- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
--
(Mark one): /X_/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended June 30, 1996
or
--
/_/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-17912
FIRST CITIZENS FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 52-1638667
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
22 Firstfield Road, Gaithersburg, Maryland 20878
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (301) 527-2400
-------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the numbers of shares outstanding for the issuer's classes of
common stock, as of August 8, 1996.
$.01 par value of common stock 2,924,889
------------------------------ -------------
(class) (outstanding)
- --------------------------------------------------------------------------------
FIRST CITIZENS FINANCIAL CORPORATION
AND SUBSIDIARY
FORM 10-Q
INDEX
Part I Financial Information Page
- ------ --------------------- ----
Item 1 Financial Statements of First Citizens Financial Corporation
and Subsidiary:
Unaudited Consolidated Statements of Financial Condition
as of June 30, 1996 and December 31, 1995............... 3
Unaudited Consolidated Statements of Income for the three
and six months ended June 30, 1996 and 1995............. 4
Unaudited Consolidated Statements of Cash Flows for the
six months ended June 30, 1996 and 1995................. 5
Unaudited Notes to Unaudited Consolidated Financial
Statements as of and for the three and six months ended
June 30, 1996 and 1995.................................. 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 9
Part II Other Information
- ------- -----------------
Item 6 Exhibits and Reports on Form 8-K............................ 15
Signature Page.............................................. 16
Exhibit Index............................................... 17
2
FIRST CITIZENS FINANCIAL CORPORATION AND SUBSIDIARY
Unaudited Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data)
June 30, December 31,
1996 1995
-------- ------------
Assets
Cash and cash equivalents.......................................................... $ 11,461 $ 15,711
Investment securities available-for-sale, at estimated fair value.................. 94,202 73,730
Investment securities held-to-maturity, net (estimated fair value of
$57,752 at June 30, 1996 and $42,439 at December 31, 1995)....................... 57,774 42,083
Loans receivable, net of allowance for losses of $7,179 and $7,460
at June 30, 1996 and December 31, 1995, respectively............................. 439,881 412,603
Loans held for sale, net, at lower of cost or market............................... 11,023 34,921
Stock in the Federal Home Loan Bank of Atlanta, at cost............................ 4,411 3,842
Real estate owned, net of allowance for losses of $963 and $975
at June 30, 1996 and December 31, 1995, respectively............................. 13,276 13,269
Accrued interest receivable........................................................ 3,925 3,364
Premises and equipment, net........................................................ 2,832 2,869
Deferred income taxes, net ........................................................ 1,436 2,328
Prepaid expenses and other assets.................................................. 5,603 2,709
-------- --------
Total Assets.................................................................. $645,824 $607,429
======== ========
Liabilities
Deposit accounts................................................................... $505,422 $487,097
Advances from the Federal Home Loan Bank of Atlanta................................ 85,200 75,140
Other borrowed money............................................................... 4,680 ---
Accounts payable and accrued expenses.............................................. 10,794 6,551
-------- --------
Total Liabilities............................................................. 606,096 568,788
-------- --------
Stockholders' Equity
Preferred stock, $.01 per share par value, 2,000,000 shares
authorized, none issued and outstanding......................................... --- ---
Common stock, $.01 per share par value, 8,000,000 shares
authorized, 2,915,238 shares and 2,629,576 shares issued and
outstanding at June 30, 1996 and December 31, 1995, respectively................ 29 26
Additional paid-in capital......................................................... 27,189 22,297
Retained earnings.................................................................. 13,425 15,970
Unrealized net holding gains (losses) on investment securities
available-for-sale, net of taxes.............................................. (915) 348
-------- --------
Total Stockholders' Equity.................................................... 39,728 38,641
-------- --------
Total Liabilities and Stockholders' Equity.................................... $645,824 $607,429
======== ========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
3
FIRST CITIZENS FINANCIAL CORPORATION AND SUBSIDIARY
Unaudited Consolidated Statements of Income
(In thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1996 1995 1996 1995
---- ---- ---- ----
Interest income
Loans receivable................................................. $ 9,017 $ 9,228 $18,345 $18,197
Investment securities............................................ 2,568 1,482 4,580 2,904
Other interest................................................... 51 45 118 51
------- ------- ------- -------
Total interest income........................................ 11,636 10,755 23,043 21,152
------- ------- ------- -------
Interest expense
Deposit accounts................................................. 5,856 5,517 11,767 10,469
Advances from the Federal Home Loan Bank of Atlanta.............. 1,190 845 2,276 1,752
Other borrowed money............................................. 17 --- 17 ---
Capitalized interest............................................. --- (36) --- (79)
------- ------- ------- -------
Total interest expense....................................... 7,063 6,326 14,060 12,142
------- ------- ------- -------
Net interest income.............................................. 4,573 4,429 8,983 9,010
Provision for loan losses............................................ --- 100 148 250
------- ------- ------- -------
Net interest income after provision for loan losses.................. 4,573 4,329 8,835 8,760
------- ------- ------- -------
Other income
Gain on sale of loans............................................ 100 105 876 150
Deposit service charges.......................................... 375 282 664 520
Loan fees and service charges.................................... 217 92 366 197
Servicing fee income, net........................................ 81 63 165 126
Gains on sale of investment securities........................... 27 1 31 46
Other............................................................ 60 63 109 105
------- ------- ------- -------
Total other income........................................... 860 606 2,211 1,144
------- ------- ------- -------
Operating expense
Compensation and employee benefits............................... 1,929 1,996 3,962 3,862
Equipment, maintenance and data processing....................... 319 314 679 629
Occupancy........................................................ 316 297 640 597
Federal insurance premiums and assessments....................... 317 327 623 654
Professional services............................................ 247 195 417 368
Advertising and promotion........................................ 118 177 300 284
(Gain) loss from real estate, net................................ (129) (52) 75 119
Other............................................................ 456 410 861 745
------- ------- ------- -------
Total operating expense...................................... 3,573 3,664 7,557 7,258
------- ------- ------- -----
Income before income taxes........................................... 1,860 1,271 3,489 2,646
Provision for income taxes ...................................... 711 317 1,262 745
------- ------- ------- -------
Net income........................................................... $ 1,149 $ 954 $ 2,227 $ 1,901
======= ======= ======= =======
Earnings per common and common equivalent share
(note 2)........................................................... $ .36 $ .30 $ .70 $ .61
======= ======== ======= =======
The accompanying notes to consolidated financial statements are an integral part
of these statements.
4
FIRST CITIZENS FINANCIAL CORPORATION AND SUBSIDIARY
Unaudited Consolidated Statements of Cash Flows
(In thousands)
Six Months Ended
June 30,
-------------------------
1996 1995
---- ----
Operating activities
Net income.................................................................................. $ 2,227 $ 1,901
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for losses on assets............................................................ 396 330
Amortization of loan fees, premiums, discounts and deferred interest...................... (444) (526)
Loans originated for sale, net of repayments.............................................. (18,846) (16,123)
Sale of loans held for sale............................................................... 43,910 13,038
(Increase) decrease in accrued interest receivable, prepaid expenses
and other assets....................................................................... (3,545) 1,674
Depreciation and amortization of premises and equipment................................... 213 213
Increase in accounts payable and accrued expenses......................................... 4,243 1,169
Deferred income tax provision (benefit)................................................... 1,686 (564)
Other..................................................................................... 19 (6)
-------- --------
Net cash provided by operating activities.............................................. 29,859 1,106
-------- --------
Investing activities
Loans originated, net of repayments and sales............................................. (29,039) (6,804)
Loans purchased........................................................................... (181) ---
Investment securities purchased........................................................... (77,584) (22,031)
Investment securities sold................................................................ 7,591 ---
Principal repayments, maturities and calls of investment securities....................... 31,686 7,445
Purchases of Federal Home Loan Bank of Atlanta stock...................................... (1,201) (51)
Sales of Federal Home Loan Bank of Atlanta stock.......................................... 632 ---
Capitalized additions to real estate owned................................................ (1,956) (1,474)
Proceeds from sale of real estate owned................................................... 2,924 3,550
Net additions to premises and equipment................................................... (176) (419)
-------- --------
Net cash used in investing activities................................................. (67,304) (19,784)
-------- --------
Financing activities
Net increase in deposits.................................................................. 18,325 14,627
Proceeds from Federal Home Loan Bank of Atlanta advances.................................. 86,975 107,740
Repayments of Federal Home Loan Bank of Atlanta advances.................................. (76,915) (102,940)
Proceeds from other borrowings............................................................ 4,680 ---
Net proceeds from exercise of stock options............................................... 130 46
-------- --------
Net cash provided by financing activities............................................. 33,195 19,473
-------- --------
Increase (decrease) in cash and cash equivalents...................................... (4,250) 795
Cash and cash equivalents at beginning of period...................................... 15,711 7,828
-------- --------
Cash and cash equivalents at end of period............................................ $ 11,461 $ 8,623
======== ========
Supplemental information
Stock dividend............................................................................ $ 4,765 $ 3,874
Interest paid on deposits and borrowed funds.............................................. 3,182 2,908
Loans transferred to real estate owned at fair value...................................... 2,666 6,244
Loans to facilitate the sale of real estate owned......................................... 1,576 405
Income tax payment ....................................................................... 1,350 1,337
Loans transferred to held for sale, net................................................... 1,254 ---
The accompanying notes to consolidated financial statements are an integral part
of these statements.
5
FIRST CITIZENS FINANCIAL CORPORATION AND SUBSIDIARY
Unaudited Notes to Unaudited Consolidated Financial Statements
As of and for the Six Months Ended June 30, 1996 and 1995
1) Basis of Presentation
---------------------
First Citizens Financial Corporation ("First Citizens Financial") is the
holding company of Citizens Savings Bank F.S.B. ("Citizens" or the "Bank"), a
wholly-owned federal savings bank subsidiary of First Citizens Financial. The
consolidated financial statements include the accounts of First Citizens
Financial, Citizens and wholly-owned subsidiaries of Citizens (collectively, the
"Company").
The financial statements as of June 30, 1996 and for the three and six months
ended June 30, 1996 and 1995 are unaudited but, in the opinion of management of
the Company, contain all adjustments, consisting solely of normal recurring
entries, necessary to present fairly the consolidated financial condition as of
June 30, 1996 and the results of consolidated operations for the six months
ended June 30, 1996 and 1995 and consolidated cash flows for the six months
ended June 30, 1996 and 1995. The consolidated statement of financial condition
as of December 31, 1995 is derived from audited financial statements. These
condensed financial statements should be read in conjunction with the financial
statements and notes thereto included in First Citizens Financial's latest
report to stockholders' on Form 10-K.
The results of consolidated operations for the six months ended June 30, 1996
are not necessarily indicative of results that may be expected for the entire
year ending December 31, 1996.
2) Earnings Per Share
------------------
On April 19, 1996, the Board of Directors declared a 10% stock dividend which
was distributed on June 3, 1996 to stockholders of record on May 3, 1996.
Average shares outstanding and all per share amounts are based on the increased
number of shares giving retroactive effect to the stock dividend.
Earnings per share for the three and six months ended June 30, 1996 were
determined by dividing net income by 3,200,989 and 3,183,165, the weighted
average number of shares outstanding during these periods, respectively.
Earnings per share for the three and six months ended June 30, 1995 were
determined by dividing net income by 3,151,200 and 3,131,938, the weighted
average number of shares outstanding during these periods, respectively.
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.
6
3) Stock Option Plans
------------------
At June 30, 1996, the Company had three stock-based compensation plans that
provide for the grant of stock options to directors and/or officers and key
employees of the Company and its subsidiary at prices at least equal to the
market value at the date of grant. The maximum term of all options granted under
the plans is ten years and vesting occurs either immediately or over a period of
up to five years. A total of 795,507 shares of Company common stock were
reserved for issuance at June 30, 1996.
The Company calculates the fair value of its stock options granted after
December 31, 1994 in accordance with Statement of Financial Accounting Standards
(SFAS) No. 123 Accounting for Stock-Based Compensation. The fair value of each
option grant is estimated on the date of grant utilizing the Black-Scholes
option-pricing model with the following weighted average assumptions:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1996 1995 1996 1995
---- ---- ---- ----
Expected volatility............................. 49.97% ---% 50.01% 51.63%
Risk-free interest rates........................ 6.80 --- 6.95 7.58
Expected lives in years......................... 10.00 10.00 10.00 10.00
Dividends....................................... --- --- --- ---
A summary of the status of the Company's three fixed stock option plans as
of June 30, 1996 and June 30, 1995 and changes during the six months ended on
those dates is presented below. Average prices and shares subject to options
have been adjusted to reflect stock dividends.
1996 1995
---------------------------- ----------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
------- ---------------- ------- ----------------
Outstanding at beginning of year........... 518,113 $ 7.40 448,618 $ 4.80
Granted.................................... 11,700 17.52 22,990 11.36
Exercised.................................. (23,068) 5.24 (34,434) 1.32
Forfeited.................................. (3,670) 13.70 --- ---
Expired.................................... (366) 15.69 --- ---
------- -------
Outstanding at June 30..................... 502,709 7.66 437,174 5.42
======= =======
Options exercisable at June 30............. 438,536 380,679
Weighted average fair value of
options granted during the period....... $ 7.33 $ 10.35
7
The following table summarizes information about fixed stock options
outstanding at June 30, 1996.
Options Outstanding Options Exercisable
------------------------------------------------------- ---------------------------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- --------------- ----------- ---------------- ---------------- ----------- ----------------
(years)
$ 1.32 - 1.33 130,995 5.6 $ 1.32 130,995 $ 1.32
3.38 - 3.39 42,949 1.2 3.38 42,949 3.38
5.17 - 6.00 125,958 5.7 5.93 125,958 5.93
10.23 -10.95 68,365 6.5 10.55 48,199 10.38
11.36 12,100 8.7 11.36 6,723 11.36
13.74 -13.85 8,148 8.3 13.77 3,308 13.81
15.68 -15.70 98,474 9.4 15.68 70,651 15.68
16.36 -16.37 5,670 9.3 16.37 5,120 16.37
17.625-17.75 10,050 10.0 17.70 4,633 17.72
In accordance with SFAS No. 123, the following table presents pro forma net
income and earnings per share at the dates indicated.
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1996 1995 1996 1995
---- ---- ---- ----
(In thousands, except per share data)
Pro forma
Net income..................................... $1,109 $954 $2,162 $1,841
====== ==== ====== ======
Earnings per common and common
equivalent share........................... .35 .30 .69 .59
=== === === ===
Compensation cost charged against historical net income in the above table
was increased by the fair value of stock-based compensation grants. The
adjustments amounted to $48,000 for the three months ended June 30, 1996 and
$75,000 and $62,000 for the six months ended June 30, 1996 and 1995,
respectively. No adjustment was required for the three months ended June 30,
1995. During the initial phase-in period, the effects of applying SFAS No. 123
to historical net income to provide pro forma disclosures are not likely to be
representative of the effects on reported net income for future years because
options vest over several years and additional grants generally are made each
year.
8
FIRST CITIZENS FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in the tables in thousands)
This discussion and analysis includes a description of material changes
which have affected the Company's consolidated financial condition and
consolidated results of operations during the periods included in the Company's
financial statements.
FINANCIAL CONDITION (June 30, 1996 compared to December 31, 1995)
Total assets increased by $38.4 million, or 6.3%, at June 30, 1996 compared
to December 31, 1995. Such increase was primarily due to increases of $36.2
million in investment securities and $2.9 million in prepaid expenses and other
assets. Loans increased by $3.4 million, net, which reflects originations net of
repayments of $61.4 million and $26.3 million of 30-year fixed rate loans sold
to improve the Bank's interest rate sensitivity.
Nonperforming assets, net (including nonaccrual loans and real estate owned,
net) amounted to $15.3 million and $15.1 million at June 30, 1996 and December
31, 1995, respectively. The primary causes of the increase were additional
nonperforming commercial real estate loans. During the six months ended June 30,
1996, the Bank sold three real estate owned projects and acquired title to the
remaining $2.7 million balance of a commercial land loan. Total nonperforming
assets, net as a percentage of total assets were 2.4% at June 30, 1996 and 2.5%
at December 31, 1995. Total loss reserves as a percentage of total nonperforming
assets, gross were 48.4% at June 30, 1996 and 50.5% at December 31, 1995.
Troubled debt restructurings, net, amounted to $2.9 million and $5.5 million,
at June 30, 1996 and December 31, 1995, respectively. Performing loans greater
than 90 days past maturity, net, amounted to $12,000 and $2.0 million at June
30, 1996 and December 31, 1995, respectively. The primary cause of the decrease
was the extension of a commercial land loan amounting to $1.2 million.
At June 30, 1996, there were no loans with respect to which known information
about the possible credit problems of the borrowers or the cash flows of the
security properties caused management to have serious doubts about the ability
of the borrowers to comply with the present loan repayment terms and which might
result in the future inclusion of such loans in nonperforming assets.
The Bank regularly reviews assets in its portfolio to determine whether any
require classification. On the basis of such review, the following assets, which
include nonperforming assets, were classified at the dates indicated:
Classified Assets June 30,1996 December 31,1995
------------ ----------------
Substandard................. $17,950 $20,446
Doubtful.................... 197 186
Loss........................ 2,327 2,387
------- -------
20,474 23,019
Specific loss reserves...... (2,327) (2,387)
------- -------
Classified assets, net...... $18,147 $20,632
======= =======
9
The Bank also identifies assets which possess credit deficiencies or
potential weaknesses deserving management's close attention as "special
mention". These assets totaled $25.9 million at June 30, 1996 compared to $25.3
million at December 31, 1995.
The allowance for losses on loans is established through a provision for
loan losses based upon management's evaluation of the risk inherent in the loan
portfolio and changes in the nature and volume of loan activity. Such evaluation
considers, among other factors, the estimated fair value of the underlying
collateral, current economic conditions and historical loan loss experience.
While management uses available information in establishing the allowance for
possible loan losses, future adjustments to the allowance may be necessary if
economic conditions differ substantially from the assumptions used in making the
evaluations. Additions to the allowance are charged to operations; realized
losses, net of recoveries, are charged to the allowance. In addition, various
regulatory agencies, as part of their examination process, periodically review
the Company's allowance for possible loan losses. Such agencies may require the
Company to recognize additions to the allowance based on their judgments about
information available to them at the time of their examinations.
The Bank provided an additional $148,000 for potential loan losses during
the first six months of 1996 and incurred $429,000 of net charge-offs during the
period.
The Bank also establishes allowances for losses on real estate owned based
upon their fair values. The Bank provided $115,000 for additional losses on real
estate owned during the first six months of 1996 and incurred $127,000 of
charge-offs during the period. The valuations of real estate owned properties
are reviewed periodically (at least quarterly) and updated as necessary based on
the Bank's expectations of holding periods, leasing or sales activity, and other
changes in market conditions.
Based on available information, management believes that current loss
reserves are adequate at this time to cover potential losses in the portfolio.
There can be no assurance, however, that additional loss provisions will not be
necessary in the future if market conditions deteriorate.
Taking advantage of a favorable rate environment, investment securities
were increased $36.2 million during the first six months of 1996. This increase
in earning assets helped to substantially offset the effects of a reduction in
net interest margin which decreased from 3.27% for the six months ended June 30,
1995 to 2.98% for the comparable period in 1996. The yield on the investment
portfolio increased from 6.30% at December 31, 1995 to 6.95% at June 30, 1996.
The Bank had unrealized gains of $.5 million and unrealized losses of $2.0
million on its investment securities available-for-sale portfolio at June 30,
1996. The amortized cost of this portfolio was $95.7 million at that date. There
were unrealized losses amounting to $210,000 and $188,000 in unrealized gains on
the investment securities held-to-maturity portfolio at that date. The Bank's
investment securities portfolio includes both agency obligations and
mortgage-backed securities.
Deposits, before interest credited, increased by $7.6 million, or 1.5%,
during the six months ended June 30, 1996. Deposits, including interest
credited, increased by $18.3 million, a 3.7% increase. Also during the six
months ended June 30, 1996, advances from the Federal Home Loan Bank increased
$10.1 million or 13.3%. Federal Home Loan Bank advances had an average interest
rate of 5.9% at June 30, 1996. Other borrowed money increased to $4.7 million at
June 30, 1996 and had an average interest rate of 6.6% at that date.
At June 30, 1996, stockholders' equity totaled $39.7 million, or 6.1% of
total assets, and reflected $.9 million of net unrealized holding losses, net of
applicable taxes, on investment securities available-for-sale. At June 30, 1996,
the Bank was considered "well capitalized" under regulatory definitions. See
"Liquidity and Capital Resources".
10
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND JUNE
30, 1995
General. The Company recorded net income of $1.1 million, or $.36 per
share, for the three months ended June 30, 1996 as compared to net income of
$954,000, or $.30 per share, for the three months ended June 30, 1995.
Net interest income, after provision for loan losses, increased $244,000
when compared to 1995. There was a $881,000, or 8.2%, increase in interest
income which was offset by a $737,000, or 11.7%, increase in interest expense.
Provision for loan losses decreased $100,000. Other income increased by $254,000
million, or 41.9%, and operating expenses decreased by $91,000, or 2.5%, during
the three months ended June 30, 1996 compared to the same period in the prior
year.
Net Interest Income. The Company's net interest income, before provision
for loan losses, increased $144,000, or 3.3%, during the three months ended June
30, 1996 as compared to the same period of 1995. Interest income on loans
decreased by $211,000, or 2.3%, due to decreases in average yields from 8.2% to
8.0% during the three months ended June 30, 1996 compared to the same period in
the prior year. Interest income on investment securities increased by $1.1
million which was primarily due to a $60.9 million increase in average
outstanding balances during the three months ended June 30, 1996 compared to the
same period in the prior year.
Interest paid on deposits increased $339,000, or 6.1%, due to a $29.6
million increase in average outstanding balances. Interest on borrowed funds
increased $362,000 due to a $23.9 million increase in average outstanding
balances. Interest rates increased from 5.8% to 5.9% during the three months
ended June 30, 1996 compared to the same period in the prior year.
Provision for Loan Losses. During the second quarter of 1995, the Company
provided $100,000 for loan losses. Management believes that the current loss
reserves appear adequate at this time to cover potential losses in the loan
portfolio, therefore, no additional loss reserves were provided during the
second quarter of 1996. There can be no assurance, however, that additional
reserves will not be necessary if market conditions change.
Other Income. Total other income increased $254,000, or 41.9%, during the
three months ended June 30, 1996 as compared to the three months ended June 30,
1995. Loan fees and service charges increased $125,000 due to recognition of
deferred extension fees. Other income also increased as a result of increased
charges on deposit accounts.
Operating Expense. Operating expense decreased by $91,000, or 2.5%, during
the three months ended June 30, 1996 as compared to the three months ended June
30, 1995. Compensation and employee benefits decreased by $67,000 due to
decreased accruals for bonuses and compensation. Loss from real estate decreased
by $77,000 due primarily to a $37,000 decrease in net real estate owned
operating expense and a $33,000 increase in net gains on sales of real estate
owned.
11
Income Taxes. For the quarter ended June 30, 1996, the Company's effective
tax rate was substantially equal to the statutory tax rate. For the quarter
ended June 30, 1995, the Company's effective tax rate was less than the
statutory tax rate due to the tax effects of the exercise of non-incentive stock
options by former employees and recovery of $60,000 of the valuation allowance
on deferred tax assets.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND JUNE 30,
1995
General. The Company recorded net income of $2.2 million, or $.70 per
share, for the six months ended June 30, 1996 as compared to net income of $1.9
million, or $.61 per share, for the six months ended June 30, 1995.
Net interest income, after provision for loan losses, increased $75,000
when compared to 1995. There was a $1.9 million, or 8.9%, increase in interest
income which was offset by a $1.9 million, or 15.8%, increase in interest
expense. Provision for loan losses decreased $102,000. Other income increased by
$1.1 million, or 93.3%, and operating expenses increased by $300,000, or 4.1%,
during the six months ended June 30, 1996 compared to the same period in the
prior year.
Net Interest Income. The Company's net interest income, before provision
for loan losses, decreased $27,000, or .3%, during the six months ended June 30,
1996 as compared to the same period of 1995. Interest income on loans increased
by $148,000 million, or .8%, due to an increase in average outstanding balances
of $4.2 million. Interest income on investment securities increased by $1.7
million which was primarily due to a $49.4 million increase in average
outstanding balances during the six months ended June 30, 1996 compared to the
same period in the prior year.
Interest paid on deposits increased $1.3 million, or 12.4%, due to an
increase in average rates paid on deposits from 4.6% to 4.8% and a $34.2 million
increase in average outstanding balances. Interest on borrowed funds increased
$541,000 due to a $17.4 million increase in average outstanding balances.
Provision for Loan Losses. During the first half of 1996 and 1995, the
Company provided $148,000 and $250,000, respectively, for loan losses.
Management of the Bank believes that the current loss reserves appear adequate
at this time to cover potential losses in the loan portfolio. There can be no
assurance, however, that additional reserves will not be necessary if market
conditions change.
12
Other Income. Total other income increased $1.1 million, or 93.3%, during
the six months ended June 30, 1996 as compared to the six months ended June 30,
1995. The Company realized gains of $574,000 on the sale of 30-year fixed-rate
loans amounting to $26.3 million, net. The Company also realized gains amounting
to $302,000, an increase of $152,000 from 1995, on the sale of mortgage loans
originated for sale by First Citizens Mortgage Corporation ("FCMC"), the Bank's
mortgage banking subsidiary. FCMC experienced increased gains on sales of loans
originated for sale during the first quarter of 1996 due to increased
originations of such loans caused by decreased interest rates. Loan fees and
service charges increased $169,000 primarily due to recognition of deferred
fees.
Operating Expense. Operating expense increased by $300,000, or 4.1%, during
the six months ended June 30, 1996 as compared to the six months ended June 30,
1995. Compensation and employee benefits increased by $100,000 due to
adjustments to various benefit plans. The Bank recorded a $133,000 adjustment to
lower of cost or market on fixed-rate loans held for sale during the six months
ended June 30, 1996. These loans were subsequently sold in the third quarter of
1996 at a small profit. No such adjustment was required during the six months
ended June 30, 1995. Professional services and equipment, maintenance and data
processing expenses also increased during the six months ended June 30, 1996
compared to the same period in the prior year.
Income Taxes. For the the six months ended June 30, 1996, the Company's
effective tax rate was less than the statutory tax rate primarily due to the
effects of exercises of non-incentive stock options granted to directors and
employees. For the six months ended June 30, 1995, the Company's effective tax
rate was less than the statutory tax rate due to the effects of exercises of
non-incentive stock options and recovery of $120,000 of the valuation allowance
on deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
Under current regulations, a savings association, such as the Bank,
generally is required to maintain liquid assets at 5.0% or more of its net
withdrawable deposits plus short-term borrowings. The Bank is in compliance with
this requirement. At June 30, 1996, the Bank had outstanding loan commitments
totaling $24.1 million.
SAIF-insured institutions, such as the Bank, are required to maintain
minimum levels of capital. At June 30, 1996, the Bank continued to exceed all
currently applicable core, tangible and risk-based capital requirements.
13
At June 30, 1996, the Bank had the following amounts of capital:
Actual % of Required % of Excess % of
Amount Assets* Amount Assets* Amount Assets*
------ ------- -------- ------- ------ -------
Core ** $39,632 6.1% $25,836 4.0% $13,796 2.1%
Tangible 39,632 6.1 9,688 1.5 29,944 4.6
Risk-weighted** 44,708 11.0 32,455 8.0 12,253 3.0
- ----------
<FN>
* Based upon adjusted total assets for the core and tangible capital
requirements, and risk-weighted assets for the risk-based capital
requirement.
** 5.0% core and 10.0% risk-based capital required to be considered "well
capitalized" and 4.0% core and 8.0% risk-based capital required to be
considered "adequately capitalized" under the OTS "Prompt Corrective
Action" regulations. Under current OTS capital regulations, the minimum
core capital requirement is 3% and the minimum risk-based capital
requirement is 8%.
</FN>
In August 1993, the OTS issued a final rule which adds an
interest-rate-risk ("IRR") component to its risk-based capital rule. Under the
rule, savings institutions with greater than normal interest rate exposure would
be required to deduct from risk-based capital one-half of the difference
between the institution's actual measured exposure and the normal level of
exposure. The amount to be deducted would be provided by OTS. The OTS has
indefinitely delayed implementation of the final rule. Based on financial data
as of June 30, 1996, management believes that compliance with the new IRR would
not have had a material impact on the Bank's risk-based capital position at
that date.
The United States Congress is considering various legislative proposals
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"). It cannot be determined whether,
or in what form, any such legislation will eventually be enacted. Legislation
pertaining to how qualified savings institutions calculate their bad debt
deduction for federal income tax purposes, if they were to convert their
charters, was adopted by the Congress on August 2, 1996 and is expected to be
signed by the President during the week of August 19, 1996. The legislation
(i) repeals future bad debt deductions; (ii) exempts pre-1988 bad debt
deductions from recapture; and (iii) suspends post-1987 bad debt deductions from
recapture, provided that the savings institution meets a new home mortgage
lending test. Once enacted, the legislation will exempt from recapture $4.0
million in pre-1988 bad debt deductions taken by the Bank and will defer
recapture of an additional $.6 million, subject to compliance with the home
mortgage lending test.
At June 30, 1996, First Citizens Financial Corporation, on an
unconsolidated basis, had $1.2 million of cash. First Citizens Financial
Corporation's expenses primarily consist of certain shareholder-related
activities. First Citizens Financial Corporation believes it can fund its
working capital needs from its own cash account, through the next several years,
without payment of dividends from the Bank.
14
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
11. Computation of Primary and Fully Diluted Earnings Per Share.
27. Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended June 30, 1996.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST CITIZENS FINANCIAL
CORPORATION
------------------------
(Registrant)
Date: August 9, 1996 By: /s/ Enos K. Fry
--------------------- ------------------------
Enos K. Fry
Vice Chairman and
President
Date: August 9, 1996 By: /s/ William C. Scott
--------------------- ------------------------
William C. Scott
Senior Vice President and
Chief Financial Officer
16
FIRST CITIZENS FINANCIAL CORPORATION AND SUBSIDIARY
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT DESCRIPTION PAGE
- ----------- ------------------- ----
11 Computation of Primary and Fully Diluted
Earnings Per Share...................................... 18
27 Financial Data Schedule................................. 19
17