1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter ended March 31, 1996 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
Court Street, Dyersburg, Tennessee 38024
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (901) 285-4410
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 3 months and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Of the registrant's only class of common stock ($1.00 par value) there
were 735,029 shares outstanding as of March 31, 1996 (net of treasury
stock).
2
PART I -FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
3
FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
March 31, December 31,
1996 1995
(Unaudited) (Note)
ASSETS
Cash and due from banks $10,088,000 $11,694,000
Federal funds sold $0 $1,850,000
Investment securities
Trading Investments-stated at market $0 $0
Held to maturity-amortized cost-fair
value of $33,947,000 at March 31, $33,113,000 $33,947,000
1996 and $34,258,000 at December 31,
1995.
Available for sale-stated at market $43,924,000 $39,944,000
Loans (Excluding unearned income of
$1,564,000 at March 31, 1996 and
$1,657,000 at December 31, 1995) $197,201,000 $191,906,000
Less: Allowance for loan losses $2,289,000 $2,216,000
Net Loans $194,912,000 $189,690,000
Premises and equipment $8,666,000 $8,831,000
Other assets $5,536,000 $5,456,000
TOTAL ASSETS $296,239,000 $291,412,000
LIABILITIES AND STOCKHOLDERS EQUITY
Deposits $240,452,000 $237,160,000
Securities sold under Agreements
to Repurchase $20,245,000 $19,745,000
Federal Funds Purchased & Other
Short Term Borrowing $200,000 $0
Long term debt-note 3 (includes
long term FHLB) $4,107,000 $4,652,000
Notes Payable of Employee Stock
Ownership Plan $0 $0
Other liabilities $3,662,000 $2,752,000
TOTAL LIABILITIES $268,666,000 $264,309,000
Contingent Liabilities
Stockholders' Equity
Common stock, $1 par value-
2,000,000 authorized; 735,130
issued and outstanding at March
31, 1996; 733,399 issued and
outstanding at December 31, 1995 $735,000 $733,000
Surplus $9,794,000 $9,720,000
Retained earnings $16,872,000 $16,167,000
Obligation of Employee Stock
Ownership Plan $0 $0
Net unrealized gains (losses)
on available for sale $177,000 $485,000
Total Common Stock and
Retained Earnings $27,578,000 $27,105,000
Less-101 treasury shares, at
cost at March 31, 1996 and 40
shares at December 31, 1995 ($5,000) ($2,000)
TOTAL STOCKHOLDERS' EQUITY $27,573,000 $27,103,000
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $296,239,000 $291,412,000
NOTE: The balance sheet at December 31, 1995 has been taken from
the audited financial statements at that date and condensed.
4
FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Three Month Periods Ended
March 31, March 31,
1996 1995
INTEREST INCOME
Interest and fees on loans $4,685,000 $4,020,000
Interest on investment securities:
Taxable $1,082,000 $1,020,000
Tax-exempt $125,000 $125,000
Other interest income $28,000 $45,000
Lease financing income $1,000 $1,000
TOTAL INTEREST INCOME $5,921,000 $5,211,000
INTEREST EXPENSE
Interest on deposits $2,564,000 $2,258,000
Other interest expense $295,000 $269,000
TOTAL INTEREST EXPENSE $2,859,000 $2,527,000
NET INTEREST INCOME $3,062,000 $2,684,000
Provision for loan losses $105,000 $65,000
Net interest income
after provision $2,957,000 $2,619,000
Other Income
Securities gains (losses) $136,000 $7,000
Other income $762,000 $647,000
Total Other Income $898,000 $654,000
Other expenses $2,402,000 $2,308,000
Net income before
income taxes $1,453,000 $965,000
Provision for income taxes $506,000 $322,000
Net Income $947,000 $643,000
Earnings Per Share $1.29 $0.90
Weighted average number of
shares outstanding 733630 717079
The accompanying notes are an integral part of these financial statements.
5
FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31
1996 1995 1994
OPERATING ACTIVITIES
Net cash provided by
operating activities $2,217,000 $525,000 $528,000
INVESTING ACTIVITIES
Proceeds of maturities
of held to maturity
securities $2,309,000 $1,149,000 $8,024,000
Purchase of held to
maturity investments ($1,500,000) ($10,000,000) ($5,340,000)
Proceeds from maturities
of available for sale
securities $1,191,000 $0 $0
Proceeds from sales of
available for sale
securities $3,100,000 $0 $0
Purchase of available
for sale securities ($8,660,000) ($2,133,000) ($2,000,000)
Increase in loans-net ($5,327,000) ($5,673,000) ($3,500,000)
Purchases of premises
and equipment ($64,000) ($594,000) ($420,000)
Net Cash provided by
investing activities ($8,951,000) ($17,251,000) ($3,236,000)
FINANCING ACTIVITIES
Net Increase (Decrease)
in Demand & Savings
Accounts $1,300,000 ($4,430,000) $625,000
Increase (Decrease) in
Time Accounts $1,992,000 $16,786,000 $766,000
Increase (Decrease) in
Long term Debt ($545,000) $2,658,000 $2,295,000
Treasury Stock
Transactions ($3,000) $0 $52,000
Proceeds from Sale of
Common Stock $76,000 $228,000 $20,000
Cash Dividends Paid ($242,000) ($218,000) ($188,000)
Net Increase (Decrease) in
Short Term Borrowings $700,000 $270,000 $946,000
Net Cash provided (used) by
Financing Activities $3,278,000 $15,294,000 $4,516,000
Increase (Decrease) in
Cash & Cash
Equivalents ($3,456,000) ($1,432,000) $1,808,000
Cash and Cash
Equivalents at
beginning of year $13,544,000 $12,684,000 $13,608,000
Cash and Cash Equivalents
at end of year $10,088,000 $11,252,000 $15,416,000
Cash Payments made for
interest and income
taxes during the years
presented are as follows:
1996 1995 1994
Interest $2,913,000 $2,233,000 $1,933,000
Income Taxes $332,000 $237,000 $261,000
The accompanying notes are an integral part of these financial
statements.
6
FIRST CITIZENS BANCSHARES, INC.,
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1996
NOTE 1-CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet as of March 31, 1996, the consolidated
statements of income for the three month periods ended March 31, 1996,
1995, and 1994, and the consolidated statements of cash flows for the
three month periods then ended have been prepared by the company with-
out an audit. The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
necessary to present fairly the financial position, results of
operations and cash flows at March 31, 1996 and for all periods
presented have been made. Operating results for the reporting
periods presented are not necessarily indicative of the results that
may be expected for the year ended December 31, 1996. For further
information, refer to the consolidated financial statements and foot-
notes thereto included in the company's annual report on Form 10-K for
the year ended December 31, 1995.
NOTE 2-ORGANIZATION
First Citizens Bancshares, Inc., is a Bank Holding Company chartered on
December 14, 1982, under the laws of the State of Tennessee. On September
23, 1983 all of the outstanding shares of common stock of First Citizens
National Bank were exchanged for an equal number of shares in First
Citizens Bancshares, Inc.
NOTE 3-SHORT TERM BORROWINGS
03/31/96 03/31/95
Amount outstanding-end of period $20,445,000 $17,220,000
Weighted average rate of outstanding 4.41% 4.78%
Maximum amount of borrowings at month end $22,424,000 $18,318,000
Average amounts outstanding for period $19,926,000 $17,593,000
Weighted average rate of average amounts 4.51% 4.52%
NOTE 4-LONG TERM DEBT
Long term debt for the period ending 3/31/96 consists of Federal Home Loan
Bank Borrowings totaling $4,107,000. These borrowings are maturity matched
with specific loans and investments. The average volume, rate and maturity
is as follows:
Average Average Average
Volume Rate Maturity
FHLB Borrowings $1,907,000 5.59% 11 years
FHLB Borrowings $2,200,000 5.69% 8 years
NOTE 5-STATEMENT OF CASH FLOWS
March March March
1996 1995 1994
Actual payments made
during the periods:
Interest $2,913,000 $2,233,000 $1,933,000
Income taxes $332,000 $237,000 $261,000
NOTE 6-CONTINGENT LIABILITIES
There are no material pending litigations as of the current
reportable date that would result in a liability.
7
FIRST CITIZENS BANCSHARES, INC.,
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(UNAUDITED)
MARCH 31, 1996
NOTE 7-INVESTMENT SECURITIES
The difference between book values of investment securities and
market values at march 31, 1996 and December 31, 1995, total
$122,000 and $311,000 respectively. FASB 115 requires banks to
classify securities into Held to Maturity, Available for Sale,
and Trading. Securities held in the Available for Sale segment of
the portfolio are marked to market quarterly, with adjustments made
net of taxes to the capital account. For the quarter ended March
31, 1996, this adjustment was a negative $233,000. Changes in the
market value of securities are a direct result of interest rate
fluctuations in the bond market. The Held to Maturity securities
are stated at amortized cost with no adjustments being made as a
result of changes in market values. Trading Account activity for
the quarter consisted of the purchase of a FNMA NON CUM
Preferred Stock, Par Value $150,000. The stock was purchased
and sold on March 1, 1996 resulting in a profit of $750.00. First
Citizens has not engaged in any derivative activities as defined
by paragraphs 5-7 of FASB 119 for any of the reported periods.
NOTE 8-REGULATORY CAPITAL REQUIREMENTS
Regulatory agencies impose certain minimum capital requirements
on both First Citizens Bancshares, Inc., and First Citizens
National Bank. On December 16, 1988, the Federal Reserve Board
approved the Risk Based Capital Guidelines for Bank Holding
Companies. Presently, the Holding Company and First Citizens
National Bank exceed the required minimum standards set by the
Regulators. The combined Tier 1 and Tier 2 Ratio are 13.09% and
14.19% as of 3/31/96 and 12/31/95 respectively.
NOTE 9-DEFERRED INCOME TAXES
First Citizens adopted FASB 109 as of January 1, 1993. The
deferred tax liability account reflects an asset totaling
$140,000. The timing differences mainly consist of Reserve for
Loan Loss Deductions and FASB 115.
NOTE 10-RESERVE FOR LOAN LOSSES
FASB 114 and 118 was implemented during the first quarter of
1995. This standard requires companies to set aside reserves
for impaired loans.
The following data reflects impaired totals for the reportable
periods:
Impaired Loan Balance or Recorded Balance $1,807,000
Amount of Recorded Balance with Related Allowance $1,328,000
Amount of Recorded Balance with no Related Allowance $479,000
Interest income recognized on impaired loans will be recognized
on a cash basis. Cash receipts will be applied as cost recovery
or principal recovery first. This is consistent with OCC
Regulations.
A quarterly review of the adequacy of the loan loss reserve by
the Board of Directors will ensure the sufficiency of said
reserve for both losses and impairment.
8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The purpose of the following discussion is to address significant
changes in income and expense accounts when compared to the quarter
ending March 31, 1996. Reference should be made to the Financial
Statements included as ITEM 1 for a more thorough understanding of
the analysis. The discussion relates mainly to activities of First
Citizens National Bank (First Citizens) in its banking business.
However, the consolidated statements of income reflect activities
of both First Citizens and First Citizens Bancshares, Inc.
(Bancshares). Limited activities to date by the Holding Company do
not materially affect the income report.
Intense strategic planning efforts have resulted in record earnings
for the first quarter of 1996. Net interest income of $3,062,000 at
March 31, 1996 was up from $2,684,000 in 1995, an increase of 14%.
Net interest margin for the same time period was 4.17% up from 4.05%
on this date in 1995. Net income for the quarter increased from
$643,000 to $947,000 when comparing the quarter ending March 31,
1995 and 1996. Increased earnings resulted in a return on average
assets for the quarter of 1.29% compared to .97% in 1995. Return
on average equity increased to 13.86% from 10.58% in 1995. Earnings
per share rose from $.90 to $1.29 when comparing the periods under
review. The improved financial performance is attributed to
intense strategic planning efforts that set goals (1) To remain an
independent community bank serving the needs of individuals, small
businesses , corporations and agriculture customers; (2) To maximize
the value of First Citizens to its shareholders by providing the
highest level of customer service and the widest selection of
quality products and services; (3) To consistently generate earnings
that are at a minimum equal to that of peer banks; (4) To attract
and retain high quality personnel, while rightsizing staffing levels
to be more in line with peer banks; and (5) To continuously evaluate
and invest in a product and service distribution system that will
provide our customers with personal access as well as electronic
delivery of products and services. In 1995 the bank made great
strides in accomplishing these goals. Two new branches were opened
to expand in the development of new and future business; Fulltime
equivalent employees were further reduced from 154 at 3/31/93 to 146
(bank level) at 3/31/96; POD and Item Imaging was introduced to the
market; An automated Teller system, "TellerPro" was installed;
Signature Verification was purchased and scheduled for installation
the first quarter of 1996; and a contract was signed with Internet/
Most, Reston, VA to convert ATM and POS processing from Deluxe, Inc.
The business partnership with Internet/Most provides First Citizens
with a an innovative network for electronic and remote banking
services. Electronic services provided by the network are ATM and
POS processing, while remote banking products include home banking
programs using personal computers and screen phone devices as well
as bill payment services. The bank s management believes that a
successful electronic/home banking program is a key factor in
accomplishing strategic planning goals set for the bank s future
service delivery system. The ATM switch from Deluxe, Inc. (current
ATM service provider) is expected to be completed by second quarter,
1996, with the introduction of the Visa Check Card within 90 to
120 days thereafter. The Visa Check Card is considered to be the
most widely accepted debit card by consumers in today's market.
Another strategic element included in the decision to add Visa
Check Card services was the selection of an online communication
between the bank and retailer. When debit transactions are
authorized online, funds can be automatically transferred from
the customers account, eliminating certain elements of preapproval
risk. If funds are not available at time of transaction approval,
the transaction is void.
In other efforts to achieve a return on assets and equity comparable
to peer banks, cost of funds was reduced from 4.60%, the first half
of 1995 to 4.32% at 3/31/96. Interest margins are projected to
increase with continued reductions in cost of funds. Loan growth
exceeded 2.60%, while deposit growth was slightly less when comparing
12/31/95 to quarter end. Liquidity ratio at 3/31/96 was 16.04%
excluding approved lines of credit totaling $20 Million (calculated
using the Comptroller of the Currency Format). With approved lines
of credit the ratio is 22.39%.
Bad debt allocations increased approximately 73,000 or 3.29% when
comparing quarter end to 12/31/95. The percentage of loan loss
reserve to total loans is well within policy guidelines of one percent.
9
A review of the statement of changes in Stockholders Equity reflects
increases in all categories with exception to a decrease of $308,000
in net unrealized gains (losses) on available for sale securities.
The decrease is attributed to a negative reaction in the bond market
to rising interest rates and other changes in economic conditions.
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 operations. 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 place. There are presently four banks
competing for deposit dollars and earning assets, two of them 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 a satisfactory
customer relationship 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.
The following table compares year-to-date non-interest income,
and expense of First Citizens as of March 31, 1994, 1995 and
1996:
Non-Interest Income
(in thousands)
March 31
% of % of
1996 Change 1995 Change 1994
Service Charges on
Deposit Accounts $330 21.33% $272 (5.23%) $287
Other Income $410 91.59% $214 (59.92%) $534
Trust Income $158 (5.96%) $168 32.28% $127
TOTAL NON-INTEREST
INCOME $898 37.31% $654 (31.01%) $948
Total Non-Interest Income increased 37.31% when comparing first quarter
of 1996 to the first quarter of 1995, after declining 31.01% when
comparing the same time periods in 1995 to 1994. The increase in 1996
is primarily attributed to a 91.59% increase in other income and a 21.33%
increase in service charges on deposit accounts. Other income increased
due to a one time refund of $70,705 from bankruptcy trustees of Southeast
Fort Worth Ltd. The refund partially reimbursed the bank for payments
made to trust customers in December, 1989. Customers were reimbursed by
the bank for investments made in Southeast Fort Worth, Ltd. at the time
Southeast filed bankruptcy, with the understanding that any settlement
received from this company would first be utilized to restore these funds
to the bank.
In April, 1995, the overdraft fee for per item paid on an overdrawn
deposit account increased from $17.50 to $20.00. Also during the first
quarter of 1995, a daily overdraft charge of $3.00 for each day the
account is overdrawn after a 5 day grace period was raised to $5.00 per
day. It was reported in the 3/31/95 10Q that service charge on deposit
accounts had decreased approximately $15,000 due to the introduction of
a free checking account product the last half of 1994. However, any
decrease in fee income was projected to be offset with increased overdraft
fees.
10
Non-Interest Expense
(in thousands)
March 31
% of % of
1996 Change 1995 Change 1994
Salaries & Employee
Benefits $1,303 5.68% $1,233 5.11% $1,173
Net Occupancy
Expense $ 204 .50% $ 203 28.48% $ 158
Other Operating
Expense $ 895 2.64% $ 872 11.08% $ 785
TOTAL NON-INTEREST
EXPENSE $2,402 4.08% $2,308 9.07% $2,116
Total Non-Interest Expense reflects a 4.07% increase when comparing
1996 to 1995, following an increase of 9.07% when comparing 1995 to
1994. The 1996 increase is reflecting of a 5.68% increase in salaries
and employee benefits. Fulltime equivalent employees as of March 31,
1995 was 149 compared to 151.64 and 145 at 3/31/95 and 3/31/94
respectively. An ongoing strategic planning goal is to reduce FTE to
be more in line with peer banks posting approximately 147 employees for
$294,000,000 in assets. During the first quarter the bank employed four
parttime tellers to complete the bank s teller training program.
Parttime tellers are trained in a one month training program, then
utilized to meet additional staffing needs during peak time hours
and to support extended banking hours. Procedures are in place to
continuously monitor staff levels. However, it is conceivable that FTE
will remain slightly higher than peer banks as a result of increased
staff necessary to support extended banking hours and additional
services offered to our customers that are not traditionally offered
by peer group banks. These services include trust department services
(10 employees), in-house data processing (6 employees); mortgage
lending (3 employees); and the discount brokerage service division (3
employees). A 28.48% change in net occupancy expense in 1995 was
attributed to the cost of opening two new branches as well as the
purchase of equipment and software associated with the installation
of POD and Statement Imaging and Teller Platform Application. Net
occupancy expense and other operating expense remains consistent
with previous years.
DEPOSITS
The average daily amount of deposits and average rates paid on such
deposits are summarized for the quarters ending March 31 for the years
indicated:
COMPOSITION OF DEPOSITS
(in thousands)
1996 1995 1994
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
Non
Interest Bearing
Demand Deposits $ 26,019 - $ 25,465 - $ 24,667 -
Savings Deposits $ 71,530 3.10% $ 65,650 2.96% $ 65,730 .54%
Time Deposits $141,216 5.70% $126,852 5.59% $104,718 4.51%
TOTAL DEPOSITS $238,765 4.30% $217,967 4.64% $195,115 3.58%
A review of composition of deposits for the years 1996, 1995 and 1994
reflects total deposit growth in excess of $26 million and $22 million
respectively. Growth in the deposit base was centered primarily in the
time deposit category for the years under comparison. However, savings
deposits were up almost 9 percent when comparing the quarter ending
3/31/96 to 3/31/95 after remaining relatively flat when comparing 1995
to 1994. Factors contributing to the substantial growth are (1) rising
interest rates in 1995 (2) the purchase of approximately 8 million in
deposits held by the newly acquired Ripley branch in 1995 and (3) new
deposits acquired as a result of opening both the Ripley and Industrial
Park Branches. An analysis of 1994 is reflective of customers response
to low interest rates paid on deposits and their reluctance to commit
funds into bank certificates of deposit when a higher rate was paid on
mutual funds and annuity products. The average rate paid on time deposits
during the first quarter of 1996 was 5.70% compared to 5.59% and 4.51% for
the same time periods in 1995 and 1994.
11
Demand deposits accounts have remained relatively flat when reviewing
the years under comparison. However, sweep account funds totaling
$10,398,000 are not included in average balances for non-interest
bearing demand deposits. The "Sweep" total is included in the balance
sheet category of securities sold under an agreement to repurchase
totaling $20,245,000 with an average rate of 4.41% at 3/31/96. Sweep
totals at 3/31/95 was $17,220,000 at an average rate of 4.78%.
Repurchase Agreement "Sweep" is a product offered to large balance
customers which provides for funds to automatically sweep daily from
a demand deposit account into an overnight repurchase agreement. This
affords commercial customers the opportunity to earn interest on excess
collected funds while providing availability of adequate funds to clear
large denomination checks as presented for payment. There were no
significant changes to products and services during the first quarter.
The following table sets forth the maturity distribution of Certificates
of Deposit and other time deposits of $100,000.00 or more outstanding on
the books of First Citizens on March 31, 1996
Maturity Distribution Of Time Certificates Of Deposit
In Amounts of $100,000.00 Or More As Of March 31, 1996
(in thousands)
Maturity Total Amount
3 months or less $ 7,228
3 through 6 months $ 4,886
6 through 12 months $ 8,986
over 12 months $ 6,826
Total $27,926
A summary of average interest earning assets and interest bearing
liabilities is set forth in the following table together with average
yields on the earning assets and average costs on the interest bearing
liabilities. The average yield on interest earning assets continues to
climb upward when reviewing the information presented in the table.
Interest earning assets as of 3/31/96 were $268,298,000 at an average
rate of 8.91% compared to $242,023,000, average rate of 8.57% and
$215,575,000 average rate of 7.75% at 3/31/95 and 3/31/94 respectively.
The rate earned on interest earning deposits increased 3.28% and 2.90%
when comparing 1996, 1995 and 1994. The average rate on total interest
bearing liabilities was 4.81%, 4.70%, and 3.70% as of March 31, 1996,
1995, and 1994. Net yield on average earning assets was 4.65%, 4.54%,
and 4.68% reflecting an upward swing in interest rates beginning in late
1994 and continuing into 1996. Maintaining interest rate margins
achieved in prior years continues to be a challenge. As interest rates
are rising customers are shopping banks to lock in the lowest rate
possible on loans, while deposit customers are shopping to lock in
the highest rate on deposits. The Dyersburg, Dyer County market is
extremely competitive with three other banks in the market place as well
as credit unions and brokerage firms. First Citizens has historically out
performed peer banks with the average rate earned on the loan portfolio.
Asset/Liability policies are in place to protect the company from 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.
12
First Citizens National Bank
Quarter Ending March 31
Monthly Average Balances and Interest Rates
(in thousands)
1996 1995 1994
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
ASSETS
INTEREST EARNING
ASSETS:
Loans (1)(2)(3) $191,649 $4,685 9.78% $167,931 $4,019 9.57% $149,378 $3,274 8.77%
Investment Securities:
Taxable $ 63,718 $1,051 6.60% $ 60,262 $ 997 6.62% $ 47,168 $ 707 6.00%
Tax Exempt (4) $ 10,948 $ 208 7.60% $ 10,814 $ 208 7.70% $ 13,005 $ 243 7.48%
Interest Earning
Deposits $ 49 $ 1 8.17% $ 163 $ 2 4.91% $ 199 $ 1 2.01%
Federal Funds Sold $ 1,930 $ 27 5.60% $ 2,819 $ 42 5.96% $ 5,765 $ 47 3.26%
Lease Financing $ 4 $ 0 0% $ 34 $ 1 11.76% $ 60 $ 1 6.67%
Total Interest
Earning Assets $268,298 $5,972 8.91% $242,023 $5,269 8.71% $215,575 $4,273 7.93%
NON-INTEREST
EARNING ASSETS:
Cash and Due From
Banks $ 9,958 $ - -% $ 9,342 $ - -% $ 8,579 $ - -%
Bank Premises and
Equipment $ 8,748 $ - -% $ 8,503 $ - -% $ 7,985 $ - -%
Other Assets $ 4,343 $ - -% $ 3,936 $ - -% $ 3,217 $ - -%
Total Assets $291,347 $ - -% $263,804 $ - -% $235,356 $ - -%
LIABILITIES AND
SHAREHOLDERS' EQUITY:
INTEREST BEARING
LIABILITIES:
Savings Deposits $ 71,530 $ 553 3.10% $ 65,650 $ 485 2.96% $ 65,730 $ 418 2.54%
Time Deposits $141,216 $2,010 5.70% $126,852 $1,773 5.59% $104,718 $1,182 4.51%
Federal Funds
Purchased and
Other Interest
Bearing Liabilities $ 25,024 $ 296 4.74% $ 22,620 $ 269 4.76% $ 18,899 $ 151 3.20%
Total Interest
Bearing Liabilities $237,770 $2,859 4.81% $215,122 $2,527 4.70% $189,347 $1,751 3.70%
13
NON-INTEREST
BEARING LIABILITIES:
Demand Deposits $ 26,019 $ - -% $ 25,465 $ - -% $ 24,625 $ - -%
Other Liabilities $ 2,570 $ - -% $ 1,599 $ - -% $ 1,691 $ - -%
Total Liabilities $266,359 $ - -% $242,186 $ - -% $215,663 $ - -%
SHAREHOLDERS'
EQUITY $ 24,988 $ - -% $ 21,618 $ - -% $ 19,693 $ - -%
TOTAL LIABILITIES
AND SHAREHOLDERS'
EQUITY $291,347 $ - -% $263,804 $ - -% $235,356 $ - -%
NET INTEREST
INCOME $ - $3,113 -% $ - $2,742 -% $ - $2,522 -%
NET YIELD ON
AVERAGE EARNING
ASSETS $ - $ - 4.65% $ - $ - 4.54% $ - $ - 4.68%
(Annualized)
(1) Loan totals are shown net of interest collected, not earned
and Loan Loss Reserve.
(2) Nonaccrual loans are included in average total loans.
(3) Loan Fees are included in interest income and the
computations of the yield on loans. Overdraft fees are excluded.
(4) Interest and rates on securities which are non-taxable for Federal
Income Tax purposes are presented on a taxable equivalent basis.
COMPOSITION OF LOANS
The loan portfolio, First Citizens' largest earning asset, has grown
from $132,743,000 at 3/31/92 to $197,201,000 at 3/31/96. When reviewing
loan categories, it is evident that the largest percentage of growth
is centered in Real Estate (mortgage) loans. Mortgage loans increased
$16,969,000 or 17.71% when comparing 1996 to 1995. Construction loans
increased $2,418,000 or 2.11%. 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 approximately
40,000. The entire trade areas has outpaced both the state and the nation
in per capital personal income growth since the early 1980's. The State of
Tennessee projects that per capital 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 of 8.5% is up from November figures of 5.2% and weaker than the State of
Tennessee s rate of 5.5%. Manufacturers within the area have indicated that
the increase was caused by a softness in demand for their products. Also
during the last half of 1995 a local factory was closed causing the loss
of some 400 jobs. It is projected that approximately 50 jobs will be
created from the opening of a plant located at the Dyersburg Industrial
Park in the second quarter of 1996. Other industries located in Dyersburg
and the surrounding areas have announced either the opening date of a
manufacturing plant or expansion of an existing facility. Layoffs are
more prevalent the first quarter of 1996 than in 1995, but are not
considered to be a serious problem overall. Retailers reported that sales
appear to be gaining strength. Local economic conditions are stable
and represent no immediate threat to the loan portfolio.
The loan portfolio is made up of quality loans and is well diversified
with no concentrations of credit in any one industry. The provision
for loan losses increased in proportion to loan growth as required by
loan policy. Problem loans at 3/31/96 was $2,887,586 down from
$3,709,018 at 3/31/95. Past due loan totals are well within peer
group ratios. Experience of the lending and loan review staff as
well as adherence to policy lends a comfort level to the portfolio
and supports the Loan Loss Allowance at the present level. Loans
reviewed during the last twelve months comprise $146,523,079 or
86.41% of the total portfolio.
14
In April, 1996 First Citizens was made aware that Bennett Funding
Group, Inc., Syracuse, New York had filed Chapter 11 Bankruptcy and that
legal claims had been filed against the company's CFO claiming among other
things the selling of fictitious leases. Assets of the Corporation have
been frozen as a result of the bankruptcy filing. First Citizens National
Bank is a holder of outstanding debt on Bennett Funding Group, Inc. in the
principal amount of $991,029 down from the beginning balance of $1,699,880.
The bank holds 176 outstanding leases securing this debt. Of the total, 25
have been contacted using the acceptable language provided by Bennett.
Response received indicate that the equipment securing the leases is in
place and in working order. All leases have been reinspected and we have no
reason to believe there are fictitious or fraudulent leases in our portfolio.
First Citizens has joined with other banks, also purchasers of leases from
Bennett Funding, to employ legal representation as a group until all facts
can be sorted out. At this time no loss is expected. The Kansas Bankers
Surety Company, holder of the bank s blanket bond insurance policy has been
notified of the issue. The loan has been added to the banks problem list
and an allocation made to the loan loss reserve in the amount of $200,000
to cover any exposure to the bank not covered by the bond.
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 Amort. discussed herein Amort. discussed herein
Equipment 5 Years 75%
Inventory 5 Years 50%
A/R 5 Years 75%
Livestock 5 Years 80%
Crops 1 Year 50%
*Securities 10 Years 75% (Listed)
50% (Unlisted)
*Maximum LTV on margin stocks (stocks not listed on a national exchange)
when proceeds are used to purchase or carry same, shall be 50%.
Diversification of the banks' real estate portfolio is a necessary and
desirable goal of the bank's real estate loan policy. In order to achieve
and maintain a prudent degree of diversity, given the composition and
general economic state of the bank's market area, the bank will strive to
maintain a real estate loan portfolio diversification based upon the
following:
* Agricultural loans totaling in aggregate no more than 20% of the
Bank's total loans;
* Land acquisition and development loans totaling in aggregate no
more than 10% of the Bank's total loans;
* Commercial construction loans totaling in aggregate no more than
10% of the Bank's total loans;
* Residential construction loans totaling in aggregate no more than
10% of the Bank's total loans;
* Residential mortgage loans totaling in aggregate no more than 40%
of the Bank's total loans; and
* Commercial loans totaling in aggregate no more than 30% of the
Bank's total loans.
15
It is the policy of FCNB that no real estate loan will be made (except in
accordance with the provisions for certain loans in excess of supervisory
limits provided for hereinafter) that exceed the loan-to-value percentage
limitations ("LTV limits") designated by category as follows:
Loan Category LTV Limit (%)
Raw Land 65
Land Development or Farmland 75
Construction:
Commercial, multi-family, and
other non-residential 80
1-to-4 family residential 80
Improved Property 80
Owner-occupied 1-to-4 family
and home equity 80
Multi-family construction loans include loans secured by cooperatives
and condominiums. Owner-occupied 1-to-4 family and home equity loans
which equal or exceed 90% LTV at origination must have either private
mortgage insurance or other readily marketable collateral pledged in
support of the credit.
On occasion, the Loan Committee may entertain and approve a request to
lend sums in excess of the LTV limits as established by policy, provided
that:
a. The request is fully documented to support the fact that other
credit factors justify the approval of that particular loan as an
exception to the LTV limit;
b. The loan, if approved, is designated in the Bank's records and
reported as an aggregate number with all other such loans approved
by the full Board of Directors on at least a quarterly basis;
c. The aggregate total of all loans so approved, including the extension
of credit then under consideration, shall not exceed 50% of the
Bank's total capital; and
d. Provided further that the aggregate portion of these loans in excess
of the LTV limits that are classified as commercial, agricultural,
multi-family or non-1-to-4 family residential property shall not
exceed 30% of the Bank's total capital.
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 as of March 31
in the years indicated is as follows:
Year Yield
1996 9.78%
1995 9.57%
1994 8.77%
1993 9.73%
1992 10.49%
The aggregate amount of unused guarantees, commitments to extend credit
and standby letters of credit was $27,337,000 as of 3/31/96.
16
The following table sets forth loan totals net of unearned income by
category for the past five years:
March 31
(in thousands)
1996 1995 1994 1993 1992
Real Estate Loans:
Construction $ 13,875 $ 11,457 $ 7,598 $ 7,003 $ 4,088
Mortgage $112,732 $ 95,763 $ 90,537 $ 87,864 $ 77,000
Commercial,
Financial and
Agricultural
Loans $ 46,691 $ 45,467 $ 35,784 $ 27,206 $ 33,425
Installment
Loans to
Individuals $ 21,739 $ 19,885 $ 16,212 $ 14,976 $ 15,723
Other Loans $ 2,164 $ 1,878 $ 2,711 $ 2,119 $ 2,507
TOTAL LOANS $197,201 $174,450 $152,842 $139,168 $132,743
LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
The degree of risk to which a bank is subjected can be controlled through
a well managed asset/liability program. First Citizens controls interest
rate risk by employing interest sensitive liabilities in assets that are
also interest sensitive. One tool used to ensure market rate return is
variable rate loans. Loans totaling $86,547,000 or 43.89% of the total
portfolio are subject to repricing with one year or carry a variable rate
of interest. The ratio is up from 40% at 3/31/95, and 42% at 3/31/94.
Maturities in the one to five year category total $114,677,000 reflecting a
modest decrease of $1,102,000 when compared to 3/31/95.
Due after
Due in one one year but Due after
year or less within five years five years
(in thousands)
Real Estate $31,940 $83,022 $11,645
Commercial,
Financial and
Agricultural $28,633 $13,170 $ 4,888
All Other Loans $ 5,418 $18,485 $ 0
TOTAL $65,991 $114,677 $16,533
Loans with Maturities After One Year for which:
(in thousands)
Interest Rates are Fixed or Predetermined $110,654
Interest Rates are Floating or Adjustable $20,556
NON-PERFORMING ASSETS
Total non performing assets at 3/31/96 reached a record low of .59%
compared to peer group banks at .64%, after increasing approximately
$635,000 or 42.61% in 1995. The increase in 1995 when compared to 1994
was the result of one credit totaling $900,000 classified as non
performing the first quarter of 1995. The credit was paid in full the
last quarter of 1995 with no losses incurred.
Non Accrual loans total $740,000 at quarter end consisting of real
estate at .33%, commercial .33%, Installment .08% and Agriculture loans
at .21%.
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
17
discussed above, the date on which an asset reaches non-accrual
status is determined by its contractual term. A debt is well secured
if it is secured (1) by collateral in the form of liens or pledges or
real or personal property, including securities that have a realizable
value sufficient to discharge the debt (including accrued interest) in
full, or (2) by the guaranty of a financially responsible party. A debt
is considered to be proceeding in due course either through legal action,
including judgement enforcement procedures, or, in appropriate
circumstances, through collection efforts not involving legal action which
are reasonably expected to result in repayment of the debt or in its
restoration to a current status. Loans that represent a potential loss to
First Citizens are adequately reserved for in the provision for loan losses.
Interest income on loans is recorded on an accrual basis. The accrual of
interest is discontinued on all loans, except consumer loans, which become
90 days past due, unless the loan is well secured and in the process of
collection. Consumer loans which become past due 90 to 120 days are charged
to the allowance for loan losses. The gross interest income that would have
been recorded for the three months ending 3/31/96 if all loans reported as
non-accrual had been current in accordance with their original terms and had
been outstanding throughout the period is $18,000. Interest income on loans
reported as ninety days past due and on interest accrual status was $10,000
for year-to-date 1996. Loans on which terms have been modified to provide
for a reduction of either principal or interest as a result of deterioration
in the financial position of the borrower are considered to be Restructured
Loans. Restructured loan total at March 31, 1996 was zero.
Loans classified by regulatory examiners and not reported under non-accrual,
past due or restructured pose no significant credit problems. Loan Officers
are required to develop a "Plan of Action" for each problem loan within their
portfolio. Adherence to each established plan is monitored by Loan
Administration and reevaluated at regular intervals for effectiveness.
The following table sets forth the balance of non-performing loans as of
March 31, for the years indicated:
Non-Performing Loans
March 31
(in thousands)
90 Days Past Due
Year Non-Accrual Accruing Interest Total
1996 $ 740 $ 427 $1,167
1995 $ 721 $1,404 $2,125
1994 $1,051 $ 439 $1,490
1993 $1,517 $ 161 $1,678
1992 $1,952 $1,136 $3,088
LOAN LOSS EXPERIENCE AND
RESERVES FOR LOAN LOSSES
During the quarter just ended activity to the Reserve Account consisted
of (1) loan charge-offs - $72,000 (2) recovery of loans previously charged
off - $40,000 and (3) additions to Reserve - $105,000. Recovery of loans
previously charged off continues to be a priority to the bank. One full
time employee is assigned the responsibility for recovery of charged off
loans and deposit accounts.
18
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 risks will cover a
minimum of 70% of the gross portfolio less installment loans. In addition,
any single note or series of notes directly or indirectly related to one
borrower which equals 25% of the bank's legal lending limit will be included
in the review.
For analysis purposes loans reviewed will be separated into five
classifications:
1. Pass - Loans that have been reviewed and graded high quality or
no major deficiencies.
2. Watch - Loans which, because of unusual circumstances, need to be
supervised with slightly more attention than is customary.
3. Problem - Loans which require additional collection effort to
liquidate both principal and interest.
4. Specific Allocation - Impaired loans, in total or in part, in which
a future loss is possible.
5. Charged-Off
Examples of factors taken into consideration during the review are:
Industry or geographic economic problems, sale of business, change of or
disagreement among management, unusual growth or expansion of the business,
past due for either principal or interest 90 days, placed on non-accrual or
renegotiated status, renewed four times without principal reduction,
declining financial condition, adverse change in personal life, frequent
overdrafts, lack of cooperation by borrower, decline in marketability or
market value of collateral, insufficient cash flow, and inadequate collateral
values.
19
LOAN LOSS ALLOWANCE ANALYSIS
DATE
AVERAGE AVERAGE PERCENT CURRENT RESERVE
LOSS 3 YRS. BALANCE 3 YRS. BALANCE REQUIRED
I. CREDIT $ GROSS $ % $ $
CARDS
II. INSTALL. $ NET $ % $ $
LOANS
III. IMPAIRED WITH ALLOCATIONS $ $
IMPAIRED WITHOUT ALLOCATIONS $ $
ALLOWANCE
IV. DOUBTFUL 50% $ $
SUBSTANDARD 10%
WATCH 5%
OTHER LOANS NOT LISTED PREVIOUSLY .75%
LESS SBA/FMHA GUARANTEED PORTIONS
TOTAL LOANS $
V. LETTERS OF CREDIT .75% $ $
VI. OTHER REAL ESTATE OWNED $
RESERVE REQUIRED $
RESERVE BALANCE $
EXCESS (DEFICIT) $
RESERVE AS % OF TOTAL LOANS %
PEER GROUP %
LOSS EXPERIENCE III & IV AVERAGE LAST 3 YEARS
.% OR $
Management estimates the approximate amount of charge-offs for the 12
month period ending 12/31/96 to be as follows:
Domestic Amount
Commercial, Financial & Agricultural $50,000
Real Estate-Construction None
Real Estate-Mortgage 70,000
Installment Loans to individuals &
credit cards 80,000
Lease financing None
Foreign N/A
01/01/96 through 12/31/96 Total $200,000
The book value of repossessed real property held by Bancshares and First
Citizens National Bank is $861,000 at 3/31/96 compared to $1,032,000 at
3/31/95. Property held on the books of Bancshares is a strip shopping
center valued at $655,000 and a parcel of land purchased for expansion of
the Midtown Branch in 1988. Expansion plans were abandoned after a decision
was made to construct the Industrial Park Branch. This property valued at
$164,000 has been classified as ORE and is being offered for sale. The
remaining balance represents other real estate held by First Citizens
National Bank. Efforts to market the property held by the Holding Company
are on-going.
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
adjusted to reflect the decline, if any, in its realizable value. Such
adjustments are charged directly to expense.
20
The following table summarizes the monthly average of net loans
outstanding; changes in the reserve for loan losses arising from
loans charged off and recoveries on loans previously charged off;
additions to the reserve which have been charged to operating
expense; and the ratio of net loans charged off to average loans
outstanding.
First Citizens National Bank
Loan Loss Experience and Reserve for Loan Losses
(in thousands)
Quarter ending March 31
1996 1995 1994 1993 1992
Average Net Loans
Outstanding $191,653 $167,965 $149,438 $132,564 $129,818
Balance of Reserve
for Loan Losses
at Beginning of
Period $ 2,216 $ 2,054 $ 1,676 $ 1,703 $ 1,936
Loan Charge-Offs $ (72) $ (60) $ (24) $ (26) $ (307)
Recovery of Loans
Previously Charged Off $ 40 $ 56 $ 44 $ 38 $ 38
Net Loans Charged Off $ (32) $ (4) $ 20 $ 12 $ (269)
Additions to Reserve
Charged to Operating
Expense $ 105 $ 65 $ 99 $ 117 $ 131
Balance at End of
Period $ 2,289 $ 2,115 $ 1,795 $ 1,832 $ 1,798
Ratio of Net Charge-Offs
during quarter to Average
Net Loans Outstanding (.02%) (.00%) .01% .01% (.21%)
The following table will identify charge-offs by category for the
periods ending 3/31/96, 3/31/95 and 3/31/94:
Charge-offs: 1996 1995 1994
Domestic:
Commercial, Financial and Agricultural $ 43 $ 0 $ 0
Real Estate-Construction 0 0 0
Real Estate-Mortgage 0 31 0
Installment Loans to individuals 29 29 24
Lease financing 0 0 0
Foreign N/A N/A N/A
Total $ 72 $ 60 $ 24
Recoveries:
Domestic:
Commercial, Financial and Agricultural $ 8 $ 15 $ 16
Real Estate-Construction 0 0 0
Real Estate-Mortgage 1 10 2
Installment Loans to individuals 31 31 26
Lease Financing 0 0 0
Foreign N/A N/A N/A
Total $ 40 $ 56 $ 44
Net Charge-offs $(32) $(4) $ 20*
*Recoveries exceeded Charge-offs
21
Investment Securities
Bancshares' book value of listed investment securities as of the
dates indicated are summarized as follows:
Composition of Investment Securities
(March 31)
1996 1995 1994 1993 1992
U. S. Treasury &
Government Agencies $62,387 $60,735 $42,353 $61,068 $55,020
State & Political
Subdivisions $11,013 $10,426 $13,665 $ 9,057 $ 5,446
All Others $ 3,637 $ 4,393 $ 5,519 $ 5,645 $ 3,944
TOTALS $77,037 $75,554 $61,537 $75,770 $64,410
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 fund deposits. Investments
for the first quarter, 1995 were up $1.5 million when compared to
the same time period in 1994. Securities contained within the
portfolio consist primarily of U. S. Treasury, and other U. S.
Government Agency Securities and tax exempt obligations of States
and Political Subdivisions. Fixed rate holdings comprise 90% of the
portfolio, while adjustable rates comprise the remaining 10%.
Purchases made during the first quarter, 1996 totaled $10,160,000
consisting of Government Backed and Municipal Securities.
Securities totaling $1,500,000 were placed in the Held-To-Maturity
Account while securities totaling $8,660,000 were booked in the
Available for Sale account.
FNMA Preferred Stock was purchased on 3/1/96 par value $150,000 and
placed in the Trading Account. The security was sold on 3/1/96 (same
day as purchased) for a profit of $750.00. Other securities sold
from the Available for Sales account during the quarter totaled
$3,100,000. A profit of $126,731 was realized from the sales. All
investments were sold prior to maturity from the Available for Sale
Account to meet liquidity needs.
Fixed rate holdings currently have an expected average life of 3.6
years. It is estimated that this average life would extend to 4.8
years should rates rise 100 basis points and 5.1 years should rates
increase 200 basis points. This is a result of some extension
occurring in the callable bonds and mortgage-backed holdings as
rates rise. For rates down 100 basis points the average life would
decrease to 2.3 years.
In terms of price sensitivity, we estimate that at rates up 100
basis points the market value of the portfolio would fall by 2.4%,
while at rates up 200 basis points the market value would fall by
6.1%. This is about equal to the price sensitivity of the 3 to 4
year Treasury bond, which is consistent with the current average
life of the portfolio. For rates down 100 basis points we estimate
that the market value would increase by about 2.3%.
The adjustable rate holdings all reprice on an annual or more
frequent basis and currently have an average life of 6.2 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 about 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 portfolio
for Held-To-Maturity, Available-For-Sale, and Trading Account
Investments. As of March 31, 1996 approximately 74.41% of the total
portfolio was placed in the Held-To-Maturity account. The remaining
25.59% was booked in the Available-For-Sale account. FASB 115 also
required banks to Mark to Market the Available for Sale and Trading
Account Investments at the end of each calendar quarter. Held-To-
22
Maturity Account Investments are stated at amortized cost on the
balance sheet. Mark to Market resulted in a negative capital entry
of $389,004.
Maturities in the portfolio are made up of 14.14% within one year,
61.20% after one year and within five years, and 24.53% after five
years. Policy provides for 20% maturities on an annual basis.
Maturities were extended from 5 to 10 years on most securities
purchased during the latter part of 1995. Management made a
conscious effort to extend maturities for a higher yield on the
portfolio. Securities purchased with extended maturities bear call
features ranging from 1 to 3 years. Approximately $3 million are
projected to be called in the next 6 months. Maturities on
investments purchased in 1996 are also structured to meet loan
demand as well as projected changes in interest rates.
First Citizens National Bank has not engaged in derivative
activities as defined by paragraph 5 thru 7 of FASB 119 (reference
footnote 7).
Investment Securities
Held to Maturity Available for Sale
March 31, 1996
(in thousands)
Amortized Fair Amortized Fair
Cost Value Cost Value
U.S. Treasury Securities $ 3,016 $ 3,003 $10,955 $11,067
U.S. Government agency
and corporation obligations
(exclude mortgage-backed
securities):
Issued by U.S. Government
agencies (2) 150 150 0 0
Issued by U.S. Government-
sponsored agencies (3) 19,984 20,103 18,283 18,413
Securities issued by states
and political subdivisions
in the U.S.:
General obligations 3,952 3,965 3,679 3,662
Revenue obligations 2,496 2,489 901 902
Industrial development
and similar obligations 0 0 0 0
Mortgage-backed securities (MBS):
Pass-through securities:
Guaranteed by GNMA 400 411 2,040 2,062
Issued by FNMA and FHLMC 974 979 421 450
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 1,137 4,724 4,728
Collateralized by MBS
issued or guaranteed by
FNMA, FHLMC, or GNMA 0 0 0 0
All other privately-
issued 0 0 0 0
Other debt securities:
Other domestic debt
securities 998 998 250 250
Foreign debt securities 0 0 0 0
Equity securities:
Investments in mutual funds - - 0 0
Other equity securities with
readily determinable fair
values - - 749 763
All other equity securities (1) - - 1,627 1,627
Total 33,113 33,235 43,629 43,924
23
(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.
Investment Securities
Unrealized Gains/(Losses)
March 31, 1996
Unrealized Unrealized Net
Gains Losses Gains/Losses
U. S. Treasury Securities 150 52 98
Obligations of U.S.
Government Agencies &
Corp. 656 304 352
Obligations of States and
Political Subdivisions 47 57 (10)
Other Securities 2 0 2
Totals 855 413 442
Maturing and Portfolio Percentages as of March 31, 1996
After One Year After Five Years After
Within One Year Within Five Years Within Ten Years Ten Years
Amount % Amount % Amount % Amount %
3/31/96 $ 8,214 6.17% $38,127 6.61% $20,348 6.62% $10,348 7.07%
3/31/95 $10,760 6.80% $46,249 6.61% $12,909 6.40% $ 5,636 6.10%
3/31/94 $14,715 6.63% $36,230 6.05% $ 5,841 6.40% $ 4,751 6.10%
3/31/93 $17,794 7.08% $49,291 6.11% $ 1,997 6.12% $ 6,688 6.15%
3/31/92 $16,741 7.45% $38,538 7.12% $ 7,608 7.89% $ 1,523 7.44%
Maturity and Yield on Securities March 31, 1996
(in thousands)
Maturing
After One Year After Five Years After
Within One Year Within Five Years Within Ten Years Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield
U. S. Treasury and
Government Agencies $ 7,086 6.11% $30,163 6.61% $15,572 6.72% $9,566 7.03%
State and Political
Subdivisions* $ 382 5.68% $ 7,463 6.63% $ 2,386 6.94% $ 782 7.59%
All Others $ 746 6.87% $ 501 6.00% $ 2,390 5.60% $ - -%
TOTALS $ 8,214 6.17% $38,127 6.61% $20,348 6.62% $10,348 7.07%
* Yields on tax free investments are stated herein on a
taxable equivalent basis.
Return on Equity and Assets
The table below presents for Bancshares certain
operating ratios for the quarters ending March 31st: (Not
Annualized)
1996 1995 1994 1993 1992
Percentage of Net
Income to:
Average Total Assets .33% .24% .35% .32% .17%
Average Shareholders
Equity 3.47% 2.64% 3.74% 3.84% 2.14%
Percentage of
Dividends Declared
Per Common Share
to Net Income
Per Common Share 25.56% 33.90% 22.73% 22.41% 38.89%
Percentage of Average
Shareholders'
Equity** to Average
Total Assets 10.07% 9.18% 10.03% 9.10% 8.76%
24
Improved earnings are reflected when reviewing the financial
ratios for the years of 1992 thru 1996. Management has made
ongoing efforts to control expenses and maximize earnings to
achieve earnings comparable to peer group banks. An
analysis of return on assets at March 31, 1996 reflects a
upward swing when compared to 3/31/95, after declining
slightly. Accelerated asset growth coupled with rising
rates paid on interest bearing deposits had a significant
impact on earnings in the first quarter of '95. A
comparison of total assets at 3/31/95 and 3/31/94 reflects
an average growth rate in excess of 13%. Assets continue to
grow at an accelerated rate in 1996. However, interest
margins have expanded to achieve a ROA in excess of 1995.
Increased expenses during the 1st quarter of 1995 can be
attributed to the addition of two branch banks opened in
November, 1994 and January, 1995 and the installation cost
of POD and Statement Imaging 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% is
required if maximum benefits are to be realized.
Total Shareholder's equity (including Loan Loss Reserve) of
First Citizens Bancshares as of 3/31/96 was $29,862,000
compared to $29,319,000 at 12/31/95.
Percentage of Dividends declared per common share to net
income per common share decreased slightly when comparing
3/31/96 to 3/31/95. Number of shares outstanding continues
to increase due to shares of stock issued on a quarterly
basis to service the Dividend Reinvestment Program. A stock
repurchase program, approval by the Board of Directors in
1994 for the purpose of acquiring shares on the open market
to service the 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. A 10% stock dividend
declared on October 21, 1992 was payable to shareholders of
record December 15, 1992, thereby increasing outstanding
shares. Earnings per share were adjusted accordingly.
During the third quarter, of 1993 a 2.5 for 1 stock split
was declared to holders of record as of October 15, 1993 on
the common capital stock of Bancshares. The numbers of
shares outstanding increased proportionately with no effect
on capital. An amendment to the Company's Charter by the
shareholders in April, 1994 approved an increase in the
number of shares authorized from 750,000 to 2,000,000.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Liquidity is the ability to meet the needs of our customer
base for loans and deposit withdrawals by maintaining assets
which are convertible to cash equivalents with minimal
exposure to interest rate risks. Liquidity is determined by
a comparison of net liquid assets to net liabilities and
consistently 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.
Strong loan demand and seasonal growth in agriculture lines
of credit will place the bank in a tight liquidity position
for the months of May through October, 1996. Loan to
deposit ratio including repurchase agreements and federal
home loan bank borrowings is 74.99% at 3/31/96. Deposit
growth at quarter end was slightly over 8%, while loan
growth exceeded 13%.
25
To address liquidity concerns the bank has the following
sources available: (1) Approved lines of credit with the
Federal Home Loan Bank totaling $11.5 million and
correspondent banks totaling $8.5 million; (2) Loans in
excess of $64 million maturing in one year or less; and (3)
Investment Securities of approximately $3 million with call
features that are projected to be called within 6 months or
less and $8 million investment securities with maturity
dates of one year or less. At March 31, 1996 Federal Home
Loan Borrowings totaled $4.1 million. These borrowing are
maturity matched with specific loans and investments on the
books of the bank. In May, 1996, the bank purchased $5
million in State of Tennessee funds. $2 million was
purchased at 5.30% for a period of 6 months and $3 million
was purchased at 5.50% for l year.
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 is 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 exposure limitation set by policy.
26
CONDENSED GAP REPORT
--------------------
CURRENT BALANCES
--------------------
03/31/96
(in thousands)
DAILY 0-1 1-2 2-3 3-6 6-12 1-2 2+
TOTAL FLOATING MONTH MONTHS MONTHS MONTHS MONTHS YEARS YEARS
- ----------------------------------------------------------------------------------------------
CASH AND DUE FROM
CURRENCY AND COIN 2,267 - - - - - - - 2,267
DUE FROM BANKS 2,025 - - - - - - - 2,025
CASH ITEMS 5,302 - - - - - - - 5,302
MONEY MARKET 49 49 ______ _____ _____ _____ _____ _____ -
TOTAL CASH & DUE FROM 9,643 49 - - - - - - 9,594
INVESTMENTS 75,938 - - 353 3,852 4,586 6,597 11,588 48,962
LOANS
COMMERCIAL FIXED 22,835 - 1,135 863 625 1,901 9,548 2,295 6,468
COMMERCIAL VARIABLE 20,466 20,466 - - - - - - -
REAL ESTATE VARIABLE 21,293 21,293 - - - - - - -
REAL ESTATE FIXED 100,125 - 4,379 1,534 1,690 3,572 8,108 13,219 67,623
HOME EQUITY LOANS 4,364 4,364 - - - - - - -
SEC MORTGAGE 546 - 546 - - - - - -
INSTALLMENT LOANS 21,458 - 193 289 338 758 1,676 4,111 14,093
INSTALLMENT VARIABLE 126 126 - - - - - - -
FLOOR PLAN 979 979 - - - - - - -
CREDIT CARDS 1,712 - - - - - 1,712 - -
FACTORING REC 209 - 209 - - - - - -
OVERDRAFTS 243 - 243 - - - - - -
NON-ACCRUAL LOANS 740 - - - - - - - 740
FHLB LOANS 2,105 - - - - - - - 2,105
TOTAL LOANS 197,201 47,228 6,705 2,686 2,653 6,231 21,044 19,625 91,029
LOAN LOSS RESERVE 2,289 - - - - - - - 2,289
NET LOANS 194,912 47,228 6,705 2,686 2,653 6,231 21,044 19,625 88,740
FED FUNDS SOLD _______ ______ ______ _____ _____ _____ ______ ______ ______
TOTAL EARNING ASSETS 270,850 47,228 6,705 3,039 6,505 10,817 27,641 31,213 137,702
OTHER ASSETS
BUILDING, F&F AND LAND 8,666 - - - - - - - 8,666
OTHER REAL ESTATE 19 - - - - - - - 19
OTHER ASSETS 4,634 - - - - - - - 4,634
TOTAL OTHER ASSETS 13,319 - - - - - - - 13,319
TOTAL ASSETS 293,812 47,277 6,705 3,039 6,505 10,817 27,641 31,213 160,615
DEMAND DEPOSITS
BANKS 39 - - - - - - - 39
DEMAND DEPOSITS 26,034 - - - - - - - 26,034
TOTAL DEMAND 26,073 - - - - - - - 26,073
27
CONDENSED GAP REPORT
--------------------
CURRENT BALANCES
--------------------
03/31/96
(in thousands)
DAILY 0-1 1-2 2-3 3-6 6-12 1-2 2+
TOTAL FLOATING MONTH MONTHS MONTHS MONTHS MONTHS YEARS YEARS
- ----------------------------------------------------------------------------------------------
SAVINGS ACCOUNTS
REGULAR SAVINGS 18,691 - - - - - - - 18,691
NOW ACCOUNT 25,344 - - - - - - - 25,344
BUSINESS CHECKING 49 - - - - - - - 49
IMF-MMDA 11,370 11,370 - - - - - - -
FIRST RATE ACCOUNT 11,414 11,414 - - - - - - -
DOGWOOD CLUB 4,862 - - - - - - - 4,862
TOTAL SAVINGS 71,730 22,784 - - - - - - 48,946
TIME DEPOSITS
FLEX-CD 93,486 - 6,903 9,033 6,440 17,677 27,497 21,275 4,661
LARGE CD-FLEX 27,926 - 2,399 3,309 1,518 4,886 8,986 2,728 4,100
IRA-FLOATING 168 168 - - - - - - -
IRA-FIXED 20,944 - 980 355 256 1,458 4,776 4,832 8,287
CHRISTMAS CLUB 183 - - - - - 183 - -
TOTAL TIME 142,707 168 10,282 12,697 8,214 24,021 41,442 28,835 17,048
TOTAL DEPOSITS 240,510 22,952 10,282 12,697 8,214 24,021 41,442 28,835 92,067
SHORT TERM BORROWINGS
FED FUNDS PURCHASED 200 200 - - - - - - -
TT&L 849 849 - - - - - - -
SECURITIES SOLD-SWEEP 12,501 12,501 - - - - - - -
SECURITIES SOLD-FIXED 7,744 - 101 554 2,387 3,239 1,150 313 -
FHLB-LIBOR INVESTMENT 1,907 1,907 - - - - - - -
FHLB-LONG TERM 2,200 - - - - - - - 2,200
TOTAL SHORT TERM BORR. 25,401 15,457 101 554 2,387 3,239 1,150 313 2,200
OTHER LIABILITIES
ACCRUED INT PAYABLE 2,491 - - - - - - - 2,491
OTHER LIABILITIES 229 - - - - - - - 229
TOTAL OTHER LIAB. 2,720 - - - - - - - 2,720
TOTAL LIABILITIES 268,631 38,409 10,383 13,251 10,601 27,260 42,592 29,148 96,987
CAPITAL
COMMON STOCK 2,000 - - - - - - - 2,000
SURPLUS 4,000 - - - - - - - 4,000
UNREALIZED GAIN(LOSSES) 177 - - - - - - - 177
UNDIVIDED PROFITS 19,004 - - - - - - - 19,004
TOTAL CAPITAL 25,181 - - - - - - - 25,181
TOTAL LIAB. & CAPITAL 293,812 38,409 10,383 13,251 10,601 27,260 42,592 29,148 122,168
GAP (SPREAD) - 8,868 -3,678 -10,212 -4,096 -16,443 -14,951 2,065 38,447
GAP % TOTAL ASSETS - 3.02 -1.25 -3.48 -1.39 -5.60 -5.09 0.70 13.09
CUMULATIVE GAP - 8,868 5,190 -5,022 -9,118 -25,561 -40,512 -38,447 -
CUMM. GAP % TOTAL ASSETS - 3.02 1.77 -1.71 -3.10 -8.70 -13.79 -13.09 -
SENSITIVITY RATIO - 1.23 1.11 0.92 0.87 0.74 0.72 0.78 1.00
28
NOTES TO THE GAP REPORT
1. The gap report reflects interest sensitivity positions
during a flat rate environment. These time frames
could change if rates rise or fall.
2. Repricing over-rides maturity in various time frames.
3. Demand deposits are placed in the last time frame due
to lack of interest sensitivity. Our demand deposits
are considered core deposits.
4. Savings accounts are placed into the +2 year time
frame. In a flat rate environment, saving accounts
tend not to reprice or liquidate. Savings deposits
become price sensitive, after a major increase in the 6
month CD rate. These accounts are placed in this
category instead of the variable position due to
history and characteristics. These accounts are
considered core deposits.
5. 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.
The net interest income exposure or limit as a percent
of unimpaired capital is .76%. Currently, the bank's
exposure is less than established limits.
6. FCNB would benefit from a flat rate environment. If
interest rates rise rapidly, net interest income could
be adversely impacted. First Citizens Liquidity would
be negatively impacted should interest rates drop
prompting an increase in loan demand. Adequate lines
of credit are available to handle liquidity needs.
Capital Resources
Total shareholders' equity of First Citizens Bancshares as
of March 31, 1996, was $27,573,000 compared to $24,739,000
at 3/31/95. Shareholders equity at 12/31/95 was
$27,103,000. Capital as a percentage of total assets for
the quarter ending March 31 is presented in the following
table for the years indicated (excluding Loan Loss
Reserves):
1996 1995 1994 1993 1992
9.31% 9.06% 9.37% 8.41% 7.87%
Increasing the capital base of the Company is a vital part
of strategic planning. Although the present capital to
asset ratio remains well in excess of the level required by
Regulators for banks our size, management is aware of the
importance of this base.
Risk-based capital focuses primarily on broad categories of
credit risk and incorporates elements of transfer, interest
rate and market risks. The calculation of risk-based
capital ratio is accomplished by dividing qualifying capital
by weighted risk assets. The minimum risk-based capital
ratio established by the Federal Reserve is 8%. At least
one-half or 4% must consist of core capital (Tier 1), and
the remaining 4% may be in the form of core (Tier 1) or
supplemental capital (Tier 2). Tier 1 capital/core capital
consists of common stockholders equity, qualified perpetual
stock and minority interests in consolidated subsidiaries.
Tier 2 capital/supplementary capital consists of the
allowance for loan and lease losses, perpetual preferred
stock, term subordinated debt, and other debt and stock
instruments. Bancshares' capital consists entirely of Tier
1 components, with the exception of the allowance for loan
and lease losses.
29
Bancshares has historically maintained capital in excess of
minimum levels established by the Federal Reserve Board.
The risk-based capital ratio reflects continuous improvement
when reviewing the years included in the above table.
Risk-based capital ratio as of 3/31/96 was 14.19%,
significantly in excess of the 8% mandated by the Regulatory
Authorities. 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.
Effects of Inflation
Inflation has a significant impact on the growth of total
assets in the banking industry, resulting in a need to
increase equity capital in order to maintain an appropriate
equity to asset ratio.
Operating expenses are directly affected by increases in
salaries and employee benefits, supplies, legal, audit and
professional fees, utilities, advertising and insurance.
Inflation and competition are major keys to the cost of
acquiring and retaining deposits.
A well managed asset/liability management program can
maximize net interest income; and at the same time, reduce
the impact of inflation on earnings.
Part II - Other Information
Item 1. Legal Proceedings
There are no legal proceedings against the bank at this
time.
Item 2. Changes in Securities
Dividends paid to Shareholders of First Citizens Bancshares,
Inc. are funded by dividends to the Bank Holding Company
from First Citizens National Bank. Federal Reserve Bank
regulators would be critical of a bank holding company that
pays cash dividends that are not covered by earnings or that
are funded from borrowings or unusual or non recurring
gains, such as the sale of property or assets. Under rules
set forth by the Comptroller of the Currency in Interpretive
Ruling 7.6100, the board of directors of a national bank may
declare dividends as it may judge to be expedient, subject
to statutory limitations which deal with the balance of the
surplus account, sufficiency of net profits, dividend
payments on preferred stock, and default of any assessment
due to the Federal Deposit Insurance Corporation.
Item 6(b) No reports on Form 8-K were filed for the quarter
ended 3/31/96.
30
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
First Citizens Bancshares, Inc.
(Registrant)
Date: May 14, 1996 Stallings Lipford
Stallings Lipford, Chairman &
CEO
Date: May 14, 1996 Jeff Agee
Jeff Agee, Vice President &
Chief Financial Officer
First Citizens National Bank
(Principal Subsidiary)