third-party guarantees, the frequency and subjectivity of loan reviews and risk gradings, emerging or changing trends that might not be fully captured in the historical loss experience, and charges against the allowance for actual losses that are greater than previously estimated. These judgments and assumptions are dependent upon or can be influenced by a variety of factors including the breadth and depth of experience of lending officers, credit administration and the corporate loan review staff that periodically review the status of the loan, changing economic and industry conditions, changes in the financial condition of the borrower and changes in the value and availability of the underlying collateral and guarantees.

Management completes a similar process as above when the Corporation is in its due diligence phase of a pending merger. The allowance for loan losses at the target bank is evaluated for adequacy based on the same factors as used in the Corporations’ own allowance calculation. Upon completion of the merger, this process is repeated and any excess or deficiency in the allowance is recognized.

Note 1 and Note 4 in the Notes to Consolidated Financial Statements provide additional information regarding Allowance for Loan Losses.

Management’s Report on Internal Control over Financial Reporting

First Citizens Banc Corp is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements included in this annual report. The consolidated financial statements and notes included in this annual report have been prepared in conformity with United States generally accepted accounting principles and necessarily include some amounts that are based on management’s best estimates and judgments.

We, as management of First Citizens Banc Corp, are responsible for establishing and maintaining effective internal control over financial reporting that is designed to produce reliable financial statements in conformity with United States generally accepted accounting principles. The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability through a program of internal audits. Actions are taken to correct potential deficiencies as they are identified. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation.

Management assessed the Corporation’s system of internal control over financial reporting as of December 31, 2006, in relation to criteria for effective internal control over financial reporting as described in “Internal Control – Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concludes that, as of December 31, 2006, its system of internal control over financial reporting is effective and meets the criteria of the “Internal Control – Integrated Framework”. Crowe Chizek and Company LLC, independent registered public accounting firm, has issued an attestation report on management’s assessment of the Corporation’s internal control over financial reporting.




David A. Voight		Todd A. Michel
President, Chief Executive Officer		Senior Vice President, Controller

Sandusky, Ohio
March 2, 2007

Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that First Citizens Banc Corp. (the “Company”) maintained effective internal control over financial reporting as of December 31, 2006, based on Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). First Citizens Banc Corp.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that First Citizens Banc Corp. maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also in our opinion, First Citizens Banc Corp. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of First Citizens Banc Corp. as of December 31, 2006 and 2005, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2006 and our report dated February 28, 2007 expressed an unqualified opinion on those consolidated financial statements.

Crowe Chizek and Company LLC

Cleveland, Ohio
February 28, 2007

Report of Independent Registered Public Accounting Firm on Financial Statements

Board of Directors and Shareholders
First Citizens Banc Corp
Sandusky, Ohio

We have audited the accompanying consolidated balance sheets of First Citizens Banc Corp. as of December 31, 2006 and 2005, and the related statements of income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Citizens Banc Corp. as of December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 the Company adopted Staff Accounting Bulletin 108 “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” and accordingly adjusted assets and liabilities at the beginning of 2006 with an offsetting adjustment to the opening balance of retained earnings.

As discussed in Note 1 the Company changed it’s method of accounting for defined benefit pension plans as of December 31, 2006 in accordance with Financial Accounting Standards Board Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.”

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the First Citizen Banc Corp.’s internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2007 expressed an unqualified opinion thereon.

Crowe Chizek and Company LLC

Cleveland, Ohio
February 28, 2007

FIRST CITIZENS BANC CORP
CONSOLIDATED BALANCE SHEETS
December 31, 2006 and 2005
(In thousands, except share data)


	2006			2005
ASSETS
Cash and due from financial institutions	$	17,860		$	20,261
Federal funds sold		—			25,510
Securities available for sale		108,374			126,126
Securities held to maturity (Fair value of $4 in 2006 and $8 in 2005)		4			8
Loans, net of allowance of $8,060 and $9,212		549,665			514,770
Other securities		11,020			10,540
Premises and equipment, net		10,779			12,151
Premises and equipment, held for sale		840			—
Accrued interest receivable		5,145			4,395
Goodwill		26,093			26,093
Customer relationship intangibles		3,292			3,965
Bank owned life insurance		10,346			—
Other assets		5,568			7,117


Total assets	$	748,986		$	750,936


LIABILITIES
Deposits
Noninterest-bearing	$	92,163		$	98,314
Interest-bearing		472,388			478,791

Total deposits		564,551			577,105
Federal Home Loan Bank advances		38,916			30,539
Securities sold under agreements to repurchase		23,403			16,472
U. S. Treasury interest-bearing demand note payable		3,435			2,391
Notes payable		6,000			7,000
Subordinated debentures		25,000			25,000
Accrued expenses and other liabilities		8,209			5,319

Total liabilities		669,514			663,826

SHAREHOLDERS’ EQUITY
Common stock, no par value, 10,000,000 shares authorized, 6,112,264 shares issued		68,430			68,430
Retained earnings		28,634			27,939
Treasury stock, 640,964 and 310,862 shares at cost		(15,214	)		(7,623	)
Accumulated other comprehensive loss		(2,378	)		(1,636	)

Total shareholders’ equity		79,472			87,110


Total liabilities and shareholders’ equity	$	748,986		$	750,936

See accompanying notes to consolidated financial statements.

FIRST CITIZENS BANC CORP
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2006, 2005 and 2004
(In thousands, except per share data)


	2006			2005			2004
Interest and dividend income
Loans, including fees	$	40,637		$	36,710		$	29,629
Taxable securities		4,113			4,015			3,000
Tax-exempt securities		814			979			1,132
Federal funds sold and other		312			734			75

Total interest income		45,876			42,438			33,836
Interest expense
Deposits		11,091			8,209			6,267
Federal Home Loan Bank advances		1,421			1,002			669
Subordinated debentures		1,823			1,594			799
Other		1,280			786			428

Total interest expense		15,615			11,591			8,163

Net interest income		30,261			30,847			25,673
Provision for loan losses		1,128			1,123			1,805

Net interest income after provision for loan losses		29,133			29,724			23,868
Noninterest income
Computer center item processing fees		896			877			1,150
Service charges		3,223			3,563			3,386
Net gains (loss) on sale of securities		—			(13	)		107
Net gain on sale of loans		20			93			151
Net loss on loans moved to HFS		—			—			(1,029	)
ATM fees		724			682			566
Trust fees		1,280			1,083			839
Gain on Branch Sale		—			766			—
Bank owned life insurance		346			—			—
Loss on sale of other real estate owned		(663	)		(60	)		(31	)
Other		844			847			1,062

Total noninterest income		6,670			7,838			6,201
Noninterest expense
Salaries and wages		11,246			11,905			9,556
Benefits		3,100			2,665			2,705
Net occupancy expense		1,440			1,543			1,374
Equipment expense		1,214			1,334			1,177
Contracted data processing		897			1,383			959
State franchise tax		734			1,026			788
Professional services		1,532			1,166			940
Amortization of intangible assets		673			733			498
ATM expense		461			504			442
Stationery & supplies		354			502			454
Courier		654			636			415
Other operating expenses		4,672			4,532			4,024

Total noninterest expense		26,977			27,929			23,332

Income before income taxes		8,826			9,633			6,737
Income tax expense		2,666			2,974			1,924

Net income	$	6,160		$	6,659		$	4,813

Earnings per common share, basic and diluted	$	1.12		$	1.15		$	0.92

Weighted average basic common shares		5,520,692			5,804,361			5,211,904

Weighted average diluted common shares		5,520,692			5,805,681			5,216,557

See accompanying notes to consolidated financial statements.

FIRST CITIZENS BANC CORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years ended December 31, 2006, 2005 and 2004
(In thousands, except per share data)


												Accumulated
												Other			Total
	Common Stock					Retained			Treasury			Comprehensive			Shareholders’
	Shares			Amount		Earnings			Stock			Income (Loss)			Equity
Balance, January 1, 2004		5,033,203		$	47,370	$	28,612		$	(7,241	)	$	384		$	69,125
Comprehensive Income:
Net Income							4,813									4,813
Change in minimum additional pension liability, net of tax													393			393
Change in unrealized gain/(loss) on securities available for sale, net of reclassification and tax effects													(1,281	)		(1,281	)

Total comprehensive income																3,925
Cash dividends ($1.08 per share)							(5,644	)								(5,644	)
Issuance of common stock for merger, net of issuance costs		785,823			21,060											21,060
Purchase of treasury stock, at cost		(11,624	)							(253	)					(253	)

Balance, December 31, 2004		5,807,402			68,430		27,781			(7,494	)		(504	)		88,213
Comprehensive Income:
Net Income							6,659									6,659
Change in minimum additional pension liability, net of tax													(14	)		(14	)
Change in unrealized gain/(loss) on securities available for sale, net of reclassification and tax effects													(1,118	)		(1,118	)

Total comprehensive income																5,527
Cash dividends ($1.12 per share)							(6,501	)								(6,501	)
Purchase of treasury stock, at cost		(6,000	)							(129	)					(129	)

Balance, December 31, 2005		5,801,402			68,430		27,939			(7,623	)		(1,636	)		87,110
SAB 108 adjustments, net of tax							755									755
Comprehensive Income:
Net Income							6,160									6,160
Change in minimum additional pension liability, net of tax													263			263
Change in unrealized gain/(loss) on securities available for sale, net of reclassification and tax effects													724			724

Total comprehensive income																7,147
Cumulative effect of change in accounting for pension obligations													(1,729	)		(1,729	)
Cash dividends ($1.12 per share)							(6,220	)								(6,220	)
Purchase of treasury stock, at cost		(330,102	)							(7,591	)					(7,591	)

Balance, December 31, 2006		5,471,300		$	68,430	$	28,634		$	(15,214	)	$	(2,378	)	$	79,472

See accompanying notes to consolidated financial statements.

FIRST CITIZENS BANC CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2006, 2005 and 2004
(In thousands, except per share data)


	2006			2005			2004
Cash flows from operating activities
Net income	$	6,160		$	6,659		$	4,813
Adjustments to reconcile net income to net cash from operating activities Security amortization, net of accretion		(10	)		888			(742	)
Depreciation		930			1,022			987
Amortization of intangible assets		673			733			498
Amortization of and valuation allowance on servicing rights		(53	)		(14	)		38
Net realized (gain) loss on sale of securities		—			13			(107	)
FHLB stock dividends		(464	)		(355	)		(232	)
Provision for loan losses		1,128			1,123			1,805
Loans originated for sale		(188	)		(2,516	)		(4,100	)
Proceeds from sale of loans		208			1,990			3,381
Gain on sale of loans		(20	)		(93	)		(151	)
Loss on loans transferred to HFS		—			—			1,029
Loss on sale of OREO properties		663			60			31
Bank owned life insurance		(346	)		—			—
Deferred income taxes		276			581			110
Change in
Net deferred loan fees		(489	)		(205	)		207
Accrued interest receivable		(750	)		131			968
Other assets		624			(3,371	)		(2,885	)
Accrued interest, taxes and other expenses		920			1,951			386

Net cash from operating activities		9,262			8,597			6,036
Cash flows from investing activities
Cash paid in bank acquisition, net of cash received		—			—			(7,585	)
Cash paid in branch sale		—			(11,303	)		—
Securities available for sale
Maturities, prepayments and calls		62,487			37,233			75,438
Purchases		(43,629	)		(11,486	)		(42,201	)
Sales		—			—			243
Securities held for maturity
Maturities, prepayments and calls		4			3			3
Purchases of FRB stock		(16	)		(1,213	)		—
Purchases of Bank owned life insurance		(10,000	)		—			—
Loan originations, net of loan payments		(35,212	)		34,042			(16,624	)
Loans sold from HFS portfolio		—			9,505			—
Proceeds from sale of OREO properties		604			797			422
Property and equipment expenditures		(398	)		(1,349	)		(632	)
Change in federal funds sold		25,510			(15,563	)		4,860


Net cash from investing activities		(650	)		40,666			13,924

See accompanying notes to consolidated financial statements.

FIRST CITIZENS BANC CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended December 31, 2006, 2005 and 2004
(In thousands, except per share data)


	2006			2005			2004
Cash flows from financing activities
Change in deposits		(12,554	)		(51,113	)		(28,690	)
Repayment of Federal Home Loan Bank advances		(133	)		(316	)		(54	)
Net change in short-term FHLB advances		38,510			—			(18,975	)
Net change in long-term FHLB advances		(30,000	)		—			30,000
Change in securities sold under repurchase agreements		6,931			3,760			(4,982	)
Change in U.S. Treasury interest-bearing notes payable		1,044			636			816
Change in short-term note payable		(1,000	)		(1,000	)		(1,000	)
Cash dividends paid		(6,220	)		(6,501	)		(5,644	)
Net proceeds from issuance of subordinated debentures		—			—			12,500
Purchase of treasury stock		(7,591	)		(129	)		(253	)

Net cash from financing activities		(11,013	)		(54,663	)		(16,282	)


Net change in cash and due from banks		(2,401	)		(5,400	)		3,678
Cash and due from banks at beginning of year		20,261			25,661			21,983


Cash and due from banks at end of year	$	17,860		$	20,261		$	25,661


Supplemental cash flow information:
Interest paid		15,490			11,584			8,263
Income taxes paid		1,800			2,520			2,374

Supplemental non-cash disclosures:
Transfer of loans from portfolio to held for sale	$	—		$	—		$	8,886
Transfer of loans from portfolio to other real estate owned		—			238			1,130
Change in minimum additional pension liability, net of intangible for prior service cost		(263	)		14			(602	)
Fixed assets transferred to held for sale		840			—			179

Fair value of assets acquired in FNB acquisition							$	193,861
Common stock issued for acquisition								(21,060	)

Total liabilities assumed								172,801

See accompanying notes to consolidated financial statements.

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Amounts in thousands, except share data)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of the accounting policies adopted by First Citizens Banc Corp, which have a significant effect on the financial statements.

Consolidation Policy: 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 Insurance Agency, Inc., and Water Street Properties, Inc. (Water St.). Mr. Money Finance Company (Mr. Money), Citizens’ previously wholly-owned subsidiary, was merged into Citizens in August of 2006. Also in August of 2006, First Citizens Title Insurance Agency, Inc. was dissolved. The above companies together are referred to as the Corporation. Intercompany balances and transactions are eliminated in consolidation.

Nature of Operations: 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 six financial institutions in addition to Citizens. SCC accounted for 2.0% of the Corporation’s total revenues. 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 for the year ended December 31, 2006. Water Street Properties, Inc. was formed to hold repossessed assets of FCBC’s subsidiaries. Water St. revenue was than 1% of total revenue for the year ended December 31, 2006.

Use of Estimates: 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 the financial statements and the disclosures provided, and future results could differ. The allowance for loan losses, fair values of financial instruments, and pension obligations are particularly subject to change.

Cash Flows: Cash and cash equivalents include cash on hand and demand deposits with financial institutions. Net cash flows are reported for federal funds purchased or sold, customer loan transactions, deposit transactions, securities sold under agreements to repurchase and other short-term borrowings.

Securities: Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Debt securities are classified as available for sale when they might be sold before maturity. Equity securities with readily determinable fair values are also classified as available for sale. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income.

Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Gains and losses on sales are based on the amortized cost of the security sold using the specific identification method.

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Amounts in thousands, except share data)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)

Declines in the fair value of securities below their cost that are other than temporary are reflected as realized losses. In estimating other-than-temporary losses, management considers: (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, and (3) the Corporation’s ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value.

Other securities which include Federal Home Loan Bank (FHLB) stock, Federal Reserve Bank (FRB) stock, Farmer Mac stock (FMS), Bankers’ Bancshares Inc. (BB) stock, and Norwalk Community Development Corp (NCDC) stock are carried at cost.

Loans Held for Sale: Loans originated and intended for sale in the secondary market and loans that management no longer intends to hold for the foreseeable future, are carried at the lower of cost or market in the aggregate, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.

Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, and an allowance for loan losses.

Interest income is reported on the interest method and includes amortization of net deferred loan fees over the loan term. Interest income on real estate loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Interest income on commercial loans is also discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Interest income on consumer loans is discontinued when management determines future collection is unlikely. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

Interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required using past loan loss experience, risks in the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. Loan losses are charged against the allowance when management believes the loan balance is uncollectible.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component consists of a pooling of commercial credits risk graded as special mention and substandard that are not individually examined, and general reserves, which are based on a rolling average of historical net charge-offs.

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Amounts in thousands, except share data)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)

A loan is impaired when full payment under the loan terms is not expected. Smaller-balance loans of similar nature such as residential mortgage, consumer, and credit card loans are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures. Commercial and commercial real estate loans with balances $350,000 or larger, are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the estimated fair value of collateral if repayment is expected solely from the collateral. If the collateral is greater than the outstanding balance of the loan, no specific allowance is allocated for the loan.

Premises and Equipment: Land is carried at cost. Buildings and improvements and furniture and equipment are stated at cost less accumulated depreciation. Depreciation is computed using both accelerated and straight-line methods over the estimated useful life of the asset, ranging from three to seven years for furniture and equipment and seven to fifty years for buildings and improvements.

Other Real Estate: Other real estate acquired through or instead of loan foreclosure is initially recorded at fair value when acquired, establishing a new cost basis. Any reduction from carrying value of the related loan to fair value at the time of acquisition is accounted for as a loan loss. Any subsequent reduction in fair value is recognized in a valuation allowance by a charge to income. Other real estate owned included in other assets totaled approximately $565 at December 31, 2006 and $1,294 at December 31, 2005.

Servicing Rights: Servicing rights are recognized as assets for the allocated value of retained servicing rights on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondarily, prepayment characteristics. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Any impairment of a grouping is reported as a valuation allowance to the extent that fair value is less than the capitalized asset for the grouping.

Federal Home Loan Bank (FHLB) stock: The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

Federal Reserve Bank (FRB) stock: The Bank is a member of the Federal Reserve system. Members are required to own 6% of stock based on the capital stock and surplus totals of the Bank. FRB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value.

Bank Owned Life Insurance (BOLI): The Corporation has purchased life insurance policies on a group of senior officers. The purpose of the BOLI is to partially offset expenses related to pension benefits, healthcare and other employee related expenses. BOLI is recorded at its cash surrender value, which is the amount that can be realized.

Goodwill and Other Intangible Assets: Goodwill results from prior business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Amounts in thousands, except share data)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)

identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment will be recognized in the period identified.

Other intangible assets consist of core deposit intangible assets arising from whole bank and branch acquisitions. The core deposit intangible assets are measured at fair value and then amortized on an accelerated method over their estimated useful lives, which range from ten to twelve years.

Long-term Assets: Premises and equipment, core deposit intangible asset, non-compete agreement, and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.

Repurchase Agreements: Substantially all repurchase agreement liabilities represent amounts advanced by various customers. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance.

Income Taxes: 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.

Retirement Plans: The Corporation sponsors a noncontributory defined benefit retirement plan for all full-time employees who have attained the age of 20¹/2 and have a minimum of six months of service. Pension expense is the net of service and interest cost, return on plan assets and amortization of gains and losses not immediately recognized. Accrued pension costs are funded to the extent deductible for federal income tax purposes. As of January 1, 2007, no additional employees will be added to the benefit plan.

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans– an amendment of FASB Statements No. 87, 88, 106 and 132(R). The effect of this standard on the Corporations’ financial statements is discussed further in the Adoption of New Accounting Standards section.

The Corporation also provides a savings and retirement 401(k) plan for all eligible employees who elect to participate. The decision to make contributions to the plan, which represents a match of a portion of the salary deferred by participants, is made annually by the Board of Directors. Such contributions are funded as they are accrued.

Stock Compensation: Effective January 1, 2006, the Corporation adopted SFAS No. 123(R),Share-based Payment, using the modified prospective transition method. The adoption of this standard had no effect on net income in 2006, as all options outstanding at December 31, 2005 were fully vested and no additional options have been granted.

Prior to January 1, 2006, employee compensation expense under stock options was reported using the intrinsic value method; therefore, no stock-based compensation cost is reflected in net income for the years ending December 31, 2005 and 2004, 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.

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Amounts in thousands, except share data)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)

The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of SFAS Statement No. 123,Accounting for Stock-Based Compensation, for the years ending December 31.


	2005		2004
Net income as reported	$	6,659	$	4,813
Deduct: Stock-based compensation expense determined under fair value based method		62		79


Pro forma net income	$	6,597	$	4,734


Basic earnings per share as reported	$	1.15	$	0.92
Pro forma basic earnings per share		1.14		0.91

Diluted earnings per share as reported	$	1.15	$	0.92
Pro forma diluted earnings per share		1.14		0.91

The pro forma effects are computed using option pricing models, utilizing the following weighted-average assumptions as of grant date. No options were granted during 2004, 2005, or 2006.


	2003			2002
Risk-free interest rate		3.98	%		4.77	%
Expected option life	10 years			10 years
Expected stock price volatility		22.62	%		19.37	%
Dividend yield		2.97	%		4.44	%
Calculated fair value	$	8.23		$	3.33

Off-Balance-Sheet Financial Instruments: Financial instruments include off-balance-sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale and changes in the minimum pension liability, which are also recognized as separate components of shareholders’ equity.

Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Amounts in thousands, except share data)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)

Restrictions on Cash: Citizens is required to maintain certain daily reserve balances on hand in accordance with Federal Reserve Board requirements. The average reserve balance maintained in accordance with such requirements at December 31, 2006 and 2005 approximated $6,123 and $5,024. These balances do not earn interest.

Dividend Restriction: Banking regulations require maintaining certain capital levels and may limit the dividends paid by Citizens to FCBC or by FCBC to shareholders. These restrictions pose no practical limit on the ability of Citizens or FCBC to pay dividends at historical levels.

Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.

Earnings per Common Share: 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.

Operating Segments: While the Corporation’s chief decision makers monitor the revenue streams of the various products and services, the identifiable segments are not material and operations are managed and financial performance is evaluated on a Corporation-wide basis. Accordingly, all of the Corporation’s financial service operations are considered by management to be aggregated in one reportable operating segment.

Adoption of New Accounting Standards:

Effective January 1, 2006, the Company adopted SFAS No. 123(R),Share-based Payment. See “Stock Compensation” above for further discussion of the effect of adopting this standard.

FASB Statement No. 158: In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans– an amendment of FASB Statements No. 87, 88, 106 and 132(R). This Statement requires an employer to recognize the over funded or under funded status of a defined benefit postretirement plan (other than a multi-employer plan) as an asset or liability in its balance sheet, beginning with year end 2006, and to recognize changes in the funded status in the year in which the changes occur through comprehensive income beginning in 2007. Additionally, defined benefit plan assets and obligations are to be measured as of the date of the employer’s fiscal year-end, starting in 2008. Adoption had the following effect on individual line items in the 2006 balance sheet:

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Amounts in thousands, except share data)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)


	Before						After
	Application of						Application of
	SFAS No. 158			Adjustments			SFAS No. 158
Liability for pension benefits	$	949		$	2,620		$	3,569
Deferred income taxes		(1,133	)		(891	)		(2,024	)
Total Liabilities		667,785			1,729			669,514
Accumulated other comprehensive income		(649	)		(1,729	)		(2,378	)
Total stockholders’ equity	$	81,201		$	(1,729	)	$	79,472

SAB 108: In September 2006, the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin No. 108,Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements(SAB 108), which is effective for fiscal years ending on or after November 15, 2006. SAB 108 provides guidance on how the effects of prior-year uncorrected financial statement misstatements should be considered in quantifying a current year misstatement. SAB 108 requires public companies to quantify misstatements using both an income statement (rollover) and balance sheet (iron curtain) approach and evaluate whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. If prior year errors that had been previously considered immaterial now are considered material based on either approach, no restatement is required so long as management properly applied its previous approach and all relevant facts and circumstances were considered. Adjustments considered immaterial in prior years under the method previously used, but now considered material under the dual approach required by SAB 108, are to be recorded upon initial adoption of SAB 108. The amount so recorded is shown as a cumulative effect adjustment and is recorded in opening retained earnings as of January 1, 2006. Included in this cumulative effect adjustment are the following items and amounts:


	Gross			Tax effect			Net
Accrued Current Tax to remove excess tax cushion	$	358		$	—		$	358
FAS 91 deferred costs that were previously expensed		802			273			529
Accrued commission expense		(200	)		(68	)		(132	)


Totals	$	960		$	205		$	755

The above items were all considered immaterial in previous year’s financial statements and were the result of multiple years of immaterial misstatements in the financial statements. The current tax and commission expense items were the result of monthly accrual entries. The FAS 91 item was a result of deferred costs being expensed in the current period rather than being spread over the life of the loan.

Effect of Newly Issued But Not Yet Effective Accounting Standards:

In February 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 155, Accounting for Certain Hybrid Financial Instruments-an amendment to FASB Statements No. 133 and 140. This

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Amounts in thousands, except share data)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)

Statement permits fair value re-measurement for any hybrid financial instruments, clarifies which instruments are subject to the requirements of Statement No. 133, and establishes a requirement to evaluate interests in securitized financial assets and other items. The new standard is effective for financial assets acquired or issued after the beginning of the entity’s first fiscal year that begins after September 15, 2006. Management does not expect the adoption of this statement to have a material impact on its consolidated financial position or results of operations.

In March 2006, the FASB issued Statement No. 156,Accounting for Servicing of Financial Assets-an amendment of FASB Statement No. 140. This Statement provides the following: 1) revised guidance on when a servicing asset and servicing liability should be recognized; 2) requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; 3) permits an entity to elect to measure servicing assets and servicing liabilities at fair value each reporting date and report changes in fair value in earnings in the period in which the changes occur; 4) upon initial adoption, permits a onetime reclassification of available-for-sale securities to trading securities for securities which are identified as offsetting the entity’s exposure to changes in the fair value of servicing assets or liabilities that a servicer elects to subsequently measure at fair value; and 5) requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional footnote disclosures. This standard is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006 with the effects of initial adoption being reported as a cumulative-effect adjustment to retained earnings. Management does not expect the adoption of this statement will have a material impact on its consolidated financial position or results of operations.

In September 2006, the FASB issued Statement No. 157,Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standard is effective for fiscal years beginning after November 15, 2007. The Company has not completed its evaluation of the impact of the adoption of this standard.

In July 2006, the FASB issued FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109(FIN 48), which prescribes a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company has determined that the adoption of FIN 48 will not have a material effect on the financial statements.

In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-4,Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. This issue requires that a liability be recorded during the service period when a split-dollar life insurance agreement continues after participants’ employment or retirement. The required accrued liability will be based on either the post-employment benefit cost for the continuing life insurance or based on the future death benefit depending on the contractual terms of the underlying agreement. This issue is effective for fiscal years beginning after December 15, 2007. The Company has not completed its evaluation of the impact of adoption of EITF 06-4.

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Amounts in thousands, except share data)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)

In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-5,Accounting for Purchases of Life Insurance — Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (Accounting for Purchases of Life Insurance).This issue requires that a policyholder consider contractual terms of a life insurance policy in determining the amount that could be realized under the insurance contract. It also requires that if the contract provides for a greater surrender value if all individual policies in a group are surrendered at the same time, that the surrender value be determined based on the assumption that policies will be surrendered on an individual basis. Lastly, the issue discusses whether the cash surrender value should be discounted when the policyholder is contractually limited in its ability to surrender a policy. This issue is effective for fiscal years beginning after December 15, 2006. The Company does not believe the adoption of this issue will have a material impact on the financial statements.

Financial Statement Presentation: Certain items in the 2004 and 2005 financial statements have been reclassified to conform to the 2006 presentation.

NOTE 2 — SECURITIES

The fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows.


			Gross		Gross
	Fair		Unrealized		Unrealized
	Value		Gains		Losses
2006
U.S. Treasury securities and obligations of U.S. government agencies	$	87,379	$	54	$	(469	)
Obligations of states and political subdivisions		16,971		159		(59	)
Mortgage-back securities		3,543		2		(70	)


Total debt securities		107,893		215		(598	)
Equity securities		481		—		—


Total	$	108,374	$	215	$	(598	)


			Gross		Gross
	Fair		Unrealized		Unrealized
	Value		Gains		Losses
2005
U.S. Treasury securities and obligations of U.S. government agencies	$	97,815	$	—	$	(1,531	)
Obligations of states and political subdivisions		22,809		247		(89	)
Mortgage-back securities		5,021		11		(117	)

Total debt securities		125,645		258		(1,737	)
Equity securities		481		—		—


Total	$	126,126	$	258	$	(1,737	)

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Amounts in thousands, except share data)

NOTE 2 – SECURITIES(Continued)

The carrying amount, unrecognized gains and losses, and fair value of securities held to maturity were as follows.


			Gross		Gross
	Carrying		Unrecognized		Unrecognized		Fair
	Amount		Gains		Losses		Value
2006
Mortgage-backed securities	$	4	$	—	$	—	$	4


2005
Mortgage-backed securities	$	8	$	—	$	—	$	8

The fair value of securities and carrying amount, if different, at year end 2006 by contractual maturity were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.


	Held to maturity				Available for sale
	Amortized Cost		Fair Value		Fair Value
Due in one year or less	$	—	$	—	$	46,234
Due from one to five years		—		—		50,645
Due from five to ten years		—		—		5,136
Due after ten years		—		—		2,335
Mortgage-backed		4		4		3,543
Equity securities		—		—		481


Total	$	4	$	4	$	108,374

Securities with a carrying value of $97,327 and $107,459 were pledged as of December 31, 2006 and 2005, to secure public deposits and other deposits and liabilities as required or permitted by law.

Proceeds from sales of securities, gross realized gains and gross realized losses were as follows.


	2006		2005			2004
Sale proceeds	$	—	$	—		$	243
Gross realized gains		—		—			104
Gross realized losses		—		(10	)		—
Gains (losses) from securities called or settled by the issuer		—		(3	)		3

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Amounts in thousands, except share data)

NOTE 2 – SECURITIES(Continued)

Debt securities with unrealized losses at year end 2006 and 2005 not recognized in income are as follows.


2006	12 Months or less				More than 12 months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Loss		Value		Loss		Value		Loss
U.S. Treasury securities and obligations of U.S. government agencies	$	14,445	$	10	$	45,878	$	459	$	60,323	$	469
Obligations of states and political subdivisions		2,376		6		2,910		53		5,286		59
Mortgage-backed securities		145		—		2,838		70		2,983		70


Total temporarily impaired	$	16,966	$	16	$	51,626	$	582	$	68,592	$	598


2005	12 Months or less				More than 12 months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Loss		Value		Loss		Value		Loss
U.S. Treasury securities and obligations of U.S. government agencies	$	23,522	$	332	$	74,293	$	1,199	$	97,815	$	1,531
Obligations of states and political subdivisions		5,101		48		1,994		41		7,095		89
Mortgage-backed securities		3,740		117		—		—		3,740		117


Total temporarily impaired	$	32,363	$	497	$	76,287	$	1,240	$	108,650	$	1,737

The Corporation evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Corporation may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.

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.

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Amounts in thousands, except share data)

NOTE 3 — LOANS

Loans at year-end were as follows.


	2006			2005
Commercial and agricultural	$	56,789		$	65,903
Commercial real estate		218,084			195,983
Residential real estate		234,344			206,411
Real estate construction		28,294			29,712
Consumer		19,909			25,268
Credit card and other		267			632
Leases		341			615

Total Loans		558,028			524,524
Allowance for loan losses		(8,060	)		(9,212	)
Net deferred loan fees		(303	)		(542	)

Net loans	$	549,665		$	514,770

Loans to directors and executive officers, including their immediate families and companies in which they are principal owners during 2006 were as follows.


Balance — January 1, 2006	$	4,763
New loans and advances		2,044
Repayments		(2,105	)
Effect of changes in related parties		(607	)


Balance — December 31, 2006	$	4,095

Deposits from principal officers, directors, and their affiliates at year-end 2006 and 2005 were $5,805 and $7,589.

NOTE 4 — ALLOWANCE FOR LOAN LOSSES

A summary of the activity in the allowance for loan losses was as follows.


	2006			2005			2004
Balance — January 1	$	9,212		$	11,706		$	6,308
Provision for loan losses		1,128			1,123			1,805
Balance from acquisition		—			—			5,746
Loans charged-off		(3,466	)		(5,706	)		(2,888	)
Recoveries		1,186			2,089			735


Balance — December 31	$	8,060		$	9,212		$	11,706

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Amounts in thousands, except share data)

NOTE 4 — ALLOWANCE FOR LOAN LOSSES(Continued)

Impaired loans were as follows.


	2006		2005
Year-end loans with no allocated allowance for loan losses	$	—	$	—
Year-end loans with allocated allowance for loan losses		16,746		13,669
Amount of allowance for loan losses allocated		3,856		4,827


	2006		2005		2004
Average balance of impaired loans during year	$	12,404	$	16,593	$	8,724
Interest income recognized during impairment		533		530		471
Interest income recognized on a cash basis		533		530		471

Nonperfroming loans were as follows:


	2006		2005
Loans past due over 90 days still on accrual	$	2,717	$	331
Nonaccrual loans		7,576		14,401

Nonperforming loans and impaired loans are defined differently. Some loans may be included in both categories, whereas other loans may only be included in one category.

NOTE 5 – SERVICING RIGHTS

Activity for capitalized mortgage servicing rights and the related valuation allowance follows.


	2006			2005			2004
Servicing rights:
Beginning of year	$	218		$	285		$	342
Additions		2			14			36
Amortized to expense		(69	)		(81	)		(93	)
Direct write-downs		—			—			—

End of year	$	151		$	218		$	285


Valuation allowance:
Beginning of year	$	(16	)	$	(84	)	$	(139	)
Additions expensed		—			—			—
Reductions credited to expense		16			68			55


End of year	$	—		$	(16	)	$	(84	)

The fair value of servicing rights at year-end 2006 and 2005 were $166 and $202. The fair value of MSR’s was estimated by calculating the present value of estimated future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, servicing costs, and other economic factors. Currently, a third party consultant for the Corporation completes this calculation on a quarterly basis. The total balance of serviced loans at year-end 2006 was $25,192 compared to $29,191 year-end 2005.

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Amounts in thousands, except share data)

NOTE 5 – SERVICING RIGHTS(Continued)

Estimated amortization expense for each of the next five years is:


2007	$	47
2008		44
2009		37
2010		18
2011		4

NOTE 6 — PREMISES AND EQUIPMENT

Year-end premises and equipment were as follows.


	2006			2005
Land and improvements	$	2,045		$	2,033
Buildings and improvements		11,852			13,797
Furniture and equipment		12,473			12,553

Total		26,370			28,383
Accumulated depreciation		(15,591	)		(16,232	)

Premises and equipment, net	$	10,779		$	12,151

Year-end premises and equipment, held for sale, were as follows.


	2006			2005
Buildings and improvements	$	908			—
Furniture and equipment		386			—

Total		1,294			—
Accumulated depreciation		(454	)		—

Premises and equipment, net	$	840		$	—

At December 31, 2006, premises and equipment held for sale represented fixed assets related to a closed branch of Citizens in Norwalk, Ohio.

Depreciation expense was $930, $1,022, and $987 for 2006, 2005, and 2004.

Rent expense was $191, $229 and $255 for 2006, 2005, and 2004. Rent commitments under non-cancelable operating leases were as follows, before considering renewal options that generally are present.


2007	$	167
2008		49
2009		27

Total	$	243

The rent commitments listed above are primarily for the leasing of four banking branches.

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Amounts in thousands, except share data)

NOTE 7 – GOODWILL AND INTANGIBLE ASSETS

The change in the carrying amount of goodwill for the years ended December 31, 2006 and December 31, 2005 is as follows.


	2006		2005
Beginning of year	$	26,093	$	26,093
Acquired goodwill		—		—
Impairment		—		—


End of year	$	26,093	$	26,093

Acquired Intangible Assets

Acquired intangible assets were as follows as of year end.


	2006				2005
	Gross				Gross
	Carrying		Accumulated		Carrying		Accumulated
	Amount		Amortization		Amount		Amortization
Customer relationship intangibles	$	6,425	$	3,133	$	6,425	$	2,460

Aggregate amortization expense was $673, $733 and $498 for 2006, 2005, and 2004.

Estimated amortization expense for each of the next five years and thereafter is as follows.


2007	$	644
2008		622
2009		476
2010		444
2011		425
Thereafter		681

	$	3,292

NOTE 8 — INTEREST-BEARING DEPOSITS

Interest-bearing deposits as of December 31, 2006 and 2005 were as follows.


	2006		2005
Demand	$	123,778	$	113,675
Statement and Passbook Savings		122,599		141,312
Certifcates of Deposit
In excess of $100,000		39,925		41,745
Other		154,969		149,101
Individual Retirement Accounts		31,117		32,888

Total	$	472,388	$	478,721

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Amounts in thousands, except share data)

NOTE 8 — INTEREST-BEARING DEPOSITS(Continued)

Scheduled maturities of certificates of deposit at December 31, 2006 were as follows.


2007	$	145,591
2008		40,594
2009		4,522
2010		1,032
2011		353
Thereafter		2,802


Total	$	194,894

NOTE 9 — FEDERAL HOME LOAN BANK ADVANCES

The Corporation has a $40 million cash management advance line of credit with the Federal Home Loan Bank. The Corporation had no advances outstanding on this line as of December 31, 2006 and December 31, 2005. The Corporation also has a $80 million repo advance line with the Federal Home Loan Bank. The Corporation had $38,510 in advances outstanding on this line as of December 31, 2006 and $0 at December 31, 2005.

The Corporation has fixed-rate mortgage-matched advances from the Federal Home Loan Bank. Mortgage-matched advances are utilized to fund specific fixed-rate loans with certain prepayment of principal permitted without penalty.

At year-end 2006 and 2005, advances from the Federal Home Loan Bank were as follows.


	2006		2005
Maturities June 2006 through June 2010, with fixed-rates ranging from 3.03% to 7.8%, averaging 4.11% in 2006 and 5.78% in 2005	$	38,916	$	30,539

Scheduled principal reduction of FHLB loans at December 31, 2006 were as follows.


2007	$	38,510
2008		0
2009		361
2010		45


Total	$	38,916

In addition to the borrowings, the Corporation has outstanding letters of credit with the Federal Home Loan Bank totaling $19,600 at year-end 2006 and $11,600 at year-end 2005 used for pledging against public funds. Federal Home Loan Bank borrowings and the letters of credit are collateralized by Federal Home Loan Bank stock and by $78,997 and $56,904 of residential mortgage loans under a blanket lien arrangement at year-end 2006 and 2005.

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Amounts in thousands, except share data)

NOTE 10 — OTHER BORROWINGS

Information concerning securities sold under agreements to repurchase and treasury tax and loan deposits were as follows.


	2006			2005
Average balance during the year	$	20,166		$	14,988
Average interest rate during the year		4.09	%		2.69	%
Maximum month-end balance during the year	$	27,068		$	21,083
Weighted average interest rate at year end		4.28	%		3.49	%

Securities underlying repurchase agreements had a fair value of $27,104 at December 31, 2006 and $19,829 at December 31, 2005.

NOTE 11 – NOTE PAYABLE

FCBC has a secured borrowing agreement with LaSalle Bank, NA for up to $12,000. The agreement is split into two pieces; a $5,000 secured revolving line of credit which matures July 26, 2007, and a $10,000 term loan, of which $4,000 has been paid down. The term loan matures July 30, 2007 and will require a $6,000 balloon principal payment. At December 31, 2006, no amounts were outstanding on the line of credit balance and the term loan had a balance of $6,000. At December 31, 2005, no amounts were outstanding on the line of credit and the term loan was $7,000. The interest rate is three month LIBOR plus 1.75%, or 7.12% at December 31, 2006 and adjusts quarterly. The borrowings are secured by 100% of the common stock of Citizens.

NOTE 12 – SUBORDINATED DEBENTURES

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 current rate on the trust preferred securities issued in March 2003 and March 2002 are 8.52% and 8.97%. 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. After March 26, 2008 and March 26, 2007, respectively, subordinated debentures may be redeemed at face value.

Additionally, a trust formed in September 2004 by the Corporation issued $12,500 of 6.05% fixed rate trust preferred securities 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 value.

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Amounts in thousands, except share data)

NOTE 13 – INCOME TAXES

Income tax expense was as follows.


	2006		2005		2004
Current	$	2,390	$	2,393	$	1,814
Deferred		276		581		110


Income tax expense	$	2,666	$	2,974	$	1,924

Effective tax rates differ from the statutory federal income tax rate of 34% due to the following.


	2006			2005			2004
Income taxes computed at the statutory federal tax rate	$	3,001		$	3,275		$	2,291
Add (subtract) tax effect of
Nontaxable interest income, net of nondeductible interest expense		(253	)		(321	)		(372	)
Dividends received deduction		(1	)		(1	)		(1	)
Cash surrender value of BOLI		(118	)		—			—
Other		37			21			6

Income tax expense	$	2,666		$	2,974		$	1,924

Tax expense attributable to security gains totaled $0, $(4) and $36 in 2006, 2005 and 2004.

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Amounts in thousands, except share data)

NOTE 13 – INCOME TAXES (continued)

Year-end deferred tax assets and liabilities were due to the following.


	2006			2005
Deferred tax assets
Allowance for loan losses	$	2,551		$	2,801
Deferred compensation		620			580
Intangible assets		1,265			1,434
Deferred loan fees		—			161
Pension costs		1,213			294
Unrealized loss on securities available for sale		130			503
Other		67			6

Deferred tax asset		5,846			5,779


Deferred tax liabilities
Tax depreciation in excess of book depreciation		(735	)		(727	)
Discount accretion on securities		(42	)		(32	)
Purchase accounting adjustments		(1,404	)		(1,580	)
FHLB stock dividends		(1,530	)		(1,368	)
Leases		(48	)		(64	)
Deferred loan fees		(264	)		—
Other		(51	)		(69	)

Deferred tax liability		(4,074	)		(3,840	)


Net deferred tax asset	$	1,772		$	1,939

NOTE 14 — RETIREMENT PLANS

The Corporation sponsors a savings and retirement 401(k) plan, which covers all employees who meet certain eligibility requirements and who choose to participate in the plan. The matching contribution to the 401(k) plan was $138, $124 and $101 in 2006, 2005 and 2004.

The Corporation and its subsidiaries also sponsor a pension plan which is a noncontributory defined benefit retirement plan for all employees who have attained the age of 20¹/2, completed six months of service and work 1,000 or more hours per year. Annual payments, subject to the maximum amount deductible for federal income tax purposes, are made to a pension trust fund. Also, effective January 1, 2007, no new employees will be added to the retirement plan.

The Corporation uses a September 30 measurement date for its plan.

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Amounts in thousands, except share data)

NOTE 14 — RETIREMENT PLANS(Continued)

Information about the pension plan is as follows.


	2006			2005
Change in benefit obligation:
Beginning benefit obligation	$	10,066		$	8,460
Service cost		923			712
Interest cost		590			489
Actuarial (gain) loss		(225	)		493
Benefits paid		(351	)		(88	)

Ending benefit obligation		11,003			10,066

Change in plan assets, at fair value:
Beginning plan assets		6,565			5,436
Actual return		596			569
Employer contribution		655			648
Benefits paid		(351	)		(88	)
Administrative expenses		(30	)		—

Ending plan assets		7,435			6,565


Funded status		(3,568	)		(3,502	)
Unrecognized net actuarial loss		—			3,679
Unrecognized prior service cost		—			25
Unrecognized net transition asset at January 1, 1989 being recognized over 17 years		—			(20	)

Net amount recognized	$	(3,568	)	$	182

Prior to the adoption of FAS Statement 158, amounts recognized in the consolidated balance sheet at December 31, 2005 were as follows.


Accrued benefit cost	$	(855	)
Intangible assets		25
Accumulated other comprehensive income		1,012


Net amount recognized	$	182

Amounts recognized in accumulated other comprehensive income at December 31, 2006 consist of:


Unrecognized actuarial loss (net of tax, of $1,095)	$	2,125

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Amounts in thousands, except share data)

NOTE 14 — RETIREMENT PLANS(Continued)

The accumulated benefit obligation for the defined benefit pension plan was $8,384 in 2006 and $7,419 in 2005.

The components of net periodic pension expense were as follows.


	2006			2005			2004
Service cost	$	923		$	712		$	633
Interest cost		590			489			464
Expected return on plan assets		(471	)		(569	)		(344	)
Net amortization and deferral		127			231			145


Net	$	1,169		$	863		$	898


Additional information
Increase/(decrease) in minimum liability included in other comprehensive income	$	(400	)	$	21		$	(602	)

The weighted average assumptions used to determine benefit obligations at year-end were as follows.


	2006			2005			2004
Discount rate on benefit obligation		5.51	%		5.09	%		5.47	%
Long-term rate of return on plan assets		7.00			7.00			7.00
Rate of compensation increase		3.00			3.00			3.00

The weighted average assumptions used to determine net periodic pension cost were as follows.


	2006			2005			2004
Discount rate on benefit obligation		5.51	%		5.09	%		5.47	%
Long-term rate of return on plan assets		7.00			7.00			7.00
Rate of compensation increase		3.00			3.00			3.00

The expectation for long-term rate of return on the pension assets and the expected rate of compensation increases are reviewed periodically by management in consultation with outside actuaries and primary investment consultants. Factors considered in setting and adjusting these rates are historic and projected rates of return on the portfolio and historic and estimated rates of increases of compensation.

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Amounts in thousands, except share data)

NOTE 14 — RETIREMENT PLANS(Continued)

The Corporation’s pension plan asset allocation at year-end 2006, and 2005, target allocation for 2007, and expected long-term rate of return by asset category are as follows.


				Percentage of Plan						Weighted-
	Target			Assets						Average Expected
	Allocation			at Year-end						Long-Term Rate
Asset Category	2007			2006			2005			of Return
Equity securities		20-50	%		53.0	%		50.3	%		11.1	%
Debt securities		30-60			17.7			15.5			5.5
Money market funds		20-30			29.3			34.2			2.5


Total					100.0	%		100.0	%		7.6	%

The Corporation developed the pension plan investment policies and strategies for plan assets with its pension management firm. The long-term guidelines from above were created to maximize the return on portfolio assets while reducing the risk of the portfolio. The management firm may allocate assets among the separate accounts with the established long-term guidelines. Transfers among these accounts will be at the management firms discretion based on their investment outlook and the investment strategies that are outlined at periodic meetings with the Corporation.

The Corporation expects to contribute $632 to its pension plan in 2007.

Expected benefit payments, which reflect expected future service, are as follows.


2007	$	214
2008		913
2009		357
2010		478
2011		365
2012 through 2016		8,286


Total	$	10,613

Continued

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Amounts in thousands, except share data)

NOTE 15 – STOCK OPTIONS

Options to buy stock may be granted to directors, officers and employees under the stock option plan, which provides for issue of up to 225,000 options. Exercise price is the market price at date of grant. The maximum option term is ten years, and options vest after three years.

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


	2006
			Weighted
			Average
			Exercise
	Shares		Price
Outstanding at beginning of year		39,000	$	25.44
Granted		—		—
Exercised		—		—
Forfeited		—		—

Outstanding at end of year		39,000	$	25.44


Options exercisable at year-end		39,000	$	25.44

Options outstanding at year-end 2006 were as follows.

Outstanding

Weighted

Average

Weighted

Remaining

Average

Contractual

Exercise

Exercise price

Number

Life

Price

$20.50

25,700

5 yrs. 6 mos.

20.50

$35.00

13,300

6 yrs. 3.5 mos.

35.00

Outstanding at year-end

39,000

5 yrs. 9 mos.

25.44

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. As of December 31, 2006 and December 31, 2005, the aggregate intrinsic value of the stock options was $0.

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Amounts in thousands, except share data)

NOTE 16 — COMMITMENTS, CONTINGENCIES AND OFF-BALANCE-SHEET RISK

Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk to 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 the commitment.

The contractual amount of financial instruments with off-balance-sheet risk was as follows at year-end.


	2006				2005
	Fixed		Variable		Fixed		Variable
	Rate		Rate		Rate		Rate
Commitments to extend credit:
Lines of credit and construction loans	$	11,065	$	64,371	$	9,785	$	63,564
Overdraft protection		—		11,180		—		9,450
Letters of credit		20		3,844		42		3,411

	$	11,085	$	79,395	$	9,827	$	76,425

Commitments to make loans are generally made for a period of one year or less. Fixed-rate loan commitments included above had interest rates ranging from 4.00% to 10.25% at December 31, 2006 and 4.37% to 11.50% at December 31, 2005. Maturities extend up to 30 years.

NOTE 17 – CAPITAL REQUIREMENTS AND RESTRICTION ON RETAINED EARNINGS

The Corporation and Citizens are subject to regulatory capital requirements administered by the federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators. Failure to meet capital requirements can initiate regulatory action.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At year-end 2006 and 2005, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Amounts in thousands, except share data)

NOTE 17 – CAPITAL REQUIREMENTS AND RESTRICTION ON RETAINED EARNINGS(Continued)

At December 31, 2006 and 2005, the Corporation’s and the Bank’s actual capital levels and minimum required levels were as follows.


											To Be Well
											Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
						(Dollars in Millions)
2006
Total capital to risk- weighted assets
Consolidated	$	80.3		14.4	%	$	44.6		8.0	%		n/a		n/a
Citizens		69.6		12.8			43.5		8.0			54.4		10.0
Tier I (Core) capital to risk- weighted assets
Consolidated		60.4		10.8			22.3		4.0			n/a		n/a
Citizens		62.8		11.5			21.8		4.0			32.6		6.0
Tier I (Core) capital to average assets
Consolidated		60.4		8.5			28.4		4.0			n/a		n/a
Citizens		62.8		8.9			28.2		4.0			35.2		5.0

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Amounts in thousands, except share data)

NOTE 17 – CAPITAL REQUIREMENTS AND RESTRICTION ON RETAINED EARNINGS(Continued)


											To Be Well
											Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
						(Dollars in Millions)
2005
Total capital to risk- weighted assets
Consolidated	$	85.2		16.1	%	$	42.5		8.0	%		n/a		n/a
Citizens		66.2		12.9			41.0		8.0			51.3		10.0
Tier I (Core) capital to risk- weighted assets
Consolidated		66.9		12.6			21.2		4.0			n/a		n/a
Citizens		59.8		11.7			20.5		4.0			30.7		6.0
Tier I (Core) capital to average assets
Consolidated		66.9		9.2			29.0		4.0			n/a		n/a
Citizens		59.8		8.2			29.0		4.0			36.3		5.0

The Corporation’s primary source of funds for paying dividends to its shareholders and for operating expenses is dividends received from Citizens. Payment of dividends by Citizens to the Corporation is subject to restrictions by Citizens regulatory agencies. These restrictions generally limit dividends to the current and prior two years retained earnings as defined by the regulations. In addition, dividends may not reduce capital levels below minimum regulatory requirements. At December 31, 2006, Citizens cannot pay any dividends to FCBC without being granted regulatory approval for a dividend.

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Amounts in thousands, except share data)

NOTE 18 — PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION

Condensed financial information of FCBC follows.


Condensed Balance Sheets	2006			2005

Assets:
Cash	$	15,735		$	14,159
Securities available for sale		481			481
Loans, net of allowance of $0 in 2006 and 2005		1,169			6,903
Investment in bank subsidiary		93,151			91,166
Investment in nonbank subsidiaries		1,653			2,394
Note receivable from nonbank subsidiaries		587			5,758
Other assets		1,249			616


Total assets	$	114,025		$	121,477


Liabilities and Shareholders’ Equity:
Deferred income taxes and other liabilities	$	3,553		$	2,367
Subordinated debentures		25,000			25,000
Note payable		6,000			7,000
Common stock		68,430			68,430
Retained earnings		28,634			27,939
Treasury Stock		(15,214	)		(7,623	)
Accumulated other comprehensive loss		(2,378	)		(1,636	)


Total liabilities and shareholders’ equity	$	114,025		$	121,477


Condensed Statements of Income	2006			2005			2004

Dividends from bank subsidiaries	$	8,310		$	20,269		$	8,828
Interest income		291			467			423
Other income		684			176			124
Provision for loan losses		(18	)		(28	)		—
Interest expense		(2,279	)		(1,981	)		(1,079	)
Other expense, net		(2,367	)		(1,807	)		(1,610	)


Earnings before equity in undistributed net earnings of subsidiaries		4,622			17,096			6,686
Income tax benefit		1,424			1,077			728
(Distributions in excess of earnings of subsidiaries) / equity in undistributed net earnings of subsidiaries		115			(11,514	)		(2,601	)


Net income	$	6,160		$	6,659		$	4,813

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Amounts in thousands, except share data)

NOTE 18 — PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION(Continued)


Condensed Statements of Cash Flows	2006			2005			2004

Operating activities:
Net income	$	6,160		$	6,659		$	4,813
Adjustment to reconcile net income to net cash provided by operating activities:
Provision for loan losses		18			28			—
Change in other assets and other liabilities		(465	)		1,188			(3,166	)
Distributions in excess of/(equity in undistributed) net earnings of subsidiaries		(115	)		11,514			2,601

Net cash from operating activities		5,598			19,389			4,248

Investing activities:
Loan originations, net of loan payments		5,716			(6,268	)		27
Change in loan to nonbank subsidiaries		5,073			6,108			(1,100	)
Cash paid for acquisition, net of cash received		—			—			(10,902	)

Net cash from investing activities		10,789			(160	)		(11,975	)

Financing activities:
Net change in short term note payable		(1,000	)		(1,000	)		(1,000	)
Repayment of long-term note payable		—			—			—
Proceeds from subordinated debentures payable to First Citizens Statutory Trust I, II, and III		—			—			12,500
Cash paid for treasury stock		(7,591	)		(129	)		(253	)
Cash dividends paid		(6,220	)		(6,501	)		(4,075	)

Net cash from financing activities		(14,811	)		(7,630	)		7,172


Net change in cash and cash equivalents		1,576			11,599			(555	)

Cash and cash equivalents at beginning of year		14,159			2,560			3,115


Cash and cash equivalents at end of year	$	15,735		$	14,159		$	2,560

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Amounts in thousands, except share data)

NOTE 19 — FAIR VALUES OF FINANCIAL INSTRUMENTS

The carrying amount and estimated fair values of financial instruments were as follows.


	December 31, 2006						December 31, 2005
	Carrying			Estimated			Carrying			Estimated
	Amount			Fair Value			Amount			Fair Value
Financial assets:
Cash and due from financial institutions	$	17,860		$	17,860		$	20,261		$	20,261
Federal funds sold		—			—			25,510			25,510
Securities available for sale		108,374			108,374			126,126			126,126
Securities held to maturity		4			4			8			8
Loans, net of allowance for loan losses		549,665			540,145			514,770			502,795
Other securities		11,020			11,020			10,540			10,540
Accrued interest receivable		5,145			5,145			4,395			4,395

Financial liabilities:
Deposits		(564,551	)		(563,537	)		(577,105	)		(574,319	)
Federal Home Loan Bank advances		(38,916	)		(38,918	)		(30,539	)		(29,956	)
U.S. Treasury interest-bearing demand note payable		(3,435	)		(3,435	)		(2,391	)		(2,391	)
Securities sold under agreements to repurchase		(23,403	)		(23,403	)		(16,472	)		(16,472	)
Notes payable		(6,000	)		(6,000	)		(7,000	)		(7,000	)
Subordinated debentures		(25,000	)		(25,000	)		(25,000	)		(25,000	)
Accrued interest payable		(614	)		(614	)		(473	)		(473	)

The estimated fair value approximates carrying amount for all items except those described below. Estimated fair value for securities is based on quoted market values for the individual securities or for equivalent securities. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the cash flow analysis or underlying collateral values. Fair value of loans held for sale is based on market quotes. Fair value of debt is based on current rates for similar financing. The fair value of off-balance-sheet items is based on the current fees or cost that would be charged to enter into or terminate such arrangements and are considered nominal.

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Amounts in thousands, except share data)

NOTE 20 – OTHER COMPREHENSIVE INCOME/(LOSS)

Other comprehensive income/(loss) components and related taxes were as follows.


	2006			2005			2004
Unrealized holding gains /(losses) on available for sale securities	$	1,097		$	(1,707	)	$	(1,840	)
Reclassification adjustments for gains / (losses) later recognized in income		—			13			(107	)

Net unrealized gain /(losses)		1,097			(1,694	)		(1,947	)
Minimum pension liability adjustment		398			(21	)		602
Tax effect		(508	)		583			457


Other comprehensive income/(loss)	$	987		$	(1,132	)	$	(888	)

NOTE 21 – EARNINGS PER SHARE

The factors used in the earnings per share computation follow.


	2006		2005		2004
Basic
Net Income	$	6,160	$	6,659	$	4,813

Weighted Average common shares outstanding		5,520,692		5,804,361		5,211,904

Basic earnings per share	$	1.12	$	1.15	$	0.92


Diluted
Net Income	$	6,160	$	6,659	$	4,813

Weighted average common shares outstanding for basic earnings per common share		5,520,692		5,804,361		5,211,904
Add: dilutive effects of assumed exercise of options		—		1,320		4,653


Average shares and dilutive potential common shares outstanding		5,520,692		5,805,681		5,216,557


Diluted earnings per share	$	1.12	$	1.15	$	0.92

Stock options for 39,000 and 13,300 shares of common stock were not considered in computing diluted earnings per common share for 2006 and 2005 because they were antidilutive.

Basic earnings per common share are calculated by dividing net income by the weighted-average number of common shares outstanding for the period.

Diluted earnings per common share takes into consideration the pro forma dilution of unexercised stock option awards, computed using the treasury stock method.

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Amounts in thousands, except share data)

NOTE 22 – QUARTERLY FINANCIAL DATA (UNAUDITED)


							Basic		Diluted
	Interest		Net Interest		Net		Earnings per		Earnings per
	Income		Income		Income		Common Share		Common Share
2006
First quarter	$	10,909	$	7,538	$	1,525	$	0.27	$	0.27
Second quarter⁽¹⁾		11,575		7,878		1,738		0.32		0.32
Third quarter⁽²⁾		11,613		7,448		1,286		0.24		0.24
Fourth quarter		11,779		7,397		1,611		0.29		0.29

2005
First quarter⁽³⁾	$	10,085	$	7,458	$	1,616	$	0.28	$	0.28
Second quarter		10,625		7,806		1,471		0.25		0.25
Third quarter		10,752		7,740		1,566		0.27		0.27
Fourth quarter⁽⁴⁾		10,976		7,843		2,006		0.35		0.35


⁽¹⁾⁾		Net income rose in the second quarter primarily due to the growth of the loan portfolio, and the related interest income related to the loan growth

⁽²⁾		Net income included ($555) in losses, before tax, on other real estate owned properties

⁽³⁾		Net income in the first quarter includes $766 for a gain, before tax, on the sale of two First Citizens branches.

⁽⁴⁾		Net income in the fourth quarter increased primarily due to an increase in net interest income caused by the continued increase in interest rates, several one time adjustments made to non-interest expense items that were merger related, and a reduction in health care costs

First Citizens Banc Corp
Directors

W. Patrick Murray, Chairman of the Board
Attorney,Murray & Murray Company, L.P.A

Laurence A. Bettcher
President,Bettcher Industries, Inc.

Ronald E. Dentinger
Manager,Country Star Co-Op

Blythe A. Friedley
Owner/President,Friedley & Co. Insurance Agency

James O. Miller
President & CEO,The Citizens Banking Company

George L. Mylander
Retired Educator and City Official
Chair Emeritus,Firelands Regional Medical Center

Allen R. Nickles, CPA, CFE
Partner,Payne, Hammersmith, Nickles & Co.

Robert L. Ransom
Funeral Director,Ransom Funeral Home

Leslie D. Stoneham
President,Stoneham Farms, Inc.

David A. Voight
President/Chief Executive Officer,First Citizens Banc Corp
Chairman of the Board,The Citizens Banking Company

Daniel J. White
Independent Business Consultant

J. George Williams
Owner & Secretary/Treasurer,
W & W Farms, Inc. and K & W Farms Inc.

Officers

W. Patrick Murray,Chairman of the Board

David A. Voight,President/Chief Executive Officer

James O. Miller,Executive Vice President

Bruce A. Bravard,Senior Vice President

LeRoy C. Link,Senior Vice President

James E. McGookey,Senior Vice President, General Counsel

Todd A. Michel,Senior Vice President, Controller

Charles C. Riesterer,Senior Vice President

Richard J. Dutton,Senior Vice President

Donna J. Dalferro,Vice President/Corporate Secretary

Karen S. Rutger,Vice President/Human Resources

Douglas A. Greulich,Investment Officer/Cashier

Michael E. Powell,Human Resources Director

Steven J. Tomasula, CPA,Assistant Controller

Kevin J. Jones,Auditor

Rebecca L. Howser,Assistant Auditor

Kathleen A. Bodi,Assistant Corporate Secretary

Directors Of Affiliated Companies
The Citizens Banking Company

David A. Voight
Chairman of the Board,The Citizens Banking Company

John O. Bacon
President/ Chief Executive Officer,Mack Iron Works Company

William F. Boose
Retired,Boose Farm Market, Inc.

Thomas A. Depler
Attorney,Poland, Depler & Shepherd Co., LPA

James D. Heckelman
President,Dan-Mar Co., Inc.

James O. Miller
President/Chief Executive Officer,
The Citizens Banking Company

Timothy E. Morse
Retired

W. Patrick Murray
Chairman of the Board,First Citizens Banc Corp
Attorney,Murray and Murray Company, LPA

George L. Mylander
Retired Educator and City Official
Chair Emeritus,Firelands Regional Medical Center

John P. Pheiffer
President,Sandusky Bay Development Company
Secretary/Treasurer,Dorr Chevrolet Oldsmobile, Inc.

J. William Springer
President/Chief Executive Officer,Industrial Nut Corporation

J. George Williams
Owner & Secretary/Treasurer,
W & W Farms, Inc. and K & W Farms, Inc.

Gerald B. Wurm
President,Wurms’s Woodworkimg Co.

SCC Resources. Inc.

LeRoy C. Link
President,SCC Resources, Inc.

James E. McGookey
Senior Vice President, General Counsel,
First Citizens Banc Corp

James O. Miller
President/Chief Executive Officer,
The Citizens Banking Company

David A. Voight
President/Chief Executive Officer,First Citizens Banc Corp

FIRST CITIZENS BANC CORP

SHAREHOLDER INFORMATION

The Annual Meeting of the Shareholders of First Citizens Banc Corp will be held at Bowling Green State University, Firelands College, Huron, Ohio on April 17, 2007 at 10:00 a.m. Notice of the meeting and a proxy statement will be sent to shareholders in a separate mailing.

Transfer Agent First Citizens Banc Corp

Illinois Stock Transfer Company100 East Water Street

209 West Jackson Boulevard, Suite 903 Sandusky, Ohio 44870

Chicago, Illinois 60606-6905 Tel: (419) 625-4121

Tel: (312) 427-2953 or or 1-888-645-4121 (Toll Free) 1-800-757-5755 (Toll Free) Fax: (419) 627-3359

Fax: (312) 427-2879 www.fcza.com

www.illinoisstocktransfer.com

AFFILIATES

The Citizens Banking Company SCC Resources, Inc.

100 East Water Street 303 Howard Drive

Sandusky, Ohio 44870 Sandusky, Ohio 44870

Tel: (419) 625-4121 Tel: (419) 625-1605

or 1-888-645-4121 (Toll Free) Fax (419) 625-0081

Fax: (419) 627-0103 www.sccresources.com

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Civista Bancshares (CIVB) 10-K2006 FY Annual report

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