- - - - - - --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one): /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-17912
FIRST CITIZENS FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 52-1638667
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
22 Firstfield Road, Gaithersburg, Maryland 20878
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (301) 527-2400
-------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No
Number of shares of the registrant's common stock, par value $.01 per
share, outstanding as of November 3, 1995: 2,622,550
- - - - - - --------------------------------------------------------------------------------
FIRST CITIZENS FINANCIAL CORPORATION
AND SUBSIDIARY
FORM 10-Q
INDEX
Part I Financial Information Page
Item 1 Financial Statements of First Citizens Financial
Corporation and Subsidiary:
Unaudited Consolidated Statements of Financial Condition
as of September 30, 1995 and December 31, 1994............ 3
Unaudited Consolidated Statements of Income for the
three and nine months ended September 30, 1995 and 1994... 4
Unaudited Consolidated Statements of Cash Flows for
the nine months ended September 30, 1995 and 1994......... 5
Unaudited Notes to Unaudited Consolidated Financial
Statements as of and for the nine months ended
September 30, 1995 and 1994............................... 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 9
Part II Other Information
Item 6 Exhibits and Reports on Form 8-K...................... 17
Signature Page........................................ 18
Exhibit Index......................................... 19
2
FIRST CITIZENS FINANCIAL CORPORATION AND SUBSIDIARY
Unaudited Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data)
September 30, December 31,
1995 1994
Assets
Cash and cash equivalents.............................................................. $ 7,774 $ 7,828
Securities available-for-sale, at estimated fair value................................. 32,991 7,030
Securities held-to-maturity, net (estimated fair value of $80,203
at September 30, 1995 and $74,159 at December 31, 1994).............................. 80,197 77,850
Loans receivable, net of allowance for losses of $6,399 and $6,244
at September 30, 1995 and December 31, 1994, respectively............................ 428,647 425,090
Loans held for sale, net, at lower of cost or market................................... 10,156 9,418
Stock in the Federal Home Loan Bank of Atlanta, at cost................................ 3,607 3,556
Real estate owned, net of allowance for losses of $1,709 and $1,582
at September 30, 1995 and December 31, 1994, respectively............................ 17,432 14,826
Real estate ventures, net of allowance for losses of $1,398 at
September 30, 1995 and December 31, 1994,............................................ 2,441 2,355
Accrued interest and dividends receivable.............................................. 3,323 2,777
Office properties and equipment, net................................................... 2,729 2,787
Income taxes receivable................................................................ 156 439
Deferred income taxes, net ............................................................ 1,889 1,264
Prepaid expenses and other assets...................................................... 6,366 3,068
--------- ---------
Total Assets $ 597,708 $ 558,288
======= =======
Liabilities
Deposit accounts....................................................................... $ 472,592 $ 457,007
Advances from the Federal Home Loan Bank of Atlanta.................................... 73,640 60,290
Advance payments by borrowers for taxes and insurance.................................. 1,409 2,341
Accrued interest payable............................................................... 244 211
Accounts payable and accrued expenses.................................................. 12,631 4,403
--------- --------
Total Liabilities................................................................. 560,516 524,252
------- -------
Stockholders' Equity
Preferred stock, $.01 per share par value, 2,000,000 shares authorized,
none issued and outstanding.......................................................... -- --
Common stock, $.01 per share, par value, 8,000,000 shares authorized,
2,622,550 and 2,348,209 shares issued and outstanding at
September 30, 1995 and December 31, 1994, respectively............................... 26 23
Additional paid-in capital............................................................. 22,231 18,269
Retained earnings -- substantially restricted.......................................... 14,815 15,744
Unrealized net holding gains on available-for-sale portfolio, net of taxes............. 120 --
---------- ------------
Total Stockholders' Equity........................................................ 37,192 34,036
-------- --------
Total Liabilities and Stockholders' Equity $ 597,708 $ 558,288
======= =======
See accompanying notes to consolidated financial statements.
3
FIRST CITIZENS FINANCIAL CORPORATION AND SUBSIDIARY
Unaudited Consolidated Statements of Income
(In thousands except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
---- ---- ---- ----
Interest Income
Mortgage loans................................................. $ 8,118 $ 7,284 $ 24,325 $ 20,849
Other loans.................................................... 994 742 2,849 2,069
Securities..................................................... 1,819 1,343 4,723 4,134
Real estate ventures........................................... 54 7 189 67
Other interest................................................. 14 15 65 119
--------- -------- ---------- ----------
Total interest income...................................... 10,999 9,391 32,151 27,238
------ ----- ------ ------
Interest expense
Deposit accounts............................................... 5,746 4,427 16,215 12,909
Advances from the FHLB of Atlanta.............................. 948 632 2,700 1,759
Capitalized interest........................................... (36) (96) (115) (318)
------- ------ --------- -------
Total interest expense..................................... 6,658 4,963 18,800 14,350
------ ----- ------ -------
Net interest income................................................ 4,341 4,428 13,351 12,888
(Recovery of) provision for loan losses (48) ( 58) 202 (180)
------- ------- ------- -------
Net interest income after (recovery of) provision
for loan losses................................................ 4,389 4,486 13,149 13,068
------ ----- ------- -------
Other income
Loan fees and service charges.................................. 73 137 270 446
Servicing fee income, net...................................... 84 54 210 172
Gain on sale of loans.......................................... 191 41 341 499
Gain on sale of securities..................................... -- 66 45 124
Savings service charges........................................ 235 190 659 535
Other.......................................................... 183 72 385 220
------- ------- -------- --------
Total other income.......................................... 766 560 1,910 1,996
------- ------ ------- -------
Operating expense
Compensation and employee benefits............................. 1,838 1,994 5,700 5,610
Occupancy...................................................... 315 260 912 765
Advertising and promotion...................................... 92 81 376 297
Federal insurance premiums and assessments..................... 300 330 954 990
Equipment, maintenance and data processing..................... 290 287 919 886
Professional services.......................................... 200 183 567 505
(Gain) loss from real estate, net.............................. 42 (50) 161 832
Other.......................................................... 437 318 1,183 932
------- ------ ------- --------
Total operating expense.................................... 3,514 3,403 10,772 10,817
------ ----- ------ ------
Income before income taxes......................................... 1,641 1,643 4,287 4,247
Income tax expense ................................................ 597 556 1,342 1,436
------- ------- ------- -------
Net income......................................................... $ 1,044 $ 1,087 $ 2,945 $ 2,811
====== ====== ======= =======
Earnings per common and common equivalent
share (note 3)................................................ $ .36 $ .38 $ 1.03 $ 1.00
======== ======= ======== ========
See accompanying notes to consolidated financial statements.
4
FIRST CITIZENS FINANCIAL CORPORATION AND SUBSIDIARY
Unaudited Consolidated Statements of Cash Flows
(In thousands)
Nine Months Ended
September 30,
1995 1994
Operating activities
Net income......................................................................... $ 2,945 $ 2,811
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for losses on assets................................................... 331 895
Amortization of loan fees, premiums, discounts and deferred
interest...................................................................... (794) (576)
Loans originated for resale...................................................... (26,605) (24,618)
Sale of loans originated for resale.............................................. 25,008 33,349
Repayments of loans held for sale................................................ 878 3,227
(Increase) decrease in accrued interest receivable and other assets.............. 1,151 (1,317)
Dividends received in stock in FHLB of Atlanta .................................. (51) (44)
Depreciation and amortization of office properties and equipment................. 293 365
Increase in accrued interest payable and other liabilities....................... 3,140 4,885
Income taxes recoverable......................................................... 283 173
Tax refund received.............................................................. -- 11
(Increase) decrease in deferred income taxes, net................................ (699) 1,213
Other............................................................................ 5 (2)
----------- ------------
Net cash provided by operating activities..................................... 5,885 20,372
------- --------
Investing activities
Loan principal repayments.......................................................... 68,669 71,595
Loans originated................................................................... (76,768) (112,603)
Loans sold......................................................................... 36 --
Loans purchased.................................................................... -- (1,075)
Loan fees, discounts and interest income deferred.................................. 44 845
Purchase of securities available-for-sale, net..................................... (29,250) (4,997)
Proceeds from sale of securities available-for-sale, net........................... -- 11,193
Securities available-for-sale principal repayments................................. 1,781 9,127
Maturity of securities available-for-sale.......................................... 1,000 --
Purchase of securities held-to-maturity, net....................................... (6,122) (26,715)
Securities held-to-maturity principal repayments................................... 2,665 6,735
Maturity of securities held-to-maturity............................................ 7,009 --
Capitalized additions to and purchases of real estate owned........................ (2,264) (6,531)
Proceeds from sale of real estate owned, gross..................................... 4,488 11,768
Investments in and advances to real estate ventures................................ (86) (316)
Repayment of investments in and advances to real estate ventures .................. -- 73
Net additions to office properties and equipment................................... (235) (442)
---------- ---------
Net cash used in investing activities........................................... (29,033) (41,343)
-------- -------
5
FIRST CITIZENS FINANCIAL CORPORATION AND SUBSIDIARY
Unaudited Consolidated Statements of Cash Flows (Continued)
(In thousands, except per share data)
Nine Months Ended
September 30,
1995 1994
Financing activities
Net decrease in deposits with maturities of three months or less................... (17,344) (10,796)
Increase in deposits with greater than three months maturity....................... 789,835 174,861
Withdrawals of deposits with greater than three months maturity.................... (756,906) (157,932)
Advance payments by borrowers for taxes and insurance, net......................... (932) (497)
Proceeds from FHLB of Atlanta advances............................................. 154,140 65,960
Repayments of FHLB of Atlanta advances............................................. (145,790) (50,910)
Net proceeds from exercise of stock options........................................ 99 19
Other.............................................................................. (8) (5)
----------- -----------
Net cash provided by financing activities........................................ 23,094 20,700
-------- --------
Decrease in cash and cash equivalents............................................ (54) (271)
Cash and cash equivalents at beginning of period ................................ 7,828 10,689
--------- -------
Cash and cash equivalents at end of period....................................... $ 7,774 $ 10,418
========= =======
Supplemental information
Interest paid on deposits and borrowed funds....................................... $ 4,022 $ 2,914
Charge-offs net of recoveries...................................................... 47 2,370
Loans to facilitate the sale of real estate owned.................................. 1,291 3,915
Income tax payment ................................................................ 1,757 51
Change in unrealized net holding gains on available-for-sale
portfolio, net of taxes.......................................................... 120 519
Stock dividend (note 3)............................................................ 3,874 1,441
Securities available-for-sale transferred to held-to-maturity
portfolio ....................................................................... 5,843 9,950
Loans transferred to real estate owned at fair value............................... 6,244 2,913
See accompanying notes to consolidated financial statements.
6
FIRST CITIZENS FINANCIAL CORPORATION AND SUBSIDIARY
Unaudited Notes to Unaudited Consolidated Financial Statements
As of and for the Nine Months Ended September 30, 1995 and 1994
1) Basis of Presentation
On August 2, 1989, First Citizens Financial Corporation's ("First Citizens
Financial") formation as the holding company of Citizens Savings Bank F.S.B.
("Citizens" or the "Bank") was completed. On that date, each outstanding share
of common stock of Citizens was converted automatically into one share of common
stock of First Citizens Financial and Citizens became a wholly-owned subsidiary
of First Citizens Financial.
The consolidated financial statements include the accounts of Citizens and
its wholly-owned subsidiaries and of First Citizens Financial. First Citizens
Financial and its wholly-owned subsidiary are referred to collectively as the
"Company".
The financial statements as of September 30, 1995 and for the three and nine
months ended September 30, 1995 and 1994 are unaudited but in the opinion of
management of the Company, contain all adjustments, consisting solely of normal
recurring entries, necessary to present fairly the consolidated financial
condition as of September 30, 1995 and the results of consolidated operations
for the three and nine months ended September 30, 1995 and 1994 and consolidated
cash flows for the nine months ended September 30, 1995 and 1994. The
consolidated statement of financial condition as of December 31, 1994 is derived
from audited financial statements. It is suggested that these condensed
financial statements be read in conjunction with the financial statements and
notes thereto included in the Company's 1994 Annual Report and Form 10-K.
The results of consolidated operations for the three and nine months ended
September 30, 1995 are not necessarily indicative of results that may be
expected for the entire year ending December 31, 1995.
Certain amounts for 1994 have been reclassified to conform to the
presentation for 1995.
2) Impaired Loans
Effective January 1, 1995, the Company adopted, on a prospective basis,
Statement of Financial Accounting Standards ("SFAS") No. 114, Accounting by
Creditors for Impairment of a Loan, which was issued in May 1993, and No. 118,
Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures, an Amendment of FASB Statement No. 114, which was issued in October
1994. Under SFAS 114, a loan is impaired when, based on all current information
and events, it is probable that a creditor will be unable to collect all amounts
due according to the contractual terms of the agreement, including all scheduled
principal and interest payments. SFAS 114 requires that impaired loans be
measured based on the present value of expected future cash flows, discounted at
the loan's effective interest rate. As a practical expedient, impairment may be
measured based on the loan's observable market price, or, if the loan is
collateral-dependent, the fair value of the collateral. When the measure of the
impaired loan is less than the recorded investment in the loan, the impairment
is recorded through a valuation allowance. In addition, SFAS 114
7
changes the method of accounting for loans for which foreclosure is probable and
requires that such impaired loans be accounted for as loans.
The Bank evaluates each impaired real estate loan individually to determine
the income recognition policy. Generally, payments received are applied in
accordance with the contractual terms of the note or as a reduction of
principal.
At September 30, 1995, the Bank had impaired real estate loans with a
carrying value of $3.7 million. There were no specific reserves for losses on
such impaired loans. The average recorded investment in impaired real estate
loans for the nine months ended September 30, 1995 was $6.3 million. The Bank
recognized interest income of $24,000 on its impaired loans for the nine months
ended September 30, 1995. Properties reported as in-substance foreclosures and
selected expense amounts at September 30, 1994 have been reclassified to loans
to conform to the presentation for 1995.
3) Earnings Per Share
On April 21, 1995, the Board of Directors declared a 10% stock dividend which
was distributed on June 5, 1995 to stockholders of record on May 5, 1995.
Average shares outstanding and all per share amounts are based on the increased
number of shares giving retroactive effect to the stock dividend.
Earnings per share for the three and nine months ended September 30, 1995
were determined by dividing net income by 2,876,538 and 2,858,761, the weighted
average number of shares outstanding during these periods, respectively (as
adjusted for the 10% stock dividend). Earnings per share for the three and nine
months ended September 30, 1994 were determined by dividing net income by
2,839,799 and 2,815,952, the weighted average number of shares outstanding
during these periods, respectively (as adjusted for the 10% stock dividend).
Outstanding shares also include common stock equivalents which consist of
outstanding stock options, if such options are dilutive. The Company has not
separately reported fully diluted earnings per share as it is not materially
different from earnings per share.
8
FIRST CITIZENS FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in the tables in thousands)
This discussion and analysis includes a description of material changes which
have affected the Company's consolidated financial condition and consolidated
results of operations during the periods included in the Company's financial
statements.
FINANCIAL CONDITION (September 30, 1995 compared to December 31, 1994)
Total assets increased by $39.4 million, or 7.1%, at September 30, 1995
compared to December 31, 1994. Such increase was primarily due to increases of
$28.3 million in securities and $4.3 million in loans. Real estate owned
increased by $2.6 million, net.
The following table sets forth the amounts of the Bank's nonperforming assets
by category at the dates indicated:
September 30, 1995 December 31, 1994
No. of loans No. of loans
Amount or projects Amount or projects
Nonaccrual loans:
Construction - Commercial land............... $ -- -- $ 9,349 1
Other nonconstruction loans.................. 1,668 14 530 8
------- --- -------- ---
Total nonaccrual loans..................... 1,668 14 9,879 9
------- --- ------- ---
Real estate venture........................... 940 1 939 1
-------- --- -------- ---
Real estate owned:
Residential land............................. 8,635 3 11,565 3
Residential construction..................... 1,726 1 1,841 1
Residential property......................... 237 1 -- --
Commercial land.............................. 8,544 4 2,825 3
Commercial office building................... -- -- 177 1
-------- --- -------- ---
Total real estate owned................... 19,142 9 16,408 8
------ --- ------ ---
Total nonperforming assets, gross............. 21,750 24 27,226 18
== ==
Specific loss reserves..................... 2,651 2,521
------- -------
Total nonperforming assets, net............... $ 19,099 $ 24,705
====== ======
Total nonperforming assets, net, as a
percentage of total assets................. 3.2% 4.4%
====== ======
Total loss reserves as a percentage of
total nonperforming assets, gross.......... 44.3% 34.3%
====== ======
Troubled debt restructurings, net (a)......... $ 5,475 3 $ 2,813 2
====== === ====== ===
Performing loans greater than 90 days
past maturity ............................ $ 915 7 $ 59 2
====== === ====== ===
<FN>
(a) Includes $2.9 million in investments in and advances to real estate
ventures.
</FN>
9
During the nine months ended September 30, 1995, the Bank's nonperforming
assets, net decreased by $5.6 million. The primary causes of the decrease were
sales of real estate owned properties amounting to $5.3 million and repayments
of $1.5 million on nonaccrual assets. Offsetting increases include costs
capitalized on several real estate projects being developed to permit their sale
and ten new nonperforming loans. During April 1995, the Bank received $.8
million in proceeds from the sale by the borrower of one of the commercial land
lots securing the $9.3 million nonaccrual construction loan included in the
above table at December 31, 1994. These monies were applied to reduce the
outstanding principal balance of the loan to $8.6 million. During May 1995, the
loan was restructured and the Bank received commercial lots with a fair value of
$6.0 million in lieu of cash payment. The remaining loan balance is to be repaid
by May 1997 and is reported as a troubled debt restructuring at September 30,
1995. Troubled debt restructurings at September 30, 1995 also included a real
estate venture amounting to $2.9 million which has negotiated a deferred
interest repayment plan with the Bank.
At September 30, 1995, there was one loan (amounting to $127,000) with
respect to which known information about the possible credit problems of the
borrowers or the cash flows of the security property caused management to have
serious doubts regarding the ability of the borrowers to comply with the present
loan repayment terms and which may result in the future inclusion of such loan
in nonperforming assets.
In accordance with applicable Office of Thrift Supervision ("OTS")
regulations, the Bank regularly reviews assets in its portfolio to determine
whether any asset requires classification. On the basis of such review, the
following assets, which include all of the nonperforming assets in the previous
table, were classified at the dates indicated:
September 30, December 31,
1995 1994
Classified:
Substandard.......................... $ 25,037 $ 30,379
Doubtful............................. 226 354
Loss................................. 3,137 2,999
------- -------
28,400 33,732
Specific loss reserves............... (3,137) (2,999)
------ ------
Classified assets, net............... $ 25,263 $ 30,733
====== ======
The Bank also identified assets which possess credit deficiencies or
potential weaknesses deserving management's close attention as "special
mention". These assets totaled $24.4 million at September 30, 1995 compared to
$23.9 million at December 31, 1994.
An allowance for losses on loans is established through a provision for loan
losses based upon management's evaluation of the risk inherent in the loan
portfolio and changes in the nature and volume of loan activity. Such evaluation
considers, among other factors, the estimated net realizable value of the
underlying collateral, current economic conditions and historical loan loss
experience. While management uses available information in establishing the
allowance for possible loan losses, future adjustments to the allowance may be
necessary if economic conditions differ substantially from the assumptions used
in making the evaluations. Additions to the allowance are charged to operations;
realized losses, net of recoveries, are charged to the allowance. In addition,
various regulatory agencies, as part of their examination process, periodically
review the Company's allowance for possible loan losses. Such agencies
10
may require the Company to recognize additions to the allowance based on their
judgments about information available to them at the time of their examinations.
The Bank provided an additional $202,000 for potential loan losses during
the nine months ended September 30, 1995 and incurred $47,000 of net charge-offs
during the period.
The Bank also establishes allowances for losses on real estate owned based
upon their fair values and allowances for investments in and advances to real
estate ventures based upon their net realizable values. The Bank provided
$129,000 for additional losses on real estate owned during the nine months ended
September 30, 1995. There were no additional provisions for possible losses on
real estate ventures during the period. The valuations of real estate owned
properties and investments in and advances to real estate ventures are reviewed
periodically and updated as necessary based on the Bank's expectations of
holding periods, leasing or sales activity, and other changes in market
conditions.
Management believes that current loss reserves are adequate at this time to
cover potential losses in the portfolio. There can be no assurance, however,
that additional loss provisions will not be necessary in the future if market
conditions deteriorate.
The Bank had unrealized gains of $275,000 and unrealized losses of $28,000
on its securities available-for-sale portfolio at September 30, 1995. The
amortized cost of this portfolio was $32.7 million at that date. There were
unrealized gains amounting to $.5 million and unrealized losses of $.5 million
on the securities held-to-maturity portfolio at September 30, 1995. The
amortized cost of this portfolio was $80.2 million at at that date.
Deposits, before interest was credited, increased by $.7 million, or .2%,
during the nine months ended September 30, 1995. Deposits, including interest
credited, increased by $15.6 million, a 3.4% increase. Also during the nine
months ended September 30, 1995, advances from the Federal Home Loan Bank
increased $13.4 million, or 22.1%. Federal Home Loan Bank advances had an
average interest rate of 5.9% at September 30, 1995.
At September 30, 1995, stockholders' equity totaled $37.2 million, or 6.2%
of total assets, and included $120,000 of net unrealized holding gains, net of
taxes, on securities available-for-sale under SFAS No. 115. At September 30,
1995, the Bank exceeded the currently applicable core, tangible and risk-based
capital requirements by $18.1 million, $27.0 million and $10.6 million,
respectively. Based on its regulatory capital position as of that date, the Bank
met the "well capitalized" criteria under OTS regulations. See "Liquidity and
Capital Resources".
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995
AND SEPTEMBER 30, 1994
General. Net interest income, after recovery of loan losses, decreased
$97,000, or 2.2%, when compared to 1994. There was a $1.6 million, or 17.1%,
increase in interest income which was offset by a $1.7 million, or 34.2%,
increase in interest expense. Recovery of loan losses decreased $10,000. Other
income increased by $206,000, or 36.8%, and operating expenses increased by
$111,000, or 3.3%, during the three months ended September 30, 1995 compared to
the same period in the prior year.
11
Pretax income amounted to $1.6 million in each of the three month periods ended
September 30, 1995 and 1994. The Company recorded net income of $1.0 million, or
$.36 per share, for the three months ended September 30, 1995 as compared to net
income of $1.1 million or $.38 per share, for the three months ended September
30, 1994.
Net Interest Income. The Company's net interest income, before recovery of
loan losses, decreased $87,000, or 2.0%, during the three months ended September
30, 1995 as compared to the same period of 1994. Interest income on loans
increased by $1.1 million, or 13.5%, primarily due to a $35.0 million increase
in average outstanding balances. Average yields increased from 7.8% to 8.2%
during the three months ended September 30, 1995 compared to the same period in
the prior year. Interest income on securities increased by $476,000 as a result
of an increase in average yields from 5.9% to 6.7% and a $18.7 million increase
in average balances. Interest income on real estate ventures increased during
the three months ended September 30, 1995 compared to the same period in the
prior year primarily due to construction and lease of an additional building
during late 1994. The Bank has renegotiated the current interest due on its
remaining real estate venture and interest due in excess of the amount received
is deferred.
Interest on deposits increased $1.3 million, or 29.8%, primarily due to an
increase in average rates paid on deposits from 4.0% to 4.8%. Average
outstanding balances increased $30.3 million. Interest on borrowed funds
increased $316,000 due to an increase in average rates paid from 4.9% to 5.8%
and a $12.9 million increase in average outstanding balances.
Recovery of Loan Losses. During third quarter of 1995, the Company recovered
$48,000 from the provision for loan losses compared to a recovery of $58,000
during the third quarter of 1994. Management of the Bank believes that the
current loss reserves appear adequate at this time to cover potential losses in
the loan portfolio. There can be no assurance, however, that additional reserves
will not be necessary if market conditions change.
Other Income. Total other income increased $206,000, or 36.8%, during the
three months ended September 30, 1995 as compared to the three months ended
September 30, 1994. Loan fees and service charges decreased $64,000 due to lower
extension and release fees collected in 1995. The Company realized gains
amounting to $191,000, an increase of $150,000 from 1994, on the sale of
mortgage loans originated for sale by First Citizens Mortgage Corporation
("FCMC"), the Bank's mortgage banking subsidiary. FCMC experienced increased
gains on sales of loans originated for sale due to increased originations of
such loans caused by decreased interest rates during the third quarter of 1995.
Also, during the third quarter of 1995, the Company realized a gain of $107,000
on the sale of a former branch site.
Operating Expense. Operating expense increased by $111,000, or 3.3%, during
the three months ended September 30, 1995 as compared to the three months ended
September 30, 1994. Compensation and employee benefits decreased $156,000
because the Bank implemented a pension plan for directors during the third
quarter of 1994. No such cost was incurred in 1995. The increase in occupancy
expense was primarily due to costs associated with the Bank's new administrative
offices. Loss from real estate increased by $92,000 primarily because net
operating expense of real estate owned increased as a result of legal expenses
incurred on real estate owned. Provisions for losses on real estate owned and
real
12
estate ventures during the three months ended September 30, 1995 amounted to
$48,000 compared to provisions during the three months ended September 30, 1994
of $236,000.
Income Taxes. For the quarters ended September 30, 1995 and 1994, the
Company's effective tax rate was less than the statutory tax rate due to
recoveries of the valuation allowance on deferred tax assets. When SFAS No. 109
Accounting for Income Taxes was adopted during the first quarter of 1993, the
Company established a valuation allowance for the excess of deferred tax assets
over taxable income available in carryback years and future reversals of
existing taxable temporary differences. The Company was able to recover $36,000
and $60,000 of the valuation allowance during the quarters ended September 30,
1995 and 1994, respectively. Amounts recovered reduce income tax expense for
financial statement purposes and the valuation allowance is correspondingly
reduced.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND
SEPTEMBER 30, 1994
General. Net interest income, after provision for (recovery of) loan losses,
increased $81,000, or .6%, when compared to 1994. There was a $4.9 million, or
18.0%, increase in interest income which was partially offset by a $4.5 million,
or 31.0%, increase in interest expense. Provision for loan losses increased
$382,000. Other income decreased by $86,000, or 4.3%, and operating expenses
decreased by $45,000, or .4%, during the nine months ended September 30, 1995
compared to the same period in the prior year. The Company recorded net income
of $2.9 million, or $1.03 per share, for the nine months ended September 30,
1995 as compared to net income of $2.8 million, or $1.00 per share, for the nine
months ended September 30, 1994.
Net Interest Income. The Company's net interest income, before provision for
(recovery of) loan losses, increased $463,000, or 3.6%, during the nine months
ended September 30, 1995 as compared to the same period of 1994. Interest income
on loans increased by $4.3 million, or 18.6%, primarily due to a $51.9 million
increase in average outstanding balances. Average yields increased from 7.8% to
8.1% during the nine months ended September 30, 1995 compared to the same period
in the prior year. Interest income on securities increased by $.6 million which
was primarily due to an increase in average yields from 5.8% to 6.6% during the
nine months ended September 30, 1995 compared to the same period in the prior
year. Average outstanding balances increased $1.1 million. Interest income on
real estate ventures increased during the nine months ended September 30, 1995
compared to the same period in the prior year primarily due to construction and
lease of an additional building during late 1994. The Bank has renegotiated the
current interest due on the remaining real estate venture and interest due in
excess of the amount received is deferred.
Interest on deposits increased $3.3 million, or 25.6%, primarily due to an
increase in average rates paid on deposits from 4.0% to 4.7%. Average
outstanding balances increased $27.7 million. Interest on borrowed funds
increased $.9 million due to an increase in average rates paid from 4.7% to 5.8%
and a $12.1 million increase in average outstanding balances.
Provision for (Recovery of) Loan Losses. During the first three quarters of
1995, the Company increased the provision for loan losses by $202,000. During
the first three quarters of 1994, the Company reduced the provision for loan
losses by a net of $180,000. As part of the supervisory
13
agreement entered into on December 12, 1991 as a result of the Bank's high level
of classified assets, the Bank agreed to maintain general valuation allowances
of at least $8.5 million. Based on the progress that the Bank made in reducing
its level of classified assets, on March 3, 1994, the OTS terminated the minimum
valuation allowance requirement and required that the Bank maintain adequate
loss reserves. Management of the Bank believes that the current loss reserves
appear adequate at this time to cover potential losses in the loan portfolio.
There can be no assurance, however, that additional reserves will not be
necessary if market conditions change.
Other Income. Total other income decreased $86,000, or 4.3%, during the nine
months ended September 30, 1995 as compared to the nine months ended September
30, 1994. Loan fees and service charges decreased $176,000 due to lower
extension fees and late charges collected in 1995. The Company realized gains
amounting to $341,000, a decrease of $158,000 from 1994, on the sale of mortgage
loans originated for sale by FCMC. FCMC experienced decreased gains on sales of
loans originated for sale due to decreased originations of such loans caused by
increased interest rates during the first half of 1995. Other income also
increased as a result of increased charges on deposit accounts and profits
recognized on the sale of a former branch site.
Operating Expense. Operating expense decreased by $45,000, or .4%, during
the nine months ended September 30, 1995 as compared to the nine months ended
September 30, 1994. Compensation and employee benefits increased $90,000 due to
additions to staffing which occurred in 1994, increased bonus accrual and
directors' fees and pension expense. The increase in occupany expense was
primarily due to costs associated with the Bank's new administrative offices.
Loss from real estate decreased by $.7 million because provisions for losses on
real estate owned and real estate ventures during the nine months ended
September 30, 1995 amounted to $129,000 compared to provisions during the nine
months ended September 30, 1994 of $1.1 million. Net operating expenses of real
estate owned increased as a result of sales of all remaining commercial
operating properties in 1994 and legal expenses incurred on real estate owned .
Income Taxes. For the periods ended September 30, 1995 and 1994, the
Company's effective tax rate was less than the statutory tax rate primarily due
to recoveries of the valuation allowance on deferred tax assets, as discussed
above. The Company was able to recover $156,000 of the valuation allowance
during the nine months ended September 30, 1995 and $210,000 during the nine
months ended September 30, 1994. Additionally, income tax expense during the
nine months ended September 30, 1995 was reduced by the tax effects of the
exercise of non-incentive stock options by former employees.
LIQUIDITY AND CAPITAL RESOURCES
Under current regulations, a savings association, such as the Bank,
generally is required to maintain liquid assets at 5.0% or more of its net
withdrawable deposits plus short-term borrowings. The Bank is in compliance with
this requirement. At September 30, 1995, the Bank had outstanding loan
commitments totaling $14.7 million.
SAIF-insured institutions, such as the Bank, are required to maintain
minimum levels of capital. At September 30, 1995, the Bank continued to exceed
all currently applicable core, tangible and risk-based capital requirements.
14
At September 30, 1995, the Bank had the following amounts of capital:
Actual % of Required % of Excess % of
Amount Assets(a) Amount Assets(a) Amount Assets(a)
Core (b) $36,004 6.0% $23,893 4.0%(c) $12,111 2.0%
Tangible 36,004 6.0 8,960 1.5 27,044 4.5
Risk-weighted(b) 40,721 10.9 29,919 8.0 10,802 2.9
<FN>
(a) Based upon adjusted total assets for the core and tangible capital
requirements, and risk-weighted assets for the risk-based capital
requirement.
(b) 5.0% core and 10.0% risk-based capital are required to be
considered "well capitalized" under the OTS "Prompt Corrective
Action" regulations.
(c) Under current OTS capital regulations, the minimum core capital
requirement is 3.0%. Under the OTS "Prompt Corrective Action"
regulations, the minimum core capital requirement to be considered
"adequately capitalized" is 4.0%.
</FN>
On August 31, 1993, the OTS issued a final rule, which has been delayed
until further notice, adding an interest-rate-risk ("IRR") component to its
risk-based capital rule. Savings institutions with greater than normal interest
rate exposure will be required to deduct from risk-based capital one-half of the
difference between the institution's actual measured exposure and the normal
level of exposure. The amount to be deducted will be provided by OTS. Based on
financial data as of September 30, 1995, management believes that compliance
with the new IRR would not have had a material impact on the Bank's risk-based
capital position at that date.
The United States Congress is considering legislation regarding federally
insured banks and thrifts which would, among other things, (i) abolish the OTS
and transfer its functions to other agencies of the United States government,
(ii) require federally chartered thrifts, including the Bank, to convert to
national or state bank charters or state thrift charters and (iii) impose a
one-time assessment in order to recapitalize the Savings Association Insurance
Fund ("SAIF"). The amount of the assessment will be determined by the Federal
Deposit Insurance Corporation and may be up to 90 basis points on the deposit
liabilities of certain thrifts, including the Bank. This legislation is in a
preliminary stage and it cannot be determined whether, or in what form, any such
legislation will eventually be enacted. If a 90 basis points special assessment
were required, it would result in a charge to the Bank of up to $2.6 million
after taxes, which would have the effect of reducing the Bank's tangible and
core capital to $33.4 million, or 5.6% of adjusted total assets, and risk-based
capital to $38.1 million, or 10.1% of risk- weighted assets, on a pro forma
basis as of September 30, 1995. Assuming such a special assessment were made
and, as a result, the SAIF was fully recapitalized, it would have the effect of
reducing the Bank's deposit insurance premiums to the SAIF.
At September 30, 1995, First Citizens Financial had $1.1 million of cash.
First Citizens Financial believes it can fund its working capital needs (which
primarily consist of certain shareholder-related expenses) from its own cash
account, through the next several years, without payment of dividends from the
Bank.
15
RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
SFAS No. 121 will be effective for fiscal years beginning after December 15,
1995 and establishes accounting standards for the impairment of long-lived
assets. Adoption of SFAS No. 121 is not expected to have a material impact on
the Company.
SFAS No. 122 will be effective for fiscal years beginning after December 15,
1995 and requires a mortgage banking enterprise to recognize as separate assets
the rights to service mortgage loans for others, however those rights are
acquired. Adoption of SFAS No. 122 is not expected to have a material impact on
the Company.
SFAS No. 123 will be effective for fiscal years beginning after December 15,
1995 and establishes accounting and reporting standards for stock-based employee
compensation plans. Adoption of SFAS No. 123 is not expected to have a material
impact on the Company.
16
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11. Computation of Primary and Fully Diluted Earnings Per Share.
27. Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
September 30, 1995.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST CITIZENS FINANCIAL
CORPORATION
------------------------
(Registrant)
Date: November 13, 1995 By: /s/ Enos K. Fry
----------------- ------------------------
Enos K. Fry
Vice Chairman and
President
Date: November 13, 1995 By: /s/ William C. Scott
----------------- ------------------------
William C. Scott
Senior Vice President and
Chief Financial Officer
18
FIRST CITIZENS FINANCIAL CORPORATION AND SUBSIDIARY
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT DESCRIPTION PAGE
11 Unaudited Computation of Primary and Fully Diluted
Earnings Per Share...................................... 20
27 Financial Data Schedule...................................... 21
19