UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended December 31, 1995
Commission file number 0-17912
First Citizens Financial Corporation
22 Firstfield Road
Gaithersburg, Maryland 20878
(301) 527-2400
Incorporated in the State of Delaware
IRS Employer Identification Number 52-1638667
Securities registered pursuant to Section 12(b) of the Act: (Not applicable)
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 8, 1996 was $38,560,827.
At March 8, 1996, the Registrant had 2,649,182 shares of $.01 par value common
stock outstanding.
Portions of the definitive proxy statement for the annual meeting of
stockholders to be held on April 19, 1996 are incorporated by reference into
Part III.
FIRST CITIZENS FINANCIAL CORPORATION 1995 Annual Report AND FORM 10-K Citizens
Savings Bank f.s.b.
Corporate Profile
First Citizens Financial Corporation is the holding company (formed in 1989) for
Citizens Savings Bank f.s.b. ("Citizens" or the "Bank"). At December 31, 1995,
Citizens had total assets of $607.6 million and operated through 16 offices
located in Montgomery and Frederick Counties in Maryland.
The common stock of First Citizens Financial Corporation is traded
over-the-counter on Nasdaq's National Market under the symbol "FCIT". All
depositor accounts of the Bank are insured up to $100,000 by the Savings
Association Insurance Fund, which is administered by the Federal Deposit
Insurance Corporation.
Citizens' message for 1996 is YOUR COMMUNITY BANK. Citizens has been serving its
community since 1929. Our employees actively participate in community projects,
live in your neighborhood and are here to serve you, our customers.
Table of Contents
Financial Highlights ......................... 1
Letter to Stockholders ....................... 2
Your Community Bank .......................... 4
Selected Consolidated Financial and Other Data 8
Management's Discussion and Analysis ......... 10
Consolidated Financial Statements ............ 18
Independent Auditors' Reports ................ 37
Report of Management ......................... 38
Selected Quarterly Financial Data ............ 38
Form 10-K .................................... 39
Investor Services Directory .................. 53
Citizens Savings Bank f.s.b. Locations ....... 53
Board of Directors and Corporate Officers .... 54
Financial Highlights
(Dollars in thousands except per share data)
Year ended December 31,
Increase
1995 1994 (Decrease)
Net interest income ........................ $ 17,723 $ 17,485 1.4%
(Recovery of) provision for loan losses .... (28) (635) (95.6)
Other income ............................... 2,643 2,547 3.8
Loss from real estate, net ................. 99 1,810 (94.5)
Other expense .............................. 14,202 13,525 5.0
Net income ................................. 4,107 3,635 13.0
Earnings per share of common stock ......... 1.43 1.28 11.7
At December 31,
Increase
1995 1994 (Decrease)
Total assets ............................................. $607,429 $558,288 8.8%
Loans receivable, net .................................... 412,603 427,445 (3.5)
Investment securities, net .............................. 119,655 88,436 35.3
Real estate owned, net ................................... 13,269 14,826 (10.5)
Deposits ................................................. 487,097 457,007 6.6
Stockholders' equity ..................................... 38,641 34,036 13.5
Total loan originations .................................. 144,433 179,765 (19.7)
Allowance for losses on loans and real estate ............ 8,435 9,224 (8.6)
Charge-offs, net of recoveries ........................... 1,135 6,994 (83.8)
Book value per common share .............................. 14.69 13.18 11.5
Nonperforming assets, net, as a percentage of total assets 2.5% 4.4% (43.2)
Stockholders' equity as a percentage of total assets ..... 6.4 6.1 4.9
Stock Traded on Nasdaq-First Citizens Financial Corporation's (the "Company")
common stock trades on Nasdaq's National Market under the symbol "FCIT". As of
December 31, 1995, First Citizens Financial Corporation had approximately 901
stockholders of record and 2,629,576 outstanding shares of common stock. The
Company has not paid any cash dividends to holders of its common stock. It is
not expected that cash dividends will be paid to holders of its common stock in
the foreseeable future. See Notes 9 and 13 to the Consolidated Financial
Statements for restrictions on the payment of dividends by Citizens Savings Bank
f.s.b. to the Company. The following table sets forth the high, low and closing
market price information for the common stock of the Company for the periods
indicated.
Calendar Quarter Ended:
High Low Close
1995:
December 31. $20.00 $15.50 $19.00
September 30 18.63 17.25 18.50
June 30 .... 18.75 13.18 17.75
March 31 (a) 14.32 10.91 13.58
1994: (a)
December 31. $15.91 $11.36 $11.82
September 30 16.36 11.82 15.91
June 30 .... 12.50 10.39 11.59
March 31 (b) 12.34 9.74 10.17
<FN>
(a) Adjusted for a 10% stock dividend declared April 21, 1995.
(b) Adjusted for a 5% stock dividend declared April 20, 1994.
</FN>
To Our Stockholders:
For 1995, First Citizens Financial Corporation (the "Company") reported record
net income and year-end stockholders' equity. Net income totaled $4.1 million,
or $1.43 per share, in 1995, an increase of 13% over the prior year's net income
of $3.6 million, or $1.28 per share. Stockholders' equity reached a record high
of $38.6 million at December 31, 1995, up from the $34.0 million reported at
year-end 1994. This was the fourth consecutive year during which stockholders'
equity has increased since the $21.5 million reported at December 31, 1991.
Net interest income before (recoveries of) loan loss provisions of the Company's
principal subsidiary, Citizens Savings Bank f.s.b. (the "Bank") increased
slightly to $17.7 million for 1995 from $17.5 million for 1994. Due to an
increase in deposit rates during 1995, the Bank's net interest margin decreased
to 3.15% in 1995, compared to 3.37% in 1994. However, average interest-earning
assets increased $46.6 million, to $550.4 million at December 31, 1995, from
$503.8 million at December 31, 1994, which more than offset the decline in net
interest margin.
Operating expenses decreased $1.0 million, to $14.3 million in 1995 from $15.3
million in 1994. During 1995, loss from real estate, net, amounted to $99,000 as
compared to net losses of $1.8 million in 1994. This decrease resulted primarily
from a $1.0 million reduction in the provision for losses on real estate owned.
The Bank also recognized net gains of $.7 million from the sale of real estate
owned in 1995 compared to a net loss on the sale of real estate owned of $.1
million in 1994.
The market price of the Company's stock increased to $19.00 per share at
December 31, 1995, from $11.82 per share at December 31, 1994, a 60.7% increase
over the prior year's close, after adjustment for a 10% stock dividend. The
Company paid a 10% stock dividend to stockholders on June 5, 1995, the fourth
stock dividend declared by the Board of Directors over the past several years
and a doubling of the amount of the stock dividend (5%) declared in 1994 and in
prior years.
The Bank experienced continued success in reducing its nonperforming assets, net
(including real estate owned) in 1995, decreasing these assets to $15.1 million,
or 2.5% of total assets, compared to $24.7 million, or 4.4% of total assets, as
of December 31, 1994. Classified assets, net, decreased by approximately 33%, to
$20.6 million in 1995, compared to $30.7 million in 1994. These reductions
reflect management's continued commitment to further reduce the levels of
nonperforming and classified assets.
A year ago we announced to you, our stockholders, our belief that many of the
burdens of the past years are now behind us and that management had begun to
turn its focus toward strengthening the image and position of the Bank in our
community for the future. We set out in 1995 to redefine the Bank's position as
a true "Community Bank", expanding its relationships with local middle-market
companies and placing renewed emphasis on strengthening our banking
relationships through individualized attention, responsiveness to changes in our
customers' needs and targeting new markets for future growth and development. We
committed ourselves to providing the highest level of professional service and
new and innovative products, and rededicated ourselves to the people within our
community and to our stockholders, whose needs and interests remain our foremost
priority and our most valued commodity.
1995 signaled the beginning of this renewed emphasis, and our performance over
the past year reflects well upon the results of this effort. In an era of rapid
change and uncertainty in the financial industry, we remain solidly committed to
the traditional values upon which the Bank and the Company were first founded
while at the same time positioning the Bank to compete in the future. As a
"Community Bank", we believe the value of the services we provide and the
strength of the relationships we establish are enhanced by our proximity and
accessibility to our customer base. While many competitors offer similar
services and products from distant locations, we provide individualized
attention and personal banking relationships from within our market community.
An indication of our belief that we will be better able to serve our customer
base was the addition of several new products such as "the merchant card", "the
MasterMoneyTM direct debit card" and the commercial "Cash Management system".
These new and innovative products not only make banking more convenient but also
generate fee income for the Bank. We have also established quarterly "economic
breakfasts" targeted at local middle-market companies in order to foster the
development of new relationships with these businesses. These meetings feature a
guest speaker who discusses the current economic climate and outlook at
community, regional and national levels. Also symbolic of the new direction
which the Bank began in 1995 was the relocation for our corporate headquarters
to Gaithersburg, Maryland, in March 1995. This relocation increases the
visibility and proximity of the Bank to the commercial enterprises and markets
we have targeted as we continue to develop business and customer relationships.
This new emphasis and direction are the foundations from which we will build our
future. The cornerstone of our efforts will be to continue to focus on expanding
and growing our relationships with local middle-market companies, developing a
broader network of services and products to offer our customers, while
continuing to provide the traditional banking relationships which are the heart
and soul of a "Community Bank".
We will continue to build upon the success we have experienced in these areas to
further enhance the Company's profitability, maximize its value and reward the
faithful support and continued confidence of you, our stockholders.
Very truly yours,
Herbert W. Jorgensen
Chairman of the Board and
Chief Executive Officer
Enos K. Fry
Vice Chairman of the Board
and President
Your Community Bank
Although much has changed at Citizens Savings Bank f.s.b. since we opened our
doors for business in 1929, one thing remains the same -- our fine tradition of
community service.
Community Service [ ]
Our extraordinary growth in assets is a product of our belief that we are
partners with our customers and our community. Our commitment to service extends
beyond Citizens Savings Bank branches and offices. Because of this partnership
with our community, our staff members are active volunteer leaders in a broad
range of civic endeavors. These volunteer services range from business and
economic development to health and youth organizations.
One example of this participation in the business community is our involvement
in the Montgomery Housing Partnership, Inc.'s (MHPI) Naples Manor project. MHPI
was created to work with local county government with the goal of providing
affordable housing in our community. Citizens has not only provided financial
donations to support MHPI but has also opened a line of credit for MHPI designed
to facilitate the purchase of additional housing units.
For over 66 years, we have remained a community bank, committed to helping our
customers achieve their financial goals by providing them with the best possible
savings and lending products while demonstrating our commitment to customer
service on a daily basis. Because we are partners with our community, we make
decisions where it counts, right here in Montgomery County. We are actively
involved in our community _ not because we have to be, but because we want to
be. As we continue our growth, our efforts will be focused on strengthening this
tradition.
Consumer Lending [ ]
We are proud to announce that our Consumer Lending Division experienced an
unparalleled 28% increase in loan originations during 1995. A large portion of
this increase is attributable to the popularity of our 1995 Home Equity Credit
Line product which offered favorable terms of prime plus zero.
Another contributing factor to our increase was our auto loan product, which
offered competitive rates and the convenience of applying for an auto loan by
phone with a guaranteed response within 24 hours. Our auto loan portfolio
increased 29% in 1995.
Corporate Lending [ ]
In 1995, our Corporate Lending Division emphasized a strategy of focusing on
small- and medium-sized companies operating within our community. We specialize
in providing loans and other financial services to businesses and professionals
who are building organizations that, in turn, improve the overall economy of our
community. We pride ourselves in the knowledge of our account officers. They
have outstanding lending skills and a broad spectrum of experiences which are
utilized to fully understand and then respond to the needs of our customers. At
Citizens, we recognize the intrinsic interdependence between banking and a
successful corporate community. With this knowledge, motivation and commitment
to service, our account officers in the Corporate Lending Division were able to
increase the Division's loan portfolio by almost 60% and increase corporate
demand deposit accounts by 48%.
Community Banking [ ]
Citizens is a community bank you can depend on. We are committed to helping
people build a strong financial future. Many of our customers came to us as
young couples financing their first home. We have helped them save for their
future and realize their dreams: cars, education, vacations and retirement. They
have stayed with us through the years, bringing their children and grandchildren
to bank with us. To us this loyalty represents the highest form of recognition.
Today, our customers are in the forefront of the trend toward high-tech banking
services. The move towards more sophisticated banking services presents us with
new challenges and the opportunity to serve our customers in new markets. In
1995, we were one of the first banks to introduce the MasterMoneyTM debit card.
MasterMoneyTM not only allows customers the flexibility of easy access to their
money _ it also generates additional income for the Bank via service fees for
MasterMoneyTM transactions.
Our Golden Advantage Plus Checking, which offers customers who are 55 or older
expanded services such as free checks, free checking and free ATM use at all
MOST and Plus ATMs, generated $3.9 million in deposits during 1995. We also
introduced Advantage Plus checking, giving customers free ATM use at all MOST
and Plus ATMs, which created another $4.2 million in deposits during 1995.
Real Estate Lending [ ]
Due to their exceptional team of lending officers, 1995 was a pivotal year for
the Real Estate Lending Division. Our lending officers are highly skilled at
matching the community's need for development with the builders' need for
flexibility in the financial structuring of development and construction loans.
The Real Estate Lending Division succeeded in reducing our non-performing assets
from $24.7 million, or 4.4% of total assets, at December 31, 1994 to $15.1
million, or 2.5% of total assets, at December 31, 1995. The positive impact of
these reductions is reflected in the current financial statements of Citizens
Savings Bank.
We remain a community bank that believes in the simple philosophy that banking
is a "people" business and that our customers are Citizens' most important
asset. Individual attention to the financial needs of our customers is what
Citizens Savings Bank is all about. We take the time to identify the customers'
financial goals, determine which of our products best meets their needs and
provide them with the best in customer service.
Selected Consolidated Financial and Other Data
(Dollars in thousands except per share data)
The following table summarizes certain selected consolidated financial data at
or for the periods indicated. This information should be read in conjunction
with the consolidated financial statements and notes thereto which appear
elsewhere herein. All per share information has been restated to reflect a 10%
stock dividend declared April 21, 1995 and 5% stock dividends declared April 20,
1994 and April 21, 1993.
Operations Data
Year ended December 31,
1995 1994 1993 1992 1991
Interest income ................................................. $ 43,463 $ 37,339 $ 38,248 $ 41,202 $ 47,551
Interest expense ................................................ 25,740 19,854 20,921 26,618 36,220
------ ------ ------ ------ ------
Net interest income ............................................. 17,723 17,485 17,327 14,584 11,331
(Recovery of) provision for loan losses ......................... (28) (635) 1,329 352 6,351
------ ---- ----- --- -----
Net interest income after (recovery of) provision for loan losses 17,751 18,120 15,998 14,232 4,980
Other income .................................................... 2,643 2,547 3,936 4,553 3,946
Loss from real estate, net ...................................... 99 1,810 1,669 2,059 2,084
Other operating expense ......................................... 14,202 13,525 12,423 11,923 12,991
------ ------ ------ ------ ------
Income (loss) before income taxes (benefit) and cumulative
effect of accounting change ................................... 6,093 5,332 5,842 4,803 (6,149)
Provision for income taxes (benefit) ............................ 1,986 1,697 1,473 1,914 (2,515)
----- ----- ----- ----- ------
Income (loss) before cumulative effect of accounting change ..... 4,107 3,635 4,369 2,889 (3,634)
Cumulative effect of change in accounting for income taxes ...... _ _ 1,510 _ _
----- ----- ----- ----- ------
Net income (loss) ............................................... $ 4,107 $ 3,635 $ 5,879 $ 2,889 $ (3,634)
======== ======== ======== ======== ========
Earnings (loss) per common and common equivalent share
before cumulative effect of accounting change ................. $ 1.43 $ 1.28 $ 1.58 $ 1.12 $ (1.44)
Cumulative effect of change in accounting for income taxes ...... _ _ .54 _ _
-------- -------- -------- -------- --------
Earnings (loss) per common and common equivalent share .......... $ 1.43 $ 1.28 $ 2.12 $ 1.12 $ (1.44)
======== ======== ======== ======== ========
Financial Condition Data
At December 31,
1995 1994 1993 1992 1991
Total assets ............................................. $607,429 $558,288 $522,199 $541,297 $550,941
Investment securities, net (a) ........................... 119,655 88,436 85,007 113,011 137,828
Loan portfolio, gross:
Permanent loans (b) .................................... 406,499 394,699 338,913 314,811 289,509
Construction loans:
Residential .......................................... 28,639 27,908 21,445 19,328 25,183
Commercial real estate ............................... _ 4,053 9,727 9,727 10,197
Land acquisition and development ..................... 5,583 12,357 14,363 16,866 19,218
Land ................................................. 1,833 2,667 11,083 19,779 23,676
Other consumer and corporate loans ..................... 32,253 21,273 17,601 14,822 16,514
------ ------ ------ ------ ------
474,807 462,957 413,132 395,333 384,297
Allowance for loan losses ................................ 7,460 7,642 11,725 11,150 11,582
Nonperforming loans, net ................................. 1,828 9,879 13,244 20,490 29,130
Troubled debt restructurings, net ........................ 5,475 2,813 17,642 19,078 15,043
Real estate owned, net ................................... 13,269 14,826 26,880 35,424 38,089
Deposits ................................................. 487,097 457,007 436,227 460,004 445,181
Federal Home Loan Bank of Atlanta advances ............... 75,140 60,290 48,390 46,500 55,000
Other borrowings ......................................... _ _ _ 3,863 22,346
Stockholders' equity (c) ................................. 38,641 34,036 30,970 24,457 21,511
Book value per share ..................................... 14.69 13.18 12.09 9.65 8.50
Selected Consolidated Financial and Other Data (continued)
Other Data
At or for the
Year ended December 31,
1995 1994 1993 1992 1991
Return on average assets (d) ................................. .71% .68% 1.09% .53% (.66)%
Return on average stockholders' equity (d) ................... 11.37 11.21 20.88 12.67 (16.22)
Average stockholders' equity to average assets (d) ........... 6.24 6.04 5.23 4.19 4.04
Nonperforming assets, net, to total assets ................... 2.49 4.43 7.68 10.33 12.23
General and administrative expense to average total assets (e) 2.45 2.52 2.31 2.19 2.35
Average interest rate spread ................................. 3.01 3.28 3.44 3.08 2.53
Net interest margin (f) ...................................... 3.15 3.37 3.39 2.92 2.25
Number of:
Deposit accounts ........................................... 48,217 43,159 35,670 37,236 38,921
Mortgage loans ............................................. 3,721 3,314 3,005 3,193 3,271
Branch offices ............................................. 14 14 14 14 14
Mortgage origination offices ............................... 1 2 1 1 1
<FN>
(a) Includes agency and mortgage-backed securities and Federal Home Loan Bank
("FHLB") of Atlanta stock. Includes $73.7 million, $7.0 million and $34.6
million in securities available-for-sale at December 31, 1995, 1994 and
1993, respectively.
(b) Includes loans held for sale, second trust loans, home equity loans and
loans secured by commercial real estate.
(c) Includes unrealized net holding gains, net of applicable taxes, at December
31, 1995, 1994 and 1993.
(d) Ratio was calculated on a daily basis for 1995, 1994 and 1993 and on a
monthly basis for prior years.
(e) Excludes provisions for losses on real estate.
(f) Net interest income divided by average interest-earning assets.
</FN>
Management's Discussion and Analysis
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(Dollars in the tables in thousands except per share data)
General
First Citizens Financial Corporation (the "Company") is the holding company for
Citizens Savings Bank f.s.b. ("Citizens" or the "Bank"). The Company's business
consists mainly of the business of the Bank.
The consolidated earnings of the Company depend primarily on the difference
between the interest earned by the Bank on its loan and securities portfolios
and the interest paid on its deposits and borrowings. Other sources of income
include gains on sales of assets, including loans and securities, and other
non-interest income, such as fees and service charges on loans and deposits.
Earnings are also affected by operating expenses, provisions for losses on
assets (including loans and real estate owned) and income taxes.
Net income for 1995 increased 13.0% and was $4.1 million, or $1.43 per share,
compared to net income for 1994 of $3.6 million, or $1.28 per share. Net income
for 1993 was $5.9 million, or $2.12 per share. During 1995, the Bank reduced
losses on liquidation of real estate owned properties and reduced recoveries of
loan loss allowances. Net income for 1993 included the impact of adoption of
Statement of Financial Accounting Standards ("SFAS") No. 109 on income taxes.
Adoption of this Statement resulted in a one-time increase in net income of $1.5
million, or $.54 per share. Due to increases in taxable income, the Company
recovered $.2 million, or $.07 per share, of the valuation allowance on deferred
tax assets in 1995 compared to $.3 million, or $.11 per share, in 1994 and $.8
million, or $.27 per share, in 1993. The Company's return on average equity was
11.37% and return on average assets was .71% for 1995. At December 31, 1995, the
Company had total assets of $607.4 million and stockholders' equity of $38.6
million. At that date, the Bank was considered "well capitalized" under
regulatory definitions. See Part I _ Item 1, "Business _ Regulation _ Regulatory
Capital Requirements" of Form 10-K.
Financial Condition
Loans. The Company's total loan portfolio, net, increased $10.7 million, or
2.4%, to $447.5 million at December 31, 1995 compared to $436.9 million at
December 31, 1994, primarily reflecting originations in excess of repayments.
During 1995, loan originations and purchases totaled $144.5 million, including
$37.1 million of loans originated for resale, compared to $179.8 million,
including $28.7 million originated for resale in 1994. The Bank increased its
origination of home equity, consumer and corporate loans by 55.4%, from $44.1
million originated during 1994, to $68.6 million originated in 1995. Origination
of permanent mortgage loans decreased by 69.2%, from $108.2 million originated
during 1994, to $33.3 million originated in 1995. Such decrease was due to
higher interest rates, which reduced the volume of residential loans originated
and increased emphasis on origination of other types of loans, as well as
management's decision to invest in securities. Repayments and sales of loans
totaled $96.3 million and $35.5 million, respectively, during 1995. Loans
amounting to $6.2 million were transferred to real estate owned during 1995.
Loans to facilitate the sale of real estate owned at market rates amounted to
$3.3 million during 1995. At December 31, 1995, loans held for sale amounted to
$34.9 million.
Nonperforming Assets, Troubled Debt Restructurings and Classified Assets. When a
borrower's payment is 60 or more days past due, the Bank generally institutes
legal action to foreclose on the property securing the loan or seeks to obtain a
deed in lieu of foreclosure from the borrower. If foreclosed, the property is
sold at a public sale and may be purchased by the Bank if there are no
acceptable bids. The Bank seeks to sell all real estate acquired through
foreclosure.
The Bank generally ceases to accrue interest on loans with interest more than
three months delinquent and on all loans whose collectibility is doubtful. Any
accrued and unpaid interest on such loans is reversed and charged against
current income at the time the loan is placed on "nonaccrual" status. Interest
reserved on nonaccrual loans is recognized as income when received in cash.
The Bank classifies problem assets as "substandard", "doubtful" or "loss",
depending on the presence of certain characteristics. General allowances for
loan losses are established for problem assets classified as "substandard" or
"doubtful" and for other assets as deemed necessary. The Bank either establishes
a specific allowance for the amount of assets classified as "loss" or charges
off such assets. Specific loss reserves for problem assets classified as "loss"
are not includible in the Bank's regulatory capital; however, limited general
allowances for losses may be added.
During 1995, the Bank reduced its nonperforming assets, net, (comprised of
nonaccrual loans and real estate owned) by 38.9%, from $24.7 million at December
31, 1994, to $15.1 million at December 31, 1995. Troubled debt restructurings,
net, were $5.5 million at December 31, 1995 compared to $2.8 million at December
31, 1994. The Bank had $2.0 million of performing loans greater than 90 days
past maturity at December 31, 1995. During 1995, the Bank reduced its classified
assets, net, by 32.9%, from $30.7 million at December 31, 1994, to $20.6 million
at December 31, 1995. See Part I _ Item 1, "Business _ Lending Activities _
Nonperforming Assets" of Form 10-K for a detailed discussion of these assets.
Allowances for Losses on Loans and Real Estate Owned. The allowance for losses
on loans is established 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 fair value of the
underlying collateral, current economic conditions and historical loan loss
experience. The Bank also establishes allowances for losses on real estate owned
based upon its estimated fair value less selling costs. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowances for losses. Such agencies may require
the Bank to recognize additions to the allowances based on their judgments about
information available to them at the time of their examination. Based on
available information, management believes that adequate allowances for loss
have been provided on the above assets. See Notes 3 and 4 to the Consolidated
Financial Statements for analyses of the Bank's allowances for losses.
Investment Securities. The Company's investment securities portfolios, net,
(comprised of agency obligations, mortgage-backed securities and stock),
increased by $31.3 million, or 35.3%, to $119.7 million at December 31, 1995
compared to $88.4 million at December 31, 1994. During 1995, the Company
purchased $30.7 million of investment securities (primarily United States
Government agency obligations) and $26.6 million of mortgage-backed securities.
The Company increased its purchases of securities in order to improve its "gap"
position. See "Asset/Liability Management". At December 31, 1995, agency and
mortgage-backed securities available-for-sale amounted to $40.6 million and
$33.1 million, respectively.
Deposits and Borrowings. Deposits increased by $30.1 million, or 6.6%, during
the year ended December 31, 1995, after including interest credited of $20.3
million. See "Period to Period Comparisons _ Comparison of Years Ended December
31, 1995 and 1994 _ Net Interest Income." Of the $487.1 million in deposits at
December 31, 1995, $85.3 million consisted of certificates of deposit which have
flexible maturities and adjustable interest rates. See Note 6 to the
Consolidated Financial Statements. Total borrowings increased $14.9 million, or
24.6%, during 1995. See "Liquidity and Capital Resources".
Stockholders' Equity. At December 31, 1995, stockholders' equity totaled $38.6
million and included $.3 million of unrealized net holding gains, net of
applicable taxes, on investment securities available-for-sale. There were no
unrealized net holding gains or losses, net of applicable taxes, at December 31,
1994.
In 1991, due to high levels of classified assets and the Bank's failure to meet
the then-applicable risk-based capital requirement, the Bank entered into a
supervisory agreement with the Office of Thrift Supervision ("OTS") and agreed
to the issuance of a capital directive. The Bank was released from the
supervisory agreement in 1994 and the capital directive in 1993. As a condition
of release from the capital directive, the OTS required the Bank to continue to
operate in accordance with its capital plan. On February 23, 1996, as a result
of Citizens' continued capital compliance and improved condition, the OTS
notified the Bank that it is no longer subject to a capital plan.
Yield Analysis
The Yield Analysis table on page 12 shows the Company's average outstanding
interest-earning and interest-bearing balances, yields and costs (computed on a
daily basis) at or during the periods indicated (excluding loan origination and
other fees, except that portion considered an adjustment to yield).
Rate/Volume Analysis
The following table sets forth certain information regarding changes in interest
income and interest expense of the Company for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided regarding changes attributable to: (i) changes in the
interest rate earned or paid on these balances (change in rate multiplied by old
volume), (ii) changes in the volume of assets or liabilities outstanding (change
in volume multiplied by old interest rate), and (iii) a combination of change in
rate and change in volume. The information was calculated using average daily
balances.
Rate/Volume Analysis
Year ended December 31,
1995 v. 1994 Increase (Decrease) Due to 1994 v. 1993 Increase (Decrease) Due to
Rate/ Rate/
Rate Volume Volume Total Rate Volume Volume Total
Interest-earning assets
Loans ............................ $ 1,880 $ 2,981 $ 183 $ 5,044 $(1,049) $ 1,249 $ (42) $ 158
Investment securities ............ 547 461 46 1,054 (604) (319) 30 (893)
--- --- -- ----- ---- ---- -- ----
Total ........................ 2,427 3,442 229 6,098 (1,653) 930 (12) (735)
----- ----- --- ----- ------ --- --- ----
Other interest ................... _ _ 26 26 _ _ (174) (174)
Interest-bearing liabilities
Deposits ......................... 3,157 1,123 201 4,481 (616) (354) 12 (958)
FHLB advances and other borrowings 521 602 122 1,245 (192) 165 (12) (39)
--- --- --- ----- ---- --- --- ---
Total ........................ 3,678 1,725 323 5,726 (808) (189) _ (997)
----- ----- --- ----- ---- ---- ----
Capitalized interest ............. _ _ 160 160 _ _ (70) (70)
Net change in net interest income
before (recovery of) provision
for loan losses .................. $(1,251) $ 1,717 $ (228) $ 238 $ (845) $ 1,119 $ (116) $ 158
======= ======= ====== ======== ======= ======= ======= ======
Yield Analysis
Year ended December 31,
1995 1994 1993
Average
Yield/Cost at Average Interest Average Interest Average Interest
December 31, Amount Earned Average Amount Earned Average Amount Earned Average
1995 Outstanding or Paid Yield/Cost Outstanding or Paid Yield/Cost Outstanding or Paid Yield/Cost
Assets
Loan portfolios (a) ........ 8.22% $449,638 $36,728 8.18%(f) $410,811 $31,684 7.71%(f) $395,012 $31,526 7.99%(f)
Investment securities (b) .. 6.30 100,794 6,574 6.52 93,022 5,520 5.93 97,899 6,413 6.55
-------- ------- -------- ------- -------- -------
All interest-earning assets 7.82 550,432 43,302 7.87(f) 503,833 37,204 7.38(f) 492,911 37,939 7.70(f)
------- ------- -------
Other assets ............... 28,742 33,196 45,651
-------- -------- --------
Total assets ............. $579,174 $537,029 $538,562
======== ======== ========
Liabilities and stockholders'
equity
Money market accounts ...... 3.62 $ 86,636 3,034 3.50 $ 84,862 2,922 3.44 $ 88,690 2,840 3.20
Certificates of deposit .... 5.51 306,326 17,100 5.58 259,845 12,823 4.93 267,887 13,728 5.12
Other deposits ............. 2.27 75,301 2,004 2.66 95,563 1,912 2.00 92,228 2,047 2.22
-------- ------- -------- ------- -------- -------
Total deposits ........... 4.87 468,263 22,138 4.73 440,270 17,657 4.01 448,805 18,615 4.15
FHLB advances and other
borrowings ............... 5.90 65,578 3,815 5.82 53,125 2,570 4.84 49,958 2,609 5.22
-------- ------- -------- ------- -------- -------
All interest-bearing
liabilities ........... 5.00 533,841 25,953 4.86 493,395 20,227 4.10 498,763 21,224 4.26
------- ------- -------
Other liabilities .......... 9,198 11,215 11,636
-------- -------- --------
Total liabilities ........ 543,039 504,610 510,399
Stockholders' equity ....... 36,135 32,419 28,163
-------- -------- --------
Total liabilities and
stockholders' equity .. $579,174 $537,029 $538,562
======== ======== ========
Average interest rate spread(c)2.82% $17,349(e) 3.01%(f) $16,977(e) 3.28%(f) $16,715(e) 3.44%(f)
==== ======= ==== ======= ==== ======= ====
Net yield on interest-earning
assets (d) ................. N/A 3.15% 3.37% 3.39%
==== ==== ==== ====
<FN>
(a) Nonaccruing loans and loans held for sale are included in the average
outstanding balance.
(b) Yield was calculated using amortized cost.
(c) Average yield on all interest-earning assets less average cost of all
interest-bearing liabilities.
(d) Net interest income divided by average total interest-earning assets.
(e) Excludes capitalized interest and other interest income of $.2 million each
for 1995; $.4 million and $.1 million, respectively, for 1994 and $.3
million each for 1993.
(f) Interest-earning assets include assets on which interest was contractually
due. If nonperforming loans were excluded from the calculation in 1995,
1994 and 1993, the weighted average yield on loans would be 8.26%, 7.94%
and 8.29%, respectively; the weighted average yield on all interest-earning
assets would be 7.94%, 7.54% and 7.91%, respectively; and the average
interest rate spread would be 3.08%, 3.44% and 3.65%, respectively.
</FN>
Period to Period Comparisons
Comparison of Years Ended
December 31, 1995 and 1994
General. The Company recorded a 13.0% increase in net income for 1995. Net
income for 1995 was $4.1 million, $1.43 per share, as compared to net income of
$3.6 million, $1.28 per share, for 1994. The Company recovered $28,000 from the
provision for loan losses during 1995 compared to recoveries of $.6 million in
1994. Loss from real estate, net, decreased by $1.7 million in 1995.
Net Interest Income. The Company's net interest income, before recovery of
provision for loan losses, increased $.2 million, or 1.4%, from 1994 primarily
due to a $6.1 million, or 16.4%, increase in interest income, which was
partially offset by a $5.9 million, or 29.6%, increase in interest expense.
Interest income on loans increased $5.0 million, or 15.9%, due primarily to an
increase in average outstanding balances of $38.8 million during 1995. The
increase in average outstanding balances reflects the impact of the loans
originated during 1994. Average yields on loans increased from 7.71% in 1994 to
8.18% in 1995. Interest income on investment securities increased $1.1 million
primarily due to an increase in average yields on investment securities from
5.93% to 6.52%. Average outstanding balances of investment securities increased
from $93.0 million for 1994 to $100.8 million for 1995.
Interest expense on deposits increased $4.5 million, or 25.4%, primarily due to
an increase in the average rates paid on deposits from 4.01% in 1994 to 4.73% in
1995. This increase was due to the effect of the overall increase in interest
rates experienced in the economy during most of the past year. The Bank
continues to experience intense competition for deposits from other financial
institutions located in the Bank's market area. Average outstanding balances
increased by $28.0 million in 1995 reflecting the impact of interest credited to
deposits and successful promotions of certificates of deposits. Interest on
borrowed funds increased $1.2 million in 1995 due primarily to the effects of an
increase in average outstanding borrowings of $12.5 million during 1995. Average
rates paid on borrowings increased from 4.84% for 1994 to 5.82% for 1995. The
Company's average cost of funds was 4.86% for 1995 compared to 4.10% for 1994.
Recovery of Provision for Loan Losses. Through its periodic review of the loan
portfolio during 1995, management determined that the Bank could reduce the
allowance for loan losses by a net of $28,000. Management believes that the
current loss allowances are adequate at this time to cover potential losses in
the loan portfolio. There can be no assurance, however, that additional
provisions will not be necessary if market conditions begin to deteriorate.
Other Income. Total other income increased $96,000, or 3.8%, during 1995 as
compared to 1994. During 1995, the Company realized gains amounting to $.5
million, a decrease of $45,000 from 1994, on the sale of mortgage loans
originated for resale by the Bank's wholly-owned mortgage banking subsidiary,
First Citizens Mortgage Corporation ("FCMC"). FCMC experienced a decrease in
volume of loans originated for resale due to decreased refinancings and
purchases of loans as a result of increases in interest rates during most of
1995. Gains on sales of investment securities classified as available-for-sale
decreased by $78,000. Deposit service charges increased by $.2 million primarily
due to increased volume of nonsufficient funds charges. The Bank also recognized
a $.1 million profit on the sale of a former branch site in 1995.
Operating Expense. Operating expense decreased $1.0 million, or 6.7%, in 1995
compared to 1994. Compensation and employee benefits increased $62,000, or .8%,
in 1995 primarily due to average raises of 4.0%. During 1994, the Company and
the Bank adopted a retirement plan for directors of the Company and the Bank at
a cost of $189,000 compared to a cost of $87,000 in 1995. During 1995, loss from
real estate, net, amounted to $99,000 as compared to net losses of $1.8 million
in 1994. See Note 4 to the Consolidated Financial Statements for components of
loss from real estate, net. During 1995, the Company provided $.4 million for
losses on real estate owned, compared to $1.3 million in 1994. Allowances are
provided to reduce the carrying value of these assets to fair value less
estimated selling costs. The Company recognized net gains of $.7 million from
the sales of real estate owned in 1995 compared to net losses of $.1 million in
1994. In 1994, the Bank incurred a $.9 million loss when it accelerated the
disposition of a shopping center.
Income Taxes. The Company recognized a 32.6% effective tax rate in 1995 compared
to a 31.8% effective tax rate in 1994. The Company's effective tax rate was less
than the statutory tax rate primarily due to recoveries of $.2 million of the
valuation allowance on deferred tax assets. At December 31, 1995, the valuation
allowance amounted to $.3 million. Amounts recovered reduce income tax expense
for financial statement purposes and the valuation allowance is correspondingly
reduced. Income tax expense during 1995 was also reduced by the tax effects of
the exercises of non-incentive stock options. The Company's 1994 effective tax
rate was less than the statutory tax rate primarily due to $.3 million of
recoveries of the valuation allowance.
Comparison of Years Ended
December 31, 1994 and 1993
General. The Company recorded net income of $3.6 million, $1.28 per share, for
1994 as compared to net income of $5.9 million, $2.12 per share, for 1993. The
Company recovered $.6 million from the provision for loan losses during 1994
compared to provisions of $1.3 million in 1993. Loss from real estate, net,
increased $.1 million in 1994. Net income for 1993 included a one-time increase
of $1.5 million, or $.54 per share, relating to the adoption of SFAS No. 109.
Net Interest Income. The Company's net interest income, before provision for
loan losses, increased $.2 million, or .9%, from 1993 primarily due to a $1.1
million, or 5.1%, decrease in interest expense, which was partially offset by a
$.9 million, or 2.3%, decrease in interest income. Interest income on loans
increased $.2 million, or .5%, due primarily to a $15.8 million increase in the
average outstanding balances of loans during 1994. Average yields on loans
decreased from 7.99% in 1993 to 7.71% in 1994. The decrease in average yields
reflects the impact of the lower-rate loans originated during 1993 and late
1992. Interest income on loans was reduced by $1.0 million in 1994 and $1.1
million in 1993 due to interest earned but not recognized on nonperforming loans
and troubled debt restructurings. Interest income on investment securities
decreased $.9 million primarily due to a decrease in average yields from 6.55%
in 1993 to 5.93% in 1994. Average outstanding balances of investment securities
decreased from $97.9 million for 1993 to $93.0 million for 1994.
Interest expense on deposits decreased $1.0 million, or 5.1%, primarily due to a
decrease in the average rates paid on deposits from 4.15% in 1993 to 4.01% in
1994. This decrease was due to the effect of the overall decrease in interest
rates experienced in the economy during the previous two years. During the
latter part of 1994, rates began increasing. The Bank continued to experience
intense competition for deposits from other financial institutions located in
the Bank's market area. Average outstanding balances decreased by $8.5 million
for 1994 from 1993. Reflecting an industry-wide disintermediation, many
depositors turned to alternative investments, such as mutual funds and stocks,
in an attempt to earn higher yields. Interest on borrowed funds decreased
$39,000 in 1994 due primarily to the effects of a decrease in average rates paid
on borrowings from 5.22% for 1993 to 4.84% for 1994. Average outstanding
borrowings increased $3.2 million during 1994. The Company's average cost of
funds was 4.10% for 1994 compared to 4.26% for 1993.
Recovery of Provision for Loan Losses. As part of the supervisory agreement
entered into on December 12, 1991, due to the Bank's high level of classified
assets, the Bank had agreed to maintain general valuation allowances of at least
$8.5 million. Based on the progress that the Bank had 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. Through its periodic review of the loan portfolio during 1994,
management, after considering the elimination of the minimum valuation allowance
requirement together with the Bank's significant progress in reducing the level
of classified assets, determined that the Bank could reduce the allowance for
loan losses by a net of $.6 million.
Other Income. Total other income decreased $1.4 million, or 35.3%, during 1994
as compared to 1993. Net servicing fee income decreased by $.1 million as loans
serviced for others decreased due to repayments and payoffs. During 1994, the
Company realized gains amounting to $.5 million, a decrease of $.9 million from
1993, on the sale of mortgage loans originated for resale by FCMC. FCMC
experienced a decrease in volume of loans originated for resale due to decreased
refinancings and purchases of loans as a result of increases in interest rates.
Additionally, the Bank increased its purchases of loans originated by FCMC.
Gains on sales of investment securities classified as available-for-sale
decreased by $.2 million reflecting the effects of increases in interest rates
on the fair value of the mortgage-backed securities sold.
Operating Expense. Operating expense increased $1.2 million, or 8.8%, in 1994
compared to 1993. Compensation and employee benefits increased $.9 million, or
13.9%, in 1994 primarily due to average raises of 5.0%, the addition of six
members of senior management of the Bank and adoption of a retirement plan for
directors of the Company and the Bank. Bonuses decreased $.1 million during
1994. During 1994, loss from real estate, net, amounted to $1.8 million as
compared to net losses of $1.7 million in 1993. See Note 4 to the Consolidated
Financial Statements for components of loss from real estate, net. During 1994,
the Company provided $1.3 million for losses on real estate owned, compared to
$1.8 million in 1993. Allowances are provided to reduce the carrying value of
these assets to fair value less estimated selling costs. The Company incurred
net losses of $.1 million from the sales of real estate owned in 1994 compared
to net gains on sales of $.6 million in 1993. In 1994, the Bank incurred a $.9
million loss when it accelerated the disposition of a shopping center with a net
book value of $2.1 million.
Income Taxes. The Company recognized a 31.8% effective tax rate in 1994 compared
to a 25.2% effective tax rate in 1993. The Company's 1994 effective tax rate was
less than the statutory tax rate primarily due to recoveries of $.3 million of
the valuation allowance on deferred tax assets. When SFAS No. 109 was adopted
during 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. At December 31, 1994, the
valuation allowance amounted to $.5 million. Amounts recovered reduce income tax
expense for financial statement purposes, and the valuation allowance is
correspondingly reduced. The Company's 1993 effective tax rate was less than the
statutory tax rate primarily due to $.8 million of recoveries of the valuation
allowance.
Asset/Liability Management
A continuing goal of the Bank's business strategy has been to maximize income
over time in varying interest rate environments. The Asset/Liability Committee,
a committee comprised of members of senior management, is charged with managing
interest rate risk.
Interest rate risk is the risk that net interest income will fluctuate as a
result of a change in interest rates. It is the assumption of interest rate risk
along with credit risk that drives the net interest margin of a financial
institution.
A related component of interest rate risk is the risk that the market value of
portfolio equity will fluctuate with changes in interest rates. This component
is a direct corollary to the earnings-impact component: an institution exposed
to earnings erosion is also exposed to shrinkage in market value.
Interest Rate Risk Measurement
The Bank employs three approaches to interest rate risk measurement: (1) "gap"
analysis, (2) income-simulation analysis, and (3) rate-shock market-value
analysis. Each method has its relative advantages and limitations, and none
should be relied upon in a vacuum.
1. Gap Analysis _ Historically, interest rate risk measurement was limited to a
review of a bank's "gap" position, or the difference between assets and
liabilities which reprice and/or mature within a given time frame, typically the
cumulative one-year horizon. Although the gap approach delineates when a given
dollar of assets or liabilities has the ability to mature or reprice, it does
not address the probable response of that asset or liability to changes in
interest rates. This difference is critical. Undue reliance on a gap report to
draw conclusions concerning an interest rate risk position can lead management
to costly and potentially damaging investment and lending decisions.
2. Income-Simulation Analysis _ Income-simulation analysis considers both the
maturity and repricing characteristics of assets and liabilities, as well as the
relative sensitivities of these balance sheet components. Income-simulation
analysis attends to both the possibility and probability of the behavior of
balance sheet items. The benefits of income-simulation analysis are many.
Because of the ability of the income-simulation model to reflect the relative
rate sensitivities of assets and liabilities, management can more clearly define
the ability of the Bank to absorb or benefit from shifts in interest rates.
Proposed strategies to manage perceived risks can be tested in the computer
model prior to implementation.
3. Market-Value Analysis _ Market-value-of-portfolio-equity analysis is intended
to address the changes in equity value arising from movements in interest rates.
The market value of equity is estimated by valuing the Bank's assets and
liabilities. The extent to which assets have gained or lost value in relation to
the gains or losses of liabilities determines the appreciation or depreciation
in equity on a market-value basis. In this sense, the market value of equity is
a residual value. For example, in a rising-rate environment, both assets and
liabilities decrease in value. The loss in asset value is detrimental to the
residual equity value; the loss in liability value is positive for equity value.
If the assets lose relatively more value than the liabilities, the market value
of equity will shrink. Conversely, should the liabilities depreciate by a
proportionately greater amount, the market value of equity will increase despite
the fact that rates have risen. In the latter case, the Bank's obligations have
lost more value than its assets, and hence the Bank has realized greater equity
value.
The development of market-value analysis has been heavily influenced by the OTS'
Thrift Bulletin 13, which is intended to evaluate the impact of immediate and
sustained interest rate shifts of the current yield curve upon the market value
of the current balance sheet. This rate-shock approach is concerned primarily
with the ability of the balance sheet to absorb rate shocks on a
liquidation-value basis. The analysis does not consider non-rate-related issues
which affect equity valuation, such as franchise value or real estate values.
There are several disadvantages to this market-value approach to interest rate
risk evaluation. As with gap analysis, market-value analysis is static. There is
no recognition of the potential for strategy adjustments in a volatile rate
environment which would protect or conserve values.
There is also the limitation of perspective. With the exception of institutions
with profound interest rate and/or credit risk, as well as a history of poor
earnings performance, the market value/liquidation approach is less relevant.
Although there is value for management in understanding the market value of its
institution, management should not confuse a market valuation for liquidation
purposes with a going-concern estimate of franchise value.
Interest Rate Risk Management
The management of the interest rate risk position of the Bank begins with a
thorough evaluation of the balance sheet using the methods discussed above. To
perform the computer analyses in the most cost-effective manner, the Bank
prepares the gap analysis and performs the modeling required for
income-simulation analysis. Due to the complexity of market-value analysis, the
Bank relies on the OTS market-value analysis in addition to completing its own
market-value analysis. Management reviews the Bank's gap position and the
results of the income-simulation and market-value analyses, with an emphasis on
the income-simulation results.
During 1995, in an effort to increase the amount of interest-earning assets
maturing or otherwise repricing within one year, three years and five years, the
Bank originated real estate construction loans with monthly repricings and
adjustable-rate residential loans for its own portfolio. Increased emphasis has
also been placed on corporate and consumer loans, the majority of which can
reprice monthly. Additionally, the Bank purchased shorter-term investment
securities and investment securities with early calls. The effect of these
strategies on the interest rate risk position of the Bank was monitored by
periodic income-simulation analyses. While the simulation models indicate that
the Bank's earnings will be reduced in a period of rising interest rates because
of the large amount of fixed-rate loans, the result is not as dramatic as would
be suggested by the negative gap positions reflected in the Asset/Liability
Repricing Schedule on page 16. Because of the increasing interest rate
environment during 1994, depositors were not willing to invest in longer-term
deposits; they purchased shorter-term certificates instead which caused the gap
ratios at December 31, 1994 to deteriorate compared to December 31, 1993.
During 1996, the Bank intends to focus on origination of real estate
construction, corporate and consumer loans, including home equity and second
trust loans. Additionally, during 1996, the Bank will continue to emphasize the
acquisition of deposit relationships and non-interest-bearing checking accounts.
The table on page 16 sets forth the Bank's gap information, at the dates
indicated. When a savings institution has a positive gap for a given period, it
means that the amount of its interest-earning assets maturing or otherwise
repricing within such period exceeds the amount of the interest-bearing
liabilities repricing within the same period. Accordingly, in a rising interest
rate environment, savings institutions with a positive gap will generally
experience a greater increase in the yield on their assets than in the cost of
their liabilities. The cost of funds of institutions with a positive gap will
generally decrease less than the yield on their assets in a falling interest
rate environment. Changes in interest rates will generally have the opposite
effect on savings institutions with a negative gap. A rising interest rate
environment imposes risks on institutions with a negative gap because the
increase in the cost of liabilities is greater than the increase in the yield on
assets.
Asset/Liability Repricing Schedule
December 31, 1995 (a)
More Than More Than More Than More Than More Than
6 Months 6 Months to 1 Year to 3 Years to 5 Years to 10 Years to More Than
or Less 1 Year 3 Years 5 Years 10 Years 20 Years 20 Years Total
Mortgage loans (b):
First mortgage loans:
Balloon and adjustable rate
(all property types) ....... $ 59,435 $ 25,875 $ 58,392 $ 2,034 $ 981 $ _ $ _ $146,717
Fixed rate:
1-4 dwelling units ......... 10,259 7,343 29,226 20,800 58,167 29,649 973 156,417
Other residential and all
non-residential .......... 25,045 3,499 3,896 3,789 240 540 20,148 57,157
Second mortgages ............... 53,636 _ 161 1,727 4,571 3,722 10 63,827
Non-mortgage loans:
Consumer ....................... 3,389 461 5,341 8,380 595 _ _ 18,166
Corporate ...................... 3,840 2,179 3,584 2,548 1,889 47 _ 14,087
Investment securities ............ 38,568 27,846 14,374 27,209 4,790 2,407 _ 115,194
------ ------ ------ ------ ----- ----- ------- -------
Total rate-sensitive assets .... $194,172 $ 67,203 $114,974 $66,487 $71,233 $36,365 $21,131 $571,565
======== ======== ======== ======= ======= ======= ======= ========
Deposits:
Fixed-maturity deposits ........ $129,042 $ 66,404 $100,629 $22,580 $ 1,215 $ _ $ _ $319,870
Transaction accounts ........... 8,140 6,466 13,376 3,579 4,804 1,801 1,328 39,494
Money market deposit accounts .. 46,826 21,456 9,509 4,521 3,472 627 36 86,447
Passbook and statement accounts 2,771 2,529 8,055 5,252 6,666 4,379 1,542 31,194
Non-interest-bearing deposits .. 2,369 1,880 1,040 2,305 3,889 _ _ 11,483
Borrowings _ FHLB advances ....... 20,140 7,500 32,500 9,000 6,000 _ _ 75,140
------ ----- ------ ----- ----- ------
Total rate-sensitive liabilities $209,288 $106,235 $165,109 $47,237 $26,046 $ 6,807 $ 2,906 $563,628
======== ======== ======== ======= ======= ======= ======= ========
Gap (repricing difference) ....... $(15,116) $(39,032) $(50,135) $19,250 $45,187 $29,558 $18,225
1995 Cumulative gap .............. (15,116) (54,148) (104,283) (85,033) (39,846) (10,288) 7,937
1995 Cumulative gap/total
rate-sensitive assets .......... (2.6)% (9.5)% (18.2)% (14.9)% (7.0)% (1.8)% 1.4%
1994 Cumulative gap/total
rate-sensitive assets .......... (7.2) (15.5) (20.0) (15.8) (7.0) (2.2) 1.2
1993 Cumulative gap/total
rate-sensitive assets .......... 10.6 .6 (7.9) (8.1) (3.4) (4.0) (2.8)
<FN>
(a) Estimated maturity/repricing amounts are based on contractual maturity and
amortization, as well as estimated loan prepayment rates and deposit
erosion rates provided by the OTS. Management believes these prepayment and
erosion rates represent reasonable estimates, based on the Bank's
experience.
(b) Loans are net of the undisbursed portion of loans due borrowers and
deferred loan fees.
</FN>
Liquidity and Capital Resources
Under current regulations, the Bank is required to maintain liquid assets at
5.0% or more of its net withdrawable deposits plus short-term borrowings. For
the year ended December 31, 1995, the Bank maintained a monthly average
liquidity level of 8.8%.
The Bank's primary sources of funds are deposits and loan principal payments
received in connection with normal loan amortization and loan prepayments. The
Bank supplements these funds by obtaining advances from the Federal Home Loan
Bank ("FHLB") of Atlanta and other borrowings. At December 31, 1995, the Bank
had $75.1 million in FHLB advances outstanding, reflecting an increase in
aggregate borrowings of $14.9 million, or 24.6%, compared to December 31, 1994.
Deposits, before interest credited, increased by $9.8 million during 1995 and
$4.7 million during 1994 but decreased $40.6 million during 1993. The increase
in deposits in 1995 and 1994 is a result of the increased emphasis on developing
customer relationships. Deposits decreased in 1993 due, in part, to efforts by
the Bank to increase its capital-to-assets ratio and decrease its short-term
rate-sensitive liabilities. Loan principal repayments were $96.3 million in
1995, $97.9 million in 1994 and $116.7 million in 1993. Proceeds from the sales
of loans were $35.5 million, $37.3 million and $98.6 million during 1995, 1994
and 1993, respectively. Principal repayments of mortgage-backed securities
totaled $7.9 million, $18.1 million and $37.8 million during 1995, 1994 and
1993, respectively. Sales of mortgage-backed securities totaled $11.2 million
and $15.9 million during 1994 and 1993, respectively. The Bank used these funds,
together with borrowings, to originate $144.4 million, $179.8 million and $223.3
million in loans during 1995, 1994 and 1993, respectively. The Bank also
purchased $57.3 million, $33.7 million and $26.6 million of investment
securities during 1995, 1994 and 1993, respectively. The increase in interest
rates experienced during most of 1995 slowed demand for residential mortgages
and decreased the market value of the Bank's investment securities. The Bank
decided to reduce its origination of residential mortgage loans for its own
portfolio and to sell $25.1 million, net, of 30-year fixed-rate mortgage loans.
The Bank also decided to increase its acquisition of investment securities in
order to improve its gap and liquidity positions. At December 31, 1995, the Bank
had outstanding commitments to originate primarily adjustable-rate loans,
excluding loans in process, of $21.2 million.
At December 31, 1995, the Company, on an unconsolidated basis, had $1.1 million
in cash. See Part I _ Item 1, "Business _ Regulation _ Regulatory Restrictions
on the Payment of Dividends by the Bank to the Company" of Form 10-K. The
Company's expenses primarily consist of certain stockholder-related expenses
which, during 1995, were paid from the Company's cash. The Company believes it
can fund its working capital needs from its own cash account through the next
several years without payment of dividends by the Bank.
Capital Requirements
Savings institutions are required to maintain minimum levels of regulatory
capital. At December 31, 1995, the Bank was considered "well capitalized" under
regulatory definitions. See Part I _ Item 1, "Business _ Regulation _ Regulatory
Capital Requirements" of Form 10-K for additional information.
The United States Congress is considering legislation regarding Federally
insured banks and thrifts which would, among other things, (i) require Federally
chartered thrifts, including the Bank, to convert to national or state bank
charters or state thrift charters, and (ii) impose a one-time assessment in
order to recapitalize the Savings Association Insurance Fund. The amount of the
assessment 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 point 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 $34.6
million, or 5.6% of adjusted total assets, and risk-based capital to $39.4
million, or 10.2% of risk-weighted assets, on a pro forma basis as of December
31, 1995. In addition, if the Bank were required to convert its Federal savings
bank charter, the Bank could be required to recapture its bad debt reserve for
Federal income tax purposes unless the Bank meets a proposed residential loan
origination requirement. Such recaptured amount would be $1.6 million, after
taxes, and, if recaptured, would further reduce the Bank's income and capital
ratios. See Note 10 to the Consolidated Financial Statements for additional
information about the proposed legislation and its potential impact on the Bank.
Impact of Inflation and Changing Prices
The financial statements and the related data therein have been prepared in
accordance with generally accepted accounting principles, which require
measurement of financial position and operating results in terms of historical
dollars, without considering changes in the relative purchasing power of money
over time due to inflation. See Note 17 to the Consolidated Financial Statements
for estimated fair market values of certain assets and liabilities.
Since the primary assets and liabilities of the Company are monetary in nature,
changes in the general level of prices for goods and services have a relatively
minor impact on the Company's total expenses. Increases in operating expenses
such as salaries and maintenance are, in part, attributable to inflation.
However, interest rates have a far more significant effect than inflation on the
performance of financial institutions, including the Bank. The majority of loans
originated for the Bank's portfolio are adjustable-rate loans, which helps to
mitigate the effect of changes in interest rates upon the Bank.
First Citizens Financial Corporation and Subsidiary
Consolidated Statements of Financial Condition
(Dollars in thousands except per share data)
December 31,
1995 1994
Assets
Cash and cash equivalents .............................................................................. $ 15,711 $ 7,828
Investment securities available-for-sale, at estimated fair value (notes 2 and 7) ...................... 73,730 7,030
Investment securities held-to-maturity (estimated fair value of $42,439 and $74,159 at December 31, 1995
and 1994, respectively) (notes 2 and 7) .............................................................. 42,083 77,850
Loans receivable, net (notes 3 and 7) .................................................................. 412,603 427,445
Loans held for sale, at lower of cost or market ........................................................ 34,921 9,418
Stock in the Federal Home Loan Bank of Atlanta, at cost (note 7) ....................................... 3,842 3,556
Real estate owned, net of allowance for losses of $975 and $1,582 at December 31, 1995 and 1994,
respectively (note 4) ................................................................................ 13,269 14,826
Accrued interest receivable ............................................................................ 3,364 2,777
Premises and equipment, net (note 5) ................................................................... 2,869 2,787
Deferred income taxes, net (note 9) .................................................................... 2,328 1,264
Prepaid expenses and other assets ...................................................................... 2,709 3,507
----- -----
Total assets ......................................................................................... $607,429 $558,288
======== ========
Liabilities
Deposit accounts (note 6) .............................................................................. $487,097 $457,007
Advances from the Federal Home Loan Bank of Atlanta (note 7) .......................................... 75,140 60,290
Accounts payable and accrued expenses .................................................................. 6,551 6,955
----- -----
Total liabilities .................................................................................... 568,788 524,252
------- -------
Stockholders' equity (notes 10 and 13)
Preferred stock, $.01 per share par value, 2,000,000 shares authorized, none issued or outstanding ..... _ _
Common stock, $.01 per share par value, 8,000,000 shares authorized, 2,629,576 shares and 2,348,209
shares issued and outstanding at December 31, 1995 and 1994, respectively .......................... 26 23
Additional paid-in capital ............................................................................. 22,297 18,269
Retained earnings _ substantially restricted ........................................................... 15,970 15,744
Unrealized net holding gains on investment securities available-for-sale, net of taxes (note 2)......... 348 _
--- ---
Total stockholders' equity ........................................................................... 38,641 34,036
------ ------
Total liabilities and stockholders' equity ........................................................... $607,429 $558,288
======== ========
The notes to consolidated financial statements are an integral part of these
statements.
First Citizens Financial Corporation and Subsidiary
Consolidated Statements of Income
(Dollars in thousands except per share data)
Year ended December 31,
1995 1994 1993
Interest income
Loans receivable ................................................................... $ 36,728 $ 31,684 $ 31,526
Investment securities .............................................................. 6,574 5,520 6,413
Other interest ..................................................................... 161 135 309
--- --- ---
Total interest income ............................................................ 43,463 37,339 38,248
------ ------ ------
Interest expense
Deposit accounts (note 6) .......................................................... 22,138 17,657 18,615
Advances from the Federal Home Loan Bank of Atlanta ................................ 3,815 2,570 2,566
Other borrowed money ............................................................... _ _ 43
Capitalized interest ............................................................... (213) (373) (303)
---- ---- ----
Total interest expense ........................................................... 25,740 19,854 20,921
------ ------ ------
Net interest income .............................................................. 17,723 17,485 17,327
(Recovery of) provision for loan losses (note 3) ..................................... (28) (635) 1,329
--- ---- -----
Net interest income after (recovery of) provision for loan losses ................... 17,751 18,120 15,998
------ ------ ------
Other income
Deposit service charges ............................................................ 1,095 889 863
Gain on sale of loans .............................................................. 495 540 1,488
Loan fees and service charges ...................................................... 476 594 763
Servicing fee income, net .......................................................... 258 230 332
Other .............................................................................. 319 294 490
--- --- ---
Total other income ............................................................... 2,643 2,547 3,936
----- ----- -----
Operating expense
Compensation and employee benefits (note 11) ....................................... 7,573 7,511 6,596
Equipment, maintenance and data processing ......................................... 1,291 1,211 1,290
Federal insurance premiums and assessments ......................................... 1,265 1,319 1,331
Occupancy (note 12) ................................................................ 1,229 1,048 930
Professional services .............................................................. 769 706 575
Advertising and promotion .......................................................... 492 397 318
Loss from real estate, net (note 4) ................................................ 99 1,810 1,669
Other .............................................................................. 1,583 1,333 1,383
----- ----- -----
Total operating expense .......................................................... 14,301 15,335 14,092
------ ------ ------
Income before income taxes and cumulative effect of accounting change ................ 6,093 5,332 5,842
Provision for income taxes (note 9) ................................................ 1,986 1,697 1,473
----- ----- -----
Income before cumulative effect of accounting change ................................. 4,107 3,635 4,369
Cumulative effect of change in accounting for income taxes (note 9) ................ _ _ 1,510
----- ----- -----
Net income ........................................................................... $ 4,107 $ 3,635 $ 5,879
======== ======== ========
Earnings per common and common equivalent share before cumulative effect of accounting
change ............................................................................. $ 1.43 $ 1.28 $ 1.58
Cumulative effect of change in accounting for income taxes ........................... _ _ .54
----- ----- -----
Earnings per common and common equivalent share (note 13) ........................... $ 1.43 $ 1.28 $ 2.12
======== ======== ========
The notes to consolidated financial statements are an integral part of these
statements.
First Citizens Financial Corporation and Subsidiary
Consolidated Statements of Stockholders' Equity
(In thousands)
Year ended December 31,
1995 1994 1993
Preferred stock (none issued or outstanding)
Common stock
Balance at beginning of year ........................................... $ 23 $ 22 $ 21
Exercise of stock options .............................................. 1 _ _
10% stock dividend declared April 21, 1995, distributed June 5, 1995 ... 2 _ _
5% stock dividend declared April 20, 1994, distributed June 7, 1994 .... _ 1 _
5% stock dividend declared April 21, 1993, distributed June 3, 1993 .... _ _ 1
-------- -------- --------
Balance at end of year ................................................. $ 26 $ 23 $ 22
======== ======== ========
Additional paid-in capital
Balance at beginning of year ........................................... $ 18,269 $ 16,794 $ 15,708
Exercise of stock options .............................................. 157 35 38
10% stock dividend declared April 21, 1995, distributed June 5, 1995 ... 3,871 _ _
5% stock dividend declared April 20, 1994, distributed June 7, 1994 .... _ 1,440 _
5% stock dividend declared April 21, 1993, distributed June 3, 1993 .... _ _ 1,048
-------- -------- --------
Balance at end of year ................................................. $ 22,297 $ 18,269 $ 16,794
======== ======== ========
Retained earnings
Balance at beginning of year ........................................... $ 15,744 $ 13,555 $ 8,728
10% stock dividend declared April 21, 1995, distributed June 5, 1995 ... (3,881) _ _
5% stock dividend declared April 20, 1994, distributed June 7, 1994 .... _ (1,446) _
5% stock dividend declared April 21, 1993, distributed June 3, 1993 .... _ _ (1,052)
Net income for the year ................................................ 4,107 3,635 5,879
-------- -------- --------
Balance at end of year ................................................. $ 15,970 $ 15,744 $ 13,555
======== ======== ========
Unrealized net holding gains on investment securities available-for-sale
Balance at beginning of year ........................................... $ _ $ 599 $ _
Adjustment to unrealized net holding gains ............................. 348 (599) 599
-------- -------- --------
Balance at end of year ................................................. $ 348 $ _ $ 599
======== ===== ========
The notes to consolidated financial statements are an integral part of these
statements.
First Citizens Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows
(In thousands)
Year ended December 31,
1995 1994 1993
Operating activities
Net income ............................................................................ $ 4,107 $ 3,635 $ 5,879
Adjustments to reconcile net income to net cash provided by operating
activities:
Provisions for losses on assets ..................................................... 346 703 3,122
Amortization of loan fees, premiums, discounts and deferred interest ................ (991) (903) (1,333)
Loans originated for resale, net of repayments ...................................... (35,836) (25,123) (102,733)
Sale of loans originated for resale ................................................. 35,419 37,320 98,554
(Increase) decrease in accrued interest receivable, prepaid expenses and other assets 208 (1,395) (784)
Dividends received in stock in the Federal Home Loan Bank of Atlanta ................ _ (44) (191)
Depreciation and amortization of premises and equipment ............................. 430 485 576
Increase (decrease) in accounts payable and accrued expenses ........................ (404) 343 160
Deferred income tax provision (benefit) ............................................. (1,282) 1,709 (1,899)
------ ----- ------
Net cash provided by operating activities ......................................... 1,997 16,730 1,351
----- ------ -----
Investing activities
Loans originated, net of repayments ................................................. (12,284) (55,900) (3,178)
Loans sold .......................................................................... 36 _ _
Loans purchased ..................................................................... (22) (1,075) (3,046)
Investment securities purchased ..................................................... (57,277) (33,675) (26,573)
Investment securities sold .......................................................... _ 11,193 15,947
Principal repayments and maturities of investment securities ........................ 26,992 18,134 39,795
Purchases of Federal Home Loan Bank of Atlanta stock ................................ (568) _ _
Sales of Federal Home Loan Bank of Atlanta stock .................................... 282 _ _
Capitalized additions to real estate owned .......................................... (4,059) (8,314) (6,714)
Proceeds from sale of real estate owned ............................................. 8,208 18,021 5,284
Net additions to premises and equipment ............................................. (512) (685) (142)
---- ---- ----
Net cash provided by (used in) investing activities ............................... (39,204) (52,301) 21,373
------- ------- ------
Financing activities
Net increase (decrease) in deposits ................................................. 30,090 20,780 (23,777)
Proceeds from Federal Home Loan Bank of Atlanta advances ............................ 204,740 108,435 101,665
Repayments of Federal Home Loan Bank of Atlanta advances ............................ (189,890) (96,535) (99,775)
Net repayments of other borrowings .................................................. _ _ (3,863)
Net proceeds from exercise of common stock options .................................. 158 35 38
Other ............................................................................... (8) (5) (3)
-- -- --
Net cash provided by (used in) financing activities ............................... 45,090 32,710 (25,715)
------ ------ -------
Increase (decrease) in cash and cash equivalents .................................. 7,883 (2,861) (2,991)
Cash and cash equivalents at beginning of year .................................... 7,828 10,689 13,680
----- ------ ------
Cash and cash equivalents at end of year .......................................... $ 15,711 $ 7,828 $ 10,689
========= ========= =========
Supplemental information
Interest paid on deposits and borrowed funds ........................................ $ 5,563 $ 4,121 $ 4,429
Loans transferred to real estate owned, at fair value ............................... 6,244 4,266 7,852
Loans to facilitate the sale of real estate owned ................................... 3,284 7,685 14,670
Loans transferred to loans held for sale, net ....................................... 25,066 _ _
Income tax payments ................................................................. 2,490 56 2,915
The notes to consolidated financial statements are an integral part of these
statements.
First Citizens Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
(Dollars reported in the tables in thousands)
(1) Summary of Significant Accounting Policies
(a) Basis of Financial Statement Presentation
First Citizens Financial Corporation ("First Citizens Financial") is the holding
company of Citizens Savings Bank f.s.b. (the "Bank"). First Citizens Financial
and its wholly-owned subsidiary are referred to collectively as the "Company".
The name of each first- and second-tier subsidiary and its primary business
activity follows:
Citizens Savings Bank f.s.b. _ Savings bank
First Citizens Corporation _ Management of real estate owned
First Citizens Development Corporation _ Real estate development
First Citizens Mortgage Corporation _ Origination and sale of mortgage loans
First Citizens Insurance Agency, Inc. _ Sales of annuities and mortgage life,
accidental death and health and accident insurance
First Citizens Securities Corporation _ Inactive
All significant intercompany transactions and balances have been eliminated in
consolidation.
The business of the Company consists primarily of the business of the Bank. The
Bank operates 14 branches located in Montgomery and Frederick Counties in
Maryland. The Bank's principal business is attracting deposits from the general
public and investing those funds in loans. The Bank's customers are primarily
small and middle-market businesses and middle-market individuals.
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for losses on loans and real estate owned, management periodically obtains
independent appraisals for significant properties.
Management believes that the allowances for losses on loans and real estate
owned are adequate. While management uses available information to estimate
losses on these assets, future additions to the allowances may be necessary
based on changes in economic conditions, particularly in the Bank's market area.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowances for losses on
loans and real estate owned. Such agencies may require the Bank to recognize
additions to the allowances based on their judgments about information available
to them at the time of their examination.
(b) Cash Equivalents
Cash equivalents are comprised of interest-bearing deposits, which are overnight
funds held at other institutions.
(c) Investment Securities
The Company classifies its debt and marketable equity securities in one of three
categories: trading, available-for-sale or held-to-maturity. Trading securities
are bought and held principally for the purpose of selling them in the near
term. Held-to-maturity securities are those securities which the Company has the
ability and intent to hold until maturity. All other investment securities not
included in trading or held-to-maturity are classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted for the
amortization of premiums and accretion of discounts. Unrealized holding gains
and losses on trading securities are included in earnings. Unrealized holding
gains and losses, net of the related tax effect, on available-for-sale
securities are excluded from earnings and are reported as a separate component
of stockholders' equity until realized. Transfers of investment securities
between categories are recorded at fair value at the date of transfer.
Unrealized holding gains and losses are recognized in earnings for transfers of
investment securities into trading securities. Unrealized holding gains or
losses associated with transfers of investment securities from the
available-for-sale to the held-to-maturity portfolios are recorded as a separate
component of stockholders' equity and are maintained and amortized into earnings
over the remaining life of the investment security as an adjustment to yield in
a manner consistent with the amortization or accretion of premium or discount on
the associated security. Unrealized holding gains and losses associated with
transfers of investment securities from the held-to-maturity portfolio to the
available for sale portfolio are recognized as a separate component of
stockholders' equity.
A decline in the market value of any available-for-sale or held-to-maturity
security below cost, that is deemed other than temporary, is charged to
earnings, resulting in the establishment of a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the related
investment security as an adjustment to yield using the effective interest
method. Dividend and interest income are recognized when earned. Realized gains
and losses are included in earnings and are derived using the specific
identification method for determining the cost of investment securities sold.
(d) Loans Held for Investment
Loans held for investment are carried at cost, adjusted for amortization of
premiums and accretion of discounts using a method which approximates the
interest method over the term of the asset. Management has the ability and
intention to hold these loans to maturity.
(e) 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 SFAS 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 No.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 No. 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 No. 114 changes the method of accounting for loans
for which foreclosure is probable and requires that such impaired loans be
accounted for as loans until the lender takes possession of the collateral.
In accordance with SFAS No. 118, 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.
(f) Loan Origination Fees and Other Discounts
Nonrefundable loan fees, net of the direct costs associated with originating the
loan, are deferred over the contractual life of the loan as an adjustment to
yield. It is the Company's policy to cease amortizing deferred loan fees on
nonaccrual loans.
Discounts on loans to facilitate the sale of real estate owned are amortized
over the life of the loan using the interest method.
(g) Allowance for Loan Losses
The loan portfolio is periodically (at least quarterly) reviewed by management,
and provisions for estimated losses are made based on management's evaluation of
the potential losses in the loan portfolio. In this review, particular attention
is paid to delinquent loans, loans under the foreclosure process and, when
collectibility is in doubt, any loans where there is evidence of a decline in
the market value of the underlying collateral to less than the related loan
balance, as well as known and inherent risks in the portfolio and current
economic conditions.
(h) Loans Held for Sale
Loans held for sale are carried at the lower of cost, adjusted for amortization
of premiums and accretion of discounts, using a method which approximates the
interest method over the term of the asset, or aggregate market. Any gain or
loss on sale is recognized at the time of sale using the specific identification
method.
Historically, substantially all 30-year fixed-rate loans have been originated
for sale in the secondary market on a servicing-released basis. Loans sold in
the secondary market are subject to 60- to 90-day forward commitments.
(i) Real Estate Owned
Real estate acquired through foreclosure or deed in lieu of foreclosure is
recorded at fair value less estimated selling costs at acquisition date.
Management periodically evaluates the recoverability of the carrying value of
the real estate owned. An allowance, if necessary, is provided to reduce the
carrying value to its fair value less estimated selling costs. Costs relating to
property improvements, including development costs and interest during the
development and construction periods, are capitalized; and costs relating to
holding properties are charged to expense. Gains or losses on the sale of real
estate owned are recognized upon disposition of the property.
(j) Accrued Interest Receivable on Loans
The Bank generally ceases to accrue interest on loans with interest more than
three months delinquent and on all loans whose collectibility is doubtful. Any
accrued and unpaid interest on such loans is reversed and charged against
current income at the time the loan is placed on "nonaccrual" status. Income is
subsequently recognized only to the extent cash payments are received until, in
management's judgment, the borrower's ability to make periodic payments has been
restored, in which case the loan is returned to accrual status.
(k) Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are recorded using the straight-line
method over the estimated useful lives of the assets or terms of the leases.
Additions and betterments are capitalized, while charges for repairs and
maintenance are expensed when incurred. The cost and accumulated depreciation or
amortization are eliminated from the accounts when an asset is sold or retired,
and the resultant gain or loss is credited or charged to income.
(l) Income Taxes
Effective January 1, 1993, the Company adopted the provisions of SFAS No. 109,
Accounting for Income Taxes, and reported the cumulative effect of that change
in the method of accounting for income taxes in the 1993 consolidated statement
of income. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(m) Issued But Not Yet Adopted Statements of Financial Accounting Standards
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, will be effective for fiscal years
beginning after December 15, 1995. This Statement establishes accounting
standards for impairment of certain long-lived assets held for use and held for
disposal. Adoption of this Statement is not expected to have a material impact
on the Company.
SFAS No. 122, Accounting for Mortgage Servicing Rights, will be effective for
fiscal years beginning after December 15, 1995. This Statement requires
recognition, as separate assets at fair value, of the rights to service mortgage
loans for others and evaluation of mortgage servicing rights for impairment.
Adoption of this Statement is not expected to have a material impact on the
Company.
SFAS No. 123, Accounting for Stock-Based Compensation, will be effective for
transactions entered into after December 15, 1995. This Statement establishes a
fair value based method of accounting for employee stock options and encourages
all entities to adopt that method of accounting for all employee stock
compensation plans. However, an entity will be allowed to continue to measure
compensation cost using the intrinsic value based method prescribed by
Accounting Principles Board Opinion No. 25. The Company has not determined which
of these two acceptable methods it will use.
(n) Reclassifications
Certain amounts for 1994 and 1993 have been reclassified to conform to the
presentation for 1995.
(2) Investment Securities
Investment securities are summarized as follows at December 31:
Gross Gross
Unrealized Unrealized Estimated
Amortized Holding Holding Fair
Cost Gains Losses Value
Available-for-sale 1995:
Nonequity securities:
Mortgage-backed securities .................... $32,627 $ 529 $ 21 $33,135
United States Government
agency obligations .......................... 40,480 218 140 40,558
------- ------- ------- -------
Total nonequity securities ................ 73,107 747 161 73,693
Equity securities _ FNMA stock .................. 4 33 _ 37
------- ------- ------- -------
$73,111 $ 780 $ 161 $73,730
======= ======= ======= =======
1994:
Nonequity securities _ Mortgage-
backed securities ............................. $ 6,969 $ 58 $ 19 $ 7,008
Equity securities _ FNMA stock .................. 4 18 _ 22
------- ------- ------- -------
$ 6,973 $ 76 $ 19 $ 7,030
======= ======= ======= =======
1993:
Nonequity securities _ Mortgage-
backed securities ............................. $33,573 $ 1,051 $ 75 $34,549
Equity securities _ FNMA stock .................. 4 20 _ 24
------- ------- ------- -------
$33,577 $ 1,071 $ 75 $34,573
======= ======= ======= =======
Held-to-maturity (all nonequity securities) 1995:
Mortgage-backed securities ...................... $42,083 $ 368 $ 12 $42,439
======= ======= ======= =======
1994:
Mortgage-backed securities ...................... $53,894 $ 15 $ 1,979 $51,930
United States Government agency
obligations ................................... 23,956 _ 1,727 22,229
------- ------- ------- -------
$77,850 $ 15 $ 3,706 $74,159
======= ======= ======= =======
1993:
Mortgage-backed securities ...................... $46,922 $ 1,058 $ 9 $47,971
======= ======= =========== =======
Mortgage-backed securities with amortized costs of $11.2 million and $15.9
million were sold during 1994 and 1993, respectively, at gross realized gains of
$.1 million and $.3 million, respectively. There were no gross realized losses
on the sales.
During 1995 and 1994, the Bank transferred $5.8 million and $10.0 million,
respectively, of mortgage-backed securities from available-for-sale to
held-to-maturity. Unrealized holding losses amounted to $59,000 for the 1994
transfer at date of transfer. There were no unrealized gains or losses related
to the 1995 transfer.
During 1995, the Bank transferred $34.6 million of investment securities from
held-to-maturity to available-for-sale as a result of guidance published by the
Financial Accounting Standards Board on the implementation of SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities. The net
unrealized gain on these investment securities at the date of transfer was
$74,000.
Investment securities amounting to $37.6 million with estimated fair values of
$38.2 million were pledged as collateral for advances from the Federal Home Loan
Bank ("FHLB") of Atlanta at December 31, 1995.
Nonequity investment securities have scheduled maturities as follows at December
31, 1995:
Estimated Weighted
Amortized Fair Average
Cost Value Yields
Available-for-sale
Within one year ................. $ 1,764 $ 1,753 8.50%
After one year before five years 40,384 40,477 6.28
After five years before ten years 4,880 4,958 7.38
After ten years ................. 26,079 26,505 6.09
------ ------
$73,107 $73,693
======= =======
Held-to-maturity
After one year before five years $ 3,445 $ 3,445 6.42%
After ten years ................. 38,638 38,994 6.91
------ ------
$42,083 $42,439
======= =======
(3) Loans Receivable, net
Loans receivable, net, are summarized as follows at December 31:
1995 1994 1993 1992 1991
Conventional:
1-4 family units ........................ $ 210,599 $ 239,072 $ 172,375 $ 153,683 $ 134,807
Multi-family units ...................... 19,307 23,031 24,976 26,514 27,144
Commercial real estate .................. 66,284 67,206 71,091 67,198 68,572
FHA/VA loans _ 1-4 family units ........... 409 549 670 962 1,105
--- --- --- --- -----
Total ................................. 296,599 329,858 269,112 248,357 231,628
------- ------- ------- ------- -------
Construction:
Residential ............................. 28,639 27,908 21,445 19,328 25,183
Commercial real estate .................. _ 4,053 9,727 9,727 10,197
Land acquisition and development ........ 5,583 12,357 14,363 16,866 19,218
Land .................................... 1,833 2,667 11,083 19,779 23,676
----- ----- ------ ------ ------
Total ................................. 36,055 46,985 56,618 65,700 78,274
------ ------ ------ ------ ------
Consumer:
Home equity loans and second trusts ..... 55,972 41,445 33,608 38,012 46,584
Other consumer .......................... 18,166 14,336 10,902 7,484 6,980
------ ------ ------ ----- -----
Total ................................. 74,138 55,781 44,510 45,496 53,564
------ ------ ------ ------ ------
Corporate:
Commercial real estate .................. 18,704 13,864 14,629 11,085 8,022
Other corporate ......................... 14,087 6,937 6,699 7,338 9,534
------ ----- ----- ----- -----
Total ................................. 32,791 20,801 21,328 18,423 17,556
------ ------ ------ ------ ------
Subtotal ............................ 439,583 453,425 391,568 377,976 381,022
Net items:
Deferred discounts and loan fees ........ (1,105) (2,070) (1,566) (2,112) (2,603)
Undisbursed portion of construction loans (18,415) (16,268) (10,356) (11,137) (14,192)
Allowance for loan losses ............... (7,460) (7,642) (11,725) (11,150) (11,582)
------ ------ ------- ------- -------
Loans receivable, net ..................... $ 412,603 $ 427,445 $ 367,921 $ 353,577 $ 352,645
========= ========= ========= ========= =========
Adjustable-rate loans, one-step fixed-rate loans and fixed-rate loans amounted
to $212.7 million, $108.1 million and $118.8 million, respectively, at December
31, 1995. The interest rate on one-step fixed-rate loans adjusts one time at the
fifth or seventh anniversary of origination to a fixed amount over predetermined
indices and remains at that revised rate for the remainder of the 25- or 23-
year term, respectively.
Loans to facilitate the sale of real estate owned at below-market rates, net of
discounts, amounted to $13.9 million, $16.3 million and $14.1 million at
December 31, 1995, 1994 and 1993, respectively.
At December 31, 1995, the Bank had recorded investments in impaired real estate
loans totaling $6.7 million. The Bank had $2.9 million of specific allowances
for losses on $5.6 million of such impaired loans. There were no specific
allowances for impaired loans totaling $1.1 million. The average recorded
investment in impaired real estate loans for the year ended December 31, 1995
was $9.0 million. The Bank recognized interest income of $.1 million on its
impaired loans during the year ended December 31, 1995.
The aggregate balances of loans greater than $60,000 (which are primarily
residential mortgage loans) to any executive officer or director was $2.4
million and $2.1 million at December 31, 1995 and 1994, respectively. During
1995, $.7 million was added and $.4 million was repaid.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") significantly reduced the total amount of loans that savings
institutions may make to a single or related group of borrowers. Under FIRREA,
savings institutions may make loans to one borrower in an amount up to 15% of
unimpaired capital and surplus on an unsecured basis and an additional amount up
to 10% of unimpaired capital and surplus if the loan is secured by certain
readily marketable collateral (which does not include real estate). Prior to
FIRREA, the Bank's loans-to-one-borrower limit, for loans secured by real
estate, equaled $38.3 million, which was its regulatory capital under the
then-existing Federal Home Loan Bank Board regulations. Under FIRREA, the Bank's
loans-to-one-borrower limit, for loans not secured by readily marketable
collateral, is $6.4 million, based on unimpaired capital and surplus, as
defined, as of December 31, 1995.
At December 31, 1995, the Bank had loans to one borrower (totaling $10.5
million) in excess of the limits, which are grandfathered under the provisions
of FIRREA. The Bank will not be able to lend additional amounts to this borrower
for the foreseeable future.
Nonperforming loans and loans which are troubled debt restructurings, net, are
summarized as follows at December 31:
1995 1994 1993
Nonperforming loans, net:
Commercial land ...................... $ _ $9,349 $ _
Commercial property .................. 1,327 _ 3,087
Residential properties ............... 315 171 2,813
Residential land ..................... _ _ 7,271
Other ................................ 186 359 73
--- --- --
$1,828 $9,879 $13,244
====== ====== =======
Troubled debt restructurings, net:
Commercial land ...................... $2,575 $ _ $ 9,182
Commercial property .................. 2,900 2,813 7,008
Residential properties ............... _ _ 181
Residential land ..................... _ _ 1,271
--- --- -----
$5,475 $2,813 $17,642
====== ====== =======
Interest income that would have been recorded under the original terms of such
loans, and the interest actually recognized for the years ended December 31, are
summarized as follows:
1995 1994 1993
Interest income that would have been
recognized ....................... $878 $849 $2,362
Interest income recognized ....... 477 120 1,261
--- --- -----
Interest income not recognized ... $401 $729 $1,101
==== ==== ======
The Bank is not committed to lend additional funds to debtors whose loans have
been modified. An analysis of the allowance for loan losses follows for the
years ended December 31:
Allowance for Loan Losses
1995 1994 1993 1992 1991
Balance, January 1:
Construction ................................. $ 4,979 $ 8,863 $ 9,613 $ 10,400 $ 8,281
Residential and commercial
permanent .................................. 2,177 2,320 1,141 631 182
Corporate .................................... 380 372 277 395 369
Consumer ..................................... 106 170 119 156 177
--- --- --- --- ---
7,642 11,725 11,150 11,582 9,009
----- ------ ------ ------ -----
(Recoveries of) provisions for
the year:
Construction ................................. (1,522) (1,363) (112) (241) 6,092
Residential and commercial
permanent .................................. 1,153 522 1,180 413 556
Corporate .................................... 232 195 127 (22) 188
Consumer ..................................... 109 11 134 19 111
--- -- --- -- ---
(28) (635) 1,329 169 6,947
--- ---- ----- --- -----
Charge-offs, net of recoveries, during the year:
Construction ................................. _ 2,521 638 546 3,973
Residential and commercial
permanent ................................... 76 665 1 (97) 107
Corporate .................................... (2) 187 32 96 162
Consumer ..................................... 80 75 83 56 132
-- -- -- -- ---
154 3,448 754 601 4,374
--- ----- --- --- -----
Balance, December 31:
Construction ................................. 3,457 4,979 8,863 9,613 10,400
Residential and commercial
permanent .................................. 3,254 2,177 2,320 1,141 631
Corporate .................................... 614 380 372 277 395
Consumer ..................................... 135 106 170 119 156
--- --- --- --- ---
$7,460 $7,642 $11,725 $ 11,150 $11,582
====== ====== ======= ======== =======
The unpaid principal balance of mortgage loans serviced for others is summarized
as follows at December 31:
1995 1994 1993
Mortgage loans underlying pass-through
securities owned by the Company ......... $ 10,895 $18,465 $28,565
Mortgage loans serviced for other investors 112,273 44,799 49,096
------- ------ ------
$123,168 $63,264 $77,661
======== ======= =======
Mortgage loans serviced for other investors are not included in the accompanying
consolidated statements of financial condition. An analysis of the activity of
amounts capitalized in connection with the right to service mortgage loans
follows for the years ended December 31:
1995 1994 1993
Balance, January 1 . $ 161 $ 118 $ 241
Capitalized ...... _ 71 _
Amortized ........ (63) (28) (123)
--- --- ----
Balance, December 31 $ 98 $ 161 $ 118
===== ===== =====
The Company periodically recalculates the present value of future servicing
income using current prepayment experience and adjusts the capitalized amounts
accordingly. The capitalized amounts are included in prepaid and other assets.
(4) Real Estate Owned, net
Real estate owned, net, is summarized as follows at December 31:
1995 1994
No. of No. of
Amount Projects Amount Projects
Acquired in foreclosure or by deed in
lieu of foreclosure:
Residential land ................ $ 5,326 2 $11,565 3
Residential construction ........ 728 1 1,841 1
Residential properties .......... 243 1 _ _
Commercial land ................. 7,947 4 2,825 3
Commercial office buildings ..... _ _ 177 1
------ --- ------ ---
14,244 8 16,408 8
=== ===
Less allowance for losses ....... (975) (1,582)
------ ------
$13,269 $14,826
====== ======
An analysis of the allowances for losses on real estate owned follows:
Balance at December 31, 1992 $2,472
Provision for losses ..... 1,793
Charge-offs .............. (475)
------
Balance at December 31, 1993 3,790
Provision for losses ..... 1,338
Charge-offs .............. (3,546)
------
Balance at December 31, 1994 1,582
Provision for losses ..... 374
Charge-offs .............. (981)
------
Balance at December 31, 1995 $ 975
======
Loss from real estate, net, for the years ended December 31 follows:
1995 1994 1993
Provision for losses on real estate owned $374 $1,338 $1,793
Other costs of real estate .............. 437 377 436
(Gain) loss on sale of real estate owned (712) 147 (559)
Profit from construction loans .......... _ (52) (1)
---- ------ ------
$ 99 $1,810 $1,669
==== ====== ======
(5) Premises and Equipment, net
Premises and equipment, net, are summarized as follows at December 31:
1995 1994
Land ......................................... $ 649 $ 762
Office buildings ............................. 2,635 2,901
Furniture, fixtures and equipment ............ 5,697 5,324
Leasehold improvements ....................... 538 472
------ ------
9,519 9,459
Less accumulated depreciation and amortization (6,650) (6,672)
------ ------
$2,869 $2,787
====== ======
(6) Deposit Accounts
Deposit accounts are summarized, by type, as follows at December 31:
1995 1994
Weighted % Weighted %
Average of Average of
Rates Amount Total Rates Amount Total
Commercial checking ..... _% $ 11,483 2.4% _% $ 8,059 1.8%
Passbook and statement
accounts .............. 3.04 31,194 6.4 3.02 39,379 8.6
Interest-bearing checking
accounts ............. 2.32 38,103 7.8 2.49 36,580 8.0
Money market deposit
accounts .............. 3.62 86,447 17.7 3.36 90,020 19.7
-------- ----- -------- -----
Total noncertificate
accounts ......... 167,227 34.3 174,038 38.1
-------- ----- -------- -----
Certificates of deposit:
Seven-day to
three-month ......... 4.72 2,077 .4 3.99 1,553 .3
Three-month to ten-year 5.48 298,080 61.2 5.22 265,715 58.2
Negotiable rate ....... 6.07 19,713 4.1 4.72 15,701 3.4
-------- ----- -------- -----
Total certificates of
deposit ........... 319,870 65.7 282,969 61.9
-------- ----- -------- -----
$487,097 100.0% $457,007 100.0%
======== ===== ======== =====
At December 31, 1995, certificates of deposit included $12.1 million in 12-month
certificates which allow a one-time penalty-free withdrawal of up to the
certificate amount, $4.7 million in 18-month certificates which allow a one-time
"step-up" to the current interest rate at the depositor's option without
penalty, $7.7 million in 24-month certificates whose interest rates
automatically increase from 5.50% to 6.25% over the term of the certificates,
$20.0 million in 24-, 36- and 48-month certificates whose interest rates
automatically increase .25% on each annual anniversary and $40.8 million in
30-month certificates which allow three "step-up's" to the current interest rate
without penalty. Certificate accounts mature as follows:
December 31,
4.00% 4.01%- 6.01%- 8.01%- 1995 1994
or less 6.00% 8.00% 12.10% Total Total
Within 12 months $ 1,802 $120,380 $ 60,944 $ 372 $183,498 $165,653
13-24 months ... _ 56,240 30,727 309 87,276 51,734
25-36 months ... _ 9,981 7,214 9 17,204 50,672
37-48 months ... _ 4,151 21,302 61 25,514 9,006
49-60 months ... _ 1,094 1,410 _ 2,504 1,565
Thereafter ..... _ 738 3,136 _ 3,874 4,339
------- -------- -------- ------ -------- --------
1995 total ... $ 1,802 $192,584 $124,733 $ 751 $319,870 $282,969
======= ======== ======== ====== ======== ========
1994 total ... $48,651 $208,084 $ 24,870 $1,364 $282,969
======= ======== ======== ====== ========
Total certificates of deposit in excess of $100,000 were $30.0 million and $35.5
million at December 31, 1995 and 1994, respectively. Interest expense, by type,
for the years ended December 31 follows:
1995 1994 1993
Passbook and statement accounts .. $ 985 $ 1,077 $ 1,240
Interest-bearing checking accounts 1,019 835 807
Money market deposit accounts .... 3,034 2,922 2,840
Certificates of deposit .......... 17,100 12,823 13,728
------ ------ ------
$22,138 $17,657 $18,615
======= ======= =======
(7) Advances from the Federal Home Loan Bank of Atlanta
Advances from the FHLB of Atlanta are summarized as follows at December 31:
1995 1994
Maturing during the year Average Average
ending December 31, Rate Balance Rate Balance
1995..................... _% $ _ 6.17% $30,900
1996..................... 5.13 27,640 4.99 21,890
1997..................... 5.12 10,000 _ _
1998..................... 6.21 22,500 6.05 7,500
2000..................... 6.97 14,000 _ _
2002..................... 8.48 1,000 _ _
------- -------
$75,140 $60,290
======= =======
At December 31, 1995, advances amounting to $5.0 million reprice monthly based
on LIBOR and $5.8 million reprice daily based on the overnight Federal funds
rate.
The following table sets forth certain information as to the Company's
short-term advances for the years ended December 31.
1995 1994 1993
Highest month-end balances ..................... $43,640 $31,550 $33,000
Average month-end balances ..................... 33,013 19,615 19,658
Weighted average interest rate at year-end ..... 5.13% 6.17% 3.93%
Weighted average interest rate during the year . 5.63 4.95 5.65
At December 31, 1995, the following assets were pledged as collateral under a
blanket floating lien collateral agreement to secure the advances from the FHLB
of Atlanta: all stock in the FHLB of Atlanta; mortgage-backed securities with
carrying values, including accrued interest receivable, of $37.8 million and
fair values of $38.2 million; residential mortgage loans with aggregate
principal balances totaling up to 150% of the outstanding amount of the advances
and other loan collateral amounting to $2.2 million. The Bank is required to be
a member of the Federal Home Loan Bank System and to maintain an investment in
the stock of the FHLB of Atlanta at least equal to the greater of 1% of the
unpaid principal balance of its residential mortgage loans, 1% of 30% of its
total assets, or 1/20th of its outstanding advances from the FHLB of Atlanta.
(8) Other Borrowed Money
The Bank enters into sales of securities under agreements to repurchase the same
securities. Fixed-coupon reverse repurchase agreements are treated as
financings, and the obligations to repurchase securities sold are reflected as a
liability in the balance sheet. The dollar amount of securities underlying the
agreements remains in the asset accounts. The securities underlying the
agreements are book entry securities, and the broker retains possession of the
securities collateralizing the reverse repurchase agreements. There were no
reverse repurchase agreements outstanding at any time during 1995 or 1994, and
there was no other borrowed money at December 31, 1995 or 1994.
The maximum amount of reverse repurchase agreements outstanding at any month-end
during the year ended December 31, 1993 was $2.8 million. The average amount of
outstanding reverse repurchase agreements for the year ended December 31, 1993
was $1.5 million. The weighted average interest rates on these agreements during
the year ended December 31, 1993 was 3.26%.
(9) Income Taxes
Effective January 1, 1993, the Company adopted SFAS No. 109. The cumulative
impact of this change in accounting principle resulted in an increase in
earnings of $1.5 million, or $.54 per share, and is reported separately in the
Consolidated Statements of Income.
The provision (benefit) for income taxes for the years ended December 31 is
summarized as follows:
1995 1994 1993
Current:
Federal ............................. $ 2,686 $ (100) $ 1,412
State ............................... 582 88 450
--- -- ---
3,268 (12) 1,862
----- --- -----
Deferred:
Federal ............................. (1,093) 1,426 (409)
State ............................... (189) 283 20
---- --- --
(1,282) 1,709 (389)
------ ----- ----
$ 1,986 $ 1,697 $ 1,473
======= ======= =======
A reconciliation of the statutory Federal income tax rate to the Company's
effective income tax rate for the years ended December 31 follows:
Percent of Pretax Income
1995 1994 1993
Statutory Federal income tax rate ................. 34.0% 34.0% 34.0%
State income taxes, net of Federal income tax
benefit ......................................... 4.3 5.0 5.5
Change in valuation allowance for deferred tax
assets allocated to income tax expense .......... (3.2) (5.6) (13.3)
Deductible exercises of non-incentive stock options (2.6) (1.5) (1.0)
Other ............................................. .1 (0.1) _
---- ---- ----
Effective tax rates ............................... 32.6% 31.8% 25.2%
==== ==== ====
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31 are as
follows:
1995 1994
Deferred tax assets:
Loss reserves on loans and real estate owned $ 2,888 $ 2,926
Deferred interest .......................... 1,077 900
Other ...................................... 678 218
--- ---
Total gross deferred tax assets .......... 4,643 4,044
Less valuation allowance ................. (267) (465)
---- ----
Net deferred tax assets .................. 4,376 3,579
----- -----
Deferred tax liabilities:
Loan fees .................................. 1,106 1,067
FHLB of Atlanta stock dividends ............ 433 470
Prepaid deductions ......................... 199 383
Taxes on unrealized net holding gains ...... 218 1
Other ...................................... 92 394
---- -----
Total gross deferred tax liabilities ..... 2,048 2,315
----- -----
Net deferred tax assets .................. $ 2,328 $ 1,264
======= =======
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. The Company has
established a valuation allowance for the excess of deferred tax assets over
taxes paid available in carryback years and future reversals of certain existing
taxable temporary differences. During 1995 and 1994, $.2 million and $.3
million, respectively, of the valuation allowance were recovered as a reduction
of income tax expense.
The Bank's cumulative book allowance for loan losses exceeds its cumulative tax
bad debt reserves by $2.9 million. Earnings appropriated to bad debt reserves
and deducted for Federal income tax purposes were not available for payment of
cash dividends or other distributions to stockholders, including distributions
on redemption, dissolution or liquidation, without payment of such taxes by the
Company on the amount of such earnings removed from the reserves for such
distribution at the then-current tax rate. Under applicable Internal Revenue
Code provisions, the amount which would have been deemed removed from such
reserves by the Company, in the event of any such distribution to stockholders,
and which would have been subject to taxation at the Company level at the normal
tax rate, would have approximated twice the net amount actually distributed to
the stockholders.
The Company has not recognized a deferred tax liability of $1.6 million for the
tax effects of the "base year" tax bad debt reserve because the Company does not
currently anticipate that such reserve will reverse and result in taxable income
in the foreseeable future.
No portion of the Bank's net deferred tax asset is required to be deducted for
regulatory capital purposes at December 31, 1995.
The Company met certain conditions, including maintaining an investment in
certain qualifying assets in excess of 60% of total assets, and qualified under
provisions of the Internal Revenue Code to elect to deduct from taxable income
an allowance for bad debts based on either a percentage of taxable income before
such deduction or actual loan loss experience.
(10) Capital Requirements
Savings institutions are currently required to maintain: (i) "core capital" of
at least 4.0% of adjusted total assets (under the Office of Thrift Supervision
("OTS") prompt corrective action regulations), (ii) "tangible capital" of at
least 1.5% of adjusted total assets, and (iii) "risk-based capital" of at least
8.0% of risk-weighted assets. At June 30, 1991, the Bank met the core and
tangible capital requirements but not the then-applicable 7.2% risk-based
capital requirement. Accordingly, pursuant to applicable Federal regulations,
the Bank filed a capital restoration plan with the OTS in September 1991, which
was approved on December 12, 1991. In connection with OTS' approval of the
Bank's capital plan, the Bank agreed to the issuance by the OTS of a capital
directive requiring that the Bank meet all applicable capital requirements by
December 31, 1992, which was subsequently extended to June 30, 1993. The Bank
met all applicable regulatory capital requirements at December 31, 1992. On May
17, 1993, the OTS released the Bank from the capital directive but required that
the Bank continue to operate in accordance with its capital plan. The capital
plan approved by the OTS in December 1991 covered the period ending on June 30,
1994. The Bank filed an amended capital plan which was approved by the OTS. On
February 23, 1996, as a result of Citizens' continued capital compliance and
improved condition, the OTS notified the Bank that it is no longer subject to a
capital plan.
On December 12, 1991, the Bank also entered into a supervisory agreement with
the OTS as a result of the Bank's high level of classified assets. The Bank also
agreed to additional reporting requirements and to continue to maintain general
valuation allowances on assets of at least $8.5 million. Based on the progress
that the Bank made in reducing its level of classified assets, the OTS
terminated the minimum general valuation allowance requirement on March 3, 1994.
On July 29, 1994, the OTS released the Bank from the supervisory agreement in
light of the continued improvement in the Bank's asset quality.
In August 1993, the OTS issued a final rule which adds an interest rate
component to the OTS risk-based capital requirement. Savings institutions will
be required to incorporate interest rate risk ("IRR") into their risk-based
capital calculation when OTS concludes testing of its appeals process. Under the
rule, IRR is measured as the ratio of the greater of the decline in net
portfolio value resulting from a 200 basis point increase or decrease in market
interest rates to the estimated economic value of assets, as calculated by an
OTS model. A savings institution whose measured IRR exceeds 2.0% must deduct
from total capital an IRR component equal to one-half of the difference between
its measured IRR and 2.0%, multiplied by the estimated economic value of its
total assets. Based upon financial data available as of December 31, 1995,
management believes that compliance with the new IRR will not have a material
impact on the Bank's risk-based capital position.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), each Federal banking agency is required to establish, by regulation,
for each capital measure, the levels at which an insured institution is "well
capitalized", "adequately capitalized", "undercapitalized", "significantly
undercapitalized" and "critically undercapitalized". The Federal banking
agencies are required to take prompt corrective action with respect to savings
institutions that fall below minimum capital standards. The degree of regulatory
intervention mandated by FDICIA is tied to a savings institution's capital
category, with increasing scrutiny and more stringent restrictions being imposed
as an institution's capital declines. The prompt corrective actions specified by
FDICIA for "undercapitalized" institutions include increased monitoring and
periodic review of capital compliance efforts, a requirement to submit a capital
plan, prohibitions on the payment of dividends and management fees, restrictions
on total asset growth, and limitations on certain new activities (such as
opening new branch offices and engaging in acquisitions and new lines of
business) without OTS approval. The OTS may appoint a conservator or receiver
for critically undercapitalized institutions.
An institution is considered "well capitalized" if it has a total risk-based
capital ratio of 10% or greater, a tier 1 or core capital to risk-weighted
assets ratio of 6% or greater, and a leverage ratio of 5% or greater (provided
that the institution is not subject to an order, written agreement, capital
directive or prompt corrective action directive to meet and maintain a specific
capital level for any capital measure). At December 31, 1995, the Bank had a
leverage (tangible) ratio of 6.1%, a ratio of core capital to risk-weighted
assets of 9.7% and total risk-based capital ratio of 10.9% and was considered
"well capitalized".
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, (iii) require savings
and loan holding companies to be regulated as bank holding companies, and (iv)
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 point 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 $34.6 million, or 5.6% of adjusted total assets, and total
risk-based capital to $39.4 million, or 10.2% of risk-weighted assets, on a pro
forma basis as of December 31, 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 in future
periods. In addition, if the Bank were required to convert its Federal savings
bank charter, the Bank could be required to recapture its bad debt reserve for
Federal income tax purposes unless the Bank meets a proposed residential loan
origination requirement. Such recaptured amount would be $1.6 million, after
taxes, and, if recaptured, would further reduce the Bank's income and capital
ratios.
(11) Employee Benefit Plans and Director Retirement Plan
The Company's defined benefit pension plan covers substantially all of its
employees. Employees are fully vested after five years of service. Benefits are
calculated based on 1% of final average earnings, adjusted for years of service.
The Company makes annual contributions to the plan in accordance with actuarial
computations made by an independent actuary.
The following table sets forth the plan's funded status at December 31.
1995 1994
Actuarial present value of benefit obligation:
Accumulated benefit obligation ........................ $(1,827) $(1,524)
Vested benefit obligation ............................. (1,699) (1,187)
====== ======
Projected benefit obligation for service rendered to date $(2,343) $(2,319)
Plan assets at fair value, primarily listed stocks and
U.S. Bonds ............................................ 2,771 2,597
----- -----
Funded status ........................................... 428 278
Balance of unrecognized net loss from past experience
different from that assumed and effects of changes in
assumptions ........................................... 499 631
Prior service cost not yet recognized in net periodic
pension cost .......................................... (735) (805)
Balance of unrecognized net obligation at January 1,
1987, being recognized over 18 years .................. (194) (215)
---- ----
Accrued pension cost included in accounts payable and
accrued expenses ...................................... $ (2) $ (111)
======= =======
Net periodic pension (benefit) cost included the following components:
Year ended December 31,
1995 1994 1993
Service cost _ benefit earned during the period $ 141 $ 207 $ 187
Interest cost on projected benefit obligation . 155 176 152
Actual return on plan assets .................. (152) (164) (132)
Net amortization and deferral ................. (150) (58) (34)
---- --- ---
Net periodic pension (benefit) cost ........... $ (6) $ 161 $ 173
===== ===== =====
For 1995, the weighted average discount rate used in determining the present
value of the projected benefit obligation was 7.5%, compared with 8.0% for 1994
and 7.0% for 1993. The weighted average expected long-term rate of return on
assets and rate of increase on future compensation levels was 8.5% and 4.5%,
respectively, for all three years.
During 1990, the Company implemented a 401(k) plan for all employees which
provides for an employer match of at least 25% on an employee's contribution of
up to 6% of the employee's salary. The employer match may be doubled if certain
targets are met. The Company's contributions to the 401(k) plan were $107,000,
$59,000 and $100,000 in 1995, 1994 and 1993, respectively. Employees are fully
vested in the employer match after three years of service.
During 1994, the Company and the Bank implemented a directors' retirement plan.
The Company assumed the Bank's obligations under such plan in 1995. Eligible
directors will receive an annual payment equal to the annual retainer in effect
at the time of their retirement for the highest position attained by the
director. Such payments are reduced by any payments received under the Bank's
defined benefit plan and are payable for a period, based on years of service,
not to exceed ten years. Persons who served as directors at the time the plan
was adopted are entitled to retirement payments for ten years, notwithstanding
their actual length of service. A director is eligible for retirement when he
resigns after age 70, is not renominated due to age or ceases to be a director
in connection with a "change in control", as defined. A retirement by reason of
death entitles the director's beneficiary or estate to receive the payments
which would have otherwise been made to the deceased director. The directors'
retirement plan is not funded. Expense is accrued annually over the period to
eligibility. A 7% discount rate was used to determine the $87,000 and $189,000
accruals for 1995 and 1994, respectively.
Effective January 1, 1996, directors of the Company and the Bank will be
permitted to defer all or a portion of their director and committee fees until
they cease to be directors, at which time the director may elect to receive the
deferred balance in either a lump sum payment or over ten years. Interest on the
deferred amounts will be credited annually. Directors currently receive fees
only for attending meetings of the Board of Directors of the Bank or Committees
thereof. In the event of a director's death, if life insurance is obtained on
the life of any director, the plan also provides for a death benefit equal to a
projected benefit based on the director's deferral balance and projected further
deferrals until age 65. If life insurance is not obtained, the benefit equals
the director's deferral balance at his death. The Bank has purchased life
insurance on the life of each of the participating directors.
Effective March 7, 1996, the Bank and First Citizens Mortgage Corporation
("FCMC") entered into supplemental retirement agreements for the benefit of the
presidents of the respective companies. Under terms of the agreements, the
presidents will receive annual payments of 70% and 60%, respectively, of their
final annual cash compensation, less amounts payable to them under the Company's
retirement plans, for the longer of 15 years or life commencing following their
retirement after age 65. If employment is terminated for other than "cause"
before attaining age 65, the presidents will receive prorated benefits under
these agreements. The agreements are not funded.
(12) Commitments
The Bank leases certain offices under long-term operating lease agreements. Rent
expense on operating leases was $.7 million, $.5 million and $.4 million for the
years ended December 31, 1995, 1994 and 1993, respectively.
Future minimum annual rental commitments under these leases are summarized as
follows:
1996................. $ 863
1997................. 775
1998................. 770
1999................. 718
2000................. 468
2001-2003............ 68
------
Total................ $3,662
======
The Bank had outstanding loan origination commitments aggregating $21.2 million
and $4.9 million at December 31, 1995 and 1994, respectively, primarily for
variable-rate commitments, all of which expire within 90 days.
The Bank had commitments to sell loans totaling $3.7 million and $2.1 million at
December 31, 1995 and 1994, respectively.
The Bank had outstanding commitments to fund letters of credit of $7.2 million
and $6.7 million and unused lines of credit, primarily on home equity loans, of
$49.0 million and $36.7 million at December 31, 1995 and 1994, respectively.
Some of the loans that FCMC sells on a servicing-released basis are sold with
recourse. Generally, the recourse provisions relate to loans where the borrower
becomes delinquent during the first three to six months after settlement. FCMC
has never been required to repurchase any loan it has sold. At December 31,
1995, loans sold with recourse amounted to $10.6 million.
At December 31, 1995, the Company was involved in various claims and legal
actions arising in its business. The outcome of these claims and actions are not
presently determinable; however, in the opinion of the Company's management,
after consulting with the Company's legal counsel, the ultimate disposition of
these matters is not expected to have a material adverse impact on the Company's
consolidated financial condition or results of operations.
(13) Common Stock
On December 24, 1986, when the Bank converted from a mutual form of Federal
savings bank to a stock form of Federal savings bank, it established a
"Liquidation Account" in an amount equal to its regulatory capital as of June
30, 1986. The Bank may not declare or pay a cash dividend on or repurchase any
of its capital stock if the effect thereof would cause the net worth of the Bank
to be reduced below either the amount required for the liquidation account or
the capital requirements imposed by the OTS. The liquidation account amounted to
$1.0 million at December 31, 1995.
The OTS has adopted a regulation that establishes uniform treatment for all
capital distributions by savings associations (including dividends, stock
repurchases and cash-out mergers). The regulation establishes three tiers of
institutions for purposes of determining the level of dividends that can be
paid. Institutions that either before or after a proposed capital distribution
fail to meet their then-applicable minimum capital requirements may not make any
capital distributions, except with prior OTS approval. OTS regulations require
SAIF-insured institutions owned by holding companies to give the OTS 30 days'
advance notice of any proposed declaration of dividends. See note 9 for
additional potential restrictions on payment of dividends.
Under Delaware law, First Citizens Financial may pay dividends out of surplus,
or in the event there is no surplus, out of net profits for the fiscal year in
which the dividend is declared and/or the preceding fiscal year. Dividends may
not be paid out of net profits, however, if the capital of First Citizens
Financial has been diminished to an amount less than the aggregate amount of
capital represented by all classes of preferred stock.
Net income per share of common stock for 1995, 1994 and 1993 was computed by
dividing net income by 2,863,839; 2,829,104 and 2,775,084, respectively, the
weighted average number of shares of common stock outstanding for each year (as
adjusted for all stock dividends). 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.
The Company has three stock option plans that provide for the grant of stock
options to directors and/or officers and key employees of the Company and its
subsidiaries at prices at least equal to the market value at the date of grant.
A total of 733,917 shares of Company common stock were reserved for issuance
under the option plans at December 31, 1995.
A summary of changes in the outstanding options under the plans for the years
ended December 31 follows:
1995 1994 1993
Balance, January 1 ............................ 370,782 314,311 255,958
Options granted with immediate vesting ...... 75,563 11,735 _
Options granted with vesting in six months to
five years ................................ 39,337 52,000 77,125
Stock dividends ............................. 37,675 16,790 15,285
Options exercised ........................... (45,714) (20,083) (22,651)
Options expired or canceled ................. (6,600) (3,971) (11,406)
------ ------ -------
Balance, December 31 .......................... 471,043 370,782 314,311
======= ======= =======
The options outstanding at December 31, 1995 were exercisable as follows:
Immediately Subject to Vesting
Exercisable Over One to Five Years
Exercise Exercise
Shares(a) Price(a) Shares(a) Price(a)
120,760 $1.45 19,801 $12.05
479 1.46 7,334 12.50
38,200 3.72 4,400 15.11
1,452 3.73 26,670 17.25
------
1,908 5.70 58,205
======
1,908 5.98
16,978 6.28
17,172 6.29
93,528 6.60
34,650 11.25
9,899 12.05
3,666 12.50
1,100 15.11
1,908 15.23
65,075 17.25
4,155 18.00
-------
412,838
=======
<FN>
(a) Adjusted for prior stock dividends.
</FN>
There were 65 option holders at December 31, 1995. Options exercised during 1995
had exercise prices ranging from $1.45 to $12.50. Options canceled during 1995
had an exercise price of $12.50. Closing price of the Company's stock at
December 31, 1995 was $19.00 per share.
(14) Financial Instruments with Off Balance Sheet Risk
The Bank is a party to financial instruments with off balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit and financial guarantees. These instruments may involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated statements of financial condition.
Credit risk is defined as the possibility of sustaining a loss because the other
parties to a financial instrument failed to perform in accordance with the terms
of the contract. The Bank's maximum exposure to credit loss under standby
letters of credit and commitments to extend credit is represented by the
contractual amounts of those instruments. The Bank uses the same credit policies
in making commitments and conditional obligations as it does for on balance
sheet instruments.
Financial instruments whose contract amounts represent potential credit risk at
December 31, 1995 follow:
Contractual
Amount
Commitments to extend credit.................... $ 21,160
Standby letters of credit....................... 7,231
Loans sold with recourse........................ 10,609
Unused lines of credit.......................... 49,010
At December 31, 1995, the Bank did not have any financial instruments whose
contractual amounts exceeded the amount of credit risk.
The Bank evaluates each customer's creditworthiness on a case-by-case basis and
requires collateral to support financial instruments when deemed necessary. The
amount of collateral obtained upon extension of credit is based on management's
evaluation of the counterparty. Collateral held varies but may include: real
estate; deposits held by the Bank; marketable securities; accounts receivable;
inventory; property, plant and equipment; and income-producing commercial
properties.
Commitments to extend credit are agreements to lend to a customer so long as
there is no violation of any condition established in the contract. Commitments
usually have fixed expiration dates or other termination clauses and may require
payment of a fee. Since some of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of the contractual obligations by a customer to a
third party. The majority of these guarantees extend until satisfactory
completion of the customer's contractual obligations. The Bank's current policy
requires collateral supporting these commitments.
Loans sold with recourse were sold by FCMC on a servicing-released basis.
Generally, the recourse provisions relate to loans where the borrower becomes
delinquent during the first three to six months after settlement. FCMC has never
been required to repurchase any loan it has sold.
(15) Significant Group Concentrations of Credit Risk
Most of the Bank's business activity is with customers located in Central
Maryland, Northern Virginia and the District of Columbia. In addition, most of
the real estate owned and nonaccrual loans are located in these same markets.
Accordingly, the ultimate collectibility of a substantial portion of the Bank's
loan portfolio, which primarily consists of real estate loans (see note 3), and
the recovery of a substantial portion of the carrying amount of real estate
owned are susceptible to changes in conditions in these markets.
(16) Related Party Transactions
During 1994, a senior attorney of the law firm that serves as the Company's
general counsel was elected chairman of the Board of Directors. The Company paid
$.5 million, $.3 million and $.4 million in legal and related fees to his law
firm during 1995, 1994 and 1993, respectively. Additionally, the Company
received $14,000 during 1995 and $56,000 during 1994 and 1993 in rent from the
law firm. The lease to the law firm was converted to a month-to-month lease
during 1994 and was terminated in 1995. During 1994 and 1993, the Company paid
$85,000 and $75,000, respectively, to a company owned by one of its directors
for construction work at one of the real estate owned properties. The contract
was awarded based on competitive bids. Another of the Company's directors owns
an insurance agency which was awarded several of the Company's insurance
policies in 1994 and 1995. Such award was based on competitive bids. Total
premiums paid by the Company amounted to $.1 million, and commissions earned by
the insurance agency were $10,000 during each of the years ended December 31,
1995 and 1994. In 1993, the Company paid $35,000 to the wife of a director who
was the listing agent for a single-family home sold from the real estate owned
portfolio.
(17) Disclosures About the Fair Value of Financial Instruments
Fair value information which pertains to the Company's financial instruments is
based on the requirements set forth in SFAS No. 107, Disclosures About Fair
Value of Financial Instruments, and does not purport to represent the aggregate
net fair value of the Company. Much of the information used to determine fair
value is highly subjective and judgmental in nature and, therefore, the results
may not be precise. The subjective factors include, among other things,
estimates of cash flows, risk characteristics, credit quality and interest
rates, all of which are subject to change. Since the fair value is estimated as
of the balance sheet date, the amount which will actually be realized or paid
upon settlement or maturity could be significantly different.
The estimated fair value of financial instruments is summarized as follows at
December 31:
1995 1994
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
Assets
Cash and interest-bearing
deposits .................. $ 15,711 $ 15,711 $ 7,828 $ 7,828
Investment securities ....... 115,813 116,169 84,880 81,189
Loans receivable ............ 405,316 407,043 415,152 397,932
Loans held for sale ......... 34,921 35,743 9,418 9,444
Excess servicing ............ 98 98 161 161
Other assets ................ 5,696 5,696 3,890 3,890
Liabilities
Deposit accounts ............ 487,097 490,088 457,007 455,558
Advances from FHLB of Atlanta 75,140 76,032 60,290 58,727
Other liabilities ........... 2,922 2,922 4,164 4,164
Off balance sheet instruments
Commitments to extend credit _ 228 _ 35
Standby letters of credit ... _ 8 _ 8
Loans sold with recourse .... _ _ _ _
Unused lines of credit ...... _ _ _ _
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and cash equivalents _ For cash and cash equivalents, the carrying amount
is a reasonable estimate of fair value due to the short maturity of these
instruments.
Investment securities _ Fair values for these securities are based on prices
published in financial newspapers or bid quotations received from securities
dealers.
Loans receivable and loans held for sale _ For homogeneous categories of loans,
such as some residential mortgages 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. It was not practicable to
estimate the fair value of nonperforming and restructured loans with carrying
values of $7.3 million and $12.3 million at December 31, 1995 and 1994,
respectively, because it was not practicable to reasonably access the credit
adjustment that would be applied in the marketplace for such loans. However, the
fair values of the underlying collateral securing these loans was calculated by
discounting estimated future cash flows of property sales or income on
commercial properties. The estimated fair value of the underlying collateral was
$10.4 million and $16.2 million at December 31, 1995 and 1994, respectively. The
Bank will not share in any appreciation on these loans because the maximum it
can collect is the principal balance outstanding and delinquent or deferred
interest due.
Excess servicing _ The fair value of excess servicing is determined based on the
estimated discounted net cash flows to be received, adjusted for anticipated
prepayment less normal servicing costs.
Other assets _ The estimated fair value of other assets, which primarily include
accrued interest receivable and miscellaneous receivables from customers and
tenants of real estate owned properties, approximates the carrying value due to
the short maturity of these instruments.
Deposit accounts _ The fair value of demand deposits, savings accounts and
certain money market deposits is equal to the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of deposit is
based on the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for deposits of similar remaining
maturities.
Advances from FHLB of Atlanta _ The fair value of existing debt is based on
published market rates for similar issues or on rates currently available from
brokers for debt with similar terms and remaining maturities.
Other liabilities _ The estimated fair value of other liabilities, which
primarily include accrued interest payable and trade accounts payable,
approximates the carrying value due to the short maturity of these instruments.
Off balance sheet instruments _ The fair value of commitments is estimated using
the fees currently charged to enter into similar agreements, taking into account
the remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed-rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates. The
fair value of standby letters of credit is based on fees currently charged for
similar agreements.
(18) Condensed Financial Information (Parent Company Only)
Statements of Financial Condition
December 31,
1995 1994
Assets
Cash ............................................ $ 1,136 $ 906
Equity in net assets of subsidiary .............. 37,706 32,981
Income taxes recoverable ........................ 152 38
Deferred income taxes ........................... 7 _
Other assets .................................... 2 256
------- -------
$39,003 $34,181
======= =======
Liabilities _ Accounts payable and accrued expenses $ 362 $ 145
------- -------
Stockholders' equity
Preferred stock ................................. _ _
Common stock .................................... 26 23
Additional paid-in capital ...................... 22,297 18,269
Retained earnings ............................... 15,970 15,744
Unrealized net holding gains on investment
securities available-for-sale, net of taxes ... 348 _
------- -------
Total stockholders' equity ................. 38,641 34,036
------- -------
$39,003 $34,181
======= =======
Statements of Income
Year ended December 31,
1995 1994 1993
Interest income .................... $ 34 $ 41 $ 36
Noninterest expense ................ 443 153 126
------- ------- -------
Loss before equity in net income of
subsidiary ....................... (409) (112) (90)
Equity in net income of subsidiary . 4,377 3,709 5,935
------- ------- -------
Income before income tax benefit and
cumulative effect of accounting
change ........................... 3,968 3,597 5,845
Income tax benefit ................. 139 38 33
------- ------- -------
Income before cumulative effect of
accounting change ................ 4,107 3,635 5,878
Cumulative effect of change in
accounting for income taxes ...... _ _ 1
------- ------- -------
Net income ......................... $ 4,107 $ 3,635 $ 5,879
======= ======= =======
Statements of Cash Flows
Year ended December 31,
1995 1994 1993
Operating activities
Net income ............................ $ 4,107 $ 3,635 $ 5,879
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Equity in net income of subsidiary (4,377) (3,709) (5,935)
(Increase) decrease in income
taxes recoverable ............... (114) (37) 16
Increase in deferred income taxes . (7) _ _
(Increase) decrease in other assets 254 (245) 15
Increase (decrease) in accounts
payable and accrued expenses .... 217 35 (70)
Other ............................. _ _ (4)
------ ------ ------
Net cash provided by (used in)
operating activities .......... 80 (321) (99)
------ ------ ------
Financing activities
Net proceeds from exercise of common
stock options ..................... 158 35 38
Other ............................... (8) (5) (4)
------ ------ ------
Net cash provided by financing
activities ........................ 150 30 34
------ ------ ------
Increase (decrease) in cash ....... 230 (291) (65)
Cash at beginning of period ....... 906 1,197 1,262
------ ------ ------
Cash at end of period ............. $ 1,136 $ 906 $ 1,197
======= ======= =======
The primary activity of First Citizens Financial is that of a unitary savings
bank holding company. See notes 9 and 13 for regulatory restrictions on payments
of dividends by the Bank to First Citizens Financial. The Company's expenses
primarily consist of certain stockholder-related expenses.
Report of Independent Public Accountants
The Board of Directors and Stockholders
First Citizens Financial Corporation
Gaithersburg, Maryland
We have audited the accompanying consolidated statement of financial condition
of First Citizens Financial Corporation (a Delaware Corporation) and subsidiary
as of December 31, 1995, and the related consolidated statements of income,
stockholders' equity and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an 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 audit provides 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
Financial Corporation and subsidiary as of December 31, 1995, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
As discussed in Note 1, effective January 1, 1995, the Company changed its
method of accounting for impaired loans.
Washington, D.C.
January 26, 1996, except with respect to the first paragraph in Note 10 and the
last paragraph in Note 11 as to which the
dates are February 23, 1996 and March 7, 1996, respectively
Independent Auditors' Report
The Board of Directors and Stockholders
First Citizens Financial Corporation
Gaithersburg, Maryland
We have audited the accompanying consolidated statement of financial condition
of First Citizens Financial Corporation and subsidiary as of December 31, 1994,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the years in the two-year period ended December 31, 1994.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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
Financial Corporation and subsidiary as of December 31, 1994, and the results of
their operations and their cash flows for each of the years in the two-year
period ended December 31, 1994 in conformity with generally accepted accounting
principles.
As discussed in Notes 1 and 9, the Company changed its method of accounting for
income taxes in 1993 to adopt the provisions of Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes.
Washington, D.C.
February 3, 1995
Report of Management
The management of First Citizens Financial Corporation (the "Company") is
responsible for the preparation, the integrity and the objectivity of these
consolidated financial statements. The consolidated financial statements and
notes have been prepared in accordance with generally accepted accounting
principles and, in the judgment of management, present fairly the Company's
financial position and results of operations. The financial information
contained elsewhere in this report is consistent with that in the financial
statements. The financial statements and other financial information in this
report include amounts that are based on management's best estimates and
judgments and give due consideration to materiality.
The Company maintains a system of internal accounting controls to provide
reasonable assurance that assets are safeguarded and that transactions are
executed in accordance with management's authorization and recorded properly to
permit the preparation of financial statements in accordance with generally
accepted accounting principles.
The Internal Audit Department of the Company reviews, evaluates, monitors and
makes recommendations on both administrative and accounting control, and acts as
an integral, but independent, part of the system of internal controls.
The Company's independent accountants were engaged to perform an audit of the
consolidated financial statements. This audit provides an objective review of
management's responsibility to report operating results and financial condition.
Working with the Company's internal auditors, they review and make tests as
appropriate of the data included in the financial statements.
The Board of Directors discharges its responsibility for the Company's financial
statements through its Audit Committee. The Audit Committee meets periodically
with the independent accountants, internal auditors and management. Both the
independent accountants and internal auditors have direct access to the Audit
Committee to discuss the scope and results of their work, the adequacy of
internal accounting controls and the quality of financial reporting.
Herbert W. Jorgensen William C. Scott
Chairman of the Board and Senior Vice President and
Chief Executive Officer Chief Financial Officer
Selected Quarterly Financial Data (unaudited)
Condensed quarterly financial data for the years ended December 31, 1995 and
1994 follows:
(Dollars in thousands except per share data)
Three Months Ended
December 31, September 30, June 30, March 31, December 31, September 30 June 30, March 31,
1995 1995 1995 1995 1994 1994 1994 1994
Total interest income .............. $11,312 $10,999 $10,755 $10,397 $10,101 $9,391 $8,962 $8,885
Total interest expense ............. 6,940 6,658 6,326 5,816 5,504 4,963 4,659 4,728
------- ------- ------- ------- ------- ------ ------ ------
Net interest income .............. 4,372 4,341 4,429 4,581 4,597 4,428 4,303 4,157
(Recovery of) provision for
loan losses ...................... (230) (48) 100 150 (608) (58) 5 26
------- ------- ------- ------- ------- ------ ------ ------
Net interest income after
(recovery of) provision
for loan losses ................ 4,602 4,389 4,329 4,431 5,205 4,486 4,298 4,131
Other income ....................... 733 766 606 538 551 560 565 871
(Gain) loss from real estate, net .. (62) 42 (52) 171 1,131 (50) 190 539
Other operating expense ............ 3,591 3,472 3,716 3,423 3,540 3,453 3,371 3,161
------- ------- ------- ------- ------- ------ ------ ------
Income before income taxes ....... 1,806 1,641 1,271 1,375 1,085 1,643 1,302 1,302
Provision for income taxes ......... 644 597 317 428 261 556 443 437
------- ------- ------- ------- ------- ------ ------ ------
Net income ......................... $ 1,162 $ 1,044 $ 954 $ 947 $ 824 $1,087 $ 859 $ 865
======= ======= ======= ======= ====== ====== ====== ======
Earnings per common and common
equivalent share ................. $ .40 $ .36 $ .33 $ .34(a) $ .29(a) $ .37(a) $ .31(a) $ .31(a)
======= ======== ======== ======= ====== ====== ====== ======
<FN>
(a) Adjusted for a 10% stock dividend distributed June 5, 1995.
</FN>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended December 31, 1995
Commission file number 0-17912
First Citizens Financial Corporation
22 Firstfield Road
Gaithersburg, Maryland 20878
(301) 527-2400
Incorporated in the State of Delaware
IRS Employer Identification Number 52-1638667
Securities registered pursuant to Section 12(b) of the Act: (Not applicable)
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 8, 1996 was $38,560,827.
At March 8, 1996, the Registrant had 2,649,182 shares of $.01 par value common
stock outstanding.
Portions of the definitive proxy statement for the annual meeting of
stockholders to be held on April 19, 1996 are incorporated by reference into
Part III.
FORM 10-K CROSS REFERENCE INDEX
Page
Part I
Item 1. Business................................. 40
Item 2. Properties............................... 50
Item 3. Legal Proceedings........................ 50
Item 4. Submission of Matters to a Vote of
Security Holders....................... 50
Part II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters........ 50
Item 6. Selected Financial Data.................. 50
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 50
Item 8. Financial Statements and Supplementary
Data.................................. 50
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure............................ 50
Part III
Item 10. Directors and Executive Officers of the
Registrant............................. 51
Item 11. Executive Compensation.................. 51
Item 12. Security Ownership of Certain Beneficial
Owners and Management................. 51
Item 13. Certain Relationships and Related
Transactions........................... 51
Part IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K................ 51
This Annual Report and Form 10-K incorporates into a single document the
requirements of the Securities and Exchange Commission for Annual Reports to
stockholders and Form 10-Ks. Only those sections of the Annual Report referenced
in the above index are incorporated into the Form 10-K.
PART I
Item 1. Business
(Dollars in the tables in thousands)
General
First Citizens Financial Corporation (the "Company"), a Delaware Corporation,
was incorporated in February 1989 for the purpose of becoming the savings and
loan holding company for Citizens Savings Bank f.s.b. ("Citizens" or the
"Bank"). The holding company formation was completed on August 2, 1989. The
Company is presently conducting business as a non-diversified unitary savings
and loan holding company. See "Regulation _ Savings and Loan Holding Company
Regulations".
At December 31, 1995, the business of the Company consisted primarily of the
business of Citizens. Citizens is a Federally chartered savings bank which
conducts its business through 15 offices located in Montgomery and Frederick
counties in central Maryland. At December 31, 1995, Citizens also had a mortgage
origination office in Montgomery County. The Bank was originally incorporated in
1929 as a state-chartered savings and loan association and converted to a
Federally chartered savings bank in July 1986. The Bank converted from a Federal
mutual to a Federal stock form on December 24, 1986.
Deposits at the Bank have been Federally insured since 1936. The Bank is subject
to comprehensive regulation, examination and supervision. See "Regulation".
Financial information contained in this Form 10-K concerning the Company is
presented on a consolidated basis, unless otherwise indicated. All per share
data contained herein have been adjusted for stock dividends paid by the Company
in 1993, 1994 and 1995.
Market Area
The Bank's primary market area is Montgomery County, Maryland, which is one of
the most affluent counties in the country. Additionally, the Bank provides
products and services to residents of the greater Washington, D.C. metropolitan
area. Service industries and the local and Federal governments are the largest
employers in Montgomery County. The service sector includes activities such as
computer and data processing, research and development laboratories, amusement
and other personal services. Several departments of the Federal government have
facilities located in Montgomery County. Many consulting firms have located in
Montgomery County to be near the departments of the Federal government to which
they provide services. The Federal government has started an effort to
significantly decrease its size. The Bank is unable, at this point, to determine
the impact of the Federal downsizing, if any, on the Bank.
Lending Activities
General. The Bank's lending activities include the origination of loans secured
by first and second mortgage liens for the construction, purchase or refinancing
of single-family homes, multi-family, commercial real estate, land, construction
and home equity line of credit loans. To a lesser extent, the Bank originates
secured and unsecured consumer and corporate loans as well as loans secured by
deposit accounts and personal property. In response to the substantial downturn
experienced in the local economy and real estate markets in the early 1990's,
among other factors, the Bank significantly reduced its construction and
commercial real estate lending activities. The volume and amount of residential
permanent and home equity loans are substantially influenced by the local
economy and interest rates.
Real estate loans secured by single-family homes are originated through the
Bank's subsidiary, First Citizens Mortgage Corporation ("FCMC"), whose lending
area includes the District of Columbia, Northern Virginia, and Montgomery, Anne
Arundel, Frederick, Howard and Prince George's Counties in Maryland. These loans
are then either sold to Citizens or sold by FCMC in the secondary market on a
servicing-released basis. All other types of loans are originated through the
Bank's executive office or branch network and are administered at the Bank's
executive office.
At December 31, 1995, approximately 83.7% of Citizens' total real estate loans
were secured by real estate located in Maryland. The majority of these loans are
secured by property located in Montgomery County. Under applicable Federal
regulations, the Bank is currently authorized to make real estate loans
throughout the United States; however, Citizens concentrates its lending
activities on serving the credit needs of its local market.
Mortgage Loans Secured by 1-4 Family Units, Home Equity Line of Credit Loans and
Second Trusts. Citizens offers 30-year adjustable-rate mortgage loans, 15-year
adjustable-rate home equity line of credit loans and fixed-rate 5- to 15-year
second trusts which are retained in the Bank's loan portfolio. Historically,
substantially all fixed-rate first trust mortgage loans have been originated for
sale in the secondary market on a servicing-released basis. During 1994, the
Bank retained in its portfolio approximately 50% of the fixed-rate loan
originations. The Bank sold substantially all such loans originated in 1995.
Loans sold in the secondary market are sold subject to 60- to 90-day forward
commitments to sell at prices which will yield profits of 1.5% to 2.5% per loan.
The Bank also has offered 30-year one-step adjustable-rate mortgage loans. The
interest rate on adjustable-rate and one-step mortgage loans changes annually,
every 3 years, or at 5 or 7 years. The amount of interest rate adjustments on
first mortgage loans are limited per adjustment and in total over the life of
the loan. Approximately 3.4% of the Bank's adjustable-rate loans secured by 1-4
family units have a "floor" interest rate which generally is the original note
rate. The Bank also offers adjustable-rate loans with options, at various dates
and for various fees, to convert to fixed-rate loans.
Although adjustable-rate mortgage loans allow the Bank to increase the
sensitivity of its asset base to changes in interest rates, the terms of such
loans may also increase the likelihood of delinquencies in periods of high
interest rates. The Bank currently offers adjustable-rate mortgage loans at
rates which are initially lower than those for fixed-rate loans. The interest
rate on home equity line of credit loans can adjust monthly and, at December 31,
1995, was equal to The Wall Street Journal's ("WSJ") prime lending rate. Prior
to maturity, interest only is payable on these loans.
Citizens' single-family residential mortgage loans generally have remained
outstanding for much shorter periods than their stated terms. At December 31,
1995, $267.0 million, or 65.1% of the Bank's loan portfolio, consisted of loans
secured by 1-4 dwelling units compared to $281.1 million, or 66.1% of the Bank's
loan portfolio, at December 31, 1994. During 1995, the Bank transferred $25.1
million, net, of 30-year fixed-rate 1-4 family loans, or 60.8% of such loans, to
loans held for sale in order to improve its interest rate sensitivity position.
Construction Loans. Citizens makes construction loans to professional builders
and developers to acquire, develop and construct residential subdivisions,
neighborhood shopping centers and warehouses and, to a lesser extent, office and
professional buildings, apartment buildings and nursing homes. Additionally, the
Bank has offered land acquisition and development loans for the acquisition of
raw land to be developed into finished lots by the borrower-developer, who then
constructs single-family homes or commercial buildings or resells the improved
lots to other builders. At December 31, 1995, construction loans outstanding,
including acquisition and development loans, totaled $34.2 million, or 8.3% of
the Bank's loan portfolio, compared to $44.3 million, or 10.4% of the Bank's
loan portfolio, at December 31, 1994.
Construction loans on commercial properties are generally construction/permanent
loans that may be converted to an adjustable-rate permanent mortgage loan with a
maturity of up to five years. The Bank attempts to provide the permanent
financing on residential subdivision loans secured by construction loans
originated by the Bank. During the construction phase, the borrower pays only
interest on commercial or residential construction loans. All construction loans
originated by the Bank during 1995 were adjustable-rate loans, with the rate
tied to the WSJ's prime rate.
Acquisition and development loans adjust monthly to an index based on the WSJ's
prime lending rate, plus up to 250 basis points, and have maturities of one to
three years. Interest only, which has generally been paid out-of-pocket by the
borrower, is payable on these loans until maturity.
Multi-family, Commercial Real Estate and Land Loans. Citizens offers permanent
mortgage loans secured by multi-family residential properties, commercial real
estate and land. Such loans have maturities ranging up to 10 years, with
principal amortized over a period of up to 30 years. The interest rate on such
loans adjusts either monthly, annually or every 3 years. The interest rate is
tied to the WSJ's prime lending rate, the Federal Home Loan Bank ("FHLB") of
Atlanta's cost of funds or the constant maturity Treasury yield. At December 31,
1995, the Bank obtained a spread of up to 200 basis points over the base
interest rate on such loans with monthly interest rate adjustments and up to 375
basis points on such loans with annual or 3-year interest rate adjustments.
Land loans consist primarily of loans for the acquisition of real property on
which the borrower ultimately intends to construct single-family homes or
commercial buildings. Such loans typically include payments for initial site
work, feasibility and usage studies, legal fees, interest and other
pre-development expenses. Interest only is payable on these loans until
maturity.
At December 31, 1995, loans secured by multi-family residential properties,
commercial real estate and land totaled $104.3 million, or 25.7% of the Bank's
loan portfolio, compared to $106.8 million, or 25.0% of the Bank's loan
portfolio, at December 31, 1994.
The Bank's underwriting practices with respect to commercial real estate and
multi-family residential loans are intended to ensure that the property securing
the loan will generate sufficient cash flow to cover operating expenses and debt
service payments. On land loans, the Bank looks primarily to the location and
salability of the property and the creditworthiness of the borrower to ensure
the repayment of the loan. In the case of multi-family residential and
commercial real estate mortgage loans, the Bank also reviews operating histories
and projections of the borrower. Citizens' practice is to inspect each property
before issuing a loan commitment and to require the personal guarantee of the
borrower's principals.
Loans secured by land, multi-family residential and commercial properties
involve significantly greater risks than single-family residential mortgage
loans. Because the payment experience of loans secured by such property is often
dependent upon the successful operation or management of the security property,
or, in the case of land loans, the ultimate development or sale of the property,
repayment of the loan may be subject, to a greater extent, to adverse conditions
in the real estate market or the economy than is generally the case with
single-family residential mortgage loans. The commercial real estate business is
cyclical and subject to downturns, overbuilding and local economic conditions.
The Bank seeks to minimize these risks in a variety of ways, including adherence
to strict underwriting standards and originating loans using property located
within its market area as collateral. The economic recession during the early
1990's and its impact on the local real estate market and borrowers' ability to
repay loans had a significant adverse effect on the Bank's portfolio of
construction and non-residential loans. As a result, the Bank reduced the volume
of construction and non-residential real estate loan originations. Since
construction and non-residential real estate loans typically provide for a
higher rate of return than residential mortgage loans, this reduction had a
negative impact on the Bank's net interest income. See "Nonperforming Assets".
Non-residential real estate loans by savings institutions are limited to 400% of
total capital (approximately $168.0 million at December 31, 1995 for the Bank).
The Bank's non-residential real estate loans amounted to $84.4 million at
December 31, 1995.
Consumer and Corporate Loans. The Bank offers loans secured by deposit accounts,
other consumer loans (including automobile and recreational vehicle loans, boat
loans, personal unsecured loans, unsecured line of credit loans and overdraft
protection on checking accounts) and corporate loans. Corporate loans include
working capital line of credit loans and equipment loans. Citizens intends to
increase such non-mortgage lending activities in the future. Office of Thrift
Supervision ("OTS") regulations generally permit Federally chartered savings
institutions to originate secured and unsecured consumer loans comprising up to
30% of the institution's assets. Federally chartered savings institutions are
authorized to invest up to 10% of their assets in commercial (corporate) loans
in accordance with applicable Federal regulations. The Bank was in compliance
with these limitations at December 31, 1995. At December 31, 1995, non-real
estate consumer and corporate loans totaled $32.3 million, or 7.4% of the Bank's
assets, compared to $21.3 million, or 5.0% of the Bank's assets, at December 31,
1994.
Loan Maturities and Rate Sensitivity. See Note 3 to the Consolidated Financial
Statements for the composition of the Bank's loan portfolio. The following table
sets forth certain information at December 31, 1995 as to maturities within the
Bank's loan portfolio, and is based on scheduled repayments. Loans which "roll
over" at maturity were amortized over the original amortization period. Loans
which were past maturity were assumed to repay within one year.
After 1 Year
Within Within After
1 Year 5 Years 5 Years Total
Loan Maturities
Residential mortgage .... $ 9,625 $ 24,553 $196,137 $230,315
Construction loans ...... 20,323 15,732 _ 36,055
Commercial real estate .. 19,227 14,818 50,943 84,988
Home equity and second
trust ................. 2,312 3,297 50,363 55,972
Consumer non-real estate 5,101 4,122 8,943 18,166
Corporate non-real estate 544 591 12,952 14,087
--- --- ------ ------
Total loans ........... $ 57,132 $ 63,113 $319,338 $439,583
======== ======== ======== ========
Rate Sensitivity
Fixed-rate .............. $ 25,911 $ 21,639 $ 71,238 $118,788
One-step ................ 1,059 7,473 99,571 108,103
Adjustable-rate ......... 30,162 34,001 148,529 212,692
------ ------ ------- -------
Total loans ........... $ 57,132 $ 63,113 $319,338 $439,583
======== ======== ======== ========
Loan Activities. The following table sets forth the Bank's loan activities for
the periods indicated.
Year ended December 31,
1995 1994 1993
Originations:
Permanent mortgage ............. $ 33,282 $ 108,159 $ 80,684
Construction _ residential ..... 7,689 14,680 12,072
Land loans ..................... 1,055 167 515
Home equity loans .............. 37,825 21,835 22,446
Consumer loans ................. 16,378 14,073 12,381
Corporate loans ................ 17,241 8,235 7,084
------- ------- -------
Total loans originated ....... 113,470 167,149 135,182
======= ======= =======
Purchases: ....................... 22 1,075(a) 3,046(a)
------- ------- -------
Principal reductions:
Loan principal repayments ...... 95,779 99,814 116,743
Loans sold ..................... 36 _ _
Loans transferred to real estate
owned ........................ 6,244 6,553 7,893
Loans transferred to held for
sale ......................... 25,275 _ _
------- ------- -------
Total loans repaid, sold and
transferred ................ 127,334 106,367 124,636
------- ------- -------
Increase (decrease) in gross loans
receivable ..................... $(13,842) $ 61,857 $ 13,592
======== ======== ========
<FN>
(a) Loans purchased in 1994 and 1993 include adjustable-rate loans amounting to
$1.1 million and $1.9 million, respectively, which had been securitized and
which were converted to fixed-rate loans. Under terms of the
securitization, the Bank was required to repurchase these loans upon their
conversion to a fixed-rate loan and can, at its option, resecuritize them
into fixed-rate securities.
</FN>
Residential loan originations are attributable primarily to walk-in customers
and referrals from real estate brokers and builders. Other real estate-secured
loan originations are obtained primarily from builders who have previously
borrowed from the Bank and, to a lesser extent, by direct solicitation of area
builders and referrals from area brokers or builders. Mortgage loan originations
decreased in 1995 due to increasing interest rates and management's decision to
invest in securities instead of loans. In addition to the loan originations in
the above table, FCMC originated $37.1 million for resale in 1995 compared to
$28.7 million in 1994.
Interest rates and origination fees charged on loans originated by the Bank are
generally competitive with other mortgage loan originators in its primary market
area. Pursuant to loan approval limits set by the Bank's Board of Directors, all
loan applications are approved either by designated officers of FCMC or the Bank
and by the Board of Directors.
OTS regulations do not establish a loan-to-value limit on mortgage loans secured
by 1-4 family dwellings. The Bank generally limits the maximum loan-to-value
ratio on single-family conventional loans to 95%. Private mortgage insurance is
generally required on home loans with loan-to-value ratios in excess of 80%.
Permanent loans on multi-family residential properties, commercial real estate
and land generally are made with loan-to-value ratios of 80% or less.
All property securing real estate loans made by the Bank or FCMC is appraised by
the staff appraiser or independent appraisers approved by the Board of
Directors. On all real estate loans, the Bank requires the borrower to obtain
title, fire and extended casualty insurance and, where appropriate, flood
insurance. In the case of construction loans, builders' risk, workers'
compensation, liability and indemnity insurance must be obtained. Liability and
indemnity coverage is also required on land loans.
Under Federal and state environmental laws, lenders may be liable for the costs
of cleaning up hazardous materials found on security properties. Environmental
contamination may render the security property unsuitable for residential use or
substantially reduce the property's value. The Bank attempts to control its
exposure to environmental risks by, among other things, obtaining certification
as to known environmental risks and requiring documentation of cleanup efforts
and environmental studies as appropriate. No assurance can be given, however,
that the value of properties securing loans in the Bank's portfolio will not be
adversely affected by the presence of hazardous materials or that future changes
in Federal or state laws will not increase the Bank's exposure to liability for
environmental cleanup.
The Bank issues commitments to prospective borrowers to make loans subject to
various conditions. With respect to single-family residential loans, it is the
Bank's policy to make 75-day commitments to lend at the interest rate quoted to
the borrower at the time of application. The Bank generally makes 30- to 60-day
commitments on non-residential real estate loans. At December 31, 1995, the Bank
had $21.2 million of loan origination commitments outstanding, primarily for
variable-rate loans.
Purchase and Sale of Loans and Loan Servicing. From time to time, the Bank has
purchased whole loans and loan participations. See "Loan Activities" for
information regarding the dollar amount of loans purchased during 1995, 1994 and
1993. At December 31, 1995, purchased loans and loan participations serviced by
others totaled $.3 million, or .1% of the Bank's total loan portfolio.
Historically, substantially all 30-year fixed-rate loans made by FCMC have been
originated subject to 60- to 90-day forward commitments to sell at prices which
will yield profits of 1.5% to 2.5% per loan. These loans have been sold on a
servicing-released basis. At December 31, 1995, loans sold with unelapsed
recourse provisions amounted to $10.6 million.
Only loans which were originated for resale were sold in 1994 and 1993. In
addition, the Bank also sold one loan at the request of the borrower during
1995. The Bank had commitments to sell $3.7 million of loans at December 31,
1995. During 1995, the Bank transferred $25.1 million, net, of 30-year
fixed-rate loans to held for sale and, in February 1996, signed a commitment to
sell these loans.
The following table sets forth information as to the Bank's loan servicing
portfolio, net, at the dates shown.
At December 31,
1995 % 1994 %
Serviced and owned by the Bank:
Loans ....................... $456,092 78.6% $446,467 87.5%
Mortgage-backed securities .. 10,895 1.9 18,465 3.7
------ --- ------ ---
Total serviced and owned
by the Bank ............. 466,987 80.5 464,932 91.2
Serviced for others ........... 112,273 19.5 44,799 8.8
------- ---- ------ ---
Total loans and mortgage-
backed securities serviced $579,260 100.0% $509,731 100.0%
======== ===== ======== =====
Loans serviced for others increased in 1995 because the Montgomery County
Housing Opportunity Commission has hired the Bank to service all of its
residential first mortgage loans.
Information concerning the Bank's loan servicing income on loans serviced for
others, net, is summarized in the following table for the periods indicated.
Year ended December 31,
1995 1994 1993
Gross loan servicing income during the year... $349 $351 $538
Gross servicing spread during the year (a).... .38% .50% .54%
Loan servicing income expressed as a
percentage of net interest income before
(recovery of) provision for loan losses .... 1.97 2.01 3.10
<FN>
(a) Based on beginning and end-of-period balances.
</FN>
Fee Income from Lending Activities. In addition to interest earned on loans, the
Bank receives fees for originating loans and may charge for making loan
commitments. Loan origination and commitment fee income can be volatile because
it is primarily dependent upon the volume of loan originations. Such income is
also affected by the type of loans and commitments made and by competitive and
economic conditions. In addition to origination and commitment fees, the Bank
charges fees for late payments and for related miscellaneous services. Income
realized from these activities can vary significantly with the volume and type
of loans in the portfolio.
The Bank recognizes all nonrefundable loan and commitment fees, net of direct
origination costs, into income over the life of the related loan as a yield
adjustment. Nonrefundable loan and commitment fees, net of direct costs, are
generally recognized over the adjustment period on adjustable-rate loans in
order to recognize a level yield on these loans over their lives.
Usury Limitations. There are, in general, no Federal or Maryland usury
limitations currently applicable to the origination by the Bank of: (i) first
lien residential real estate loans, (ii) any loans made to a corporation, (iii)
commercial loans in excess of $15,000 not secured by residential real property
or (iv) commercial loans in excess of $75,000 secured by residential real
property. An interest ceiling of 24% simple interest per year is generally
applicable to other types of loans originated by the Bank.
Nonperforming Assets. The following table sets forth the amount of the Bank's
nonperforming assets, by category, past due loans and troubled debt
restructurings at the dates indicated.
Nonperforming assets
At December 31,
1995 1994 1993 1992 1991
Nonperforming loans:
Nonaccrual loans:
Construction loans:
Residential ....................... $ _ $ _ $ 2,069 $ 2,663 $ 3,981
Commercial real estate ............ _ 10,288 939 3,304 12,383
Land acquisition and development .. _ _ 4,523 11,601 10,443
Land .............................. _ _ 3,177 3,124 3,048
-------- -------- -------- -------- --------
Total construction loans ........ _ 10,288 10,708 20,692 29,855
Residential ......................... 315 171 803 1,547 1,127
Commercial real estate .............. 2,266 _ _- _ _
Consumer ............................ _ 5 16 36 57
Corporate ........................... 186 354 57 51 _
-------- -------- -------- -------- --------
Total nonaccrual loans .......... 2,767 10,818 11,584 22,326 31,039
Accruing loans past due 90 days or more _ _ 3,087 _ _
-------- -------- -------- -------- --------
Total nonperforming loans ........... 2,767 10,818 14,671 22,326 31,039
Real estate owned (a) (b) ............... 14,244 16,408 30,670 37,896 39,045
-------- -------- -------- -------- --------
Total nonperforming assets, gross ....... 17,011 27,226 45,341 60,222 70,084
Specific loss allowances .............. (1,915) (2,521) (5,217) (4,308) (2,865)
-------- -------- -------- -------- --------
Total nonperforming assets, net ......... $ 15,096 $ 24,705 $ 40,124 $ 55,914 $ 67,219
======== ======== ======== ======== ========
Total nonperforming assets, net, as a
percentage of total assets ............ 2.5% 4.4% 7.7% 10.3% 12.2%
======== ======== ======== ======== ========
Total loss allowances as a percentage of
total nonperforming assets, gross ..... 50.5% 34.3% 33.2% 21.4% 16.6%
======== ======== ======== ======== ========
Troubled debt restructurings, net ....... $ 5,475 $ 2,813 $ 17,642 $ 19,078 $ 15,043
======== ======== ======== ======== ========
Performing loans greater than 90 days
past maturity ........................ $ 1,972 $ 59 $ 1,375 $ 609 $ 29,217
======== ======== ======== ======== ========
<FN>
(a) See Note 4 to the Consolidated Financial Statements for an analysis of real
estate owned by type of property.
(b) Real estate owned includes $2.5 million, $3.1 million, $6.9 million, $6.7
million and $4.7 million of capitalized costs at December 31, 1995, 1994,
1993, 1992 and 1991, respectively.
</FN>
During 1995, the Bank's nonperforming assets, net, decreased by $9.6 million.
The primary causes of the decrease were sales of real estate owned properties
amounting to $11.5 million and repayments, net, of $1.2 million on nonaccrual
loans. Offsetting increases include costs capitalized on several real estate
projects and nine new nonperforming loans amounting to $1.8 million. During
1995, the Bank provided $3.3 million in loans at market rates to borrowers who
purchased real estate owned.
At December 31, 1994, nonaccrual loans included a $9.3 million acquisition and
development loan originated in 1986 and secured by 230 acres of commercial and
residential land in Frederick County, Maryland. Infrastructure development is
complete but sales have been slow and the borrower was unable to keep the
interest payments current. The loan was restructured in September 1991 to allow
the borrower to pay $10,000 of the current monthly interest payment and defer
the remaining interest. The borrower became delinquent during the last half of
1994 and was placed on nonaccrual status at September 30, 1994. During April
1995, the Bank received $.8 million in proceeds from the sale by the borrower of
one of the commercial land lots. These monies were applied to reduce the
outstanding principal balance of the loan. During May 1995, the loan was
restructured and the Bank received lots with a fair value of $6.0 million in
lieu of cash payment. During November 1995, the Bank received $.4 million from
the sale of a second commercial lot. The remaining $2.6 million loan is to be
repaid by May 1997. This loan is non-interest-bearing and is recorded as a
troubled debt restructuring at December 31, 1995. Troubled debt restructurings
at December 31, 1995 also included a commercial real estate loan amounting to
$2.9 million, net. At December 31, 1995, performing loans greater than 90 days
past principal maturity included a $1.8 million land loan. The loan was extended
during the first quarter of 1996.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") significantly reduced the dollar amount of loans that savings
institutions may make to a single or related group of borrowers. Real estate
owned at December 31, 1995 includes a total of $11.9 million (five projects) in
various stages of development where the borrowers had loans outstanding to the
Bank in excess of the Bank's post-FIRREA loans-to-one-borrower limit. In many
cases, the Bank was required to take these properties into real estate owned
because the loan matured and the Bank was unable, as a result of the FIRREA
loans-to-one-borrower limits, to disburse additional funds to the borrower to
complete the project. In some cases, the Bank is expending additional monies for
the development of certain real estate properties to facilitate their sale. See
Note 3 to the Consolidated Financial Statements for a discussion of
grandfathered loans in excess of the loans-to-one-borrower limits.
In addition to the nonperforming assets described above, as of December 31,
1995, there were three loans, amounting to $4.1 million, with respect to which
known information about the possible credit problems of the borrowers or the
cash flows of the security properties has caused management to have serious
doubts as to the ability of the borrowers to comply with the present loan
repayment terms and which may result in the future inclusion of such loans in
nonperforming assets.
The Bank regularly (at least quarterly) classifies its assets in accordance with
applicable regulations. On the basis of such review, the following assets were
classified at the dates indicated. The following table includes all of the
nonperforming assets and troubled debt restructurings included in the previous
table.
Year ended December 31,
1995 1994 1993
Substandard .............. $20,446 $30,379 $61,515
Doubtful ................. 186 354 539
Loss ..................... 2,387 2,999 6,580
----- ----- -----
23,019 33,732 68,634
Specific loss allowances (2,387) (2,999) (6,580)
------ ------ ------
Classified assets, net ... $20,632 $30,733 $62,054
======= ======= =======
The Bank also identifies assets which possess credit deficiencies or potential
weaknesses deserving management's close attention as "special mention". These
assets totaled $25.3 million at December 31, 1995 compared to $23.9 million at
December 31, 1994 and $26.2 million at December 31, 1993.
Investment Activities
Federally chartered associations have authority to invest in various types of
liquid assets, including short-term United States Treasury obligations,
securities of various Federal agencies, certain certificates of deposit at
insured banks and savings and loan associations, certain bankers' acceptances
and federal funds. Subject to various restrictions, Federally chartered
associations may also invest a portion of their assets in commercial paper,
corporate debt securities and in certain kinds of mutual funds. The Bank has
maintained its liquid assets at levels above the minimum requirements imposed by
Federal Deposit Insurance Corporation ("FDIC") regulations and at levels
believed adequate to meet requirements of normal business activities. See Part
II _ Item 7, "Management's Discussion and Analysis _ Liquidity and Capital
Resources".
The Bank increases or decreases its liquid investments depending upon the
availability of funds and comparative yields on other investments in relation to
its return on loans. The Bank's investments primarily include overnight funds,
United States Treasury and Federal agency obligations and certain
mortgage-backed securities. Mortgage-backed securities are liquid investments
generally secured by pools of government-insured or government-guaranteed
fixed-rate or adjustable-rate 1-4 family mortgage loans. The payment of interest
and principal on such loans is passed through to security holders after
deducting a servicing fee. See Note 2 to the Consolidated Financial Statements
for information on the type, carrying value, estimated fair value, gross
unrealized holding gains, gross unrealized holding losses, scheduled maturities
and weighted average yields of the Company's investment securities portfolio.
Sources of Funds
General. The Bank's primary sources of funds are deposits and loan principal
payments received in connection with normal loan amortization and loan
prepayments. The Bank supplements these funds by obtaining FHLB advances and
other borrowings. Loan repayments are a relatively stable source of funds, while
deposit inflows and outflows are significantly influenced by prevailing interest
rates and general economic conditions. Borrowings may be used on a short-term
basis to compensate for reductions in normal sources of funds or on a
longer-term basis to support expanded lending activities. See Part II _ Item 7,
"Management's Discussion and Analysis _ Liquidity and Capital Resources".
Deposit Activities. The Bank offers a variety of deposit products currently
ranging from transaction accounts to certificates with maturities of up to seven
years. The Bank's deposits are primarily derived from the areas where its 14
branch offices are located, with its 13 Montgomery County branch offices
comprising 95.3% of its deposits. There were no brokered deposits at any time
during 1995. The Bank collects penalties for early withdrawal of funds on
certain certificates of deposit.
Deposits increased by $30.1 million, or 6.6%, during the year ended December 31,
1995, after including interest credited of $20.3 million. During 1994, deposits
increased $20.8 million, or 4.8%, after including interest credited of $16.1
million.
The Bank prices its deposits to take advantage of opportunities for profitable
investment of the funds through its regular lending activities. Interest rates
are primarily based on prevailing market conditions and the Bank's need for
funds. Interest rates paid by the Bank generally are competitive with the rates
offered by other institutions in its primary market area. The Bank continues to
emphasize checking and money market demand accounts and short-term deposits in
an effort to build its relationships with its customers.
See Note 6 to the Consolidated Financial Statements for the amounts and
maturities of certificate accounts by interest rate category. See Part II _ Item
7, "Management's Discussion and Analysis _ Yield Analysis" for average balances
of money market accounts and certificates of deposit.
At December 31, 1995, maturities on certificates of deposit of more than
$100,000 were as follows:
Within three months ........................ $ 5,883
After three months but within six months ... 3,640
After six months but within twelve months .. 9,032
After twelve months ........................ 11,446
------
$30,001
=======
Borrowings. The FHLB System functions in a reserve credit capacity for savings
institutions and certain other home financing member institutions. As a member
of the FHLB System, the Bank is required to own capital stock in the FHLB of
Atlanta and is authorized to apply for advances on the security of such stock,
selected home mortgages and specific other assets, provided certain
creditworthiness standards have been met. See "Regulation _ Federal Home Loan
Bank System". At December 31, 1995, the Bank had total borrowings outstanding of
$75.1 million, of which $64.3 million were fixed-rate advances and $10.8 million
were variable-rate advances. See Note 7 to the Consolidated Financial Statements
for information as to highest and average balances, interest rates and
maturities.
Service Corporation Activities
Federal regulations permit a Federally chartered savings institution to invest
up to 2% of its assets in subsidiary service corporations engaged in certain
activities, and an additional 1% of its assets when the additional funds are
used primarily for community, inner-city or community development purposes. As
of December 31, 1995, the Bank's investments in and advances to its non-real
estate owned salvage service corporations amounted to $4.1 million and
represented .7% of the Bank's total assets. In addition, OTS regulations
authorize Federally chartered savings institutions which meet minimum regulatory
capital requirements to invest up to an additional 50% of regulatory capital in
conforming loans to service corporations. At December 31, 1995, conforming loans
to service corporation subsidiaries totaled $2.6 million, or 6.1% of regulatory
capital.
Investments in and advances to the real estate owned salvage subsidiary totaled
$13.0 million at December 31, 1995.
The Bank has five service corporation subsidiaries: First Citizens Development
Corporation ("FCDC"), First Citizens Mortgage Corporation ("FCMC"), First
Citizens Corporation ("FCC"), First Citizens Insurance Agency, Inc. ("FCIA") and
First Citizens Securities Corporation ("FCSC"). The principal activity of FCDC,
which commenced operations in 1974, was real estate investment and development.
FCMC, which began operations in 1979, engages in the origination and sale of
residential mortgage loans. See "Lending Activities". FCC, which was activated
in 1991, manages real estate owned. FCIA, which began operations in 1974, offers
annuities and mortgage life, accidental death and health and accident insurance
to the Bank's customers. FCSC is presently inactive.
Employees
At December 31, 1995, the Company had 173 full-time employees and 19 part-time
employees, none of whom were represented by a collective bargaining group.
Employee benefits include the Bank's pension and 401(k) plans, and life and
health insurance. Management considers its relations with its employees to be
excellent.
Competition
The Bank experiences substantial competition in attracting and retaining
deposits and in making mortgage and other loans. The primary factors in
competing for deposits are interest rates, the quality and range of financial
services offered, convenience of office locations, office hours and automatic
teller machines. Competition for deposits comes primarily from other financial
institutions, money market funds and other investment alternatives. The primary
factors in competing for loans are interest rates, loan origination fees and the
quality and range of lending services offered. Competition for origination of
first mortgage loans comes primarily from other financial institutions, mortgage
banking firms and insurance companies. Federal legislation has removed most
state law barriers to interstate acquisitions of banks and will ultimately
permit multi-state banking operations to merge into a single bank. Although
savings institutions, such as the Bank, already have similar authority,
enactment of this legislation is expected to increase marketplace competition
for the Bank.
Regulation
General. As a savings and loan holding company, the Company is subject to
regulation, examination, supervision and reporting requirements by the OTS.
Certain of these regulatory requirements are referred to below or appear
elsewhere herein. As a Federal savings bank, the Bank is subject to extensive
regulation, examination, supervision and/or reporting requirements by the OTS,
the FDIC and the Board of Governors of the Federal Reserve System. The Bank's
primary regulator is the OTS. This supervision and regulation is intended
primarily for the protection of depositors.
Regulatory Capital Requirements. Savings banks must satisfy three different
capital requirements. Savings banks must maintain "tangible" capital of at least
1.5% of adjusted total assets, "core" capital of at least 4.0% of adjusted total
assets under the OTS' prompt corrective action regulations and risk-based
capital of at least 8.0% of "risk-weighted" assets. The first two ratios measure
the extent to which the Bank has leveraged its capital assets. The last ratio
measures capital based on the risks associated with the Bank's assets. The
risk-based capital rules specify four categories of asset or commitment risk,
with each being assigned a weight of 0% through 100%, depending upon the risk
involved.
A reconciliation of the Bank's capital, computed using generally accepted
accounting principles ("GAAP"), to regulatory capital as of December 31, 1995
follows:
Tangible Core Risk-based
Capital Capital(a) Capital
GAAP capital ...................... $37,190 $37,190 $37,190
Additional capital item _ general
valuation allowances on loans (b) _ _ 4,815
------- ------- -------
Regulatory capital _ actual ....... 37,190 37,190 42,005
Minimum capital requirement ....... 9,110 24,293 30,741
------- ------- -------
Excess regulatory capital ......... $28,080 $12,897 $11,264
======= ======= =======
Regulatory capital _ actual ratio . 6.1% 6.1% 10.9%
Minimum capital requirement ratio . 1.5 4.0 8.0
------- ------- -------
Excess regulatory capital ratio ... 4.6% 2.1% 2.9%
------- ------- -------
<FN>
(a) 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%.
(b) Limited to 1.25% of risk-weighted assets.
</FN>
No portion of the Bank's net deferred tax asset ($2.3 million at December 31,
1995) was required to be deducted for regulatory capital purposes.
Capital requirements higher than the generally applicable minimum requirements
may be established for a particular savings association if the OTS determines
that the savings association's capital is or may become inadequate in view of
its particular circumstances. Under OTS regulations, any savings association
that fails to meet any one of the capital requirements must file a capital plan
with the OTS addressing, among other things, the manner in which the association
will increase its capital to comply with all applicable capital standards.
Further, the failure by a savings association to materially comply with an
approved capital plan constitutes an unsafe or unsound practice.
The Office of the Comptroller of the Currency and the FDIC have more stringent
core capital requirements which require that the most highly rated banks have a
minimum core capital ratio of 3.0%, with an additional 100 to 200 basis point
cushion required for all other banks as established by the regulator on a
case-by-case basis. The OTS has proposed that only those savings associations
rated a composite "1" (the highest rating) under the Federal regulators' rating
system for savings institutions will be permitted to operate at or near the
regulatory minimum leverage ratio of 3.0%. All other savings institutions would
be required to maintain a minimum leverage ratio of 3.0% plus at least an
additional 100 to 200 basis points. The OTS has not taken final action on the
proposal. At December 31, 1995, the Bank had a core capital ratio (as defined)
of 6.1%.
In August 1993, the OTS issued a final rule which adds an interest rate
component to the OTS risk-based capital requirements. Savings institutions will
be required to incorporate interest rate risk ("IRR") into their risk-based
capital calculation when OTS concludes testing of its appeals process. Based
upon financial data as of December 31, 1995, management believes that compliance
with the new IRR will not have a material impact on the Bank's risk-based
capital position.
Prompt Corrective Action. The prompt corrective action regulations of the
Federal Deposit Insurance Corporation Improvement Act of 1991 define specific
capital categories based on an institution's capital ratios. The capital
categories, in declining order, are "well capitalized", "adequately
capitalized", "undercapitalized", "significantly undercapitalized" and
"critically undercapitalized". Institutions categorized as "undercapitalized" or
worse are subject to certain restrictions.
To be considered "well capitalized", an institution must generally have a
leverage ratio of at least 5%, a ratio of core capital to risk-weighted assets
of at least 6% and a total risk-based capital ratio of at least 10%. To be
considered "adequately capitalized", an institution must generally have a
leverage ratio of at least 4%, a ratio of core capital to risk-weighted assets
of at least 4% and a total risk-based capital ratio of at least 8%. At December
31, 1995, the Bank had a leverage ratio of 6.1%, a ratio of core capital to
risk-weighted assets of 9.7% and a risk-based capital ratio of 10.9% and was
considered "well capitalized".
Qualified Thrift Lender Requirement. In order for the Bank to exercise the
powers granted to Federally chartered savings associations and maintain full
access to FHLB advances, and in order for the Company to continue to engage in
the activities currently authorized for unitary savings and loan holding
companies, the Bank must maintain 65% of its assets in certain investments and
otherwise qualify as a "qualified thrift lender" ("QTL"). Any savings
association that fails to meet the QTL test must either convert to a bank
charter (but must retain its Savings Association Insurance Fund ("SAIF")
insurance until its conversion to Bank Insurance Fund membership), or limit its
future investments and activities (including branching and payment of dividends)
to those permitted for both savings associations and national banks. At December
31, 1995, the Bank was in compliance with the QTL test.
Liquidity. Under OTS regulations, savings associations are required to maintain
certain average daily balances of liquid assets, as defined. This liquidity
requirement may be changed from time to time by the Director of the OTS to any
amount within the range of 4% to 10% and currently is 5%. OTS regulations also
require each savings association to maintain an average daily balance of
short-term liquid assets at a specified percentage (currently 1%) of the total
of the average daily balance of its net withdrawable deposits and short-term
borrowings. At December 31, 1995, the Bank was in compliance with these
liquidity requirements.
Loans-to-One-Borrower Limitations. Federal law requires that loans and
extensions of credit to a person outstanding at one time and not fully secured
may not exceed 15% of the unimpaired capital and surplus of the Bank. Loans and
extensions of credit fully secured by readily marketable collateral (as defined)
may compose an additional 10% of unimpaired capital and surplus. Higher limits
may be available in certain circumstances. See Note 3 to the Consolidated
Financial Statements for a discussion of the limits and the amount and number of
loans in excess of these limits.
Insurance of Deposits. The Bank's deposits are insured by the SAIF up to a
maximum of $100,000 for each insured depositor. The FDIC has adopted a
risk-based assessment system under which all insured institutions are placed
into one of nine categories and assessed insurance premiums, ranging from .23%
to .31% of deposits, based upon their level of capital and supervisory
evaluation. Insurance of deposits may be terminated by the FDIC after notice and
hearing in certain circumstances. The Bank is not aware of any activity or
condition that is likely to result in a termination or suspension of its deposit
insurance.
The United States Congress is considering legislation regarding Federally
insured banks and thrifts which would, among other things, impose a one-time
assessment in order to recapitalize the SAIF. See Note 10 to the Consolidated
Financial Statements.
Interstate Acquisitions and Branching. The OTS' statement of policy on branching
by Federally chartered savings institutions permits a Federal association to
branch into any state or states of the United States and its territories, except
as otherwise prohibited under Federal law. This policy statement expressly
preempts any contrary state law.
Federal Home Loan Bank System. The Bank, as a member of the FHLB of Atlanta, is
required to own shares of capital stock in that FHLB. At December 31, 1995, the
Bank was in compliance with this requirement. The FHLB of Atlanta acts as a
central credit facility for its member institutions. The maximum amount which
the FHLB of Atlanta will advance fluctuates from time to time and generally is
reduced by borrowings from any other source. Long-term advances may be made only
for the purposes of providing funds for residential housing finance. See
"Qualified Thrift Lender Requirement".
Federal Reserve System. Federal Reserve Board reserve requirements are imposed
on all depository institutions that maintain transaction accounts or nonpersonal
time deposits. As of December 31, 1995, the Bank met its reserve requirements.
Savings associations have authority to borrow from the Federal Reserve Bank
"discount window". Federal Reserve regulations require savings associations to
exhaust all FHLB sources before borrowing from the Federal Reserve System.
Safety and Soundness Regulations. During 1995, the OTS, along with the other
Federal banking agencies, adopted safety and soundness guidelines relating to
(i) internal controls, information systems and internal audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate exposure; (v) asset
growth and (vi) compensation and benefit standards for officers, directors,
employees and principal shareholders. Pursuant to such guidelines, the Bank is
required to establish and maintain a system to identify problem assets and
prevent deterioration of those assets in a manner commensurate with its size and
the nature and scope of its operations. The Bank also must establish and
maintain a system to evaluate and monitor earnings and ensure that earnings are
sufficient to maintain adequate capital and reserves in a manner commensurate
with its size and the nature and scope of its operations. An institution or
holding company not meeting one or more of the safety and soundness standards
would be required to file a compliance plan with the appropriate Federal banking
agency.
Activities of Subsidiaries. Savings associations seeking to establish a new
subsidiary, acquire control of an existing company (after which it would be a
subsidiary), or conduct a new activity through a subsidiary, are required to
provide 30 days' prior notice to the FDIC and the Director of the OTS and to
conduct any activities of the subsidiary in accordance with regulations and
orders of the Director of the OTS.
Savings and Loan Holding Company Regulations. The Company is a savings and loan
holding company subject to OTS regulations, examinations, supervision and
reporting requirements. As a subsidiary of a savings and loan holding company,
the Bank is subject to certain restrictions in its dealings with the Company and
with other companies affiliated with the Company and is also subject to
regulatory requirements and provisions as a Federal savings bank.
Regulatory Restrictions on the Payment of Dividends by the Bank to the Company.
The OTS has adopted a regulation that establishes uniform treatment for all
capital distributions by savings associations (including dividends, stock
repurchases and cash-out mergers). Institutions that either before or after a
proposed capital distribution fail to meet their then-applicable minimum capital
requirements may not make any capital distributions, except with prior OTS
approval. OTS regulations require SAIF-insured institutions owned by a holding
company to give the OTS 30 days' advance notice of any proposed declaration of
dividends.
Taxation
Federal. The Company, on behalf of itself and the Bank, files a calendar year
Federal income tax return and reports income and expenses using the accrual
method of accounting.
Savings institutions are generally taxed in the same manner as other
corporations. Additionally, qualifying savings institutions, such as the Bank,
are allowed to establish a reserve for bad debts and, for each tax year, are
permitted to deduct additions to that reserve for losses on "qualifying real
property loans" using the more favorable of two alternative methods: (i) a
method based on the institution's actual loss experience (the "experience
method") or (ii) a method based on a specified percentage of the institution's
taxable income (the "percentage of taxable income method").
Under the percentage of taxable income method, a qualifying institution may
deduct up to 8% of its taxable income, after certain adjustments and subject to
certain limitations. The net effect of the percentage of taxable income method
deduction is that the maximum effective Federal income tax rate is generally
31.28%. The Company's actual effective tax rate (state and Federal) was 32.6% in
1995, 31.8% in 1994 and 25.2% in 1993. Under the experience method, a savings
institution is permitted to deduct an amount based on average loan losses over
the current and previous five years. In 1995, 1994 and 1993, the Company elected
to use the experience method bad debt deduction.
The amount of the bad debt deduction that a savings institution may claim is
subject to certain limitations. As of December 31, 1995, the Bank does not
expect that these restrictions will limit the amount of its otherwise allowable
bad debt deduction.
The Bank's cumulative book allowance for loan losses exceeded its cumulative tax
bad debt reserves by $2.9 million. In certain circumstances, if the Bank makes
distributions to the Company that are considered to result in withdrawals from
that excess bad debt reserve, then the amounts considered to be withdrawn will
be included in the Bank's taxable income. The amount considered to be withdrawn
by a distribution will be the amount of the distribution plus the amount
necessary to pay the tax with respect to the withdrawal. Distributions in excess
of the Bank's current and accumulated earnings and profits, distributions in
redemption of stock, and distributions in partial or complete liquidation of the
Bank will be considered to result in withdrawals from its bad debt reserves.
Beginning in 1993, the Company adopted an asset and liability approach for
financial accounting and reporting for income taxes, in accordance with
Statement of Financial Accounting Standards No. 109.
Net operating losses of savings institutions may be carried back three years and
forward 15 years.
Depending on the composition of its items of income and expense, a savings
institution may be subject to the alternative minimum tax. Savings institutions
must pay an alternative minimum tax equal to the amount (if any) by which 20% of
its alternative minimum taxable income ("AMTI"), as reduced by an exemption
varying with AMTI, exceeds the regular tax due. AMTI equals regular taxable
income, increased or decreased by certain adjustments, and increased by certain
tax preferences. The Bank does not expect that it will be required to pay an
alternative minimum tax for 1995.
The Company's Federal income tax returns for 1992, 1993 and 1994 are currently
under examination by the Internal Revenue Service.
State. Maryland imposes a franchise tax on mutual and stock savings banks that
subjects the Maryland net earnings of such savings banks to a 7% tax. Maryland
net earnings is substantially similar to Federal taxable income, with
adjustments for items such as interest income on obligations of any state or
political subdivision thereof.
Item 2. Properties
The Company neither owns nor leases any real property. For the present, it uses
the premises, equipment and furniture of the Bank without direct payment of any
rental fees to the Bank.
The corporate offices of the Bank, and four of its five subsidiaries, are
located at 22 Firstfield Road, Gaithersburg, Maryland 20878. In addition to its
corporate offices, the Bank conducted business at December 31, 1995 through 14
other offices, and, through FCMC, one additional office. The Bank and FCMC lease
two offices which are totally sublet. Seven offices are owned and the remaining
eleven are leased, with expiration dates on the leases ranging from 1997 to
2003. All but two offices are located in Montgomery County, Maryland. The
remaining two offices are in Frederick County, Maryland. The Bank is attempting
to sell its former headquarters building and lease back the Bank's branch office
located therein. As of December 31, 1995, the net book value of owned offices
was $1.5 million and the net book value of leasehold improvements was $.1
million.
The Bank owns computers, peripheral equipment and terminals which are used for
the purpose of providing data processing services to Citizens. The net book
value at December 31, 1995 of such equipment was $.6 million.
Item 3. Legal Proceedings
The Bank is a party to certain litigation incidental to its business, including
foreclosure actions. At December 31, 1995, the Company was involved in various
other claims and legal actions arising in its business. The outcome of these
claims and actions are not presently determinable; however, in the opinion of
the Company's management, after consulting with the Company's legal counsel, the
ultimate disposition of these matters is not expected to have a material adverse
impact on the Company's consolidated financial condition or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of the fiscal year to a vote
of the Company's stockholders, through the solicitation of proxies or otherwise.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Information required by this item is set forth on page 1 hereof.
Item 6. Selected Financial Data
Information required by this item is set forth on pages 8 and 9 hereof.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Information required by this item is set forth on pages 10 through 17 hereof.
Item 8. Financial Statements and Supplementary Data
Information required by this item is set forth on pages 18 through 38 hereof.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On March 16, 1995, the Company appointed Arthur Andersen LLP, independent
certified public accountants, as the Company's independent auditors for 1995.
KPMG Peat Marwick LLP had been the Company's independent auditors. KPMG Peat
Marwick's reports on the Company's financial statements for 1994 and 1993 did
not contain an adverse opinion or disclaimer of opinion and were not qualified
or modified as to uncertainty, audit scope or accounting principles. The
decision to retain Arthur Andersen LLP and not to re-hire KPMG Peat Marwick was
recommended by the Audit Committee of the Board of Directors, and was based upon
bids received from those firms.
During the Company's two most recent fiscal years and any subsequent interim
period preceding the change in independent auditors, there were no disagreements
with KPMG Peat Marwick on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure. The Company did
not, during its two most recent fiscal years and any subsequent interim period
prior to engaging Arthur Andersen LLP, consult that firm regarding (i) either
(a) the application of accounting principles to a specific transaction, either
completed or proposed, or (b) the type of audit opinion that might be rendered
on the Company's financial statements; or (ii) any matter that was either the
subject of a disagreement with KPMG Peat Marwick or a "reportable event" (as
defined in SEC regulations).
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding directors of the Company is omitted from this Report, as
the Company intends to file its definitive annual meeting proxy statement within
120 days after the end of the Registrant's fiscal year. The information to be
included therein regarding directors and executive officers of the Company is
incorporated herein by reference to the sections entitled "Information as to
Nominees and Other Directors" and "Other Executive Officers".
Item 11. Executive Compensation
Information regarding compensation of executive officers and directors is
omitted from this Report, as the Company intends to file its definitive annual
meeting proxy statement within 120 days after the end of the Registrant's fiscal
year and the information included therein regarding compensation of executive
officers and directors (excluding the report on executive compensation and the
stock performance graph) is incorporated herein by reference to the sections
entitled "Executive Compensation" and " Compensation of Directors".
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this Item is omitted from this Report, as the Company
intends to file its definitive annual meeting proxy statement within 120 days
after the end of the Registrant's fiscal year. The information to be included
therein regarding this Item is incorporated herein by reference to the sections
entitled "Stock Owned by Management" and "Principal Holders of Voting
Securities".
Item 13. Certain Relationships and Related Transactions
Information required by this Item is omitted from this Report, as the Company
intends to file its definitive annual meeting proxy statement within 120 days
after the end of the Registrant's fiscal year. The information to be included
therein regarding this Item is incorporated by reference to the section entitled
"Certain Transactions".
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a)
List of documents filed as part of this report.
(a) (1) Financial Statements.
Page
Reference
Consolidated Statements of Financial Condition _
December 31, 1995 and 1994........................ 18
Consolidated Statements of Income _ Years Ended
December 31, 1995, 1994 and 1993.................. 19
Consolidated Statements of Stockholders' Equity _
Years Ended December 31, 1995, 1994 and 1993...... 20
Consolidated Statements of Cash Flows _ Years Ended
December 31, 1995, 1994 and 1993.................. 21
Notes to Consolidated Financial Statements.......... 22-36
Independent Auditors' Reports....................... 37
(a) (2) Financial Statement Schedules.
All financial statement schedules are omitted because the required information
is inapplicable or the information is presented in the Consolidated Financial
Statements or related notes.
(a) (3) Exhibits.
The following exhibits are either filed as part of this Report or are
incorporated herein by reference:
Exhibit No. 3. Certificate of Incorporation and Bylaws.
(a) Certificate of Incorporation, as amended, of the Company (incorporated
herein by reference to Annex C to the Prospectus/Proxy Statement filed as
part of the Pre-Effective Amendment No. 1 to the Company's Registration
Statement on Form S-4 (Registration No. 33-27259) filed on March 16, 1989).
(b) Amended Bylaws of the Company (incorporated herein by reference to exhibit
3(b) of the Company's 1994 Form 10-K).
Exhibit No. 10. Material Contracts.
(a) Stock Option Plan, as amended (incorporated herein by reference to Exhibit
4.4 of the Post-Effective Amendment No. 1 to the Company's Form S-4
Registration Statement on Form S-8 (Registration No. 33-27259) filed on
October 4, 1989).
(b) Directors' Stock Option Plan (incorporated herein by reference to the
Company's Form S-8 Registration Statement (Registration No. 33-62466) filed
on May 7, 1993).
(c) Employee Stock Option Plan (incorporated herein by reference to the
Company's Form S-8 Registration Statement (Registration No. 33-91612) filed
on April 26, 1995).
(d) Directors' Retirement Plan, as amended.
(e) Deferred Fee Plan for Directors, effective as of January 1, 1996.
(f) Employment Agreement between and among First Citizens Financial
Corporation, Citizens Savings Bank f.s.b. and Herbert W. Jorgensen, dated
November 22, 1995, as amended.
(g) Amended Employment Agreement between and among First Citizens Financial
Corporation, Citizens Savings Bank f.s.b. and Enos K. Fry, dated September
7, 1995.
(h) Amended Employment Agreement between and among First Citizens Financial
Corporation, Citizens Savings Bank f.s.b. and Charles R. Duda, dated
September 7, 1995.
(i) Employment Agreement, as amended, between First Citizens Mortgage
Corporation and Benjamin O. Delaney, Jr., dated January 1, 1994, as
amended.
(j) Supplemental Retirement Agreement by and between Citizens Savings Bank
f.s.b. and Enos K. Fry dated March 7, 1996.
(k) Supplemental Retirement Agreement by and between First Citizens Mortgage
Corporation and Benjamin O. Delaney, Jr. dated March 7, 1996.
(l) 1995 Incentive Bonus Plan.
(m) 1996 Incentive Bonus Plan.
(n) Dividend Agreement dated August 3, 1989 as to dividends by the Bank to the
Company.
Exhibit No. 11. Computation of Primary and Fully Diluted Earnings Per Share.
Exhibit No. 16. Letter re Change in Certifying Accountant (Incorporated herein
by reference to Amendment No. 1 to the Company's 1994 Form 10-K on From 10-K/A).
Exhibit No. 21. List of Subsidiaries (incorporated by reference to Exhibit No.
21 to the Company's 1993 Form 10-K).
Exhibit No. 23. Consent of Experts.
(a) Consent of KPMG Peat Marwick LLP (Registration Nos. 33-27259, 33-62466 and
33-91612).
(b) Consent of Arthur Andersen LLP (Registration Nos. 33-27259, 33-62466 and
33-91612).
(b) Reports on Form 8-K.
No Forms 8-K were filed during the quarter ended December 31, 1995.
(c) Exhibits.
See Item 14(a)(3) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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
By: Herbert W. Jorgensen March 7, 1996
Chairman and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on March 7, 1996 on behalf of the
Registrant in the capacities indicated.
By: Herbert W. Jorgensen
Chairman and Chief Executive Officer
(Principal Executive Officer)
By: Enos K. Fry
President and Vice Chairman
By: Charles R. Duda
Executive Vice President and Chief Operating Officer
By: William C. Scott
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
By: N. Richard Kimmel
Vice Chairman
By: Stanley Betts
Albert M. Cowell, Jr.
William J. Walsh, III
H. Deets Warfield, Jr.
Melvin O. Wright
Directors
Investor Services Directory
Stockholder Information
First Citizens Financial Corporation's periodic reports filed with the
Securities and Exchange Commission are available without charge to stockholders
and other interested parties. To request these publications, or if you have
questions about First Citizens Financial Corporation, you are invited to
contact:
Investor Relations
First Citizens Financial Corporation
22 Firstfield Road
Gaithersburg, MD 20878
(301) 527-2400 or 1 (800) 573-8700
Transfer Agent and Registrar
Chemical Mellon Shareholder Services, L.L.C.
PO Box 590
Ridgefield Park, NJ 07660
1 (800) 851-9677
Communications concerning change of address, lost certificates and transfer
requirements should be directed to the Transfer Agent.
General Counsel
Robert E. Gough
Heise Jorgensen & Stefanelli P.A.
18310 Montgomery Village Avenue, Suite 400
Gaithersburg, MD 20879
Special Counsel
Hogan & Hartson L.L.P.
555 - 13th Street, N.W.
Washington, DC 20004
Annual Meeting
The 1996 Annual Meeting of Stockholders will be held at 9:00 a.m. on April 19,
1996 at the DoubleTree Hotel in Rockville, Maryland.
1995 Annual Report and Form 10-K
This report is submitted for the general information of the stockholders of
First Citizens Financial Corporation and is not intended to be used in
connection with any sale or purchase of securities. Copies of this report are
available from the Corporate Secretary of First Citizens Financial Corporation.
Corporate Headquarters
22 Firstfield Road
Gaithersburg, MD 20878
(301) 527-2400
Citizens Savings Bank f.s.b. Locations
Branch Locations:
MAIN OFFICE*
8485 Fenton Street
Silver Spring, MD 20910
(301) 589-9610
Manager: Cynthia White
BETHESDA*
4405 East-West Highway
Bethesda, MD 20814
(301) 654-2411
Manager: Carlos Molina
CHEVY CHASE*
5416 Wisconsin Avenue
Chevy Chase, MD 20815
(301) 654-2154
Manager: Ellen Winston
DAMASCUS*
9801 Main Street
Damascus, MD 20872
(301) 253-2000
Manager: Chandra Bappanad
FLOWER HILL*
18261 Flower Hill Way
Gaithersburg, MD 20879
(301) 840-5600
Manager: David O'Berry
FREDERICK*
Frederick County Square
Shopping Mall
1003 West Patrick Street
Frederick, MD 21702
Metro_(301) 831-4272
Local_(301) 662-9420
Manager: Erin Stott
GAITHERSBURG*
205 North Frederick Avenue
Gaithersburg, MD 20877
(301) 926-0560
Manager: Dick Reed
KENSINGTON*
3720 Farragut Avenue
Kensington, MD 20895
(301) 949-2200
Manager: Ron Perrell
OLNEY*
17920 Georgia Avenue
Olney, MD 20832
(301) 774-2300
Manager: Rob Hill
POTOMAC*
Potomac Place Shopping Center
10100 River Road
Potomac, MD 20854
(301) 299-8230
Manager: Kathleen Mayer
QUINCE ORCHARD*
12110 Darnestown Road
Gaithersburg, MD 20878
(301) 977-8313
Manager: Ann Blake
ROCKVILLE*
414 Hungerford Drive
Rockville, MD 20850
(301) 762-3101
Manager: Gina Monello
WHEATON-GLENMONT*
2335 Glenallen Avenue
Wheaton, MD 20906
(301) 946-4787
Manager: Erin Stott
WHITE OAK*
11161 New Hampshire Avenue
Silver Spring, MD 20904
(301) 593-7600
Manager: Bill Yeck
Mortgage Originations:
First Citizens Mortgage
Corporation
12501 Prosperity Drive, Suite 130
Silver Spring, MD 20904
(301) 622-9002
Fax (301) 622-5026
Board of Directors and Corporate Officers
Board of Directors
Herbert W. Jorgensen
Chairman and Chief Executive Officer
Senior Attorney, Heise Jorgensen & Stefanelli P.A.
Enos K. Fry
Vice Chairman of the Board
President, Citizens Savings Bank f.s.b.
N. Richard Kimmel
Vice Chairman of the Board
Owner, Kimmel Properties
Stanley Betts
President, Bogley, Harting & Betts, Inc.
Albert M. Cowell, Jr.
President, A. Myron Cowell, Inc.
William J. Walsh, III
Senior Vice President, Donohoe Real Estate Services
H. Deets Warfield, Jr.
President, Damascus Motor Co., Inc.
Melvin O. Wright
Retired Investment Banker
Chairmen Emeriti
Stanley Betts
Clinton C. Sisson (a)
Directors Emeriti
Harry W. Goff (b)
Retired Builder
T.W. Perry, Jr.
President, T.W. Perry, Inc.
Evelyn K. Stevens
Retired Corporate Secretary
of Citizens Savings Bank f.s.b.
Corporate Officers
First Citizens Financial Corporation
Herbert W. Jorgensen
Chief Executive Officer
Enos K. Fry
President
Charles R. Duda
Executive Vice President and Chief Operating Officer
William C. Scott
Senior Vice President and Chief Financial Officer
Barbara J. Guy
Corporate Secretary
John V. Romagna
Treasurer
Citizens Savings Bank f.s.b.
Herbert W. Jorgensen
Chief Executive Officer
Enos K. Fry
President
Charles R. Duda
Executive Vice President and Chief Operating Officer
John V. Romagna
Senior Vice President and Treasurer
William C. Scott
Senior Vice President and Chief Financial Officer
David H. Bowman
Senior Vice President, Real Estate Lending
Timothy E. Hall
Senior Vice President, Corporate Lending
LuAnn Loeber
Senior Vice President, Community Banking
Mark A. Schissler
Senior Vice President, Human Resources
J. Terry Thomas
Senior Vice President, Consumer Lending
Barbara J. Guy
Corporate Secretary
Vice Presidents
Juline H. Anderson
Savings Administration
V. Ann Blake
Quince Orchard Branch
Margaret H. Blewitt
Construction Servicing
C R Carder IV
Asset Quality and Compliance, CRA Officer
Rosemary Z. Chamblin
Residential Servicing
Alan E. Good
Administrative Services
Gary D. Houston
Real Estate Lending
Richard J. Hunt, Jr.
Corporate Lending
James P. Kerr, III
Staff Appraiser and Inspector
Gregory G. Lamb
Real Estate Lending
Guy J. Tegler
Corporate Lending
Michael B. Vavreck
Deposit Operations
Lowell W. Yoder
Corporate Lending
Assistant Vice Presidents
Mary Ann Y. Aellen
Henry A. Ault
Joyce B. Cane
Mark L. Joyce
Judith G. Judkins
Henry P. Kistner
Maria P. Lampos
Debbie J. MacArthur
Gina C. Monello
David B. O'Berry
Jeanne Chappuis Petrykanyn
Richard B. Reed
Merle J. Sabatini
Ellen H. Winston
John M. Wright
Barbara J. Egmore
Director of Internal Audit
Myrian E. Fuentes
Assistant Secretary
First Citizens Corporation
Herbert W. Jorgensen
Chairman and Chief Executive Officer
Enos K. Fry
President
David H. Bowman
Vice President
James P. Kerr, III
Vice President
Gary D. Houston
Assistant Vice President
Gregory G. Lamb
Assistant Vice President
Barbara J. Guy
Secretary
John V. Romagna
Treasurer
First Citizens Development Corporation
Albert M. Cowell, Jr.
Chairman
Herbert W. Jorgensen
Chief Executive Officer
Enos K. Fry
President
David H. Bowman
Executive Vice President
Barbara J. Guy
Secretary
John V. Romagna
Treasurer
First Citizens Mortgage Corporation
William J. Walsh, III
Chairman
Herbert W. Jorgensen
Chief Executive Officer
Benjamin O. Delaney, Jr.
President
Thomas L. Bean
Senior Vice President
Kimberly C. Bean
Vice President
Mary Ann Y. Aellen
Secretary-Treasurer
(a) Chairman Emeritus Sisson died on May 6, 1995.
(b) Director Emeritus Goff died on September 25, 1995.
INDEX TO EXHIBITS
Page (by
Sequential
Exhibit Numbering
Number Identity of Exhibit System)
- ------- ------------------- ----------
(3)(a) Certificate of Incorporation, as amended, of the Company
(incorporated herein by reference to Annex C to the
Prospectus/Proxy Statement filed as part of the Pre-
Effective Amendment No. 1 to the Company's Registration
Statement on Form S-4 (Registration No. 33-27259) filed
on March 16, 1989).
(3)(b) Amended Bylaws of the Company (incorporated
herein by reference to Exhibit 3(b) of the Company's
1994 Form 10- K).
(10)(a) Stock Option Plan, as amended (incorporated herein by
reference to Exhibit 4.4 of the Post-Effective Amendment
No. 1 to the Company's Form S-4 Registration Statement
on Form S-8 (Registration No. 33-27259) filed on October
4, 1989).
(10)(b) Directors' Stock Option Plan (incorporated herein by
reference to the Company's Form S-8 Registration
Statement (Registration No. 33-62466) filed on May 7,
1993).
(10)(c) Employee Stock Option Plan (incorporated herein by
reference to the Company's Form S-8 Registration
Statement (Registration No. 33-91612) filed on April 26,
1995).
(10)(d) Directors' Retirement Plan, as amended.
(10)(e) Deferred Fee Plan for Directors, effective as of January 1,
1996.
(10)(f) Employment Agreement between and among First
Citizens Financial Corporation, Citizens Savings Bank
F.S.B. and Herbert W. Jorgensen, dated November 22,
1995, as amended.
(10)(g) Amended Employment Agreement between and among
First Citizens Financial Corporation, Citizens Savings
Bank F.S.B. and Enos K. Fry, dated September 7, 1995.
(10)(h) Amended Employment Agreement between and among
First Citizens Financial Corporation, Citizens Savings
Bank F.S.B. and Charles R. Duda, dated September 7,
1995.
(10)(i) Employment Agreement, as amended, between First
Citizens Mortgage Corporation and Benjamin O.
Delaney, Jr., dated January 1, 1994, as amended.
(10)(j) Supplemental Retirement Agreement by and between
Citizens Savings Bank F.S.B. and Enos K. Fry dated March
7, 1996.
(10)(k) Supplemental Retirement Agreement by and between First
Citizens Mortgage Corporation and Benjamin O. Delaney,
Jr. dated March 7, 1996.
(10)(l) 1995 Incentive Bonus Plan.
(10)(m) 1996 Incentive Bonus Plan.
(10)(n) Dividend Agreement dated August 3, 1989 as to dividends
by the Bank to the Company.
(11) Computation of Primary and Fully Diluted Earnings Per
Share.
(16) Letter re Change in Certifying Accountant (incorporated
herein by reference to Amendment No. 1 to the Company's
1994 Form 10-K on Form 10-K/A).
(21) List of Subsidiaries (incorporated herein by reference to
Exhibit No. 21 to the Company's 1993 Form 10-K).
(23)(a) Consent of KPMG Peat Marwick LLP (Registration Nos.
33-27259, 33-62466 and 33-91612).
(23)(b) Consent of Arthur Andersen LLP (Registration Nos. 33-27259,
33-62466 and 33-91612).
(27) Financial Data Schedule.