.
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 September 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)
Restraint'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 November 10, 1998: 2,805,698.
Transitional Small Business Disclosure Format (check one) Yes____ No__X__
<PAGE>
INDEX PAGE
----------
Part 1. Financial Information
---------------------
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of 3
September 30, 1998 and March 31, 1998.
Condensed Consolidated Statements of Income for the Three 4
And Six Months Ended September 30, 1998 and 1997.
Condensed Consolidated Statements of Cash Flows
For The Six Months Ended September 30, 1998 and 1997. 5-6
Notes to Condensed Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of Results 9-16
Of Operations and Financial Condition
Item 3. Quantitative and Qualitative Disclosures 17
PART II OTHER INFORMATION
Item 5 Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
2
<PAGE>
PART 1 - FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
FIRST CITIZENS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
September 30 and March 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Cash on hand and in banks $ 12,712,391 $ 13,057,128
Interest-bearing deposits in banks 29,482,399 18,603,707
Federal funds Sold 11,392,221 13,840,000
Securities available for sale 35,748,647 36,380,214
Securities held to maturity at amortized cost, fair
value of $736,990 and $1,881,250, respectively 729,522 1,879,748
Loans held for sale 8,023,600 7,473,800
Loans receivable, net 263,647,433 256,310,581
Real estate held for development and sale 2,320,521 2,320,521
Premises and equipment 7,524,725 7,371,409
Goodwill and other intangibles 6,793,131 7,009,308
Other assets 7,207,376 3,565,672
------------- ------------
Total assets $385,581,966 $367,812,088
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposit accounts $334,644,906 $318,382,055
Other borrowings 8,526,797 9,602,365
Accrued expenses and other liabilities 3,346,697 3,067,797
------------- ------------
Total liabilities 346,518,400 331,052,217
------------- ------------
Stockholders' Equity
Preferred stock, no par value, 8,000,000 shares
authorized, none issued 0 0
Common stock, $1 par value, 8,000,000 shares
authorized, 2,805,698 And 2,835,897 issued,
respectively 2,805,698 2,835,897
Additional paid-in capital 12,572,134 12,914,173
Retained earnings 23,419,608 21,287,420
Accumulated other comprehensive income, net of tax 266,126 155,502
------------- ------------
39,063,566 37,192,992
Less cost of 41,028 shares of treasury stock 0 (433,121)
------------- ------------
Total stockholders' equity 39,063,566 36,759,871
------------- ------------
Total liabilities and equity $385,581,966 $367,812,088
============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
FIRST CITIZENS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
For the Three and Six Months Ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
1998 1997 1998 1997
--------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable $6,971,803 $6,179,564 $13,687,064 $12,063,451
Interest-bearing time deposits 342,439 30,321 726,967 53,069
Securities 509,688 498,281 1,036,029 1,034,794
Federal Funds Sold 159,069 142,038 358,465 267,388
-----------------------------------------------
Total interest income 7,982,999 6,850,204 15,808,525 13,418,702
-----------------------------------------------
INTEREST EXPENSE:
Deposits 3,616,582 2,781,176 7,167,670 5,450,787
Other borrowings 155,619 337,790 308,678 637,080
-----------------------------------------------
Total interest expense 3,772,201 3,118,966 7,476,348 6,087,867
Net interest income 4,210,798 3,731,238 8,332,177 7,330,835
Provision for loan losses 75,000 70,000 140,000 110,000
-----------------------------------------------
Net interest income after provision for
loan losses 4,135,798 3,661,238 8,192,177 7,220,835
-----------------------------------------------
OTHER INCOME (LOSSES):
Loan servicing and other fees 63,957 96,479 133,203 194,267
Deposit and other service charge 408,771 403,575 805,138 762,403
Gain (loss) on sale of securities 14,763 1,730 223,051 (1,122)
Gain on sale of loans 250,171 260,073 508,129 525,036
Gain on sale of real estate held for
development and sale 0 55,055 0 3,377,426
Other operating income 109,203 94,591 198,709 191,196
-----------------------------------------------
Total other income 846,865 911,503 1,868,230 5,049,206
-----------------------------------------------
OTHER EXPENSES:
Salaries and employee benefits 1,538,712 1,410,138 3,099,766 2,802,741
Occupancy and equipment 427,090 365,093 816,371 767,584
Goodwill amortization 105,229 111,037 197,961 220,925
Other operating expense 1,032,784 708,724 2,124,852 1,456,451
-----------------------------------------------
Total other expenses 3,103,815 2,594,992 6,238,950 5,247,701
Income before income taxes 1,878,848 1,977,749 3,821,457 7,022,340
Income tax expense 609,121 668,771 1,212,703 2,485,209
-----------------------------------------------
Net income 1,269,727 1,308,978 2,608,754 4,537,131
-----------------------------------------------
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized gains on securities available
for sale arising during period 125,096 24,621 251,146 117,615
Less: reclassification of adjustment for
(gains) losses included in net income (9,301) (1,090) (140,522) 707
-----------------------------------------------
Total other comprehensive income (loss) 115,795 23,531 110,624 118,322
-----------------------------------------------
Comprehensive income $1,385,522 $1,332,509 $2,719,378 $4,655,453
===============================================
Basic earnings per common share $ 0.45 $ 0.47 $ 0.93 $ 1.64
===============================================
Diluted earnings per common share $ 0.43 $ 0.45 $ 0.88 $ 1.54
===============================================
Cash dividends per common share $ 0.09 $ 0.07 $ 0.17 $ 0.15
===============================================
The accompanying notes are an integral part of these financial statements.
</TABLE>
4
FIRST CITIZENS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Six Months Ended September 30, 1998 and 1997
(Unaudited)
1998 1997
OPERATING ACTIVITIES
Net income $ 2,608,754 $ 4,537,131
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Provision for loan losses 140,000 110,000
Depreciation and amortization 393,107 396,495
Amortization and accretion, net 216,177 245,085
(Gain) loss on sale of securities available for
sale (223,051) 1,212
Gain on sale of loans (508,129) (525,036)
Net (increase) decrease in loans held for sale (41,671) 3,384,707
Gain on sale of real estate held for development
and sale 0 (3,377,426)
Other operating activities (3,552,180) (594,740)
--------------------------
Net cash provided by (used in) operating
activities (966,993) 4,177,428
--------------------------
INVESTING ACTIVITIES
Proceeds from maturities of securities available
for sale (5,929,040) 5,107,496
Proceeds from maturities of securities held to
maturity 1,150,226 1,246,734
Purchases of securities available for sale 14,173,893 (12,252,534)
Proceeds from sales of securities available for
sale (3,590,235) 6,214,837
Proceeds from calls of securities available for
sale (3,500,000) 1,500,000
Net (increase) decrease in interest bearing
deposits in other banks (10,878,692) (1,468,577)
Net (increase) decrease in Federal funds sold 2,447,779 1,380,000
Net increase in loans (7,476,852)(16,915,262)
Proceeds from sales of real estate held for
development and sale 0 4,313,432
Purchase of premises and equipment (546,423) 181,848
--------------------------
Net cash provided by (used in) investing
activities (14,149,344)(10,692,026)
--------------------------
5
<PAGE>
FIRST CITIZENS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
For the Six Months Ended September 30, 1998 and 1997
(Unaudited)
1998 1997
FINANCING ACTIVITIES
Net increase in deposits 16,262,851 9,034,576
Net decrease in other borrowings (1,075,568) (2,600,540)
Dividends paid (476,566) (402,325)
Proceeds from stock options exercised 60,883 189,156
Purchase of Treasury Stock 0 (126,684)
---------------------------
Net cash provided by financing activities 14,771,600 6,094,183
---------------------------
Net increase (decrease) in cash and due from banks (344,737) (420,415)
Cash and due from banks at beginning of period 13,057,128 13,866,250
---------------------------
Cash and due from banks at end of period $12,712,391 $13,445,835
===========================
The accompanying notes are an integral part of these financial statements.
6
<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 unaided; 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 and six month periods ended September
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 and six months ended September 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 Statement 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 September 30, 1998 the Company had amortized all organization costs which
will be required to be written off upon adoption of SOP 98-5.
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 recognizes 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.
7
<PAGE>
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.
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):
<TABLE>
<CAPTION>
Three Months Ended September 30, 1998 Three Months Ended September 30, 1997
Net Per Net Per
Income Shares share Income Shares share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
<S> <C> <C> <C> <C> <C> <C>
Basic EPS (1) $1,269,727 2,797,532 $0.45 $1,308,978 2,776,961 $0.47
======= =======
Dilutive
effect of
stock options 0 172,406 0 151,876
---------- ------------ --------- -----------
Diluted EPS $1,269,727 2,969,938 $0.43 $1,308,978 2,928,837 $0.45
========== ============ ======= ========= =========== =======
Six Months Ended September 30, 1998 Six Months Ended September 30, 1997
Net Per Net Per
Income Shares share Income Shares share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Basic EPS (1) $2,608,754 2,796,587 $0.93 $4,537,131 $2,769,697 $1.64
======= ======
Dilutive
effect of
stock options 0 176,030 0 185,658
---------- ----------- -------- -----------
Diluted EPS $2,608,754 2,972,617 $0.88 $4,537,131 $2,955,355 $1.54
======================= ======== =========== =========== =======
</TABLE>
(1) Number of shares represents a weighted average outstanding for the period.
NOTE 4. TREASURY STOCK
During the quarter ended September 30, 1998 the Company retired its 41,028
shares of Treasury Stock.
8
<PAGE>
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors which have effected the Company's financial position and operating
results during the periods included in the accompanying condensed consolidated
financial statements.
FINANCIAL CONDITION
Total assets increased $17.8 million during the six months ended September 30,
1998 from $367.8 million to $385.6 million, or 4.83%. During the same period in
1997, assets grew $10.8 million, or 3.21%. The growth in both years was funded
by an increase in total deposits of $16.3 million and $9.0 million,
respectively, plus retained net profits. The increase in total assets for 1998
consisted primarily of an increase of $10.9 million in interest-bearing
deposits, an increase of $7.3 million in net loans, less a decrease of $2.4
million in Federal funds sold.
The loan to deposit ratio at September 30, 1998 was 81.18% compared to 93.01% at
September 30,1997. The decrease in the loan to deposit ratio is due to the
significant growth of deposits 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 maturates of
assets and deposit growth are such that adequate funds are provided to meet
estimated customer withdrawals and loan requests.
At September 30, 1998, the Company had cash and due from banks of $12.7 million,
interest bearing deposits in banks of $29.5 million, and Federal funds sold of
$11.4 million. Additionally, the Company has $35.7 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 September 30, 1998, the Banks had, in
addition to amounts already borrowed, a combined credit availability of
approximately $49.3 million.
REGULATORY CAPITAL REQUIREMENTS
Banking regulations require the Company and Banks to maintain minimum capital
levels in relation to assets. At September 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 September 30, 1998 are as follows.
9
<PAGE>
Regulatory
Actual Requirement
Leverage Capital Ratio 8.54% 4.00%
Risk Based Capital Ratios
Core Capital 11.35% 4.00%
Total Capital 12.60% 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
SIX MONTHS ENDED SEPTEMBER 30, 1998
NET INTEREST INCOME. Net interest income increased by $1,001,000 for the six
months ended September 30, 1998 compared to the same period in 1997, or by
13.75%. The comparable increase in 1997 as compared to the six months ended
September 30,1996 was $3,562,000. The increase in 1997 was due to two
acquisitions that occurred during the fiscal ended March31, 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 six months ended September 30, 1996. The
increase in net interest income for the six months ended September 30, 1998 is
attributable to an increase in earning assets of $45.9 million compared to
September 30, 1997. During this same period however, total deposits and other
borrowings increased by a combined $44.0 million. 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 increased slightly to 4.82% at September 30, 1998 as compared to
4.80% at September 30, 1997.
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 $140,000 was made during the six month period ending
September 30, 1998 based upon this review process. The allowance for loan loss
as a percentage of total loans was 1.43% at September 30, 1998 compared to 1.52%
at March 31, 1998. Nonperforming loans as a percentage of total loans was 1.46%
at September 30, 1998 compared to 1.11% at March 31, 1998. Management believes
the allowance for loan loss at September 30, 1998 is adequate to meet any future
losses in the loan portfolio.
At September 30, 1998 and March 31, 1998, nonaccrual, past due, and restructured
loans were as follows:
10
<PAGE>
September 30, March 31,
1998 1998
(Dollars in Thousands)
Total nonaccruing loans $3,898 $2,886
Loans contractually past due ninety
days or more as to interest or
principal payments and still accruing 375 303
Restructured loans 640 894
The increase in nonaccrual loans from March 31, 1998 to September 30, 1998
consist of various construction and real estate mortgage loans. The increase was
not attributable to any one group of 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 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 judgement, 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.
Information regarding certain loans and allowance for loan loss data through
September 30, 1998 and 1997 is as follows:
11
<PAGE>
<TABLE>
<CAPTION>
Three Months Six Months
1998 1997 1998 1997
(Dollars in thousands)
<S> <C> <C> <C> <C>
Average amount of loans outstanding $ 273,898 $ 265,213 $ 270,066 $ 257,596
==============================================
Balance of allowance for loan losses at
beginning of period $ 3,958 $ 3,808 $ 3,852 $ 3,739
----------------------------------------------
Loans charged off
Commercial and financial 77 124 77 124
Construction 0 0 0 0
Real estate 90 23 95 23
Installment 27 30 30 45
----------------------------------------------
194 177 202 192
----------------------------------------------
Loans recovered
Commercial and financial 50 10 96 45
Construction 0 1 0 1
Real estate 1 48 3 53
Installment 4 4 5 8
----------------------------------------------
55 63 104 107
----------------------------------------------
Net (charge-offs) recoveries (139) (114) (98) (85)
Additions to allowance charged to
operating expense during period 75 70 140 110
----------------------------------------------
Balance of allowance for loan losses at
end of period $ 3,894 $ 3,764 $ 3,894 $ 3,764
==============================================
Ratio of net loans (charged-off)
recovered during the period to average
loans outstanding (0.05%) (0.04%) (0.04%) (0.03%)
==============================================
</TABLE>
OTHER INCOME. Other income decreased by $3.2 million for the six months ended
September 30, 1998 compared to an increase of $3.3 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 and
eight-year period. For the three-month period ended September 30, 1998, there
have been no sales of real estate held for development and sale.
During the six months ended September 30, 1998, the Company recognized gains on
sale of securities of $223,000 compared to losses recognized for the same period
in 1997 of $1,000. All other components of other income were comparable with
1997 considering the growth in deposit accounts. Other income increases in 1997
compared to the six
12
<PAGE>
months ended September 30, 1996 are not comparable due to the two bank
acquisitions discussed previously.
OTHER EXPENSES. Other expenses increased by $991,000, or 18.9% for the six
months ended September 30, 1998 as compared to the same period in 1997. The
increase in 1997 as compared to the same period in 1996 was $1,744,000. The
significant increase between 1997 and 1996 is once again due to the expenses
related to the two banks acquired after September 30, 1996 not included in the
1996 operations. The most significant increase in 1998 is an increase of
$297,000 in salaries and employee benefits and an increase of $668,000 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 September 30, 1998, the total number of employees was 146 compared to
138 at September 30, 1997.
During the first quarter of 1998, the Company finalized the consolidation of the
accounting and data processing departments for its three banking subsidiaries
and completed a 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 first quarter ended June 30, 1998
conversion expenses of $144,000. In addition, all item processing is now
outsourced. Previously, one of the banks outsourced this function. The increase
in other operating expenses related to the change in item processing was
approximately $120,000. The remaining increases in other expenses is due to
increases attributable to the growth in loans and deposits.
NET INCOME. Net income decreased by $1,928,000 for the six months ended
September 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 $210,000.
The effective tax rate for the six months ended September 30, 1998 and 1997 was
32% and 35%, respectively.
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997.
NET INTEREST INCOME. Net interest income increased by $480,000 for the quarter
ended September 30, 1998 compared to the same period in 1997, or by 12.85%. The
comparable increase in 1997 as compared to the quarter ended September 30,1996
was $1,483,000. As previously mentioned, the increase between 1997 and 1996 was
due to two acquisitions that occurred during the fiscal ended March 31, 1997.
The increase in net interest income for the quarter ended September 30, 1998 is
attributable to an increase in earning assets of $35.2 million compared to
September 30, 1997. 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
13
<PAGE>
increased slightly to 4.85% at September 30, 1998 as compared to 4.76% at
September 30, 1997.
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 $75,000 was made during the three month period ending
September 30, 1998 based upon this review process.
OTHER INCOME. Other income decreased by $65,000 for the quarter ended September
30, 1998 compared to a decline of $205,000 for the same period in 1997. Gain on
sale of real estate held for development and sale declined $55,000 from 1997,
and had declined $495,000 in 1997 compared to the same period in 1996
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 September 30, 1996 are not comparable due to the two bank
acquisitions made in the year ended March 31, 1997.
OTHER EXPENSES. Other expenses increased by $509,000, or 19.61% for the three
months ended September 30, 1998 as compared to the same period in 1997. The
increase in 1997 as compared to the same period in 1996 was $229,000. The
significant increase between 1997 and 1996 is once again due to the expenses
related to the two banks acquired after September 30, 1996 not included in the
1996 operations. The most significant increase in 1998 is an increase of
$129,000 in salaries and employee benefits and an increase of $324,000 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 September 30, 1998, the total number of employees was 146 compared to
138 at September 30, 1997. The increase in other operating expenses is chiefly
due to a $100,000 increase in data and item processing costs. The remaining
increases in other expenses is attributable increases due to the growth in loans
and deposits.
NET INCOME. Net income decreased by $39,000 for the three months ended September
30, 1998, as compared to the same period in 1997. The effective tax rate for the
three months ended September 30, 1998 and 1997 was 32% and 34%, 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 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. This risk
encompasses hardware and software owned, leased, licensed or otherwise used
by the Company or mission-critical functions or by customers with which the
Company has a material relationship.
14
<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. This
conversion included the replacement of substantially all of the Company's
computer workstations with equipment that is certified to be Y2K compliant. The
cost of this equipment totaled approximately $1 million. In addition, one of the
banking subsidiaries was required to pay a fee of $144,000 to terminate its
contract with its former data processing provider.
A provision in the Company's contract with its new provider of the Company's
core data processing services stipulated that the provider would be Y2K
compliant. During the quarter ended September 30, 1998, testing on the system
was done by proxy and the results did not disclose significant Y2K issues.
However, the Company and its data processing provider will continue to test the
system for Y2K compliance throughout the remainder of 1998 and 1999.
The Company has also reviewed its non-information technology equipment (vaults,
alarms, elevators, etc.) and have believe that the Y2K will not have a material
adverse impact on these items.
The Company has developed a written Y2K Testing Strategy and plans to test all
internal mission critical systems by December 31, 1998, with testing for systems
supplied by third party providers to be completed by March 31, 1999.
The Company has also developed a Business Resumption Contingency Plan in the
event that one or more systems fail on or following January 1, 2000. As a part
of this plan, the Company has compiled a list of worst case Y2K scenarios along
with the potential effects these failures could have on the Company's business
operations, and a general statement of the controls to minimize, eliminate or
respond to each disruption. These potential situations range from the failure of
the core-processing provider to the failure of the Company's electrical and
telephone supply. At this time, Management does not believe that the likelihood
of these failures is significant. However, management will begin to develop
specific plans and procedures that would be needed to implement any steps which
may be necessary to continue business operations if such events occur. The
Company has not estimated its potential costs associated with such matters.
Management is currently reviewing significant commercial loan relationships
to determine how much Y2K risk may exist in its customer base.
Other than costs identified above, the Company does not expect further Y2K
project costs to be material. Based on the review of computer and other
components, management does not believe the cost of remediation will be material
of the Company's financial statements, although there can be no assurances in
this regard.
15
<PAGE>
The preceding discussion of the Year 2000 issue includes forward-looking
statements reflecting management's current assessments and estimates and which
involve risks and uncertainties. Various factors could cause actual results to
differ materially from those expected by such assessments and forward-looking
statements. Factors that might affect the timely and satisfactory completion of
the Year 2000 project include, but are not limited to, representations of third
party providers and timely correction of hardware or software problems, the
readiness of key utilities, suppliers and customers, and similar uncertainties.
The Company's Y2K project is an ongoing process involving continual evaluation.
Unanticipated problems could emerge and alternative solutions may be devised
that may be more costly than anticipated or more difficult to solve.
16
<PAGE>
ITEM 2. 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.
17
<PAGE>
PART II-OTHER INFORMATION
Item 5. Other information
On September 25, 1998 the Company announced that it had executed a definitive
letter of intent to acquire three bank branches from Community First Bank of
Carrolton, Georgia. The three branches are located in Wal-Mart Superstores in
Newnan, Fayetteville, and Stockbridge, Georgia and have a combined deposit base
of approximately $25 million. The transaction is subject to regulatory approval
and is expected to be consummated as of December 31, 1998.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits,
27. Financial Data Schedule.
(b) Reports on Form 8-K.
A Form 8-K was filed on July 2, 1998 stating that effective December 31, 1998,
the Company was converting its fiscal year end from March 31 to December 31.
18
<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, therefore duty
authorized.
FIRST CITIZENS CORPORATION
(Registrant)
----------------------------
Date: November 13, 1998 /S/TOM MOAT
----------------------
Tom Moat
Chief Executive Officer
Date: November 13, 1998 /S/ DOUGLAS J. HERTHA
-----------------------
Douglas J Hertha
Vice President
Chief Financial and
Accounting Officer
19
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