- --------------------------------------------------------------------------------
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 September 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 number of shares outstanding for the issuer's classes of
common stock, as of November 8, 1996.
$.01 par value of common stock 2,933,664
- ------------------------------ ---------------
(class) (outstanding)
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FIRST CITIZENS FINANCIAL CORPORATION
AND SUBSIDIARY
FORM 10-Q
INDEX
Part I Financial Information Page
Item 1 Financial Statements of First Citizens Financial Corporation
and Subsidiary:
Unaudited Consolidated Statements of Financial Condition
as of September 30, 1996 and December 31, 1995 ...................3
Unaudited Consolidated Statements of Income for the three
and nine months ended September 30, 1996 and 1995 ................4
Unaudited Consolidated Statements of Cash Flows for the
nine months ended September 30, 1996 and 1995.....................5
Notes to Unaudited Consolidated Financial Statements
as of and for the nine months ended September 30, 1996
and 1995..........................................................6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................8
Part II Other Information
Item 6 Exhibits and Reports on Form 8-K...................................12
Signature Page.......................................................13
Exhibit Index........................................................14
2
FIRST CITIZENS FINANCIAL CORPORATION AND SUBSIDIARY
Unaudited Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data)
September 30, December 31,
Assets 1996 1995
----------- ----------
Cash and cash equivalents................................................................ $ 13,674 $ 15,711
Investment securities available-for-sale, at estimated fair value 93,338 73,730
Investment securities held-to-maturity, net (estimated fair value of $59,967 at
September 30, 1996 and $42,439 at December 31, 1995)................................... 59,800 42,083
Loans receivable, net of allowance for losses of $7,179 and $7,460 at September 30, 1996
and December 31, 1995, respectively.................................................... 463,203 412,603
Loans held for sale, net, at lower of cost or market..................................... 7,454 34,921
Stock in the Federal Home Loan Bank of Atlanta, at cost.................................. 4,572 3,842
Real estate owned, net of allowance for losses of $962 and $975 at September 30, 1996
and December 31, 1995, respectively.................................................... 12,201 13,269
Accrued interest receivable.............................................................. 4,291 3,364
Premises and equipment, net.............................................................. 3,157 2,869
Deferred income taxes, net .............................................................. 1,271 2,328
Prepaid expenses and other assets........................................................ 5,498 2,709
--------- ---------
Total Assets........................................................................ $ 668,459 $ 607,429
======= =======
Liabilities
Deposit accounts......................................................................... $ 509,373 $ 487,097
Advances from the Federal Home Loan Bank of Atlanta...................................... 90,800 75,140
Other borrowed money..................................................................... 19,238 ---
Accounts payable and accrued expenses.................................................... 9,500 6,551
--------- ---------
Total Liabilities................................................................... 628,911 568,788
------- -------
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, 2,927,170
and 2,629,576 shares issued and outstanding at September 30, 1996 and
December 31, 1995, respectively....................................................... 29 26
Additional paid-in capital............................................................... 27,232 22,297
Retained earnings........................................................................ 12,920 15,970
Unrealized net holding gains (losses) on investment securities available-for-sale, net of
taxes................................................................................. (633) 348
--------- -----------
Total Stockholders' Equity.......................................................... 39,548 38,641
-------- ---------
Total Liabilities and Stockholders' Equity.......................................... $ 668,459 $ 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 Nine Months Ended
September 30, September 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
Interest income
Loans receivable................................................. $ 9,522 $ 9,166 $ 27,867 $ 27,363
Investment securities............................................ 2,719 1,819 7,299 4,723
Other interest................................................... 6 14 124 65
--------- --------- -------- --------
Total interest income........................................ 12,247 10,999 35,290 32,151
------ ------ ------ ------
Interest expense
Deposit accounts................................................. 5,889 5,746 17,656 16,215
Advances from the Federal Home Loan Bank of Atlanta ............. 1,249 948 3,525 2,700
Other borrowed money............................................. 198 --- 215 ---
Capitalized interest............................................. --- (36) --- (115)
--------- -------- ---------- ------
Total interest expense....................................... 7,336 6,658 21,396 18,800
------ ------- ------ ------
Net interest income.............................................. 4,911 4,341 13,894 13,351
Provision for (recovery of) loan losses.............................. 1 (48) 149 202
-------- -------- -------- -------
Net interest income after provision for (recovery of) loan losses 4,910 4,389 13,745 13,149
------ ------- ------ -------
Other income
Deposit service charges.......................................... 373 290 1,037 810
Gain on sale of loans............................................ 71 191 947 341
Loan fees and service charges.................................... 94 73 460 270
Servicing fee income, net........................................ 56 84 221 210
Gains on sale of investment securities........................... --- --- 31 46
Other............................................................ 35 128 144 233
-------- -------- -------- -------
Total other income........................................... 629 766 2,840 1,910
------- -------- ------- ------
Operating expense
Compensation and employee benefits............................... 1,960 1,838 5,922 5,700
Federal insurance fund recapitalization ......................... 3,029 --- 3,029 ---
Equipment, maintenance and data processing....................... 301 290 980 919
Federal insurance premiums....................................... 326 300 949 954
Occupancy........................................................ 307 315 947 912
Professional services............................................ 221 200 638 567
Advertising and promotion........................................ 87 92 387 376
(Gain) loss from real estate, net................................ (45) 42 30 161
Other............................................................ 264 437 1,125 1,183
-------- -------- ------- -------
Total operating expense...................................... 6,450 3,514 14,007 10,772
------- ------- ------ ------
Income (loss) before income taxes................................... (911) 1,641 2,578 4,287
Provision (benefit) for income taxes ............................ (406) 597 856 1,342
--------- -------- -------- -------
Net income (loss).................................................... $ (505) $ 1,044 $ 1,722 $ 2,945
======== ======= ======= =======
Earnings (loss) per common and common equivalent
share (note 2).....................................................$ (.16) $ .33 $ .54 $ .94
========= ========= ======== ========
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)
Nine Months Ended
September 30,
Operating activities 1996 1995
---- ----
Net income..................................................................................$ 1,722 $ 2,945
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for losses on assets............................................................ 264 331
Amortization of loan fees, premiums, discounts and deferred interest (635) (794)
Loans originated for sale, net of repayments.............................................. (22,378) (25,727)
Sale of loans held for sale............................................................... 51,136 25,008
(Increase) decrease in accrued interest receivable, prepaid expenses and other assets .... (3,806) 1,434
Depreciation and amortization of premises and equipment................................... 308 293
Increase in accounts payable and accrued expenses......................................... 2,949 2,208
Deferred income tax provision (benefit)................................................... 1,674 (699)
Other..................................................................................... 19 (3)
---------- -----------
Net cash provided by operating activities.............................................. 31,253 4,996
------- -------
Investing activities
Loans originated, net of repayments and sales............................................. (51,268) (8,105)
Loans purchased........................................................................... (181) ---
Investment securities purchased........................................................... (82,543) (35,372)
Investment securities sold................................................................ 7,591 ---
Principal repayments, maturities and calls of investment securities 35,923 12,455
Purchases of Federal Home Loan Bank of Atlanta stock...................................... (1,518) (51)
Sales of Federal Home Loan Bank of Atlanta stock.......................................... 788 ---
Capitalized additions to real estate owned................................................ (2,648) (2,264)
Proceeds from sale of real estate owned................................................... 3,815 4,488
Net additions to premises and equipment................................................... (596) (235)
--------- --------
Net cash used in investing activities................................................. (90,637) (29,084)
-------- -------
Financing activities
Net increase in deposits.................................................................. 22,276 15,585
Proceeds from Federal Home Loan Bank of Atlanta advances.................................. 146,450 154,140
Repayments of Federal Home Loan Bank of Atlanta advances.................................. (130,790) (145,790)
Proceeds from other borrowings............................................................ 19,238 ---
Net proceeds from exercise of stock options............................................... 173 99
---------- -----------
Net cash provided by financing activities .............................................. 57,347 24,034
---------- ----------
Decrease in cash and cash equivalents .................................................. (2,037) (54)
Cash and cash equivalents at beginning of period ....................................... 15,711 7,828
---------- ----------
Cash and cash equivalents at end of period ......... ................................... $13,674 $ 7,774
========== ==========
Supplemental information
Stock dividend (note 2)...................................................................$ 4,765 $ 3,874
Interest paid on deposits and borrowed funds.............................................. 4,950 4,022
Loans transferred to real estate owned at fair value...................................... 2,666 6,244
Loans to facilitate the sale of real estate owned......................................... 2,452 1,291
Income tax payment ....................................................................... 1,350 1,757
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
Notes to Unaudited Consolidated Financial Statements
As of and for the Nine Months Ended September 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 September 30, 1996 and for the three and
nine months ended September 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 September 30, 1996 and the results of consolidated operations
for the three and nine months ended September 30, 1996 and 1995 and consolidated
cash flows for the nine months ended September 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 on Form 10-K.
The results of consolidated operations for the nine months ended September
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 nine months ended September 30, 1996
were determined by dividing net income by 3,193,238 and 3,188,890, the weighted
average number of shares outstanding during these periods, respectively.
Earnings per share for the three and nine months ended September 30, 1995 were
determined by dividing net income by 3,164,191 and 3,144,637, 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.
3) Stock Option Plans
At September 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 September 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 Nine Months Ended
September 30, September 30,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
Expected volatility............................. 49.61% 51.25% 49.96% 51.56%
Risk-free interest rates........................ 6.89 6.42 6.81 7.34
Expected lives in years......................... 10.00 10.00 10.00 10.00
Dividends....................................... --- --- --- ---
6
A summary of the status of the Company's three fixed stock option plans as
of September 30, 1996 and 1995, respectively, and changes during the nine 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 518,112 $ 7.40 448,586 $ 4.80
Granted.................................... 13,200 17.32 27,560 12.19
Exercised.................................. (35,000) 5.37 (43,963) 2.25
Forfeited.................................. (4,036) 13.87 --- ---
Expired.................................... (641) 15.90 --- ---
------- -------
Outstanding at September 30................ 491,635 7.74 432,183 5.53
======= =======
Options exercisable at September 30 433,540 365,235
Weighted average fair value of options
granted during the period............... $ 10.79 $ 7.48
The following table summarizes information about fixed stock options
outstanding at September 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 - 1.33 126,328 5.3 $ 1.32 126,328 $1.32
3.38 - 3.39 39,615 6.2 3.38 39,615 3.38
5.17 - 6.00 123,860 5.5 5.94 123,860 5.94
10.23 - 10.95 68,365 7.7 10.55 54,918 10.45
11.36 12,100 8.4 11.36 6,720 11.36
13.74 - 13.85 8,148 8.1 13.77 3,308 13.81
15.68 - 15.70 96,274 9.2 15.68 68,813 15.68
16.00 - 16.37 6,895 9.2 16.27 5,345 16.33
17.625 - 17.75 10,050 9.7 17.70 4,633 17.72
In accordance with SFAS No. 123, the following table presents pro forma net
income (loss) and earnings (loss) per share at the dates indicated.
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------------------
1996 1995 1996 1995
---- ---- ---- ----
Pro forma (In thousands, except per share data)
Net income (loss).................................. $ (506) $ 1,014 $ 1,672 $ 2,874
==== ===== ===== =====
Earnings (loss) per common and common
equivalent share............................... $ (.16) $ .32 $ .53 $ .91
==== === === ===
Compensation cost charged against historical net income in the above table
was increased by the fair value of stock- based compensation grants. The pre-tax
adjustments amounted to $2,000 and $47,000 for the three months ended September
30, 1996 and 1995, respectively, and $75,000 and $103,000 for the nine months
ended September 30, 1996 and 1995, respectively. 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.
7
FIRST CITIZENS FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in the tables in thousands)
This discussion and analysis includes a description of material changes
which have affected the Company's consolidated financial condition and
consolidated results of operations during the periods included in the Company's
financial statements.
FINANCIAL CONDITION (September 30, 1996 compared to December 31, 1995)
Total assets increased by $61 million, or 10.0%, at September 30, 1996
compared to December 31, 1995. Such increase was due to increases of $37.3
million in investment securities and $2.8 million in prepaid expenses and other
assets. Loans increased by $23.1 million, net, which reflects originations net
of repayments of $51.3 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 $13.3 million and $15.1 million at September 30, 1996
and December 31, 1995, respectively. The primary cause of the decrease was a
$1.1 million commercial real estate loan returned to accrual status. During the
nine months ended September 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 2.0% at September 30, 1996 and 2.5% at December 31, 1995. Total loss
reserves as a percentage of total nonperforming assets, gross were 54.7% at
September 30, 1996 and 50.5% at December 31, 1995.
Troubled debt restructurings, net, amounted to $3.9 million and $5.5
million, at September 30, 1996 and December 31, 1995, respectively. Performing
loans greater than 90 days past maturity, net, amounted to $5,000 and $2.0
million at September 30, 1996 and December 31, 1995, respectively. The primary
cause of the decrease was the extension of a commercial land loan amounting to
$1.8 million.
At September 30, 1996, there were no loans with respect to which known
information about possible credit problems of the borrowers or cash flows of the
security properties caused management to have serious doubts about the ability
of the borrowers to comply with 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 September 30,1996 December 31,1995
----------------- ----------------
Substandard................................ $ 16,340 $ 20,446
Doubtful................................... 168 186
Loss....................................... 2,339 2,387
------- -------
18,847 23,019
Specific loss reserves..................... (2,339) (2,387)
------ ------
Classified assets, net..................... $ 16,508 $ 20,632
====== ======
The Bank also identifies assets which possess credit deficiencies or
potential weaknesses deserving management's close attention as "special
mention". These assets totaled $25.4 million at September 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
8
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 $149,000 for potential loan losses during
the first nine 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 nine 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
increased $37.3 million during the first nine months of 1996. This increase in
earning assets helped to substantially offset the effects of a reduction in net
interest margin which decreased from 3.21% for the nine months ended September
30, 1995 to 3.03% for the comparable period in 1996. The yield on the investment
portfolio increased from 6.30% at December 31, 1995 to 7.11% at September 30,
1996.
The Bank had unrealized gains of $.5 million and unrealized losses of $1.5
million on its investment securities available-for-sale portfolio at September
30, 1996. The amortized cost of this portfolio was $94.3 million at that date.
There were unrealized losses amounting to $144,000 and $311,000 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 $6.1 million, or 1.3%,
during the nine months ended September 30, 1996. Deposits, including interest
credited, increased by $22.3 million, a 4.6% increase. Also during the nine
months ended September 30, 1996, advances from the Federal Home Loan Bank
increased $15.7 million, or 20.8%. Federal Home Loan Bank advances had an
average interest rate of 6.1% at September 30, 1996. Other borrowed money
increased to $19.2 million at September 30, 1996 and had an average interest
rate of 6.6% at that date. Accounts payable and accrued expenses include a
one-time Savings Association Insurance Fund ("SAIF") recapitalization assessment
of $3.0 million.
At September 30, 1996, stockholders' equity totaled $39.5 million, or 5.9%
of total assets, and reflected $.6 million of net unrealized holding losses, net
of applicable taxes, on investment securities available-for-sale. At September
30, 1996, the Bank was considered "well capitalized" under regulatory
definitions. See "Liquidity and Capital Resources".
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND
SEPTEMBER 30, 1995
General. The Company recorded a net loss of $505,000, or $.16 per share,
for the three months ended September 30, 1996 as compared to net income of $1.0
million, or $.33 per share, for the three months ended September 30, 1995.
Net interest income, after provision for (recovery of) loan losses,
increased $521,000 when compared to 1995. There was a $1.2 million, or 11.3%,
increase in interest income which was partially offset by a $678,000, or 10.2%,
increase in interest expense. Provision for loan losses increased $49,000. Other
income decreased by $137,000, or 17.9%. Operating expenses, excluding the
one-time SAIF recapitalization assessment of $3.0 million, decreased by $93,000,
or 2.6%, during the three months ended September 30, 1996 compared to the same
period in the prior year.
Net Interest Income. The Company's net interest income, before provision
for (recovery of) loan losses, increased $570,000, or 13.1%, during the three
months ended September 30, 1996 as compared to the same period of 1995. Interest
income on loans increased by $356,000, or 3.9%, due to an increase in average
loans outstanding during the three months ended
9
September 30, 1996 compared to the same period in the prior year. Interest
income on investment securities increased by $900,000 which was primarily due to
a $49.3 million increase in average outstanding balances during the three months
ended September 30, 1996 compared to the same period in the prior year.
Interest paid on deposits increased $143,000, or 2.5%, due to a $34.1
million increase in average outstanding balances. Interest rates on deposits
decreased from 4.8% to 4.6% during the three months ended September 30, 1996
compared to the same period in the prior year. Interest on borrowed funds
increased $499,000 due to a $31.3 million increase in average outstanding
balances. Interest rates on borrowed funds increased from 5.8% to 6.0% during
the three months ended September 30, 1996 compared to the same period in the
prior year.
Provision for (Recovery of) Loan Losses. During the third quarter of 1995,
the Company recovered $48,000 from the allowance for loan losses. Management
believes that the current loss reserves appear adequate at this time to cover
potential losses in the loan portfolio. Therefore, only $1,000 of additional
loss reserves were provided during the third 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 decreased $137,000, or 17.9%, during the
three months ended September 30, 1996 as compared to the three months ended
September 30, 1995. Gain on sales of loans decreased $120,000 primarily due to
decreased volume of fixed-rate loans originated for resale by First Citizens
Mortgage Corporation ("FCMC"), the Bank's mortgage banking subsidiary.
Originations by FCMC were negatively affected by an increase in fixed-rate loan
interest rates during the third quarter of 1996.
Operating Expense. Operating expense increased by $2.9 million, or 83.6%,
during the three months ended September 30, 1996 as compared to the three months
ended September 30, 1995. Excluding a one-time SAIF recapitalization assessment
of $3.0 million, operating expense decreased by $93,000, or 2.6% during the
period. Compensation and employee benefits increased by $122,000 due to
increased accruals for bonuses and other compensation. Other expense decreased
primarily as a result of a recovery of a lower of cost or market adjustment on
loans held for sale.
Income Taxes. For the quarter ended September 30, 1996, the Company's
effective tax rate was substantially equal to the statutory tax rate. For the
quarter ended September 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 $36,000 of the valuation
allowance on deferred tax assets.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER
30, 1995
General. The Company recorded net income of $1.7 million, or $.54 per
share, for the nine months ended September 30, 1996 as compared to net income of
$2.9 million, or $.94 per share, for the nine months ended September 30, 1995.
Net interest income, after provision for (recovery of) loan losses,
increased $596,000 when compared to 1995. There was a $3.1 million, or 9.8%,
increase in interest income which was partially offset by a $2.6 million, or
13.8%, increase in interest expense. Provision for loan losses decreased
$53,000. Other income increased by $930,000, or 48.7%. Operating expenses,
excluding the one-time SAIF recapitalization assessment of $3.0 million,
increased by $206,000, or 1.9%, during the nine months ended September 30, 1996
compared to the same period in the prior year.
Net Interest Income. The Company's net interest income, before provision
for (recovery of) loan losses, increased $543,000, or 4.1%, during the nine
months ended September 30, 1996 as compared to the same period of 1995. Interest
income on loans increased by $504,000, or 1.8%, due to an increase in average
outstanding balances of $9.3 million. Interest income on investment securities
increased by $2.6 million which was primarily due to a $49.3 million increase in
average outstanding balances during the nine months ended September 30, 1996
compared to the same period in the prior year.
10
Interest paid on deposits increased $1.4 million, or 8.9%, due to an
increase in average rates paid on deposits from 4.6% to 4.7% and a $34.2 million
increase in average outstanding balances. Interest on borrowed funds increased
$1.0 million due to a $22.1 million increase in average outstanding balances.
Provision for (Recovery of) Loan Losses. During the first three quarters of
1996 and 1995, the Company provided $149,000 and $202,000, 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.
Other Income. Total other income increased $930,000, or 48.7%, during the
nine months ended September 30, 1996 as compared to the nine months ended
September 30, 1995. Deposit service charges increased as a result of the
increased volume of accounts subject to such charges. 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 $344,000, substantially the
same amount as 1995, on the sale of mortgage loans originated for sale by FCMC.
Loan fees and service charges increased $190,000 primarily due to recognition of
deferred fees.
Operating Expense. Operating expense increased by $3.2 million, or 30.0%,
during the nine months ended September 30, 1996 as compared to the nine months
ended September 30, 1995. Excluding a one-time SAIF recapitalization assessment
of $3.0 million, operating expense increased by $206,000, or 1.9%, during the
period. Compensation and employee benefits increased by $222,000 due to
adjustments to various benefit plans. Professional services and equipment,
maintenance and data processing expenses also increased during the nine months
ended September 30, 1996 compared to the same period in the prior year.
Income Taxes. For the nine months ended September 30, 1996 and 1995, 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. Additionally, for the nine months ended September 30, 1995, the
effective tax rate was less than the statutory tax rate due to the recovery of
$156,000 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 September 30, 1996, the Bank had outstanding loan
commitments totaling $19.6 million.
SAIF-insured institutions, such as the Bank, are required to maintain
minimum levels of capital. At September 30, 1996, the Bank continued to exceed
all currently applicable core, tangible and risk-based capital requirements.
At September 30, 1996, the Bank had the following amounts of capital:
Actual % of Required % of Excess % of
Amount Assets* Amount Assets* Amount Assets*
------ ------- ------ ------- ------ -------
Core ** $39,158 5.9% $26,771 4.0% $12,387 1.9%
Tangible 39,158 5.9 10,039 1.5 29,119 4.4
Risk-weighted** 44,411 10.6 33,605 8.0 10,806 2.6
<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
11
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 September 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, and
(iii) require savings and loan holding companies to be regulated as bank holding
companies. 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 enacted in August 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. The legislation exempts from recapture $4.0 million
in pre-1988 bad debt deductions taken by the Bank and defers recapture of an
additional $.6 million, subject to compliance with the home mortgage lending
test. Legislation imposing a one-time assessment in order to recapitalize the
SAIF was enacted on September 30, 1996. Such legislation requires thrifts to pay
a 65.7 basis point assessment based on deposits as of March 31, 1995. The
assessment amounted to $3.0 million for the Bank and will be paid during the
fourth quarter of 1996. Payment of this special assessment will reduce the
Bank's deposit insurance premiums to the SAIF in future periods.
At September 30, 1996, First Citizens Financial Corporation, on an
unconsolidated basis, had $1.3 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.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11. Computation of Primary and Fully Diluted Earnings Per Share.
27. Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
September 30, 1996.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST CITIZENS FINANCIAL
CORPORATION
------------------------
(Registrant)
Date: November 12, 1996 By: /s/ Enos K. Fry
-------------------------- ----------------
Enos K. Fry
Vice Chairman and
President
Date: November 12, 1996 By: /s/ William C. Scott
-------------------------- ---------------------
William C. Scott
Senior Vice President and
Chief Financial Officer
13
FIRST CITIZENS FINANCIAL CORPORATION AND SUBSIDIARY
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT DESCRIPTION PAGE
11 Computation of Primary and Fully Diluted
Earnings Per Share ..................................... 15
27 Financial Data Schedule................................. 16
14