Civista Bancshares 10K 2008 Annual report | CIVB Filing

Exhibit 13.1

First Citizens Banc Corp 2008 Annual Report

FIVE YEAR CONDENSED CONSOLIDATED FINANCIAL SUMMARY


	*2008*			*2007*			*2006*			*2005*			*2004*
EARNINGS
Net Income (000)	$	(38,978	)	$	6,885		$	6,160		$	6,659		$	4,813
Net Income (000) excluding impairment charge⁽¹⁾	$	4,313		$	6,885		$	6,160		$	6,659		$	4,813
Per Common Share⁽²⁾
Earnings (basic and diluted)	$	(5.06	)	$	1.25		$	1.12		$	1.15		$	0.92
Earnings, excluding impairment charge (basic and diluted)⁽¹⁾	$	0.56		$	1.25		$	1.12		$	1.15		$	0.92
Book Value	$	9.94		$	16.37		$	14.53		$	15.02		$	15.19
Dividends Paid	$	0.91		$	1.12		$	1.12		$	1.12		$	1.08

BALANCES
Assets (millions)		1,053.6			1,119.3			749.0			750.9			817.5
Deposits (millions)		809.9			839.8			564.6			577.1			647.0
Net Loans (millions)		787.8			787.4			549.7			514.8			556.2
Shareholders’ Equity (millions)		76.6			126.2			79.5			87.1			88.2

PERFORMANCE RATIOS
Return on Average Assets		(3.54	%)		0.88	%		0.83	%		0.85	%		0.71	%
Return on Average Assets, excluding impairment charge⁽¹⁾		0.39	%		0.88	%		0.83	%		0.85	%		0.71	%
Return on Average Equity		(31.57	%)		8.78	%		7.68	%		7.69	%		6.74	%
Return on Average Equity, excluding impairment charge⁽¹⁾		3.49	%		8.78	%		7.68	%		7.69	%		6.74	%
Equity Capital Ratio		7.27	%		11.27	%		10.61	%		11.60	%		10.79	%
Net Loans to Deposit Ratio		97.27	%		93.76	%		97.36	%		89.20	%		85.96	%
Loss Allowance to Total Loans		1.11	%		0.93	%		1.45	%		1.76	%		2.06	%


⁽¹⁾		Management uses certain non-GAAP (generally accepted accounting principles) financial measures to evaluate the Corporation’s performance. For additional information, please see the non-GAAP disclosure on page three of this document.

⁽²⁾		Per share data has been adjusted for the business combination with FNB Financial Corporation in October 2004 and with Futura Banc Corp. in 2007.

To Our Shareholders:

It is amazing how quickly the world has changed. In last year’s letter we reported to you that 2007 was the most profitable year in five. Our efforts in diversifying our markets, taking advantage of size efficiencies, and adapting to a changing marketplace were bearing fruit and were reflected in our earnings and growth.

At that time, no one could predict the events of 2008. During the past year, we experienced plummeting property values, the onset of a significant economic recession, historic losses of value in the stock market, a dramatic drop in interest rates, and the continuation of a shift in jobs from higher paying manufacturing positions to lesser paying service positions. And we are now seeing crushing layoffs and slowdowns.

Considering the issues of 2008, we are pleased to report cash earnings and the payment of dividends. Many banks in Ohio and the nation are unable to say this.

Earnings

After writing off $43,291,000 in goodwill, our net loss for the year was a negative $5.06 per share. As we previously communicated, this does not affect cash, cash earnings, regulatory capital, or dividends. Again, the goodwill was accumulated as a result of the many acquisitions we have made since 1990. Based on our annual review, we, like many other companies, felt it was appropriate to reduce its value on our books.

Net income before the goodwill adjustment was $.56 per share. While this was a good performance for this environment, the economy caused increases in our problem loans and in our expenses for collecting these loans. As a result, additions to our loan loss reserves and collection expenses reduced our earnings by approximately $.62 per share. If we add back the additional reserves, expenses, and goodwill adjustment, the adjusted earnings would have been $1.18 per share for 2008 versus $1.24 per share in 2007.

This is not to dismiss the net loss or the decrease in adjusted earnings. However, while the current market and recession have had a temporary impact on net earnings, it has not materially impacted our ability to generate very respectable gross revenue. Our net interest income before loan loss provision was $5.24 per share in 2008 and $5.37 per share in 2007. The Federal Reserve comparative statistics on Citizens Bank show a 2008 interest margin of 4.48% compared to a peer number of 3.68%. Non-interest income for the bank compares reasonably at .82% of assets to peer banks’ .86% of assets.

Stock Performance

There is no need to point out the dreadful performance of financial stocks in general and Ohio financial stocks in particular. We are no exception. Below is an alternative performance chart, not comparing us to national market statistics, but to publicly traded Ohio financial stocks from year end 2004 to year end 2008. This removes our distortion of the 2003 Russell Index and faces the reality that publicly traded Ohio financials have not performed to any national index.

Source: Bloomberg, SNL Securities

Dividends

For years we have differentiated ourselves as a dividend stock. Over the last five years we have paid a total of $5.35 per share in dividends. Over the last 10 years we have paid a total of $11.58 per share in dividends. This is a strong dividend payout. We understand our shareholders’ interest in dividends. Our goal is to continue a strong dividend program – but our dividend payments are going to be impacted by our earnings, and our earnings are going to be impacted by the dollars that we need to add to our loan loss reserve. The dollars needed for the loan loss reserve are going to be affected by the breadth and depth of this recession.

The Treasury’s Capital Purchase Program does place a $.15 per share per quarter limit on dividends for three years. In view of the economic climate, we will be happy if earnings increase to the extent that we could ask for special permission to exceed $.15 during the three year limitation period.

Staying With The Fundamentals

Banks throughout Ohio have had to adapt to the changes in the state’s economy. Over the last several years we have seen decreased employment opportunities, shifts away from manufacturing, population shifts, etc. Many Ohio banks decided to deploy their capital into new markets outside of the state. Many established offices in other parts of the country, such as Florida, Georgia, and Arizona. Many banks looked at sub-prime mortgages, 120% financing mortgages, negative amortization mortgages, and a variety of non-conventional products. Many banks saw the attractive 8% return on Fannie Mae and Freddie Mac stock and invested heavily in them.

We had the opportunity to invest our capital and resources into these types of alternatives. If we had, you would have seen and been very pleased with the short-term boost to earnings. I can assure you that you would not be pleased today. We were uncomfortable with heated markets outside of areas that we know. We believe that customers should make down payments and have the ability to make their loan payments. And investments that look too good to be true usually are.

We believe that the fundamentals of gathering deposits and making loans in markets we know and developing personal customer relationships continue to prevail. By sticking with the fundamentals, we have avoided the systemic problems plaguing many banks. The issues we confront today are marketplace issues and not issues with our business model.

The Recession

Our short-term goal is to come through this recession with the least negative impact to the corporation. Paraphrasing a comment from a former United States Comptroller of Currency, banks in this economic climate need “a fortress balance sheet with deep wells of liquidity”. This is at the heart of the Capital Purchase Program. It is also the basis for our efforts to gather the liquidity of deposits, our programs and communications to maintain the confidence of our communities, our investments of additional resources in loan credit analysis with the goal of limiting loan losses, and our regular communications to you. Steps taken include:

	•		Capital Purchase Program —In January we received shareholder approval to issue preferred stock. With this approval we sold $23,184,000 in preferred stock and warrants to purchase 469,312 shares of common stock to the U.S. Treasury. This program was offered to strengthen healthy banks. This program increased our regulatory capital from approximately $61,000,000 to approximately $84,000,000. Your board and management believe this strengthened-capital position is important in these uncertain economic times. As we stated previously, this additional capital will provide support if we experience a long and sustained economic downturn with increased loan losses. If our economy recovers quickly, we can repurchase this preferred stock at par after three years.

			Much publicized restrictions of the Capital Purchase Program involve executive compensation. We can report to you that our compensation structure does not come close to any of these restrictions. Our executive compensation is typically at the 50th percentile for companies of our size, we do not have executive bonus or incentive programs, we do not provide personal automobiles or the trips and perks highlighted in news reports. For 2009 there has been a freeze on executive salaries and most salaries of other company employees.

	•		Working With Customer Loan Issues- While the large national and regional banks seem to have little flexibility in working with customers that are impacted by the recession, we are dealing with our customers on an individual basis. If our customer has not abandoned their home or business, we want to work with them. When possible, we are renegotiating and modifying loan terms to help the customer through the recession. We believe this is a better alternative than repossession or foreclosure. A short-term cash flow reduction is preferable to attempting to sell repossessed property in a depressed market. Sometimes this is not possible. When this is the case we assess the situation, assess the collateral involved, and make a decision. Sometimes we sell the property for whatever it brings, and we move on. Sometimes we believe there is long-term potential, and we will hold the property to wait for the market to turn around.

	•		Customer Confidence –We have participated in the Transaction Account Guarantee Program which provides unlimited deposit insurance on non-interest bearing checking accounts and the CDARS program which can provide upwards of $50,000,000 in deposit insurance for customers with multiple Certificate of Deposit accounts. Through January 2009, the CDARS program has brought in over $23,000,000 in new deposit dollars. Coupled with the temporary increase of the FDIC insurance to $250,000, we can provide our customers with a high level of safety and soundness for their accounts. Deposits and deposit customers are our raw material.

	•		Shareholder Communications –A commitment for 2008 was to provide you with timely and candid information. We have attempted through letters and website postings to provide information on how your company is doing. When shares are held at a broker, we cannot control the timely forwarding of information to you. If your shares are held at a broker and you would like to be on our direct mailing list, complete and return to us the card attached to the annual report.

2009 and Beyond

2009 is going to be a challenging year — perhaps more so than 2008. The current rate environment will place pressure on our interest margin. We are going to see additional loan losses. We will see additional related expenses whether they are expenses to modify loans, repossession expenses, or the estimated $2,600,000 increase in our FDIC premium for 2009, which includes the recently approved one-time emergency special assessment. During these trying times we must keep a balanced perspective. Yes, we do have many customers experiencing significant problems that will take the company’s time, resources, and loan loss reserve dollars to work through, but 95% of our customers are current with their payments. Yes we are seeing unemployment rising in our markets to levels of 10% to 13% — but that means 87% to 90% of our neighbors in the workforce are working.

Our pledge remains to take the steps we deem necessary to get through the recession with the least negative impact to the company. Short-term actions must be taken but it is also a good time for companies to assess where they are at, where they are going, and to be prepared for the turnaround. We are doing exactly that. We are looking at our offices and office needs, staffing, education and training, customer product offerings, marketing efforts, and technology changes. We are focusing on desirable customers currently being ignored by the large banking institutions. We are also focused on our deposit gathering, giving us the raw material needed as the economy turns. And just as it has in the past, it will turn and should offer us the opportunity to prosper.

Very truly yours,

James O. Miller
President & CEO

ANNUAL REPORT

CONTENTS


Five –Year Selected Consolidated Financial Data			1

Common Stock and Shareholder Matters			5

General Development of Business			5

Management’s Discussion and Analysis of Financial Condition and Results of Operations			6

Quantitive and Qualitative Disclosures about Market Risk			21

Financial Statements
Management’s Report on Internal Control over 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 Operations			29
Consolidated Statements of Changes in Shareholders’ Equity			30
Consolidated Statements of Cash Flow			33
Notes to Consolidated Financial Statements			35

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Five-Year Selected Consolidated Financial Data

(Dollars in thousands, except per share data)


	Year ended December 31,
	2008			2007			2006		2005			2004
Statements of income:
Total interest and dividend income	$	62,267		$	49,947		$	45,876	$	42,438		$	33,836
Total interest expense		21,780			20,371			15,615		11,591			8,163

Net interest income		40,487			29,576			30,261		30,847			25,673
Provision for loan losses		8,207			1,020			1,128		1,123			1,805

Net interest income after provision for loan losses		32,280			28,556			29,133		29,724			23,868

Security gains/(losses)		193			(1	)		—		(13	)		107
Other noninterest income		9,463			7,506			6,670		7,851			6,094

Total noninterest income		9,656			7,505			6,670		7,838			6,201

Goodwill Impairment		43,291			—			—		—			—
Other noninterest expense		36,254			26,163			26,977		27,929			23,332

Total noninterest expense		79,545			26,163			26,977		27,929			23,332

Income (loss) before federal income taxes		(37,609	)		9,898			8,826		9,633			6,737
Federal income tax expense		1,369			3,013			2,666		2,974			1,924

Net income (loss)	$	(38,978	)	$	6,885		$	6,160	$	6,659		$	4,813

Net income excluding impairment charge⁽¹⁾	$	4,313		$	6,885		$	6,160	$	6,659		$	4,813


Per share of common stock:
Earnings (loss) (basic and diluted)	$	(5.06	)	$	1.25		$	1.12	$	1.15		$	0.92
Earnings (basic and diluted) excluding impairment charge⁽¹⁾		0.56			1.25			1.12		1.15			0.92
Dividends		0.91			1.12			1.12		1.12			1.08
Book value		9.94			16.37			14.53		15.02			15.19

Average common shares outstanding:
Basic		7,707,917			5,505,023			5,520,692		5,804,361			5,211,904
Diluted		7,707,917			5,505,023			5,520,692		5,805,681			5,216,557

Year-end balances:
Loans, net	$	787,789		$	787,386		$	549,665	$	514,770		$	556,188
Securities		167,159			158,920			119,398		136,674			163,451
Total assets		1,053,611			1,119,257			748,986		750,936			817,510
Deposits		809,921			839,820			564,551		577,105			647,045
Borrowings		155,038			145,051			96,754		81,402			78,322
Shareholders’ equity		76,617			126,156			79,472		87,110			88,213

Average balances:
Loans, net	$	791,298		$	579,025		$	530,409	$	532,620		$	499,284
Securities		163,054			118,542			126,645		150,184			120,088
Total assets		1,099,943			780,769			739,571		780,321			681,644
Deposits		808,646			574,133			566,584		609,564			539,635
Borrowings		162,400			118,375			87,825		80,056			68,110
Shareholders’ equity		123,468			78,435			80,182		86,586			71,422

Five-Year Selected Ratios


	Year ended December 31,
	2008			2007			2006			2005			2004
Net yield on average interest-earning assets		4.18	%		4.17	%		4.49	%		4.31	%		4.07	%
Return on average total assets		(3.54	)		0.89			0.83			0.85			0.71
Return on average total assets, excluding impairment charge⁽¹⁾		0.39			0.89			0.83			0.85			0.71
Return on average shareholders’ equity		(31.57	)		8.78			7.68			7.69			6.74
Return on average shareholders’ equity, excluding impairment charge⁽¹⁾		3.49			8.78			7.68			7.69			6.74
Average shareholders’ equity as a percent of average total assets		11.22			10.05			10.84			11.10			10.48
Net loan charge-offs as a percent of average total loans		0.84			0.52			0.42			0.66			0.43
Allowance for loan losses as a percent of loans at year-end		1.11			0.93			1.45			1.76			2.06
Shareholders’ equity as a percent of total year-end assets		7.27			11.28			10.61			11.60			10.79


⁽¹⁾		Net income (loss) for 2008 has been adjusted for the impairment charge to goodwill. Net income excluding the impairment charge equals net income (loss) for the period plus the impairment charge of $43,291.

Non-GAAP Financial Measures: Management uses certain non-GAAP (generally accepted accounting principles) financial measures to evaluate The Corporation’s performance. Specifically, management reviews each of the following before impairment charge; net income, per share earnings (diluted), return on average assets and return on average equity. Net income excluding the impairment charge equals net income for the year plus the impairment charge to goodwill of $43,291. Management believes the adjusted performance metrics present a more reasonable view of the Corporation’s operating performance and ensures comparability of operating performance from period to period. Provided are reconciliations of net income (loss) to net income before impairment charge, net income (loss) per share (diluted) to net income per share (diluted) before impairment charge, return on average assets to return on average assets before impairment charge and return on average equity to return on average equity before impairment charge. These reconciliations are presented to comply with SEC Regulation G and not as an indication that the adjusted performance metrics are a substitute for net income (loss), net income (loss) per share (diluted), return on average assets or return on average equity determined by GAAP.


	Year ended December 31,
	2008			2007			2006			2005			2004
Reconciliation of net income (loss) to net income excluding impairment charge

Net income (loss)	$	(38,978	)	$	6,885		$	6,160		$	6,659		$	4,813
Plus goodwill impairment charge		43,291			—			—			—			—

Net income before impairment charge	$	4,313		$	6,885		$	6,160		$	6,659		$	4,813


Reconciliation of net income (loss) per share (diluted) to net income per share (diluted) excluding impairment charge

Net income (loss) per share	$	(5.06	)	$	1.25		$	1.12		$	1.15		$	0.92
Plus goodwill impairment charge per share		5.62			—			—			—			—

Net income per share before impairment charge	$	0.56		$	1.25		$	1.12		$	1.15		$	0.92


Reconciliation of return on average assets to return on average assets excluding impairment charge

Return on average assets		(3.54	)%		0.89	%		0.83	%		0.85	%		0.71	%
Plus goodwill impairment charge		3.93			—			—			—			—

Return on avg. assets before impairment charge		0.39	%		0.89	%		0.83	%		0.85	%		0.71	%


Reconciliation of return on average equity to return on average equity excluding impairment charge

Return on average equity		(31.57	)%		8.78	%		7.68	%		7.69	%		6.74	%
Plus goodwill impairment charge		35.06			—			—			—			—

Return on avg. equity before impairment charge		3.49	%		8.78	%		7.68	%		7.69	%		6.74	%

Stockholder 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, 2003 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 ofForm 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, 2008, there were 7,707,917 shares outstanding held by approximately 1,444 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.

2008


First Quarter	Second Quarter	Third Quarter	Fourth Quarter
$13.20 to $15.50	$11.01 to $14.84	$9.00 to $13.44	$5.37 to $10.12

2007


First Quarter	Second Quarter	Third Quarter	Fourth Quarter
$19.55 to $20.20	$16.68 to $19.89	$17.27 to $18.50	$13.56 to $17.77

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


	2008		2007
First quarter	$	.28	$	.29
Second quarter		.28		.29
Third quarter		.20		.27
Fourth quarter		.15		.27


	$	0.91	$	1.12

Information regarding potential restrictions on dividends paid can be found in Note 18 to the Consolidated Financial Statements.

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 $1,053,611 at December 31, 2008. 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. Citizens maintains its main office at 100 East Water Street, Sandusky, Ohio and operates branch banking offices in the following Ohio communities; Sandusky (2), Norwalk (2), Berlin Heights, Huron, Castalia, New Washington, Shelby (3), Willard, Crestline, Chatfield, Tiro, Greenwich, Plymouth, Shiloh, Akron, Dublin, Hilliard, Plain City, Russells Point, Urbana (2) , West Liberty and Quincy. Additionally, Citizens currently operates a loan production office in Port Clinton, Ohio. In the third quarter of 2008 the Corporation closed its loan production offices located in Marion, Ohio and Marysville, Ohio. Citizens accounts for 99.8% of the Corporation’s consolidated assets at December 31, 2008.

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. This subsidiary accounts for less than one percent of the Corporation’s consolidated assets as of December 31, 2008.

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, 2008.

WATER STREET PROPERTIES (Water St.) was formed to hold properties repossessed by FCBC subsidiaries. Water St. accounted for less than one percent of the Corporation’s consolidated assets as of December 31, 2008.

FIRST CITIZENS INVESTMENTS, INC (FCI) is wholly-owned by Citizens to hold and manage its securities portfolio. The operations of FCI are located in Wilmington, Delaware.

FIRST CITIZENS CAPITAL LLC (FCC) is wholly-owned by Citizens to hold inter-company debt that is eliminated in consolidation. The operations of FCC are located in Wilmington, Delaware.

Management’s Discussion and Analysis of Financial Condition and Results of Operations — As of December 31, 2008 and December 31, 2007 and for the Years Ending December 31, 2008, 2007 and 2006

(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, 2008 and 2007, and during the three-year period ended December 31, 2008. 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, 2008, total assets were $1,053,611, compared to $1,119,257 at December 31, 2007. The decrease in assets is primarily the result of a $43,291 impairment charge to goodwill. Additionally, federal funds sold decreased by $18,408 from the end of the year 2007. The decrease in federal funds sold is reflective of decreases in deposits. Other factors contributing to the decrease in assets are discussed in the following sections.

At $787,789, net loans are nearly unchanged from December 31, 2007, up only 0.1%. The mix of the loan portfolio did shift in 2008. Growth in Commercial and Commercial Real Estate of $26,985 was offset by a decline in Residential Real Estate, Real Estate Construction and Consumer loans by $23,000. The decline in the consumer loan portfolio has continued largely due to products such as same as cash loans and other lending alternatives in the market place that are being used by consumers rather than the traditional consumer lending that the Corporation offers. These changes were also the product of management’s approach over the last half of the year. Our focus became more about asset quality and less about loan growth. Some of the changes we made were to reduce the loan-to-value requirement on new Commercial loans, changed collateral value limits on certain new Agricultural loans and reduced loan-to-value limits on residential Home Equity Lines of Credit. We also refocused on selling fixed rate mortgages on the secondary market, rather than booking them into the portfolio. While the primary goal was to try to improve asset quality, a secondary result was that these measures helped preserve liquidity.

Year-end deposit balances totaled $809,921 in 2008 compared to $839,820 in 2007, a decrease of $29,899, or 3.6%. Non-interest bearing demand and savings accounts decreased by $15,783 and $23,151, respectively, from 2007 to 2008, while interest bearing demand and time deposit accounts increased by $3,951 and $5,084, respectively, from 2007 to 2008. 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. Average deposit balances for 2008 were $808,646 compared to $574,133 for 2007, an increase of 40.8%. Non-interest bearing deposits averaged $124,541 for 2008, compared to $89,171 for 2007, increasing $35,370, or 39.7%. Savings, NOW, and MMIA accounts averaged $356,603 for 2008 compared to $250,938 for 2007. Average certificates of deposit increased $93,478 to total an average balance of $234,024 for 2007. All of the increase in average balances was the result of the mergers with Champaign National Bank and Miami Valley Bank.

Borrowings from the Federal Home Loan Bank of Cincinnati were $69,982 at December 31, 2008. The detail of these borrowings can be found in Note 9 to the Consolidated Financial Statements. The increase of $5,512 from year-end 2007 was primarily the result an additional $5,000 long-term FHLB advance in the first quarter of 2008. The term on the advance is eighty-four months and has a fixed rate of 2.84%, and is callable after thirty-six months.

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 $31,143 at December 31, 2008 compared to $27,395 at December 31, 2007. Obligations of U.S. government agencies maintained under Citizens’ control are pledged as collateral for the repurchase agreements.

Securities available for sale increased a total of $6,585, or 4.6% from $144,351 on December 31, 2007 to $150,936 on December 31, 2008. U.S. Treasury securities and obligations of U.S. government agencies decreased $19,212, from $95,723 at December 31, 2007 to $76,511 at December 31, 2008. Obligations of states and political subdivisions available for sale increased $6,232 from 2007 to 2008. Mortgage-backed securities increased by $19,370 to total $39,076 at December 31, 2008. The Corporation continued utilizing letters of credit from the Federal Home Loan Bank (FHLB) to replace maturing securities that were pledged for public entities. As of December 31, 2008, the Corporation was in compliance with all pledging requirements.

Mortgage-backed securities totaled $39,076 at December 31, 2008 and none are considered unusual or “high risk” securities as defined by regulating authorities. Of this total, $34,579 are pass-through securities issued by the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC) and $4,497 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, 2008 was 5.79%. The average maturity at December 31, 2008 was approximately 9.55 years. The Corporation has not invested in any derivative securities.

Securities available for sale had an estimated fair value at December 31, 2008 of $150,936. This fair value includes unrealized gains of approximately $2,696 and unrealized losses of approximately $320. Net unrealized gains totaled $2,376 on December 31, 2008 compared to net unrealized gains of $944 on December 31, 2007. The change in unrealized gains is primarily due to changes in market interest rates. Note 3 to the Consolidated Financial Statements provides more information on unrealized gains and losses.

Premises and equipment, net of accumulated depreciation, decreased $597 from December 31, 2007 to December 31, 2008. The decrease in office premises and equipment is attributed to new purchases of $823, depreciation of $1,986 and disposals of $153. Premises and equipment, net, held for sale totaling $719 at December 31, 2007 consisted of a closed branch in Norwalk, Ohio. This building is currently being used as a storage facility and was returned to the fixed asset portfolio in 2008.

Total shareholders’ equity decreased $49,539, or 39.3% during 2008 to $76,617. Net losses of $38,978 were the largest piece of the decline in equity. The loss can be further broken down into operating earnings of $4,313 and goodwill impairment charge of $43,291. The decline in equity is also made up of dividends paid of $7,014 and the increase in the market value of securities available for sale, net of tax, of $945. The remaining change in shareholders’ equity consisted of the change in the Corporation’s pension liability, net of tax of ($4,492). For further explanation of these items, see Note 1 and Note 14 to the Consolidated Financial Statements. The Corporation paid a cash dividend on February 1, 2008 and May 1, 2008 at a rate of $.28 per share, on August 1, 2008 at a rate of $.20 per share and November 1, 2008, at a rate of $.15 per share. Total outstanding shares at December 31, 2008 were 7,707,917. The ratio of total shareholders’ equity to total assets was 7.3% at December 31, 2008 compared to 11.3% at December 31, 2007.

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, 2008 and December 31, 2007

Net Income (Loss)

The Corporation’s net loss for the year ended December 31, 2008 was $38,978, compared to net income of $6,885 for the year ended December 31, 2007. The net loss in 2008 would have been net income of $4,313 without the goodwill impairment of $43,291. The change in net income was the result of the items discussed in the following sections.

Net Interest Income

Net interest income for 2008 was $40,487, an increase of $10,911, or 36.9% from 2007. The change in net interest income for 2008 was the result of an increase in interest income on earning assets of $12,320 from 2007. Average earning assets increased 36.5 percent from 2007 from a combination of organic growth and an acquisition. Average loans increased 36.2 percent over 2007, mainly due to the acquisition of Futura Banc Corporation. This increase was partially offset by an increase in interest expense on interest-bearing liabilities of $1,409. Average balances in time deposits increased 40.3 percent from 2007, mainly due to the acquisition of Futura Banc Corporation and the assumption of deposits from Miami Valley Bank. 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 $12,320, or 24.7% for 2008. The increase in income was a result of the increase in volume on the interest earning assets. Average loans increased $212,524 from 2007 to 2008. Interest earned on the Corporation’s loan portfolio grew as the increase in average balances offset the decline in yield of 73 basis points. The average balance of the securities portfolio for 2008 compared to 2007 increased $40,118, mainly due to the acquisition of Futura Banc Corporation. Interest earned on the security portfolio, including bank stocks, increased mainly due to the increase in average balances. Average balances of Federal Funds sold and interest-bearing deposits in other banks increased $2,015.

Total interest expense increased $1,409, or 6.9% for 2008 compared to 2007. The increase in interest expense can be attributed to an increase volume on average interest-bearing liabilities offset by a decline in the rate paid. Total average balance of interest-bearing liabilities increased $243,168 while the average rate decreased 81 basis points in 2008. Average interest-bearing deposits increased $199,143 from 2007 to 2008. The increase in average interest-bearing deposits offset by a decline in rate of approximately 65 basis points caused interest expense on deposits to increase $1,318. Interest expense on FHLB borrowings decreased $57 due primarily to the decrease in rate paid on the borrowings of 99 basis points. The average balance in subordinated debenture increased $4,397 from 2007 to 2008, but the rate on these securities decreased 114 basis points, resulting in a decrease in interest expense of $43. The increase in subordinated debentures is the result of the Corporation acquiring two additional trust preferred securities as part of the Futura acquisition. Other borrowings increased in balance from $29,102 in 2007 to $56,427 in 2008. The increase in other borrowings is mainly the result of the Corporation securing a borrowing agreement with Key Bank, NA. At December 31, 2008, $20,500 was outstanding on the borrowing. The additional borrowings resulted in an increase in interest expense of $191.

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 16 through 18 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, 2008.


	As of and for year ended
	December 31,
	2008			2007			2006
Net loan charge-offs	$	6,719		$	2,983		$	2,280
Provision for loan losses charged to expense		8,207			1,020			1,128
Net loan charge-offs as a percent of average outstanding loans		0.84	%		0.52	%		0.42	%
Allowance for loan losses	$	8,862		$	7,374		$	8,060
Allowance for loan losses as a percent of year-end outstanding loans		1.11	%		0.93	%		1.45	%
Allowance for loan losses as a percent of impaired loans		60.55	%		56.88	%		48.13	%
Impaired loans	$	14,637		$	12,965		$	16,746
Impaired loans as a percent of gross year-end loans⁽¹⁾		1.84	%		1.64	%		3.00	%
Nonaccrual and 90 days or more past due loans as a percent of gross year-end loans⁽¹⁾		2.64	%		1.48	%		1.85	%


⁽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 sufficient to provide for probable losses incurred in the current portfolio. 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 Corporation provides for loan losses through regular provisions to the allowance for loan losses. The provision is affected by net charge-offs on loans and changes in specific and general allocations required on the allowance for loan losses. Provisions for loan losses totaled $8,207, $1,020, and $1,128, in 2008, 2007 and 2006, respectively. The Corporation’s provision for loan losses increased during 2008 in conjunction with an increase in the Corporation’s level of non-performing loans resulting from a rapid deterioration in local economic conditions. Impaired loans at December 31, 2008 were $14,637 or 1.8 percent of gross year-end loans, compared to $12,925 or 1.6 percent of gross loans outstanding at December 31, 2007. In addition, nonaccrual and 90 days or more past due loans as a percent of gross loans were 2.6 percent at December 31, 2008 compared to 1.4 percent at December 31, 2007.

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 pools of similar loans, historical reserve allocations

and current 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 $9,656 in 2008 compared to $7,505 in 2007, an increase of 28.6%. In addition to the increase related to the 2007 mergers, the significant items contributing to this change are as follows.

Service charges paid to Citizens increased $1,221 compared to 2007, the increased revenues were primarily due to higher volumes in deposit accounts from acquisitions. Revenue from computer operations decreased in 2008, down $132 from 2007 due to a decrease in the number of financial institutions for which processing is provided. Revenue from bank owned life insurance decreased $41 in 2008 compared to the same period in 2007. Sales of other real estate owned resulted in recognized losses of $313 in 2008 compared to losses of $243 for 2007. The disposal of premises and equipment in 2008 resulted in a loss of $137 compared to losses of $64 for 2007, which led to an increase of $73 from last year.

Noninterest Expense

Noninterest expense totaled $79,545 in 2008, an increase of $53,382, or 204.0% over 2007. The following discussion highlights the significant items that resulted in increases or decreases in the components of noninterest expense.

Salaries and wages totaled $14,388 in 2008 compared to $10,908 in 2007 for an increase of $3,480. The increase in salaries was attributable to an increase of approximately 37 full-time equivalent employees compared to 2007. In addition, approximately $137 of severance cost relating to branch restructuring and loan production office closures were posted in the third quarter of 2008. Employees increased due to the acquisition of Futura Banc Corporation and the assumption of deposits of Miami Valley Bank in the fourth quarter of 2007. The Corporation subsequently purchased one of Miami Valley’s branch banking offices, and retained the employees of that branch. The Corporation’s self-insured health plan costs decreased $169 in 2008, as the Corporation continues to monitor and adapt the plan to better manage the continued increases in medical costs. The Corporation’s pension plan expenses decreased $607 in 2008 compared to 2007. This decrease was due to a plan amendment that prevents new employees from entering the defined benefit plan of the Corporation after January 1, 2007. The decrease was also due to settlement expenses in 2007 that we did not have in 2008.

Net occupancy expense increased $914 from $1,432 in 2007 to $2,346. The increase was a result of the acquisition of Futura Banc Corporation and subsequent purchase of one of Miami Valley’s branch banking offices.

Equipment expense increased $1,057 as a result of the acquisition of Futura Banc Corporation and subsequent purchase of one of Miami Valley’s branch banking offices. In addition, new equipment purchases by SCC to replace and update proof and image capabilities contributed to the increase as well.

Computer processing expense increased by $346 compared to last year primarily due to conversion costs associated with acquisitions.

State franchise taxes increased $259 in 2008 compared to 2007. This increase is attributable to the acquisitions in 2007.

Professional services expenses increased for 2008 compared to 2007 by $706. The primary cause of this increase is due to merger related audit fees, increased post merger legal fees associated with lending and collection activities and from consulting fees for employment searches.

Other expense increased in 2008 compared to 2007 by $46,542. The large increase includes $43,291 for goodwill impairment charges. Excluding the goodwill impairment charge, other expenses increased $3,251 in 2008. Amortization of intangible assets increased $735 from 2007, due to an increase in intangible assets, which is the result of the merger with Futura and acquisition of deposits from Miami Valley Bank. Other operating expense increases were primarily a result of merger, integration and restructuring charges recognized from the acquisition of Futura Banc Corporation.

The FDIC board agreed to impose an emergency special assessment of 20 basis points on all banks to restore the Deposit Insurance Fund to an acceptable level. The assessment, which will be payable on September 30, 2009 is in addition to a planned increase in premiums and a change in the way regular premiums are assessed which the board also approved at its Friday morning meeting. The Corporations expects the impact of the emergency special assessment will be material.

Income Tax Expense

Income before federal income taxes amounted to ($37,609) in 2008 and 9,898 in 2007. The Corporation’s effective income tax rate for 2008 was (3.5%) as a result of the non-tax deductible goodwill impairment. Without the goodwill impairment, the 2008 effective tax rate would have been 24.4%, compared to 30.4% in 2007.

Comparison of Results of Operations for the Year Ended December 31, 2007 and December 31, 2006

Net Income

The Corporation’s net income for the year ended December 31, 2007 was $6,885, compared to $6,160 for the year ended December 31, 2006, an increase of $725 or 11.8%. The increase in net income was the result of the items discussed in the following sections.

Net Interest Income

Net interest income for 2007 was $29,576, a decrease of $685, or 2.3% from 2006. The change in net interest income for 2007 was the result of an increase in interest income on earning assets of $4,071 from 2006, or 33 basis points. This increase was offset by an increase in rate paid on interest-bearing liabilities of $4,756, or 60 basis points. Average balances in time deposits increased $11,544 and the yield on these deposits increased 71 basis points from 2006. 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 $4,071, or 8.9% for 2007. The increase in income was a result of the increase in volume on the interest earning assets. Average loans increased $47,648 from 2006 to 2007. Interest earned on the Corporation’s loan portfolio grew as the increase in average balances offset the decline in yield of 4 basis points. The average balance of the securities portfolio for 2007 compared to 2006 decreased $8,103. Interest earned on the security portfolio, including bank stocks, increased due to the decrease in volume offsetting a increase in rate earned on these assets of 93 basis points. Average balances of Federal Funds sold and interest-bearing deposits in other banks decreased $2,468.

Total interest expense increased $4,756, or 30.5% for 2007 compared to 2006. The increase in interest expense can be attributed to an increase in the both the rate and volume on average interest-bearing liabilities. Total average balance of interest-bearing liabilities increased $41,310 while the average rate increased 60 basis points in 2007. Average interest-bearing deposits increased $10,760 from 2006 to 2007. The increase in rate of approximately 56 basis points caused interest expense on deposits to increase $2,967. Interest expense on FHLB borrowings increased $1,767 due primarily to the increase in rate paid on the borrowings of 92 basis points, along with an increase in balance of $28,803. The average balance in subordinated debenture increased $178 from 2006 to 2007, but the rate on these securities decreased 17 basis points, resulting in a decrease in expense of $32. Other borrowings increased in balance from $27,533 in 2006 to $29,102 in 2007. The rate on these borrowings also increased, resulting in an increase in expense of $54.

Provision and Allowance for Loan Losses


	As of and for year ended
	December 31,
	2007			2006			2005
Net loan charge-offs	$	2,983		$	2,280		$	3,617
Provision for loan losses charged to expense		1,020			1,128			1,123
Net loan charge-offs as a percent of average outstanding loans		0.52	%		0.42	%		0.66	%
Allowance for loan losses	$	7,374		$	8,060		$	9,212
Allowance for loan losses as a percent of year-end outstanding loans		0.93	%		1.45	%		1.76	%
Allowance for loan losses as a percent of impaired loans		56.88	%		48.13	%		67.39	%
Impaired loans	$	12,965		$	16,746		$	13,669
Impaired loans as a percent of gross year-end loans⁽¹⁾		1.64	%		3.00	%		2.61	%
Nonaccrual and 90 days or more past due loans as a percent of gross year-end loans⁽¹⁾		1.48	%		1.85	%		2.81	%


⁽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.

on the allowance for loan losses. Provisions for loan losses totaled $1,020, $1,128, and $1,123, in 2007, 2006 and 2005, respectively. The Corporation’s provision for loan losses declined during 2007 in conjunction with a decline in the Corporation’s level of non-performing loans. Impaired loans at December 31, 2007 were $12,925 or 1.6 percent of gross year-end loans, compared to $16,746 or 3.0 percent of gross loans outstanding at December 31, 2006. In addition, nonaccrual and 90 days or more past due loans as a percent of gross loans were 1.4 percent at December 31, 2007 compared to 1.8 percent at December 31, 2006.

Noninterest Income

Noninterest income totaled $7,505 in 2007 compared to $6,670 in 2006, an increase of 12.5%. The significant items contributing to this change are as follows.

Service charges paid to Citizens increased $335 compared to 2006, primarily due to two reasons. Citizens revamped personal checking account offerings in December 2006, which include value added features. Citizens also provided a re-disclosure of its Check Protect Policy in the third quarter of 2006. Both of these enhancements led to increased product usage and associated fees. Revenue from computer operations decreased in 2007, down $50 from 2006 due to a decrease in the number of financial institutions for which processing is provided. Revenue from bank owned life insurance increased $184 in 2007 compared to the same period in 2006. The Corporation purchased $10,000 of bank owned life insurance late in the second quarter of 2006. Sales of other real estate owned resulted in recognized losses of $243 in 2007 compared to losses of $663 for 2006. The sale of premises and equipment in 2007 resulted in a small loss of $64 compared to the sale of a building that had been used as a storage facility for a $148 gain in 2006, which led to a decrease of $212 from last year.

Noninterest Expense

Noninterest expense totaled $26,163 in 2007, a decrease of $814, or 3.0% over 2006. The following discussion highlights the significant items that resulted in increases or decreases in the components of noninterest expense.

Salaries and wages totaled $10,908 in 2007 compared to $11,246 in 2006 for a decrease of $338. The decrease in salaries was attributable to a decrease in wage expense for deferred loan costs. The Corporation’s self-insured health plan costs decreased $115 in 2007, as the Corporation continues to monitor and adapt the plan to better manage the continued increases in medical costs. The Corporation’s pension plan expenses decreased $107 in 2007 compared to 2006. This decrease was due to a plan amendment that prevents new employees from entering the defined benefit plan of the Corporation after January 1, 2007.

Net occupancy expense decreased $8 from $1,440 in 2006 to $1,432. The reduction was a result of reduced building repairs and maintenance.

Equipment expense increased $14 as a result of new equipment purchases by SCC to replace and update proof and image capabilities.

Computer processing expense decreased by $35 compared to last year primarily due to the Corporation renegotiating its contract with its service provider.

State franchise taxes increased $139 in 2007 compared to 2006. In 2006 Citizens paid a special dividend to the holding company for a tender offer, which reduced its state franchise tax liability.

Professional services expenses decreased for 2007 compared to 2006 by $388. The primary cause of this decrease 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 in 2006. Also, an increase in legal fees paid to handle an increase in foreclosure work at Citizens was experienced in 2006.

ATM expense and stationery and supplies increased in 2007. ATM expense increased $69 compared to 2006. Stationery and supplies increased $62 from 2006. In 2007, Citizens began to use “Citizens Bank”, along with a brand mark, as part of a branding initiative. As a result of this change, items such as letterhead, envelopes, teller stamps and other items needed to be reordered.

Other expense increased in 2007 compared to 2006 by $64. The primary reason for this increase was due to an increase of $59 in amortization of intangible assets, which is the result of the merger with Futura and acquisition of deposits from Miami Valley Bank. In addition, courier expense increased $13 from 2006. This increase is also the result of the merger with Futura.

Income Tax Expense

Income before federal income taxes amounted to $9,898 in 2007 and $8,826 in 2006. The Corporation’s effective income tax rate for 2007 remained relatively unchanged from a year ago. The 2007 effective tax rate was 30.4%, compared to 30.2% in 2006.

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

The following table sets forth, for the years ended December 31, 2008, 2007 and 2006, the distribution of assets, including interest amounts and average rates of major categories of interest-earning assets and interest-bearing liabilities (Dollars in thousands):


	2008								2007								2006
	Average					Yield/			Average					Yield/			Average					Yield/
Assets	balance			Interest		rate			balance			Interest		rate			balance			Interest		rate
Interest-earning assets:
Loans (1)(2)(3)	$	799,413		$	54,116		6.77	%	$	586,889		$	43,999		7.50	%	$	539,241		$	40,637		7.54	%
Taxable securities (4)		131,800			6,743		5.15	%		101,933			5,045		4.65	%		106,942			4,113		3.56	%
Non-taxable securities (4)(5)		31,254			1,270		4.07	%		16,609			673		4.06	%		19,703			814		4.21	%
Federal funds sold		3,139			52		1.66	%		3,561			151		4.24	%		6,076			278		4.58	%
Interest-bearing deposits in other banks		3,076			86		2.76	%		639			79		12.36	%		592			34		5.74	%

Total interest-earning assets		968,682			62,267		6.42	%		709,631			49,947		7.15	%		672,554			45,876		6.82	%
Noninterest-earning assets:
Cash and due from financial institutions		20,922								14,821								16,956
Premises and
equipment, net		21,863								12,003								11,841
Accrued interest receivable		6,820								5,190								4,703
Intangible assets		74,489								29,213								29,744
Other assets		4,166								7,174								6,248
Bank owned life insurance		11,116								10,601								6,357
Less allowance for loan losses		(8,115	)							(7,864	)							(8,832	)

Total	$	1,099,943							$	780,769							$	739,571


(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 $483 in 2008, $225 in 2007 and $1,051 in 2006.

(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, 2008, 2007 and 2006, 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):


	2008							2007							2006
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	$	356,603	$	4,060		1.14	%	$	250,938	$	4,021		1.60	%	$	251,722	$	3,119		1.24	%
Certificates of deposit		327,502		11,316		3.46	%		234,024		10,037		4.29	%		222,480		7,973		3.58	%
Federal Home Loan Bank advances		77,563		3,131		4.04	%		63,321		3,188		5.03	%		34,518		1,420		4.11	%
Securities sold under repurchase agreements		31,700		548		1.73	%		23,133		941		4.07	%		19,000		769		4.05	%
Notes payable		21,074		947		4.49	%		4,624		318		6.88	%		7,367		455		6.18	%
Subordinated debentures		30,349		1,748		5.76	%		25,952		1,791		6.90	%		25,774		1,823		7.07	%
U.S. Treasury demand notes payable		1,714		30		1.17	%		1,345		75		5.58	%		1,166		56		4.80	%

Total interest- bearing liabilities		846,505		21,780		2.57	%		603,337		20,371		3.38	%		562,027		15,615		2.78	%

Noninterest-bearing liabilities:
Demand deposits		124,541							89,171							92,382
Other liabilities		5,429							9,826							4,980

		129,970							98,997							97,362
Shareholders’ equity		123,468							78,435							80,182

Total	$	1,099,943						$	780,769						$	739,571

Net interest income and interest rate spread			$	40,487		3.85	%			$	29,576		3.77	%			$	30,261		4.04	%

Net yield on interest- earning assets						4.18	%						4.17	%						4.49	%

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.


	2008 compared to 2007									2007 compared to 2006
	Increase (decrease) due to:									Increase (decrease) due to:
	Volume⁽¹⁾			Rate⁽¹⁾			Net			Volume⁽¹⁾			Rate⁽¹⁾			Net
							(Dollars in thousands)
Interest income:
Loans	$	14,713		$	(4,597	)	$	10,116		$	3,573		$	(211	)	$	3,362
Taxable securities		1,549			150			1,699			(238	)		1,170			932
Nontaxable securities		598			—			598			(113	)		(28	)		(141	)
Federal funds sold		(16	)		(83	)		(99	)		(108	)		(19	)		(127	)
Interest-bearing deposits in other banks		107			(101	)		6			3			42			45

Total interest-earning assets	$	16,951		$	(4,631	)	$	12,320		$	3,117		$	954		$	4,071


Interest expense:

Savings and interest-bearing demand accounts		1,403			(1,364	)		39			(10	)		913			903
Certificates of deposit		3,485			(2,206	)		1,279			431			1,633			2,064
Federal Home Loan Bank advances		642			(689	)		(47	)		1,394			373			1,767
Securities sold under repurchase agreements		270			(663	)		(393	)		168			4			172
Note payable		774			(145	)		629			(184	)		47			(137	)
Subordinated debentures		278			(321	)		(43	)		13			(45	)		(32	)
U.S. Treasury demand notes payable		16			(71	)		(55	)		9			10			19

Total interest-bearing liabilities	$	6,868		$	(5,459	)	$	1,409		$	1,821		$	2,935		$	4,756


Net interest income	$	10,083		$	828		$	10,911		$	1,296		$	(1,981	)	$	(685	)


(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. All securities are classified as available for sale. At December 31, 2008, securities with maturities of one year or less, totaled $8,141, or 5.6%, 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 2008 was $19,812. The primary additions to cash from operating activities are from changes in other assets, changes in accrued interest receivables, amortization of intangible assets, the provision for loan losses and depreciation. The goodwill impairment charge of $43,291 in 2008 did not impact cash and as a result had no impact on cash provided by operating activities. Cash from investing activities was $2,503 in 2008. Security purchases and increases in loans were offset by security maturities and a decrease in fed funds sold. Cash from financing activities in 2008 totaled $(23,011). The primary uses of cash in financing activities include the run-off of deposits, the payment of dividends and the change in note payables. The cash from financing activities included long-term FHLB borrowings, changes in securities sold under repurchase agreements, cash received in deposit acquisition and changes in U.S. Treasury interest-bearing demand notes payable. Cash from operating and investing activities was less than cash used by financing activities by $696, which resulted in a decrease in cash and cash equivalents to $26,649.

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, 2008, Citizens had total credit availability with the FHLB of $160,798 of which $69,982 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 2008, Citizens paid $11,576 in dividends to the Corporation, which accumulated cash at the Corporation to be used for general corporate purposes including funding payments on borrowings at the holding company level. At December 31, 2008, Citizens is unable to pay dividends to the Corporation without obtaining regulatory approval.

In addition to the restrictions placed on dividends by banking regulations, on January 23, 2009, the Corporation completed the issuance of $23 million of perpetual preferred stock and related warrants under the U.S. Department of Treasury’s voluntary Capital Purchase Program (CPP). The Board and Management believe that while the Corporation was “Well Capitalized” under regulatory guidelines prior to the capital addition, in the currently uncertain economic environment it was prudent to further strengthen the Corporation’s capital position. Pursuant to our participation in the CPP, dividends paid on common stock cannot be increased nor can common shares be repurchased without the Treasury’s consent until the earlier of, the Corporation redeems all of those shares, the third anniversary of the date of the perpetual stock or the Treasury has transferred them to third parties.

The Corporation manages its liquidity and capital through quarterly Asset/Liability Committee (ALCO) meetings. The ALCO discusses issues like those in the above paragraphs as well as others that will affect future liquidity and capital position of the Corporation. The ALCO 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, 2008 and 2007 were 11.3% and 10.3% respectively for total risk-based capital, and 7.9% and 7.3% respectively for Tier I risk-based capital. The Corporation has elected to participate in the Treasury’s Capital Purchase Program. This participation will lead to improvement of the Corporation’s capital ratios. Upon completion, the Corporation’s total risk-based capital ratio will be 15.01% and the Tier I risk-based capital ratio will be 11.65%

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 5.8% and 7.7% at December 31, 2008 and 2007. As with the risk-based capital ratios above, the leverage ratio will also improve as a result of the Corporation’s participation in the Treasury’s Capital Purchase Program. The leverage ratio will be 8.36%

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, 2008 and 2007 in Note 16 to the Consolidated Financial Statements. The fair value of loans at December 31, 2008 was 101.9% of the carrying value compared to 100.7% at December 31, 2007. The fair value of deposits at December 31, 2008 was 100.1% of the carrying value compared to 100.0% at December 31, 2007.

Contractual Obligations

The following table represents significant fixed and determinable contractual obligations of the Corporation as of December 31, 2008.


	One year		One to		Three to		Over five
Contractual Obligations	or less		three years		five years		years		Total
Deposits without a stated maturity	$	470,434	$	—	$	—	$	—	$	470,434
Certificates of deposit		260,944		68,132		7,838		2,573		339,487
FHLB advances, securities sold under agreements to repurchase and U.S. Treasury interest- bearing demand note		44,751		30,068		22,569		7,723		105,111
Subordinated debentures⁽¹⁾		—		—		—		29,427		29,427
Long-term debt		—		—		20,500		—		20,500
Operating leases		306		450		409		438		1,603


(1)		The subordinated debentures consist of $2,000, $2,500, $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 Key Bank, N.A. 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, 2008 and 2007, 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, 2008 or 2007. 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, 2008								December 31, 2007
Change in	Dollar		Dollar			Percent			Dollar		Dollar			Percent
Rates	Amount		Change			Change			Amount		Change			Change
+200bp	$	106,377	$	(24	)		0	%	$	118,940	$	(26,162	)		-18	%
+100bp		107,705		1,304			1	%		133,346		(11,756	)		-8	%
Base		106,401		—			—			145,102		—		—
-100bp		112,159		5,758			5	%		152,879		7,777			5	%

The change in net portfolio value from December 31, 2007 to December 31, 2008, is primarily a result of two factors. First, while the entire yield curve has moved down, the largest decreases were on the short end of the curve. Secondly, the Corporation’s balance sheet mix has shifted due to increases in the investment portfolio funded by increased usage of borrowed funds and large CDs. As a result, the Corporation has seen a decrease in the base level of net portfolio value, due to an increase in the fair value of its liabilities, particularly deposits, but also borrowed funds. An upward movement in rates would lead to nearly identical decreases in the fair value of assets and liabilities, and would lead to a very small decrease in the net portfolio value. A downward change would lead to an increase in the net portfolio value as the fair value of assets would increase faster than the fair value of the liabilities.

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 assessing 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 5 in the Notes to Consolidated Financial Statements provide additional information regarding Allowance for Loan Losses.

Goodwill

SFAS No. 142 requires an annual evaluation of goodwill for impairment, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The financial events of 2008 and the impact they have had on capital markets, including the Corporation’s stock prompted management to perform a more extensive evaluation of the Corporation’s goodwill during the fourth quarter of 2008.

Management, with the assistance of outside valuation experts, calculated the estimated fair value of the Bank to be $125 million based on three valuation approaches; (i) the comparable transactions approach; (ii) the control premium approach; and, (iii) the discounted cash flow approach. Once it is determined that the fair value is materially less than the carrying value, FAS 142 requires a company to calculate the implied fair value of goodwill and compare it to the carrying value of goodwill. The amount of the excess of the carrying amount of goodwill over the implied amount of goodwill is the amount of the impairment loss, which was calculated at $43,291. As a result, the Corporation recorded a goodwill impairment charge of $43,291 which reduced the goodwill balance on its books to $21,720 from $66,235. The goodwill impairment charge was computed by determining the fair value of the Bank on a controlling interest basis. The fair value was considered to be the amount at which the Bank could be sold in a current transaction between willing parties, that is, other than a forced liquidation sale.

Management’s Report on Internal Control over Financial Reporting

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, 2008, 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, 2008, its system of internal control over financial reporting is effective and meets the criteria of the “Internal Control — Integrated Framework”. Crowe Horwath LLP, independent registered public accounting firm, has issued an audit report on the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2008.

Management is responsible for compliance with the federal and state laws and regulations concerning dividend restrictions and federal laws and regulations concerning loans to insider designated by the FDIC as safety and soundness laws and regulations.

Management has assessed compliance by the Company with the designated laws and regulations relating to safety and soundness. Based on the assessment, management believes that the Company complied, in all significant respects, with the designated laws and regulations related to safety and soundness for the year ended December 31, 2008.



James O. Miller		Todd A. Michel
President, Chief Executive Officer		Senior Vice President, Controller

Sandusky, Ohio
March 4, 2009

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

We have audited First Citizens Banc Corp.’s internal control over financial reporting as of December 31, 2008, 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 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, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, 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, First Citizens Banc Corp. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in 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, 2008 and 2007, 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, 2008 and our report dated March 4, 2009 expressed an unqualified opinion on those Consolidated Financial Statements.


		Crowe Horwath LLP

Cleveland, Ohio
March 4, 2009

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, 2008 and 2007, and the related statements of operations, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2008. 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, 2008 and 2007, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the First Citizen Banc Corp.’s internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 4, 2009 expressed an unqualified opinion thereon.


		Crowe Horwath LLP

Cleveland, Ohio
March 4, 2009

FIRST CITIZENS BANC CORP

CONSOLIDATED BALANCE SHEETS
December 31, 2008 and 2007
(In thousands, except share data)


	2008			2007
ASSETS
Cash and due from financial institutions	$	26,649		$	27,345
Federal funds sold		—			18,408
Securities available for sale		150,936			144,351
Loans, net of allowance of $8,862 and $7,374		787,789			787,386
Other securities		16,223			14,569
Premises and equipment, net		20,996			21,593
Premises and equipment, held for sale		—			719
Accrued interest receivable		5,764			7,142
Goodwill		21,720			66,235
Other intangible assets		7,780			9,689
Bank owned life insurance		11,365			10,876
Other assets		4,389			10,944

Total assets	$	1,053,611		$	1,119,257


LIABILITIES
Deposits
Noninterest-bearing	$	122,141		$	137,924
Interest-bearing		687,780			701,896

Total deposits		809,921			839,820
Federal Home Loan Bank advances		69,982			64,470
Securities sold under agreements to repurchase		31,143			27,395
U. S. Treasury interest-bearing demand note payable		3,986			2,259
Notes payable		20,500			21,500
Subordinated debentures		29,427			29,427
Accrued expenses and other liabilities		12,035			8,230

Total liabilities		976,994			993,101

SHAREHOLDERS’ EQUITY
Common stock, no par value, 20,000,000 shares authorized, 8,455,881 shares issued		114,365			114,365
Retained earnings (accumulated deficit)		(16,546	)		29,446
Treasury stock, 747,964 shares at cost		(17,235	)		(17,235	)
Accumulated other comprehensive loss		(3,967	)		(420	)

Total shareholders’ equity		76,617			126,156

Total liabilities and shareholders’ equity	$	1,053,611		$	1,119,257

See accompanying notes to consolidated financial statements.

FIRST CITIZENS BANC CORP

CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2008, 2007 and 2006
(In thousands, except per share data)


	2008			2007			2006
Interest and dividend income
Loans, including fees	$	54,116		$	43,999		$	40,637
Taxable securities		6,743			5,045			4,113
Tax-exempt securities		1,270			673			814
Federal funds sold and other		138			230			312

Total interest income		62,267			49,947			45,876
Interest expense
Deposits		15,376			14,058			11,091
Federal Home Loan Bank advances		3,131			3,188			1,421
Subordinated debentures		1,748			1,791			1,823
Other		1,525			1,334			1,280

Total interest expense		21,780			20,371			15,615

Net interest income		40,487			29,576			30,261
Provision for loan losses		8,207			1,020			1,128

Net interest income after provision for loan losses		32,280			28,556			29,133
Noninterest income
Computer center item processing fees		714			845			896
Service charges		4,779			3,558			3,223
Net gains (loss) on sale of securities		193			(1	)		—
Net gain on sale of loans		8			11			20
ATM fees		1,368			851			724
Trust fees		1,904			1,185			1,280
Gain/Loss on sale of Fixed Assets		(137	)		(64	)		148
Bank owned life insurance		489			530			346
Loss on sale of other real estate owned		(313	)		(243	)		(663	)
Other		651			833			696

Total noninterest income		9,656			7,505			6,670
Noninterest expense
Salaries and wages		14,388			10,908			11,246
Benefits		2,785			2,707			3,100
Net occupancy expense		2,346			1,432			1,440
Equipment expense		2,285			1,228			1,214
Contracted data processing		1,208			862			897
State franchise tax		1,132			873			734
Professional services		1,850			1,144			1,532
Amortization of intangible assets		1,467			732			673
ATM expense		718			530			461
Telephone		932			424			469
Courier		680			667			654
Goodwill impairment		43,291			—			—
Other operating expenses		6,463			4,656			4,557

Total noninterest expense		79,545			26,163			26,977

Income (loss) before income taxes		(37,609	)		9,898			8,826
Income tax expense		1,369			3,013			2,666

Net income (loss)	$	(38,978	)	$	6,885		$	6,160

Earnings (loss) per common share, basic and diluted	$	(5.06	)	$	1.25		$	1.12

Weighted average basic common shares		7,707,917			5,505,023			5,520,692

See accompanying notes to consolidated financial statements.

FIRST CITIZENS BANC CORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years ended December 31, 2008, 2007 and 2006
(In thousands, except per share data)


												Accumulated
												Other			Total
	Common Stock					Retained			Treasury			Comprehensive			Shareholders’
	Shares			Amount		Earnings			Stock			Income (Loss)			Equity
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 CHANGES IN SHAREHOLDERS’ EQUITY (Continued)
Years ended December 31, 2008, 2007 and 2006
(In thousands, except per share data)


												Accumulated
												Other			Total
	Common Stock					Retained			Treasury			Comprehensive			Shareholders’
	Shares			Amount		Earnings			Stock			Income (Loss)			Equity
Balance, December 31, 2006		5,471,300		$	68,430	$	28,634		$	(15,214	)	$	(2,378	)	$	79,472
Comprehensive Income:
Net Income							6,885									6,885
Change in funded status on pension benefits, net of tax													1,082			1,082
Change in unrealized gain/(loss) on securities available for sale, net of reclassification and tax effects													876			876

Total comprehensive income																8,843
Cash dividends ($1.12 per share)							(6,073	)								(6,073	)
Issuance of 2,343,617 shares for acquisition		2,343,617			45,935											45,935
Purchase of treasury stock, at cost		(107,000	)							(2,021	)					(2,021	)

Balance, December 31, 2007		7,707,917		$	114,365	$	29,446		$	(17,235	)	$	(420	)	$	126,156

See accompanying notes to consolidated financial statements.

FIRST CITIZENS BANC CORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Continued)
Years ended December 31, 2008, 2007 and 2006
(In thousands, except per share data)


					Retained						Accumulated
					Earnings						Other			Total
	Common Stock				(Accumulated			Treasury			Comprehensive			Shareholders’
	Shares		Amount		deficit)			Stock			Income (Loss)			Equity
Balance, December 31, 2007		7,707,917	$	114,365	$	29,446		$	(17,235	)	$	(420	)	$	126,156
Comprehensive Income:
Net Income (loss)						(38,978	)								(38,978	)
Change in funded status on pension benefits, net of tax												(4,492	)		(4,492	)
Change in unrealized gain/(loss) on securities available for sale, net of reclassification and tax effects												945			945

Total comprehensive income (loss)															(42,525	)
Cash dividends ($0.91 per share)						(7,014	)								(7,014	)

Balance, December 31, 2008		7,707,917	$	114,365	$	(16,546	)	$	(17,235	)	$	(3,967	)	$	76,617

See accompanying notes to consolidated financial statements.

FIRST CITIZENS BANC CORP

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2008, 2007 and 2006
(In thousands, except per share data)


	2008			2007			2006
Cash flows from operating activities
Net income (loss)	$	(38,978	)	$	6,885		$	6,160
Adjustments to reconcile net income to net cash from operating activities
Security amortization, net of accretion		(255	)		(416	)		(10	)
Depreciation		1,986			999			930
Gain (loss) on sale of fixed assets		137			64			(148	)
Amortization of intangible assets		1,467			732			673
Amortization of and valuation allowance on servicing rights		(43	)		(55	)		(53	)
Net realized (gain) loss on sale of securities		(193	)		1			—
FHLB stock dividends		(468	)		(127	)		(464	)
Provision for loan losses		8,207			1,020			1,128
Loans originated for sale		—			—			(188	)
Proceeds from sale of loans		—			—			208
Gain on sale of loans		(8	)		(11	)		(20	)
Loss on sale of OREO properties		313			243			663
Bank owned life insurance		(489	)		(530	)		(346	)
Goodwill Impairment		43,291			—			—
Deferred income taxes		(709	)		1,753			276
Change in
Net deferred loan fees		71			(694	)		(489	)
Accrued interest receivable		1,378			(96	)		(750	)
Other assets		3,805			(6,086	)		624
Accrued interest, taxes and other expenses		300			(28	)		920

Net cash from operating activities		19,812			3,654			9,114
Cash flows from investing activities
Cash paid in bank acquisition, net of cash received		—			(6,347	)		—
Securities available for sale
Maturities, prepayments and calls		63,159			55,873			62,487
Purchases		(68,085	)		(55,621	)		(43,629	)
Securities held for maturity
Maturities, prepayments and calls		—			4			4
Purchases of FRB stock		(1,186	)		(10	)		(16	)
Purchases of Bank owned life insurance		—			—			(10,000	)
Loan originations, net of loan payments		(9,719	)		(39,153	)		(35,212	)
Proceeds from sale of OREO properties		733			1,632			604
Property and equipment expenditures		(807	)		(1,134	)		(250	)
Change in federal funds sold		18,408			2,134			25,510

Net cash from investing activities		2,503			(42,622	)		(502	)

See accompanying notes to consolidated financial statements.

FIRST CITIZENS BANC CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended December 31, 2008, 2007 and 2006
(In thousands, except per share data)


	2008			2007			2006
Cash flows from financing activities
Change in deposits		(29,899	)		(20,761	)		(12,554	)
Cash received in deposit acquisition		3,915			47,767			—
Repayment of Federal Home Loan Bank advances		(188	)		(150	)		(133	)
Net change in short-term FHLB advances		700			(38,509	)		38,510
Net change in long-term FHLB advances		5,000			50,000			(30,000	)
Change in securities sold under repurchase agreements		3,748			3,992			6,931
Change in U.S. Treasury interest-bearing notes payable		1,727			(1,292	)		1,044
Change in short-term note payable		(1,000	)		15,500			(1,000	)
Cash dividends paid		(7,014	)		(6,073	)		(6,220	)
Net proceeds from issuance of subordinated debenture		—			5,000			—
Redemption of subordinated debenture		—			(5,000	)		—
Purchase of treasury stock		—			(2,021	)		(7,591	)

Net cash from financing activities		(23,011	)		48,453			(11,013	)


Net change in cash and due from financial institutions		(696	)		9,485			(2,401	)
Cash and due from financial institutions at beginning of year		27,345			17,860			20,261


Cash and due from financial institutions at end of year	$	26,649		$	27,345		$	17,860


Supplemental cash flow information:
Interest paid		22,138			20,500			15,490
Income taxes paid		345			2,110			1,800

Supplemental non-cash disclosures:
Transfer of loans from portfolio to other real estate owned	$	1,920		$	1,857		$	565
Fixed assets transferred to/(from) held for sale		(719	)		—			840

Fair value of assets acquired in Futura acquisition				$	322,505
Common stock and cash issued for acquisition					(62,758	)

Total liabilities assumed					259,747

See accompanying notes to consolidated financial statements.

FIRST CITIZENS BANC CORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(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.

Nature of Operations and Principles of Consolidation: 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.). First Citizens Capital LLC (FCC) is wholly-owned by Citizens to hold inter-company debt that is eliminated in consolidation. The operations of FCC are located in Wilmington, Delaware. First Citizens Investments, Inc. (FCI) is wholly-owned by Citizens to hold and manage its securities portfolio and is eliminated in consolidation. The operations of FCC are located in Wilmington, Delaware. The above companies together are referred to as the Corporation. Intercompany balances and transactions are eliminated in consolidation. Champaign Investment Company (CIC) was a subsidiary that provided financial planning and investment advisory services to the former Futura Banc Corporation’s customers. On December 19, 2008, CIC was merged with Citizens

The Corporation provides financial services through its offices in the Ohio counties of Erie, Crawford, Champaign, Franklin, Logan, Summit, Huron, 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. There are no significant concentrations of loans to any one industry or customer. However, the customer’s ability to repay their loans is dependent on the real estate and general economic conditions in the area. Other financial instruments that potentially represent concentrations of credit risk include deposit accounts in other financial institutions and Federal Funds sold. In 2008, SCC provided item processing for four financial institutions in addition to Citizens. SCC accounted for 2.3% 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, 2008. 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, 2008.

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, impairment of goodwill, 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 with maturities fewer than 90 days. Net cash flows are reported for customer loan and deposit transactions, interest bearing deposits in other financial institutions, and federal funds purchased or sold and repurchase agreements.

Interest-Bearing Deposits in Other Financial Institutions: Interest-bearing deposits in other financial institutions mature within one year and are carried at cost.

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Amounts in thousands, except share data)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)

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, net of tax.

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.

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: Mortgage 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 aggregate cost or market, 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 accrued on the unpaid principle balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments.

Interest income on mortgage and commercial 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 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.

All 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.

Purchased Loans: The Corporation purchases individual loans and groups of loans. Purchased loans that show evidence of credit deterioration since origination are recorded at the amount paid (or allocated fair value in a purchase business combination), such that there is no carryover of the seller’s allowance for

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Amounts in thousands, except share data)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)

loan losses. After acquisition, incurred losses are recognized by an increase in the allowance for loan losses.

Purchased loans are accounted for individually or aggregated into pools of loans based on common risk characteristics (e.g., credit score, loan type, and date of origination). The Corporation estimates the amount and timing of expected cash flows for each purchased loan or pool, and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan or pool (accretable yield). The excess of the loan’s or pool’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference).

Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded. If the present value of expected future cash flows is greater than the carrying amount, it is recognized as part of future interest income.

Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, risk, 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.

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 covers non-classified loans and is based on historical loss experience adjusted for current factors.

A loan is impaired when full payment under the loan terms is not expected. Commercial and commercial real estate loans over $350,000 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. Large groups of smaller balance homogeneous loans of such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.

Other Real Estate: Other real estate acquired through or instead of loan foreclosure is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed. Other real estate owned included in other assets totaled approximately $1,661 at December 31, 2008 and $557 at December 31, 2007.

Premises and Equipment: Land is carried at cost. Premises 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.

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Amounts in thousands, except share data)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)

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 evaluated periodically 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. 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): Citizens has purchased life insurance policies on certain key executives. Upon adoption of EITF 06-5, which is discussed further below, BOLI is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Prior to the adoption of EITF 06-5, the Corporation recorded BOLI at its cash surrender value.

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 requires disclosure when there are contractual restrictions on the Company’s ability to surrender a policy. The adoption of EITF 06-5 on January 1, 2007 had no impact on the Corporation’s financial condition or results of operations.

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 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 and other intangible assets arising from whole bank and branch acquisitions. These intangible assets are measured at fair value and then amortized on an accelerated method over their estimated useful lives, which range from five to twelve years.

Servicing Rights: Servicing rights are recognized as assets for the allocated value of retained servicing rights on loans sold. Guidelines as set for in paragraphs 68, 69 and 70 of FASB 140 are followed to estimate the “fair value of the servicing asset” and as further clarified by the fair value techniques of FASB 157. The valuation technique used is the present value of estimated future cash flows using current market discount rates. Servicing rights are amortized 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.

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Amounts in thousands, except share data)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)

Long-term Assets: Premises and equipment, core deposit and other intangible assets, 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.

Loan Commitments and Related 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.

Stock-Based 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.

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.

The Corporation adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), as of January 1, 2007. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The adoption had no material effect on the Corporation’s financial statements.

The Corporation recognizes interest and/or penalties related to income tax matters in income tax expense.

Retirement Plans: Pension expense is the net of service and interest cost, return on plan assets and amortization of gains and losses not immediately recognized. Employee 401(k) and profit sharing plan expense is the amount of matching contributions. Deferred compensation allocates the benefits over the years of service.

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.

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 funded status of the pension plan, which are also recognized as separate components of shareholders’ equity.

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Amounts in thousands, except share data)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)

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.

Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank was required to meet regulatory reserve and clearing requirements. 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.

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.

Operating Segments: While the Corporation’s chief decision makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Corporation-wide basis. Operating segments are aggregated into one as operating results for all segments are similar. Accordingly, all of the Corporation’s financial service operations are considered by management to be aggregated in one reportable operating segment.

Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation.

Adoption of New Accounting Standards:

In February 2006, the FASB issued Statement No. 155,Accounting for Certain Hybrid Financial Instruments(SFAS No. 155), which permits fair value re-measurement for 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. The adoption of this statement did not have a material impact on the Corporation’s consolidated financial position or results of operations.

In September 2006, the Financial Accounting Standards Board (“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 was effective beginning after January 1, 2008. See Note 16 for additional detail.

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Amounts in thousands, except share data)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. The standard provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The new standard became effective for the Corporation on January 1, 2008. The Corporation did not elect to apply the standard to any financial assets or liabilities.

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 impact of adoption of EITF 06-4 was immaterial.

Effect of Newly Issued but Not Yet Effective Accounting Standards:

In December 2007, the FASB issued FAS No. 141 (revised 2007), Business Combinations (“FAS 141(R)”), which establishes principals and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. FAS No. 141(R) is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. The adoption of this standard is not expected to have a material effect on the Corporation’s results of operations or financial position.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161 “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Management is currently evaluating the impact of SFAS No. 161 on the Corporation’s disclosures.

In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162 “The Heirarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States. This Statement will be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411. The adoption of SFAS No. 162 is not expected to impact the Corporation’s consolidated financial statements.

On February 20, 2008, the FASB issued Staff Position FAS 140-3 “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions” (FSP FAS 140-3”) to resolve questions about the accounting for repurchase financings. This FSP is effective for repurchase financings in which the initial transfer is entered into in fiscal years beginning after November 15, 2008. Management is currently evaluating the impact, if any, of FSP FAS 140-3 on the Corporation’s consolidated financial statements.

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Amounts in thousands, except share data)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)

On April 25, 2008, the FASB issued Staff Position FAS 142-3 “Determination of the Useful Life of Intangible Assets” (“FSP FAS 142-3), which amends the list of factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under SFAS No. 142 “Goodwill and Other Intangible Assets.” FSP FAS 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. Management is currently evaluating the impact, if any, of FSP FAS 142-3 on the Corporation’s consolidated financial statements.

On May 9, 2008, the FASB issued Staff Position APB 14-1 “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”). FSP APB 14-1 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. The adoption of FSP APB 14-1 is not expected to impact the Corporation’s consolidated financial statements.

On June 16, 2008, the FASB issued Staff Position EITF 03-6-1 “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (FSP EITF 03-6-1”). The FSP addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method described in paragraphs 60 and 61 of FASB Statement No. 128, Earnings per Share. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. The adoption of FSP EITF 03-6-1 is not expected to impact the Corporation’s consolidated financial statements.

NOTE 2 — MERGERS

On December 17, 2007, the Corporation completed the merger of Futura Banc Corporation (“Futura”) which was announced June 7, 2007. Immediately following the merger, Futura’s banking subsidiary, Champaign National Bank, was merged into FCBC’s banking affiliate, Citizens Banking Company.

The Corporation issued 2,343,617 shares of common stock valued at approximately $45,935 and paid cash of $16,823 resulting in an aggregate purchase price of $62,758, before considering direct expenses related to the acquisition. Total assets of Futura prior to the merger were $281,810, including $207,982 in loans and $237,681 in deposits. The transaction was recorded as a purchase and, accordingly, the operating results of Futura have been included in the Corporation’s Consolidated Financial Statements since the date of the merger. The aggregate of the purchase price over the fair value of the net assets acquired of approximately $39,667 will be evaluated for impairment on an annual basis.

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Amounts in thousands, except share data)

NOTE 2 – MERGERS(Continued)

The following summarizes pro forma financial information for the year ended December 31, 2007, and 2006, assuming the Futura merger occurred at the start of each period stated.


	2007		2006
Net interest income after provision for loan losses	$	37,555	$	39,894
Net income		6,848		8,151
Basic and diluted earnings per share		0.87		1.04

The pro forma information includes adjustments for interest income on loans and securities acquired, amortization of identifiable intangibles arising from the transaction, depreciation expense on property acquired, interest expense on deposits acquired and related tax effects. The pro forma results do not necessarily represent results which would have occurred if the merger had taken place on the basis assumed above, nor are they indicative of the results of future combined operations.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition for Futura. Core deposit intangibles and other intangibles will be amortized over periods of between five and ten years using an accelerated method. Goodwill will not be amortized, but instead will be evaluated for impairment.


Cash and short-term investments	$	26,517
Securities		35,032
Loans, net		201,669
Goodwill		39,667
Core deposit intangible		5,321
Customer relationship intangible		864
Other assets		13,435

Total assets acquired		322,505

Deposits		238,562
Other borrowed funds		18,904
Other liabilities		2,281

Total liabilities assumed		259,747


Net assets acquired	$	62,758

This acquisition provided the Corporation with the strategic opportunity to expand into new markets that while similar to existing markets are projected to be more vibrant in population growth and wage growth. Additionally, the acquisition will provide exposure to suburbs of larger urban areas without the commitment of operating inside large metropolitan areas dominated by regional and national financial organizations. The acquisition also creates synergies on the operational side of the Corporation by allowing non-interest expenses to be spread over a larger operating base.

On October 5, 2007, the Company acquired a branch office facility and assumed related deposits from Miami Valley Bank. Approximately $56,448 of deposits was assumed, along with $9,092 in liquid assets, were received. Additionally, the Corporation had an option to buy the premises and equipment, at fair

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Amounts in thousands, except share data)

NOTE 2 – MERGERS(Continued)

market value. The Corporation did elect to purchase the office located in Quincy, Ohio while declining the option to purchase the office located in Lakeview, Ohio. The Corporation instead opted to serve these customers from the Russells Point office, which is located approximately one mile from Lakeview. The transaction resulted in both amortizable intangibles of $945 and non-amortizable goodwill of $476. The core deposit intangible will be amortized to expense over 10 years using an accelerated method. The Company acquired the branch at a premium to further solidify its market share in its southern market, expand its customer base to enhance deposit fee income, provide an opportunity to market additional products and services to new customers, and improve customer convenience by adding a new location. Regarding the two matters discussed above, the goodwill of $476 will be deductible over 15 years for tax purposes. The remaining goodwill is not deductible.

NOTE 3 — 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
2008
U.S. Treasury securities and obligations of U.S. government agencies	$	76,511	$	1,391	$	(65	)
Obligations of states and political subdivisions		34,673		527		(219	)
Mortgage-back securities		39,076		583		(36	)

Total debt securities		150,260		2,501		(320	)
Equity securities		676		195		—

Total	$	150,936	$	2,696	$	(320	)


			Gross		Gross
	Fair		Unrealized		Unrealized
	Value		Gains		Losses
2007
U.S. Treasury securities and obligations of U.S. government agencies	$	95,723	$	834	$	(13	)
Obligations of states and political subdivisions		28,441		139		(30	)
Mortgage-back securities		19,706		73		(59	)

Total debt securities		143,870		1,046		(102	)
Equity securities		481		—		—

Total	$	144,351	$	1,046	$	(102	)

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Amounts in thousands, except share data)

NOTE 3 – SECURITIES(Continued)

The fair value of securities and carrying amount, if different, at year end 2008 by contractual maturity were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.


	Available for sale
	Fair Value
Due in one year or less	$	8,141
Due from one to five years		38,151
Due from five to ten years		34,170
Due after ten years		30,722
Mortgage-backed		39,076
Equity securities		676

Total	$	150,936

Securities with a carrying value of $125,385 and $121,198 were pledged as of December 31, 2008 and 2007, 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.


	2008		2007			2006
Sale proceeds	$	—	$	—		$	—
Gross realized gains		—		—			—
Gross realized losses		—		—			—
Gains (losses) from securities called or settled by the issuer		193		(1	)		—

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Amounts in thousands, except share data)

NOTE 3 – SECURITIES(Continued)

Debt securities with unrealized losses at year end 2008 and 2007 not recognized in income are as follows.


2008	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	$	6,991	$	65	$	—	$	—	$	6,991	$	65
Obligations of states and political subdivisions		10,370		140		1,355		79		11,725		219
Mortgage-backed securities		3,070		36		—		—		3,070		36


Total temporarily impaired	$	20,431	$	241	$	1,355	$	79	$	21,786	$	320


2007	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	$	—	$	—	$	3,010	$	13	$	3,010	$	13
Obligations of states and political subdivisions		3,712		11		6,026		19		9,738		30
Mortgage-backed securities		—		—		2,285		59		2,285		59


Total temporarily impaired	$	3,712	$	11	$	11,321	$	91	$	15,033	$	102

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 changes 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, 2008, 2007 and 2006
(Amounts in thousands, except share data)

NOTE 4 — LOANS

Loans at year-end were as follows.


	2008			2007
Commercial and agricultural	$	109,375		$	96,385
Commercial real estate		313,000			299,005
Residential real estate		325,962			343,160
Real estate construction		30,628			33,480
Consumer		17,409			20,359
Credit card and other		400			2,467
Leases		164			185

Total Loans		796,938			795,041
Allowance for loan losses		(8,862	)		(7,374	)
Net deferred loan fees		(287	)		(281	)

Net loans	$	787,789		$	787,386

Loans to directors and executive officers, including their immediate families and companies in which they are principal owners during 2008 were as follows.


Balance — January 1, 2008	$	4,515
New loans and advances		2,468
Repayments		(1,223	)
Effect of changes to related parties		(483	)

Balance — December 31, 2008	$	5,277

Deposits from principal officers, directors, and their affiliates at year-end 2008 and 2007 were $3,898 and $6,490.

NOTE 5 — ALLOWANCE FOR LOAN LOSSES

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


	2008			2007			2006
Balance — January 1	$	7,374		$	8,060		$	9,212
Provision for loan losses		8,207			1,020			1,128
Balance from acquisition		—			1,277			—
Loans charged-off		(7,798	)		(4,028	)		(3,466	)
Recoveries		1,079			1,045			1,186

Balance — December 31	$	8,862		$	7,374		$	8,060

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Amounts in thousands, except share data)

NOTE 5 — ALLOWANCE FOR LOAN LOSSES(Continued)

Impaired loans were as follows.


	2008		2007
Year-end loans with no allocated allowance for loan losses	$	8,001	$	6,193
Year-end loans with allocated allowance for loan losses		6,636		6,772
Amount of allowance for loan losses allocated		1,897		2,057


	2008		2007		2006
Average balance of impaired loans during year	$	14,438	$	15,807	$	12,404
Interest income recognized during impairment		626		1,008		533
Interest income recognized on a cash basis		626		1,008		533

Nonperforming loans were as follows:


	2008		2007
Loans past due over 90 days still on accrual	$	3,053	$	2,423
Nonaccrual loans		17,943		9,308

Nonperforming loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

Purchased Loans subject to SOP 03-3:

In conjunction with the Futura merger (see Note 2), Citizens acquired certain loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans is as follows:


	2008		2007
Commercial	$	2,015	$	4,275

Outstanding balance	$	2,015	$	4,275

These loans were recorded at their net realizable value on December 17, 2007. There are no specific allowances recorded for these loans at December 31, 2008.

Any accretable yield, or income expected to be collected subsequent to the acquisition date, is not material.

For those purchased loans disclosed above, the Corporation did not increase the allowance for loan losses during 2008 and no allowances for loan losses were reversed during 2008.

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Amounts in thousands, except share data)

NOTE 5 — ALLOWANCE FOR LOAN LOSSES(Continued)

Purchased loans for which it was probable at acquisition that all contractually required payments would not be collected are as follows:


	2007
Contractually required payments recievable of loans purchased during the year:
Commercial	$	12,937


	2007
Cash flows expected to be collected at acquisition		4,396
Fair value of acquired loans at acquisition		4,275

NOTE 6 — PREMISES AND EQUIPMENT

Year-end premises and equipment were as follows.


	2008			2007
Land and improvements	$	3,981		$	3,965
Buildings and improvements		19,860			18,877
Furniture and equipment		17,020			16,440

Total		40,861			39,282
Accumulated depreciation		(19,865	)		(17,689	)

Premises and equipment, net	$	20,996		$	21,593

Depreciation expense was $1,986, $999 and $930 for 2008, 2007 and 2006.

Rent expense was $381, $201 and $191 for 2008, 2007, and 2006. Rent commitments under non-cancelable operating leases were as follows, before considering renewal options that generally are present.


2009	$	306
2010		246
2011		204
2012		204
2013		204
2014		175
2015		88

Total	$	1,427

The rent commitments listed above are primarily for the leasing of eight financial services branches.

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(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, 2008 and December 31, 2007 is as follows.


	2008			2007
Beginning of year	$	66,235		$	26,093
Acquired goodwill		—			40,142
Impairment		(43,291	)		—
Other adjustments		(1,224	)		—


End of year	$	21,720		$	66,235

As a result, the Corporation recorded a goodwill impairment charge of $43,291 which reduced the goodwill balance on its books to $21,720 from $66,235. The goodwill impairment charge was computed by determining the fair value of the Bank on a controlling interest basis. The fair value was considered to be the amount at which the Bank could be sold in a current transaction between willing parties, that is, other than a forced liquidation sale. Three different methods were used to determine the fair value of the Bank. The three methods used were the discounted cash flow method, the comparable transactions method and the control premium method.

Acquired Intangible Assets

Acquired intangible assets were as follows as of year end.


	2008				2007
	Gross				Gross
	Carrying		Accumulated		Carrying		Accumulated
	Amount		Amortization		Amount		Amortization
Core deposit and other intangibles	$	13,113	$	5,333	$	13,554	$	3,865

Aggregate amortization expense was $1,467, $732 and $673 for 2008, 2007 and 2006.

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


2009	$	1,288
2010		1,218
2011		1,162
2012		974
2013		847
Thereafter		2,291

	$	7,780

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Amounts in thousands, except share data)

NOTE 8 — INTEREST-BEARING DEPOSITS

Interest-bearing deposits as of December 31, 2008 and 2007 were as follows.


	2008		2007
Demand	$	224,966	$	221,015
Statement and Passbook Savings		123,327		146,478
Certificates of Deposit
In excess of $100		119,893		85,540
Other		177,297		204,883
Individual Retirement Accounts		42,297		43,980

Total	$	687,780	$	701,896

Scheduled maturities of certificates of deposit, including IRA’s at December 31, 2008 were as follows.


2009	$	260,944
2010		60,347
2011		7,785
2012		5,292
2013		2,546
Thereafter		2,573

Total	$	339,487

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 $7 million outstanding on this line as of December 31, 2008 and had no advances outstanding on this line as of December 31, 2007. The Corporation also has an $80 million repo advance line with the Federal Home Loan Bank. The Corporation had $0 in advances outstanding on this line as of December 31, 2008 and December 31, 2007.

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, advances from the Federal Home Loan Bank were as follows:


	2008		2007
Maturities May 2009 through January 2017, fixed rate at rates from 2.84% to 7.80%, averaging 4.40%	$	69,982	$	64,470

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Amounts in thousands, except share data)

NOTE 9 — FEDERAL HOME LOAN BANK ADVANCES(Continued)

Scheduled principal reduction of FHLB advances at December 31, 2008 were as follows.


2009	$	9,622
2010		30,036
2011		32
2012		22,534
2013		35
Thereafter		7,723

Total	$	69,982

In addition to the borrowings, the Corporation has outstanding letters of credit with the Federal Home Loan Bank totaling $28,750 at year-end 2008 and $27,750 at year-end 2007 used for pledging to secure public funds. Federal Home Loan Bank borrowings and the letters of credit are collateralized by Federal Home Loan Bank stock and by $148,099 and $124,496 of residential mortgage loans under a blanket lien arrangement at year-end 2008 and 2007.

NOTE 10 — OTHER BORROWINGS

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


	2008			2007
Average balance during the year	$	33,413		$	24,478
Average interest rate during the year		1.70	%		4.10	%
Maximum month-end balance during the year	$	40,153		$	32,057
Weighted average interest rate at year end		1.66	%		3.70	%

Securities underlying repurchase agreements had a fair value of $38,294 at December 31, 2008 and $30,878 at December 31, 2007.

NOTE 11 – NOTE PAYABLE

FCBC has a secured borrowing agreement with Key Bank, NA for up to $25,000. The agreement is split into two pieces; a $15,000 secured revolving line of credit which matures November 29, 2012, and a $10,000 term loan. The term loan matures November 29, 2012 and will require a $5,000 balloon principal payment. The borrowing agreement also contains covenants related to capital ratios, nonperforming assets and return on average assets. Compliance with covenants is monitored and reported to Key Bank, NA quarterly. At December 31, 2008, $11,500 was outstanding on the line of credit balance and the term loan balance was $9,000. At December 31, 2007, $11,500 was outstanding on the line of credit and the term loan was $10,000. The interest rate is three month LIBOR plus 1.15%, or 3.15% at December 31, 2008 and 6.12% at December 31, 2007, and adjusts quarterly. The borrowings are secured by 100% of the common stock of Citizens. Subsequent to December 31, 2008, the Corporation repaid these borrowings in full.

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Amounts in thousands, except share data)

NOTE 12 – SUBORDINATED DEBENTURES

Trusts formed by the Corporation, in March 2003 and March 2002, issued $7,500 of floating rate and $5,000 of floating rate trust preferred securities through special purpose entities as part of pooled offerings of such securities. The Corporation issued subordinated debentures to the trusts in exchange for the proceeds of the offerings, which debentures represent the sole assets of the trusts. The Corporation may redeem the subordinated debentures, in whole but not in part, any time prior to March 26, 2008 and March 26, 2007, respectively at a price of 107.50% of face value. After March 26, 2008 and March 26, 2007, respectively, subordinated debentures may be redeemed at face value. The Corporation elected to redeem and refinance the $5,000 floating rate subordinated debenture that was issued in March of 2002. The refinancing was done at face value and resulted in a 2.00% reduction in the rate. The new subordinated debenture has a 30 year maturity and has a “No Call Period” of five years. The new subordinated debenture is redeemable, in whole or in part, anytime without penalty after the expiration of the “No Call Period”. At the time of the refinancing, the corporation amortized the remaining $126 of deferred issuance costs associated with the original subordinated debenture. The replacement subordinated debenture does not have any deferred issuance cost associated with it. The interest rate at December 31, 2008 on the $7,500 debenture is 6.63% and the $5,000 debenture is 4.42%.

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. The current rate on the $12,500 subordinated debenture is 6.05%.

Finally, the Corporation acquired two additional trust preferred securities as part of the Futura acquisition. Futura TPF Trust I and Futura TPF Trust II were formed in June of 2005 in the amounts of $2,500 and $2,000, respectively. The Corporation issued subordinated debentures to the trusts in exchange for ownership of all of the common security of the trusts and the proceeds of the preferred securities sold by the trusts. The Corporation may redeem the subordinated debentures, in whole or in part, in a principal amount with integral multiples of $1,000, on or after June 15, 2010 at 100% of the principal amount, plus accrued and unpaid interest. The subordinated debentures mature on June 15, 2035. The subordinated debentures are also redeemable in whole or in part from time to time, upon the occurrence of specific events defined within the trust indenture. The current rate on the $2,500 subordinated debenture is variable at 3.66% and the current rate on the $2,000 subordinated debenture is fixed until June 2010 at 5.71%.

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Amounts in thousands, except share data)

NOTE 13 — INCOME TAXES

Income tax expense was as follows.


	2008			2007		2006
Current	$	2,078		$	1,260	$	2,390
Deferred		(709	)		1,753		276

Income tax expense	$	1,369		$	3,013	$	2,666

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


	2008			2007			2006
Income taxes computed at the statutory federal tax rate	$	(12,787	)	$	3,365		$	3,001
Add (subtract) tax effect of
Goodwill impairment		14,611			—			—
Nontaxable interest income, net of nondeductible interest expense		(504	)		(195	)		(253	)
Dividends received deduction		(1	)		(22	)		(1	)
Cash surrender value of BOLI		(166	)		(180	)		(118	)
Other		216			45			37

Income tax expense	$	1,369		$	3,013		$	2,666

Tax expense attributable to security gains totaled $66, $0 and $0 in 2008, 2007 and 2006.

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Amounts in thousands, except share data)

NOTE 13 — INCOME TAXES(Continued)

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


	2008			2007
Deferred tax assets
Allowance for loan losses	$	2,695		$	2,097
Deferred compensation		742			673
Intangible assets		1,324			1,416
SOP 03-3 bad debts		1,634			2,401
Pension costs		2,089			—
Other		56			64


Deferred tax asset		8,540			6,651


Deferred tax liabilities
Tax depreciation in excess of book depreciation		(650	)		(825	)
Pension Costs		—			(523	)
Discount accretion on securities		(18	)		(41	)
Purchase accounting adjustments		(3,326	)		(3,774	)
FHLB stock dividends		(2,249	)		(2,090	)
Leases		(52	)		(57	)
Deferred loan fees		(407	)		(429	)
Unrealized gain on securities available for sale		(808	)		(321	)
Other		(35	)		(35	)

Deferred tax liability		(7,545	)		(8,095	)


Net deferred tax asset (liability)	$	995		$	(1,444	)

Unrecognized Tax Benefits

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:


	2008			2007
Balance at January 1	$	40		$	40
Additions based on tax positions related to current year		123			—
Additions for tax positions of prior years		—			—
Reductions for tax positions of prior years		—			—
Reductions due to statute of limitations		(40	)		—
Settlements		—			—

Balance at December 31	$	123		$	40

Of the 2008 and 2007 totals, $30 and $0 respectively represent amounts that would favorably affect the effective income tax rate in future periods. The Corporation does not expect the amount of unrecognized tax benefit to change significantly in the next year.

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Amounts in thousands, except share data)

NOTE 13 — INCOME TAXES(Continued)

The total amount of interest and penalties, net of the related tax benefit, recorded in the income statement for the years ended December 31, 2008 and 2007 was $(2) and $2 respectively, and the amount accrued for interest and penalties at December 31, 2008 and 2007 was $4 and $6.

The Corporation and its subsidiaries are subject to U.S. federal income tax as well as income tax of the state of Ohio for all affiliates other than the Bank. The Bank is subject to tax in Ohio based upon its net worth. The Corporation is no longer subject to examination by taxing authorities for years before 2005.

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 $161, $108 and $138 in 2008, 2007 and 2006.

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 changed measurement dates for its plan from September 30 to December 31, effective for 2007. The impact of changing the measurement date was not material.

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Amounts in thousands, except share data)

NOTE 14 — RETIREMENT PLANS(Continued)

Information about the pension plan is as follows.


	2008			2007
Change in benefit obligation:
Beginning benefit obligation	$	8,966		$	11,003
Service cost		595			539
Interest cost		544			543
Actuarial (gain)/loss		3,490			101
Benefits paid		(754	)		(1,879	)
Plan Amendments		—			(1,990	)
Settlement (gain)/loss		—			405
Measurement Date Change		—			244


Ending benefit obligation		12,841			8,966

Change in plan assets, at fair value:
Beginning plan assets		10,505			7,435
Measurement Date Change		—			192
Actual return		(2,632	)		272
Employer contribution		78			4,511
Benefits paid		(754	)		(1,879	)
Administrative expenses		—			(26	)

Ending plan assets		7,197			10,505


Funded status at end of year	$	(5,644	)	$	1,539

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


	2008		2007
Unrecognized actuarial loss (net of tax, of $2,851 in 2008 and $537 in 2007)	$	5,535	$	1,043

The accumulated benefit obligation for the defined benefit pension plan was $9,594 in 2008 and $8,317 in 2007.

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Amounts in thousands, except share data)

NOTE 14 — RETIREMENT PLANS(Continued)

The components of net periodic pension expense were as follows.


	2008			2007			2006
Service cost	$	595		$	539		$	923
Interest cost		543			543			590
Expected return on plan assets		(732	)		(540	)		(471	)
Net amortization and deferral		49			28			127
Measurement date change		—			222			—
Settlement		—			270			—

Net periodic benefit cost		455			1,062			1,169


Net loss (gain) recognized in other comprehensive income		6,805			(1,639	)		—
Prior service cost (credit)		—			—			—
Amortization of prior service cost		—			—			—

Total recognized in other comprehensive income		6,805			(1,639	)		—

Total recognized in net periodic benefit cost and other comprehensive income (before tax)	$	7,260		$	(577	)	$	1,169

The estimated net loss and prior service costs for the defined benefit pension plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is $395

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


	2008			2007			2006
Discount rate on benefit obligation		5.43	%		5.51	%		5.51	%
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.


	2008			2007			2006
Discount rate on benefit obligation		5.43	%		5.51	%		5.51	%
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, 2008, 2007 and 2006
(Amounts in thousands, except share data)

NOTE 14 — RETIREMENT PLANS(Continued)

The Corporation’s pension plan asset allocation at year-end 2008, and 2007, target allocation for 2009, and expected long-term rate of return by asset category are as follows.


				Percentage of Plan
	Target			Assets
	Allocation			at Year-end
Asset Category	2009			2008			2007
Equity securities		20-50	%		47.0	%		55.9	%
Debt securities		30-60			33.0			24.2
Money market funds		20-30			20.0			19.9

Total					100.0	%		100.0	%

The Corporation developed the pension plan investment policies and strategies for plan assets with its pension management firm. The assets are currently invested in six diversified investment funds, which include four equity funds, one money market fund and one bond fund. 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 within 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 expected long-term rate of return on the plan assets is 7.00% in 2008 and 2007. This return is based on the expected return for each of the asset categories, weighted based on the target allocation for each class.

The Corporation expects to contribute $0 to its pension plan in 2009. Employer contributions totaled $78 in 2008, which, along with negative market changes, led to a change in funded status from $1,539 to $(5,644).

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


2009	$	177
2010		196
2011		270
2012		311
2013		488
2014 through 2018		4,598


Total	$	6,040

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(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.


	2008					2007
				Weighted				Weighted
				Average				Average
				Exercise				Exercise
	Shares			Price		Shares		Price
Outstanding at beginning of year		39,000		$	25.44		39,000	$	25.44
Granted		—			—		—		—
Exercised		—			—		—		—
Forfeited		(9,500	)		25.54		—		—

Outstanding at end of year		29,500		$	25.42		39,000	$	25.44


Options exercisable at year-end		29,500		$	25.42		39,000	$	25.44

Options outstanding at year-end 2008 were as follows.

Outstanding

Weighted

Average

Weighted

Remaining

Average

Contractual

Exercise

Exercise price

Number

Life

Price

$20.50

19,500

3 yrs. 6 mos.

20.50

$35.00

10,000

4 yrs. 3.5 mos.

35.00

Outstanding at year-end

29,500

3 yrs. 9 mos.

25.42

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, 2008 and December 31, 2007, the aggregate intrinsic value of the stock options was $0.

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Amounts in thousands, except share data)

NOTE 16 — FAIR VALUE MEASUREMENT

FASB Statement No. 157 establishes a fair value hierarchy about the assumptions used to measure fair value. The statement describes three levels of inputs that may be used to measure fair value. Level 1: Quoted prices for identical assets in active markets that are identifiable on the measurement date; Level 2: Significant other observable inputs, such as quoted prices for similar assets, quoted prices in markets that are not active and other inputs that are observable or can be corroborated by observable market data; Level 3: Significant unobservable inputs that reflect the Corporation’s own view about the assumptions that market participants would use in pricing an asset.

Securities: The fair values of securities available for sale are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

Impaired loans: The fair value of impaired loans is determined using the fair value of collateral for collateral dependent loans. The Corporation uses appraisals and other available data to estimate the fair value of collateral. (Level 2 inputs).

Assets measured at fair value are summarized below.

Fair Value Measurements at Reporting Date Using:


	Quoted Prices in
	Active Markets		Significant Other		Significant
	for Identical		Observable		Unobservable
	Assets		Inputs		Inputs
Assets:	(Level 1)		(Level 2)		(Level 3)
Assets measured at fair value on a recurring basis:
Available for sale securities	$	—	$	150,936	$	—

Assets measured at fair value on a nonrecurring basis:
Impaired Loans	$	—	$	4,739	$	—

Impaired loans with specific reserves, which are measured for impairment using the fair value of collateral for collateral dependent loans, had a carrying amount of $6,636 with a valuation allowance of $1,897, resulting in an additional provision for loan losses of $417.

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Amounts in thousands, except share data)

NOTE 16 — FAIR VALUE MEASUREMENT(Continued)

The carrying amount and estimated fair values of financial instruments not previously presented were as follows.


	December 31, 2008						December 31, 2007
	Carrying			Estimated			Carrying			Estimated
	Amount			Fair Value			Amount			Fair Value
Financial Assets:
Cash and due from financial institutions	$	26,649		$	26,649		$	27,345		$	27,345
Federal funds sold		—			—			18,408			18,408
Loans, net of allowance for loan losses		787,789			803,086			787,386			792,672
Accrued interest receivable		5,764			5,764			7,142			7,142

Financial Liabilities:
Deposits		(809,921	)		(811,125	)		(839,820	)		(838,537	)
Federal Home Loan Bank advances		(69,982	)		(67,429	)		(64,470	)		(69,236	)
U.S. Treasury interest-bearing demand note payable		(3,986	)		(3,986	)		(2,259	)		(2,259	)
Securities sold under agreement to repurchase		(31,143	)		(31,143	)		(27,395	)		(27,395	)
Notes payable		(20,500	)		(20,500	)		(21,500	)		(21,500	)
Subordinated debentures		(29,427	)		(38,588	)		(29,427	)		(29,427	)
Accrued interest payable		(843	)		(843	)		(1,175	)		(1,175	)

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 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.

For certain homogeneous categories of loans, such as some residential mortgages, credit card receivables, and other consumer loans, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

NOTE 17 — 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

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Amounts in thousands, except share data)

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.


	2008				2007
	Fixed		Variable		Fixed		Variable
	Rate		Rate		Rate		Rate
Commitments to extend credit:
Lines of credit and construction loans	$	6,286	$	97,800	$	9,154	$	101,105
Overdraft protection		—		12,556		—		11,393
Letters of credit		50		1,120		97		1,485

	$	6,336	$	111,476	$	9,251	$	113,983

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 3.25% to 9.50% at December 31, 2008 and 5.00% to 9.50% at December 31, 2007. Maturities extend up to 30 years.

NOTE 18 — 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 2008 and 2007, the most recent regulatory notifications categorized Citizens 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, 2008, 2007 and 2006
(Amounts in thousands, except share data)

NOTE 18 — CAPITAL REQUIREMENTS AND RESTRICTION ON RETAINED EARNINGS(Continued)

At December 31, 2008 and 2007, the Corporation’s and Citizens’ actual capital levels and minimum required levels were as follows.


											To Be Well
											Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Purposes
	Amount		Ratio			Amount		Ratio			Amount		Ratio
2008
Total Capital to risk- weighted assets
Consolidated	$	87,244		11.3	%	$	61,930		8.0	%		n/a		n/a
Citizens		96,536		12.4			62,281		8.0		$	77,852		10.0	%
Tier I (Core) Capital to risk- weighted assets
Consolidated		61,193		7.9			30,945		4.0			n/a		n/a
Citizens		87,674		11.3			31,035		4.0			46,553		6.0
Tier I (Core) Capital to average assets
Consolidated		61,193		5.8			42,202		4.0			n/a		n/a
Citizens		87,674		8.2			42,768		4.0			53,460		5.0

2007
Total Capital to risk- weighted assets
Consolidated	$	85,113		10.3	%	$	66,107		8.0	%		n/a		n/a
Citizens		94,252		12.5			60,321		8.0		$	75,402		10.0	%
Tier I (Core) Capital to risk- weighted assets
Consolidated		59,945		7.3			32,847		4.0			n/a		n/a
Citizens		75,378		10.0			30,151		4.0			45,227		6.0
Tier I (Core) Capital to average assets
Consolidated		59,945		7.7			31,140		4.0			n/a		n/a
Citizens		75,378		9.9			30,456		4.0			38,070		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, 2008, 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, 2008, 2007 and 2006
(Amounts in thousands, except share data)

NOTE 19 — PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION

Condensed financial information of FCBC follows.


Condensed Balance Sheets	2008			2007
Assets:
Cash	$	7,052		$	8,588
Securities available for sale		676			481
Loans, net of allowance of $0 in 2008 and 2007		21			1,053
Investment in bank subsidiary		107,739			153,558
Investment in nonbank subsidiaries		12,729			13,530
Other assets		1,303			5,218

Total assets	$	129,520		$	182,428


Liabilities and Shareholders’ Equity:
Deferred income taxes and other liabilities	$	2,976		$	5,345
Subordinated debentures		29,427			29,427
Note payable		20,500			21,500
Common stock		114,365			114,365
Retained earnings (accumulated deficit)		(16,546	)		29,446
Treasury Stock		(17,235	)		(17,235	)
Accumulated other comprehensive loss		(3,967	)		(420	)

Total liabilities and shareholders’ equity	$	129,520		$	182,428


Condensed Statements of Income	2008			2007			2006
Dividends from bank subsidiaries	$	11,576		$	16,285		$	8,310
Dividends from nonbank subsidiaries		620			—			—
Interest income		3			16			291
Other income		70			2			684
Provision for loan losses		(819	)		—			(18	)
Interest expense		(2,695	)		(2,109	)		(2,279	)
Other expense, net		(2,221	)		(2,133	)		(2,367	)

Earnings before equity in undistributed net earnings of subsidiaries		6,534			12,061			4,621
Income tax benefit		1,925			1,425			1,424
(Distributions in excess of earnings of subsidiaries) / equity in undistributed net earnings of subsidiaries		(47,437	)		(6,601	)		115

Net income (loss)	$	(38,978	)	$	6,885		$	6,160

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Amounts in thousands, except share data)

NOTE 19 — PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION(Continued)


Condensed Statements of Cash Flows	2008			2007			2006
Operating activities:
Net income (loss)	$	(38,978	)	$	6,885		$	6,160
Adjustment to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses		—			—			18
Change in other assets and other liabilities		(1,981	)		4			(465	)
Distributions in excess of/(equity in undistributed) net earnings of subsidiaries		47,437			6,601			(115	)


Net cash from operating activities		6,478			13,490			5,598

Investing activities:
Loan originations, net of loan payments		—			—			5,716
Change in loan to nonbank subsidiaries		—			280			5,073
Capital investment in nonbank subsidiary		—			(11,500	)		—
Cash paid for acquisition, net of cash received		—			(16,823	)		—


Net cash from investing activities		—			(28,043	)		10,789

Financing activities:
Net change in note payable		(1,000	)		15,500			(1,000	)
Repayment of long-term note payable		—			(5,155	)		—
Proceeds from subordinated debentures payable to First Citizens Statutory Trust I		—			5,155			—
Cash paid for treasury stock		—			(2,021	)		(7,591	)
Cash dividends paid		(7,014	)		(6,073	)		(6,220	)


Net cash from financing activities		(8,014	)		7,406			(14,811	)


Net change in cash and cash equivalents		(1,536	)		(7,147	)		1,576

Cash and cash equivalents at beginning of year		8,588			15,735			14,159


Cash and cash equivalents at end of year	$	7,052		$	8,588		$	15,735

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Amounts in thousands, except share data)

NOTE 20 – OTHER COMPREHENSIVE INCOME (LOSS)

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


	2008			2007			2006
Unrealized holding gain (loss) on available for sale securities	$	1,432		$	1,327		$	1,097
Reclassification adjustments for gain (loss) later recognized in income		—			—			—

Net unrealized gain (loss)		1,432			1,327			1,097
Pension liability adjustment		(6,805	)		1,639			398
Tax effect		1,826			(1,008	)		(508	)


Other comprehensive income (loss)	$	(3,547	)	$	1,958		$	987

The following table is a summary of the accumulated other comprehensive income balances, net of tax:


				Current
	Balance at			Period			Balance at
	12/31/07			Change			12/31/08
Unrealized gains (losses) on securities available for sale	$	623		$	945		$	1,568
Unrealized loss on pension benefits		(1,043	)		4,492			(5,535	)

Total	$	(420	)	$	(3,547	)	$	(3,967	)

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Amounts in thousands, except share data)

NOTE 21 – EARNINGS PER SHARE

The factors used in the earnings per share computation follow.


	2008			2007		2006
Basic
Net income (loss)	$	(38,978	)	$	6,885	$	6,160

Weighted Average common shares outstanding		7,707,917			5,505,023		5,520,692

Basic earnings (loss) per share	$	(5.06	)	$	1.25	$	1.12


Diluted
Net income (loss)	$	(38,978	)	$	6,885	$	6,160

Weighted average common shares outstanding for basic earnings per common share		7,707,917			5,505,023		5,520,692
Add: dilutive effects of assumed exercise of options		—			—		—


Average shares and dilutive potential common shares outstanding		7,707,917			5,505,023		5,520,692


Diluted earnings (loss) per share	$	(5.06	)	$	1.25	$	1.12

Stock options for 29,500 shares in 2008 and 39,000 shares in 2007 and 2006 were not considered in computing diluted earnings per common share 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.

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Amounts in thousands, except share data)

NOTE 22 – QUARTERLY FINANCIAL DATA (UNAUDITED)


					Net			Basic			Diluted
	Interest		Net Interest		Income/			Earnings per			Earnings per
	Income		Income		(Loss)			Common Share			Common Share
2008
First quarter⁽¹⁾⁽²⁾	$	16,266	$	9,642	$	1,312		$	0.17		$	0.17
Second quarter⁽³⁾		15,781		10,367		105			0.01			0.01
Third quarter⁽³⁾		15,470		10,534		1,230			0.16			0.16
Fourth quarter⁽⁴⁾⁽⁵⁾		14,750		9,944		(41,625	)		(5.06	)		(5.06	)

2007
First quarter	$	11,763	$	7,032	$	1,259		$	0.23		$	0.23
Second quarter⁽⁶⁾⁽⁷⁾		12,338		7,482		1,970			0.36			0.36
Third quarter⁽⁸⁾		12,556		7,225		1,467			0.27			0.27
Fourth quarter^(9)(10)		13,289		7,836		2,189			0.38			0.38


⁽¹⁾		Interest income and net interest income both increased due to merger related volume, partially offset by decreased rates.

⁽²⁾		Net income decreased due to a larger provision for loan losses, as well as merger-related noninterest expenses.

⁽³⁾		Net income was reduced primarily by a larger provision for loan losses.

⁽⁴⁾		Interest income and net interest income declined due to decreased market rates.

⁽⁵⁾		The fourth quarter net loss is primarily the result of goodwill impairment.

⁽⁶⁾		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. The increase in net interest income was due to the same.

⁽⁷⁾		Salaries and benefits decreased, primarily due to a reduction in pension expense.

⁽⁸⁾		Net interest income dropped in the third quarter due to increases in funding costs, primarily FHLB advances, but also deposits.

⁽⁹⁾		Both interest income and net interest income rose in the fourth quarter as loan interest increased. Interest on the investment portfolio and federal funds sold increased as well.

⁽¹⁰⁾		Net income also rose in the fourth quarter due to a decrease in provision for loan loss and an increase in data processing fees.

(Continued)

FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
(Amounts in thousands, except share data)

NOTE 23 – PARTICIPATION IN THE TREASURY CAPITAL PURCHASE PROGRAM

On October 3, 2008, Congress passed the Emergency Economic Stabilization Act of 2008 (EESA), which provides the U. S. secretary of the Treasury with broad authority to implement certain actions to help restore stability and liquidity to U.S. markets. One of the provisions resulting from the Act is the Treasury Capital Purchase Program (CPP), which provides direct equity investment of perpetual preferred stock by the Treasury in qualified financial institutions. The program is voluntary and requires an institution to comply with a number of restrictions and provisions, including limits on executive compensation, stock redemptions and declaration of dividends. Applications were required by November 14, 2008 and are subject to approval by the Treasury. The CPP provides for a minimum investment of 1 percent of Risk-Weighted Assets, with a maximum investment equal to the lesser of 3 percent of Total Risk-Weighted Assets or $25 billion. The perpetual preferred stock investment will have a dividend rate of 5% per year, until the fifth anniversary of the Treasury investment, and a dividend of 9%, thereafter. The CPP also requires the Treasury to receive a warrant for common stock equal to 15 percent of the capital invested by the Treasury. The Corporation’s application for participation in the CPP was approved. On January 23, 2009, the Corporation received $23,184 in exchange for the issuance of 23,184 shares of preferred stock, $23,184 redemptive value and a warrant to purchase 469,312 shares of common stock at $7.41 per share to the treasury. All of the proceeds received by First Citizens from the sale of the Preferred Shares and warrants will qualify as Tier 1 capital for regulatory purposes.

(Continued)

FIRST CITIZENS BANC CORP

Directors

David A. Voight
Chairman of the Board

John O. Bacon
President & CEO Mack Iron Works Company

Laurence A. Bettcher
President, Bettcher Industries, Inc.

Barry W. Boerger
Self-Employed Farmer

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

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

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

Allen R. Maurice
Attorney, Wagner, Maurice, Davidson & Gilbert Co., LPA

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

W. Patrick Murray
Attorney, Murray & Murray Company, LPA

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

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

J. William Springer
President & CEO, Industrial Nut Corporation

Richard A. Weidrick, CPA, PFS
Owner, Weidrick, Livesay, Mitchell & Burge LLC

Daniel J. White
International Business Consultant
President, Norwalk Furniture

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

Gerald B. Wurm
President, Wurms Woodworking Co.

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

Officers

James O. Miller, President,
Chief Executive Officer

Richard J. Dutton,
Senior Vice President

James E. McGookey,
Senior Vice President,General Counsel, Corporate Secretary

Todd A. Michel,
Senior Vice President, Controller

Charles C. Riesterer,
Senior Vice President, Lending

Kevin J. Jones,
Auditor

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 21, 2009, at 10:00 a.m. Notice of the meeting and a proxy statement will be sent to shareholders in a separate mailing.

Transfer Agent
Illinois Stock Transfer Company
209 West Jackson Boulevard, Suite 903
Chicago, Illinois 60606-6905
Tel: (312) 427-2953
or 1-800-757-5755 (Toll Free)
Fax: (312) 427-2879
www.illinoisstocktransfer.com

First Citizens Banc Corp
100 East Water Street
Sandusky, Ohio 44870
Tel: (419) 625-4121
or 1-888-645-4121 (Toll Free)
Fax: (419) 627-3359
www.fcza.com

Citizens Bank Locations Berlin Heights: 24 E. Main St. “ERLIN (EIGHTS #ASTALIA 3ANDUSKY Champaign Bank Locations KRON First citizen Banc Corp

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Civista Bancshares (CIVB) 10-K2008 FY Annual report

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