1
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
For Quarter ended June 30, 2000 Commission File Number 2-83542
FIRST CITIZENS BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
TENNESSEE
(State or other jurisdiction of 62-1180360
incorporation or organization) (I.R.S. Employer Identification No.)
P. O. Box 370
Court Street, Dyersburg, Tennessee 38024
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (901) 285-4410
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 3 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Of the registrant's only class of common stock (no par value) there
were 3,716,389 shares outstanding as of June 30, 2000 (Net of Treasury).
2
PART I -FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
3
FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(Stated in thousands)
June 30, December 31,
2000 1999
(unaudited) (unaudited)
ASSETS
Cash and due from banks $ 16,326 $ 17,410
Federal funds sold 0 0
Investment securities -
Trading Investments-Stated at Market 0 0
Held to Maturity-amortized cost-Fair
Value of $18,519 at June 30, 2000
and $19,768 at December 31, 1999. 19,103 20,345
Available for Sale-Stated at Market 81,190 78,792
Loans (Excluding unearned income of
$1,757 at June 30, 2000 and
$2,131 at December 31, 1999) 337,565 325,377
Less: Allowance for loan losses 3,898 3,718
Net Loans 333,667 321,659
Premises and equipment
14,417 13,417
Intangible assets 4,065 4,223
Other real estate 296 476
Other assets 17,213 16,348
TOTAL ASSETS $486,277 $472,670
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $365,506 $366,819
Securities sold under agreement to
repurchase 16,860 22,390
Federal funds purchased and Other
Short Term Borrowing 29,575 23,700
Long-term debt 24,099 11,264
Notes payable of employee stock
ownership plan 970 1,117
Other liabilities 3,889 3,700
Total Liabilities 440,899 428,990
Stockholders' Equity:
Common stock, No Par value - 10,000,000
authorized; 3,717,593 issued and
outstanding at June 30, 2000;
3,705,165 issued and outstanding at
December 31, 1999 3,718 3,705
Surplus 15,300 15,034
Retained earnings 29,443 28,298
Obligation of Employee Stock
Ownership Plan (970) (1,117)
Net Unrealized Gains (Losses) on Available
for Sale (2,090) (2,036)
Total Common Stock and Retained Earnings 45,401 43,884
Less-1,204 Treasury Shares, at Cost at
June 30, 2000 and 6,807 Shares at Cost at
December 31, 1999 (23) (204)
Total Stockholders' Equity 45,378 43,680
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $486,277 $472,670
NOTE: The balance sheet at December 31, 1999, has been taken from the
audited financial statements at that date and condensed.
4
FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(stated in thousands except EPS and shares outstanding)
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
Interest Income
Interest and fees
on loans $ 7,819 $7,256 $15,310 $14,340
Interest on investment
securities:
Taxable 1,409 1,576 2,817 3,028
Tax-exempt 162 156 310 320
Other interest income -
Fed Funds Sold 0 41 9 141
Other interest income -
Checking 19 11 31 26
Lease financing income 0 0 0 0
Total Interest Income 9,409 9,040 18,477 17,855
Interest Expense
Interest on deposits 3,839 3,328 7,477 6,722
Other interest expense 803 864 1,474 1,654
Total Interest Expense 4,642 4,192 8,951 8,376
Net Interest Income 4,767 4,848 9,526 9,479
Provision for Loan
Losses 194 196 381 402
Net Interest Income
after Provision 4,573 4,652 9,145 9,077
Other Income
Securities gains
(losses) 0 64 0 95
Other income 1,479 1,380 2,994 2,733
Total Other Income 1,479 1,444 2,994 2,828
Other expenses 3,953 3,774 7,884 7,510
Net income before
income taxes 2,099 2,322 4,255 4,395
Taxes 731 789 1,413 1,505
Net income $1,368 $1,533 $2,842 $2,890
Earnings per share $ 0.37 $ 0.42 $ 0.77 $ 0.80
Weighted average number of
shares outstanding 3,702,608 3,633,556 3,702,608 3,633,556
The accompanying notes are an integral part of these financial
statements.
5
FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
(UNAUDITED)
(stated in thousands)
Six Months Ended
June 30,
2000 1999 1998
Net Cash Provided by Operating
Activities $ 3,508 $ 2,069 $ 2,368
Investing Activities
Proceeds of Maturities of Held to
Maturity Securities 1,242 6,476 3,624
Purchase of Held to Maturity
Investments 0 (2,500) (6,043)
Proceeds from Maturities of
Available for Sale Securities 1,827 6,637 17,914
Proceeds from Sales of Available
for Sale Securities 0 8,227 9,074
Purchase of Available for Sale
Securities (4,225) (16,200) (41,458)
Increase in Loans-Net (12,389) (15,157) (41,537)
Payment for purchase of Bank of
Troy-Net of cash acquired 0 0 (5,957)
Purchases of Premises and
Equipment (1,676) (2,125) (1,351)
Net Cash Provided by
Investing Activities (15,221) (14,642) (65,734)
Financing Activities
Net increase (decrease) in Demand
and Savings Accounts (2,429) (7,890) 10,271
Increase (decrease) in
Time Accounts 1,116 1,194 30,524
Increase (decrease) in Long
Term Debt 12,835 5,360 11,582
Treasury Stock Transactions 181 112 (29)
Proceeds from Sale of Common Stock 278 485 4,416
Cash Dividends Paid (1,697) (1,410) (789)
Net increase (decrease) in
Short-term Borrowings 345 1,041 1,504
Net Cash Provided (used) by
Financing Activities 10,629 (1,108) 57,479
Increase (decrease) in Cash
and Cash Equivalents (1,084) (13,681) (5,887)
Cash and Cash Equivalents at
Beginning of Year 17,410 28,318 18,846
Cash and Cash Equivalents at
End of Year $16,326 $14,637 $12,959
Cash payments made for interest and income taxes during the years presented are
as follows:
2000 1999 1998
Interest $8,905 $8,856 $7,070
Income Taxes 2,448 941 1,764
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FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
(UNAUDITED)
(stated in thousands)
A non cash transaction took place on January 1, 1999 to purchase First Volunteer
Bank and its holding company. The parent company was purchased by
issuing 445,000 shares of our stock. The First Volunteer Investment
comprises various assets and liabilities.
Assets Liabilities
Cash $1
Due From $10
Prepaids $85
First Volunteer Bank Invest. $3,997
Plateau $3
Accrued Interest $3
Accrued Taxes $10
Other Payables $56
Note Payable $225
Capital $3,802
Totals $4,096 $4,096
FIRST CITIZENS BANCSHARES, INC.
STATEMENT OF COMPREHENSIVE INCOME
STATED IN THOUSANDS EXCEPT PER SHARE AMOUNTS
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
2000 1999 2000 1999
Net Income $1,368 $1,533 $2,842 $2,890
Changes in Available
for Sale Securities (98) (1,890) (90) (2,779)
Tax Impact (Available for
Sale Securities) 39 756 36 1,112
Comprehensive Income $1,309 $ 399 $2,788 $1,223
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FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
June 30, 2000
Note 1 - Consolidated Financial Statements
The consolidated balance sheet as of June 30, 2000, the consolidated statements
of income for the six month period ended June 30, 2000, 1999 and 1998, and the
consolidated statement of cash flows for the six month periods then ended have
been prepared by the company without an audit. The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with instructions to Form 10-Q and Article 10 of Regulation S - X.
Accordingly they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments necessary to present fairly the
financial position, results of operations and cash flows at June 30, 2000 and
for all periods presented have been made. Operating results for the reporting
periods presented are not necessarily indicative of results that may be expected
for the year ended December 31, 2000. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
company's annual report on Form 10-K for the year ended December 31, 1999.
Note 2 - Organization
First Citizens Bancshares, Inc., is a bank holding company chartered on December
14, 1982, under the laws of the State of Tennessee. On September 23, 1983, all
of the outstanding shares of common stock of First Citizens National Bank were
exchanged for an equal number of shares in First Citizens Bancshares, Inc.
Note 3 - Short Term Borrowings
June 30 June 30
2000 1999
Amount Outstanding-End of Period $46,435 $39,148
Weighted Average Rate of Outstanding 5.95% 4.79%
Maximum Amount of Borrowings at Month End $46,435 $49,148
Average Amounts Outstanding for Period $40,904 $46,354
Weighted Average Rate of Average Amounts 4.67% 4.77%
Note 4 - Long-Term Debt
Long term debt is comprised of Federal Home Loan Bank Borrowings, ESOP debt and
finance company debt. The Finance Company and ESOP debt is classified as long
term debt due the bank's intent to renew. Parent company ESOP debt is with
Suntrust-Nashville. The average life is as presented and the FHLB Funds are
matched with loans and investments.
Average Average Average
Volume Rate Maturity Variable
FHLB Borrowings $21,460 5.94% 2 Years Fixed
Finance Company Debt $ 1,000 6.00% 5 Years Fixed
ESOP Obligation $ 1,101 7.90% 7 Years Monthly
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FIRST CITIZENS BANCSHARES,INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(IN THOUSANDS)
June 30, 2000
Note 5 - Statement of Cash Flows
June 30,
2000 1999 1998
Actual payments made
during the periods:
Interest $8,905 $ 8,856 $ 7,070
Income taxes 2,448 941 1,764
Note 6 - Contingent Liabilities
There are no material pending litigations as of the current reportable date that
would result in a liability.
Note 7 - Investment Securities
The differences between book values of investment securities and market values
at June 30, 2000 and December 31, 1999, total ($3,483) and ($3,394)respectively.
FASB 115 requires banks to classify securities as held to maturity, available
for sale, and trading. First Citizens has $0 in the trading account. Available
for Sale securities values are adjusted to market quarterly and the adjustments
flow to the capital account (net of tax). Held to maturity securities are stated
at amortized cost. Available for sale securities reflects a $98 decrease for the
3 month period ending June 2000 and, net of tax, ($59) flowed to the capital
account. These movements can fluctuate with the bond market.
First Citizens has not engaged in derivative activities (as defined by
paragraphs 5-7 of FASB 119) for any of the reported periods.
Note 8 - Regulatory Capital Requirements
Regulatory agencies impose certain minimum capital requirements on both First
Citizens Bancshares, Inc. and First Citizens National Bank. On December 16,
1988, the Federal Reserve Board approved risk based capital guidelines for bank
holding companies. Presently, the holding company and First Citizens National
Bank exceed the required minimum standards established by regulators. The
consolidated Tier 1 and Tier 2 ratios are 12.90% and 14.06%
respectively.
Note 9 - Deferred Income Taxes
First Citizens adopted FASB 109 as of January 1, 1993. The deferred tax account
reflects an asset totaling $676. Timing differences mainly consist of Reserve
for Loan Loss timing differences.
Note 10 - Reserve for Loan Losses
FASB 114 and 118 was implemented during the first quarter of 1995. This new FASB
requires companies to set aside reserves for impaired loans.
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FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(IN THOUSANDS)
June 30, 2000
The following data reflects impaired totals for the reportable periods:
Impaired Loan Balance or Recorded Balance $2,453
Amount of Recorded Balance with Related Allowance $1,985
Amount of Recorded Balance with no Related Allowance $ 468
Interest income recognized on impaired loans is recognized
on a cash basis. Cash receipts will be applied as cost recovery
or principal recovery first, consistent with OCC Regulations.
First Citizens will continue to make sure the overall reserve is adequate in
addition to the impaired loans.
Note 11 - Asset Impairment
The Financial Accounting Standards Board issued Statement 121 addressing the
accounting for impairment of long-lived assets that will be held and used,
including certain identifiable intangibles, and the good-will related to those
assets. The statement addresses accounting for long-lived assets and certain
identifiable assets to be disposed.
The statement requires assets that are to be held and used are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset in question may not be recoverable.
As of the reportable date, there are no FASB 121 adjustments.
Note 12 - FASB 128 and 129 - Earnings Per Share
First Citizens Bancshares has a simple capital structure, having only common
stock outstanding. The method used for computing the weighted average shares is
based on a daily weighted average amount. First Citizens has no preferred stock,
redeemable stock, or other items that would dilute basic earnings per share.
Note 13 - FASB 130 - Comprehensive Income
This statement establishes reporting and display requirements for comprehensive
income and its components. A separate financial statement is presented that
begins with net income from operations and includes all other comprehensive
income. Bancshares has only one comprehensive income item (changes in the market
value of available for sale investment securities). This total is carried to the
Balance Sheet Net of Tax (unrealized gain or loss on available for sale).
Note 14 - FASB 132 Employers' disclosures about pensions and other
postretirement benefits.
First Citizens and its subsidiaries do not sponsor any defined benefit plans or
postretirement benefits.
10
FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(IN THOUSANDS)
June 30, 2000
Note 15 - Leveraged ESOP
Origination Date: 06/25/98
First Citizens Bancshares has guaranteed a $2 million loan payable to Suntrust
Bank of Nashville, Tennessee at the rate of Libor plus 1.20 percent. Accrued
interest is payable quarterly commencing July 1, 1998. Principal shall be paid
in equal quarterly payments of $52 commencing October 1, 1998. There are no
prepayment penalties associated with this loan. It is our intent to pay this
loan off within 7 years. First Citizens Bancshares issued 85,106 shares
at the market/appraised price of $23.50 to use for the ESOP purchase/leverage.
The parent company also recorded a note payable and a contra equity account for
this transaction. The contra equity account is called unallocated ESOP shares.
The source of loan repayment is the lead bank (First Citizens National
Bank). First Citizens will record as an expense the contributions for the
funding of the payments to the ESOP. First Citizens National Bank contributes
10% of covered payroll on an annual basis to the ESOP.
First Citizens National Bank of Dyersburg Employee Stock Ownership Plan and
Trust is considered a money purchase/stock bonus plan. The plan trustee is the
Investment Management and Trust Services Division of First Citizens National
Bank. The eligibility requirements to participate in the plan are: completed 1
year of service and attained the age of 21. Each year First Citizens National
Bank will contribute 10% to the money purchase pension plan.
Contributions to the stock bonus plan are discretionary. The stock bonus
plan has not been utilized in the last decade. An employee has to be employed
on the last day of the year and have completed 1000 hours of service to
receive a contribution.
The current ytd ESOP expense was $335 thousand.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The purpose of the following discussion is to address material changes in income
and expense accounts when compared to the quarter ending June 30, 2000.
Reference should be made to the financial statements included as ITEM 1 for a
more thorough understanding of the analysis. The discussion relates mainly to
activities of First Citizens National Bank (First Citizens) in its banking
business. However, the consolidated statements of income reflect activities of
both First Citizens and First Citizens Bancshares Inc. (Bancshares). Limited
activity to date by the Holding Company does not materially affect the income
report.
The first two quarters of year 2000 have been dominated by extreme volatility in
financial markets. Bank stocks have been hit especially hard as the Federal
Reserve continued efforts to calm the threat of inflation by slowing the rapid
rate of economic growth. The weapon of choice in this effort has been to
increase interest rates, having increased rates six times by a total of 1.75
percentage points in the past year. A rising rate environment is bad news for
banks, as pressures to net interest margins are reflected in reduced net
interest income. The good news would appear to be that the Fed may be at or
close to the end of their rate increases. Net income remained relatively flat
decreasing 1.66%, when compared to first two quarters of 1999. Net income for
the three months ended June 30, 2000 and 1999 was $1,368,000 and $1,533,000,
resulting in earnings per common share
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT)
of $0.37 cents and $0.42 cents per share. Net income for the six months ended
June 30, 2000 and 1999 was $2,842,000 and $2,890,000 or $.077 cents and $.080
cent per common share. Even though net interest margins increased slightly
during the first half of 2000, it is expected that the remaining two quarters
will be more negatively impacted by a declining net interest margin, a direct
result of rising rates.
Year to date returns on average assets and equity are 1.18% and 12.76%
respectively, compared to 1.24% and 13.37% for the same period in 1999. Both
performance ratios are earnings driven and, as a result, reflect pressures that
exist throughout the financial services industry. Current economic conditions
present a challenge to earnings potential of First Citizens. However, we will
deal with the challenge by intensifying efforts to create new sources of fee
income, examining processes to maximize efficiencies, and growing the customer
base through aggressive business development.
Total assets are up $15,144,000, an increase of 3.21% from June 30, 1999. Second
quarter loan growth continued at the moderate pace set during first quarter, and
as of June 30, 2000 was up 4.85% from June 30, 1999. Deposit growth for the
twelve months ending 6/30/00 was $12,200,000, an increase of 3.43 percent.
Shareholders equity was up 4.02%, ending the first half with a balance of
$45,378,000.
Dividends to shareholders were increased 20% from the same period one-year ago,
paying 45 cents per share compared to 37.5 cents per share the first two
quarters of 1999. The number of shares outstanding at June 30, 2000 was
3,718,000, up from 3,703,000 in 1999. The Dividend Reinvestment program was
suspended after twelve years with payment of June 15, 2000 dividend. The
decision to suspend the program resulted from the inability to purchase shares
in the market place to support the needs of Dividend Reinvestment. The Board
determined that issuing new shares to fund the program was not in the best
interest of shareholders.
Quality of the loan portfolio continues to be a primary focus of bank
management. Total loans as of June 30, 2000 were $337,565,000 compared to
$325,377,000 at December 31, 1999. Second quarter internal loan review report
indicates that the loan portfolio is in good condition based on the percentage
of problem loans to gross capital funds as of June 30, 1999. Total
non-performing loans at June 30 2000 were .89 percent of the loan portfolio
compared to .71 percent for peer group average. For further discussion of the
loan portfolio refer to the section labeled Composition of Loans.
During June, the Super Money Market Branch located inside the Kroger Supermarket
on Highway 78 was closed. Significant effort was expended to redirect customers
to other branches, with focus being on our new Green Village Office. The Super
Money Market office has for a number of years evolved to be a paying and
receiving station. Net losses continued to increase, with budget projections for
the current year at (-)$195,000. Monthly costs on a lease negotiated with NBC in
1986, increased with each renewal at five-year intervals, and are currently more
than twice the rental rate for comparable space in the Dyersburg area. Our
commitment on the current renewal period will expire in May of 2002. At that
time monthly lease payments will cease and the property will be released to
Kroger Company. The newly constructed 6400 square foot facility at Green Village
is designed to generate and service a much larger customer base than currently
exists. The addition of a commercial lender to staff, a small business center
designed to focus on the needs of local business and a full service postal
facility lay the groundwork for growth and development at this location.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CON'T.)
First Citizens continues to take an aggressive approach to meeting customer
demands for internet based banking services. "nBusiness", an internet based cash
management application, is in test market with five of the banks local small
business customers. The test period is projected to extend for 90 business days
before offering the service to small business owners. The bank's Small Business
Center located at the Green Village Office will also support internet based
financial support services, such as development of a small business financial
plan, payroll and marketing.
The Gramm-Leach-Bliley Act, referred to as "Financial Modernization" was signed
into law November 12, 1999. The Act is the most significant piece of legislation
to be enacted in the last 50 years and is expected to dramatically change the
landscape of the financial services industry. In essence, the Act is a
conglomeration of numerous provisions that impact a broad range of issues within
the banking industry. Financial Modernization will pave the way for a new era in
banking.
The Act contains seven titles, each of which focuses on a different aspect of
the financial services industry. An overview of the Act can be summarized using
the following points:
- - Removes barriers between insurance, banks, and securities by allowing these
entities to merge and sell each other's products under a holding company
structure with some exceptions.
- - Reasserts the supremacy of state regulation of the business of insurance
with specific exceptions.
- - Prohibits companies outside the financial services industry to purchase
(merge/affiliate) with insurers, banks, and/or securities firms.
- - Allows banks to sell insurance and securities products as long as it
discloses to the purchasers that these products are not guaranteed by the
Federal Deposit Insurance System.
- - Prohibits banks from tying the purchase of insurance and securities
products as conditions for loan approvals.
- - Permits affiliated companies to share customers' personal data with each
other but gives the customer the right to prohibit the sharing of this data
with companies outside the holding company structure.
- - Allows states to preempt federal laws that offer greater privacy
protections than those included in the Financial Services Modernization
Act.
- - Requires states to enact uniform laws and regulations governing the
licensure of individuals and entities authorized to sell and solicit the
purchases of insurance within and outside a state.
What does this mean for First Citizens? It means that First Citizens Bancshares,
Inc. has requested and been granted approval from the Federal Reserve Bank of
St. Louis to change its' Bank Holding Company status to a financial holding
company effective June 8, 2000. As a financial holding company, Bancshares may
engage in any type of financial activity, including any type of insurance or
securities activity, or become affiliated with any type of financial company. A
Financial Holding Company is subject to the same regulations as other bank
holding companies, including reporting, examination, supervision, and
consolidated capital requirements imposed by the Federal Reserve Board. There
are however, ways in which an FHC will be regulated differently than other bank
holding companies, including the conditions it must satisfy to be an FHC; and
the reduced requirements regarding notice and prior approval that will apply
when the company commences new activities or new affiliations. A second change
will be increased competition as large-scale independent
13
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CON'T.)
investment bankers (brokerage firms, insurance companies, mutual funds) are
likely to begin offering banking services in offices nationwide. The good news
is, our focus on diversification has placed the Company in a position to compete
by offering the same products and services at convenient locations by a staff
our customers know and trust. Through utilization of technology, we offer the
same sophisticated services as larger banks with offices nationwide. One example
is our Internet Banking Account that has drawn rave reviews from existing and
new customers. Customers of First Citizens Financial Plus have access to on-line
trading and White and Associates/First Citizens Insurance has established a web
presence that will progress toward on-line insurance sales.
Overall, opportunities available as a result of the new legislation are a plus
for community banks. Increased competition that is sure to develop from giant
financial services organizations simply means we will work harder to earn the
business of our customers. As community bankers, we recognize that bigger does
not always mean better, and knowing our customers affords us a tremendous
advantage as we strive to identify and serve their financial needs.
First Citizens intends to pursue challenges and opportunities presented by
"Financial Modernization". We have made the choice to compete and will do so
in an aggressive manner. We intend to maximize our potential for success as
we focus on the following:
- - Market Awareness - Business decisions will be driven by a clear
understanding of the financial needs of existing and potential customers, a
focus on enhancing our ability to serve those needs and an awareness of
changes which might impact either or both.
- - Strategic Planning - Establishing a clear direction for the future of First
Citizens, understanding what must be done to accomplish established goals
and recognizing signs that might indicate a need to rethink the strategy
are key components of the Plan. The management team, acting under guidance
of a diverse and committed Board of Directors is positioned to execute a
well thought out Strategic Plan.
- - Technology Utilization - Automated customer information systems, electronic
banking and remote distribution of services are as available to First
Citizens as to the largest bank in America. We are committed to investing
resources in a manner that will allow us to remain competitive as the
information age continues to grow and mature.
- - Staff Development - There is no one element within an organization more
important to success than is the quality of staff. In spite of automation
and the efficiencies of outsourcing, community banks still need people. In
response, a formalized Staff Development program was introduced in 1999,
which will support and enhance the quality of current and future management
of First Citizens at all levels. Recognizing leadership skills, enhancing
abilities through training and supporting realistic career goals are
primary objectives of this ongoing process.
The likely focus of the immediate future in this industry is the convergence of
financial services. Our emphasis on diversification in recent years has placed
First Citizens in the enviable position of being able to effectively compete in
this new environment.
14
The following table compares year-to-date non-interest income, and expense of
First Citizens as of June 30, 2000, 1999, and 1998:
Non-Interest Income
(in thousands)
June 30 June 30 June 30
2000 % of Change 1999 % of Change 1998
Service Charges
on Deposit
Accts. $1,255 10.08% $1,140 29.70% $ 879
Other Income $1,310 9.71% $1,194 34.16% $ 890
Trust Income $ 429 (13.15%) $ 494 24.12% $ 398
TOTAL NON-INTEREST
INCOME $2,994 5.86% $2,828 30.51% $2,167
Total non-interest income increased 5.86% and 30.51% when comparing 2000 to 1999
and 1998. The increase reflects a continued focus on fee income and the bank's
commitment to diversifying the income stream. Service Charges on Deposit
Accounts, which includes income from overdraft fees was up 10.08% when compared
to June 30, 1999. Increased sales in Broker Services and Insurance, reflective
of the bank's referral and sales program, resulted in a 9.71% increase in Other
Income. Referrals resulting in closed sales increased 72% when comparing the
first half of 2000 to 1999. Income received from Investment Management and Trust
Services was down 13.15% from last year. A large portion of fee income in this
area is calculated as a percent of portfolio market value. The volatility in the
financial markets has resulted in a decrease in market value of many investment
portfolios, thus negatively impacting derived income in this area. In
addition, a portion of the fees due on certain accounts were not collected
before June 30, 2000, therefore are not reflected in the Trust Income total.
Non-Interest Expense
2000 % of Change 1999 % of Change 1998
Salaries & Employee
Benefits $4,461 4.42% $4,272 24.92% $3,420
Net Occupancy
Expense $1,414 12.57% $1,256 29.69% $ 969
Other Operating
Expense $2,009 1.36% $1,982 24.27% $1,595
TOTAL NON-INTEREST
EXPENSE $7,884 4.98% $7,510 25.51% $5,984
Non Interest Expense
Non-interest expense increased slightly to $7,884,000 in 2000 from $7,510,000 in
1999 reflecting ongoing efforts to monitor and control expense categories such
as salaries and benefits, net occupancy expense and other operating expense. A
comparison of staffing levels reveals that First Citizens maintains one fulltime
equivalent employee for every 2.4 million in assets. Peer banks ratio as of
6/31/00 was 2.61 million dollars in assets per employee. Unlike most peer banks,
First Citizens maintains an Investment and Trust Services Division, Brokerage
Firm, Agricultural and Mortgage Lending Department, and a Finance Company. Each
of these entities adds additional staff, as does the extended banking hours on
Thursday, Friday, and Saturday. First Citizens is committed to attracting and
retaining well qualified personnel by offering salaries and employee benefits
which equal or exceed peer companies, paying bonuses when productivity standards
are met, and enhancing career opportunities by promoting from within when
possible. Fulltime equivalent employees were 197 at 6/30/00. First Volunteer
acquisition (21), Opening of Delta Finance II (2), and employees hired to
establish
15
brokerage and mortgage lending service in Obion and Lauderdale Counties (3)
Electronic Banking/Call Center (3) increased FTE approximately 30 employees in
1999. The opening of the new Green Village facility, designed to generate and
service a much larger customer base, increased FTE by three employees with the
addition of a Commercial Loan Officer, Post Office employee and another Customer
Service Representative.
Technology investments resulted in an increase in computer expense and the
related depreciation to those investments. Net occupancy and other operating
expense increased 12.57% and 1.36% respectively when compared to 6/30/99.
Installation of a Wide Area Network was completed the last half of 1998. Other
investments in technology related equipment were the purchase and installation
of computer related wiring and equipment associated with bringing Bank of Troy
and First Volunteer computer systems online with those of First Citizens
National Bank. Net occupancy expense is projected to continue to increase as
technology is installed to meet the needs of our customer base. These costs will
be offset in part by the reallocation of employees to fee income producing
positions. Other operating expense increased in 1999 due to organizational cost
associated with the Insurance Agency, Bank of Troy and First Volunteer
acquisitions.
Deposits
The average daily amount of deposits and average rates paid on such deposits is
summarized for the quarter ending June 30 for the years indicated:
COMPOSITION OF DEPOSITS
(in thousands)
2000 1999 1998
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
Non-Interest
Bearing Demand
Deposits $ 40,771 0.00% $ 37,139 0.00% $ 33,353 0.00%
Savings Deposits $116,126 3.05% $119,609 2.88% $ 92,429 3.23%
Time Deposits $210,730 5.60% $190,227 5.26% $185,511 5.63%
TOTAL DEPOSITS $367,627 4.17% $346,975 3.87% $311,293 4.19%
Total deposits for the company have increased approximately 6% and 11.46% when
comparing 2000 to 1999 and 1998. Deposit growth in 2000 is reflected primarily
in Time Deposits with an 11% increase from 1999. Deposit instruments are created
to target local consumers, professionals, and small businesses as its primary
deposit base. These instruments consist primarily of demand deposits, savings
accounts, certificates of deposits and individual retirement accounts. Senior
products consist of discount service charges and other benefits designed for
that market segment.
Non-interest bearing deposits increased $7 million since 1998. Retention of
Savings and time deposits continues to be a challenge with increased competition
by brokerage firms, insurance companies and other financial service providers.
The company's market place is considered highly competitive, with a fairly
sophisticated customer base. According to a market share analysis, Bancshares
holds approximately 54% of bank deposits domiciled in Dyer County. First
Citizens competes with First Tennessee Bank, N.A. (21% of total deposits), Union
Planters National Bank (12%), Security Bank (15.5%) and City State Bank (2%) in
the Dyer County market. The bank also competes with the Dyersburg Dyer County
City Employees Credit Union, several finance companies, three brokerage firms,
16
and numerous other types of financial services providers. First Citizens
competes with 2 or more large community bank competitors in the Obion County as
well as all other types of financial service providers. Competitor marketing
programs are aggressive in seeking new deposit dollars with advertising programs
that offers rates on certificates of deposits in excess of 7 percent and above
in some market areas. First Citizens holds in excess of 15% of total deposits in
Obion County and 4% in Lauderdale County. Economic indicators for the West
Tennessee area are extremely optimistic. We expect the population to grow at a
marginal rate, in the three counties in which we have banking locations. Dyer
County is projected to grow from the 1998 population of 36,489 to 37,400 by the
year-end 2003. Previous expectations of Lauderdale County were for the
population to decline. However current projections call for an increase from
31,960 to 32,055, a gain of less than 1 percent. The population of Obion County
is projected to increase slightly in the next five years.
Average rates paid on deposits continue to reflect sound asset/liability
management strategy to maintain interest margins that are consistent with
company goals. A deposit strategy adopted in 1996 reflected a shift from paying
higher rates to obtain retail deposits to the purchase of wholesale deposits.
Interest cost of wholesale deposits in comparison to market rates paid on retail
deposits often provides for net interest margins that compliment the bank's
capital plan. In order to stimulate deposit growth moving into the third quarter
of 1999, a decision was made to increase deposit rates to a level more in line
or slightly above Dyer County market rates. The decision to pay higher rates was
based on the need to acquire or retain a total customer relationship and to
attract deposits to fund aggressive loan demand. It is presently more cost
effective and efficient to borrow wholesale funds which can be earmarked for a
specific dollar amount and allow for a more precise management of maturities.
Therefore, aggressive pricing of deposits is based on total customer
relationship, and in some cases, high volume deposits. During the second quarter
of 2000, a new competitively priced 18 month CD was introduced which boasted the
feature of an interest penalty waiver for early withdrawal after the CD has been
on deposit for 12 months. The term on this CD was designed in accordance with
our strategic funding objectives.
The bank determines the level to which short-term and marketable assets are
available to fund short-term liabilities and outflow of deposits through its
liquidity ratio. The liquidity ratio at 6/30/00 was 8.96% well within the policy
range of 6.06% to 9.24%. Another measure of liquidity is the dependency ratio
that indicates the degree to which volatile liabilities are being relied upon to
fund longer term assets. The lower the dependency ratio, the more liquid the
bank. First Citizens dependency ratio as of 6/30/00 was 23.85% within policy
guidelines of 20.28% to 24.65%.
Sweep accounts totaling $16,860,000 are not included in the average balances for
deposits. The "Sweep" total is included in the balance sheet category of
securities sold under agreement to repurchase. Repurchase agreements ("sweep")
is a product offered to large balance customers, which provides for funds to
automatically sweep daily from a demand deposit account into an overnight
repurchase agreement. This affords commercial customers the opportunity to earn
interest on excess collected funds while providing availability of adequate
funds to clear large denomination checks as presented for payment.
17
The following table sets forth the maturity distribution of Certificates of
Deposit and other time deposits of $100,000.00 or more outstanding on the books
of First Citizens on June 30, 2000:
Maturity Distribution Of Time Certificates Of Deposit
In Amounts of $100,000.00 Or More As Of June 30, 2000
(in thousands)
Maturity Total Amount
3 months or less $34,871
3 through 12 months $32,735
1 year - 3 years $ 5,013
over 3 years $ 230
Total $72,849
A summary of average interest earning assets and interest bearing liabilities is
set forth in the following table together with average yields on earnings assets
and average costs on interest bearing liabilities. The average yield on interest
earning assets reflects an increase when reviewing information presented in the
table. Interest earning assets as of 6/30/00 were $430,324,000 at an average
rate of 8.84% compared to $426,108,000 average rate of 8.57% at 6/30/99. The
average rate on total interest bearing liabilities was 4.74%, 4.34% and 4.98%,
as of June 30, 2000, 1999, and 1998. Net yield on average earning assets was
4.53%, 4.63%, and 4.48%. Maintaining interest rate margins achieved in prior
years continues to be a challenge. When interest rates rise, customers are
shopping banks to lock in the lowest rate possible on loans, while deposit
customers are shopping to lock in the highest rate on deposits. In a rising rate
environment, the competition for deposit dollars increases and outflow to
mutual, funds brokered CD's and other non traditional investments increases. The
sensitivity to loan rates also increases as banks scramble to retain quality
customers being "courted" by the competition. First Citizens has historically
out performed peer banks with the average rate earned on the loan portfolio.
Asset/Liability policies are in place to protect the company from a material
negative impact brought about by volatile swings in interest rates. Interest
margins are well managed to achieve acceptable profits and a return on equity
within policy guidelines.
18
First Citizens Bancshares
Quarter Ending June 30
Monthly Average Balances and Interest Rates
(in thousands)
2000 1999 1998
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
ASSETS
INTEREST EARNING
ASSETS:
Loans (1)(2)(3) $328,974 $7,819 9.50% $310,911 $7,256 9.33% $265,028 $6,385 9.64%
Investment Securities:
Taxable $ 85,635 $1,409 6.58% $ 96,798 $1,576 6.52% $ 80,158 $1,331 6.64%
Tax Exempt (4) $14,059 $ 270 7.68% $ 14,233 $ 240 6.75% $ 12,175 $ 218 7.16%
Interest Earning
Deposits $ 1,656 $ 19 4.58% $ 971 $ 11 4.54% $ 480 $ 6 5.00%
Trading Account $ 0 $ 0 0.00% $ 0 $ 0 0.00% $ 0 $ 0 0.00%
Federal Funds Sold $ 0 $ 0 0.00% $ 3,195 $ 41 5.14% $ 1,411 $ 56 15.87%
Lease Financing $ 0 $ 0 0.00% $ 0 $ 0 0.00% $ 0 $ 0 0.00%
Total Interest
Earning Assets $430,324 $9,517 8.84% $426,108 $9,124 8.57% $359,252 $7,996 8.90%
NON-INTEREST
EARNING ASSETS:
Cash and Due From
Banks $ 14,869 $ 0 0.00% $ 14,190 $ 0 0.00% $ 10,912 $ 0 0.00%
Bank Premises and
Equipment $ 14,223 $ 0 0.00% $ 12,313 $ 0 0.00% $ 9,110 $ 0 0.00%
Other Assets $ 19,745 $ 0 0.00% $ 18,910 $ 0 0.00% $ 13,950 $ 0 0.00%
Total Assets $479,161 $ 0 0.00% $471,521 $ 0 0.00% $393,224 $ 0 0.00%
LIABILITIES AND
SHAREHOLDERS' EQUITY:
INTEREST BEARING
LIABILITIES:
Savings Deposits $116,126 $ 886 3.05% $119,609 $ 861 2.88% $ 92,429 $ 747 3.23%
Time Deposits $210,730 $2,952 5.60% $190,227 $2,499 5.26% $185,511 $2,511 5.63%
Federal Funds
Purchased and
Other Interest
Bearing
Liabilities $ 63,334 $ 804 5.07% $ 77,138 $ 832 4.32% $ 43,730 $ 714 6.53%
Total Interest
Bearing
Liabilities $390,190 $4,642 4.75% $386,974 $4,192 4.34% $318,759 $3,972 4.98%
NON-INTEREST
BEARING
LIABILITIES:
Demand Deposits $ 40,771 $ 0 0.00% $ 37,139 $ 0 0.00% $ 33,353 $ 0 0.00%
Other Liab. $ 2,994 $ 0 0.00% $ 3,087 $ 0 0.00% $ 1,887 $ 0 0.00%
Total Liab. $433,955 $ 0 0.00% $427,200 $ 0 0.00% $356,910 $ 0 0.00%
SHAREHOLDERS'
EQUITY $ 45,206 $ 0 0.00% $ 44,321 $ 0 0.00% $ 36,314 $ 0 0.00%
TOTAL LIABILITIES
AND SHAREHOLDERS'
EQUITY $479,161 $ 0 0.00% $471,521 $ 0 0.00% $393,224 $ 0 0.00%
NET INTEREST
INCOME $ $4,875 $ 0 $4,932 0.00% $ 0 $4,024 0.00%
NET YIELD ON
AVERAGE EARNING
ASSETS
(ANNUALIZED) $ $ 0 4.53% $ 0 $ 0 4.63% $ 0 $ 0 4.48%
[FN]
(1) Loan totals are shown net of interest collected, not earned and Loan Loss
Reserve.
(2) Non-accrual loans are included in average total loans.
(3) Loan Fees are included in interest income and the computations of the yield
on loans.
(4) Interest and rates on securities which are non-taxable for Federal Income
Tax purposes are presented on a taxable equivalent basis.
</FN>
19
COMPOSITION OF LOANS
Total loans as of 6/30/00 were $337,565,000 compared to $322,048,000 at 6/30/99.
Loans acquired in merger and acquisition activity added approximately $58
million to the loan portfolio in 1999. Real Estate Mortgage loans comprise over
59% of First Citizens' total loan portfolio. Commercial expansions in retail as
well as medical facility construction represent a significant volume in total
real estate loans.
Commercial Real Estate Loans were $95,573,041 as of 6/30/00, up 16.32% when
compared to the same time period in 1999. One to Four Family Residential and
Home Equity loans comprise approximately 41% of total portfolio compared to 35%
in 1999. Residential Real Estate Loans were $111,091,624 as of 6/30/00, up 5.1%
when compared to the same period in 1999. The Dyer County population is
approximately 41,000 based on 1997 estimates (Dyersburg/Dyer County Chamber of
Commerce Publication). The upward trend in residential mortgages is not only
attributed to acquired loans but, to growth in population and new home starts in
Dyer and the surrounding counties. New housing starts in 1999 totaled 73 in
Dyersburg and 135 in Dyer County. Demographics from the Dyersburg/Dyer County
Chamber of Commerce reflect Dyersburg as one of the fastest-growing communities
in Tennessee. During the 1980's the population increased 16.4%. Tennessee named
Dyer County a Three-Star Community for 15 consecutive years based on its
community economic development preparedness. Dyersburg/Dyer County is a
regional, retail, medical, employment and cultural center for more than 300,000
people who live in 10 surrounding counties. The 1997 per capita income for trade
area counties list Dyer County at $20,178, Obion at $20,818 and Lauderdale at
$16,888. Other surrounding counties range from $11,705 to $19,487. A diversified
mix of employment opportunities has provided a stable, growing economy. The Dyer
County distribution of employment consists primarily of service employers 14.9%,
government 14.7%, trade 19.3%, and manufacturing 40.5%. Dyer County's
unemployment rate for June, 2000 was 5.9% unchanged from first quarter. The
unemployment rate for Obion and Lauderdale Counties was 4.1% and 5.8%
respectively. The State of Tennessee rate was 3.6%.
First Citizens is the largest agricultural lender in the state of Tennessee and
is an approved Farm Credit Services lender. Agriculture comprises a significant
portion of the Dyer County Market. Total farm land in production is
approximately 231,000 acres or 56% of Dyer County land. Farming is a $79 million
industry in the county with Dyer County being Tennessee's no. 1 producer of
soybeans, grain, sorghum, and commercial vegetables. Other important crops are
wheat, cotton, and corn. The county's 509 farm operations average 453 acres with
an average value of $499,501. Agricultural credit 90 days or more past due total
$1,450,686 or .43% of total loans. Agricultural problem loans total $2,603,514
or .77% of total loans.
Growth in the consumer loan portfolio slowed in early 1997, because of an
increase in the number of bankruptcies in the State of Tennessee as well as
perceived deterioration in consumer credit within Dyer County. Loan
Administration developed credit scoring tools as well as tighter consumer
lending policies to manage consumer losses. Past due consumer loan total was
$710,337 or .21% of total loans.
The following table sets forth loan totals net of unearned income by category
for the past five years:
June 30
(in thousands)
2000 1999 1998 1997 1996
Real Estate Loans:
Construction $ 34,501 $ 31,072 $ 23,461 $ 20,579 $ 14,924
Mortgage $199,651 $181,101 $157,373 $130,584 $116,719
Commercial, Financial
and Agricultural Loans $ 62,776 $ 68,735 $ 56,166 $ 44,912 $ 53,279
Installment Loans to
Individuals $ 37,758 $ 38,387 $ 31,421 $ 24,485 $ 22,083
Other Loans $ 2,879 $ 2,753 $ 2,524 $ 2,314 $ 2,250
TOTAL LOANS $337,565 $322,048 $270,945 $222,874 $209,255
20
The provision for loan losses increased in proportion to loan growth as required
by bank loan policy. The provision at 6/30/00 was $3,898,000 or 1.15% of total
loans. Policy requires a provision of at least one percent of total loans.
Experience of the lending staff and adherence to loan policy lends a comfort
level to the portfolio that supports the Loan Loss Allowance at the present
level. Problem loans at 6/30/00 are $8.1 million or 2.39% of total loan
portfolio, down 10.34% from $8.9 million for the same period in 1999.
Composition of Loans
Due after
Due in one one year but Due after
year or less within five years five years
(in thousands)
Real Estate $ 49,673 $130,210 $54,269
Commercial, Financial
and Agricultural $ 34,801 $ 24,140 $ 3,835
All Other Loans $ 17,823 $ 22,572 $ 242
TOTAL $102,297 $176,922 $58,346
Loans with Maturities After One Year for which:
(in thousands)
Interest Rates are Fixed or Predetermined $202,832
Interest Rates are Floating or Adjustable $ 32,436
Loan Administration sets policy guidelines approved by the Board of Directors
regarding portfolio diversification and underwriting standards. Loan policy
includes board approved guidelines for collateralization, loans in excess of
loan to value limits, maximum loan amount, maximum maturity and amortization
period for each loan type. Policy guidelines for loan to value ratio and
maturities related to various collateral are as follows:
Collateral Max. Amortization Max. LTV
Real Estate Amort. discussed herein Amort. discussed herein
Equipment 5 Years 75%
Inventory 5 Years 50%
A/R 5 Years 75%
Livestock 5 Years 80%
Crops 1 Year 50%
*Securities 10 Years 75% (Listed)
50% (Unlisted)
*Maximum LTV on margin stocks (stocks not listed on a national exchange) when
proceeds are used to purchase or carry same, shall be 50%.
Diversification of the banks' real estate portfolio is a necessary and desirable
goal of the bank's real estate loan policy. In order to achieve and maintain a
prudent degree of diversity, given the composition and general economic state of
the bank's market area, the bank will strive to maintain a real estate loan
portfolio diversification based on the following:
*Agricultural loans totaling in aggregate no more than 20% of the
Bank's total loans;
*Land acquisition and development loans totaling in aggregate no
more than 10% of the Bank's total loans;
*Commercial construction loans totaling in aggregate no more than
10% of the Bank's total loans;
21
*Residential construction loans totaling in aggregate no more than
10% of the Bank's total loans;
*Residential mortgage loans totaling in aggregate no more than 40%
of the Bank's total loans; and
*Commercial loans totaling in aggregate no more than 30% of the
Bank's total loans.
It is the policy of FCNB that no real estate loan will be made (except in
accordance with the provisions for certain loans in excess of supervisory limits
provided for hereinafter) that exceed the loan-to-value percentage limitations
("LTV limits") designated by category as follows:
Loan Category LTV Limit (%)
Raw Land 65
Land Development or Farmland 75
Construction:
Commercial, multi-family, and
other non-residential 80
1-to-4 family residential 80
Improved Property 80
Owner-occupied 1-to-4 family
and home equity 80
Multi-family construction loans include loans secured by cooperatives and
condominiums. Owner-occupied 1-to-4 family and home equity loans which equal or
exceed 90% LTV at origination must have either private mortgage insurance or
other readily marketable collateral pledged in support of the credit.
On occasion, the Loan Committee may entertain and approve a request to lend sums
in excess of the LTV limits as established by policy, provided that:
a. The request is fully documented to support the fact that other credit
factors justify the approval of that particular loan as an exception to the
LTV limit;
b. The loan, if approved, is designated in the Bank's records and reported as
an aggregate number with all other such loans approved by the full Board of
Directors on at least a quarterly basis;
c. The aggregate total of all loans so approved, including the extension of
credit then under consideration, shall not exceed 50% of the Bank's total
capital; and
d. Provided further that the aggregate portion of these loans in excess of the
LTV limits that are classified as commercial, agricultural, multi-family or
non-1-to-4 family residential property shall not exceed 30% of the Bank's
total capital.
22
Amortization Schedules
Every loan must have a documented repayment arrangement. While reasonable
flexibility is necessary to meet the credit needs of the Bank's customers, in
general all loans should be repaid within the following time frames:
Loan Category Amortized Period
Raw Land 10 years
Construction:
Commercial, multi-family, and
other non-residential 20 years
1-to-4 family residential 20 years
Improved Property Farmland 20 years
Owner-occupied 1-to-4 family
and home equity 20 years
The aggregate amount of unused guarantees, commitments to extend credit and
standby letters of credit was $51,914,000 as of 6/30/00.
The average yield on loans of First Citizens National Bank for the second
quarter of the years indicated is as follows:
2000 - 9.50%
1999 - 9.33%
1998 - 9.64%
1997 - 9.82%
1996 - 9.57%
Loan Maturities and Sensitivity to Changes in Interest Rates
The degree of risk to which a bank is subjected can be controlled through a well
managed asset/liability program. First Citizens controls interest rate risk by
employing interest sensitive liabilities in assets that are also interest
sensitive. One tool used to ensure market rate return is variable rate loans.
Loans totaling $134,733,000 or 39.91% of the total portfolio are subject to
repricing within one year or carry a variable rate of interest. The ratio is
down from 44.91% at 6/30/99. Maturities in the one to five year category total
$176,922,000.
NON-PERFORMING ASSETS
Total non performing loans as of quarter end represent .89% of the loan
portfolio compared to peer group .71% (3/31/00). Loans belonging to only three
agricultural borrowers added approximately $2.6 million to the non-performing
loan total during the 2nd quarter. Total non-performing loans at 6/30/99
represent .29% of total loans compared to peer group total of .82%.
Non-accrual loans as of June 30, 2000 total $985,000 compared to $662,000 at
6/30/99 representing a net increase of $323,000.
Categorization of a loan as non-performing is not in itself a reliable indicator
of potential loan loss. Policy states that the Bank shall not accrue interest or
discount on (1) any asset which is maintained on a cash basis because of
deterioration in the financial position of the borrower, (2) any asset for which
payment-in-full of interest or principal is not expected, or (3) any asset upon
which principal or interest has been in default for a period of 90 days or more
unless it is both well secured and in the process of collection.
23
For purposes of applying the 90 day past due test for the non-accrual of
interest discussed above, the date on which an asset reaches non-accrual status
is determined by its contractual term. A debt is well secured if it is secured
(1) by collateral in the form of liens or pledges or real or personal property,
including securities that have a realizable value sufficient to discharge the
debt (including accrued interest) in full, or (2) by the guaranty of a
financially responsible party. A debt is considered to be proceeding in due
course either through legal action, including judgement enforcement procedures,
or, in appropriate circumstances, through collection efforts not involving legal
action which are reasonably expected to result in repayment of the debt or in
its restoration to a current status. Loans that represent a potential loss to
First Citizens are adequately reserved for in the provision for loan losses.
Interest income on loans is recorded on an accrual basis. The accrual of
interest is discontinued on all loans, except consumer loans, which become 90
days past due, unless the loan is well secured and in the process of collection.
Consumer loans which become past due 90 to 120 days are charged to the allowance
for loan losses. Gross interest income that would have been recorded for the six
months ending 6/30/00 if all loans reported as non-accrual had been current in
accordance with their original terms and had been outstanding throughout the
period is $46,000. Interest income on loans reported as ninety days past due and
on interest accrual status was $95,000 for year-to-date 2000. Loans on which
terms have been modified to provide for a reduction of either principal or
interest as a result of deterioration in the financial position of the borrower
are considered to be Restructured Loans. Restructured loan total at June 30,
2000 was zero.
Loans classified by regulatory examiners and not reported under non-accrual,
past due or restructured pose no significant credit problems. Loan Officers are
required to develop a "Plan of Action" for each problem loan within their
portfolio. Adherence to each established plan is monitored by Loan
Administration and reevaluated at regular intervals for effectiveness.
The following table sets forth the balance of non-performing loans as of June
30, for the years indicated:
Non-Performing Loans
June 30
(in thousands)
90 Days Past Due
Year Non-Accrual Accruing Interest Total
2000 $ 985 $2,015 $3,000
1999 $ 662 $ 255 $ 917
1998 $ 316 $ 331 $ 647
1997 $1,097 $ 225 $1,322
1996 $1,725 $ 116 $1,841
LOAN LOSS EXPERIENCE AND
RESERVES FOR LOAN LOSSES
During the quarter just ended activity to the Reserve Account consisted of (1)
loan charge-offs - $141,000 (2) recovery of loans previously charged off -
$83,000 and (3) additions to Reserve - $194,000. Recovery of loans previously
charged off continues to be a priority to the bank. One full time employee is
assigned the responsibility for recovery of charged off loans and deposit
overdrafts. The Reserve for Loan Losses Balance at quarter end was $3,898,000 or
1.15% of total loans. Bank policy mandates a reserve balance equal to one
percent of total loans. Projected charge-offs for the year are approximately
$700,000.
24
An analysis of the allocation of the allowance for Loan Losses is made on a
fiscal quarter at the end of the month, (February, May, August, and November)
and reported to the Board at its meeting immediately preceding quarter-end.
Requirements of FASB 114 & 118 have been incorporated into the policy for
Accounting by Creditor for Impairment of a Loan. A loan is impaired when it is
probable that a creditor will be unable to collect all amounts due of principal
and interest according to the original contractional terms of the loan. First
Citizens adopted the following as a measure of impairment: (1) Impairment of a
loan at First Citizens shall exist when the present value of expected future
cash flows discounted at the loans effective interest rate impede full
collection of the contract; and (2) Fair Value of the collateral, if the loan is
collateral dependent, indicates unexpected collection of full contract value.
The Impairment decision will be reported to the Board of Directors and other
appropriate regulatory agencies as specified in FASB 114 and 118. The bank will
continue to follow regulatory guidelines for income recognition for purposes of
generally accepted accounting principles, as well as regulatory accounting
principles.
An annual review of the loan portfolio to identify risks will cover a minimum of
70% of the gross portfolio less installment loans. In addition, any single note
or series of notes directly or indirectly related to one borrower which equals
25% of the bank's legal lending limit will be included in the review.
For analysis purposes loans reviewed will be separated into five
classifications:
1. Pass - Loans that have been reviewed and graded high quality or no major
deficiencies.
2. Watch - Loans which, because of unusual circumstances, need to be
supervised with slightly more attention than is customary.
3. Problem - Loans which require additional collection effort to liquidate
both principal and interest.
4. Specific Allocation - Impaired loans, in total or in part, in which a
future loss is possible.
5. Charge-Off
Examples of factors taken into consideration during the review are: Industry or
geographic economic problems, sale of business, change of or disagreement among
management, unusual growth or expansion of the business, past due for either
principal or interest 90 days, placed on non-accrual or renegotiated status,
renewed four times without principal reduction, declining financial condition,
adverse change in personal life, frequent overdrafts, lack of cooperation by
borrower, decline in marketability or market value of collateral, insufficient
cash flow, and inadequate collateral values.
25
LOAN LOSS ALLOWANCE ANALYSIS
DATE
AVERAGE AVERAGE PERCENT CURRENT RESERVE
LOSS 3 YRS. BALANCE 3 YRS. BALANCE REQUIRED
I. CREDIT $ GROSS $ % $ $
CARDS
II. INSTALL. $ NET $ % $ $
LOANS
III. IMPAIRED WITH ALLOCATIONS $ $
IMPAIRED WITHOUT ALLOCATIONS $ $
ALLOWANCE
IV. DOUBTFUL 50% $ $
SUBSTANDARD 10%
WATCH 5%
OTHER LOANS NOT LISTED PREVIOUSLY .75%
LESS SBA/FMHA GUARANTEED PORTIONS
__________
TOTAL LOANS $
V. LETTERS OF CREDIT .75% $ $
VI. OTHER REAL ESTATE OWNED $
______
RESERVE REQUIRED $
RESERVE BALANCE $
EXCESS (DEFICIT) $
RESERVE AS % OF TOTAL LOANS %
PEER GROUP %
LOSS EXPERIENCE III & IV AVERAGE LAST 3 YEARS
.% OR $
Management estimates the approximate amount of charge-offs for the 12 month
period ending 12/31/00 to be as follows:
Domestic Amount
Commercial, Financial & Agricultural $150,000
Real Estate-Construction 0
Real Estate-Mortgage 150,000
Installment Loans to individuals 400,000
Lease financing 0
Foreign N/A
01/01/00 through 12/31/00 Total $700,000
The book value of repossessed real property held by the bank at 6/30/00 was
$296,000. The balance as of 6/30/99 was $226,000. Accounting for adjustments to
the value of Other Real Estate when recorded subsequent to foreclosure is
accomplished on the basis of an independent appraisal. The asset is recorded at
the lesser of its appraised value or the loan balance.
26
All other real estate parcels held as ORE are appraised annually and the
carrying value adjusted to reflect the decline, if any, in its realizable value.
Such adjustments are charged directly to expense.
The following table summarizes the monthly average of net loans outstanding;
changes in the reserve for loan losses arising from loans charged off and
recoveries on loans previously charged off; additions to the reserve which have
been charged to operating expense; and the ratio of net loans charged off to
average loans outstanding.
Loan Loss Experience and Reserve for Loan Losses
Quarter ending June 30
(in thousands)
2000 1999 1998 1997 1996
Average Net Loans
Outstanding $328,974 $310,911 $265,028 $216,306 $201,924
Balance of Reserve
for Loan Losses
at Beginning of
Period $ 3,762 $ 3,940 $ 3,197 $ 2,446 $ 2,289
Loan Charge-Offs $ (141)$ (158)$ (146) $ (79)$ (96)
Recovery of Loans
Previously Charged Off $ 83 $ 38 $ 79 $ 38 $ 32
Net Loans Charged Off $ (58)$ (120)$ (67) $ (41)$ (64)
Additions to Reserve
Charged to Operating
Expense $ 194 $ 196 $ 308 $ 191 $ 134
Changes incident to
Mergers $ 0 $ 0 $ 0 $ 0 $ 0
Balance at End of
Period $ 3,898 $ 3,822 $ 3,438 $ 2,596 $ 2,359
Ratio of Net Charge-
Offs during quarter
to Average Net Loans
Outstanding (.01%) (.03%) .02% (.02%) (.04%)
The following table will identify charge-offs by category
for the period ending 6/30/00.
Charge-Offs: 2000 1999
Domestic
Commercial, Financial and Agricultural $ 57 $ 12
Real Estate - Construction 0 0
Real Estate - Mortgage 13 0
Installment Loans to Individuals 51 121
Lease Financing 0 0
Credit Cards 20 25
Total ($141) ($158)
Recoveries:
Domestic:
Commercial, Financial and Agricultural $ 10 $ 0
Real Estate - Construction 0 0
Real Estate - Mortgage 27 0
Installment Loans to Individuals 44 38
Lease Financing 0 0
Credit Cards 2 0
Total $ 83 $ 38
Net $(58) $(120)
27
INVESTMENT SECURITIES
The book value of listed investment securities as of the dates
indicated are summarized as follows:
Composition of Investment Securities
June 30
(in thousands)
2000 1999 1998 1997 1996
U. S. Treasury &
Government Agencies $82,103 $88,321 $73,311 $66,322 $63,154
State & Political
Subdivisions $14,402 $13,606 $12,078 $11,321 $10,756
All Others $ 3,788 $ 3,160 $ 2,676 $ 3,032 $ 3,435
TOTALS $100,293 $105,087 $88,065 $80,675 $77,345
A major function of the bank's investment portfolio is to maximize returns from
investments while controlling the basic elements of risk. A second goal is to
provide liquidity and meet financial needs of the customer base. Investment
Securities also serve as collateral for government and public funds deposits.
Investments for the second quarter, 2000 were down approximately $5 million when
compared to the same period in 1999. Sales made from the Available for Sale
account totaled $0. Book value compared to market value resulted in a negative
entry to the capital account of $54 thousand for the year. FASB 115 requires
banks to mark to market investment securities held in the Available for Sale
portion of the Investment portfolio. Mark to market dictates that these
investments be marked up or down to account for fluctuation in market value
created by changes in interest rates. The effect to capital is temporary if
securities are held to maturity. The average maturity of the portfolio is 7
years and 3 months. The average pretax yield at 6/30/00 was 6.42% compared to
6.27% at 6/30/99. Tax free investments total approximately $14.4 million as of
quarter end. Securities purchased during 2000 total $4.2 million while
securities sold total $0.
Fixed rate holdings currently have an expected average life of 5.9 years. It is
estimated that this average life would extend to 6.4 years should rates rise 100
or 200 basis points. This is a result of some extension occurring in the
callable bonds and mortgage-backed holdings as rates rise. Should rates decline
100 basis points the average life would likely decrease to 5.0 years.
In terms of price sensitivity, we estimate that if rates were to increase 100
basis points, market value of the portfolio would fall by 4.3%, while rates
rising 200 basis points would impact the market value by a negative 8.6%. This
is comparable with the price sensitivity of a Treasury bond with a term of about
5 years. If rates drop 100 basis points, we estimate that the market value would
increase by 4.0%.
Adjustable rate holdings reprice on an annual or more frequent basis and
currently have an average life of 5.6 years. Due to the structure of these
holdings, we would expect very little extension to occur in average life should
interest rates rise, but could see some shortening should rates fall. We
estimate that the adjustable rate holdings also have the price sensitivity of
about a 3-year Treasury, although this is more difficult to project on
adjustable rate holdings than on fixed rate holdings.
28
Maturities in the portfolio are made up of 4% within one year, 40% after one
year and within five years, 42% after five years and within 10 years, and 14%
after 10 years. Maturities were extended from 5 to 10 years on most securities
purchased the first half of 2000. Management made a conscious effort to extend
maturities for a higher yield on the portfolio. Securities purchased with
extended maturities bear call features ranging from 1 to 3 years. Due to the
present interest rate environment, no securities are expected to be called in
the next 12 months. Maturities on investments purchased are structured to meet
loan demand as well as projected changes in interest rates.
First Citizens National Bank does not engage in derivative activities as defined
by paragraph 5 thru 7 of FASB 119 (reference footnote 7).
Investment Securities
Held to Maturity Available for Sale
June 30, 2000
(in thousands)
Amortized Fair Amortized Fair
Cost Value Cost Value
U.S. Treasury Securities $ 0 $ 0 $ 2,029 $ 1,993
U.S. Government agency
and corporation obligations 16,038 15,464 67,332 64,071
Securities issued by states
and political subdivisions
in the U.S.:
Taxable securities 0 0 0 0
Tax-exempt securities 3,064 3,055 11,520 11,338
U. S. Securities:
Debt securities 0 0 432 419
Equity securities (including
Federal Reserve stock) 3,351 3,370
Foreign securities:
Debt securities N/A N/A N/A N/A
Equity securities N/A N/A
Total 19,102 18,519 84,664 81,191
29
Investment Securities
Unrealized Gains/(Losses)
June 30, 2000
Unrealized Unrealized Net
Gains Losses Gains/Losses
U.S. Treasury Securities 1 37 (36)
Obligations of U.S. Government
Agencies and Corp 51 3,896 (3,845)
Obligations of States and
Political Subdivisions 56 249 (193)
Fed Reserve & Corp Stock 0 13 (13)
Totals 108 4,195 (4,087)
Maturity and Portfolio Percentages June 30, 2000
(in thousands)
After One Year After Five Years After
Within One Year Within Five Years Within Ten Years Ten Years
Amount % Amount % Amount % Amount %
6/30/00 $ 3,932 (4%) $39,715 (40%) $42,501 (42%) $14,145 (14%)
6/30/99 $13,557 (13%) $39,451 (38%) $45,560 (43%) $ 6,519 (6%)
6/30/98 $ 6,358 (7%) $26,025 (30%) $36,238 (41%) $19,444 (22%)
6/30/97 $26,681 (33%) $25,832 (32%) $16,725 (21%) $11,437 (14%)
6/30/96 $ 5,329 (7%) $38,620 (50%) $22,895 (30%) $10,501 (13%)
Maturity and Yield on Securities June 30, 1999
(in thousands)
Maturing
After One Year After Five Years After
Within One Year Within Five Years Within Ten Years Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield
U.S. Treasury and
Government Agencies $ 1,877 6.43% $36,845 5.82% $33,096 6.12% $10,285 6.45%
State and Political
Subdivisions* $ 2,055 6.13% $ 2,870 6.39% $ 5,617 6.55% $ 3,860 7.10%
All Others $ 0 0.00% $ 0 0.00% $ 3,788 5.50% $ 0 0.00%
TOTALS $ 3,932 6.28% $39,715 5.86% $42,501 6.12% $14,145 6.62%
[FN]
*Yields on tax free investments are stated herein on a taxable equivalent basis.
Parent Company's investments are included in the table.
</FN>
30
Return on Equity and Assets
Return on assets is a measurement of Bancshares' ability to maximize asset
utilization. Total assets at 6/30/00 was $486,277,000. Efforts continue to focus
on positioning the company for future growth and profitability through
improvements in technology, solid growth in the deposit base and efficient
utilization of the branch distribution system. Results of operations for the
years under comparison reflect continuous improvement. Return on assets for
1998 reflects organizational cost for Bank of Troy and White and Associates/
First Citizens Insurance Agency. Organizational costs for the Bank of Troy,
First Volunteer Bank and White and Associates reflects losses on sales of
investments and increased allocations to the loan loss reserve
(discussed further in results of operations).
The company's strategic plan addresses objectives to sustain improved earnings,
maintain a quality loan and investment portfolio and to maintain market share by
providing quality customer service. The Bank's management and employees are
rewarded with incentive compensation based on various factors including the
level of ROA achieved at year end. A return on assets of 2.00% is required if
maximum benefits are to be realized.
Total Shareholder's equity (including Loan Loss Reserve) of First Citizens
Bancshares as of 6/30/00 was $45,378,000 compared to $43,623,000 at 06/30/99.
Percent of dividends declared per common share to net income per common share
increased on a consistent basis for the years under comparison. Percentage of
dividends declared per common share to net income per common share was 59.71
percent as of June 30, 2000 compared to 48.79 percent at June 30, 1999. Number
of shares continued to increase through quarter end as a result of shares issued
to service the Dividend Reinvestment Program. The Board of Directors voted on
May 19, 2000 to discontinue the program effective after payment of the June 15,
2000 dividend. The Board determined that the inability to purchase shares in the
open market to fund the plan resulted in a continuous issuance of new shares. To
continue to issue new share to fund the program was dilutive to both earnings
per share and the per share value of Bancshares outstanding stock. The Board
issued a statement to shareholders indicating their focus was to strengthen the
value of Bancshares' stock. In addition to shares issued to fund the Dividend
Reinvestment Program in 1998 and 1999, shares were also increased during these
years as a result of shares issued to purchase 50 percent of White and
Associates Insurance and 445,251 shares were issued for the purchase of First
Volunteer Bank. A stock repurchase program is in place that allows Bancshares to
acquire Bancshares stock up to 200,000 in any calendar quarter on a first come
first served basis. However, a limitation of 27,000 shares per quarter is in
effect for each quarter of 2000. The limitation is a result of FASB Accounting
rules for pooling-of-interest that states Bancshares is limited to the purchase
of Bancshares stock equal to 10% of the original issued quantity of shares
(445,251) for the purchase of First Volunteer Bank.
In 1998, the Employee Stock Ownership Plan entered into a loan agreement in the
amount of $2,000,000 to fund the purchase of unissued stock. The stock will be
utilized to satisfy future allocations to plan participants in accordance with
the plan document approved by the Board of Directors. The balance remaining on
the ESOP loan is $1,050,000 at 6/30/00.
31
The per share price of Bank stocks came under tremendous pressure the last half
of 1999. Uncertainty of the future direction of interest rates, a decrease in
merger and acquisition activity and a leveling off of earnings have combined to
dampen the enthusiasm of investors and create an unstable stock market.
Bancshares stock traded at $30.00 per share through December 31, 1999. However
beginning first quarter 2000, the common stock traded at a per share price of
$24.00 reflecting the trend in bank stocks industry wide. An appraisal of
Bancshares stock using most recent financial data (12/31/99 audited statements)
resulted in a downward adjustment to the per share price.
Quarterly dividends of .225 cents per share were paid the first two quarters of
2000. The first two quarters of 1999 was .1875 cents, a 20% increase per share
comparing to last year.
The table below presents for First Citizens Bancshares, Inc. certain operating
ratios year-to-date as of June 30: (not annualized)
2000 1999 1998 1997
Percentage of Net Income to:
Average Total Assets .59% .62% .61% .65%
Average Shareholders Equity 6.38% 6.62% 6.29% 6.91%
Percentage of Dividends Declared
Per Common Share to Net Income
Per Common Share 59.71% 48.79% 36.09% 26.09%
*Percentage of Average
Shareholders' Equity to
Average Total Assets 10.24% 10.21% 9.63% 10.23%
*Represents primary capital - including reserve for loan losses account
LIQUIDITY AND INTEREST RATE SENSITIVITY
Liquidity is the ability to meet the needs of our customer base for loans and
deposit withdrawals by maintaining assets which are convertible to cash
equivalents with minimal exposure to interest rate risks. Liquidity is
determined by a comparison of net liquid assets to net liabilities.
Policy sets a projected liquidity range of 6.06% to 9.24% including balance
sheet and off balance sheet components. The liquidity ratio as of 6/30/00 was
8.96%. Slower deposit growth in recent years has forced banks to seek
alternative funding sources in order to meet loan demand. First Citizens has
resolved this issued by becoming a member of the Federal Home Loan Bank and
establishing lines of credit sufficient to meet all liquidity needs. Total lines
available including FHLB were $102 million at quarter end. Funds made available
through the Federal Home Loan Bank establish a fixed level of credit at a
predetermined rate. Correspondent Bank lines provide additional liquidity
required for daily settlement of the bank's books. It is anticipated that these
sources of funds will continue to be utilized as a tool for managing liquidity.
In addition, we will continue to search for other sources of funding. As a
result the company has experienced no problem with liquidity during any of the
years under review and
32
anticipates that liquidity requirements will be effectively met in the future.
Other sources available to meet liquidity needs include loans and investments
totaling $106 million that mature within one year or less. The dependency ratio
reflects the degree that volatile liabilities are depended upon to fund longer
term assets. Lower ratios reflect a higher degree of liquidity. Asset/Liability
policy sets a dependency range of 20.28% to 24.65%. The dependency ratio as of
6/30/00 was 23.85%. Large sources of funds total $124 million or 28.51% of
total sources of funds.
During the second quarter of 2000, a new 18 month CD was introduced which
boasted the feature of an interest penalty waiver for early withdrawal after the
CD has been on deposit for 12 months. This certificate was competitively priced
at 6.75%. The term on this CD was designed in accordance with our strategic
funding objectives. A report of competitive rates in the Lauderdale County
market indicates that a rate as high as 7.75% being paid on 12 month maturities.
Rates in Obion County range from 6.50% to 7.00% for 12 month maturities.
Community Bank Presidents in all counties report slow deposit growth for their
perspective market areas.
A decision was made at quarter end to increase interest rates to a level equal
to or slightly above current market rates. The decision to pay higher rates is
to acquire new customers and to retain existing customer relationships. The
bank's base rate used for pricing loans was increased by 25 basis points.
The following condensed gap report provides an analysis of interest rate
sensitivity of earning assets and costing liabilities. First Citizens
Asset/Liability Management Policy is based off net interest income. See table
below. Interest rate risk is separated and analyzed according to the following
categories of risk: (1) repricing (2) yield curve (3) option risk (4) price risk
and (5) basis risk. Trading assets are utilized infrequently and are addressed
in the investment policy. Any unfavorable trends reflected in interest rate
margins will cause an immediate adjustment to the bank's gap position or
asset/liability management strategies. The following data schedule reflects a
summary of First Citizens' interest rate risk using simulations. The projected
12 month exposure is based on 9 different rate movements (flat, rising, or
declining).
33
June 30, 2000
Interest Rate Risk
(in thousands)
Tier Capital $43,132
Projected 12
Month Exposure
Net Interest Rate Moves Current Possible
Income Levels In Basis Pts Position Scenarios Variance
Declining 4 -400 $16,307 $19,702 $3,395
Declining 3 -300 16,307 19,444 3,137
Declining 2 -200 16,307 18,476 2,169
Declining 1 -100 16,307 17,364 1,057
Most Likely-Base 50 16,307 16,307 0
Rising 1 100 16,307 15,883 (424)
Rising 2 200 16,307 15,443 (864)
Rising 3 300 16,307 14,362 (1,945)
Rising 4 400 16,307 13,279 (3,028)
Tier 1 % of Net Int % of Net Int
Capital at Income Income
Risk Actual Policy
Declining 4 7.87% 20.82% 20.00%
Declining 3 7.27% 19.24% 20.00%
Declining 2 5.03% 13.30% 20.00%
Declining 1 2.45% 6.48% 12.00%
Most Likely-Base 0.00% 0.00% 0.00%
Rising 1 -0.98% -2.60% -12.00%
Rising 2 -2.00% -5.30% -25.00%
Rising 3 -4.51% -11.93% -25.00%
Rising 4 -7.02% -22.80% -28.00%
Notes
Margin dilution is due to an increase in cost of funds and reduced loan
fee income. A material amount of FHLB Borrowings repriced during the quarter
from 4.50% to 6.50%.
Net interest incomes presented are derived from various interest rate
projections. The 100-400 moving scenarios are presented to show what would
happen if rates rose immediately (100-400 basis points). The rate
moves reflect shocks because rates are changed immediately. We do not feel
like this would actually take place, but these scenarios reflect worst case
positions.
The most likely rate projection reflects a 50 basis point increase in rates
(two 25 basis point increases). This scenario was used in the bank's budgeting
process also. All rate scenarios are compared to the base.
The rising rate scenarios will dilute First Citizens net income because FCNB's
liabilities reprice faster than its assets. In a rising rate cycle, non-
maturity deposits will not reprice until a 250 or 300 basis point rise takes
place. In a declining rate cycle, non-maturity deposits will reprice with
market conditions until deposits hit a floor position. A 200 basis point
rise in rates would cause earnings to decrease because liabilities would
reprice quicker than rate sensitive assets.
34
CONDENSED GAP REPORT
------------------------------------
CURRENT BALANCES
-----------------------------------
06/30/00
(in thousands)
O/N O/N 0-3 0-3 3-12 3-12
BAL RATE MONTHS BAL RATE MONTHS BAL RATE
- -----------------------------------------------------------------------------------------------
Assets:
Cash and Due From 0.00 0.00 0.00 0.00 0.00 0.00
Total Cash and Due From 0.00 0.00 0.00 0.00 0.00 0.00
US Treasury 0.00 0.00 0.00 0.00 1,500.02 6.34
US Agency 0.00 0.00 0.00 0.00 522.23 8.13
MBS 0.00 0.00 229.93 5.88 646.34 5.87
Agency 0.00 0.00 229.93 5.88 1,168.57 6.88
Municipals 0.00 0.00 761.16 4.86 1,379.06 4.24
Corp & Others 0.00 0.00 0.00 0.00 0.00 0.00
Equities 0.00 0.00 0.00 0.00 0.00 0.00
Unrealized G/L 0.00 0.00 0.00 0.00 0.00 0.00
Total Investments 0.00 0.00 991.09 5.10 4,047.65 5.78
Fed Funds Sold 0.00 0.00 0.00 0.00 0.00 0.00
Fed Funds Sold-Balance 0.00 0.00 0.00 0.00 0.00 0.00
Total Fed Funds Sold 0.00 0.00 0.00 0.00 0.00 0.00
Commercial Variable 0.00 0.00 12,648.28 9.97 6,043.07 9.90
Commercial Fixed 0.00 0.00 6,608.51 8.58 15,853.32 8.63
Contra Loans - Troy 0.00 0.00 44.49 8.58 135.00 8.50
Floor 0.00 0.00 96.92 0.00 0.00 0.00
Unearned 0.00 0.00 0.00 0.00 0.00 0.00
Total Commercial 0.00 0.00 19,398.19 9.44 22,031.39 8.98
Real Estate Variable 0.00 0.00 16,699.48 9.70 6,466.77 9.92
Real Estate Fixed 0.00 0.00 15,068.32 8.41 35,368.54 8.41
Home Equity +1 0.00 0.00 7,156.99 10.50 0.00 0.00
Home Equity +2 0.00 0.00 2,623.76 10.29 0.00 0.00
Home Equity 0.00 0.00 9,780.75 10.44 0.00 0.00
Secondary Mortgage 0.00 0.00 1,519.50 8.50 0.00 0.00
Total Real Estate 0.00 0.00 43,068.05 9.38 41,835.30 8.64
Installment Variable 0.00 0.00 102.83 9.34 21.44 9.17
Installment Fixed 0.00 0.00 4,525.97 9.78 12,679.10 9.70
Finance Company - 78s 0.00 0.00 0.00 0.00 0.00 0.00
Total Installment 0.00 0.00 4,628.81 9.77 12,700.54 9.70
Credit Cards 0.00 0.00 2,389.15 12.00 0.00 0.00
Overdrafts 0.00 0.00 525.44 0.00 0.00 0.00
Total Other Loans 0.00 0.00 2,914.59 9.84 0.00 0.00
Total Loans 0.00 0.00 70,009.64 9.44 76,567.23 8.91
Loan Loss Reserve 0.00 0.00 0.00 0.00 0.00 0.00
Total Net Loans 0.00 0.00 70,009.64 9.44 76,567.23 8.91
Building, Furniture & Fixtures 0.00 0.00 0.00 0.00 0.00 0.00
Other Real Estate 0.00 0.00 0.00 0.00 0.00 0.00
Other Assets 0.00 0.00 0.00 0.00 0.00 0.00
Total Assets 0.00 0.00 71,000.74 9.38 80,614.88 8.76
Liabilities:
Demand 0.00 0.00 0.00 0.00 0.00 0.00
Total Demand 0.00 0.00 0.00 0.00 0.00 0.00
Regular 0.00 0.00 0.00 0.00 4,791.71 0.00
NOW 0.00 0.00 0.00 0.00 8,787.09 0.00
Business 0.00 0.00 0.00 0.00 77.17 0.00
IMF 0.00 0.00 0.00 0.00 3,656.45 0.00
First Rate 0.00 0.00 0.00 0.00 12,907.36 0.00
Dogwood 0.00 0.00 0.00 0.00 2,288.60 0.00
Total Savings 0.00 0.00 0.00 0.00 32,508.37 0.00
CD 1-3 Months 0.00 0.00 8,711.03 4.75 0.00 0.00
CD 3-6 Months 0.00 0.00 21,564.12 5.93 6,151.97 6.61
CD 6-12 Months 0.00 0.00 13,132.97 5.40 19,926.83 5.93
CD 13 Months 0.00 0.00 4,173.24 4.80 27,199.31 5.82
CD 1-2 Years 0.00 0.00 7,679.75 5.08 47,553.35 5.78
CD 2-5 Years 0.00 0.00 2,765.78 6.07 2,963.62 5.73
CD 5 + Years 0.00 0.00 123.67 5.79 345.08 6.03
Total CD 0.00 0.00 58,150.56 5.45 104,140.17 5.87
35
CONDENSED GAP REPORT
------------------------------------
CURRENT BALANCES
-----------------------------------
06/30/00
(in thousands)
O/N O/N 0-3 0-3 3-12 3-12
BAL RATE MONTHS BAL RATE MONTHS BAL RATE
- -----------------------------------------------------------------------------------------------------
IRA Savings 0.00 0.00 0.00 0.00 0.00 0.00
IRA 1-2 Years 0.00 0.00 0.00 0.00 8,936.22 5.50
IRA 2-5 Years 0.00 0.00 422.82 5.94 196.58 5.22
IRA 5 + Years 0.00 0.00 291.21 4.82 574.65 5.16
Total IRA 0.00 0.00 714.03 5.48 9,707.45 5.47
Christmas Club 0.00 0.00 0.00 0.00 449.83 2.50
Total Time 0.00 0.00 58,864.59 5.45 114,297.45 5.82
Total Deposits 0.00 0.00 58,864.59 5.45 146,805.82 4.53
Fed Funds Purchased - Bal 0.00 0.00 0.00 0.00 0.00 0.00
Fed Funds Purchased 13,600.00 6.10 0.00 0.00 0.00 0.00
TT & L 1,000.00 6.00 0.00 0.00 0.00 0.00
Securities Sold-Sweep 8,630.35 3.41 0.00 0.00 0.00 0.00
Securities Sold - Fixed 0.00 0.00 4,315.20 6.16 3,665.60 6.06
FHLB Short Term 15,975.00 5.23 0.00 0.00 0.00 0.00
FHLB Long Term Fixed 0.00 0.00 0.00 0.00 0.00 0.00
FHLB Long Term-Callable 0.00 0.00 4,000.00 5.40 2,002.00 5.26
Note Payable-Finance-FCNB 0.00 0.00 0.00 0.00 0.00 0.00
Note Payable-Finance GE 0.00 0.00 0.00 0.00 0.00 0.00
Total Borrowing 39,205.35 5.15 8,315.20 5.79 5,667.60 5.78
Other Liabilities 0.00 0.00 0.00 0.00 0.00 0.00
Total Other Liabilities 39,205.35 5.15 8,315.20 5.79 5,667.60 5.78
Total Liabilities 39,205.35 5.15 67,179.80 5.49 152,473.42 4.58
Equity:
Retained Earnings 0.00 0.00 0.00 0.00 0.00 0.00
Stock, Surplus, PIC 0.00 0.00 0.00 0.00 0.00 0.00
Unrealized Gains/(Losses) 0.00 0.00 0.00 0.00 0.00 0.00
YTD NET INCOME 0.00 0.00 0.00 0.00 0.00 0.00
Total Equity 0.00 0.00 0.00 0.00 0.00 0.00
Total Liability/Equity 39,205.35 5.15 67,179.80 5.49 152,473.42 4.58
Period Gap (39,205.35) 0.00 3,820.94 0.00 (71,858.55) 0.00
Cumulative Gap (39,205.35) 0.00 (35,384.41) 0.00 (107,242.96) 0.00
RSA/RSL 0.00 0.00 1.06 0.00 0.53 0.00
Off Balance Sheet:
Total Off Balance Sheet 0.00 0.00 0.00 0.00 0.00 0.00
Period Gap (39,205.35) 0.00 3,820.94 0.00 (71,858.55) 0.00
Cumulative Gap (39,205.35) 0.00 (35,384.41) 0.00 (107,242.96) 0.00
RSA/RSL 0.00 0.00 1.06 0.00 0.53 0.00
36
CONDENSED GAP REPORT
------------------------------------
CURRENT BALANCES
-----------------------------------
06/30/00
(in thousands)
1-3 1-3 3-5 3-5 5-10 5-10
YEARS YEARS YEARS YEARS YEARS YEARS
BAL RATE BAL RATE BAL RATE
- -------------------------------------------------------------------------------------------------------------
Assets:
Cash and Due From 0.00 0.00 0.00 0.00 0.00 0.00
Total Cash and Due From 0.00 0.00 0.00 0.00 0.00 0.00
US Treasury 0.00 0.00 0.00 0.00 0.00 0.00
US Agency 12,982.16 6.10 22,081.67 6.13 30,476.36 6.13
MBS 1,598.90 5.87 2,766.25 6.29 2,812.58 6.76
Agency 14,581.06 6.08 24,847.92 6.15 33,288.93 6.19
Municipals 2,003.66 4.54 847.01 4.84 5,734.28 4.55
Corp & Others 0.00 0.00 0.00 0.00 431.83 8.00
Equities 0.00 0.00 3,350.70 5.50 0.00 0.00
Unrealized G/L 0.00 0.00 0.00 0.00 0.00 0.00
Total Investments 16,584.71 5.89 29,045.63 6.04 39,455.04 5.97
Fed Funds Sold 0.00 0.00 0.00 0.00 0.00 0.00
Fed Funds Sold-Balance 0.00 0.00 0.00 0.00 0.00 0.00
Total Fed Funds Sold 0.00 0.00 0.00 0.00 0.00 0.00
Commercial Variable 0.00 0.00 0.00 0.00 0.00 0.00
Commercial Fixed 11,101.03 8.51 6,390.14 8.42 1,562.38 7.22
Contra Loans - Troy 360.00 8.50 189.49 8.50 0.00 0.00
Floor 0.00 0.00 0.00 0.00 0.00 0.00
Unearned 0.00 0.00 0.00 0.00 0.00 0.00
Total Commercial 11,461.03 8.51 6,579.63 8.42 1,562.38 7.22
Real Estate Variable 2,837.06 9.44 2,443.15 9.12 0.00 0.00
Real Estate Fixed 64,150.61 8.41 79,818.80 8.41 0.00 0.00
Home Equity +1 0.00 0.00 0.00 0.00 0.00 0.00
Home Equity +2 0.00 0.00 0.00 0.00 0.00 0.00
Home Equity 0.00 0.00 0.00 0.00 0.00 0.00
Secondary Mortgage 0.00 0.00 0.00 0.00 0.00 0.00
Total Real Estate 66,987.66 8.45 82,261.95 8.43 0.00 0.00
Installment Variable 4.71 9.87 19.09 7.75 0.00 0.00
Installment Fixed 15,446.71 9.52 3,571.96 9.09 242.91 9.47
Finance Company - 78s 0.00 0.00 0.00 0.00 0.00 0.00
Total Installment 15,451.42 9.52 3,591.04 9.09 242.91 9.47
Credit Cards 0.00 0.00 0.00 0.00 0.00 0.00
Overdrafts 0.00 0.00 0.00 0.00 0.00 0.00
Total Other Loans 0.00 0.00 0.00 0.00 0.00 0.00
Total Loans 93,900.12 8.64 92,432.62 8.46 1,805.28 7.52
Loan Loss Reserve 0.00 0.00 0.00 0.00 0.00 0.00
Total Net Loans 93,900.12 8.64 92,432.62 8.46 1,805.28 7.52
Building, Furniture & Fixtures 0.00 0.00 0.00 0.00 0.00 0.00
Other Real Estate 0.00 0.00 0.00 0.00 0.00 0.00
Other Assets 0.00 0.00 0.00 0.00 0.00 0.00
Total Assets 110,484.83 8.23 121,478.26 7.88 41,260.33 6.04
Liabilities:
Demand 0.00 0.00 0.00 0.00 0.00 0.00
Total Demand 0.00 0.00 0.00 0.00 0.00 0.00
Regular 9,583.42 0.00 4,791.71 0.00 4,791.71 0.00
NOW 17,574.17 0.00 8,787.09 0.00 8,787.09 0.00
Business 154.34 0.00 77.17 0.00 77.17 0.00
IMF 3,656.45 0.00 0.00 0.00 0.00 0.00
First Rate 12,907.36 0.00 0.00 0.00 0.00 0.00
Dogwood 4,577.20 0.00 2,288.60 0.00 2,288.60 0.00
Total Savings 48,452.95 0.00 15,944.57 0.00 15,944.57 0.00
CD 1-3 Months 0.00 0.00 0.00 0.00 0.00 0.00
CD 3-6 Months 0.00 0.00 0.00 0.00 0.00 0.00
CD 6-12 Months 0.00 0.00 0.00 0.00 0.00 0.00
CD 13 Months 550.00 6.50 0.00 0.00 0.00 0.00
CD 1-2 Years 17,972.50 6.33 0.00 0.00 0.00 0.00
CD 2-5 Years 2,395.64 5.95 31.27 6.10 0.00 0.00
CD 5 + Years 2,013.31 6.04 1,687.19 5.81 10.02 4.75
Total CD 22,931.45 6.27 1,718.46 5.82 10.02 4.75
37
CONDENSED GAP REPORT
------------------------------------
CURRENT BALANCES
-----------------------------------
06/30/00
(in thousands)
1-3 1-3 3-5 3-5 5-10 5-10
YEARS YEARS YEARS YEARS YEARS YEARS
BAL RATE BAL RATE BAL RATE
- --------------------------------------------------------------------------------------------------------------------------------
IRA Savings 0.00 0.00 0.00 0.00 91.39 3.00
IRA 1-2 Years 8,936.23 5.50 0.00 0.00 0.00 0.00
IRA 2-5 Years 1,285.06 5.44 0.00 0.00 0.00 0.00
IRA 5 + Years 1,444.44 5.95 1,372.34 5.39 0.00 0.00
Total IRA 11,665.73 5.55 1,372.34 5.39 91.39 3.00
Christmas Club 0.00 0.00 0.00 0.00 0.00 0.00
Total Time 34,597.18 6.03 3,090.79 5.63 101.40 3.17
Total Deposits 83,050.13 2.51 19,035.36 0.91 16,045.98 0.02
Fed Funds Purchased - Bal 0.00 0.00 0.00 0.00 0.00 0.00
Fed Funds Purchased 0.00 0.00 0.00 0.00 0.00 0.00
TT & L 0.00 0.00 0.00 0.00 0.00 0.00
Securities Sold-Sweep 0.00 0.00 0.00 0.00 0.00 0.00
Securities Sold - Fixed 249.27 6.72 0.00 0.00 0.00 0.00
FHLB Short Term 0.00 0.00 0.00 0.00 0.00 0.00
FHLB Long Term Fixed 0.00 0.00 0.00 0.00 2,098.72 5.80
FHLB Long Term-Callable 7,000.00 5.06 0.00 0.00 7,998.00 5.85
Note Payable-Finance-FCNB 0.00 0.00 0.00 0.00 0.00 0.00
Note Payable-Finance GE 0.00 0.00 0.00 0.00 0.00 0.00
Total Borrowings 7,249.27 5.12 0.00 0.00 10,096.72 5.84
Other Liabilities 0.00 0.00 0.00 0.00 0.00 0.00
Total Other Liabilities 7,249.27 5.12 0.00 0.00 10,096.72 5.84
Total Liabilities 90,299.40 2.72 19,035.36 0.91 26,142.70 2.27
Equity:
Retained Earnings 0.00 0.00 0.00 0.00 0.00 0.00
Stock, Surplus, PIC 0.00 0.00 0.00 0.00 0.00 0.00
Unrealized Gains/(Losses) Mortgage 0.00 0.00 0.00 0.00 0.00 0.00
YTD NET INCOME 0.00 0.00 0.00 0.00 0.00 0.00
Total Equity 0.00 0.00 0.00 0.00 0.00 0.00
Total Liability/Equity 90,299.40 2.72 19,035.36 0.91 26,142.70 2.27
Period Gap 20,185.44 0.00 102,442.89 0.00 15,117.63 0.00
Cumulative Gap (87,057.52) 0.00 15,385.37 0.00 30,503.01 0.00
RSA/RSL 1.22 0.00 6.38 0.00 1.58 0.00
Off Balance Sheet:
Total Off Balance Sheet 0.00 0.00 0.00 0.00 0.00 0.00
Period Gap 20,185.44 0.00 102,442.89 0.00 15,117.63 0.00
Cumulative Gap (87,057.52) 0.00 15,385.37 0.00 30,503.01 0.00
RSA/RSL 1.22 0.00 6.38 0.00 1.58 0.00
38
CONDENSED GAP REPORT
------------------------------------
CURRENT BALANCES
-----------------------------------
06/30/00
(in thousands)
10-15 10-15 15 + 15 + NON-
YEARS YEARS YEARS YEARS SENSITIVE TOTAL
BAL RATE BAL RATE BAL BAL
- ---------------------------------------------------------------------------------------------------------------------
Assets:
Cash and Due From 0.00 0.00 0.00 0.00 14,619.67 14,619.67
Total Cash and Due From 0.00 0.00 0.00 0.00 14,619.67 14,619.67
US Treasury 0.00 0.00 528.75 6.13 0.00 2,028.77
US Agency 8,299.19 5.14 0.00 0.00 0.00 74,361.61
MBS 871.31 6.38 93.65 6.83 0.00 9,018.95
Agency 9,170.50 5.25 93.65 6.83 0.00 83,380.56
Municipals 3,639.14 4.94 220.76 5.50 0.00 14,585.07
Corp & Others 0.00 0.00 0.00 0.00 0.00 431.83
Equities 0.00 0.00 0.00 0.00 0.00 3,350.70
Unrealized G/L 0.00 0.00 0.00 0.00 (3,483.45) (3,483.45)
Total Investments 12,809.64 5.17 843.16 6.04 (3,483.45) 100,293.48
Fed Funds Sold 0.00 0.00 0.00 0.00 0.00 0.00
Fed Funds Sold-Balance 0.00 0.00 0.00 0.00 0.00 0.00
Total Fed Funds Sold 0.00 0.00 0.00 0.00 0.00 0.00
Commercial Variable 0.00 0.00 0.00 0.00 0.00 18,691.35
Commercial Fixed 977.74 7.69 926.07 7.71 0.00 43,419.19
Contra Loans - Troy 0.00 0.00 0.02 8.50 0.00 729.00
Floor 0.00 0.00 0.00 0.00 0.00 96.92
Unearned 0.00 0.00 0.00 0.00 0.00 0.00
Total Commercial 977.74 7.69 926.09 7.71 0.00 62,936.46
Real Estate Variable 0.00 0.00 0.00 0.00 0.00 28,446.46
Real Estate Fixed 0.00 0.00 0.00 0.00 0.00 194,406.26
Home Equity +1 0.00 0.00 0.00 0.00 0.00 7,156.99
Home Equity +2 0.00 0.00 0.00 0.00 0.00 2,623.76
Home Equity 0.00 0.00 0.00 0.00 0.00 9,780.75
Secondary Mortgage 0.00 0.00 0.00 0.00 0.00 1,519.50
Total Real Estate 0.00 0.00 0.00 0.00 0.00 234,152.97
Installment Variable 0.00 0.00 0.00 0.00 0.00 148.08
Installment Fixed 0.00 9.88 0.00 0.00 0.00 36,500.67
Finance Company - 78s 0.00 0.00 0.00 0.00 0.00 0.00
Total Installment 0.00 9.88 0.00 0.00 0.00 36,648.75
Credit Cards 0.00 0.00 0.00 0.00 0.00 2,389.15
Overdrafts 0.00 0.00 0.00 0.00 0.00 525.44
Total Other Loans 0.00 0.00 0.00 0.00 0.00 2,914.59
Total Loans 1,011.78 7.76 926.09 7.71 0.00 336,652.77
Loan Loss Reserve 0.00 0.00 0.00 0.00 (3,822.56) (3,822.56)
Total Net Loans 1,011.78 7.76 926.09 7.71 (3,822.56) 332,830.21
Building, Furniture & Fixtures 0.00 0.00 0.00 0.00 14,287.75 14,287.75
Other Real Estate 0.00 0.00 0.00 0.00 296.38 296.38
Other Assets 0.00 0.00 0.00 0.00 20,108.30 20,108.30
Total Assets 13,821.41 5.36 1,769.25 6.91 42,006.10 482,435.79
Liabilities:
Demand 0.00 0.00 0.00 0.00 41,817.91 41,817.91
Total Demand 0.00 0.00 0.00 0.00 41,817.91 41,817.91
Regular 0.00 0.00 0.00 0.00 0.00 23,958.56
NOW 0.00 0.00 0.00 0.00 0.00 43,935.43
Business 0.00 0.00 0.00 0.00 0.00 385.86
IMF 0.00 0.00 0.00 0.00 0.00 7,312.90
First Rate 0.00 0.00 0.00 0.00 0.00 25,814.71
Dogwood 0.00 0.00 0.00 0.00 0.00 11,443.01
Total Savings 0.00 0.00 0.00 0.00 0.00 112,850.46
CD 1-3 Months 0.00 0.00 0.00 0.00 0.00 8,711.03
CD 3-6 Months 0.00 0.00 0.00 0.00 0.00 27,716.09
CD 6-12 Months 0.00 0.00 0.00 0.00 0.00 33,059.80
CD 13 Months 0.00 0.00 0.00 0.00 0.00 31,922.55
CD 1-2 Years 0.00 0.00 0.00 0.00 0.00 73,205.61
CD 2-5 Years 0.00 0.00 0.00 0.00 0.00 8,156.31
CD 5 + Years 0.00 0.00 0.00 0.00 0.00 4,179.28
Total CD 0.00 0.00 0.00 0.00 0.00 186,950.65
39
CONDENSED GAP REPORT
------------------------------------
CURRENT BALANCES
-----------------------------------
06/30/00
(in thousands)
10-15 10-15 15 + 15 + NON-
YEARS YEARS YEARS YEARS SENSITIVE TOTAL
BAL RATE BAL RATE BAL BAL
- ------------------------------------------------------------------------------------------------------
IRA Savings 0.00 0.00 0.00 0.00 0.00 91.39
IRA 1-2 Years 0.00 0.00 0.00 0.00 0.00 17,872.45
IRA 2-5 Years 0.00 0.00 0.00 0.00 0.00 1,904.46
IRA 5 + Years 0.00 0.00 0.00 0.00 0.00 3,682.64
Total IRA 0.00 0.00 0.00 0.00 0.00 23,550.94
Christmas Club 0.00 0.00 0.00 0.00 0.00 449.83
Total Time 0.00 0.00 0.00 0.00 0.00 210,951.42
Total Deposits 0.00 0.00 0.00 0.00 41,817.91 365,619.79
Fed Funds Purchased - Bal 0.00 0.00 0.00 0.00 0.00 0.00
Fed Funds Purchased 0.00 0.00 0.00 0.00 0.00 13,600.00
TT & L 0.00 0.00 0.00 0.00 0.00 1,000.00
Securities Sold-Sweep 0.00 0.00 0.00 0.00 0.00 8,630.35
Securities Sold - Fixed 0.00 0.00 0.00 0.00 0.00 8,230.08
FHLB Short Term 0.00 0.00 0.00 0.00 0.00 15,975.00
FHLB Long Term Fixed 0.00 0.00 0.00 0.00 0.00 2,098.72
FHLB Long Term-Callable 0.00 0.00 0.00 0.00 0.00 21,000.00
Note Payable-Finance-FCNB 0.00 0.00 0.00 0.00 0.00 0.00
Note Payable-Finance GE 0.00 0.00 0.00 0.00 0.00 0.00
Total Borrowings 0.00 0.00 0.00 0.00 0.00 70,534.15
Other Liabilities 0.00 0.00 0.00 0.00 1,219.47 1,219.47
Total Other Liabilities 0.00 0.00 0.00 0.00 1,219.47 71,753.62
Total Liabilities 0.00 0.00 0.00 0.00 43,037.38 437,373.40
Equity:
Retained Earnings 0.00 0.00 0.00 0.00 27,504.76 27,504.76
Stock, Surplus, PIC 0.00 0.00 0.00 0.00 17,032.34 17,032.34
Unrealized Gains/(Losses) 0.00 0.00 0.00 0.00 (2,090.07) (2,090.07)
YTD NET INCOME 0.00 0.00 0.00 0.00 2,615.36 2,615.36
Total Equity 0.00 0.00 0.00 0.00 45,062.39 45,062.39
Total Liability/Equity 0.00 0.00 0.00 0.00 88,099.76 482,435.79
Period Gap 13,821.41 0.00 1,769.25 0.00 (46,093.66) 0.00
Cumulative Gap 44,324.42 0.00 46,093.67 0.00 0.00 0.00
RSA/RSL 0.00 0.00 0.00 0.00 0.48 0.00
Off Balance Sheet:
Total Off Balance Sheet 0.00 0.00 0.00 0.00 0.00 0.00
Period Gap 13,821.41 0.00 1,769.25 0.00 (46,093.66) 0.00
Cumulative Gap 44,324.42 0.00 46,093.67 0.00 0.00 0.00
RSA/RSL 0.00 0.00 0.00 0.00 0.48 0.00
40
CONDENSED GAP REPORT
------------------------------------
CURRENT BALANCES
-----------------------------------
06/30/00
(in thousands)
TOTAL
RATE
- -----------------------------------------------------------------------
Assets:
Cash and Due From 0.00
Total Cash and Due From 0.00
US Treasury 6.28
US Agency 6.03
MBS 6.33
Agency 6.06
Municipals 4.67
Corp & Others 8.00
Equities 5.50
Unrealized G/L 0.00
Total Investments 6.06
Fed Funds Sold 0.00
Fed Funds Sold-Balance 0.00
Total Fed Funds Sold 0.00
Commercial Variable 9.94
Commercial Fixed 8.47
Contra Loans - Troy 8.51
Floor 0.00
Unearned 0.00
Total Commercial 8.90
Real Estate Variable 9.68
Real Estate Fixed 8.41
Home Equity +1 10.50
Home Equity +2 10.29
Home Equity 10.44
Secondary Mortgage 8.50
Total Real Estate 8.65
Installment Variable 9.13
Installment Fixed 9.57
Finance Company - 78s 0.00
Total Installment 9.57
Credit Cards 12.00
Overdrafts 0.00
Total Other Loans 9.84
Total Loans 8.81
Loan Loss Reserve 0.00
Total Net Loans 8.91
Building, Furniture & Fixtures 0.00
Other Real Estate 0.00
Other Assets 0.00
Total Assets 7.41
Liabilities:
Demand 0.00
Total Demand 0.00
Regular 0.00
NOW 0.00
Business 0.00
IMF 0.00
First Rate 0.00
Dogwood 0.00
Total Savings 0.00
CD 1-3 Months 4.75
CD 3-6 Months 6.08
CD 6-12 Months 5.72
CD 13 Months 5.70
CD 1-2 Years 5.84
CD 2-5 Years 5.91
CD 5 + Years 5.94
Total CD 5.79
41
CONDENSED GAP REPORT
------------------------------------
CURRENT BALANCES
-----------------------------------
06/30/00
(in thousands)
Total
Rate
- ----------------------------------------------------------------------
IRA Savings 3.00
IRA 1-2 Years 5.50
IRA 2-5 Years 5.52
IRA 5 + Years 5.53
Total IRA 5.50
Christmas Club 2.50
Total Time 5.75
Total Deposits 3.32
Fed Funds Purchased - Bal 0.00
Fed Funds Purchased 6.10
TT & L 6.00
Securities Sold-Sweep 3.41
Securities Sold - Fixed 6.13
FHLB Short Term 5.23
FHLB Long Term Fixed 5.80
FHLB Long Term-Callable 5.44
Note Payable-Finance-FCNB 0.00
Note Payable-Finance GE 0.00
Total Borrowings 5.37
Other Liabilities 0.00
Total Other Liabilities 5.28
Total Liabilities 3.64
Equity:
Retained Earnings 0.00
Stock, Surplus, PIC 0.00
Unrealized Gains/(Losses) 0.00
YTD NET INCOME 0.00
Total Equity 0.00
Total Liability/Equity 3.30
Period Gap 0.00
Cumulative Gap 0.00
RSA/RSL 0.00
Off Balance Sheet:
Total Off Balance Sheet 0.00
Period Gap 0.00
Cumulative Gap 0.00
RSA/RSL 0.00
42
NOTES TO THE GAP REPORT
1. The gap report reflects interest sensitivity positions during a flat rate
environment. These time frames could change if rates rise or fall.
2. Repricing over-rides maturity in various time frames.
3. Demand deposits are placed in the last time frame due to lack of interest
sensitivity. For purposes of the presentation demand deposits are
considered core deposits.
4. Savings accounts are placed into 3 time buckets varying from 1 - 5 year
positions. In a flat rate environment, saving accounts tend not to reprice
or liquidate. Savings deposits become price sensitive after a major
increase in the 6 month CD rate. These accounts are placed in this category
instead of the variable position due to history and characteristics. These
accounts are considered core deposits.
5. Simulations will be utilized to reflect the impact of multiple rate
scenarios on net interest income. Decisions should be made that increase
net interest income, while always considering the impact on interest rate
risk. Overall, the bank will manage the gap between rate sensitive assets
and rate sensitive liabilities to expand and contract with the rate cycle
phase. Approximately 45% - 50% of our CD customers have maturities of 12
months or less. First Citizens will attempt to minimize interest rate risks
by increasing the volume of variable rate loans within the portfolio and
extending the maturity of FHLB borrowings. The goal of the bank's
Asset/Liability Committee is to improve net interest income through volume
increases and better pricing techniques. Long term fixed rate positions
should be held to a minimum, by increasing variable rate loans. The over 5
year fixed rate loans should be held to less than 25% assets, unless they
are funded with Federal Home Loan Bank matched funds. These maximum limits
are the high points and the ALCO will strive to keep the amount below this
point.
Subsidiaries as well as the Parent Company will adhere to providing
above average margins and reviewing the various material risks. New
products and services will be reviewed for risk by the Product Development
Committee.
6. FCNB would benefit from a flat rate environment. If interest rates rise
rapidly, net interest income could be adversely impacted. First Citizens
Liquidity could be negatively impacted should interest rates drop prompting
an increase in loan demand. Adequate lines of credit are available to
handle liquidity needs.
43
Capital Resources
Total shareholders' equity of First Citizens Bancshares as of June 30, 2000, was
$45,378,000. Capital as a percentage of total assets for the quarter ending June
30, is presented in the following table for the years indicated (excluding Loan
Loss Reserves):
2000 1999 1998 1997 1996
9.33% 9.26% 9.37% 9.48% 8.93%
The capital ratio increased from 9.26% in June 1999 to 9.33% in June 2000. A
decrease in the capital ratio when comparing June 1999 to June 1998 was a result
of the following factors: (1) A special dividend of .20 cents per share paid
fourth quarter 1999; (2) The cash purchase of Bank of Troy in 1998; and (3) Mark
to market adjustment of Available for Sale Investments, a year-to-date net
effect to capital of approximately $2.4 million. The Mark to Market adjustment,
a requirement of FASB 115, requires banks to mark to market investments held in
the Available for Sale account. The adjustment is made to the capital account
and is temporary in nature if the investments are held to maturity before being
sold. First Citizens has no plans at this time to sell securities from the
Available for Sale account prior to maturity.
Increasing the capital base of the Company is a vital part of strategic
planning. Although the present capital to asset ratio remains well in excess of
the level required by regulators for banks our size, management is aware of the
importance of this base.
Risk-based capital focuses primarily on broad categories of credit risk and
incorporates elements of transfer, interest rate and market risks. The
calculation of risk-based capital ratio is accomplished by dividing qualifying
capital by weighted risk assets. The minimum risk-based capital ratio
established by the Federal Reserve is 8 percent. At least one-half or 4% must
consist of core capital (Tier 1), and the remaining 4% may be in the form of
core (Tier 1) or supplemental capital (Tier 2). Tier 1 capital/core capital
consists of common stockholders equity, qualified perpetual stock and minority
interests in consolidated subsidiaries. Tier 2 Capital/Supplementary Capital
consists of the allowance for loan and lease losses, perpetual preferred stock,
term subordinated debt, and other debt and stock instruments. Bancshares'
capital consists entirely of Tier 1 components, with the exception of the
allowance for loan and lease losses.
Bancshares has historically maintained capital in excess of minimum levels
established by the Federal Reserve Board. The risk-based capital ratio reflects
continuous improvement when reviewing years included in the above table.
Risk-based capital ratio as of 6/30/00 was 14.06%, significantly in excess of
the 8% mandated by Regulatory Authorities. Growth in capital will be maintained
through retained earnings. There is no reason to assume that income levels will
not be sufficient to maintain an adequate capital ratio.
Effects of Inflation
Inflation has a significant impact on the growth of total assets in the banking
industry, resulting in a need to increase equity capital in order to maintain an
appropriate equity to asset ratio. While the current inflationary environment
appears stable, efforts to monitor the situation for any indication of change
will be ongoing.
44
Operating expenses are directly affected by increases in salaries and employee
benefits, supplies, legal, audit and professional fees, utilities, advertising
and insurance. Now that interest rates have been deregulated, inflation is a
major key to the cost of acquiring and retaining deposits.
A well managed asset/liability management program can maximize net interest
income; and at the same time, reduce the impact of inflation on earnings.
Part II - Other Information
Item 1. Legal Proceedings
There are no legal proceedings filed against First Citizens Bancshares or its
subsidiaries as of this report date.
Item 2. Changes in Securities
Dividends paid to Shareholders of First Citizens Bancshares, Inc. are funded by
dividends to the Bank Holding Company from First Citizens National Bank. Federal
Reserve Bank regulators would be critical of a bank holding company that pays
cash dividends not covered by earnings or that are funded from borrowings or
unusual or non-recurring gains, such as the sale of property or assets. Under
rules set forth by the Comptroller of the Currency in Interpretive Ruling
7.6100, the board of directors of a national bank may declare dividends as it
may judge to be expedient, subject to statutory limitations which deal with the
balance of the surplus account, sufficiency of net profits, dividend payments on
preferred stock, and default of any assessment due to the Federal Deposit
Insurance Corporation. Shareholders approved an amendment to the Company's
Charter in April 1998 to increase the number of shares of authorized from
750,000 to 10,000,000. Subsequently, a 4-for-1 stock split was declared which
increased shares outstanding from 2,252,754 to 2,324,739.
Item 6(b) No reports on Form 8-K were filed for the quarter ended 6/30/00
45
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) 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 Bancshares, Inc.
(Registrant)
Date: August 14, 2000 /s/Katie Winchester
Katie Winchester, President & CEO
Date: August 14, 2000 /s/Jeff Agee
Jeff Agee, Senior Vice President &
Chief Financial Officer
First Citizens National Bank
(Principal Subsidiary)