UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 333-04304
FIRST CITIZENS CORPORATION
(Exact name of registrant as specified in its charter)
Georgia 58 - 2232785
(State or other jurisdiction of (I.R.S. Employment
Incorporation or organization) Identification Number)
19 Jefferson Street
Newnan, Georgia 30263
(Address of principal (Zip Code)
executive office)
Registrant's telephone number, including area code: (770) 253-5017
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 of each of the issuer's classes of
common stock, as of August 1, 1998: 2,797,442
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
<PAGE>
INDEX
Part I. Financial Information Page
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
as of June 30, 1998 and March 31, 1998 .................. 3
Condensed Consolidated Statements of Income for the
Three Months Ended June 30, 1998 and 1997 .............. 4
Condensed Consolidated Statements of Cash Flows
For The Three Months Ended June 30, 1998 and 1997 ...... 5-6
Notes to Condensed Consolidated Financial Statements ..... 7-9
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition .......................... 10-15
Item 3. Quantitative and Qualitative Disclosures about Market Risk .. 16
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K ............................ 17
Signatures ........................................................... 18
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST CITIZENS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30 and March 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30 MARCH 31
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks ................................... $ 12,241,197 $ 13,057,128
Interest-bearing deposits in banks ........................ 28,639,171 18,603,707
Federal funds sold ........................................ 9,127,000 13,840,000
Securities available-for-sale ............................. 33,930,906 36,380,214
Securities held-to-maturity at amortized cost, fair
value of $1,236,660
and $1,881,250, respectively ........................... 1,233,027 1,879,748
Loans held for sale ....................................... 8,119,000 7,473,800
Loans receivable, net ..................................... 266,101,881 256,310,581
Real estate held for development and sale ................. 2,320,521 2,320,521
Premises and equipment .................................... 7,375,693 7,371,409
Goodwill and other intangibles ............................ 6,803,280 7,009,308
Other assets .............................................. 3,802,149 3,565,672
------------- -------------
TOTAL ASSETS .................................... $ 379,693,825 $ 367,812,088
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposit accounts .......................................... $ 328,727,229 $ 318,382,055
Other borrowings .......................................... 9,247,366 9,602,365
Accrued expenses and other liabilities .................... 3,810,318 3,067,797
------------- -------------
TOTAL LIABILITIES ............................... 341,784,913 331,052,217
------------- -------------
Stockholders' equity
Preferred stock, no par value, 8,000,000 shares
authorized; none issued ................................... -- --
Common stock, $1 par value, 8,000,000 shares
authorized, 2,838,470 ..................................... -- --
and 2,835,897 issued, respectively .................. 2,838,470 2,835,897
Additional paid-in capital ............................. 12,950,583 12,914,173
Retained earnings ...................................... 22,402,649 21,287,420
Accumulated other comprehensive income, net of tax ..... 150,331 155,502
------------- -------------
38,342,033 37,192,992
Less cost of 41,028 shares of treasury stock ........... (433,121) (433,121)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY ...................... 37,908,912 36,759,871
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ...... $ 379,693,825 $ 367,812,088
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
FIRST CITIZENS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
For the Three Months Ended June 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
INTEREST INCOME:
<S> <C> <C>
Loans .................................................................................... $ 6,715,261 $ 5,883,887
Interest-bearing deposits ................................................................ 384,528 22,748
Securities ............................................................................... 526,341 536,513
Federal funds sold ....................................................................... 199,396 125,350
----------- -----------
Total interest income ............................................................... 7,825,526 6,568,498
----------- -----------
INTEREST EXPENSE:
Deposits ................................................................................. 3,551,088 2,669,611
Other borrowings ......................................................................... 153,059 299,290
----------- -----------
Total interest expense .............................................................. 3,704,147 2,968,901
----------- -----------
Net interest income ................................................................. 4,121,379 3,599,597
Provision for loan losses ................................................................ 65,000 40,000
----------- -----------
Net interest income after provision for loan
losses ..................................................................................... 4,056,379 3,559,597
----------- -----------
OTHER INCOME (LOSSES):
Loan servicing and other fees ............................................................ 69,246 97,788
Deposit and other service charge income .................................................. 396,367 358,828
Gain (loss) on sale of securities ........................................................ 208,288 (2,852)
Gain on sale of loans .................................................................... 257,958 264,963
Gain on sale of real estate held for development and sale ................................ -- 3,322,371
Other operating income ................................................................... 89,506 96,605
----------- -----------
Total other income .................................................................. 1,021,365 4,137,703
----------- -----------
OTHER EXPENSES:
Salaries and employee benefits ........................................................... 1,561,054 1,392,603
Occupancy and equipment expenses ......................................................... 389,281 402,491
Goodwill amortization .................................................................... 92,732 109,888
Other operating expenses ................................................................. 1,092,068 747,727
----------- -----------
Total other expenses ................................................................ 3,135,135 2,652,709
----------- -----------
Income before income taxes .......................................................... 1,942,609 5,044,591
Income tax expense ....................................................................... 603,582 1,816,438
----------- -----------
Net income .......................................................................... 1,339,027 3,228,153
----------- -----------
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized gains on securities available-for sale
arising during period .................................................................. 132,299 92,994
Less: reclassification adjustment for (gains) losses included in net income .............. (137,470) 1,797
----------- -----------
Total other comprehensive income (loss) .............................................. (5,171) 94,791
----------- -----------
Comprehensive income ..................................................................... $ 1,333,856 $ 3,322,944
=========== ===========
Basic earnings per common share .......................................................... 0.48 1.18
=========== ===========
Diluted earnings per common share ........................................................ 0.44 1.09
=========== ===========
Cash dividends per common share .......................................................... 0.08 0.07
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
FIRST CITIZENS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended June 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income .......................................................... $ 1,339,027 $ 3,228,153
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for loan losses ........................................ 65,000 40,000
Depreciation and amortization .................................... 270,893 261,395
(Gain) loss on sale of securities available-for-sale ............. (208,288) 2,852
Gain on sale of loans ............................................ (257,958) (264,963)
Net (increase) in loans held for sale ............................ (387,242) (951,026)
Gain on sale of real estate held for development and sale ........ -- (3,322,371)
Other operating activities ....................................... 508,707 1,003,214
------------ ------------
Net cash provided by (used in) operating activities ....... 1,330,139 (2,746)
------------ ------------
INVESTING ACTIVITIES
Proceeds from maturities of securities
available-for-sale .................................................. 6,867,429 2,019,433
Proceeds from maturities of securities held to maturity ............. 646,721 675,383
Purchases of securities available-for-sale .......................... (6,707,672) (5,996,639)
Proceeds from sales of securities available-for-sale ................ 2,490,005 4,719,614
Net (increase) decrease in interest-bearing deposits in banks ....... (10,035,464) 1,232,188
Net decrease (increase) in Federal funds sold ....................... 4,713,000 (4,780,000)
Net increase in loans ............................................... (9,856,300) (9,438,699)
Proceeds from sales of real estate held for
development and sale ................................................ -- 4,223,850
Purchase of premises and equipment .................................. (69,149) (13,078)
------------ ------------
Net cash used in investing activities ..................... $(11,951,430) $ (7,357,948)
------------ ------------
</TABLE>
<PAGE>
FIRST CITIZENS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Three Months Ended June 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
FINANCING ACTIVITIES
Net increase in deposit accounts .................... $ 10,345,174 $ 10,773,984
Net decrease in other borrowings .................... (354,999) (1,617,783)
Dividends paid ...................................... (223,796) (201,231)
Proceeds from stock options exercised ............... 38,981 54,098
------------ ------------
Net cash provided by financing activities ........ 9,805,360 9,009,068
------------ ------------
Net increase (decrease) in cash and due from banks (815,931) 1,706,575
Cash and due from banks at beginning of period ...... 13,057,128 13,866,250
------------ ------------
Cash and due from banks at end of period ............ $ 12,241,197 $ 15,572,825
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
FIRST CITIZENS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The consolidated financial information included herein is unaudited;
however, such information reflects all adjustments (consisting
solely of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair statement of results for the
interim periods.
The results of operations for the three month period ended June 30,
1998 are not necessarily indicative of the results to be expected
for the full year.
NOTE 2. CURRENT ACCOUNTING DEVELOPMENTS
The adoption of the provisions of SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" that became effective on January 1, 1998 did not have a
material effect on the Company's financial statements.
The adoption of SFAS No. 128, "Earnings Per Share", that became
effective as of December 31, 1997 had no effect on the calculation
of earnings per common share for the three months ended June 30,
1997.
The adoption of SFAS No. 130, "Reporting Comprehensive Income", that
became effective on April 1, 1998 required the Company to report
comprehensive income in the Company's Statements of Income and
Comprehensive Income.
In April of 1998 the Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-5, "Reporting on the Costs of Start
Up Activities". SOP 98-5 requires that costs of startup activities
and organization costs be expensed as incurred. SOP 98-5 becomes
effective for financial statements for fiscal years beginning after
December 15, 1998. However, early adoption is encouraged for fiscal
years in which financial statements have not been issued. As of June
30, 1998 the Company had amortized all organization costs which will
be required to be written off upon adoption of SOP 98-5.
<PAGE>
FIRST CITIZENS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2. CURRENT ACCOUNTING DEVELOPMENTS (Continued)
In June of 1998 the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities". This
statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. It requires
that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999.
Earlier adoption is encouraged, but permitted only as of the
beginning of any fiscal quarter that begins after June 1998. The
Company has not determined the effect of SFAS 133 on its financial
condition and results of operations at this time.
There are no other recent accounting pronouncements that have had,
or are expected to have, a material effect on the Company's
financial statements.
<PAGE>
FIRST CITIZENS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3. EARNINGS PER COMMON SHARE
The following is a reconciliation of net income and weighted-average
shares outstanding used in determining basic and diluted earnings
per common share (EPS):
Three Months Ended June 30, 1998
----------------------------------------
Net Weighted-Average
Income Shares Per share
(Numerator) (Denominator) Amount
---------- --------- -----
Basic EPS ...................... $1,339,027 2,796,170 $0.48
=====
Effect of Dilutive Securities
Stock options .................. -- 241,255
---------- -----
Diluted EPS .................... $1,339,027 3,037,425 $0.44
========== ========== =====
Three Months Ended June 30, 1997
----------------------------------------
Net Weighted-Average
Income Shares Per share
(Numerator) (Denominator) Amount
---------- --------- -----
Basic EPS ...................... $3,228,153 2,745,230 $1.18
=====
Effect of Dilutive Securities
Stock
options ........................ -- 228,482
---------- -----
Diluted EPS .................... $3,228,153 2,973,712 $1.09
========== ========== =====
<PAGE>
FIRST CITIZENS CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors which have affected the Company's financial position and operating
results during the periods included in the accompanying condensed consolidated
financial statements.
FINANCIAL CONDITION
Total assets increased during the second calendar quarter of 1998 from $367.8
million to $379.7 million, or 3.23% for the quarter. The increase in total
assets in 1998 is slightly less than the 3.83% growth for the same period in
1997. The growth in both years was funded by an increase in total deposits of
$10.3 million and $10.8 million, respectively, plus retained net profits. The
increase in total assets for the quarter ended June 30, 1998 consisted primarily
of an increase of $10.0 million in interest-bearing deposits, an increase of
$10.4 million in net loans, less a decrease of $4.7 million in Federal funds
sold and a decrease $3.1 million in securities. The decreases in Federal funds
sold and securities represents the utilization of short-term investments as a
funding vehicle for loan growth. The loan to deposit ratio at June 30, 1998 was
85% compared to 93% at June 30, 1997. The decrease in the loan to deposit ratio
is due to the significant growth in deposits as compared to the growth in loans.
LIQUIDITY
Liquidity management involves the matching of the cash flow requirements of
customer withdrawals of funds and the funding of loan originations, and the
ability of the Company's subsidiary banks to meet those requirements. Management
monitors and maintains appropriate levels of liquidity so that maturities of
assets and deposit growth are such that adequate funds are provided to meet
estimated customer withdrawals and loan requests.
At June 30, 1998, the Company had cash and due from banks of $12.2 million,
interest bearing deposits in banks of $28.6 million, and Federal funds sold of
$9.1 million. Additionally, the Company has $33.9 million in securities
available for sale which could be sold to meet any liquidity needs. Two of the
Bank subsidiaries are members of the Federal Home Loan Bank of Atlanta and are
able to obtain advances if needed. At June 30, 1998, the Banks had, in addition
to amounts already borrowed, a combined credit availability of approximately $50
million.
<PAGE>
REGULATORY CAPITAL REQUIREMENTS
Banking regulations require the Company and Banks to maintain minimum capital
levels in relation to assets. At June 30, 1998, the Company's capital ratios
were considered adequate based on regulatory minimum capital requirements. The
minimum capital requirements and the actual capital ratios for the Company at
June 30, 1998 are as follows:
Regulatory
Actual Requirement
---------- ------------
Leverage Capital Ratio ..................... 8.43% 4.00%
Risk-Based Capital Ratios
Core Capital ....................... 11.11% 4.00%
Total Capital ...................... 12.36% 8.00%
Management is not aware of any other current recommendations by the regulatory
authorities, events or trends, which, if they were to be implemented, would have
a material effect on the Company's liquidity, capital resources, or operations.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
NET INTEREST INCOME. Net interest income increased by $522,000 for the quarter
ended June 30, 1998 compared to the same period in 1997, or by 14.5%. The
comparable increase in 1997 as compared to the quarter ended June 30, 1996 was
$2,079,000. The increase in 1997 was due to two acquisitions that occurred
during the fiscal year ended March 31, 1997. Those acquisitions were accounted
for as purchases, therefore, the results of operations prior to the date of
acquisition were not included in the results of operations of the Company for
the three months ended June 30, 1996. The increase in net interest income for
the quarter ended June 30, 1998 is attributable to an increase in earning assets
of $43,707,000 compared to June 30, 1997. During this same period however, total
deposits increased by $48,154,000. The overall result of an increase in net
interest income is based on the spread between rates earned on interest earning
assets and rates paid on interest bearing liabilities. The net interest margin
decreased slightly to 4.74% at June 30, 1998 as compared to 4.84% at June 30,
1997.
<PAGE>
PROVISION FOR LOAN LOSSES. The provision for loan losses is based on
management's evaluation of the economic environment, the history of charged off
loans and recoveries, size and composition of the loan portfolio, nonperforming
and past due loans, and other aspects of the loan portfolio. Management reviews
the allowance for loan loss on a quarterly basis and makes provisions as
necessary. A provision of $65,000 was made during the three month period ending
June 30, 1998 based upon this review process. The allowance for loan loss as a
percentage of total loans was 1.43% at June 30, 1998 compared to 1.52% at March
31, 1998. Nonperforming loans as a percentage of total loans was 1.20% at June
30, 1998 compared to 1.11% at March 31, 1998. Management believes the allowance
for loan loss at June 30, 1998 is adequate to meet any future losses in the loan
portfolio.
At June 30, 1998 and March 31, 1998, nonaccrual, past due, and restructured
loans were as follows:
June 30, March 31,
1998 1998
------- ------
(Dollars in thousands)
Total nonaccruing loans ...................... $3,227 $2,886
Loans contractually past due ninety days
or more as to interest or principal
payments and still accruing ................ 356 303
Restructured loans ........................... 877 894
The increase in nonaccrual loans from March 31, 1998 to June 30, 1998 consists
of various construction and real estate mortgage loans. The increase was not
attributable to any one group or individually significant loans.
It is the policy of the Company to discontinue the accrual of interest income
when, in the opinion of management, collection of such interest becomes
doubtful. This status is accorded such interest when (1) there is a significant
deterioration in the financial condition of the borrower and full repayment of
principal and interest is not expected and (2) the principal or interest is more
than ninety days past due, unless the loan is both well-secured and in the
process of collection. Accrual of interest on such loans is resumed when, in
management's judgment, the collection of interest and principal becomes
probable.
Loans classified for regulatory purposes as loss, doubtful, substandard, or
special mention that have not been included in the table above do not represent
or result from trends or uncertainties which management reasonably expects will
materially impact future operating results, liquidity, or capital resources.
These classified loans do not represent material credits about which management
is aware of any information which causes management to have serious doubts as to
the ability of such borrowers to comply with the loan repayment terms.
<PAGE>
Information regarding certain loans and allowance for loan loss data through
June 30, 1998 and 1997 is as follows:
Three Months Ended
June 30,
----------------------
1998 1997
--------- ---------
(Dollars in thousands)
Average amount of loans outstanding .................. $ 265,058 $ 245,284
Balance of allowance for loan losses at beginning
of period ............................................ $ 3,852 $ 3,739
Loans charged off
Commercial and financial .......................... (120) (--)
Construction ...................................... (--) (--)
Real estate ....................................... (73) (--)
Installment ....................................... (12) (15)
--------- ---------
(205) (15)
--------- ---------
Loans recovered
Commercial and financial .......................... 106 35
Construction ...................................... -- --
Real estate ....................................... 30 5
Installment ....................................... 4 4
--------- ---------
140 44
--------- ---------
Net (charge-offs) recoveries ......................... (65) 29
--------- ---------
Additions to allowance charged to operating
expense during period ................................ 65 40
--------- ---------
Balance of allowance for loan losses at end of
period ............................................... 3,852 3,808
========= =========
Ratio of net loans (charged-off) recoveries during the
period to average loans outstanding ............... (.02%) .01%
========= =========
OTHER INCOME. Other income decreased by $3.1 million for the quarter ended June
30, 1998 compared to an increase of $3.5 million for the same period in 1997.
The single most significant difference which affected both variances was the
gain on sale of real estate held for development and sale of $3,322,000 in the
second calendar quarter of 1997. This gain in 1997 represented the sale of
approximately 400 acres of an agreement to sale 1,400 acres over an eight year
period. For the three month period ended June 30, 1998, there have been no sales
of real estate held for development and sale.
<PAGE>
During the quarter ended June 30, 1998, the Company recognized gains on sale of
securities of $208,000 compared to losses recognized for the same period in 1997
of $3,000. All other components of other income were comparable with 1997
considering the growth in deposit accounts. Other income increases in 1997
compared to the three months ended June 30, 1996 are not comparable due to the
two bank acquisitions discussed above.
OTHER EXPENSES. Other expenses increased by $482,000, or 18.2% for the three
months ended June 30, 1998 as compared to the same period in 1997. The increase
in 1997 as compared to the same period in 1996 was $1,514,000. The significant
increase between 1997 and 1996 is once again due to the expenses related to the
two banks acquired after June 30, 1996 not included in the 1996 operations. The
most significant increase in 1998 is an increase of $168,000 in salaries and
employee benefits and an increase of $344,000 in other operating expenses. The
increase in salaries and employee benefits represents normal increases in
salaries and costs incurred in adding additional banking staff. At June 30,
1998, the total number of employees was 149 compared to 138 at March 31, 1998.
During the quarter ended June 30, 1998, the Company finalized the consolidation
of the accounting and data processing departments for its three banking
subsidiaries and completed their data processing conversion. Previously, each
banking subsidiary operated an independent data processing department on
different systems. Management's plans from the consummation of the two
acquisitions, has been to consolidate these areas and minimize the related
expenses while providing a higher level of service and convenience to their
customers. In connection with this process the Company incurred during the
quarter ended June 30, 1998 conversion expenses of $144,000. In addition, all
item processing is currently done in-house. Previously, one of the acquired
banks outsourced this function. The increase in other operating expenses related
to the change in item processing was approximately $40,000. The remaining
increases in other expenses is attributable increases due to the growth in loans
and deposits.
NET INCOME. Net income decreased by $1,889,000 for the three months ended June
30, 1998 as compared to the same period in 1997. As discussed earlier, the
primary variance over 1997 is the after tax gain on sale of real estate held for
development and sale of $2,138,000 recognized in 1997. Net of this gain
recognized in 1997, net income increased by approximately $249,000. The
effective tax rate for the three months ended June 30, 1998 and 1997 was 31% and
36%, respectively.
CAPABILITY OF THE COMPANY'S DATA PROCESSING SOFTWARE TO ACCOMMODATE THE YEAR
2000
The Company heavily relies upon computers for the daily conduct of their
business and for data processing generally. There is a concern among industry
experts that commencing on January 1, 2000, computers will be unable to "read"
the new year and there may be widespread computer malfunctions.
<PAGE>
During 1997, the Company developed a three-phase program for the Year 2000
("Y2K") information systems compliance. Phase I is to identify those systems
with which the Company has exposure to Y2K issues. Phase II is the development
and implementation of action plans to be Y2K compliant in all areas by late
1998. Phase III, to be completed by mid-1999, is the final testing of each major
area of exposure to ensure compliance.
In the second quarter of 1998 the Company completed its core data processing
conversion. The conversion was part of management's plans for consolidating the
operations of its three banking subsidiaries, not because of Y2K concerns.
However, with the completion of the conversion, the Company's core data
processing system is believed to be Y2K compliant. The evaluation and review of
the Y2K issue is a continuing process as testing will be performed throughout
the remainder of 1998 and 1999.
Based on the review of computer and other components, management does not
believe the cost of remediation will be material to the Company's financial
statements, although there can be no assurances in this regard.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed only to U.S. dollar interest rate changes and
accordingly, the Company manages exposure by considering the possible changes in
the net interest margin. The Company does not have any trading instruments nor
does it classify any portion of the securities portfolio as held for trading.
The Company does not engage in any hedging activities or enter into any
derivative instruments with a higher degree of risk than mortgage backed
securities which are commonly pass through securities. Finally, the Company has
no exposure to foreign currency exchange rate risk, commodity price risk, and
other market risks. Interest rates play a major part in the net interest income
of a financial institution. The sensitivity to rate changes is known as
"interest rate risk". The repricing of interest earning assets and
interest-bearing liabilities can influence the changes in net interest income.
As part of the Company's asset/liability management program, the timing of
repriced assets and liabilities is referred to as Gap management. It is the
policy of the Company to maintain Gap ratio in the one-year time horizon of .80
to 1.20. Gap management alone is not enough to properly manage interest rate
sensitivity, because interest rates do not respond at the same speed or at the
same level to market rate changes. For example, savings and money market rates
are more stable than loans tied to a Prime rate and thus respond with less
volatility to a market rate change. The Company uses a simulation model to
monitor changes in net interest income due to changes in market rates. The model
of rising, falling, and stable interest rate scenarios allows management to
monitor and adjust interest rate sensitivity to minimize the impact of market
rate swings. The analysis of impact on net interest margins as well as market
value of equity over a twelve month period is subjected to a 200 basis point
increase and decrease in rate.
<PAGE>
PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27. Financial Data Schedule.
(b) Reports on Form 8-K.
None.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FIRST CITIZENS CORPORATION
(Registrant)
Date: /s/ Tom Moat
----------------------------
Tom Moat
Chief Executive Officer
Date: /s/ Douglas J. Hertha
-----------------------------
Douglas J. Hertha
Vice President
Chief Financial and
Accounting Officer
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