Dear Shareholder:
The management of First Citizens Banc Corp feels an overriding responsibility to utilize our shareholders’ investment to provide a predictable and satisfactory return to the owners of our stock and to be responsible corporate citizens in the communities served by our bank. We believe we are achieving those goals but are striving to do even better.
An important objective is to increase our leverage which would lead to an increase in our return on equity or, more plainly said, a return on the dollars our shareholders have invested with us. To accomplish this goal, we need to increase our loans and deposits and reduce our shareholder capital as a percentage of our assets.
With the lack of projected economic activity in the markets we serve, internal growth will be achieved only from taking existing business away from other providers. Like all of our competitors, we are striving to accomplish that kind of growth without sacrificing profits. As evidenced by the 2006 financial statements, loan growth has been more achievable than deposit growth. During 2007, we have plans for products and marketing efforts that are targeted at improving our deposit base in a way that does not adversely affect profitability. An integral part of this effort was to understand customers’ and non-customers’ perceptions of Citizens Bank and using the information to develop branding, image and sales programs.
Other opportunities for significant growth may be available from additional acquisitions. This is an area of high priority for us. We believe our stock is a valuable currency with a price/earnings ratio of approximately 18 and a dividend return of over 5%. We are working with our investment bankers to find merger opportunities that would not dilute our existing shareholders’ interests.
In order to increase our leverage, we need to combine internal and acquisition growth with a stable-to-decreasing equity level. One method to accomplish this is our current dividend payout which is enhanced by the current tax treatment of dividends paid to shareholders. The other method is the use of stock buy-backs. For 2007 a repurchase of up to 5% of our stock has been authorized by your board of directors. The over-riding condition to any stock repurchase is that it has to be fair to our remaining stockholders.
An area of our company receiving considerable attention during 2007 is corporate governance and future leadership. Over the past few years, we have had the retirement of many fine people who, as directors, were responsible for the growth of First Citizens Banc Corp. The most recent retirement was that of George L. Mylander, who served as a director for over 40 years. During that period of time, the bank grew from one office and $30,000,000 of assets to the 16th largest banking organization in Ohio, with 21 offices and over $740,000,000 in assets. George’s guidance and support will be missed, and fortunately he has agreed to serve as a Director Emeritus.
Under the leadership of Pat Murray, who was elected Chairman of First Citizens Banc Corp, a review was conducted to evaluate the Board of Directors in efficiency and effectiveness. Based upon that work, the Board of Directors has authorized a consolidation so that the same individuals will be members of the Citizens Banking Company and First Citizens Banc Corp boards. At the annual meeting (10:00 a.m. April 17, 2007 at the Cedar Point Center of Firelands College, Bowling Green State University), you will be asked to eliminate the staggered three-year terms for directors and, beginning in April 2008, elect 13 directors for a one-year term. We expect that these directors will serve both the bank and the holding company. This is being done to make directors more accountable to shareholders, reduce director fees and make the meeting schedule more efficient.
I am retiring as an employee at the end of 2007, and James O. Miller is expected to become the President and CEO of First Citizens Banc Corp. Jim has been with us for over 20 years and has been an integral part of the evolution of your company. Jim and I are part of a management group that understands our responsibilities to our shareholders. Over the years that group of people has grown as managers and has been augmented when appropriate. I can assure you that your investment is in good hands.
Regardless of governance and leadership changes, our fundamental tasks remain the same:
- Maintaining a high net interest margin
- Increasing non-interest revenue
- Reducing non-interest expense; and
- Returning earnings to our shareholders
In last year’s annual report, I summarized the actions necessary to preserve our net interest margins by reducing the asset sensitivity of our balance sheet and increasing our loan to deposit ratio. These goals have been achieved by offering very competitive fixed rate commercial loans with prepayment penalties. Additionally, we have significantly improved our competitiveness in making fixed rate first mortgage residential loans and then maintaining them in our loan portfolio, as opposed to selling them. The merger of Mr. Money management and operations into the bank was instrumental to our success. The end result was an increase of approximately $40,000,000 or 8% in our loan portfolio and a reduction in the asset sensitivity. With interest rates projected to move lower later in 2007 and our interest rate sensitivity reduced, we are projecting earnings on loans will fall more slowly than cost of deposits, thus helping to preserve our attractive interest margin.
The other half of the interest margin equation is our cost of funding. If you were to compare us to other financial organizations, you would observe that our significantly above average interest margins have been driven by our lower cost of funds. This is attributed to a high percentage of core deposits (checking and savings). Like all banks, we are always striving to maintain as large a percentage of core deposits as we can. Success in accomplishing that is a function of our service, branch operations, products offered and rates. We are fortunate to have a very experienced, qualified and customer oriented workforce. During 2007, a continuing priority will be a re-evaluation of how we deliver service and the design of our products. Rates speak for themselves. We constantly monitor all of our competition and will remain appropriately competitive. With these efforts, we are striving to increase our existing level of core deposits and continue a net interest margin that exceeds peer comparisons.
Non-interest income is primarily made up of checking account service charges, ATM fees, overdraft fees and First Citizens Advisors income. While we are improving our checking account options with additional services and products that should attract depositors willing to pay service charges, this is an uphill battle with other financial organizations offering “free checking” as a loss leader to increase core deposits, on which they hope to attempt to generate service charges in the future. The growth in service charges will continue to be a real challenge for us.
Fees from overdrafts, a convenience product for some customers, and ATM fees derived from non-customers, produced approximately $2,000,000 in revenues in 2006. We are constantly monitoring the placement of ATM’s to develop an acceptable balance between service for customers and fee potential from non-customers. The growth component of non-interest income is the operation of First Citizens Advisors. Revenues from this segment grew again in 2006. Assets managed approached $200,000,000 at the end of 2006; a growth of over 20% from the end of 2005 and five times what we started with in 2002. In January 2007, The Citizens Banking Company completed the purchase of a 1/3 interest in an investment management company in Lorain County. The other owners are Buckeye Community Bank and Apex Investment Partners. The company is named Buckeye Advisors and is located in the Buckeye Bank Building. Besides participating in a well-run investment management company in an adjacent market, we feel there will be expanded opportunities for our trust operations from Buckeye Advisors.
When you compare our total non-interest income for 2005 of $7,838,000 against our non-interest income for 2006 of $6,670,000 there is a $1,168,000 reduction. The primary reasons for this are two extraordinary items. In 2005 our non-interest income was increased by $766,000 from the sale of the Richwood and Green Camp branches, while in 2006 our non-interest income was decreased by $407,000 from loss on the sale of two commercial properties acquired in loan defaults. In concluding my comments on non-interest income, it is important to understand that a larger percentage of increased revenue goes to profits due to the impact of fixed costs. It is because of this, we spend a considerable amount of time and effort trying to find new and better ways to increase those revenues.
We are pleased with the reduction of non-interest expense from $27,929,000 to $26,977,000, a decrease of $952,000 or 3.4%. However, in last year’s annual report, we had estimated savings in 2006 over 2005 from reductions in salaries and fringes at approximately $1,000,000. We did not accomplish that with salaries down $659,000 and fringe benefits up $435,000.
Our efficiency ratio is slightly over 70% from a peak of approximately 73%. By way of comparison, statistics indicate the average efficiency ratio for Ohio publicly traded banks is 67%. Each 1% drop in the efficiency ratio requires approximately $400,000 of increased revenue/decreased cost combination. Some of the actions we have taken to improve the ratio are:
- reducing our staffing level to 250 fulltime equivalents from a high of 310
- employee contributions to health insurance have been increased
- Defined Benefits Pension Plan has been frozen with a variable cost profit sharing component replacing it
- two Plymouth branches have been combined into one; and
- all of the remaining components of Mr. Money have been consolidated into the bank and they no longer operate separate offices
Professional fees, which saw large increases caused by the regulatory requirements of the Sarbanes Oxley Act, seem to have stabilized, and we hope that common sense will prevail and those costs can be reduced. While much has been done or is in process to reduce our efficiency ratio, much more needs to be accomplished in increasing our revenue and decreasing our expenses to achieve our goal of the mid- 60%.
In closing, it has been an honor to serve First Citizens Banc Corp and Citizens Banking Company. I have been blessed with great leadership at the director level and surrounded by talented co-workers. Together, we have accomplished something of which I am proud to be a part. If there is a legacy, it is the belief that we should return to our shareholders as much of our earnings as possible.
Your comments and questions are always welcomed.
Sincerely,
David A. Voight
President
Back to top
DOWNLOADS:
Code of Conduct (PDF)
Audit Committee Charter (PDF)
Nominating Commitee Charter (PDF)
