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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, 1997
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 August 4, 1997.
$.01 par value of common stock 2,950,908
------------------------------ -------------
(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 June 30, 1997 and December 31, 1996.................... 3
Unaudited Consolidated Statements of Income for the three
and six months ended June 30, 1997 and 1996.................. 4
Unaudited Consolidated Statements of Stockholders' Equity for
the six months ended June 30, 1997 and 1996.................. 5
Unaudited Consolidated Statements of Cash Flows for the six
months ended June 30, 1997 and 1996.......................... 6
Notes to Unaudited Consolidated Financial Statements as
of and for the three months ended June 30, 1997 and 1996..... 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 9
Part II Other Information
- ------- -----------------
Item 6 Exhibits and Reports on Form 8-K................................ 14
Signature Page.................................................. 15
Exhibit Index................................................... 16
2
FIRST CITIZENS FINANCIAL CORPORATION AND SUBSIDIARY
Unaudited Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data)
June 30, December 31,
1997 1996
-------- ------------
Assets
Cash and cash equivalents .............................................................. $ 17,305 $ 16,342
Investment securities available-for-sale, at estimated fair value ...................... 74,060 81,387
Investment securities held-to-maturity, net (estimated fair value of $63,584 and $56,788
at June 30, 1997 and December 31, 1996, respectively) ................................ 62,762 56,035
Loans receivable, net of allowance for losses of $6,234 and $6,931 at June 30, 1997
and December 31, 1996, respectively .................................................. 508,782 497,291
Loans held for sale, net, at lower of cost or market ................................... 6,084 8,801
Stock in the Federal Home Loan Bank of Atlanta, at cost ................................ 3,935 3,862
Real estate owned, net of allowance for losses of $1,022 and $1,049 at June 30, 1997
and December 31, 1996, respectively .................................................. 5,079 9,772
Accrued interest receivable ............................................................ 3,911 3,848
Premises and equipment, net ............................................................ 3,446 3,450
Deferred income taxes, net ............................................................. 1,049 1,392
Prepaid expenses and other assets ...................................................... 5,341 5,016
--------- ---------
Total Assets ...................................................................... $ 691,754 $ 687,196
========= =========
Liabilities
Deposit accounts ....................................................................... $ 543,856 $ 538,897
Advances from the Federal Home Loan Bank of Atlanta .................................... 62,300 74,800
Other borrowed money ................................................................... 29,305 24,238
Accounts payable and accrued expenses .................................................. 12,167 7,644
--------- ---------
Total Liabilities ................................................................. 647,628 645,579
--------- ---------
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, 2,950,561 and
2,937,860 shares issued and outstanding at June 30, 1997 and December 31, 1996,
respectively ..................................................................... 29 29
Additional paid-in capital ............................................................. 27,371 27,307
Retained earnings ...................................................................... 16,974 14,367
Unrealized net holding losses on investment securities available-for-sale, net of
taxes ............................................................................... (248) (86)
--------- ---------
Total Stockholders' Equity ........................................................ 44,126 41,617
--------- ---------
Total Liabilities and Stockholders' Equity ........................................ $ 691,754 $ 687,196
========= =========
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
(Dollars in thousands except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
Interest income
Loans receivable .................................. $10,630 $ 9,017 $21,010 $18,345
Investment securities ............................. 2,537 2,568 5,058 4,580
Other interest .................................... 9 51 12 118
------- ------- ------- -------
Total interest income ......................... 13,176 11,636 26,080 23,043
------- ------- ------- -------
Interest expense
Deposit accounts .................................. 6,265 5,856 12,370 11,767
Advances from the Federal Home Loan Bank of Atlanta 1,094 1,190 2,277 2,276
Other borrowed money .............................. 427 17 788 17
------- ------- ------- -------
Total interest expense ........................ 7,786 7,063 15,435 14,060
------- ------- ------- -------
Net interest income ............................... 5,390 4,573 10,645 8,983
Provision for loan losses ............................. -- -- -- 148
------- ------- ------- -------
Net interest income after provision for loan losses ... 5,390 4,573 10,645 8,835
------- ------- ------- -------
Other income
Deposit service charges ........................... 359 375 713 664
Gain on sale of loans ............................. 53 100 146 876
Loan fees and service charges ..................... 117 217 214 366
Servicing fee income, net ......................... 54 81 106 165
Gains on sale of investment securities ............ 160 27 160 31
Other ............................................. 54 60 110 109
------- ------- ------- -------
Total other income ............................ 797 860 1,449 2,211
------- ------- ------- -------
Operating expense
Compensation and employee benefits ................ 2,203 1,929 4,305 3,962
Equipment, maintenance and data processing ........ 333 319 713 679
Federal insurance premiums ........................ 128 317 248 623
Occupancy ......................................... 331 316 633 640
Professional services ............................. 119 247 309 417
Advertising and promotion ......................... 113 118 304 300
(Gain) loss from real estate, net ................. 495 (129) 382 75
Other ............................................. 429 456 837 861
------- ------- ------- -------
Total operating expense ....................... 4,151 3,573 7,731 7,557
------- ------- ------- -------
Income before income taxes ............................ 2,036 1,860 4,363 3,489
Provision for income taxes ........................ 844 711 1,756 1,262
------- ------- ------- -------
Net income ............................................ $ 1,192 $ 1,149 $ 2,607 $ 2,227
======= ======= ======= =======
Earnings per common and common equivalent
share (note 2) ...................................... $ .36 $ .36 $ .80 $ .70
======= ======= ======= ==-====
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 Stockholders' Equity
(In thousands)
Six Months Ended
June 30,
--------------------
1997 1996
---- ----
Preferred stock (none issued or outstanding)
Common stock
Balance at beginning of year ........................................... $ 29 $ 26
10% stock dividend declared April 19, 1996, distributed June 3, 1996 ... -- 3
-------- --------
Balance at June 30 ..................................................... $ 29 $ 29
======== ========
Additional paid-in capital
Balance at beginning of year ........................................... $ 27,307 $ 22,297
10% stock dividend declared April 19, 1996, distributed June 3, 1996 ... -- 4,762
Exercise of stock options .............................................. 64 130
-------- --------
Balance at June 30 ..................................................... $ 27,371 $ 27,189
======== ========
Retained earnings
Balance at beginning of year ........................................... $ 14,367 $ 15,970
10% stock dividend declared April 19, 1996, distributed June 3, 1996 ... -- (4,772)
Net income for the year ................................................ 2,607 2,227
-------- --------
Balance at June 30 ..................................................... $ 16,974 $ 13,425
======== ========
Unrealized net holding gains on investment securities available-for-sale
Balance at beginning of year ........................................... $ (86) $ 348
Adjustment to unrealized net holding gains ............................. (162) (1,263)
-------- --------
Balance at June 30 ..................................................... $ (248) $ (915)
======== ========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
5
FIRST CITIZENS FINANCIAL CORPORATION AND SUBSIDIARY
Unaudited Consolidated Statements of Cash Flows
(In thousands)
Six Months Ended
June 30,
--------------------
1997 1996
---- ----
Operating activities
Net income ............................................................................. $ 2,607 $ 2,227
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for losses on assets ....................................................... 125 396
Amortization of loan fees, premiums, discounts and deferred interest ................. (356) (444)
Loans originated for sale, net of repayments ......................................... (6,999) (18,846)
Sale of loans held for sale .......................................................... 9,717 43,910
Increase in accrued interest receivable, prepaid expenses and other assets ........... (1,012) (3,545)
Depreciation and amortization of premises and equipment .............................. 254 213
Increase in accounts payable and accrued expenses .................................... 5,613 4,243
Deferred income tax (benefit) provision .............................................. (21) 1,686
Other ................................................................................ 4 19
-------- --------
Net cash provided by operating activities ......................................... 9,932 29,859
-------- --------
Investing activities
Loans originated, net of repayments and sales ........................................ (13,141) (29,039)
Loans purchased ...................................................................... -- (181)
Investment securities available-for-sale purchased ................................... (16,648) (59,482)
Investment securities available-for-sale sold ........................................ 12,609 7,591
Principal repayments, maturities and calls of investment securities available-for-sale 11,012 29,281
Investment securities held-to-maturity purchased ..................................... (12,593) (18,102)
Principal repayments and maturities of investment securities held-to-maturity ........ 5,871 2,405
Purchases of Federal Home Loan Bank of Atlanta stock ................................ (780) (1,201)
Sales of Federal Home Loan Bank of Atlanta stock ..................................... 707 632
Capitalized additions to real estate owned ........................................... (20) (1,956)
Proceeds from sale of real estate owned .............................................. 6,674 2,924
Net additions to premises and equipment .............................................. (250) (176)
-------- --------
Net cash used in investing activities ............................................ (6,559) (67,304)
-------- --------
Financing activities
Net increase in deposits ............................................................. 4,959 18,325
Proceeds from Federal Home Loan Bank of Atlanta advances ............................. 141,483 86,975
Repayments of Federal Home Loan Bank of Atlanta advances ............................. (153,983) (76,915)
Proceeds from other borrowings ....................................................... 5,067 4,680
Net proceeds from exercise of stock options .......................................... 64 130
-------- --------
Net cash (used in) provided by financing activities ................................ (2,410) 33,195
-------- --------
Increase (decrease) in cash and cash equivalents ................................... 963 (4,250)
Cash and cash equivalents at beginning of period ................................... 16,342 15,711
-------- --------
Cash and cash equivalents at end of period ......................................... $ 17,305 $ 11,461
======== ========
Supplemental information
Interest paid on deposits and borrowed funds ......................................... $ 4,228 $ 3,182
Loans transferred to real estate owned at fair value ................................. 2,086 2,666
Loans to facilitate the sale of real estate owned .................................... 605 1,576
Income tax payment ................................................................... 665 1,350
Loans transferred to held for sale, net .............................................. -- 1,254
The accompanying notes to consolidated financial statements
are an integral part of these statements.
6
FIRST CITIZENS FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
As of and for the Six Months Ended June 30, 1997 and 1996
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, 1997 and for the three and six
months ended June 30, 1997 and 1996 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, 1997 and the results of consolidated operations for the
six months ended June 30, 1997 and 1996 and consolidated cash flows for the six
months ended June 30, 1997 and 1996. The consolidated statement of financial
condition as of December 31, 1996 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 six months ended June 30,
1997 are not necessarily indicative of results that may be expected for the
entire year ending December 31, 1997. The proposed acquisition of the Company by
Provident Bankshares Corporation is discussed in Management's Discussion and
Analysis of Financial Condition.
2) Earnings Per Share
Earnings per share for the three and six months ended June 30, 1997 were
determined by dividing net income by 3,288,788 and 3,267,520, the weighted
average number of shares outstanding during these periods, respectively.
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.
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 June 30, 1997, 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 631,885 shares of Company common stock were
reserved for issuance at June 30, 1997.
The Company calculates the fair value of its stock options granted after
December 31, 1994 in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation. Accordingly, the stated net income and earnings per share in the
Consolidated Statements of Income, in addition to the proforma net income and
earnings per share reflecting the compensation costs for stock options granted
during the three and six months ended June 30, 1997 and 1996, are disclosed in
the table below:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1997 1996 1997 1996
---- ---- ---- ----
Net income:
As reported $1,192 $1,149 $2,607 $2,227
Proforma 1,180 1,109 2,568 2,162
Earnings per share:
As reported .36 .36 .80 .70
Proforma .36 .35 .79 .69
Weighted-average assumptions:
Expected lives (years) 10.00 10.00 10.00 10.00
Risk-free interest rate (%) 6.75 6.95 6.75 6.79
Expected volatility (%) 48.21 49.97 48.38 50.01
7
The Company did not record any compensation costs during the six months
ended June 30, 1997 and 1996 relating to any of its stock option plans. In
addition, no significant modifications to the plans were made during the
periods. The fair values of the stock options granted which are used to
determine the proforma impact of the options to compensation expense, and thus,
net income and earnings per share, were based on the Black-Scholes option
pricing model for each grant made during the three and six months ended June 30,
1997 and 1996, using the key assumptions detailed above.
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 $20,000 and $48,000 for the three months ended June 30,
1997 and 1996, and $66,000 and $73,000 for the six months ended June 30, 1997
and 1996, respectively. During the initial phase-in period, the effects of
applying SFAS No. 123 to historical net income to provide proforma 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.
A summary of the status of the Company's three fixed stock option plans as
of June 30, 1997 and 1996, respectively, 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.
1997 1996
------------------------- -------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
------ ---------------- ------ ----------------
Outstanding at beginning of year ....... 539,749 $ 8.99 518,112 $ 7.40
Granted................................. 6,000 20.00 11,700 17.49
Exercised............................... (12,701) 6.05 (23,068) 5.62
Forfeited............................... (943) 15.68 (3,669) 13.69
Expired................................. -- (366) 15.69
------- -------
Outstanding at June 30.................. 532,105 9.20 502,709 7.66
======= =======
Options exercisable at June 30 ......... 481,312 438,526
Weighted average fair value of options
granted during the period............ $ 12.27 $ 10.80
The following table summarizes information about fixed stock options
outstanding at June 30, 1997.
Options Outstanding Options Exercisable
----------------------------------------------- -----------------------------
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- --------------- ----------- ---------------- -------------- ----------- --------------
(years)
$ 1.32 - 1.33 117,469 4.6 $ 1.32 117,469 $ 1.32
3.38 - 3.39 39,615 5.4 3.38 39,615 3.38
5.17 - 5.72 6,294 1.7 5.44 6,294 5.44
6.00 102,880 5.6 6.00 102,880 6.00
10.23 -10.95 68,365 6.9 10.55 54,918 10.45
11.36 12,100 7.6 11.36 9,407 11.36
13.74 -13.85 8,148 7.3 13.77 4,518 13.79
15.68 -15.70 92,539 8.4 15.68 75,164 15.68
16.00 -16.37 6,395 8.4 16.29 5,028 16.35
17.625-17.75 10,050 8.9 17.70 6,436 17.71
18.00 -18.125 59,250 9.5 18.12 56,583 18.12
19.00 3,000 9.3 19.00 1,000 19.00
20.00 6,000 9.6 20.00 2,000 20.00
------- -------
532,105 481,312
======= =======
There were 57 option holders at June 30, 1997. Options exercised during the
three months ended June 30, 1997 had exercise prices ranging from $1.32 to
$18.125. Closing price of the Company's stock at June 30, 1997 was $31.00 per
share.
8
FIRST CITIZENS FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in the tables in thousands)
- --------------------------------------------------------------------------------
This discussion and analysis includes a description of material changes
which have affected the Company's consolidated financial condition and
consolidated results of operations during the periods included in the Company's
financial statements.
PROPOSED ACQUISITION OF THE COMPANY BY PROVIDENT BANKSHARES
On March 10, 1997, the Company and Provident Bankshares Corporation
("Provident") entered into an Agreement and Plan of Merger (the "Merger
Agreement") pursuant to which the Company will merge with and into Provident
(the "Merger"). As a result of the Merger, each share of common stock, par value
$.01 per share, of the Company outstanding on the effective date of the Merger
will (subject to certain exceptions) be converted into the right to receive .73
shares of common stock, par value $1.00 per share, of Provident, together with
the corresponding number of rights attached thereto. In addition, if the average
closing price of Provident common stock for the ten trading days immediately
preceding receipt of the last regulatory approval for the Merger (determined
without regard to any related waiting periods) is below $35.625, the Company may
terminate the Merger Agreement unless Provident increases the exchange ratio in
the Merger such that the value of Provident common stock (based on such average
closing price) to be received in the Merger is not less than $26.006 per share
of Company common stock. The Merger is expected to qualify as a tax-free
reorganization for Federal income tax purposes and to be accounted for as a
pooling of interests. The Merger is expected to close in the third quarter of
1997, and is subject to a number of conditions, including, but not limited to
the approval of the Merger by the requisite vote of the stockholders of both the
Company and Provident and the receipt of all required regulatory approvals. The
Company has received all necessary regulatory approvals for the proposed
acquisition. Stockholders of both the Company and Provident will vote on the
proposed merger at separate stockholder meetings scheduled for August 20, 1997.
Due to the 5% stock dividend declared by Provident Bankshares Corporation
on April 16, 1997, each First Citizens share will be converted into .7665 shares
of Provident under the Merger Agreement.
FINANCIAL CONDITION (June 30, 1997 compared to December 31, 1996)
Total assets increased by $4.6 million, or .66%, at June 30, 1997 compared
to December 31, 1996. Such increase was primarily due to an increase in loans by
$8.8 million, net, which reflects originations net of repayments.
Nonperforming assets, net (including nonaccrual loans and real estate
owned, net) amounted to $6.4 million and $10.7 million at June 30, 1997 and
December 31, 1996, respectively. During the six months ended June 30, 1997, the
Bank sold one real estate owned project with a carrying value of $6.0 million
and acquired title to a $2.1 million joint venture project. Total nonperforming
assets, net, as a percentage of total assets were .9% at June 30, 1997 and 1.6%
at December 31, 1996. Total loss reserves as a percentage of total nonperforming
assets, gross, were 98.0% at June 30, 1997 and 67.7% at December 31, 1996.
Troubled debt restructurings, net, amounted to $3.9 million at December 31,
1996; there were no troubled debt restructurings outstanding at June 30, 1997.
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:
June 30, 1997 December 31, 1996
------------- -----------------
Classified Assets
Substandard......................... $ 8,561 $14,126
Doubtful............................ 113 138
Loss................................ 1,595 2,412
------- -------
10,269 16,676
Specific loss reserves.............. (1,595) (2,412)
------- -------
Classified assets, net.............. $ 8,674 $14,264
======= =======
9
The Bank also identifies assets which possess credit deficiencies or
potential weaknesses deserving management's close attention as "special
mention". These assets totaled $23.2 million at June 30, 1997 compared to $22.8
million at December 31, 1996.
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 did not make any additional provisions to the allowance for loan
losses for the six months ended June 30, 1997, and incurred $697,000 of net
charge-offs during the period, which represents amounts realized on a loan
transferred to real estate owned and a settlement on a contruction loan.
The Bank also establishes allowances for losses on real estate owned based
upon their fair values. The Bank recovered $177,000 of loss provisions on real
estate owned during the six months ended June 30, 1997 and incurred $102,000 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.
The Bank had unrealized gains of $160,000 and unrealized losses of $540,000
on its investment securities available-for-sale portfolio at June 30, 1997. The
amortized cost of this portfolio was $74.4 million at that date. There were
unrealized losses amounting to $44,000 and $866,000 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 was credited, decreased by $6.4 million during
the six months ended June 30, 1997. Deposits, including interest credited,
increased by $5.0 million, a .9% increase. Also during the six months ended June
30, 1997, advances from the Federal Home Loan Bank decreased $12.5 million, or
16.7%. Federal Home Loan Bank advances had an average interest rate of 6.3% at
June 30, 1997. Other borrowed money increased to $29.3 million at June 30, 1997
and had an average interest rate of 6.0% at that date.
At June 30, 1997, stockholders' equity totaled $44.1 million, or 6.4% of
total assets, and reflected $248,000 of net unrealized holding losses, net of
applicable taxes, on investment securities available-for-sale. At June 30, 1997,
the Bank was considered "well capitalized" under regulatory definitions. See
"Liquidity and Capital Resources".
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
General. The Company recorded net income of $1.2 million, or $.36 per
share, for the three months ended June 30, 1997 as compared to net income of
$1.1 million, or $.36 per share, for the three months ended June 30, 1996.
Net interest income, after provision for loan losses, increased $817,000
when compared to 1996. There was a $1.5 million, or 13.2%, increase in interest
income which was partially offset by a $723,000, or 10.2%, increase in interest
expense. Other income decreased by $63,000, or 7.3%. Operating expenses
increased $578,000, or 16.2%, during the three months ended June 30, 1997
compared to the same period in 1996. This increase was primarily due to the
$624,000 increase in loss from real estate.
10
Net Interest Income. The Company's net interest income increased $817,000,
or 17.9%, during the three months ended June 30, 1997 as compared to the same
period of 1996. Interest income on loans increased by $1.6 million, or 17.9%,
due to an increase in average loans outstanding during the three months ended
June 30, 1997 compared to the same period in the prior year.
Interest paid on deposits increased $409,000, or 7.0%, due to a $41.1
million increase in average outstanding balances. Interest rates on deposits
decreased negligibly during the three months ended June 30, 1997 compared to the
same period in the prior year. Interest on borrowed funds increased $314,000, or
26.0%, due to a $14.5 million increase in average outstanding balances. Interest
rates on borrowed funds increased from 5.9% to 6.3% during the three months
ended June 30, 1997 compared to the same period in the prior year.
Provision for Loan Losses. Management believes that current loss reserves
are adequate to cover potential losses in the loan portfolio at this time.
Therefore, no additional loss reserves were provided during the second quarter
of 1997. There can be no assurance, however, that additional reserves will not
be necessary if market conditions change.
Other Income. Total other income decreased $63,000, or 7.3%, during the
three months ended June 30, 1997 as compared to the three months ended June 30,
1996. Sales of $12.6 million of investment securities which resulted in a net
gain of $160,000 during the second quarter of 1997 were offset by decreases in
loan fees and service charges and gain on sale of loans. Loan fees and service
charges decreased $100,000 due to the recognition of $125,000 of deferred
extension fees in the second quarter of 1996.
Operating Expense. Operating expense increased $578,000, or 16.2%, during
the three months ended June 30, 1997 compared to the same period in 1996. This
increase is primarily due to a loss of $433,000 resulting from the sale of $6.0
million of real estate owned, sold in order for the Company, due to the upcoming
merger with Provident Bankshares, to concentrate on enhancing the combined
franchise value rather than managing troubled assets.
Income Taxes. For the quarter ended June 30, 1997, the Company's effective
tax rate was slightly above the statutory tax rate due to a $76,000 tax payment
made for a prior year adjustment. For the quarter ended June 30, 1996, the
Company's effective tax rate was substantially equal to the statutory tax rate.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
General. The Company recorded net income of $2.6 million, or $.80 per share
for the six months ended June 30, 1997 as compared to net income of $2.2 million
or $.70 per share for the six months ended June 30, 1996.
Net interest income, after provision for loan losses, increased $1.8
million, or 20.5%, when compared to 1996. There was a $3.0 million, or 13.2%,
increase in interest income which was offset by a $1.4 million, or 9.8% increase
in interest expense. Provision for loan losses decreased $148,000. Other income
decreased $762,000, or 34.5%, and operating expenses increased by $174,000, or
2.3%, during the six months ended June 30, 1997 compared to the same period in
1996.
Net Interest Income. The Company's net interest income, before provision
for loan losses, increased $1.7 million, or 18.5%, during the six months ended
June 30, 1997 as compared to the same period of 1996. Interest income on loans
increased $2.7 million, or 14.5%, due to an increase in average outstanding
balances of $64.4 million. Interest income on investment securities increased
$478,000, or 10.4%, due to both an increase in the average outstanding balance
of $7.5 million and an increase in the average interest rate from 6.6% to 7.0%
during the six months ended June 30, 1997 compared to the same period in 1996.
Interest paid on deposits increased $603,000, or 5.1%, due to an increase
in average outstanding balances of $40.8 million which was partially offset by a
decline in average rates paid on deposits from 4.8% to 4.7%. Interest on
borrowed funds increased $772,000, or 33.7% due to an increase in average
outstanding balances of $21.9 million and an increase in average rates paid on
borrowings from 5.8% to 6.1%.
11
Provision for Loan Losses. During the six months ended June 30,1996, the
Company provided $148,000 of additional reserves to the allowance for loan
losses. Management believes that the current loss reserves are adequate at this
time to cover potential losses in the loan portfolio. Therefore, no additional
loss reserves were provided during the six months ended June 30, 1997. There can
be no assurance, however, that additional reserves will not be necessary if
market conditions change.
Other Income. Total other income decreased $762,000, or 34.5%, during the
six months ended June 30, 1997 as compared to the six months ended June 30,
1996. Gain on sale of loans decreased $730,000 primarily due to the fact that in
1996 Citizens recognized a gain of approximately $574,000 from the sale of $26.3
million of 30-year fixed-rate loans.
Operating expense. Total operating expense increased $174,000, or 2.3%,
during the six months ended June 30, 1997 as compared to the six months ended
June 30, 1996. Loss from real estate increased $307,000 primarily due to the
recognition of a $433,000 loss from the sale of $6.0 million of real estate
owned, sold in order for the Company, due to the upcoming merger with Provident
Bankshares, to concentrate on enhancing the combined franchise value rather than
managing troubled assets. Compensation and employee benefits increased $343,000
during the six months ended June 30, 1997 compared to the same period in 1996.
Federal insurance premiums decreased by $375,000 due to the recapitalization of
the Savings Association Insurance Fund by Congress in 1996.
Income Taxes. For the six months ended June 30, 1997, the Company's
effective tax rate was substantially equal to the statutory tax rate. For 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.
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, 1997, the Bank had outstanding loan commitments
totaling $7.8 million.
SAIF-insured institutions, such as the Bank, are required to maintain
minimum levels of capital. At June 30, 1997, the Bank continued to exceed all
currently applicable core, tangible and risk-based capital requirements.
12
At June 30, 1997, the Bank had the following amounts of capital:
Actual % of Required % of Excess % of
Amount Assets* Amount Assets* Amount Assets*
------ ------- ------ ------- ------ -------
Core ** $43,241 6.3% $27,668 4.0% $15,573 2.3%
Tangible 43,241 6.3 10,375 1.5 32,866 4.8
Risk-weighted** 48,444 10.9 35,700 8.0 12,744 2.9
- ----------
* 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 3.0% and the minimum risk-based capital
requirement is 8.0%.
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, 1997,
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.
At June 30, 1997, First Citizens Financial Corporation, on an
unconsolidated basis, had a $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, throughout the next year,
without payment of dividends from the Bank.
IMPACT OF ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating primary earnings per share, the dilutive effect
of outstanding stock options will be excluded. The impact of SFAS No. 128 on the
calculation of primary earnings per share and fully diluted earnings per share
for the three and six months ended June 30, 1997 is not expected to be material.
13
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, 1997.
14
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 11, 1997 By: /s/ Enos K. Fry
------------------- --------------------------------
Enos K. Fry
Vice Chairman and
President
Date: August 11, 1997 By: /s/ William C. Scott
------------------- --------------------------------
William C. Scott
Senior Vice President and
Chief Financial Officer
15
FIRST CITIZENS FINANCIAL CORPORATION AND SUBSIDIARY
EXHIBIT INDEX
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EXHIBIT NO. EXHIBIT DESCRIPTION PAGE
- ----------- ------------------- ----
11 Computation of Primary and Fully Diluted
Earnings Per Share...................................... 17
27 Financial Data Schedule................................. 18
16