UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q10-Q/A
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 December 31, 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 February 1, 1999: 2,816,506
Transitional Small Business Disclosure Format (check one) Yes _____ No __X__
INDEX
Page
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
as of December 31, 1998 and March 31, 1998....... 3
Condensed Consolidated Statements of Income and
Comprehensive Income for the Three Months Ended
December 31, 1998 and 1997 and Nine Months Ended
December 31, 1998 and 1997....................... 4
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended December 31, 1998
and 1997......................................... 6 - 7
Notes to Condensed Consolidated Financial
Statements....................................... 8 - 11
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition........................ 12 - 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk........ 19
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K.................................. 20
Signatures................................................................ 21
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST CITIZENS CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and March 31, 1998
(Unaudited)
December 31 March 31
------------- ----------
ASSETS
Cash and due from banks $ 41,668,397 $ 13,057,128
Interest-bearing deposits in banks 8,103,922 18,603,707
Federal funds sold 12,441,058 13,840,000
Securities available-for-sale 37,733,942 36,380,214
Securities held-to-maturity at amortized cost,
fair value of $688,801 and $1,881,250, respectively 681,559 1,879,748
Loans held for sale 11,320,000 7,473,800
Loans receivable, net 287,144,827285,775,827 256,310,581
Real estate held for development and sale 2,320,521 2,320,521
Premises and equipment 8,726,9218,364,842 7,371,409
Goodwill and other intangibles 6,796,1106,729,693 7,009,308
Other assets 3,212,4902,909,490 3,565,672
-------------- --------------
Total assets $ 420,149,747418,049,251 $ 367,812,088
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposit accounts $ 364,497,721 $ 318,382,055
Other borrowings 12,338,204 9,602,365
Accrued expenses and other liabilities 3,137,7072,910,639 3,067,797
-------------- --------------
Total liabilities 379,973,632379,746,564 331,052,217
-------------- --------------
Stockholders' equity
Preferred stock, no par value, 8,000,000 shares
authorized; none issued - -
Common stock, $1 par value, 8,000,000 shares
authorized, 2,811,556 - -
and 2,835,897 issued, respectively 2,811,556 2,835,897
Additional paid-in capital 12,639,401 12,914,173
Retained earnings 24,508,58922,635,161 21,287,420
Accumulated other comprehensive income 216,569 155,502
-------------- --------------
40,176,11538,302,687 37,192,992
Less cost of 41,028 shares of treasury stock - (433,121)
-------------- --------------
Total stockholders' equity 40,176,11538,302,687 36,759,871
-------------- --------------
Total liabilities and stockholders' equity $ 420,149,747418,049,251 $ 367,812,088
============== ==============
The accompanying notes are an integral part of these financial statements.
3
FIRST CITIZENS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
For the Three Months Ended December 31, 1998 and 1997 and
Nine Months Ended December 31, 1998 and 1997
(Unaudited)
Three Months Ended Nine Months Ended
December 31 December 31
------------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------- ------------
Interest income
Loans $ 7,066,253 $ 6,444,005 $ 20,753,317 $ 18,507,456
Taxable securities 503,297 534,057 1,539,326 1,568,851
Federal funds sold 179,993 113,186 538,458 380,574
Deposits in banks 300,115 74,689 1,027,082 127,758
-------------- --------------- --------------- --------------
Total interest income 8,049,658 7,165,937 23,858,183 20,584,639
-------------- --------------- --------------- --------------
Interest expense
Deposits 3,518,333 3,082,454 10,686,003 8,533,241
Other borrowings 136,542 268,969 445,220 906,049
-------------- --------------- --------------- --------------
Total interest expense 3,654,875 3,351,423 11,131,223 9,439,290
-------------- --------------- --------------- --------------
Net interest income 4,394,783 3,814,514 12,726,960 11,145,349
Provision for loan losses 105,0001,474,000 80,000 245,0001,614,000 190,000
-------------- --------------- --------------- --------------
Net interest income after
provision for loan losses 4,289,7832,920,783 3,734,514 12,481,96011,112,960 10,955,349
-------------- --------------- --------------- --------------
Other income
Loan servicing and other loan fees 61,784 86,053 194,987 280,320
Deposit and other service charges 463,384434,384 414,547 1,268,5221,239,522 1,176,950
Gain on sale of securities 58,518 2,430 281,569 1,308
Gain on sale of loans 300,752 216,780 808,881 741,816
Gain on sale of real estate held for
development and sale - 99,518 - 3,476,944
Other operating income 93,451 118,814 292,160 310,010
-------------- --------------- --------------- --------------
977,889948,889 938,142 2,846,1192,817,119 5,987,348
-------------- --------------- --------------- --------------
Other expenses
Salaries and employee benefits 1,569,6921,623,392 1,341,963 4,669,4584,723,158 4,144,704
Occupancy and equipment expenses 387,524786,488 359,292 1,203,8951,602,859 1,126,876
Data processing costs 375,130452,921 143,693 1,003,2821,081,073 411,315
Goodwill amortization 98,980165,397 109,196 296,941363,358 330,121
Other operating expenses 794,2501,705,750 727,862 2,290,9503,202,450 1,916,691
-------------- --------------- --------------- --------------
3,225,5764,733,948 2,682,006 9,464,52610,972,898 7,929,707
-------------- --------------- --------------- --------------
Income (loss) before income taxes 2,042,096(864,276) 1,990,650 5,863,5532,957,181 9,012,990
Income tax expense 672,326(benefit) (360,618) 629,950 1,885,029852,085 3,115,159
-------------- --------------- --------------- --------------
Net income 1,369,770(loss) (503,658) 1,360,700 3,978,5242,105,096 5,897,831
-------------- --------------- --------------- --------------
4
FIRST CITIZENS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
For the Three Months Ended December 31, 1998 and 1997 and
Nine Months Ended December 31, 1998 and 1997
(Unaudited)
Three Months Ended Nine Months Ended
December 31 December 31
-------------------------- -----------------------------
1998 1997 1998 1997
---------- ---------- ----------- -----------
Other comprehensive income:
Unrealized gains on securities
available-for-sale arising during
period, net of tax 75,071 57,335 238,979 133,778
Less: reclassification adjustment
for gains included in net
income, net of tax (30,446) (1,604) (177,660) (863)
-------------- ------------ ------------ -----------
Total other comprehensive income 44,625 55,731 61,319 132,915
-------------- ------------ ------------ -----------
Comprehensive income (loss) $ 1,414,395(459,033) $ 1,416,431 $ 4,039,8432,166,415 $ 6,030,746
============== ============ ============= ============
Basic earnings (loss) per common share $ 0.49(0.18) $ 0.49 $ 1.420.75 $ 2.15
============== ============ ============= ============
Diluted earnings per common share $ 0.45(0.17) $ 0.45 $ 1.310.69 $ 1.97
============== ============ ============= ============
Cash dividends per
share of common stock $ 0.10 $ 0.08 $ 0.27 $ 0.23
============== ============ ============= ============
The accompanying notes are an integral part of these financial statements.
5
FIRST CITIZENS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended December 31, 1998 and 1997
(Unaudited)
1998 1997
-------- -------
Operating Activities
Net income $ 3,978,5232,105,096 $ 5,897,831
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for loan losses 245,0001,614,000 190,000
Depreciation and amortization 830,2931,091,828 451,042
Gain on sale of securities available-for-sale (281,569) (1,308)
Net increase in loans held for sale (3,846,200) (2,112,329)
Gain on sale of real estate held for development and sale - (3,476,944)
Other operating activities 423,092665,984 (1,499,756)
--------------- --------------
Net cash provided by (used in) operating activities 1,349,139 (551,464)
--------------- --------------
Investing Activities
Proceeds from maturities of securities available-for-sale 15,200,000 7,615,719
Proceeds from maturities of securities held to maturity 1,198,189 3,626,341
Purchases of securities available-for-sale (26,095,873) (15,269,486)
Proceeds from sales of securities available-for-sale 9,884,781 7,715,226
Net (increase) decrease in interest-bearing deposits in banks 10,499,785 (7,283,666)
Net decrease (increase) in Federal funds sold 1,398,942 (7,410,000)
Net increase in loans (31,079,246) (17,012,352)
Proceeds from sales of real estate held for development and sale - 4,437,950
Proceeds from sale of other real estate owned - 383,926
Purchase of premises and equipment (1,972,607) (263,349)
--------------- --------------
Net cash used in investing activities $ (20,966,029) $ (23,459,691)
--------------- --------------
6
FIRST CITIZENS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Nine Months Ended December 31, 1998 and 1997
(Unaudited)
1998 1997
------------ -----------
Financing Activities
Net increase in deposit accounts $ 46,115,666 $ 34,148,627
Net increase (decrease) in other borrowings 2,735,839 (12,589,131)
Purchase of treasury stock - (126,684)
Dividends paid (757,354) (623,483)
Proceeds from stock options exercised 134,008 453,199
-------------- --------------
Net cash provided by financing activities 48,228,159 21,262,528
-------------- --------------
Net increase (decrease) in cash and due from banks 28,611,269 (2,748,627)
Cash and due from banks at beginning of period 13,057,128 13,866,250
-------------- --------------
Cash and due from banks at end of period $ 41,668,397 $ 11,117,623
============== ==============
The accompanying notes are an integral part of these financial statements.
7
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 and nine month periods ended
December 31, 1998 are not necessarily indicative of the results to be
expected for the full year.
NOTE 2. CURRENT ACCOUNTING DEVELOPMENTS
In 1998, the Company adopted Statement of Financial Standards No. 130
("SFAS No. 130"), "Reporting Comprehensive Income". This statement
establishes standards for reporting and display of comprehensive income
and its components in the financial statements. This statement requires
that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a
financial statement that is displayed in equal prominence with the other
financi statements. The Company has elected to report comprehensive
income in the statements of income for the interim periods. SFAS No. 130
describes comprehensive income as the total of all components of
comprehensive income including net income. This statement uses other
comprehensive income to refer to revenues, expenses, gains and losses
that under generally accepted accounting principles are included in
comprehensive income but excluded from net income. Currently, the
Company's other comprehensive income consists of items previously
reported directly in equity under SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". As required by SFAS No. 130,
the financial statements for the prior periods have been reclassified to
reflect application of the provisions of this statement. The adoption of
this statement did not affect the Company's financial position, results
of operations or cash flows.
8
FIRST CITIZENS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2. CURRENT ACCOUNTING DEVELOPMENTS (Continued)
In June 1998, Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities". This statement is
required to be adopted for fiscal years beginning after June15, 1999.
However, the statement permits early adoption as of the beginning of any
fiscal quarter after its issuance. The Company expects to adopt this
statement effective January 1, 2000. SFAS No. 133 requires the Compan to
recognize all derivatives as either assets or liabilities in the balance
sheet at fair value. For derivatives that are not designated as hedges,
the gain or loss must be recognized in earnings in the period of change.
For derivatives that are designated as hedges, changes in the fair value
of the hedged assets, liabilities, or firm commitments must be
recognized in earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings, depending on the nature of
the hedge. The ineffective portion of a derivative's change in fair
value must be recognized in earnings immediately.
Management has not yet determined what effect the adoption of SFAS
No. 133 will have on the Company's earnings or financial position.
There are no other recent accounting pronouncements that have had, or
are expected to have, a material effect on the Company's financial
statements.
9
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 (loss) and weighted-averageweighted-
average shares outstanding used in determining basic and diluted
earnings (loss) per common share (EPS):
Three Months Ended December 31, 1998
-----------------------------------------------------
Net Weighted-Average Per share
Income Shares Amount
------------- ---------------- -------------
Basic EPS $ 1,369,770(503,658) 2,808,143 $ 0.49(0.18)
=============
Effect of Dilutive Securities
Stock options - 223,848
------------- --------------
Diluted EPS $ 1,369,770(503,658) 3,031,991 $ 0.45(0.17)
============= ============== =============
Three Months Ended December 31, 1997
-----------------------------------------------------
Net Weighted-Average Per share
Income Shares Amount
------------- ---------------- -------------
Basic EPS $ 1,360,700 2,754,840 $ 0.49
=============
Effect of Dilutive Securities
Stock options - 260,062
------------- --------------
Diluted EPS $ 1,360,700 3,014,902 $ 0.45
============= ============== =============
10
FIRST CITIZENS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3. EARNINGS PER COMMON SHARE (Continued)
Nine Months Ended December 31, 1998
-----------------------------------------------------
Net Weighted-Average Per share
Income Shares Amount
------------- ---------------- -------------
Basic EPS $ 3,978,5242,105,096 2,800,425 $ 1.420.75
============
Effect of Dilutive Securities
Stock options - 228,966
-------------- ----------------
Diluted EPS $ 3,978,5242,105,096 3,029,391 $ 1.310.69
============== ================ ============
Nine Months Ended December 31, 1997
-----------------------------------------------------
Net Weighted-Average Per share
Income Shares Amount
------------- ---------------- -------------
Basic EPS $ 5,897,831 2,748,881 $ 2.15
=============
Effect of Dilutive Securities
Stock options - 247,048
------------ ----------------
Diluted EPS $ 5,897,831 2,995,929 $ 1.97
============== ================ ============
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
The following appears in accordance with the Securities Litigation Reform Act.
These financial statements and financial review include forward looking
statements that involve inherent risks and uncertainties. A number of important
factors could cause actual results to differ materially from those in the
forward looking statements. Those factors include fluctuations in interest
rates, inflation, government regulations, economic conditions, Year 2000 issues,
and competition in the geographic business areas in which the Company conducts
its 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 fourth calendar quarter of 1998 from $385.6
million to $420.1$418.0 million, or 8.9%8.4% for the quarter. The increase in total assets
for the three months ended December 31, 1998 is almost double the 4.5% growth
for the same period in 1997. The growth in both years was funded by increases in
total deposits of $29.9 million and $25.1 million, respectively. The increase in
total assets for the quarter ended December 31, 1998 consisted primarily of a
net increase of $8.6 million in cash and due from banks, Federal funds sold, and
interest-bearing deposits; an increase of $26.7 million in net loans; and an
increase of $1.9 million in securities.
Total assets increased for the nine month period ended December 31, 1998 by
$52.3$50.2 million or 14.2%13.6%. The increase for the same period in 1997 was $25.9
million or 7.9%. The significant increase in assets for the quarter and nine
months ended December 31, 1998 as compared to 1997 is attributable to the
acquisition of three Wal-Mart Super Store branches, with deposits of
approximately $28.9 million. There were no loans acquired in the acquisition.
The acquisition was consummated on December 31, 1998, which explains the
significant increase in cash and due from banks as of December 31, 1998. These
locations are generally deposit generating branches. The proceeds from the
acquisition will be used to fund future loan growth and reduce other borrowings.
The loan to deposit ratio at December 31, 1998 was 83% compared to 88% at
December 31, 1997. The decrease in the loan to deposit ratio is due primarily to
the acquisition of deposits as of December 31, 1998. The loan to deposit ratio
prior to the acquisition of the three branches was 90%.
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
12
are such that adequate funds are provided to meet estimated customer withdrawals
and loan requests.
At December 31, 1998, all Bank subsidiaries exceeded their minimum target
liquidity ratio. At December 31, 1998, the Company had cash and due from banks
of $41.7 million, interest bearing deposits in banks of $8.1 million, and
Federal funds sold of $12.4 million. Additionally, the Company has $37.7 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 December 31, 1998, the
Banks had, in addition to amounts already borrowed, a combined credit
availability of approximately $50 million.
REGULATORY CAPITAL REQUIREMENTS
Banking regulations require the Company and Banks to maintain minimum capital
levels in relation to assets. At December 31, 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
December 31, 1998 are as follows:
Regulatory
Actual Requirement
Leverage Capital Ratio 10.80%10.27% 4.00%
Risk-Based Capital Ratios
Core Capital 8.68%8.19% 4.00%
Total Capital 12.05%11.52% 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
Net Interest Income. Net interest income increased by $580,000 for the quarter
ended December 31, 1998 compared to the same period in 1997, or by 15.2%. The
increase in 1997 as compared to the quarter ended December 31, 1996 was
$1,087,000. The increase in 1997 was due to the acquisition of the banking
subsidiaries 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 nine months ended December 31, 1996, and only
one of the acquisitions was included in the results of operations for the
quarter ended December 31, 1998. The increase in net interest income for the
quarter ended December 31, 1998 is attributable to an increase in earning assets
of $36.4 million compared to December 31, 1997. During this same period, total
deposits increased by $60.5 million. As mentioned earlier, approximately $28.8
million of the deposit growth occurred on December 31, 1998. 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 to 4.91% at December 31, 1998 as
compared to 4.76% at
13
December 31, 1997.
Net interest income increased by $1,582,000 for the nine months ended December
31, 1998 as compared to the same period in 1997. The increase in net interest
income for the nine month period is consistent with the increase for the three
month period. The increase in deposits related to the acquisition of deposits is
not included in the increase in earning assets of $36.3 million. The majority of
the increase in earning assets, or $34.0 million, consisted of loan growth which
earns a greater spread than any other earning asset.
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, 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.
AAs a part of the Company's conversion processes and an anticipated merger of two
of its subsidiary banks, the Company reviewed the adequacy of its loan loss
reserves in a more consistent manner during the quarter ended December 31, 1998.
As a result, a provision of $105,000$1,474,000 was made for the three month period
ending December 31, 1998 based uponon this evaluation. The allowance for
loan loss as a percentage of total loans was 1.27%1.79% at December 31, 1998 compared
to 1.44% at March 31, 1998. Nonperforming loans as a percentage of total loans
was .81% at December 31, 1998 compared to 1.08% at March 31, 1998. Management
believes the allowance for loan loss at December 31, 1998 is adequate to meet
any future losses in the loan portfolio.
At December 31, 1998 and March 31, 1998, nonaccrual, past due, and restructured
loans were as follows:
December 31, March 31,
1998 1998
----------- ----------
(Dollars in thousands)
Total nonaccruing loans $ 2,455 $ 2,886
Loans contractually past due ninety days
or more as to interest or principal
payments and still accruing 38 303
Restructured loans 100 894
The slight decrease in nonaccrual loans from March 31, 1998 to December 31, 1998
is a combination of improvement in various loans and the charge-off of other
loans previously classified as nonaccrual loans. The decrease was not
attributable to any one group or individually significant loans. Net charge-offs
for the nine months ended December 31, 1998 increased by $253,000 as compared to
the same period in 1997.
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.
14
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
December 31, 1998 and 1997 is as follows:
Nine Months Ended
December 31,
--------------------------
1998 1997
----------- -----------
(Dollars in thousands)
Average amount of loans outstanding $ 283,019 $ 262,940
============ ============
Balance of allowance for loan losses at beginning of period $ 3,852 $ 3,739
Loans charged off
Commercial and financial 192 124
Construction 9 -
Real estate 126 27
Consumer 126 56
----------- -----------
453 207
----------- -----------
Loans recovered
Commercial and financial 167 63
Construction 6 1
Real estate 4 120
Consumer 10 10
----------- -----------
187 194
----------- -----------
Net charge-offs (266) (13)
----------- -----------
Additions to allowance charged to operating expense during period 2451,614 190
----------- -----------
Balance of allowance for loan losses at end of period 3,8315,200 3,916
=========== ===========
Ratio of net loans charged-off during the
period to average loans outstanding .09% .00%
=========== ===========
15
Other Income. Other income increased by $40,000$11,000 for the quarter ended December
31, 1998 compared to a decrease of $397,000 for the same period in 1997.
The single most significant difference in 1997 was the gain on sale of real
estate held for development and sale of $100,000 for the quarter ended December
31, 1997 compared to $428,000 for the quarter ended December 31, 1996. For the
quarter ended December 31, 1998, the Company did not have any gains on sale of
real estate; however, gains on sale of securities increased $56,000, gains on
sales of loans increased $84,000, and service charge income increased $49,000$20,000 as
compared to 1997. Other income for the nine months ended December 31, 1998
decreased by $3.1$3.2 million as compared to 1997. The significant difference is the
gains on sale of real estate held for development and sale in 1997 of $3.5
million. Significant increases for the nine month period included an increase of
$280,000 in gains on sale of securities, an increase of $92,000$63,000 in service
charge income, and an increase of $67,000 from gain on sale of loans. During the
nine months ended December 31, 1998, the Company began restructuring its
securities in anticipation of funding loan growth and future liquidity needs.
The gain on sale of real estate held for development and sale in 1997
represented the sale of approximately 400 acres of an agreement to sale 1,400
acres over an eight year period.
Other Expenses. Other expenses increased by $544,000,$2,052,000, or 20.3%76.5% for the three
months ended December 31, 1998 as compared to the same period in 1997. The
increase in 1997 as compared to the same period in 1996 was $629,000. 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 1996
operations. The two most significant increasesincrease in 1998other expenses included a $978,000
increase in other operating expenses. This increase was attributable to a
provision of $634,000 for other operating losses. Of this, $274,000 represented
additional losses relating to a check kiting scheme which was originally
recognized in March, 1997. Also accrued were increases of
$228,000$360,000 in salaries and employee benefits and an increase of $231,000 inadjustments relating
to the Company's data processing costs.conversion during the current year. The company
also incurred $83,000 in consulting fees expenses during the quarter. Occupancy
and equipment costs increased $427,000 of which $204,000 related to building
repairs while $195,000 was due to disposals of obsolete equipment. Salaries and
benefits increased $281,000 while data processing costs increased $309,000. The
increase in salaries and employee benefits represents normal increases in
salaries and costs incurred in adding additional banking staff. The significant
increase in data processing costs is related to the conversion of all three
banking subsidiaries' core data processing systems which was completed during
the nine month period. Included in this increase is a one-time termination fee
of $144,000 related to one bank subsidiary.
Other expenses increased for the nine month period ended December 31, 1998 by
$1,535,000$3,043,000 as compared to the same period in 1997. The comparable increase in
1997 as compared to 1996 was an increase of $2,372,000. The increase in 1997
again is primarily attributable to the acquisition and inclusion of the two bank
acquisitions consummated in the fiscal year ended March 31, 1997. The increases
for the nine month period are consistent with the three month period ended
December 31, 1998. For the nine month period, salaries and employee benefits
increased $525,000$578,000 or 12.7%14.0%, and data processing costs increased $592,000.$670,000. Other
operating expenses increased by $1,286,000 of which $717,000 relates to costs
described above. Other increases in other expenses represent normal increases
and increases due to volume of deposit and loan accounts.
16
Net Income. Net income increaseddecreased by $9,0001,819,733 for the three months ended
December31,December 31, 1998 as compared to the same period in 1997. The effective tax rate
for the three months ended December 31, 1998 and 1997 was 33% and 32%,
respectively. Net income for the
nine months ended December 31, 1998 decreased by $1,919,000$3,793,000 as compared to 1997.
Excluding the gain on sale of real estate held for development and sale, the
Company's net income increased $1,558,000.decreased $316,000. The Company does not anticipate
significant gains from sale of real estate for the year ending March 31, 1999. The effective tax rate for the nine month
periods ended December 31, 1998 and 1997 was 32% and 35%, respectively. The
difference in effective tax rates is directly related to the gains on sale of
real estate.
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.
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 December 31, 1998, testing on the system was
done by proxy. The testing included tests of the deposit, loan, and general
ledger applications, as well as the item processing and security modules of the
system. The Company's Y2K project committee reviewed the testing results, noting
no Y2K related failures. The sensitive date testing, connectivity testing, and
contingency plan for the Company's data processing provider were completed in
January 1999. The project committee is presently reviewing the results of these
testing procedures. The Company and its data processing provider will continue
to test the system for Y2K compliance throughout the remainder of 1998 and 1999.
17
The Company has also reviewed its non-information technology equipment (vaults,
alarms, elevators, etc.) and 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. As a part of its Business Resumption
Contingency Plan, management developed 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
on the Company's financial statements, although there can be no assurances in
this regard.
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.
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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.
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PART II - Other Information
Item 5. Other Information.
On January 26, 1999, First Citizens Corporation entered into an
Agreement and Plan of Reorganization (the "Agreement") with BB&T
Corporation ("BB&T"). Pursuant to the Agreement, the Company will merge
with BB&T in a stock-for-stock exchange (the "Merger"). Under the terms
of the Agreement, BB&T will exchange 1.0789 shares of its common stock
for each share of the Company's common stock, subject to possible
adjustment.
The Merger is subject to approval of Company stockholders, federal and
state bank regulatory authorities, and other customary closing
conditions.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27. Financial Data Schedule.
(b) Reports on Form 8-K.
None.
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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 CORPORATION
___________________________
(Registrant)
Date: _________________June 1, 1999 /s/ Tom Moat
---------------------------
Tom Moat
Chief Executive Officer
Date:_________________ June 1, 1999 /s/ Douglas J. Hertha
---------------------------
Douglas J. Hertha
Vice President
Chief Financial and Accounting Officer
21