1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year ended December 31, 1995 Commission File Number 0-11709 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 First Citizens Place, Dyersburg, Tennessee 38025-0370 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (901) 285-4410 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered NONE NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The aggregate market value of voting stock held by nonaffiliates of the registrant at December 31, 1995 was $24,897,000. Of the registrant's only class of common stock ($1.00 par value) there were 733,359 (Net of Treasury) shares outstanding as of December 31, 1995. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement dated March 27, 1996 (Part III) Filed by Electronic Submission 2 PART I ITEM 1. BUSINESS GENERAL First Citizens Bancshares, Inc. ("Bancshares") was organized December, 1982 as a Tennessee Corporation and commenced operations in September, 1983, with the acquisition of all Capital Stock of First Citizens National Bank of Dyersburg ("First Citizens"). First Citizens was chartered as a national bank in 1900 and presently operates a general retail banking business in Dyersburg and Dyer County, Tennessee providing customary banking services. First Citizens operates under the supervision of the Comptroller of the Currency, is insured up to applicable limits by the Federal Deposit Insurance Corporation and is a member of the Federal Reserve System. First Citizens operates under the day-to-day management of its own officers and directors; and formulates its own policies with respect to lending practices, interest rates, service charges and other banking matters. Bancshares' primary source of income is dividends received from First Citizens. Dividend payments are determined in relation to First Citizens' earnings, deposit growth and capital position in compliance with regulatory guidelines. Management anticipates that future increases in the capital of First Citizens will be accomplished through earnings retention or capital injection. The following table sets forth a comparative analysis of Assets, Deposits, Net Loans, and Equity Capital of Bancshares as of December 31, for the years indicated: December 31 (in thousands) 1995 1994 1993 Total Assets $291,412 $256,685 $234,892 Total Deposits 237,160 209,481 193,823 Total Net Loans 191,906 166,727 147,646 Total Equity Capital 27,103 23,879 21,700 Individual bank performance is compared to industry standards through utilization of the Uniform Bank Performance Report (UBPR), published quarterly by the Federal Financial Institution's Examination Council. This report provides comparisons of significant operating ratios of First Citizens with peer group banks. Presented in the following chart are comparisons of First Citizens with peer group banks for the periods indicated: 12/31/95 12/31/94 12/31/93 FCNB PEER GRP FCNB PEER GRP FCNB PEER GRP Average Assets/ Net Interest Income 4.04% 4.40% 4.31% 4.43% 4.46% 4.46% Average Assets/ Net Operating Income 1.00% 1.31% 1.09% 1.26% 1.16% 1.30% Net loan losses/ Average total loans .05% .10% .01% .12% .30% .18% Primary Capital/ Average Assets 8.34% 9.18% 8.51% 9.02% 8.32% 8.72% Cash Dividends/ Net Income ** 10.47% 33.93% 19.03% 43.50% 20.20% 38.83% *Performance as of 12/31/95 is compared to peer group totals as of 09/30/95 (Most recent UBPR available) ** Dividends paid to shareholders in 1995 were funded by First Citizens Bancshares, Inc. with the only exception being first quarter. 3 EXPANSION Bancshares may, subject to regulatory approval, acquire existing banks or organize new banks. The Federal Reserve Board permits bank holding companies to engage in non-banking activities closely related to banking or managing or controlling banks, subject to Board approval. In making such determination, the Federal Reserve Board considers whether the performance of such activities by a bank holding company would offer advantages to the public which outweigh possible adverse effects. Approval by the Federal Reserve Bank of a Bank Holding Company's application to participate in a proposed activity is not a determination that the activity is a permitted non-bank activity for all bank holding companies. Approval applies only to the applicant, although it suggests the likelihood of approval in a similar case. First Citizens National Bank through its strategic planning process has stated its intention to acquire other financial institutions within the West Tennessee Area. The Bank's objective in acquiring other banking institutions would be for asset growth and diversification into other market areas. Acquisitions would afford the bank increased economies of scale within the data processing function and better utilization of human resources. Any acquisition approved by the Board of Bancshares, Inc. would be deemed to be in the best interest of Bancshares and its shareholders. On September 29, 1994, President Clinton signed into law the Riegel-Neal Interstate Banking and Branching Efficiency Act of 1994. The Act provides for nationwide interstate Banking and branching within certain limitations. A more detailed description of the act is discussed within the section entitled "Usury, Recent Legislation and Economic Environment." SUPERVISION AND REGULATION Bancshares is a one-bank holding company under the Bank Holding Company Act of 1956, as amended, and is subject to supervision and examination by the Board of Governors of the Federal Reserve System. As a bank holding company, Bancshares is required to file with the Federal Reserve Board annual reports and other information regarding the business obligations of itself and its subsidiaries. Board approval must be obtained before Bancshares may: (1) Acquire ownership or control of any voting securities of a bank or Bank Holding Company where the acquisition results in the BHC owning or controlling more than 5 percent of a class of voting securities of that bank or BHC; (2) Acquire substantially all assets of a bank or BHC or merge with another BHC. Federal Reserve Board approval is not required for a bank subsidiary of a BHC to merge with or acquire substantially all assets of another bank if prior approval of a federal supervisory agency, such as the Comptroller of the Currency is required under the Bank Merger Act. Relocation of a subsidiary bank of a BHC from one state to another requires prior approval of the Federal Reserve Board and is subject to the prohibitions of the Douglas Amendment. The Bank Holding Company Act provides that the Federal Reserve Board shall not approve any acquisition, merger or consolidation which would result in a monopoly or which would be in furtherance of any combination or conspiracy to monopolize or attempt to monopolize the business of banking in any part of the United States. Further, the Federal Reserve Board may not approve any other proposed acquisition, merger, or consolidation, the effect of which might be to substantially lessen competition or tend to create a monopoly in any section of the country, or which in any manner would be in restraint of trade, unless the anti-competitive effect of the proposed transaction is clearly outweighed in favor of public interest by the probable effect of the transaction in meeting the convenience and needs of the community to be served. An amendment effective February 4, 1993 further provides that an application may be denied if the applicant has failed to provide the Federal Reserve Board with adequate assurances that it will make available such information on its operations and activities, and the operations and activities of any affiliate, deemed appropriate to determine and enforce compliance with the Bank Holding Company Act and any other applicable federal banking statutes and regulations. In addition, consideration is given to the competence, experience and integrity of the officers, directors and principal shareholders of the applicant and any subsidiaries as well as the banks and bank holding companies concerned. The Board also considers the record of the applicant and its affiliates in fulfilling commitments to conditions imposed by the Board in connection with prior applications. 4 A bank holding company is prohibited with limited exceptions from engaging directly or indirectly through its subsidiaries in activities unrelated to banking or managing or controlling banks. One exception to this limitation permits ownership of a company engaged solely in furnishing services to banks; another permits ownership of shares of the company, all of the activities of which the Federal Reserve Board has determined after due notice and opportunity for hearing, to be so closely related to banking or managing or controlling banks, as to be a proper incident thereto. Moreover, under the 1970 amendments to the Act and to the Board's regulations, a bank holding company and its subsidiaries are prohibited from engaging in certain "tie-in" arrangements in connection with any extension of credit or provision of any property or service. Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act on any extension of credit to the bank holding company or to any of its other subsidiaries, or investments in the stock or other securities thereof, and on the taking of such stock or securities as collateral for loans to any borrower. Bank holding companies are required to file an annual report of their operations with the Federal Reserve Board, and they and their subsidiaries are subject to examination by the Board. First Citizens Bancshares, Inc. is subject to capital adequacy requirements imposed by the Federal Reserve Bank. In addition, Firs Citizens National Bank (the principal subsidiary of the corporation) is restricted by the Office of the Comptroller of the Currency from paying dividends in any years which exceed the net earnings of the current year plus retained profits of the preceding two years. It is the policy of First Citizens National Bank "the bank" to comply with regulatory requirements for the payment of dividends. The Federal Reserve Bank adopted a risk-based capital measure for use in evaluating the capital adequacy of bank holding companies effective January 1, 1991. The risk-based capital measure focuses primarily on broad categories of credit risk and incorporates elements of transfer, interest rate and market rate risk. The calculation of risk-based capital is accomplished by dividing qualifying capital by weighted risk assets. The minimum risked-base capital ratio is 8%, at least one-half or 4:00% must consist of core capital (Tier 1), and the remaining 4:00% 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 loses, perpetual preferred stock, term subordinated debt, and other debt and stock instruments. Bancshares has historically maintained capital in excess of minimum levels established by the Federal Reserve Board. A risked based capital analysis is performed on a quarterly basis to test for compliance with Federal Reserve and bank policy guidelines before declaring a dividend or increasing a dividend. The banks' policy states that before declaring a dividend the following ratios will be achieved: (1) Risked Based Capital Tier 1 will be 8.34% or above; Return on year-to-date average equity 9.00%; Asset Growth and projected one year future asset growth less than 20.00%; and non performing assets to capital less than 30%. Non performing assets include 90 day past due and non accrual loans. EXECUTIVE OFFICERS OF THE REGISTRANT The following information relates to the principal executive officers of Bancshares and its principal subsidiary, First Citizens National Bank as of December 31, 1995. Name Age Position and Office Stallings Lipford 65 Chairman of the Board and CEO of First Citizens Bancshares, Inc and Chairman of the Board of First Citizens National Bank. Mr. Lipford joined First Citizens in 1950. He became a member of the Board of Directors in 1960 and President in 1970. He was made Vice Chairman of the Board in 1982. He served as Vice Chairman of the Board of Bancshares from September, 1982 to February, 1984. The Board elected Mr. Lipford Chairman of both First Citizens and Bancshares on February 14, 1984. He served as President of First Citizens and Bancshares from 1983 to 1992, and as CEO of First Citizens from 1960 until 1996. 5 Katie Winchester 55 President of Bancshares; President and CEO of First Citizens; employed by First Citizens National Bank in 1961; served as Executive Vice President and Secretary of the Board from 1986 to 1992. She was appointed CEO of First Citizens in 1996; and President of Bancshares and First Citizens in 1992. Ms. Winchester was elected to the Board of both First Citizens and Bancshares in 1990. H. Hughes Clardy 53 Vice President of First Citizens Bancshares, Inc.; Senior Vice President and Senior Trust Officer of First Citizens National Bank. Employed by First Citizens National Bank in 1993. Mr. Clardy was employed as Vice President and Senior Trust Officer at Crestar Bank from January, 1987 to January, 1991 and as a Vice President of Dominion Trust Company of Tennessee from 1991 to 1993. Ralph Henson 54 Vice President of First Citizens Bancshares, Inc.; Executive Vice President of Loan Administration of First Citizens National Bank. Employed by First Citizens National Bank in 1964. Mr. Henson served the Bank as Senior Vice President and Senior Lending Officer until his appointment as Executive Vice President of Loan Administration in February, 1993. Jeffrey Agee 35 Vice President and Chief Financial Officer of Bancshares, Inc. and First Citizens as of April, 1994. Employed by First Citizens National Bank in 1982. Served the bank previous to April, 1994 as Vice President and Accounting Officer. Barry Ladd 55 Appointed Executive Vice President and Chief Administrative Officer of First Citizens National Bank in 1996. Senior Vice President and Senior Lending Officer of First Citizens National Bank from 4/20/94 to January 17, 1996. Employed by the Bank in 1972. Mr. Ladd served First Citizens as Vice President and Lending Officer previous to his appointment as Senior Vice President. Bennett Ragan, Jr. 47 Executive Vice President and Senior Lending Officer of First Citizens National Bank. Senior Vice President and Senior Lending Officer from 4/20/94 to 1/17/96. Employed by the Bank in 1970. Mr. Ragan served the Bank as Vice President and Lending Officer since 1986. BANKING BUSINESS First Citizens operates a general retail banking business in Dyer County, Tennessee. The bank expanded its banking operations into Lauderdale County with the purchase of a branch bank in Ripley, Tennessee in January, 1995. All persons who live in either community or who work in or have a business or economic interest in either county are considered as forming a part of the area serviced by the bank. First Citizens provides customary banking services, such as checking and savings accounts, funds transfers, various types of time deposits, and safe deposit facilities. It also finances commercial transactions and makes and services both secured and unsecured loans to individuals, firms, and corporations. Commercial lending operations include various types of credit services for its customers. Agricultural services are provided that include operating loans as well as financing for the purchase of equipment and farm land. The installment lending department makes direct loans to individuals for personal, automobile, real estate, home improvement, business and collateral needs. Mortgage lending makes available long term fixed and variable rate loans to finance the purchase of residential real estate. These loans are sold in the secondary market without retaining servicing rights. Credit cards and open-ended credit lines are available to both commercial customers and consumers. 6 First Citizens National Bank is located in a community supported by a well diversified economy. Dyer County is home for over 393 full time farm operators of 603 farms with a total land acreage of 345,600. Total Farm operators and farm laborers represent a small percentage of the Dyer County population (Dyer County Statistical Information, 1992-93). At 12/31/95 agriculture loans outstanding totaled $29,315,000 representing 15.28% of total loans. $18,871,000 was well secured with farmland, including farms, residential and other improvements, while $10,444,000 were secured loans to finance agricultural production and equipment purchases. Approximately $3,211,000 of agricultural loans were 90% FmHA guaranteed. Dyer County is also the home base for over 61 manufacturing firms employing over 40% of the population. Distribution of employment in other areas consist of 14.9% services, 14.75% government, and 19.3% trade. While First Citizens is dependent upon the debtors ability to honor their obligations, there are no concentrations of credit in any one borrower, type of loan or industry that would represent a material affect to the net income of the Bank. First Citizens Financial Plus, Inc., a Bank Service Corporation wholly owned by First Citizens National Bank is a licensed Brokerage Service. This allows the bank to compete on a limited basis with numerous non-bank entities who pose a continuing threat to our customer base, and are free to operate outside regulatory control. First Citizens was granted trust powers in 1925 and has maintained an active Trust Department since that time. Assets as of December 31, 1995 were in excess of $132,933,000. Services offered by the Investment Management and Trust Services Division include but are not limited to estate settlement, trustee of living trusts, testamentary trustee, court appointed conservator and guardian, agent for investment accounts, and trustee of pension and profit sharing trusts. The business of providing financial services is highly competitive. The competition involves not only other banks but non- financial enterprises as well. In addition to competing with other commercial banks in the service area, First Citizens competes with savings and loan associations, insurance companies, savings banks, small loan companies, finance companies, mortgage companies, real estate investment trusts, certain governmental agencies, credit card organizations, and other enterprises. The following tabular analysis sets forth the competitive position of First Citizens when compared with other financial institutions in the service area for the period ending June 30, 1995. Dyer County Market (All Financial Institutions) (in thousands) Total Deposits % of Market Share Bank Name 06/30/95 06/30/95 First Citizens National Bank $222,206* 50.36% First Tennessee Bank 98,440 22.31% Security Bank 57,819 13.10% Union Planters, FSB 36,777 8.34% Union Planters (First Exchange Bank) 22,695 5.14% Dyersburg City Employees Credit Union 3,271 .74% Total $411,425 *Does not include deposits of $16,950,086 categorized as Overnight and fixed term Repurchase Agreements. At December 31, 1995 Bancshares and its subsidiary, First Citizens National Bank, employed a total of 145 full time equivalent employees. Having been a part of the local community in excess of 100 years, First Citizens has been privileged to enjoy a major share of the financial services market. Dyersburg and Dyer County are growing and with this growth come demands for more sophisticated financial products and services. Strategic planning has afforded the Company both the physical resources and data processing technology necessary to meet the financial needs generated by this growth. 7 USURY, RECENT LEGISLATION AND ECONOMIC ENVIRONMENT Tennessee usury laws limit the rate of interest that may be charged by banks. Certain Federal laws provide for preemption of state usury laws. Legislation enacted in 1983 amends Tennessee usury laws to permit interest at an annual rate of interest four (4) percentage points above the average prime loan rate for the most recent week for which such an average rate has been published by the Board of Governors of the Federal Reserve System, or twenty-four percent (24%), whichever is less (TCA 47-14- 102(3)). The "Most Favored Lender Doctrine" permits national banks to charge the highest rate permitted by any state lender. Specific usury laws may apply to certain categories of loans, such as the limitation placed on interest rates on single pay loans of $1,000.00 or less for one year or less. Rates charged on installment loans, including credit cards, are governed by the Industrial Loan and Thrift Companies Act. On September 29, 1994, President Clinton signed into law the Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("Act"). The Act provides for nationwide interstate banking and branching with certain limitations. The Act permits bank holding companies to acquire banks without regard to state boundaries after September 29, 1995. The Federal Reserve may approve an interstate acquisition only if, as a result of the acquisition, the bank holding company would control less than 10% of the total amount of insured deposits in the United States or 30% of the deposits in the home state of the bank being acquired. The home state can waive the 30% limit as long as there is no discrimination against out-of-state institutions. Pursuant to the Act, interstate branching will take effect on June 1, 1997, except under certain circumstances. Once a bank has established branches in a host state (a state other than its headquarters state) through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the host state where any bank involved in the interstate merger transaction could have established or acquired branches under applicable federal or state law. The Act further provides that individual states may opt out of interstate branching. If a state does not opt out of interstate branching prior to May 31, 1997, then a bank in that state may merge with a bank in another state provided that neither of the states have opted out. States may either enact laws opting out of interstate branching before June 1, 1997 or permit interstate merges transactions earlier than June 1, 1997, by statute at their option. A state also may impose conditions on any interstate merger transaction that occurs before June 1, 1997 if the conditions do not discriminate against out- of-state banks, are not preempted by federal law, and do not apply or require performance after May 31, 1997. There are no known trends, events or uncertainties that are likely to have a material effect on First Citizens liquidity, capital resources or results of operation. There currently exists no recommendation by regulatory authorities which if implemented, would have such an effect. There are no matters which have not been disclosed. Interstate Banking/Branching became a reality by legislation passed September 13, 1994. The act permits full nationwide interstate branching after June 1, 1997. First Citizens Bancshares, Inc. and First Citizens National Bank are located in a highly competitive market. There are presently four banks competing for deposit dollars and earning assets, two of whom are branches of large regional competitors. First Tennessee Bank and Union Planters National Bank are two of the largest financial institutions in the state. While First Citizens has historically maintained in excess of 50% of local market share, statistics reflect a loss of approximately 2% over the past five years by both First Citizens and First Tennessee. This is reflective of increased competition brought about by the location of two branch banks into the market place, both of whom have been bought by Union Planters National Bank. Interstate banking could possibly bring about the location of large out of state banks to the area. If so, First Citizens would continue to operate as it has in the past, focusing on the wants and needs of existing and potential customers. The quality of service and individual attention afforded by an independent community bank cannot be matched by large regional competitors, managed by a corporate team unfamiliar to the area. First Citizens is a forward moving bank offering products and services that are required for maintaining satisfactory customer relationships moving into the next decade and beyond. A recent market analysis completed in September, 1995 indicates a remarkably strong performance by First Citizens in satisfying customer expectations in the areas of personnel, service and convenience. 8 Monetary policies of regulatory authorities, including the Federal Reserve Board, have a significant effect on the operating results of bank holding companies and their subsidiary banks. The Federal Reserve Board regulates the national supply of bank credit by open market operations in United States Government securities, changes in the discount rate on bank borrowings, and changes in reserve requirements against bank deposits. A tool once extensively used by the Federal Reserve Board to control growth and distribution of bank loans, investments and deposits has been eliminated through deregulation. Competition, not regulation, dictates rates which must be paid and/or charged in order to attract and retain customers. Federal Reserve Board monetary policies have materially affected the operating results of commercial banks in the past and are expected to do so in the future. The nature of future monetary policies and the effect of such policies on the business and earnings of the company and its subsidiaries cannot be accurately predicted. ITEM 2. PROPERTIES First Citizens owns and occupies a six-story building in Dyersburg, Tennessee containing approximately 50,453 square feet of office space, bearing the municipal address of First Citizens Place (formerly 200 West Court). An expansion program completed during 1988 doubled the available floor space of the existing facility. The space was utilized to combine all lending and loan related functions. First Citizens owns the Banking Annex containing total square footage of 12,989, of which approximately 3,508 square feet is rented to various tenants. The municipal address of the bank occupied portion of the Annex is 215-219 Masonic Street. The land and building occupied by the Downtown Drive-In Branch located at 113 South Church Street, Dyersburg, Tennessee is owned by First Citizens. The building, containing approximately 1,250 square feet, is located on a lot which measures 120 feet square. Also located at this address is a separate ATM facility wholly owned by the Bank. The Midtown Branch of First Citizens is located at 620 U.S. 51 By-Pass adjacent to the Green Village Shopping Center. The building contains 1,920 square feet and has been owned by First Citizens since construction. The land on which this Branch is located, having previously been leased, was purchased during 1987. In June of 1992 an additional 1.747 acres adjoining the Midtown Branch property was purchased to accommodate future growth and expansion. During 1993, the Board of Directors made a decision to locate a branch office at 2211 St. John Avenue near the Industrial Park, eliminating the need to expand the Midtown Branch. The 1.747 acres valued at $164,000, is now offered for sale. In addition, the Midtown Branch Motor Bank is located on .9 acres adjoining the Midtown Branch. This property consists of a servicing facility and six remote teller stations and is owned in its entirety by the Bank. A drive-through ATM was located at this facility during 1994. The Newbern Branch, also owned by First Citizens, is located on North Monroe Street, Newbern, Tennessee. The building contains approximately 4,284 square feet and occupies land which measures approximately 1.5 acres. A separate facility located in Newbern on the corner of Highway 51 and RoEllen Road houses an ATM. Both land and building are owned by the Bank. The Super Money Market Branch in the Kroger Supermarket on Highway 78 is operated under a franchise obtained through National Bank of Commerce, Memphis, Tennessee. While the fixtures are owned by First Citizens, space is made available from the Kroger Company through the franchise agreement. An ATM is also located near the branch in the Kroger facility. The Industrial Park Branch located at 2211 St. John Avenue is a full service banking facility that offers drive-thru Teller and ATM services. The building owned by First Citizens National Bank contains approximately 2,773 square feet and is located on 1.12 acres of land. The Industrial Park Branch, became operational In November, 1994. In November, 1993 First Citizens National Bank leased space in the Wal-Mart Store #677 located at 2650 Lake Road in Dyersburg, Tennessee to locate an Automatic Teller Machine (ATM). The ATM was installed in December, 1993. In January, 1995 the ATM was relocated in the newly constructed Super Wal-Mart Store at the same address. 9 The Ripley Branch of First Citizens National Bank, purchased January 16, 1995, is located at 292 South Washington Street in Ripley, Tennessee (Lauderdale County). The Branch contains approximately 1,450 square feet and was built in 1984 on a quarter acre of land. The Ripley Branch is a full service banking facility that also offers drive-up teller and twenty four hour ATM services. On July 14, 1995 the bank purchased 1.151 acres located on Cleveland Street in Ripley, Tennessee. The land was purchased for future expansion of the Ripley Branch. There are no liens or encumbrances against any of the properties owned by First Citizens. ITEM 3. LEGAL PROCEEDINGS On June 8, 1995, William M. Boehmler resigned without notice from his position as President and Director of First Citizens Financial Plus, Inc. a brokerage subsidiary owned by First Citizens National Bank. A subsequent lawsuit was filed by First Citizens Financial Plus, Inc. against Boehmler and the firm who employed him, J. J. B. Hilliard, W. L. Lyons, Inc., seeking compensatory and punitive damages because Boehmler took information and records allegedly belonging to the subsidiary. An injunction was issued by the circuit court prohibiting use of the information by the rival brokerage firm until the matter could be resolved. In January, 1996, an arbitration panel of the National Association of Securities Dealers awarded Boehmler and his current employer $134,045.87 from Financial Plus. The arbitrators ordered Boehmler to pay Financial Plus $9,500.00 for data reclamation costs. A letter issued by the arbitration panel stating their decision gave no reason for the ultimate outcome of the hearing. Based on advice of legal council, management made the decision not to pursue an appeal of the arbitration panel's decision. All costs associated with the matter have been included in 1995 financial statements as required by Financial Accounting Standards. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of the year ending December 31, 1995, there were no meetings, annual or special, of the shareholders of Bancshares. No matters were submitted to a vote of the shareholders nor were proxies solicited by management or any other person. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS As of December 31, 1995 there were 640 shareholders of Bancshares' stock. Bancshares common stock is not actively traded on any market. Per share prices reflected in the following table are based on records of actual sales during stated time periods. These records may not include all sales during these time periods if sales were not reported to First Citizens for transfer. Quarter Ended High Low March 31, 1995 $40.00 $37.40 June 30, 1995 $42.00 $37.90 September 30, 1995 $42.00 $41.99 December 31, 1995 $44.00 $42.00 March 31, 1994 $35.00 $30.00 June 30, 1994 $35.00 $33.10 September 30, 1994 $37.50 $35.00 December 31, 1994 $38.00 $37.40 10 Dividends paid each quarter of 1995 were 30 cents per share. In addition a special dividend of 10 cents per share was paid during the fourth quarter, bringing total dividends paid per share during 1995 to $1.30. Dividends paid per share during 1994 were 26 cents per share. A special dividend of 15 cents per share was declared during the fourth quarter of 1994. Dividends - 1995 Dividend Quarter Per Share Declared .30 1st .30 2nd .30 3rd .30 4th .10* 4th Total $1.30 *Special dividend paid in fourth quarter, 1995. Future dividends will depend on Bancshares' earnings and financial condition and other factors which the Board of Directors of Bancshares considers relevant. ITEM 6. SELECTED FINANCIAL DATA The following table presents information for Bancshares effective December 31 for the years indicated. (in thousands) (except per share data) 1995 1994 1993 1992 1991 Net Interest & Fee Income (5) $ 11,311 $ 10,476 $ 10,255 $ 9,770 $ 9,235 Gross Interest Income(5) $ 22,426 $ 18,447 $ 17,516 $ 18,274 $ 20,427 Income From Continuing Operations $ 2,706 $ 2,946 $ 2,638 $ 2,175 $ 1,961 Long Term Obligations(4) $ 4,652 $ 4,125 $ 0 $ 0 $ 0 Income Per Share from Continuing Operation(1) $ 3.72 $ 4.15 $ 3.76 $ 3.39 $ 3.06 Net Income per Common Share(2)(3) $ 3.72 $ 4.15 $ 3.94 $ 3.39 $ 3.06 Cash Dividends Declared per Common Share(2)(3) $ 1.30 $ 1.19 $ .99 $ .94 $ .89 Total Assets at Year End $291,412 $256,687 $234,892 $239,897 $227,017 Allowance for Loan Losses as a % Loans 1.16% 1.22% 1.13% 1.26% 1.46% Allowance for Loan Losses as a % of Non-Performing Loans 707.99% 196.75% 520.50% 967.62% 188.15% Loans 90 Days Past Due as a % of Loans .17% .62% .22% .13% .78% (1)Restated to reflect 10% stock dividend on December 15, 1992. (2)Restated to reflect 2.5 for 1 Stock Split on October 15, 1993. (3)The $1.19 dividend for 1994 reflects $.26 x 4 plus a special dividend of $.15. (4)Long Term Obligations is FHLB Borrowings matched with Loans & Investments. (5)Reclassified 1991 to 1994 Overdraft Fee Income. It is not included on this line item. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS To understand the following analysis, reference should be made to the consolidated financial statements and other selected financial data presented elsewhere in this report. For purposes of the following discussion, net interest income and net interest margins are presented on a fully taxable equivalent basis. Per share data is adjusted to reflect all stock dividends declared through December 31, 1995. 1995 was a year of planning and implementation, laying the foundation for growth and profitability for future years. In January, the purchase of our Ripley Branch was finalized, adding $8,000,000 to deposit totals and providing a physical presence in Lauderdale County, Tennessee. Total 11 Assets of the Ripley Branch as of 12/31/95 were $11,252,000 with a loan to deposit ratio of 25.90%. The Industrial Park Branch opened in November, 1994 continues to expand through development of new and existing business. Total Assets at 12/31/95 were $3,162,000 with a loan to deposit ratio of 59.89%. In June, 1995 a contract was signed with Internet/Most, Reston, VA. for ATM and Point of Sale Processing. A business partnership with Internet/Most will offer First Citizens National Bank an innovative network for electronic and remote banking services. Electronic services provided by the network are ATM and POS processing, while remote products include home banking programs using Personal Computer and Screen Phone devices as well as bill payment services. The bank's management believes that a successful electronic/homebanking program is a key part to accomplishing strategic planning goals set for the bank's future service delivery systems. The ATM switch from Deluxe, Inc. (current ATM network provider) is expected to be completed by second quarter, 1996, with the introduction of the bank's debit card product within 90 to 120 days thereafter. The bank has selected the Visa Check Card offered by Visa, U.S.A., Inc. as its debit (POS) card solution. Application was made to Visa in December, 1995 and accepted in January, 1996. The Visa Check Card is considered to be the most widely accepted debit card by consumers in todays market. Another strategic element included in the decision to add the Visa Check Card service was the selection of an online debit system. The online debit system is the most common means of communication between the bank and retailer. When debit transactions are authorized online, funds can be automatically transferred from the customer's account eliminating preapproval risk to the bank. If funds are not available at the time of transaction approval, the transaction is void. Installation of an automated Teller Platform, "TellerPro Plus" application purchased from Southern Data Systems, Roswell, Georgia was completed in the fourth quarter, 1995. Online Signature Verification, considered to be another critical electronic identification device, also purchased from Southern Data Systems, will be installed in the second quarter of '96. Signature Verification will reduce risk in transaction approval as well as speed up service delivery to the customer. Item and Statement Imaging was introduced to our customer base in November, 1995. A review of 1995 operating results reflected net income of $2,705,656 or $3.72 per share compared to, $2,946,249 or $4.15 per share, and $2,763,737 or $3.76 per share, in 1994 and 1993 respectively. Net income '94 is distorted due to an after tax profit of $178,000 derived from the sale of other real estate in Madison County, Tennessee. Excluding this profit 1995 net income and earnings per share would be more comparable to that of 1994. Weighted Average number of shares outstanding changed from 709,434 in '94 to 726,489 in '95. Shares were issued from previously authorized unissued stock to satisfy the requirements of the Dividend Reinvestment Plan. An increase in net interest income of approximately $4 million was accomplished despite an upward trend in the cost of funds which began in late 1994 and continued through July, 1995. Interest rates paid on deposits were reduced the third and fourth quarter of '95 causing a reduction in interest expense and improved interest margins. Strong loan growth is evident when comparing totals at December 31, 1995 to the same time period in 1994. Total Assets were up approximately $34 Million when the two periods are compared. During 1995, deposit and capital growth as well as maturing investments were utilized to fund loan demand. Changes in Financial Accounting Standards FASB NO. 114 (Accounting by creditors for impairments of loans). Effective date is fiscal years beginning after December 15, 1994. FASB 114 requires a bank to recognize impairment of a loan if the present value of expected future cash flows discounted at the loan's effective interest rate (or alternatively, the observable market price of the loan or the fair value of the collateral) is less than the recorded investment. If the fair value used is at least equal or greater than the recorded amount, there is no impairment. Impaired loans are usually considered loans in non-accrual status, 90 days or more past due that will not pay full interest and principal due, or have been classified as a problem loan. First Citizens National Bank has implemented procedures that capture average balances of impaired loans, interest income associated with impaired loans, and allocations made to the reserve for loan losses associated with impaired loans. There has been no material affect to Bancshares or the Bank as a result of the implementation of FASB 114. FASB NO. 115 (Accounting for certain investments in Debt and Equity Securities). Effective January 1, 1994, the Company adopted FASB 115 and classified securities contained in its investment portfolio according to stated specifications: Held-to-maturity (includes securities which the company has the intent and ability to hold to maturity); Trading 12 securities (includes investment securities which are held for short-term resale); and Available-for-sale (includes all other investment securities). The cumulative effect of FASB 115 on the investment portfolio for 1994 was ($259,543) and the 1995 cumulative effect was a positive $485,000 (net of tax). FASB NO. 118 (Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures) amends FASB Statement 114 to allow a creditor to use exiting methods for recognizing interest income on impaired loans. Implementation of procedures discussed in FASB 114 includes accounting requirements for income recognition on impaired loans. FASB NO. 119 (Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments) amends FASB 105 (Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk), and FASB 107 (Disclosures about Fair Value of Financial Instruments). Effective for years after December 15, 1994. Statement No. 119 requires disclosures about the amounts, nature, and terms of derivatives that are not subject to statement 105 because they do not result in off-balance-sheet risk of accounting loss. It requires banks to make a distinction between financial instruments held or issued for trading purposes and for purposes other than trading. Derivative products held in the banks investment portfolio are reported on a quarterly basis to the banks investment committee and Board of Directors. Reports presented include disclosure requirements stated in FASB 119. First Citizens National Bank has $0 investment in derivative instruments. FASB NO. 121 (Impairment of Long Lived Assets). FASB 121 establishes accounting standards for the impairment of long lived assets, certain identifiable intangibles, and good will related to those assets to be held and used and for long lived assets and certain identifiable intangibles to be disposed of. An impaired loss is recognized as the amount by which the carrying amount of the asset exceeds the fair market value of the assets. FASB 121 is effective for years beginning after December 15, 1995. We do not project any material writedowns at this time. NON-INTEREST INCOME The following table reflects non-interest income for the years ending December 31, 1995, 1994, and 1993: December 31 Change from prior year (in thousands) Increase Increase Total (Decrease) Total(Decrease) Total 1995 Amount Percentage 1994 Amount Percentage 1993 Service Charges on Deposit Accounts $1,305 $ 189 16.94% $1,116 $ 36 (3.34%) $1,080 Other Service Charges, Commissions & Fees $ 465 $ (239) (33.90%) $ 704 $ (67) (8.69%) $ 771 Other Income $1,053 $ 2 .19% $1,051 $ 182 20.95% $ 869 TOTAL NON-INTEREST INCOME $2,720 $ (151) (5.26%) $2,871 $ 151 5.56% $2,720 Non Interest Income is down by $151,000 or 5.26% when comparing 1995 to 1994 after posting a 5.56% increase in 1994 when compared to the previous year. The decrease is primarily attributed to (1) A gross profit of $297,000 resulting from the sale of the Jackson (Madison County), Tennessee property in 1994; (2) A decrease in fee income of $160,000 received from the Banks' Subsidiary, Financial Plus, Inc. The broker/dealer subsidiary has undergone a management change, following the abrupt resignation of its President in June of 1995; (Further explanation of the change is included in the legal proceedings section of this report) and (3) a reduction in insurance commissions of $52,000. A significant increase is noted in service charges on deposit accounts. Overdraft income was reclassified from interest and fees on loans into other income for prior years and restated within the table. NON-INTEREST EXPENSE December 31 Change from prior year (in thousands) Increase Increase Total (Decrease) Total(Decrease) Total 1995 Amount Percentage 1994 Amount Percentage 1993 Salaries & Employee Benefits $5,172 $ 202 4.07% $4,970 $ 220 4.63% $4,750 Net Occupancy Expense $ 341 $ 23 7.24% $ 318 $ (31) (8.88%) $ 349 Other Operating Expense $4,115 $ 593 16.84% $3,522 $(112) (3.08%) $3,634 TOTAL NON-INTEREST EXPENSE $9,628 $ 818 7.79% $8,810 $ 77 1.06% $8,733 13 Non-Interest Expense increased 7.79% when comparing 1995 to 1994 after increasing 1.06% the previous years under comparison. Salaries and benefits increased 4.07%. A comparison of assets per employee for the years 1991 through 1995 is indicated in the table below. Full time equivalent employees were 145, 150, and 149 as of 12/31/95, '94, and '93 respectively. FTE decreased inspite of employing 4 fulltime and 2 parttime employees to staff the newly acquired Ripley and Industrial Park branches and the addition of 6 Tellers On the Shelf hired during July, 1995. Tellers on the Shelf are trained in a one month training program, then utilized to fill vacancies created by absence or special projects. Assets per employee totaled $1,969,000 as of 12/31/95, compared to assets per employee for peer group banks of $1,900,000. The upward trend in other operating expenses of 16.84% is attributed to settlement and professional fees of $261,000 incurred as a result of arbitration between Financial Plus, Inc. and William M. Boehmler and Hilliard, Lyon, Inc. December 31 Assets Per Employee-FCNB Asset Per Employee-Peer Groups (in thousands) (in thousands) 1995 $1,969 $1,900 1994 $1,695 $1,900 1993 $1,563 $1,900 1992 $1,643 $1,900 1991 $1,393 $1,800 COMPOSITION OF DEPOSITS The average daily amounts of deposits and rates paid on such deposits are summarized for the periods indicated: December 31 (in thousands) 1995 1994 1993 Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate Non-Interest Bearing Demand Deposits $ 25,375 - $ 24,989 - $21,922 - Savings Deposits $ 65,996 3.05% $ 64,912 2.69% $65,612 2.58% Time Deposits $136,631 5.91% $111,268 4.79% $104,166 4.70% TOTAL DEPOSITS $228,002 4.43% $201,169 3.52% $191,700 3.44% Substantial growth in deposits in 1995 was the result of rising interest rates; the purchase of approximately $8 Million in deposits held by the newly acquired Ripley Branch; and deposits acquired as a result of opening both the Ripley and Industrial Park Branches. An Analysis of prior years (1994 and 1993) is reflective of customer response to a low interest rate environment and the flight to mutual funds by consumers in search of higher yields. The average rate paid on time deposits during 1995, 1994 and 1993 was 5.91%, 4.79%, and 3.44% respectively. Time deposits have escalated due to higher rates and an active officer call program established to seek deposit funds and loans. Pricing of deposit products is based on local market competition and Treasury Bill rates. Non Interest Bearing Demand Deposit have also expanded from $21,922,000 in 1993 to $25,375,000 in 1995. However, Securities sold under an agreement to repurchase, more commonly known as short term borrowings, totaling $19,744,966 are not included in average balances for non-interest bearing demand deposits. Additional information on "Sweep", "Repurchase Agreements" is included in the table below titled Short Term Borrowings. The Repurchase agreement "Sweep" product is offered to large balance customers and 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. 14 SHORT TERM BORROWINGS 12/31/95 12/31/94 Amount outstanding-end of Period $19,745,000 $16,950,000 Weighted Average Rate of Outstanding 4.59% 4.36% Maximum Amount of Borrowings at Month End 18,624,000 24,533,000 Average Amounts Outstanding for Period 17,033,000 17,183,000 Weighted Average Rate of Average Amounts 4.66% 3.67% The bank's management is continuously monitoring and enhancing the bank's product line in order to retain existing customers and to attract new customer relationships. In 1995 the "Dogwood" checking account was developed and marketed as a replacement for the "Generations Gold" checking account introduced in 1993. The "Dogwood" account is a package account that includes Overdraft Protection with no annual fee, no minimum balance requirement, free checks, accidental death insurance of $10,000, interest earned on a daily collected balance of $500.00 or more, and other customer benefits. Overdraft protection and Imaged Statements were also additional services offered in 1995. The following table sets forth the maturity distribution of Certificates of Deposit and other time deposits of $100,000 or more outstanding on the books of First Citizens on December 31, 1995. The overall total increased in excess of $9 million when compared to the prior year. MATURITY DISTRIBUTION OF TIME DEPOSITS IN AMOUNTS OF $100,000 AND OVER December 31 (in thousands) 1995 1994 Amount Percent Amount Percent Maturing in: 3 months or less $ 3,577 13.40% $ 3,874 22.78% Over 3 through 6 months $ 5,218 19.54% $ 3,302 19.42% Over 6 through 12 months $ 8,710 32.62% $ 5,550 32.64% Over 12 months $ 9,201 34.44% $ 4,278 25.16% TOTAL $26,706 100.00% $17,004 100.00% 15 The following table sets forth an analysis of sources and uses of funds for the years under comparison. SOURCES AND USES OF FUNDS (in thousands) 1995 1994 1993 FUNDING USES Average Increase Average Increase Average Balance (Decrease) Balance (Decrease) Balance Amount % Amount % Amount INTEREST-EARNING ASSETS: Loans (Net of Unearned Discounts & Reserve) $183,018 $22,764 14.21% $160,254 $18,590 13.12% $141,664 Taxable Investment Securities $ 59,360 $10,593 21.73% $ 48,767($10,357) (17.52%)$ 59,124 Non-Taxable Investment Securities $ 10,467 $(2,817)(21.21%)$ 13,284 $ 3,484 35.55% $ 9,800 Federal Funds Sold $ 2,603 $ (84) (3.13%)$ 2,687 $ 300 12.57% $ 2,387 Interest Earning Deposits In Banks $ 113 $ (43)(27.57%)$ 156 $ (42) (21.21%)$ 198 TOTAL INTEREST- EARNING ASSETS $255,561 $30,413 13.51% $225,148 $11,975 5.62% $213,173 Other Uses $ 20,938 $ 187 .91% $ 20,751 $ 646 3.21% $ 20,105 TOTAL FUNDING USES $276,499 $30,600 12.45% $245,899 $12,621 5.41% $233,278 INTEREST-BEARING LIABILITIES: Savings Deposits $ 65,996 $ 1,084 1.15% $ 64,912 $ (700) (1.07%)$ 65,612 Time Deposits $136,631 $25,363 22.80% $111,268 $ 7,102 6.82% $104,166 Federal Funds Purchased and Other Interest Bearing Liabilities $ 23,613 $ 967 4.27% $ 22,646 $ 1,442 6.80% $ 21,204 TOTAL INTEREST- BEARING LIABILITIES $226,240 $27,414 13.79% $198,826 $ 7,844 4.11% $190,982 Demand Deposits $ 25,375 $ 386 1.55% $ 24,989 $ 3,067 13.99% $ 21,922 Other Sources $ 24,884 $ 2,800 12.68% $ 22,084 $ 1,710 8.39% $ 20,374 TOTAL FUNDING SOURCES: $276,499 $30,600 12.45% $245,899 $12,621 5.41% $233,278 16 SUMMARY - AVERAGE BALANCE SHEET AND NET INTEREST INCOME ANALYSIS (FIRST CITIZENS NATIONAL BANK) Monthly Average Balances and Interest Rates (in thousands) 1995 1994 1993 Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate ASSETS INTEREST EARNING ASSETS: Loans (1)(2) (3) $182,997 $17,718 9.69% $160,217 $ 14,619 9.12% $141,591 $ 13,389 9.46% Investment Securities: Taxable $ 59,360 $ 3,948 6.65% $ 48,767 $ 2,978 6.11% $ 59,124 $ 3,571 6.04% Tax Exempt (4) $ 10,467 $ 730 6.98% $ 13,284 $ 908 6.84% $ 9,800 $ 677 6.91% Interest Earning Deposits $ 113 $ 7 6.20% $ 156 $ 5 3.21% $ 198 $ 6 3.03% Federal Funds Sold $ 2,603 $ 158 6.07% $ 2,687 $ 113 4.21% $ 2,387 $ 75 3.14% Lease Financing $ 21 $ 2 9.53% $ 37 $ 4 10.81% $ 73 $ 6 8.22% Total Interest Earning Assets $255,561 $22,563 8.83% $225,148 $ 18,627 8.27% $213,173 $ 17,724 8.31% NON-INTEREST EARNING ASSETS: Cash and Due From Banks $ 9,457 $ - - $ 8,876 $ - - $ 8,373 $ - - Bank Premises and Equipment $ 8,699 $ - - $ 8,008 $ - - $ 7,859 $ - - Other Assets $ 2,782 $ - - $ 3,867 $ - - $ 3,873 $ - - Total Assets $276,499 $ - - $245,899 $ - - $233,278 $ - - LIABILITIES AND SHAREHOLDERS' EQUITY: INTEREST BEARING LIABILITIES: Savings Deposits $ 65,996 $ 2,009 3.05% $ 64,912 $ 1,746 2.69% $ 65,612 $ 1,695 2.58% (5) Time Deposits $136,631 $ 8,063 5.91% $111,268 $ 5,335 4.79% $104,166 $ 4,895 4.70% Federal Funds Purchased and Other Interest Bearing Liabilities $ 23,613 $ 1,184 5.02% $ 22,646 $ 912 4.03% $ 21,204 $ 671 3.16% Total Interest Bearing Liabilities $226,240 $ 11,256 4.98% $198,826 $ 7,993 4.02% $190,982 $ 7,261 3.80% NON-INTEREST BEARING LIABILITIES: Demand Deposits $ 25,375 $ - - $ 24,989 $ - - $ 21,922 $ - - Other Liabilities $ 1,972 $ - - $ 1,553 $ - - $ 1,908 $ - - Total Liabilities $253,587 $ - - $225,368 $ - - $214,812 $ - - SHAREHOLDERS' EQUITY $ 22,912 $ - - $ 20,530 $ - - $ 18,466 $ - - 17 SUMMARY - AVERAGE BALANCE SHEET AND NET INTEREST INCOME ANALYSIS (continued) (FIRST CITIZENS NATIONAL BANK) Monthly Average Balances and Interest Rates (in thousands) 1995 1994 1993 Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $276,499 $ - - $245,899 $ - - $233,278 $ - - NET INTEREST INCOME $ - $11,307 - $ - $10,634 - $ - $10,463 - NET YIELD ON AVERAGE EARNING ASSETS $ - $ - 4.43% $ - $ - 4.72% $ - $ - 4.91% (1) Loan totals are shown net of interest collected, not earned and loan loss reserves. (2) Fee Income is included in interest income and the computations of the yield on loans. Overdraft Fee Income is excluded from the totals. (3) Includes loans on nonaccrual status. (4) Interest and rates on securities which are non-taxable for Federal Income Tax purposes are presented on a taxable equivalent basis. (5) Includes Insured Money Fund, NOW, Club Accounts, and other Savings. 18 VOLUME/RATE ANALYSIS (First Citizens 1995 Compared to 1994 1994 Compared to 1993 National Bank) Due to Changes in: Due to Changes in: Total Total Average Average Increase Average Average Increase Volume Rate (Decrease) Volume Rate (Decrease) (in thousands) Interest Earned On: Loans $ 2,987 $ 112 $ 3,099 $ 1,762 $ (532) $1,230 Taxable Investments 647 323 970 (626) 33 (593) Tax Exempt Investment Securities (193) 15 (178) 241 (10) 231 Interest Bearing Deposits with Other Banks 1 1 2 (1) 0 (1) Federal Funds Sold and Securities purchased under agreements to resell (4) 49 45 9 29 38 Lease Financing (4) 2 (2) (3) 1 (2) TOTAL INTEREST EARNING ASSETS $ 3,434 $ 502 $ 3,936 $ 1,382$ (479) $ 903 Interest Paid On: Savings Deposits 29 234 263 (18) 69 51 Time Deposits 1,215 1,513 2,728 334 106 440 Federal Funds Purchased and Securities Sold Under Agreement to Repurchase 39 233 272 46 195 241 TOTAL INTEREST BEARING LIABILITIES $ 1,283 $ 1,980 $ 3,263 $ 362$ 370 $ 732 INTEREST EARNINGS $ 2,151 $(1,478) $ 673 $ 1,020$ (849) $ 171 A summary of average interest earning assets and interest bearing liabilities is set forth in the preceding table together with average yields on the earning assets and average cost on the interest bearing liabilities. Total interest earning assets increased 13.51% and 5.62% when comparing 1995 to 1994 and 1993. Total interest bearing liabilities increased 13.79% and 4.11% when comparing 1995, 1994 and 1993 respectively. Total interest earning assets averaged $255,561,000 at an average rate of 8.83% while total interest bearing liabilities averaged $226,240,000 at an average rate of 4.98%. Net yield on average earning assets (annualized) was 4.43%, 4.72%, and 4.91% for the years of '95, '94, and '93, reflecting an upward swing in interest rates beginning in 1994 and continuing in 1995. Maintaining interest rate margins achieved in prior years proved more difficult in '95 due to higher rates paid on deposits. Asset/Liability policies are in place to protect the company from the negative effects of volatile swings in interest rates. Interest margins are well managed to achieve acceptable profits and a return on equity within policy guidelines. 19 LOAN PORTFOLIO ANALYSIS COMPOSITION OF LOANS December 31 (in thousands) 1995 1994 1993 1992 1991 Real Estate Loans: Construction $ 12,954 $ 10,511 $ 7,675 $ 5,272 $ 4,879 Mortgage $107,844 $ 97,310 $ 87,314 $ 79,376 $ 76,500 Commercial, Financial and Agricultural Loans $ 45,061 $ 38,843 $ 35,626 $ 33,931 $ 33,089 Installment Loans to Individuals $ 23,718 $ 19,117 $ 15,901 $ 15,077 $ 15,901 Other Loans $ 2,329 $ 3,000 $ 2,806 $ 2,005 $ 2,697 TOTAL LOANS $191,906 $168,781 $149,322 $135,661 $133,066 CHANGES IN LOAN CATEGORIES December 31, 1995 as compared to December 31, 1994 (in thousands) Amount of Increase % of Increase Loan Category (Decrease) (Decrease) Real Estate $12,977 12.04% Commercial, Financial and Agricultural $ 6,218 16.01% Installment Loans to Individuals $ 4,601 24.07% Other Loans $ (671) (22.37%) TOTAL LOANS $23,125 13.71% Diversification of the loan portfolio is a strategic goal of the bank and a requirement of loan policy. Total loans at 12/31/95 were $191,906 consisting of $120,798,000 Mortgage and Construction, $45,061,000 Commercial Financial and Agricultural, $23,718,000 Installment Loans to Individuals, and $2,329,000 other loans. A comparison of growth of the loan portfolio indicates the largest percentage of growth is centered in the Real Estate category. Mortgage and construction loan totals increased $12.9 Million, $12.7 Million, and $10.3 Million when comparing 1995, 1994 and 1993. The upward trend is attributed to substantial growth in both population and number of households recorded in Dyer County over the past decade. First Citizens is located in the Dyersburg/Dyer County Trade Area, having a population of 40,000. The entire trade area has outpaced both the state and the nation in per capita personal income growth since the early 1980's. The State of Tennessee projects that per capita income in the area will be greater than the national average by the year of 2000. The mix of industry in the local economy has provided stable, growing employment opportunities for residents under all economic conditions. The Dyer County distribution of employment consists primarily of service employers 14.9%, government 14.7%, trade 19.3%, and manufacturing of 40.5%. Dyer County's unemployment rate at quarter end was 4.4% up from April, 1995 at 3.8%, but significantly less than the State of Tennessee's rate of 5.5%. Based on a market study completed during the second quarter of 1995, First Citizens National Bank was the bank of choice for providing financing for personal residence of new and existing customers. The loan portfolio is made up of quality loans, and is well diversified with no concentrations of credit in any one industry. A reduction was made in the provision to loan losses despite loan growth due to a continued reduction in problem and watch loans. Problem loans totaled $2,783,975 at 12/31/95, while watch loan total was slightly above $200,000. Total non- performing loans were .59% of total portfolio, at 12/31/95 compared to .69% for peer group banks. Experience of the lending staff and adherence to policy lends a comfort level to the portfolio that supports the Loan Loss Allowance at the present level. 20 The book value of repossessed real property held by Bancshares was $935,000 at 12/31/95 and $1,119,000 at 12/31/94. The balance was significantly reduced as a result of the sale of property in December, 1993 valued at $1,055,000. The only property held on the books of Bancshares is a strip shopping center valued at $689,000. The remaining balance held in repossessed real property represents real estate held by First Citizens National Bank with exception to property purchased for expansion of the Branch located on Highway 51 ByPass valued at $164,000. 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. Loan Administration sets policy guidelines approved by the Board of Directors regarding portfolio diversification and underwriting standards. Loan policy also 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 Various (see discussion) Various (see discussion) 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 of the bank's market area and the general economic state of the market area, the bank will strive to maintain a real estate loan portfolio diversification based upon the following: . Agricultural loans totaling in the aggregate no more than 20% of the Bank's total loans. . Land acquisition and development loans totaling in the aggregate no more than 10% of the Bank's total loans. . Commercial construction loans totaling in the aggregate no more than 10% of the Bank's total loans. . Residential construction loans totaling in the aggregate no more than 10% of the Bank's total loans. . Residential mortgage loans totaling in the aggregate no more than 40% of the Bank's total loans. . Commercial loans totaling in the 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. 21 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: . 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; . 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; . 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 . 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. 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 average yield on loans of First Citizens National Bank for the years indicated are as follows: 1995 - 9.69% 1994 - 9.12% 1993 - 9.46% 1992 - 10.05% 1991 - 11.34% The aggregate amount of unused guarantees, commitments to extend credit and standby letter of credit was $27,713,000 at 12/31/95. LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES Due after Due in one one year but Due after year or less within five years five years (in thousands) Real Estate $26,108 $80,662 $14,028 Commercial, Financial and Agricultural $26,572 $14,187 $ 4,302 All Other Loans $ 5,530 $20,314 $ 203 TOTALS $58,210 $115,163 $18,533 Loans with Maturities After One Year for which: (in thousands) Interest Rates are Fixed or Predetermined $110,683 Interest Rates are Floating or Adjustable $ 23,013 The degree of interest rate risk that a bank is subject to can be controlled through a well managed asset/liability management program. First Citizens controls interest rate risk by matching assets and liabilities, (by employing interest-sensitive funds in assets that are also interest sensitive). One tool used to ensure market rate return is variable rate loans. Loans totaling $81,223,000 or 42% of the total portfolio are subject to repricing within one year or carry a variable rate of interest. Loan maturities in the one to five year category increased from $101,979, at 12/31/94 to $115,163,000 at 12/31/95 as a result of customer demand to lock in fixed rates for a longer period of time. The trend exhibited by consumers in recent years to lock in interest rates is projected to continue in 1996. 22 NON-PERFORMING LOANS Nonaccrual, Restructured and Past Due Loans and Foreclosed Properties (First Citizens National Bank) December 31 (in thousands) 1995 1994 1993 1992 1991 Nonaccrual Loans $ 836 $ 945 $1,079 $1,743 $2,058 Restructured Loans 0 0 0 0 0 Foreclosed Property Other Real Estate, 111 148 98 550 884 Other Repossessed Assets 0 0 0 0 0 Loans and leases 90 days Past due and still accruing interest $ 313 $1,044 $ 322 $ 176 $1,029 Total Nonperforming Assets $1,260 $2,137 $1,499 $2,469 $3,971 Nonperforming assets as a percent of loans and leases plus foreclosed property at end of year .66% 1.27% 1.01% 1.82% 2.97% Allowance as a percent of: Nonperforming assets 175.88% 96.12% 111.81% 68.98% 48.76% Gross Loans 1.16% 1.22% 1.12% 1.27% 1.46% Addition to Reserve as a percent of Net Charge-Offs 180.20% 1,675.00% 93.69% 63.82% 103.86% Loans and leases 90 days past due as a percent of loans and leases at year end .17% .62% .22% .13% .78% Recoveries as a percent of Gross Charge-Offs 44.66% 87.10% 28.79% 36.17% 26.64% Non Performing Assets continued in a downward trend when reviewing the years under comparison. Total Non Performing Assets were $1,260,000 as of 12/31/95 compared to $2,137,000 at year end in 1994. Non performing Assets as a percent of loans was .66% compared to 1.27% in '94 and .62% for peer group banks. Continued improvements reflected in the financial ratios are indicative of well communicated loan policies and procedures. Categorization of a loan as non-performing is not in itself a reliable indicator of potential loan loss. The banks' 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. For purposes of applying the 90 day due test for the non-accrual of interest discussed above, the date on which an asset reaches non- accrual status is determined by it 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, 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. The gross interest income that would have been recorded for the twelve months ending 12/31/95 if all loans reported as non- accrual had been current in accordance with their original 23 terms and had been outstanding throughout the period is $81,000. Interest income on loans reported as ninety days past due and on interest accrual status was $30,000 for 1995. 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". First Citizens has no Restructured Loans for the period being reported. Certain loans contained on the bank's Internal Problem Loan List are not included in the listing of non-accrual, past due or restructured loans. Management is confident that, although certain of these loans may pose credit problems, any potential for loss has been provided for by specific allocations to the Loan Loss Reserve Account. 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 re-evaluated at regular intervals for effectiveness. LOAN LOSS EXPERIENCE & RESERVE FOR LOAN LOSSES (in thousands) 1995 1994 1993 1992 1991 Average Net Loans Outstanding $183,018 $160,254 $141,664 $134,514 $134,230 Balance of Reserve for Loan Losses at Beginning of Period $ 2,054 $ 1,676 $ 1,703 $ 1,936 $ 1,914 Loan Charge-Offs $ (365) $ (186) $ (601) $ (1,009) $ (777) Recovery of Loans Previously Charged Off $ 163 $ 162 $ 173 $ 365 $ 207 Net Loans Charged Off $ (202) $ (24) $ (428) $ (644) $ (570) Additions to Reserve Charged to Operating Expense $ 364 $ 402 $ 401 $ 411 $ 592 Balance at End of Period $ 2,216 $ 2,054 $ 1,676 $ 1,703 $ 1,936 Ratio of Net Charge- Offs to Average Net Loans Outstanding .11% .01% .30% .48% .43% The preceding table summarizes activity posted to the Loan Loss Reserve Account for the past five years. The summary includes the average 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 expenses; and the ratio of net loans charged off to average loans outstanding. Changes to the Reserve Account for the quarter just ended consisted of (1) Loans charged off of $202,000 (2) Recovery of loans previously charged off $163,000 and (3) Additions to reserves totaling $364,000. An analysis of the allocation of the allowance for Loan Losses is made on a fiscal quarter at the end of the month, (February, 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 the 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 automatically. 24 For analysis purposes, the loan portfolio is separated into four 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 common. 3. Problem - Loans which require additional collection efforts to liquidate both principal and interest. 4. Specific Allocation - Loans, in total or in part, in which a future loss is possible. 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 status of either principal or interest for 90 days, placed on non-accrual or renegotiated status, 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. Identification of impaired loans from non-performing assets as well as bankrupt and doubtful loans is paramount to the reserve analysis. Special allocations shall support loans found to be collateral or interest cash flow deficient. In addition an allowance shall be determined for pools of loans including all other criticized assets as well as small homogeneous loans managed by delinquency. In no circumstance shall the reserve fall below 1% of total loans less government guarantees. The following is a sample of information analyzed quarterly to determine the allowance for loan losses. LOAN LOSS ALLOWANCE ANALYSIS 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 50.00% $ $ SUBSTANDARD 10.00% WATCH 5.00% 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 $ 25 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. Any reduction in value is charged to the allowance for possible loan losses. All other real estate parcels are appraised annually and the carrying value is adjusted to reflect the decline, if any, in its realizable value. Such adjustments are charged directly to expense. Management estimates the approximate amount of charge-offs for the 12 month period ending 12/31/96 to be as follows: Domestic Amount Commercial, Financial & Agricultural $125,000 Real Estate-Construction 0 Real Estate-Mortgage 50,000 Installment Loans to individuals & credit cards 75,000 Lease financing 0 01/01/96 through 12/31/96 Total $250,000 The following table will identify charge-offs by category for the periods ending December 31 as indicated: Year Ending December 31 (in thousands) 1995 1994 1993 Charge-offs: Domestic: Commercial, Financial & Agricultural $ 54 $ 32 $ 415 Real Estate-Construction 0 0 0 Real Estate-Mortgage 113 22 27 Installment Loans to individuals & credit cards 198 132 159 Lease financing 0 0 0 Total $ 365 $ 186 $ 601 Recoveries: Domestic: Commercial, Financial & Agricultural $ 38 $ 30 $ 53 Real Estate-Construction 0 0 0 Real Estate-Mortgage 19 12 11 Installment Loans to individuals & credit cards 106 120 109 Lease financing 0 0 0 Total $ 163 $ 162 $ 173 Net Charge-offs $ 202 $ 24 $ 428 COMPOSITION OF INVESTMENT SECURITIES December 31 (in thousands) 1995 1994 1993 1992 1991 U. S. Treasury & Government Agencies $59,462 $47,042 $42,502 $59,019 $50,919 State & Political Subdivisions $10,776 $10,883 $12,774 $ 9,300 $ 3,239 All Others $ 3,654 $ 4,801 $ 5,471 $ 6,129 $ 4,944 TOTALS $73,892 $62,726 $60,747 $74,448 $59,102 26 MATURITY AND YIELD ON SECURITIES - DECEMBER 31, 1995 (in thousands) Maturing Maturing Maturing 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 $ 4,153 6.69% $35,871 6.32% $12,882 6.82% $6,556 6.75% State and Political Subdivisions* $ 223 5.57% $ 7,304 6.59% $ 2,657 6.86% $ 592 7.57% All Others $ 744 6.87% $ 501 6.00% $ 2,409 5.50% ---- --- TOTALS $ 5,120 6.67% $43,676 6.36% $17,948 6.65% $7,148 6.83% *Yields on tax free investments are stated herein on a taxable equivalent basis. HELD TO MATURITY & AVAILABLE FOR SALE SECURITIES - DECEMBER 31, 1995 Held to Maturity Available for Sale (in thousands) Amortized Fair Amortized Fair Cost Value Cost Value U.S. Treasury Securities 3,020 3,020 10,033 10,241 U.S. Government Agency & Corporation obligations (exclude mortgage-backed securities): Issued by U.S. Govt. Agencies (2) 200 200 0 0 Issued by U.S. Govt.-Sponsored Agencies (3) 20,484 20,755 16,055 16,560 Securities issued by states & political subdivisions in the U.S.: General Obligations 3,953 3,967 3,474 3,486 Revenue Obligations 2,616 2,616 716 721 Industrial development & similar obligations 0 0 0 0 Mortgage-backed Securities (MBS): Pass-through securities: Guaranteed by GNMA 448 462 1,072 1,101 Issued by FNMA & FHLMC 1,088 1,101 435 445 Other pass-through securities 0 0 0 0 Other mortgage-backed securities (include CMOs, REMICs and stripped MBS): Issued or guaranteed by FNMA & FHLMC or GNMA 1,143 1,139 4,724 4,731 Collateralized by MBS issued or guaranteed by FNMA, FHLMC or GNMA 0 0 0 0 All other mortgage-backed securities 0 0 0 0 Other Debt Securities: Other domestic debt securities 995 999 250 252 Foreign debt securities 0 0 0 0 Equity Securities: Investments in Mutual Funds 0 0 0 0 Other equity securities with readily determinable fair values 0 0 749 780 All other equity securities (1) 0 0 1,628 1,628 Total 33,947 34,259 39,136 39,945 (1) Includes equity securities without readily determinable fair values at historical cost. (2) Includes Small Business Administration "Guaranteed Loan Pool Certificates," U.S. Maritime Administration obligations, and Export-Import Bank participation certificates. (3) Includes obligations (other than pass-through securities, CMOs, and REMICs) issued by the Farm Credit System, the Federal Home Loan Bank System, the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, the Financing Corporation, Resolution Funding Corporation, the Student Loan Marketing Association, and the Tennessee Valley Authority. 27 A major goal of the bank's investment portfolio management is to maximize returns from investments while controlling the basic elements of risk. The second goal is to provide liquidity and meet financial needs of the community. Investment Securities also serve as collateral for government and public funds deposits. Investment activity for 1995 was directed by strong loan demand and Financial Accounting Standard No. 115 (further explanation is contained within this section as well footnotes included in the Auditors Report) which addresses Accounting in Certain Investments in Debt and Equity Securities. The investment portfolio, which currently totals $73,892,000, is comprised of U. S. Treasury and U. S. Agency Obligations of $59,462,000, Municipal Obligations of $10,776,000, and all other investments totaling $3,654,000. Fixed rate holdings comprise 90% of the portfolio, while adjustable rates comprise the remaining 10%. The fixed rate holdings currently have an expected average life of 2.6 years. It is estimated that this average life would extend to 3.2 years should rates go up by 100 basis points and 3.5 years if rates increase 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 decrease to 2.4 years. In terms of price sensitivity, we estimate that if rates go up 100 basis points the market value of the portfolio would fall by 2.5%, while rates up 200 basis points would impact the market value by a negative 5.4%. This is equal to the price sensitivity of the 3-year Treasury bond, which is consistent with the current average life of the portfolio. If rates go down 100 basis points, we estimate that the market value would increase by 2.2%. The adjustable rate holdings all reprice on an annual or more frequent basis and currently have an average life of 7.2 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 a 3-year Treasury, although this is more difficult to project on adjustable rate holdings than on fixed rate holdings. FASB 115 required banks to maintain separate investment portfolios for Held-to-Maturity, Available for Sale, and Trading Account Investments. As of 12/31/95 approximately 54 percent of the banks total portfolio was placed in the Held For Sale Account while the remaining 46 percent is contained in the Held to Maturity Account. FASB 115 also requires banks to mark to market the Available for Sale and Trading Account investments at the end of each calendar quarter. Held-to Maturity account investments are stated at amortized cost on the balance sheet. Mark to market resulted in a positive capital entry of $745,000 as reflected on the 12/31/95 balance sheet. Mark to market impact to capital on 12/31/94 was a negative $259,543. All purchase and sale transactions in 1995 were made in accordance with specifications set forth in FASB 115. During the fourth quarter of 1995 transfers were made from the Held to Maturity account to the Held for Sale account to provide for future liquidity. The Financial Accounting Standards Board provided a grace period under FASB 115 from November 15 thru December 31, 1995 to allow banks to reclassify investments contained in the three portfolios. The trading account at 12/31/95 maintained a zero balance. First Citizens has not engaged in Derivative activities as defined by paragraphs 5 thru 7 of FASB 119. Maturities in the portfolio are made up of 6.9% within one year, and 59.1% maturing after one year and within five years. Policy provides for 20% maturities on an annual basis. Maturities on future investment purchases will be structured to meet loan demand as well as projected changes in interest rates. Gains/Losses reflected in year-end income statements attributable to trading account securities: Year Ended 12/31 Gains Losses Net 1995 $ 0.00 $ 0.00 $ 0.00 1994 $ 0.00 $ 0.00 $ 0.00 1993 $ 0.00 $ 0.00 $ 0.00 28 The following table allocates by category unrealized Gains/Losses within the portfolio as of December 31, 1995 (in thousands): Unrealized Net Gains Losses Gains/Losses U.S. Treasury Securities $ 220 $ 12 $ 208 Obligations of U.S. Government Agencies and Corporations $ 986 $ 138 $ 848 Obligations of States and Political Subdivisions $ 65 $ 35 $ 30 Federal Reserve and Corporate Stock $ 35 $ 0 $ 35 TOTALS $ 1,306 $ 185 $ 1,121 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 risk. Liquidity which is determined by a comparison of net liquid assets to net liabilities remains between 10% and 15%. The stability of our deposit base, sound asset/liability management, a strong capital base and quality assets assure adequate liquidity. Loan to deposit ratio at 12/31/95 was 80%. Two factors primarily affecting liquidity in '95, was loan demand in excess of budget projections and customer demand to lock in low interest rates for longer periods of time. Solid deposit growth centered primarily in time deposits provided a steady source of funds to meet liquidity needs. During the last half of '94 interest rates started to climb upward, causing consumers to move funds from Annuities and Mutual Funds into bank certificates of deposits. Asset growth was in excess of 11% for 1995. Other sources available to meet liquidity needs were (1) approved lines of credit with Federal Home Loan Bank and correspondent banks totaling $19 Million (2) Loans and investments in excess of $86,343,000 maturing within one year and (3) approximately 53% of the banks' total investments placed in the held-for-sale account. As of year end approximately $5 Million was drawn on approved lines of credit. The borrowings were maturity matched with loans and investments on the books of the bank. There are no known trends or uncertainties that are likely to have a material affect on First Citizens liquidity or capital resources. There currently exists no recommendations by regulatory authorities which if implemented, would have such an affect. There are no matters of which management is aware that have not been disclosed. Interest rate sensitivity varies with different types of interest- earning assets and interest-bearing liabilities. Overnight federal funds, on which rates change daily, and loans which are tied to the prime rate are much more sensitive than long-term investment securities and fixed rate loans. The shorter term interest sensitive assets and liabilities are the key to measurement of the interest sensitivity gap. Minimizing this gap is a continual challenge and a primary objective of the asset/liability management program. The following condensed gap report provides an analysis of interest rate sensitivity of earning assets and costing liabilities. First Citizens Asset/Liability Management Policy provides that the cumulative gap as a percent of assets shall not exceed 10% for categories up to 12 months and one to two year categories and 20% for categories in excess of two years. As evidenced by the following table, our current position is significantly below this level, with annual income exposure determined to be less than the $150,000 limitation established by policy. 29 CONDENSED GAP REPORT 12/31/95 CURRENT BALANCES (in thousands) DAILY 0-1 1-2 2-3 3-6 6-12 TOTAL FLOATING MONTHS MONTHS MONTHS MONTHS MONTHS CASH AND DUE FROM: CURRENCY AND COIN 2,711 - - - - - - DUE FROM BANKS 1,801 - - - - - - CASH ITEMS 6,524 - - - - - - MONEY MARKET 63 63 - - - - - TOTAL CASH & DUE FROM 11,099 63 - - - - - INVESTMENTS 72,793 3,845 227 227 227 5,078 1,488 TOTAL INVESTMENTS 72,793 3,845 227 227 227 5,078 1,488 LOANS: COMMERCIAL FIXED 140,151 - 3,951 4,084 2,705 6,863 12,124 COMMERCIAL VARIABLE 43,611 43,611 - - - - - HOME EQUITY LOANS 4,701 4,701 - - - - - SEC MORTGAGE 280 280 - - - - - CREDIT CARDS 1,793 - - - - - 1,793 FACTORING REC 226 - 226 - - - - OVERDRAFTS 308 308 - - - - - NON-ACCRUAL LOANS 836 - - - - - - TOTAL LOANS 191,906 48,900 4,177 4,084 2,705 6,863 13,917 LOAN LOSS RESERVE 2,216 - - - - - - NET LOANS 189,690 48,900 4,177 4,084 2,705 6,863 13,917 FED FUNDS SOLD 1,850 1,850 - - - - - TOTAL FED FUNDS SOLD 1,850 1,850 - - - - - TOTAL EARNING ASSETS 264,333 54,595 4,404 4,311 2,932 11,941 15,405 OTHER ASSETS: BUILDING, F&F & LAND 8,826 - - - - - - OTHER REAL ESTATE 111 - - - - - - OTHER ASSETS 4,478 - - - - - - TOTAL OTHER ASSETS 13,415 - - - - - - TOTAL ASSETS 288,847 54,658 4,404 4,311 2,932 11,941 15,405 DEMAND DEPOSITS: BANKS 39 - - - - - - DEMAND DEPOSITS 26,210 - - - - - - TOTAL DEMAND 26,249 - - - - - - SAVINGS ACCOUNTS: REGULAR SAVINGS 18,326 - - - - - - NOW ACCOUNT 25,823 - - - - - - BUSINESS CHECKING 67 - 67 - - - - IMF-MMDA 11,697 - - 11,697 - - - HIGH YIELD ACCOUNT 9,462 - - 9,462 - - - DOGWOOD CLUB 4,940 - - - - - - TOTAL SAVINGS 70,315 - 67 21,159 - - - 30 CONDENSED GAP REPORT 12/31/95 CURRENT BALANCES (in thousands) 1-2 2+ YEARS YEARS CASH AND DUE FROM: CURRENCY AND COIN - 2,711 DUE FROM BANKS - 1,801 CASH ITEMS - 6,524 MONEY MARKET - - TOTAL CASH & DUE FROM - 11,036 INVESTMENTS 16,040 45,661 TOTAL INVESTMENTS 16,040 45,661 LOANS COMMERCIAL FIXED 19,916 90,508 COMMERCIAL VARIABLE - - HOME EQUITY LOANS - - SEC MORTGAGE - - CREDIT CARDS - - FACTORING REC - - OVERDRAFTS - - NON-ACCRUAL LOANS - 836 TOTAL LOANS 19,916 91,344 LOAN LOSS RESERVE - 2,216 NET LOANS 19,916 89,128 FED FUNDS SOLD - - TOTAL FED FUNDS SOLD - - TOTAL EARNING ASSETS 35,956 134,789 OTHER ASSETS: BUILDING, F&F & LAND - 8,826 OTHER REAL ESTATE - 111 OTHER ASSETS - 4,478 TOTAL OTHER ASSETS - 13,415 TOTAL ASSETS 35,956 159,240 DEMAND DEPOSITS: BANKS - 39 DEMAND DEPOSITS - 26,210 TOTAL DEMAND - 26,249 SAVINGS ACCOUNTS: REGULAR SAVINGS - 18,326 NOW ACCOUNT - 25,823 BUSINESS CHECKING - - IMF-MMDA - - HIGH YIELD ACCOUNT - - DOGWOOD CLUB - 4,940 TOTAL SAVINGS - 49,089 31 CONDENSED GAP REPORT 12/31/95 CURRENT BALANCES (in thousands) DAILY 0-1 1-2 2-3 3-6 6-12 TOTAL FLOATING MONTHS MONTHS MONTHS MONTHS MONTHS TIME DEPOSITS: FLEX-CD 93,333 - 7,774 5,000 6,274 20,993 19,406 LARGE CD-FLEX 26,706 - 1,484 764 1,329 5,218 8,710 IRA-FLOATING 177 177 - - - - - IRA-FIXED 20,425 - 573 947 747 1,588 2,664 CHRISTMAS CLUB 73 - - - - - 73 TOTAL TIME 140,714 177 9,831 6,711 8,350 27,799 30,853 TOTAL DEPOSITS 237,278 177 9,898 27,870 8,350 27,799 30,853 SHORT TERM BORROWINGS: TT&L 181 181 - - - - - SECURITIES SOLD-SWEEP 11,566 11,566 - - - - - SECURITIES SOLD-FIXED 8,179 - 1,266 2,259 1,081 2,290 - FHLB-LIBOR INVESTMENT 2,407 2,407 - - - - - FHLB-LONG TERM 2,245 - - - - - - TOTAL SHORT TERM BORR. 24,578 14,154 1,266 2,259 1,081 2,290 - OTHER LIABILITIES: ACCRUED INT. PAYABLE 2,092 - - - - - - OTHER LIABILITIES 287 - - - - - - TOTAL OTHER LIABILITIES 2,379 - - - - - - TOTAL LIABILITIES 264,235 14,331 11,164 30,129 9,431 30,089 30,853 CAPITAL: COMMON STOCK 2,000 - - - - - - SURPLUS 4,000 - - - - - - UNREALIZED GAIN (LOSSES) 485 - - - - - - UNDIVIDED PROFITS 18,127 - - - - - - TOTAL CAPITAL 24,612 - - - - - - TOTAL LIAB'S & CAPITAL 288,847 14,331 11,164 30,129 9,431 30,089 30,853 GAP (SPREAD) - 40,327 -6,760 -25,818 -6,499 -18,148-15,448 GAP % TOTAL ASSETS - 13.96 -2.34 -8.94 -2.25 -6.28 -5.35 CUMULATIVE GAP - 40,327 33,567 7,749 1,250 -16,898-32,346 CUM. GAP % TOTAL ASSETS - 13.96 11.62 2.68 .43 -5.85 11.20 SENSITIVITY RATIO - 3.81 2.32 1.14 1.02 .82 .74 32 CONDENSED GAP REPORT 12/31/95 CURRENT BALANCES (in thousands) 1-2 2+ YEARS YEARS TIME DEPOSITS: FLEX-CD 28,593 5,293 LARGE CD-FLEX 5,101 4,100 IRA-FLOATING - - IRA-FIXED 5,082 8,824 CHRISTMAS CLUB - - TOTAL TIME 38,776 18,217 TOTAL DEPOSITS 38,776 93,555 SHORT TERM BORROWINGS: TT&L - - SECURITIES SOLD-SWEEP - - SECURITIES SOLD-FIXED 1,003 280 FHLB-LIBOR INVESTMENT - - FHLB-LONG TERM - 2,245 TOTAL SHORT TERM BORR. 1,003 2,525 OTHER LIABILITIES: ACCRUED INT. PAYABLE - 2,092 OTHER LIABILITIES - 287 TOTAL OTHER LIABILITIES - 2,379 TOTAL LIABILITIES 39,779 98,459 CAPITAL: COMMON STOCK - 2,000 SURPLUS - 4,000 UNREALIZED GAIN (LOSSES) 485 UNDIVIDED PROFITS - 18,127 TOTAL CAPITAL - 24,612 TOTAL LIAB'S & CAPITAL 39,779 123,071 GAP (SPREAD) -3,823 36,169 GAP % TOTAL ASSETS -1.32 12.52 CUMULATIVE GAP -36,169 - CUM. GAP % TOTAL ASSETS -12.52 - SENSITIVITY RATIO .78 1.00 NOTES TO THE GAP REPORT 1. This gap report reflects interest sensitivity positions during a flat rate environment. 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. Demand deposits are considered core deposits. 4. Savings accounts are placed in the +2 year time frame. In a flat rate environment, savings accounts generally do not reprice or liquidate. Savings deposits tend to be price sensitive, after a major increase in the 6 month CD rate. These accounts are placed in the +2 year time frame as opposed to variable based on past historical trends. Savings accounts are considered core deposits. 5. The policy for cumulative gap positions at FCNB are: Intervals less than 1 year 4% - 10%, and the period of 1 - 5 years 4% - 20%. Approximately 40% - 50% of CD customers have maturities of 6 months or less. The banks net interest income exposure limit is $150,000. Net interest income exposure as a percent of unimpaired capital is .76%. Currently, the bank's exposure is less than limits established by policy. 6. Effective GAP management ensures minimal impact to net interest income in a volatile interest rate environment. Financial markets are strained by rapid changes in rates, whether up or down. When rates rise rapidly, net Interest margins are squeezed. Rapidly decreasing rates have the potential to excessively stimulate loan demand, placing pressure on the bank's liquidity position. 33 RETURN ON EQUITY AND ASSETS FIRST CITIZENS BANCSHARES, INC. 1995 1994 1993 1992 1991 Percentage of Net Income to: Average Total Assets 1.00% 1.20% 1.17% .95% .89% Average Shareholders Equity 10.60% 12.93% 13.48% 11.79% 11.65% Percentage of Dividends Declared Per Common Share to Net Income Per Common Share 35.56% 29.23% 25.62% 27.67% 28.86% Percentage of Average Shareholders' Equity to Average Total Assets 9.32% 9.27% 8.71% 8.07% 7.60% Return on Assets at 12/31/95 posted levels slightly below those reached at 12/31/94. 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. Accelerated asset growth over the past twelve months coupled with rising rates paid on interest bearing deposits had a significant impact on earnings the first half of '95. A comparison of total assets at 12/31/95 reflects asset growth of $34.7 Million or 11.9% when compared to 12/31/94. Operating expenses increased due to the addition of two branch banks opened in November, 1994 and January, 1995 as well as the installation cost of Item Capture and Statement Imaging software and a Teller Platform System. 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 the level of ROA achieved at year end. A return on assets of 1.25% or above is required if maximum benefits are to be realized. Total Shareholder's equity (Including Loan Loss Reserve) of First Citizens Bancshares, as of 12/31/95 was $27,103,237 compared to $23,878,748 at 12/31/94. Percentage of dividends declared per common share to net income per common share has trended upward since 1993. Number of shares outstanding continues to increase as a result of stock issued on a quarterly basis to service the Dividend Reinvestment Program. A stock repurchase program, approved by the Board of Directors in 1994 for the purpose of acquiring shares on the open market to service the Dividend Reinvestment Program continues to be ineffective. Shareholders continue to express an interest in buying additional stock rather than selling shares. Under the terms of the repurchase program, the company will repurchase up to $200,000 of Bancshares' stock in a calendar quarter on a first come, first served basis. An optional stock purchase program allowing shareholders to purchase up to $5,000 in Bancshares stock in any calendar quarter was discontinued at the end of first quarter '95 because of the lack of availability of stock to service the program. Total Capital (excluding Reserve for Loan Losses) as a percentage of total assets is presented in the following table for years indicated: CAPITAL RESOURCES/TOTAL ASSETS - YEAR-END TOTALS FIRST CITIZENS BANCSHARES, INC. 1995 1994 1993 1992 1991 9.30% 9.30% 9.24% 8.05% 7.75% Cash Dividends to Shareholders for 1995, 1994, and 1993 respectively were $1.30, $1.19, and $0.99. Total shares outstanding was 733,399, 714,824, and 700,656 at 12/31/95, '94 and '93. An Amendment to the Articles of Association ratified by the Shareholders in April, 1993 approved an increase in number of shares authorized from 750,000 to 2,000,000. In September, 1993 a 2.5 for l stock split on the Common Capital Stock of Bancshares was declared to holders of record as of October 15, 1993. The number of shares outstanding increased proportionately with changes to the capital account. In addition a 10% stock dividend was declared payable December 15, 1992 which provided for issuance of one share of stock for each 10 shares owned, with payment of fractional shares being made in cash. 25,158 shares were issued as a result of the dividend. 34 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 is 8.00%. At least one-half or 4.00% must consist of core capital (Tier 1), and the remaining 4.00% 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 preferred 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 has historically maintained capital in excess of minimum levels established by the Federal Reserve Board. The risk-based capital ratio for Bancshares and First Citizens National Bank as of 12/31/95 and 12/31/94 was 14.05 percent and 14.06 percent respectively, significantly above the 8.0 percent level required by regulation. With the exception of the Reserve for Loan and Lease Losses, all capital is Tier 1 level. 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA Independent Auditors' Report Board of Directors First Citizens Bancshares, Inc. Dyersburg, Tennessee 38024 We have audited the accompanying consolidated balance sheets of First Citizens Bancshares, Inc., and Subsidiary as of December 31, 1995 and 1994, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years ended December 31, 1995. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of First Citizens Bancshares, Inc., and Subsidiary as of December 31, 1995 and 1994, and their results of operations and cash flows for the three years ended December 31, 1995, in conformity with generally accepted accounting principles. Dyersburg, Tennessee January 27, 1996 Carmichael, Dunn, Creswell & Sparks CPAs 35 FIRST CITIZENS BANCSHARES, INC., AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS December 31, 1995 and 1994 1995 1994 ASSETS Cash and due from banks - Note 13 $11,694,413 $ 9,784,155 Federal funds sold 1,850,000 2,900,000 Investment securities - Notes 1 and 2 Securities held-to-maturity (fair value of $34,258,371 at December 31, 1995 and $45,151,062 at December 31, 1994) 33,947,383 47,294,807 Securities available-for-sale, at fair value 39,943,942 16,873,500 Loans - Notes 1 and 3 (net of unearned income of $1,657,033 in 1995 and $1,333,952 in 1994) 191,906,433 168,781,491 Less: Allowance for loan losses - Notes 1 and 4 2,216,511 2,053,843 Net Loans 189,689,922 166,727,648 Premises and equipment - Notes 1 and 5 8,830,533 8,392,199 Accrued interest receivable 3,951,100 3,001,337 Other assets - Notes 1 and 6 1,504,603 1,712,888 TOTAL ASSETS $291,411,896 $256,686,534 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits - Note 7 Demand 26,131,710 26,540,953 Time 140,713,180 116,590,688 Savings 70,315,491 66,348,610 Total Deposits 237,160,381 209,480,251 Securities sold under agreement to repurchase 19,744,966 16,950,086 Long-term debt - Note 16 4,651,903 4,124,730 Other liabilities - Note 22 2,751,409 2,252,719 Total Liabilities 264,308,659 232,807,786 Stockholders' Equity Common stock, par value $1; shares authorized 2,000,000 Issued and outstanding - 733,399 shares in 1995 714,824 shares in 1994 733,399 714,824 Surplus 9,719,956 9,000,485 Retained earnings 16,166,392 14,423,084 Unrealized gain (loss) on securities available-for-sale, net of applicable deferred income taxes 485,271 (259,543) Less treasury stock, at cost 40 shares in 1995; 3 shares in 1994 (1,781) (102) Total Stockholders' Equity 27,103,237 23,878,748 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $291,411,896 $256,686,534 See accompanying notes to consolidated financial statements. 36 FIRST CITIZENS BANCSHARES, INC., AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, 1995, 1994, 1993 1995 1994 1993 Interest Income Interest and fees on loans $17,720,050 $14,619,684 $13,389,308 Interest and dividends on investment securities: Taxable 4,029,277 2,950,541 3,499,964 Tax-exempt 482,209 598,515 447,114 Dividends 61,928 160,085 91,738 Other interest income 197,635 113,435 81,203 Lease financing income 1,487 4,271 6,426 Total Interest Income 22,492,586 18,446,531 17,515,753 Interest Expense Interest on deposits 10,039,401 7,106,421 6,588,376 Interest on long-term debt 347,683 233,659 26,557 Other interest expense 794,169 631,006 646,021 Total Interest Expense 11,181,253 7,971,086 7,260,954 Net Interest Income 11,311,333 10,475,445 10,254,799 Provision for loan losses - Note 4 364,449 402,000 401,273 Net interest income after provision for loan losses 10,946,884 10,073,445 9,853,526 Other Income Income from fiduciary activities 704,726 625,293 521,284 Service charges on deposit accounts 1,304,523 1,116,546 1,079,761 Other service charges, commissions, and fees 464,879 703,599 771,024 Securities gains (losses) - net - Note 2 59,644 (69,534) 31,758 Other income 186,137 494,996 316,496 Total Other Income 2,719,909 2,870,810 2,720,323 Other Expenses Salaries and employee benefits - Note 8 5,171,955 4,970,061 4,750,184 Net occupancy expenses 340,663 317,614 348,702 Furniture and equipment expense 154,680 144,805 135,895 Depreciation 930,292 823,599 798,220 Data processing expense 227,812 177,288 154,670 Legal and professional fees 280,155 86,818 128,574 Stationary and office supplies 204,794 146,685 161,796 Other expenses 2,317,900 2,143,276 2,254,641 Total Other Expenses $9,628,251 $8,810,146 $8,732,682 Net income before income taxes $4,038,542 $4,134,109 $3,841,167 Provision for income tax expense - Note 9 1,332,886 1,187,860 1,202,708 Net income from operations 2,705,656 2,946,249 2,638,459 Cumulative change in accounting principal - Note 9 $ 125,278 Net Income $2,705,656 $2,946,249 $2,763,737 Earnings Per Common Share - Note 10: Net income from operations 3.72 4.15 3.76 Net income 3.72 4.15 3.94 Weighted average shares outstanding $ 726,489 $ 709,434 $ 700,958 *Certain items have been reclassified to conform to current years format. See accompanying notes to consolidated financial statements. 37 FIRST CITIZENS BANCSHARES, INC., AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS'EQUITY Years Ended December 31, 1995, 1994 and 1993 Common Stock Shares Amount Balance, December 31, 1992 279,247 $2,792,470 Net income, year ended December 31, 1993 Cash dividends paid - $2.10 per share Sale of common stock 4,711 47,110 Stock Split - Note 10 422,698 4,226,980 Payment of principal on note Treasury stock transactions-net Balance, December 31, 1993 706,656 7,066,560 Net income, year ended December 31, 1994 Cash dividends paid - $1.19 per share Conversion of par value of common stock from $10 to $1 - Note 11 (6,378,246) Sale of common stock 8,168 26,510 Adjustment to record unrealized gain (loss) in securities available-for-sale, net of applicable deferred income taxes effective January 1, 1994 - Note 2 Adjustment of unrealized gain (loss) on securities available-for-sale, net of applicable deferred income taxes during the year - Note 2 Treasury stock transactions-net Balance, December 31, 1994 714,824 714,824 Net income, year ended December 31, 1995 Cash dividends paid - $1.19 per share Sale of common stock 18,575 18,575 Adjustment of unrealized gain (loss) on securities available-for-sale, net of applicable deferred income taxes during the year - Note 2 Treasury stock transaction-net Balance, December 31, 1995 733,399 $ 733,399 See accompanying notes to consolidated financial statements. 38 Unrealized Gain (Loss) on Securities Available-for-Sale, Obligation of Net of Applicable Employee Stock Deferred Income Surplus Retained Earnings Ownership Plan Taxes Treasury Stock $ 6,394,048 $10,282,457 ($160,000) $ -0- $ -0- 2,763,737 (707,952) 189,014 (4,226,980) 160,000 (60,407) 2,356,082 12,338,242 -0- -0- (60,407) 2,946,249 (861,407) 6,378,246 265,710 94,696 (354,239) 447 60,305 9,000,485 14,423,084 -0- (259,543) (102) 2,705,656 (962,348) 719,315 744,814 156 (1,679) $9,719,956 $16,166,392 $ -0- $485,271 ($1,781) 39 FIRST CITIZENS BANCSHARES, INC., AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOW Years ended December 31, 1995, 1994, and 1993 1995 1994 1993 Operating Activities Net income 2,705,656 2,946,249 2,763,737 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 364,449 402,000 401,273 Provision for losses on other real estate 53,404 3,000 Provision for depreciation 930,292 823,599 798,220 Amortization of investment security discounts (3,000) (25,919) Deferred income taxes (61,538) (31,737) (175,989) (Gains) losses on sale of other real estate 36,004 (4,289) Realized and unrealized investment security (gains) losses (59,644) 69,534 (31,758) (Increase) decrease in accrued interest receivable (949,763) (428,668) 284,995 (Increase) decrease in accrued interest payable 732,857 29,159 Increase (decrease) in other assets 118,877 1,151,106 765,721 Increase (decrease) in other liabilities (169,629) (171,424) 722,887 NET CASH PROVIDED BY OPERATING ACTIVITIES 3,697,965 4,760,659 5,531,037 Investing Activities Proceeds of maturities of investment securities 10,826,000 Proceeds from sales of trading and investment securities 5,300,252 Purchases of trading and investment securities (2,367,925) Proceeds of sales and maturities of held- to-maturity investment securities 7,160,748 19,405,141 Purchases of held-to-maturity investment securities (17,780,040) Proceeds of sales and maturities of available-for-sale investment securities 11,639,381 5,109,625 Purchases of available-for-sale investment securities (27,718,689) (10,625,663) Increase in loans - net (23,326,723) (19,483,603) (14,089,936) Purchase of premises and equipment (1,368,626) (1,588,847) (362,041) NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (33,613,909) (24,963,387) (693,650) Financing Activities Net increase (decrease) in demand deposits, NOW accounts and savings accounts $ 3,557,638 $ 4,255,599 $450,967 Increase (decrease) in time deposits-net 24,122,492 11,401,403 (87,052) Increase in long-term borrowing 527,173 4,124,730 Payment of principal on long-term debt (30,021) (132,943) Proceeds from sale of common stock 737,890 292,220 236,124 Cash dividends paid (962,348) (861,407) (707,952) Net increase (decrease) in short-term borrowings 2,794,880 35,944 (8,219,777) Treasury stock transactions-net (1,523) 60,752 (60,407) NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 30,776,202 19,279,220 (8,521,040) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 860,258 (923,508) (3,683,653) Cash and cash equivalents at beginning of year 12,684,155 13,607,663 17,291,316 CASH AND CASH EQUIVALENTS AT END OF YEAR $13,544,413 $12,684,155 $13,607,663 Cash payments made for interest and income taxes during the years presented are as follows: 1995 1994 1993 Interest $10,448,396 $ 7,838,662 $7,231,795 Income taxes 1,567,316 1,260,380 1,131,310 See accompanying notes to consolidated financial statements. 40 FIRST CITIZENS BANCSHARES, INC., AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS December 31, 1995 Note 1 - Summary of Significant Accounting and Reporting Policies The accounting and reporting policies of First Citizens Bancshares, Inc., and Subsidiary conform to generally accepted accounting principles. The significant policies are described as follows: BASIS OF PRESENTATION The consolidated financial statements include all accounts of First Citizens Bancshares, Inc., and First Citizens National Bank. First Citizens Bancshares, Inc.'s, investment in its Subsidiary shown on the Parent Company Balance Sheet, is stated at equity in the underlying assets. All inter-company items are eliminated in consolidation. NATURE OF OPERATIONS The Company and its subsidiary provide commercial banking services of a wide variety to individual corporate customers in the Mid- Southern Vested Stocks with a concentration in northwest Tennessee. The Company's primary products are checking and savings deposits and residential, commercial and consumer lending. BASIS OF ACCOUNTING The consolidated financial statements are presented using the accrual basis of accounting. USES OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties. CASH EQUIVALENTS Cash equivalents include amounts due from banks which do not bear interest and federal funds sold. Generally, federal funds are purchased and sold for one day periods. SECURITIES Effective January 1, 1994, the Company adopted Statement No. 115 of the Financial Accounting Standards Board according to which investment securities are classified as follows: Held-to-maturity which includes those investment securities which the Company has the intent and the ability to hold until maturity; Trading securities which includes those investment securities which are held for short-term resale; and Available-for-sale which includes all other investment securities. Securities which are held-to-maturity are reflected at cost, adjusted for amortization of premiums and accretion of discounts using methods which approximate the interest method. Securities which are available-for-sale are carried at fair value, and unrealized gains and losses are recognized as direct increases or decreases in stockholders' equity. Trading securities, where applicable, are carried at fair value, and unrealized gains and losses on these securities are included in net income. During the years presented, First Citizens Bancshares, Inc. had no trading security transactions. Realized gains and losses on investment securities transactions are determined based on the specific identification method and are included in net income. 41 FIRST CITIZENS BANCSHARES, INC., AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (CONTINUED) December 31, 1995 Note 1 - Summary of Significant Accounting and Reporting Policies (Continued) LOANS Loans are reflected on the balance sheet at the unpaid principal amount less the allowance for loan losses and unearned income. Loans are generally placed on non-accrual status when, in the judgment of management, the loans have become impaired. Unpaid interest on loans placed on non-accrual status are reversed from income and further accruals of income are not usually recognized. Subsequent collections related to impaired loans are usually credited first to principal and then to previously uncollected interest. ALLOWANCE FOR LOAN LOSSES The provision for loan losses which is charged to operations is based on management's assessment of the quality of the loan portfolio, current economic conditions and other relevant factors. In management's judgment, the provision for loan losses will maintain the allowance for loan losses at adequate level to absorb potential loan losses which may exist in the portfolio. PREMISES AND EQUIPMENT Bank premises and equipment are stated at cost less accumulated depreciation. The provision for depreciation is computed using straight-line and accelerated methods for both financial reporting and income tax purposes. Expenditures for maintenance and repairs are charged against income as incurred. Cost of major additions and improvements are capitalized and depreciated over their estimated useful lives. REAL ESTATE ACQUIRED BY FORECLOSURE Real estate acquired through foreclosure is reflected in other assets and is recorded at the lower of fair value less estimated costs to sell or cost. Adjustments made at the date of foreclosure are charged to the allowance for loan losses. Expenses incurred in connection with ownership, subsequent adjustments to book value, and gains and losses upon disposition are included in other non-interest expenses. Adjustments to net realizable value are made annually subsequent to acquisition based on appraisal. INCOME TAXES First Citizens Bancshares, Inc., uses the accrual method of accounting for federal income tax reporting. Deferred tax assets or liabilities are computed for significant differences in financial statement and tax basis of assets and liabilities which result from temporary differences in financial statement and tax accounting. INTEREST INCOME ON LOANS Interest income on commercial and real estate loans is computed on the basis of the daily principal balance outstanding using the accrual method. Interest on installment loans is credited to operations by the rule of 78ths method, which does not represent a significant financial deviation from the interest method. NET INCOME PER SHARE OF COMMON STOCK Net income per share of common stock is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period, after giving retroactive effect to stock dividends and stock splits. INCOME FROM FIDUCIARY ACTIVITIES Income from fiduciary activities is recorded on the accrual basis. 42 FIRST CITIZENS BANCSHARES, INC., AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (CONTINUED) December 31, 1995 Note 2 - Investment Securities At February 1, 1994, First Citizens Bancshares, Inc. adopted Statement No. 115 of the Financial Accounting Standards Board which sets forth criteria for classification of investment securities for financial statement purposes. The following tables reflect amortized cost, unrealized gains, unrealized losses and fair value of investment securities for the balance sheet dates presented, segregated into held-to-maturity and available-for- sale categories: December 31, 1995 Held-To-Maturity Gross Gross Unrealized Unrealized Amortized Cost Gains Losses Fair Value U.S. Treasury securities and obligations of U.S. government corporations and agencies $26,382,642 $388,709 $94,943 $26,676,408 Obligations of states and political subdivisions 6,569,421 33,373 19,955 6,582,839 Other debt securities 995,320 3,804 999,124 TOTAL SECURITIES INVESTMENTS $33,947,383 $425,886 $114,898 $34,258,371 Available-for-Sale Gross Gross Unrealized Unrealized Amortized Cost Gains Losses Fair Value U.S. Treasury securities and obligations of U.S. government corporations and agencies $32,319,020 $808,393 $48,673 $33,078,740 Obligations of states and political subdivisions 419,086 31,773 15,535 4,206,324 Other debt securities 250,000 2,078 252,078 Total Debt Securities 36,759,106 842,244 64,208 37,537,142 Other securities investments 2,376,050 30,750 2,406,800 $39,135,156 $872,994 $64,208 $39,943,942 43 FIRST CITIZENS BANCSHARES, INC., AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (CONTINUED) December 31, 1995 Note 2 - Investment Securities (Continued) December 31, 1994 Held-To-Maturity Gross Gross Unrealized Unrealized Amortized Cost Gains Losses Fair Value U.S. Treasury securities and obligations of U.S. government corporations and agencies $36,280,060 $2,933 $1,692,832 $34,590,161 Obligations of states and political subdivisions 9,425,893 4,640 437,806 8,992,727 Other debt securities 1,588,854 16,692 37,372 1,568,174 TOTAL SECURITIES INVESTMENTS $47,294,807 $24,265 $2,168,010 $45,151,062 Available-For-Sale Gross Gross Unrealized Unrealized Amortized Cost Gains Losses Fair Value U.S. Treasury securities and obligations of U.S. government corporations and agencies $12,595,786 $13,791 $405,474 $12,204,103 Obligations of states and political subdivisions 1,444,561 16,235 3,289 1,457,507 Other debt securities 1,050,574 3,429 1,013 1,052,990 Total Debt Securities 15,090,921 33,455 409,776 14,714,600 Other securities investments 2,215,150 56,250 2,158,900 TOTAL $17,306,071 $33,455 $466,026 $16,873,500 44 FIRST CITIZENS BANCSHARES, INC., AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (CONTINUED) December 31, 1995 Note 2 - Investment Securities (Continued) The tables below summarize maturities of debt securities held-to-maturity and available-for-sale as of December 31, 1995 and 1994: December 31, 1995 Securities Securities Held-To-Maturity Available-For-Sale Amortized Cost Fair Value Amortized Cost Fair Value Amounts Maturing In: One Year or less $ 9,637,185 $ 9,644,453 $14,756,019 $14,851,381 After one year through five years 23,051,250 23,355,974 18,944,304 19,414,850 After five years through ten years 260,857 258,349 2,883,783 3,092,877 After ten years 998,091 999,595 175,000 178,034 $33,947,383 $34,258,371 $36,759,106 $37,537,142 December 31, 1994 Securities Securities Held-To-Maturity Available-For-Sale Amortized Cost Fair Value Amortized Cost Fair Value Amounts Maturing In: One Year or less $15,843,293 $15,098,601 $ 5,099,124 $ 4,967,073 After one year through five years 25,683,274 24,669,699 12,164,447 11,906,427 After five years through ten years 4,168,308 3,878,041 After ten years 1,599,932 1,504,721 $47,294,807 $45,151,062 $17,263,571 $16,873,500 Securities gains (losses) presented in the consolidated statements of income consist of the following: Year Ended December 31 Gross Sales Gains Losses Net 1995 - Securities held-to-maturity $2,150,000 $ 7,261 $ 5,189 $ 2,072 1995 - Securities available-for-sale 9,379,381 57,604 32 57,572 1994 - Securities available-for-sale 5,109,625 69,534 (69,534) 1993 - Investment securities 5,300,252 35,038 3,280 31,758 Sales of securities classified as held-to-maturity consist of securities which were called resulting in a gain or loss and the sale of one security within ninety days of maturity. At December 31, 1995 and 1994, investment securities were pledged to secure government, public and trust as follows: December 31 Amortized Cost Fair Value 1995 $38,480,063 $39,548,513 1994 41,588,244 39,959,186 In accordance with provisions of the Implementation Guide of Statement No. 115 issued by the Financial Accounting Standards Board, First Citizens Bancshares, Inc. transferred securities with a book value of $14,824,727 from the held-to-maturity category to available-for-sale category during 1995. An unrealized gain of $549,287 was recognized on these securities. 45 FIRST CITIZENS BANCSHARES, INC., AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (CONTINUED) December 31, 1995 Note 3 - Loans Loans outstanding at December 31, 1995 and 1994 were comprised of the following: 1995 1994 (In Thousands) Commercial, financial and agricultural $ 45,061 $38,843 Real estate - construction 12,954 10,511 Real estate - mortgage 107,844 97,310 Installment 23,718 19,118 Other loans 2,330 3,000 191,907 168,782 Less: Allowance for possible loan losses 2,217 2,054 $189,690 $166,728 At December 31, 1995, First Citizens Bancshares, Inc. had loans totaling approximately $836,000 which were specifically classified as impaired, the average balance of the loans during the year ended December 31, 1995 was approximately $815,000 At December 31, 1995, the Corporation has a balance in its allowance for loan losses of $216,166 related to impaired loans. Note 4 - Allowance for Possible Loan Losses An analysis of the allowance for possible loan losses during the three years ended December 31, 1995 is as follows: 1995 1994 1993 Balance, beginning of period $2,053,843 $1,676,133 $1,703,349 Provision for loan losses charged to operations 364,449 402,000 401,273 Loans charged to allowance, net of loan loss recoveries of $164,148, $162,474, and $173,875 (201,781) (24,290) (428,489) Balance, end of period $2,216,511 $2,053,843 $1,676,133 For tax purposes, the Corporation deducts the maximum amount allowable. During the year ended December 31, 1995, the deduction taken was $235,971. The deductions for tax purposes in 1994 and 1993 were $13,182 and $418,577, respectively. Note 5 - Premises and Equipment The fixed assets used in the ordinary course of business are summarized as follows: Useful Lives in Years 1995 1994 Land $1,114,046 $ 862,472 Buildings 5 to 50 7,814,847 7,608,266 Furniture and equipment 3 to 20 6,868,553 5,720,763 15,797,446 14,191,501 Less: Accumulated depreciation 6,966,913 5,799,302 $ 8,830,533 $ 8,392,199 During 1994, First Citizens National Bank acquired real estate in Dyersburg, Tennessee, as a site for a new branch banking facility at a cost of $337,023. The new branch was constructed during the year and placed in service at a total cost of building and equipment of $680,406. Note 6 - Repossessed Real Property The book value of repossessed real property on the balance sheet is $722,004 at December 31, 1995 and $816,866 at December 31, 1994. Included in these balances is certain commercial real estate which First Citizens National Bank acquired through foreclosure and which was sold to First Citizens Bancshares, Inc. as of December 31, 1991. The property is carried on the books of First Citizens Bancshares, Inc. at a cost of $650,000. During the years ended December 31, 1995 and 1994, the property was rented and produced rental income of $129,143 and $129,429, respectively. The balance of repossessed real property is reflected on the balance sheet of First Citizens Bancshares, Inc. and is carried in "other assets." 46 FIRST CITIZENS BANCSHARES, INC., AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (CONTINUED) December 31, 1995 Note 7 - Deposits Included in the deposits shown on the balance sheet are the following time deposits and savings deposits in denominations of $100,000 or more: 1995 1994 (In Thousands) Time Deposits $26,706 $17,004 Savings Deposits 22,557 21,941 NOW accounts, included in savings deposits on the balance sheet, totaled $25,823,300 at December 31, 1995 and $27,260,734 at December 31, 1994. Note 8 - Employee Stock Ownership Plan First Citizens National Bank maintains the First Citizens National Bank of Dyersburg Employee Stock Ownership Plan as an employee benefit. The plan provides for a contribution annually not to exceed twenty-five percent of the total compensation of all participants and affords eligibility for participation to all full-time employees who have completed at least one year of service. Contributions to the Employee Stock Ownership Plan totaled $390,252 in 1995, $375,914 in 1994, and $337,541 in 1993. Note 9 - Income Taxes Provision for income taxes is comprised of the following: 1995 1994 1993 Federal income tax expense (benefit) Current $ 1,144,344 $1,081,655 $1,015,549 Deferred (52,308) (137,851) (174,849) State income tax expense (benefit) Current 250,090 314,088 230,470 Deferred (9,230) (70,032) 6,260 $ 1,332,886 $1,187,860 $1,077,430 The ratio of applicable income taxes to net income before income taxes differed from the statutory rates of 34%. The reasons for these differences are as follows: 1995 1994 1993 Tax expense at statutory rate $1,373,104 $1,405,597 $1,305,997 Increase (decrease) resulting from: State income taxes, net of federal income tax benefit 158,968 143,500 155,932 Tax exempt income (219,247) (212,477) (159,408) Other differences 20,061 (148,760) (49,102) 1,332,886 1,187,860 1,253,419 Cumulative effect of adoption of SFAS No. 109, "Accounting for Income Taxes" (175,989) $1,332,886 $1,187,860 $1,077,430 Deferred tax liabilities have been provided for taxable temporary differences related to depreciation, accretion of securities discounts and other minor items. Deferred tax assets have been provided for deductible temporary differences related primarily to the allowance for loan losses and adjustments for loss on repossessed real estate. The net deferred tax assets in the accompanying consolidated balance sheets include the following components: December 31 1995 1994 Deferred tax liabilities $(251,125) $(321,752) Deferred tax assets 186,000 554,195 Net deferred tax assets $ (65,125) $ 232,443 47 FIRST CITIZENS BANCSHARES, INC., AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (CONTINUED) December 31, 1995 Note 9 - Income Taxes (continued) Effective January 1, 1994, First Citizens Bancshares, Inc. and its subsidiary adopted SFAS No. 109, "Accounting for Income Taxes," which requires an asset and liability approach to financial accounting and reporting for income taxes. Accordingly, the difference between the financial statement and tax basis of assets and liabilities is determined periodically. Deferred income tax assets and liabilities are then computed for those differences that have future tax consequences using the currently enacted tax laws and rates that apply to the periods in which they are expected to affect taxable income. Valuation allowances are established, if appropriate, to reduce the deferred tax asset to the amount which is actually expected to be realized. Income tax expense is the current tax payable or refundable for the period plus or minus the net change in the deferred tax assets or liabilities. The effect of adopting SFAS No. 109 on 1993 net income from operations was an increase of $50,711. The cumulative effect of the accounting change on years prior to January 1, 1993, of $125,278 is included in 1993 income. Note 10 - Stock Dividends On October 20, 1993, the Board of Directors declared a 2.5 for 1 stock split, which was paid on November 15, 1993, in the form of a dividend of one and one-half additional shares of the Company's common stock for each share owned by the Stockholders of record on October 15, 1993. Par value remained at $10 per share. The split resulted in the issuance of 422,698 additional shares of common stock from authorized but unissued shares and in the transfer of $4,226,980 from surplus to common stock, representing the par value of the shares issued. All references to earnings per share and to weighted average shares outstanding have been restated to give retroactive recognition to an equivalent change in capital structure in those periods. Note 11 - Common Stock Par Value During the year ending December 31, 1994, the Company's Board of Directors voted to reduce par value of the Company's capital stock from $10 to $1. The transaction was recorded on June 30, 1994, and involved a transfer from capital stock to surplus in the amount of $6,378,246. The Board of Directors also voted to increase the Company's number of shares authorized from 750,000 to 2,000,000. Note 12 - Regulatory Capital Requirements First Citizens Bancshares, Inc., is subject to minimum capital requirements imposed by the Federal Reserve Bank and which are designed to measure capital adequacy in terms of credit risk. The regulations require that total capital equal at least 8.0% of weighted risk assets as of December 31, 1995. In the case of First Citizens Bancshares, Inc., capital consists of common stockholders' equity and the allowance for loan losses of which in excess of 90% is stockholders' equity or Tier I capital. At December 31, 1995, the Corporation's risk-based capital ratio is 14.05%. Note 13 - Restrictions on Cash and Due From Bank Accounts The Corporation's bank subsidiary maintains cash reserve balances as required by the Federal Reserve Bank. Average required reserve balances during 1995 and 1994 were $161,000 and $160,000, respectively. Note 14 - Restrictions on Capital and Payment of Dividends The Corporation is subject to capital adequacy requirements imposed by the Federal Reserve Bank. In addition, the Corporation's National Bank Subsidiary is restricted by the Office of the Comptroller of the Currency from paying dividends in any years which exceed the net earnings of the current year plus retained profits of the preceding two years. As of December 31, 1995, approximately $6.9 million of retained earnings was available for future dividends from the subsidiary to the parent corporation. 48 FIRST CITIZENS BANCSHARES, INC., AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (CONTINUED) December 31, 1995 and 1994 Note 15 - Condensed Financial Information First Citizens Bancshares, Inc. (Parent Company Only) December 31 1995 1994 BALANCE SHEETS ASSETS Cash $ 728,839 $ 258,698 Investment securities, available-for-sale-at fair value 1,098,778 1,442,085 Investment in subsidiary 24,531,039 21,428,585 Real estate owned 824,134 820,402 Other assets 30,577 84,060 TOTAL ASSETS 27,213,367 24,033,830 LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Accrued expenses 110,130 155,082 TOTAL LIABILITIES 110,130 155,082 STOCKHOLDERS' EQUITY 27,103,237 23,878,748 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $27,213,367 $24,033,830 STATEMENTS OF INCOME December 31 1995 1994 INCOME Dividends from bank subsidiary $ 214,800 $ 508,000 Other income 313,608 547,553 TOTAL INCOME 528,408 1,055,553 EXPENSES Other expenses 137,301 113,797 TOTAL EXPENSES 137,301 113,797 Income before income taxes and equity in undistributed net income of bank subsidiary 391,107 941,756 Income tax expense (benefit) 62,891 157,583 328,216 784,173 Equity in undistributed net income of bank subsidiary 2,377,440 2,162,076 NET INCOME $2,705,656 $2,946,249 49 FIRST CITIZENS BANCSHARES, INC., AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (CONTINUED) December 31, 1995 and 1994 Note 15 - Condensed Financial Information (Continued) (Parent Company Only) STATEMENTS OF CASH FLOW December 31 1995 1994 Operating Activities Net income $2,705,656 $2,946,249 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 28,282 25,487 Undistributed income of subsidiary (2,377,440) (2,162,076) Gain on sale of other real estate (297,284) (Increase) decrease in other assets 53,483 77,492 Increase (decrease) in other liabilities (44,952) 95,715 NET CASH PROVIDED BY OPERATING ACTIVITIES 365,029 685,583 Investing Activities Purchase of other real estate (32,014) (12,016) Proceeds of sale of other real estate 1,458,911 Investment in securities (500,000) (1,474,520) Proceeds of sale of securities 863,107 NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 331,093 (27,625) Financing Activities Payment of dividends and payments in lieu of fractional shares (962,348) (861,407) Sale of Common Stock 737,890 292,220 Treasury Stock transactions - net (1,523) 60,752 NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (225,981) (508,435) INCREASE (DECREASE) IN CASH 470,141 149,523 Cash at beginning of year 258,698 109,175 CASH AT END OF YEAR $ 728,839 $ 258,698 Note 16 - Long Term Debt During the year ended December 31, 1989, First Citizens National Bank placed in service furniture, fixtures, and equipment with a total cost of $520,964 which were acquired through capital leases. These leases became effective at various dates ranging from January, 1989 through October, 1989, and each lease extends for a term of sixty months. The total liability on these leases as originated was $655,232 with $30,021 remaining to be paid as of December 31, 1993. The obligation in regard to these leases was completely retired during 1994. Long term debt for the year ending December 31, 1994 consists of Federal Home Loan Bank borrowings. These borrowings are maturity matched with specific loans and investments. The averages for 1995 and 1994 are as follows: Year Average Volume Average Rate Average Maturity FHLB Borrowings 1995 $5,892,739 5.90% 7 years FHLB Borrowings 1994 $2,889,000 5.45% 11 years Note 17 - Non-cash Investing and Financing Activities During the periods presented, the Corporation engaged in the following non-cash investing and financing activities: Investing 1995 1994 1993 Other real estate acquired in satisfaction of loans $368,000 $188,431 $61,729 50 FIRST CITIZENS BANCSHARES, INC., AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (CONTINUED) December 31, 1995 and 1994 Note 18 - Financial Instruments with Off-Balance Sheet Risk First Citizens National Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk which are not recognized in the statement of financial position. The Bank's exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The same policies are utilized in making commitments and conditional obligations as are used for creating on-balance sheet instruments. Ordinarily, collateral or other security is not required to support financial instruments with off-balance sheet risk. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Loan commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer's credit- worthiness is evaluated on a case-by-case basis, and collateral required, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the counter party. At December 31, 1994 and 1995, First Citizens National Bank had outstanding loan commitments of $26,037,000 and $26,472,000 respectively. Of these commitments, none had an original maturity in excess of one year. Standby letters of credit and financial guarantees are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are issued primarily to support public and private borrowing arrangements, and the credit risk involved is essentially the same as that involved in extending loans to customers. The bank requires collateral to secure these commitments when it is deemed necessary. At December 31, 1995 and 1994, outstanding standby letters of credit totaled $1,676,000 and $2,394,000. In the normal course of business, First Citizens National Bank extends loans which are subsequently sold to other lenders, including agencies of the U. S. Government. Certain of these loans are conveyed with recourse creating off-balance sheet risk with regard to the collectibility of the loan. At December 31, 1995, however, the Bank had no loans sold. Note 19 - Significant Concentrations of Credit Risk First Citizens National Bank grants agribusiness, commercial, residential and personal loans to customers throughout a wide area of the mid-southern United States. A large majority of the Bank's loans, however, are concentrated in the immediate vicinity of the Bank or northwest Tennessee. Although, the Bank has a diversified loan portfolio, a substantial portion of its debtors' ability to honor their obligations is dependent upon the agribusiness and industrial economic sectors of that geographic area. Note 20 - Disclosure of Fair Value of Financial Instruments The following assumptions were made and methods applied to estimate the fair value of each class of financial instruments reflected on the balance sheet of the Corporation: Cash and Cash Equivalents For instruments which qualify as cash equivalents, as described in Note 1 of Notes to Financial Statements, the carrying amount is assumed to be fair value. Investment Securities Fair value for investment securities is based on quoted market price, if available. If quoted market price is not available, fair value is estimated using quoted market prices for similar securities. 51 FIRST CITIZENS BANCSHARES, INC., AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (CONTINUED) December 31, 1995 and 1994 Note 20 - Disclosure of Fair Value of Financial Instruments (continued) Loans Receivable Fair value of variable-rate loans with no significant change in credit risk subsequent to loan origination is based on carrying amounts. For other loans, such as fixed rate loans, fair values are estimated utilizing discounted cash flow analyses, applying interest rates currently offered for new loans with similar terms to borrowers of similar credit quality. Fair values of loans which have experienced significant changes in credit risk have been adjusted to reflect such changes. The fair value of accrued interest receivable is assumed to be its carrying value. Deposit Liabilities Demand Deposits The fair values of deposits which are payable on demand, such as interest-bearing and non-interest-bearing checking accounts, passbook savings and certain money market accounts are equal to the carrying amount of the deposits. Variable-Rate Deposits The fair value of variable-rate money market accounts and certificates of deposit approximate their carrying value at the balance sheet date. Fixed-Rate Deposits For fixed-rate certificates of deposit, fair values are estimated using discounted cash flow analyses which apply interest rates currently being offered on certificates to a schedule of aggregated monthly maturities on time deposits. Short-Term Borrowings Carrying amounts of short-term borrowings, which include securities sold under agreement to repurchase approximate their fair values at December 31, 1993 and 1994. Long-Term Debt The fair value of the Corporation's long-term debt is estimated using the discounted cash flow approach, based on the institution's current incremental borrowing rates for similar types of borrowing arrangements. At December 31, 1994, the long- term debt interest rate equals the fair market rate and, as a result, the carrying value of long-term debt approximates its fair value. Other Liabilities Other liabilities consist primarily of accounts payable, accrued interest payable and accrued taxes. These liabilities are short- term and their carrying values approximate their fair values. Unrecognized Financial Instruments are generally extended for short periods of time, and as a result, the fair value is estimated to approximate the face or carrying amount. 52 FIRST CITIZENS BANCSHARES, INC., AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (CONTINUED) December 31, 1995 and 1994 Note 20 - Disclosure of Fair Value of Financial Instruments (continued) The estimated fair values of the Corporation's financial instruments are as follows: 1995 1994 Carrying Fair Carrying Fair Amount Value Amount Value Financial Assets Cash and cash equivalents $ 13,544,413 $13,544,413 $ 12,684,155 $ 12,684,155 Investment securities 73,891,325 74,202,313 64,168,307 62,340,388 Loans 191,906,433 168,781,491 Less: Allowance for loan losses (2,216,511) (2,053,843) Loans, net of allowance 189,689,922 188,182,000 166,727,648 163,079,141 Accrued interest receivable 3,951,100 3,951,100 3,001,337 3,001,337 Financial Liabilities Deposits $237,160,381 $238,314,000 $209,480,251 $209,349,222 Short-term borrowings 19,744,966 19,744,966 16,950,086 16,950,086 Long-term debt 4,651,903 4,665,000 4,124,730 4,143,315 Other liabilities 2,751,409 2,751,409 2,252,719 2,252,719 Unrecognized Financial Instruments Commitments to extend credit 26,037,000 26,037,000 26,472,000 26,472,000 Standby letter of credit 1,676,000 1,676,000 2,394,000 2,394,000 Note 21 - Commitments and Contingencies During the year ended December 31, 1994, the Board of Directors approved a stock repurchase plan whereby the Company is authorized to acquire up to a maximum of $200,000 of its outstanding capital stock per calendar quarter. The stock repurchase plan is designed to enable First Citizens Bancshares, Inc. to meet the requirements of the Employee Stock Ownership Plan and the Dividend Reinvestment Plan in place. Note 22 - Judgement At December 31, 1995, First Citizens Financial Plus, a subsidiary of First Citizens National Bank, was a defendant in a legal action filed by a former employee alleging unfair competitive practices used against him after he left employment of the Company. First Citizens Financial Plus, Inc. had previously initiated litigation against the former employee asserting that he had breached his fiduciary duties to the Company. In February, 1996, an arbitration panel of the National Association of Securities Dealers held First Citizens Financial Plus, Inc. liable for damages totaling approximately $134,000. The same panel found the former employee liable for $9,500 in compensatory damages. The Company has recorded the judgement, along with related legal expenses, as a liability at the balance sheet date. The expense of the judgement is reflected in other expenses on the Consolidated Statement of Income. Note 23 - Branch Acquisition During the year ended December 31, 1995, First Citizens National Bank acquired a branch of another financial institution in Ripley, Tennessee. In the transaction, the Bank acquired fixed assets and loans with a value of approximately $242,749 and assumed deposits totaling approximately $8,400,000. First Citizens National Bank paid a premium of $124,382 for the deposits acquired which had been recorded as goodwill and is being amortized over fifteen years. 53 FIRST CITIZENS BANCSHARES, INC., AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (CONTINUED) December 31, 1995 Note 24 - Amounts Receivable From Certain Persons Year Ended December 31, 1995 (In Thousands) Column A Column B Column C Column D Column E Balance at Balance at Beginning End of of Period Additions Deductions Period Amounts Amounts Written Not Collected Off Current Current Aggregate indebtedness to First Citizens National Bank of Directors and Executive Officers of First Citizens Bancshares, Inc. (21) $2,443 $2,568 $ 968 $-0- $4,043 $-0- Aggregate indebtedness to First Citizens National Bank of Directors and Executive Officers of First Citizens National Bank (23) $2,535 $2,662 $1,051 $-0- $4,146 $-0- Year Ended December 31, 1994 (In Thousands) Aggregate indebtedness to First Citizens National Bank of Directors and Executive Officers of First Citizens Bancshares, Inc. (20) $2,847 $1,363 $1,675 $-0- $2,535 $-0- Aggregate indebtedness to First Citizens National Bank of Directors and Executive Officers of First Citizens National Bank (21) $2,847 $1,36 3 $1,675 $-0- $2,535 $-0- Indebtedness shown represents amounts owed by directors and executive officers of First Citizens Bancshares, Inc., and First Citizens National Bank and by businesses in which such persons are general partners or have at least 10% or greater interest and trust and estates in which they have a substantial beneficial interest. All loans have been made on substantially the same terms, including interest rates and collateral as those prevailing at the time for comparable transactions with others and do not involve other than normal risks of collectibility. 54 ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Bancshares had no disagreements regarding accounting procedures. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information appearing in Bancshares' 1996 Proxy Statement regarding directors and officers is incorporated herein by reference in response to this Item. ITEM 11. EXECUTIVE COMPENSATION The information required under this Item is set forth in the 1996 Proxy Statement, and is incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Ownership of Bancshares' common stock by certain beneficial owners and by management is set forth in Bancshares' 1996 Proxy Statement for the Annual Meeting of Shareholders to be held April 17, 1996, in the sections entitled Voting Securities and Election of Directors and is incorporated herein by reference. (See pages 3 through 5 of the Proxy Statement). ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Officers, Directors and principal shareholders of the holding company (and their associates) have deposit accounts and other transactions with First Citizens National Bank. These relationships are covered in detail on page 9 of the Proxy Statement under "Certain Relationships and Related Transactions" and incorporated herein by reference. Additional information concerning indebtedness to Bancshares and First Citizens by Directors and/or their affiliates is included herein under Part III, Page 53 "Amounts Receivable from Certain Persons". 55 SIGNATURES Pursuant to the requirements of Section 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, hereunto duly authorized. FIRST CITIZENS BANCSHARES, INC. By /s/Stallings Lipford Stallings Lipford Chairman & CEO By /s/Jeff Agee Jeff Agee Vice President & Principal Financial Officer Dated: 03/19/96 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 19, 1996. /s/ Eddie Anderson /s/Milton E. Magee Eddie Anderson Milton E. Magee Director Director /s/Mary Frances McCauley /s J. Walter Bradshaw Mary Frances McCauley J. Walter Bradshaw Director Director /s/James Daniel Carpenter /s/L. D. Pennington James Daniel Carpenter L. D. Pennington Director Director /s/William C. Cloar /s/G.W. Smitheal, III William C. Cloar G.W. Smitheal, III Director Director /s/Richard Donner /s/H.P. Tigrett, Jr. Richard W. Donner H. P. Tigrett, Jr. Director Director /s/Larry W. Gibson /s/P.H. White, Jr. Larry W. Gibson P.H. White, Jr. Director Director /s/J.E. Heckethorn /s/Dwight Steven Williams John E. Heckethorn Dwight Steven Williams Director Director /s/ E.H. Lannom, Jr. /s/Katie Winchester E.H. Lannom, Jr. Katie Winchester Director Director /s/Stallings Lipford /s/Billy S. Yates Stallings Lipford Billy S. Yates Director Director