1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter ended June 30, 1997 Commission File Number 2-83542
FIRST CITIZENS BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
TENNESSEE
(State or other jurisdiction of 62-1180360
incorporation or organization) (I.R.S. Employer Identification No.)
P. O. Box 370
Court Street, Dyersburg, Tennessee 38024
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (901) 285-4410
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 3 months and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Of the registrant's only class of common stock ($1.00 par value) there
were 746,109 shares outstanding as of June 30, 1997 (Net of Treasury).
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PART I -FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
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FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, December 31,
1997 1996
ASSETS
Cash and due from banks $ 14,820 $ 12,507
Federal funds sold 0 1,000
Investment securities -
Trading Investments-Stated at Market 0 0
Held to Maturity-amortized cost-Fair
Value of $33,170 at June 30, 1997
and $28,097 at December 31, 1996. 33,214 28,059
Available for Sale-Stated at Market 47,461 47,688
Loans (Excluding unearned income of
$1,577 at June 30, 1997 and
$1,521 at December 31, 1996) 222,874 211,389
Less: Allowance for loan losses 2,596 2,282
Net Loans 220,278 209,107
Premises and equipment 8,239 8,135
Other assets 9,008 6,575
TOTAL ASSETS $333,020 $313,071
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $262,851 $256,414
Securities sold under agreement to
repurchase 21,544 21,225
Federal funds purchased and Other
Short Term Borrowing 6,375 0
Long-term debt 7,521 2,997
Notes payable of employee stock
ownership plan 0 0
Other liabilities 3,164 2,832
Total Liabilities 301,455 283,468
Contingent liabilities
Stockholders' Equity:
Common stock, $1 par value - 2,000,000
authorized; 746,271 issued and
outstanding at June 30, 1997;
741,516 issued and outstanding at
December 31, 1996 746 741
Surplus 10,364 10,097
Retained earnings 20,398 18,679
Obligation of Employee Stock
Ownership Plan 0 0
Net Unrealized Gains (Losses) on Available
for Sale 65 95
Total Common Stock and Retained Earnings 31,573 29,612
Less-162 Treasury Shares, at Cost at
June 30, 1997 and 40 Shares at Cost at
December 31, 1996 (8) (9)
Total Stockholders' Equity 31,565 29,603
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $333,020 $313,071
NOTE: The balance sheet at December 31, 1996, has been taken from the
audited financial statements at that date and condensed.
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FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
Interest Income
Interest and fees
on loans $ 5,306 $4,831 $10,192 $ 9,516
Interest on investment
securities:
Taxable 1,261 1,125 2,401 2,207
Tax-exempt 130 125 251 250
Other interest income 15 20 73 48
Lease financing income 0 0 0 1
Total Interest Income 6,712 6,101 12,917 12,022
Interest Expense
Interest on deposits 2,753 2,617 5,442 5,181
Other interest expense 415 334 708 629
Total Interest Expense 3,168 2,951 6,150 5,810
Net Interest Income 3,544 3,150 6,767 6,212
Provision for Loan
Losses 201 134 361 239
Net Interest Income
after Provision 3,343 3,016 6,406 5,973
Other Income
Securities gains
(losses) 6 43 19 179
Other income 880 795 1,868 1,557
Total Other Income 886 838 1,887 1,736
Other expenses 2,412 2,333 4,769 4,735
Net income before
income taxes 1,817 1,521 3,524 2,974
Provision for income
taxes 607 524 1,197 1,030
Net income $1,210 $ 997 $2,327 $1,944
Earnings per share $ 1.63 $ 1.36 $ 3.13 $ 2.65
Weighted average number of
shares outstanding 742,691 734,476 742,691 734,476
The accompanying notes are an integral part of these financial
statements.
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FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
(UNAUDITED)
Six Months Ended
June 30,
1997 1996 1995
Net Cash Provided by Operating
Activities $ 1,017 $ 3,036 $ 1,347
Investing Activities
Proceeds of Maturities of Held to
Maturity Securities 4,491 4,085 9,563
Purchase of Held to Maturity
Investments (9,600) (1,500) (11,000)
Proceeds from Maturities of
Available for Sale Securities 3,103 1,812 812
Proceeds from Sales of Available
for Sale Securities 1,934 7,600 630
Purchase of Available for Sale
Securities (4,860) (17,125) (3,133)
Increase in Loans-Net (11,532) (17,445) (16,598)
Purchases of Premises and
Equipment (561) (146) (819)
Net Cash Provided by
Investing Activities (17,025) (22,719) (20,545)
Financing Activities
Net increase (decrease) in Demand
and Savings Accounts 1,779 862 (1,212)
Increase (decrease) in
Time Accounts 4,658 8,176 23,377
Increase (decrease) in Long
Term Debt 4,524 (591) 2,615
Treasury Stock Transactions 1 (4) (7)
Proceeds from Sale of Common Stock 272 154 14
Cash Dividends Paid (607) (485) (441)
Net increase (decrease) in
Short-term Borrowings 6,694 9,508 (501)
Net Cash Provided (used) by
Financing Activities 17,321 17,620 23,845
Increase (decrease) in Cash
and Cash Equivalents 1,313 (2,063) 4,647
Cash and Cash Equivalents at
Beginning of Year 13,507 13,544 12,684
Cash and Cash Equivalents at
End of Year $14,820 $11,481 $17,331
Cash payments made for interest and income taxes during the years
presented are as follows:
1997 1996 1995
Interest $6,358 $5,404 $4,877
Income Taxes 1,163 833 841
NOTE: Net cash provided by operating activities was lower in 1997
due to the purchase of split dollar life insurance policies for
our officers. These policies are classified as other assets on
the balance sheet.
The accompanying notes are an integral part of these financial
statements.
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FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
June 30, 1997
Note 1 - Consolidated Financial Statements
The consolidated balance sheet as of June 30, 1997, the
consolidated statements of income for the six month periods
ended June 30, 1997, 1996 and 1995, and the consolidated
statement of cash flows for the six month periods then ended
have been prepared by the company without an audit. The
accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial
information and with 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 June 30,
1997 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, 1997. For further
information, refer to the consolidated financial statements
and footnotes thereto included in the company's annual
report on Form 10-K for the year ended December 31, 1996.
Note 2 - Organization
First Citizens Bancshares, Inc., is a bank holding company
chartered on December 14, 1982, under the laws of the State
of Tennessee. On September 23, 1983, all of the outstanding
shares of common stock of First Citizens National Bank were
exchanged for an equal number of shares in First Citizens
Bancshares, Inc.
Note 3 - Short Term Borrowings
June 30 June 30
1997 1996
Amount Outstanding-End of Period $27,919 $29,253
Weighted Average Rate of Outstanding 4.76% 4.68%
Maximum Amount of Borrowings at Month Ends $27,919 $29,253
Average Amounts Outstanding for Period $24,991 $23,526
Weighted Average Rate of Average Amounts 4.64% 4.52%
Note 4 - Long-Term Debt
Long term debt is comprised of Federal Home Loan Bank
Borrowings and finance company debt (Delta Finance,
subsidiary of First Citizens National Bank, organized in
first quarter, 1997). Finance company debt is classified as
long term debt because of its intent to renew. The average
life is as presented. FHLB Funds are maturity matched with
specific loans and investments.
Average Average Average
Volume Rate Maturity
FHLB Borrowings $1,981 5.86% 10 Years
FHLB Borrowings 1,947 5.75% 7 Years
FHLB Borrowings 2,497 5.77% 2 Years
Finance Company Debt 1,100 6.50% 1.5 Years
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Note 5 - Statement of Cash Flows
June 30,
1997 1996 1995
Actual payments made
during the periods:
Interest $ 6,358 $ 5,404 $ 4,877
Income taxes 1,163 833 841
Note 6 - Contingent Liabilities
There are no material pending litigations as of the current
reportable date that should result in a liability.
Note 7 - Investment Securities
The differences between book values of investment securities
and market values at June 30, 1997 and December 31, 1996,
total $108 and $38 respectively. FASB 115 requires banks to
classify securities as held to maturity, available for sale,
and trading. First Citizens has $0 in the trading account.
Available for Sale securities values are adjusted to market
quarterly and the adjustments flow to the capital account
(net of tax). Held to maturity securities are stated at
amortized cost. Available for sale securities reflects a
$50 decrease for the ending perod of June 1997 and, net of
tax, $30 flowed to capital. These movements can fluctuate
with the bond market.
First Citizens has not engaged in derivative activities (as
defined by paragraphs 5-7 of FASB 119) for any of the
reported periods.
Note 8 - Regulatory Capital Requirements
Regulatory agencies impose certain minimum capital
requirements on both First Citizens Bancshares, Inc. and
First Citizens National Bank. On December 16, 1988, the
Federal Reserve Board approved risk based capital guidelines
for bank holding companies. Presently, the holding company
and First Citizens National Bank exceed the required minimum
standards established by regulators. Tier 1 and tier 2 risk
based capital ratios are 13.69% and 14.82% respectively.
Note 9 - Deferred Income Taxes
First Citizens adopted FASB 109 as of January 1, 1993. The
deferred tax account reflects an asset totaling $267.
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 new FASB 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 $1,114
Amount of Recorded Balance with Related Allowance $ 115
Amount of Recorded Balance with no Related Allowance $ 999
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.
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A quarterly review of the adequacy of the loan loss reserve will
continue to ensure the sufficiency of said reserve for both losses and
impairment.
Note 11 - Asset Impairment
The Financial Accounting Standards Board issued Statement 121
addressing the accounting for the impairment of long-lived assets
that will be held and used, including certain identifiable
intangibles, and the good-will related to those assets. The
statement, which is effective for calendar-year 1996 financial
statements, also addresses accounting for long-lived assets and
certain identifiable assets to be disposed.
The statement requires that assets to be held and used be reviewed
for impairement whenever events or changes in circumstances
indicate that the carrying amount of the asset in question may not
be recoverable.
As of the reportable date, there are no FASB 121 adjustments.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The purpose of the following discussion is to address material changes
in income and expense accounts when compared to the quarter ending June
30, 1997. Reference should be made to the financial statements included
as ITEM 1 for a more thorough understanding of the analysis. The
discussion relates mainly to activities of First Citizens National Bank
(First Citizens) in its banking business. However, the consolidated
statements of income reflect activities of both First Citizens and First
Citizens Bancshares Inc. (Bancshares). Limited activity to date by the
Holding Company does not materially affect the income report.
Record earnings of $2,210,000 were reported for First Citizens
Bancshares, Inc. for the second quarter of 1997. Net income per share
was $1.63 up 20 percent from the second quarter of 1996. Return on
average assets was 1.44 percent, up from 1.29 percent for the same
period in 1996. Return on average equity was 15.22 percent compared to
14.80 percent for the second quarter of 1996. The increase in income
was supported by an improved net interest margin, the difference between
what the bank paid for funds and what it earned in assets. Second
quarter results reflected a net interest margin of 4.19 percent at June
30,1996. In addition, other income increased 11 percent to $880,000,
while other expenses increased only 3 percent. A continued focus on
increasing fee income will serve to protect earnings should interest
rates increase. Growth in the loan portfolio rebounded from the slow
start experienced in the first quarter, a result of weather-releated
problems within the local agriculture economy. Loans outstanding net of
reserves, were $220,278,000 at June 30, up from $209,107,000 at December
31, 1996. This is in excess of budget projections and support a net
income level exceeding 1997 budget. Past due loans in the 30-89 and 90+
categories were up 31.63 percent and 93.97 percent when reviewing the
two quarters under comparison. Ninety days or more past due loans
reflect one loan totaling approximately $700,000 that is in the process
of collection (discussed in detail in Compositon of Loan section). Past
due loan totals since quarter end have reduced to be more in line with
peer bank percentages. The percentage of loan loss reserve to total
loans is well within policy guidelines of one percent. Non accrual and
non-performing assets decreased over 36 percent and 28 percent when
comparing June 30, 1997 to 1996. Cost of Funds at 3/31/97 was 4.31
percent compared to 4.35 percent at 6/30/96. Liquidity ratio at 6/30/97
was 13.32 percent including approved lines of credit (calculated using
the Comptroller of the Currency format). Maintaining sufficient
liquidity is accomplished through utilization of credit lines with the
Federal Home Loan Bank in addition to traditional Fed Fund lines with
correspondent banks. Competition for deposits with non-bank entities
has permanently changed the source of funding for most if not all banks.
Deposit to loan ratio at quarter end was 83.52 percent.
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The price of Bancshares common stock remains strong, with demand
consistently outpacing the available supply. Trades during the second
quarter ranged from $55.00 to $69.57. However, since quarter-end a
small number of shares have traded at $70.00. Dividends of 40 cents
per share are consistent with first quarter payout and up 23 percent
from the 32.5 cents per share paid the first three quarters of 1996.
The potential for growth in both earnings and assets remains high. A
letter of intent has been signed which provides for the purchase of the
Bank of Troy, Troy, Tennessee, once due dilligence and regulatory
approval have been accomplished. Assets of the Bank of Troy were $57
million at June 30, 1997. The transaction is expected to be finalized
early in the first quarter of 1998.
The bank's strategic plan calls for future efforts to be focused on
controlled growth, efficiency and diversification of operations and
products. Strategies in place to accomplish Strategic Plan goals are as
follows:
(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 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; (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 service;
and (6) To establish a bank owned finance company as well as investigate
the addition of insurance sales to the bank's products. The most recent
market survey indicates that First Citizens holds over 51% of its
designated market. Customers surveyed indicated that the bank provides
quality service that meets customer expectations.
Fulltime equivalent employees at 6/30/97 were 155 up from 145 at
12/31/96. The increase is due to the employment of (1) 3 employees for
Delta Finance Company (a bank owned subsidiary opened the first quarter
of 1997); (2) two employees to establish a bank marketing department;
(3) one loan officer placed at the Mid-Town Branch to provide loan
services; and (4) four temporary staff members employed as relief staff
during vacation and peak time periods.
The bank continues to explore the possiblity of offering property and
casualty insurance sales to customers. All alternatives will be
explored to determine if a bank owned insurance company would be a more
profitable alternative than forming an alliance with an existing agency.
Another strategic action to improve operating efficiency and customer
service was the development of a Technology Strategic Plan. Action
goals were adopted that include the following: (1) Installation of
Document Imaging; (2) Evaluation of a marketing CIF system which will
allow for the identification of needs and opportunities which exist in
the current and potential customer base; (3) Maintaining the IBM AS/400
as the bank's primary technology infrastructure with a local area
network as a secondary communication structure; (4) Surveying the market
to identify the potential for Home Banking and Corporate Cash
Management. In response to these goals, a contract was signed with
Southern Data, Atlanta, Georgia for a document imaging system in
December, 1996. Installation was completed in June 1997. The Marketing
CIF System installed the fourth quarter of 1996, is producing desired
results in identifying products that meet customer specifications in
certain market segments. The first phase of a quality sales, quality
service program was introduced during first quarter, 1997. Results
of a Home Banking survey indicated a demand for telephone and P.C. home
banking products. First Citizens currently offers touchtone banking
service at no cost to the customer.
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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 through
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, competing for deposit dollars and earning
assets with three other banks, two of which 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 gain of approximately
1.5% 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
required for maintaining a satisfactory customer relationship moving
into the next decade and beyond. A 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 June 30, 1997, 1996, and 1995:
Non-Interest Income
(in thousands)
June 30 June 30 June 30
1997 % of Change 1996 % of Change 1995
Service Charges
on Deposit
Accts. $827 24.74% $663 10.50% $600
Other Income $677 (3.43%) $701 56.47% $448
Trust Income $383 2.96% $372 25.25% $297
TOTAL NON-INTEREST
INCOME $1,887 8.70% $1,736 29.07% $1,345
Total non-interest income is up over 8.70 percent and 29.07 percent when
comparing June, 1997 to June 1996 and 1995. The increase reflects a
continued focus on fee income and our commitment to diversifying the
income stream. Results of these efforts are evident when comparing
second quarter 1997 to previous years in the areas of trust, brokerage
and insurance commission income. In October, 1996 the Board approved
reallocating assets of approximately $3 million to purchase permanent
life insurance for officers having the rank of Vice President and up.
This program allows the bank to increase the retention rate of key
officers while continuing to earn income on the reallocated assets. In
the event of death of the insured Officer, the Bank's original
investment plus accrued interest will be repaid, as well as a death
benefit paid to designated beneficiaries. The plan is in effect at 800+
banks and is in full compliance with regulatory parameters as defined by
the Office of the Comptroller of the Currency. The 29 percent increase
in non-interest income in 1996 was the result of a 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.
Also in April, 1995 the overdraft fee for per item paid on an overdrawn
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deposit account, increased from $17.50 to $20.00 and the 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. In the first quarter of 1997,
the overdraft fee per item paid on an overdrawn deposit account
increased from $20.00 to $22.00.
Non-Interest Expense
1997 % of Change 1996 % of Change 1995
Salaries & Employee
Benefits $2,655 4.70% $2,536 4.50% $2,427
Net Occupancy
Expense $ 917 1.78% $ 901 7.17% $ 769
Other Operating
Expense $1,197 (7.79%) $1,298 (4.77%) $1,363
TOTAL NON-INTEREST
EXPENSE $4,769 .72% $4,735 3.86% $4,559
A review of Non-Interest Expense reflects ongoing efforts to monitor and
control non-interest expense categories such as Salaries and Benefits,
Net Occupancy Expense, and Other Operating Expense. Salaries and
Benefits increased 4.70% and 4.50% when comparing June 1997 to June,
1996 and 1995. Fulltime equivalent employees were 155 at quarter end
compared to 149 at March 31, 1997 and 145 at June 30, 1996. Increased
investment in technology resulted in an increase in Computer Expense and
the related depreciation to those investments. An ongoing strategic
planning goal is to automate manual processes through technology and at
the same time meet the technological needs of our customer base. Net
Occupancy Expense is projected to increase as technology is installed to
accomplish this goal. These costs will be offset in part by the
reallocation of employees to fee income producing positions. Other
Operating Expense continues to decline at a rate exceeding 7 percent
reflecting results of efforts to control inventory, professional
services and other expense categories.
Deposits
The average daily amount of deposits and average rates paid on such
deposits is summarized for the quarter ending June 30 for
the years indicated:
COMPOSITION OF DEPOSITS
(in thousands)
1997 1996 1995
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
Non-Interest
Bearing Demand
Deposits $ 27,096 - $ 26,303 - $ 25,348 -
Savings Deposits $ 82,517 3.38% $ 73,362 3.12% $ 64,485 3.03%
Time Deposits $150,177 5.48% $145,941 5.61% $138,484 6.01%
TOTAL DEPOSITS $259,790 4.24% $245,606 4.27% $228,317 4.50%
A review of composition of deposits for the years 1997, 1996, and
1995 reflects total deposit growth in excess of $14 million and
$17 million respectively. Growth in the deposit base was centered
primarily in Time Deposits reflecting a growth rate of 4%. Saving
deposits growth was 3.38%, while growth in interest bearing demand
deposits remains flat. Growth in total deposits continues to be a
challenge for First Citizens National Bank. The company's
marketplace is described as highly competitive, with a fairly
sophisticated customer base. Competition is aggressive for both
loans and deposits. According to a market share analysis,
Bancshares hold approximately 51% (excluding overnight and fixed
term repurchase agreements) of the bank deposits domiciled in Dyer
County. The bank competes with First Tennessee Bank, N.A. (23% of
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total county deposits), and Security Bank (14%). Union Planters
holds market share of 11 percent. First Citizens also competes
with Dyersburg City Employees Credit Union, seven or more consumer
finance companies, and other types of financial service providers
in the area. Competitor marketing programs are aggressive in
seeking new deposits dollars with advertising programs that offers
rates on certificates of deposit 50 basis points higher than any
rate offered by other local banks.
Average rate paid on deposits (4.24%) continues to reflect sound
asset/liability management strategy to maintain interest margins
that are consistent with company goals. A deposit strategy
adopted in 1996 encourages the purchase of selected jumbo Cd's
(i.e. State of Tennessee) as opposed to increasing funding costs,
by participating in rate wars" to secure local retail deposits.
Total deposits consisted of approximately $20 million in the State
of Tennessee Funds at quarter end. The implementation of a
quality sales quality service program is also expected to increase
deposit sales as well as provide for the cross selling of
additional products to form a total customer relationship profile.
Quality Sales, Quality Service program is scheduled to be
implemented in various phases beginning the first quarter, 1997.
An active Business Development program is in place to generate new
business and provide support for existing customers. Deposit
growth in the 1997 budget is projected at approximately 7 percent.
Sweep account funds totaling $14,159,000 are not included in the
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
$21,000,000 earning 4.00% at 6/30/97. 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 second quarter.
Management is continuously monitoring and enhancing the bank's
product line in order to retain existing customers and to attract
new customer relationships. Among new products on the market are
the "Visa Check Card" and "The Nest Egg Certificate of Deposit".
The Visa Check Card is an electronic check that allows our
customers another convenient method of accessing their checking
account funds without writing a check. The Nest Egg Certificate
of Deposit was introduced as a college savings fund for parents
which allows for a low opening balance and unlimited ongoing
deposits. Imaged deposit account statements continue to be a
success with 99.9 percent acceptance.
The following table sets forth the maturity distribution of
Certificates of Deposit and other time deposits of $100,000.00 or
more outstanding on the books of First Citizens on June 30, 1997:
Maturity Distribution Of Time Certificates Of Deposit
In Amounts of $100,000.00 Or More As Of June 30, 1997
(in thousands)
Maturity Total Amount
3 months or less $19,378
3 through 12 months $25,413
1 year - 3 years $ 4,473
over 3 years $ 300
Total $49,564
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A summary of average interest earning assets and interest bearing
liabilities is set forth in the following table together with
average yields on earnings assets and average costs on interest
bearing liabilities. The average yield on interest earning assets
reflects an increase when reviewing the information presented in
the table. Interest earning assets as of 6/30/97 were
$296,955,000 at an average rate of 9.11% compared to $278,894,000
average rate of 8.85% at 6/30/96. The average rate on total
interest bearing liabilities was 4.79%, 4.78%, and 5.08% as of
June 30, 1997, 1996, and 1995. Net yield on average earning
assets was 4.84%, 4.62%, and 4.38%, reflecting a downward movement
in interest rates beginning in mid 1996 and continuing into 1997.
Maintaining interest rate margins achieved in prior years
continues to be a challenge. As interest rates rise customers are
shopping banks to lock in the lowest rate possible on loans, while
deposit customers are shopping to lock in the highest rate on
deposits. 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
material negative impact of volatile swings in interest rates.
Interest margins are well managed to achieve acceptable profits
and a return on equity within policy guidelines.
14
First Citizens National Bank
Quarter Ending June 30
Monthly Average Balances and Interest Rates
(in thousands)
1997 1996 1995
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
ASSETS
INTEREST EARNING
ASSETS:
Loans (1)(2)(3) $216,306 $5,306 9.82% $201,919 $4,828 9.57% $178,914 $4,395 9.82%
Investment Securities:
Taxable $ 69,205 $1,251 7.23% $ 65,866 $1,126 6.84% $ 62,072 $1,030 6.63%
Tax Exempt (4) $ 11,216 $ 197 7.03% $ 10,886 $ 208 7.65% $ 10,165 $ 197 7.76%
Interest Earning
Deposits $ 203 $ 3 5.92% $ 135 $ 2 5.93% $ 164 $ 2 4.87%
Trading Account $ 0 $ 0 $ - $ - - $ - $ - -
Federal Funds Sold $ 25 $ 1 16.00% $ 83 $ 3 14.46% $ 3,211 $ 49 6.11%
Lease Financing $ 0 $ 0 0% $ 5 $ - - $ 10 $ 1 40.00%
Total Interest
Earning Assets $296,955 $6,758 9.11% $278,894 $6,167 8.85% $254,536 $5,674 8.92%
NON-INTEREST
EARNING ASSETS:
Cash and Due From
Banks $ 9,395 $ - - $ 9,549 $ - - $ 9,263 $ - -
Bank Premises and
Equipment $ 8,173 $ - - $ 8,585 $ - - $ 8,595 $ - -
Other Assets $ 8,347 $ - - $ 4,651 $ - - $ 4,707 $ - -
Total Assets $322,870 $ - - $301,679 $ - - $277,101 $ - -
LIABILITIES AND
SHAREHOLDERS' EQUITY:
INTEREST BEARING
LIABILITIES:
Savings Deposits $ 82,517 $ 697 3.38% $ 73,362 $ 572 3.12% $ 64,485 $ 490 3.03%
Time Deposits $150,177 $2,056 5.48% $145,941 $ 2,046 5.61% $138,484 $2,084 6.01%
Federal Funds
Purchased and
Other Interest
Bearing
Liabilities $ 32,093 $ 415 5.18% $ 28,101 $ 333 4.74% $ 24,410 $ 317 5.19%
Total Interest
Bearing
Liabilities $264,787 $3,168 4.79% $247,404 $ 2,951 4.78% $227,379 $2,891 5.08%
NON-INTEREST
BEARING
LIABILITIES:
Demand Deposits $ 27,096 $ - - $ 26,303 $ - - $ 25,348 $ - -
Other Liab. $ 1,847 $ - - $ 2,300 $ - - $ 1,979 $ - -
Total Liab. $293,730 $ - - $276,007 $ - - $254,706 $ - -
SHAREHOLDERS'
EQUITY $ 29,140 $ - - $ 25,672 $ - - $ 22,395 $ - -
TOTAL LIABILITIES
AND SHAREHOLDERS'
EQUITY $322,780 $ - - $301,679 $ - - $277,101 $ - -
NET INTEREST
INCOME $ - $3,590 - $ - $ 3,216 - $ - $2,783 -
NET YIELD ON
AVERAGE EARNING
ASSETS
(ANNUALIZED) $ - $ - 4.84% $ - $ - 4.62% $ - $ - 4.38%
[FN]
(1) Loan totals are shown net of interest collected, not
earned and Loan Loss Reserve.
(2) Non-accrual loans are included in average total loans.
(3) Loan Fees are included in interest income and the computations of
the yield on loans.
(4) Interest and rates on securities which are non-taxable for Federal
Income Tax purposes are presented on a taxable equivalent basis.
15
COMPOSITION OF LOANS
The bank's loan portfolio has experienced exceptional loan growth
as reflected in the Composition of Loans table. Total loans
increased $13,619,000 at 6/30/97 when compared to the same time
period in 1996. The largest percentage of growth is centered in
Real Estate Mortgage Loans. Mortgage loans have increased from
$116,719,000 at 6/30/96 to $130,584,000 at 6/30/97. The upward
trend is attributed to substantial growth in both population and
number of households recorded in Dyer County over the past decade.
Commercial, financial, and agriculture loans decreased $8,367,000
when comparing 1997 to 1996.
First Citizens is located in the Dyersburg/Dyer County trade area
having a population of approximately 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 2000. A diversified
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 for June was 5.1% up from 4.6% in May 1997 according to the
Tennessee Department of Employment Security. This compares to
Tennessee's unemployment rate of 5.0% for June, which is .1% lower
than our county's rate. During the first quarter of 1997, two
local manufacturing firms announced expansions which would add
jobs for people in Dyer County in 1997.
The provision for loan losses increased in proportion to loan
growth as required by loan policy. Problems loans at 6/30/97 were
$2,922,234 down from June 30, 1996 total of $3,540,038. Problem
loans represent 9.02% of gross capital funds as of May 31, 1997.
Watch loan totals as of quarter end are slightly over $44,000.
Past due loans totaled .76% of the total loan portfolio, are
slightly above peer group ratios. Total non performing was .88%
compared to peer group ratio of .75 percent. Loans reviewed
within the last twelve months (as of May 31, 1997 Internal Loan
Review Report) comprise $124,366,934 or 64% of the loan portfolio.
Problem loan and past due loan totals posted a significant
increase after April, 1996 due to the addition of one credit
totaling $991,029. First Citizens was made aware that the company
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. First Citizens is a holder of
outstanding debt on the company as of 6/30/97 totaling $700,000.
Charged off debt on this line totals approximately $291,000 as of
year end 1996. The bank holds approximately 176 leases. All
leases have been reinspected and we have no reason to believe that
fictitious or fraudulent leases are contained within our loan
portfolio. An allocation of $400,000 was added to the Loan Loss
Reserve to cover any existing exposure to the bank. Attorney's
representing First Citizens have reported that a settlement
agreement was filed in June, 1997 and that no additional loss is
expected. A partial recovery of the $291,000 is also projected.
Experience of Senior loan 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. Loan
Administration sets policy guidelines approved by the Board of
Directors regarding portfolio diversification and underwriting
standards. Loan policy includes board approved guidelines for
16
collateralization, loans in excess of loan to value limits,
maximum loan amount, maximum maturity and amortization period for
each loan type. Policy guidelines for loan to value ratio and
maturities related to various collateral are as follows:
Collateral Max. Amortization Max. LTV
Real Estate Amort. discussed herein Amort. discussed herein
Equipment 5 Years 75%
Inventory 5 Years 50%
A/R 5 Years 75%
Livestock 5 Years 80%
Crops 1 Year 50%
*Securities 10 Years 75% (Listed)
50% (Unlisted)
*Maximum LTV on margin stocks (stocks not listed on a national
exchange) when proceeds are used to purchase or carry same, shall
be 50%.
Diversification of the banks' real estate portfolio is a necessary
and desirable goal of the bank's real estate loan policy. In
order to achieve and maintain a prudent degree of diversity, given
the composition and general economic state of the bank's market
area, the bank will strive to maintain a real estate loan
portfolio diversification based on the following:
*Agricultural loans totaling in aggregate no more than 20% of the
Bank's total loans;
*Land acquisition and development loans totaling in aggregate no
more than 10% of the Bank's total loans;
*Commercial construction loans totaling in aggregate no more than
10% of the Bank's total loans;
*Residential construction loans totaling in aggregate no more than
10% of the Bank's total loans;
*Residential mortgage loans totaling in aggregate no more than 40%
of the Bank's total loans; and
*Commercial loans totaling in aggregate no more than 30% of the
Bank's total loans.
It is the policy of FCNB that no real estate loan will be made
(except in accordance with the provisions for certain loans in
excess of supervisory limits provided for hereinafter) that exceed
the loan-to-value percentage limitations ("LTV limits") designated
by category as follows:
Loan Category LTV Limit (%)
Raw Land 65
Land Development or Farmland 75
Construction:
Commercial, multi-family, and
other non-residential 80
1-to-4 family residential 80
Improved Property 80
Owner-occupied 1-to-4 family
and home equity 80
Multi-family construction loans include loans secured by
cooperatives and condominiums. Owner-occupied 1-to-4 family and
home equity loans which equal or exceed 90% LTV at origination
must have either private mortgage insurance or other readily
marketable collateral pledged in support of the credit.
17
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 aggregate amount of unused guarantees, commitments to extend
credit and standby letters of credit was $38,261,000 as of
6/30/97.
The average yield on loans of First Citizens National Bank for the
second quarter of the years indicated is as follows:
1997 - 9.82%
1996 - 9.57%
1995 - 9.82%
1994 - 9.10%
1993 - 9.38%
18
The following table sets forth loan totals net of unearned income
by category for the past five years:
June 30
(in thousands)
1997 1996 1995 1994 1993
Real Estate Loans:
Construction $ 20,579 $ 14,924 $ 12,619 $ 8,681 $ 6,881
Mortgage $130,584 $116,719 $102,235 $ 91,510 $ 83,383
Commercial, Financial
and Agricultural Loans $ 44,912 $ 53,279 $ 48,010 $ 44,164 $ 35,433
Installment Loans to
Individuals $ 24,485 $ 22,083 $ 20,518 $ 16,953 $ 15,233
Other Loans $ 2,314 $ 2,250 $ 1,978 $ 3,998 $ 2,098
TOTAL LOANS $222,874 $209,255 $185,360 $165,306 $143,028
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 $93,336,000 or 43.5% of the total portfolio are subject
to repricing with one year or carry a variable rate of interest.
The ratio is down slightly from 43.71% at 6/30/96. Maturities in
the one to five year category total $132,105,000, reflecting an
increase of $10.9 million when compared to 3/31/97.
Due after
Due in one one year but Due after
year or less within five years five years
(in thousands)
Real Estate $36,286 $93,755 $21,122
Commercial, Financial
and Agricultural $24,842 $17,704 $ 2,366
All Other Loans $ 6,049 $20,646 $ 104
TOTAL $67,177 $132,105 $23,592
Loans with Maturities After One Year for which:
(in thousands)
Interest Rates are Fixed or Predetermined $129,538
Interest Rates are Floating or Adjustable $ 26,159
NON-PERFORMING ASSETS
Non-performing assets as of 6/30/97 were .54 percent of total
loans compared to .88 percent at 6/30/96. Total non-performing
loans at quarter end consisted primarily of one credit in the
amount of $700,000 (discussed in the section titled Composition of
Loans). The credit is in the process of collection through a
Bankruptcy Agreement and no additional loss to the bank is
expected. Total non-performing decreased $628,000 or 36.40
percent when comparing 6/30/97 to 6/30/96. Request for payment
was made from Federal Farm Service Agency on four agriculture
credits totaling approximately $845,000 the first quarter of 1997.
Payments were received and the accounts removed from the non-
performing asset list during the second quarter of 1997. Non-
performing loans continue to be at a manageable level and below
peer group ratio of .78 percent (as of 3/31/97).
19
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 past due test for the non-accrual of interest
discussed above, the date on which an asset reaches non-accrual
status is determined by its contractual term. A debt is well
secured if it is secured (1) by collateral in the form of liens or
pledges or real or personal property, including securities that
have a realizable value sufficient to discharge the debt
(including accrued interest) in full, or (2) by the guaranty of a
financially responsible party. A debt is considered to be
proceeding in due course either through legal action, including
judgement enforcement procedures, or, in appropriate
circumstances, through collection efforts not involving legal
action which are reasonably expected to result in repayment of the
debt or in its restoration to a current status. Loans that
represent a potential loss to First Citizens are adequately
reserved for in the provision for loan losses.
Interest income on loans is recorded on an accrual basis. The
accrual of interest is discontinued on all loans, except consumer
loans, which become 90 days past due, unless the loan is well
secured and in the process of collection. Consumer loans which
become past due 90 to 120 days are charged to the allowance for
loan losses. Gross interest income that would have been recorded
for the six months ending 6/30/97 if all loans reported as non-
accrual had been current in accordance with their original terms
and had been outstanding throughout the period is $54,000.
Interest income on loans reported as ninety days past due and on
interest accrual status was $11,000 for year-to-date 1997. Loans
on which terms have been modified to provide for a reduction of
either principal or interest as a result of deterioration in the
financial position of the borrower are considered to be
Restructured Loans. Restructured loan total at June 30, 1997
was zero.
Loans classified by regulatory examiners and not reported under
non-accrual, past due or restructured pose no significant credit
problems. Loan Officers are required to develop a "Plan of
Action" for each problem loan within their portfolio. Adherence to
each established plan is monitored by Loan Administration and
reevaluated at regular intervals for effectiveness.
The following table sets forth the balance of non-performing loans
as of June 30, for the years indicated:
Non-Performing Loans
June 30
(in thousands)
90 Days Past Due
Year Non-Accrual Accruing Interest Total
1997 $1,097 $ 225 $1,322
1996 $1,725 $ 116 $1,841
1995 $ 869 $ 490 $1,359
1994 $ 889 $ 520 $1,409
1993 $1,466 $ 142 $1,608
20
LOAN LOSS EXPERIENCE AND
RESERVES FOR LOAN LOSSES
During the quarter just ended activity to the Reserve Account
consisted of (1) loan charge-offs - $79,000 (2) recovery of loans
previously charged off - $38,000 and (3) additions to Reserve -
$191,000. 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 overdrawn
deposit accounts. The Reserve for Loan Losses Balance at quarter
end was $2,596,000 or 1.21% of total loans. Bank policy mandates
a reserve balance equal to one percent of total loans. Projected
charge-offs for the year are approximately $200,000.
An analysis of the allocation of the allowance for Loan Losses is
made on a fiscal quarter at the end of the month, (February, May,
August, and November) and reported to the Board at its meeting
immediately preceding quarter-end. Requirements of FASB 114 & 118
have been incorporated into the policy for Accounting by Creditor
for Impairment of a Loan. A loan is impaired when it is probable
that a creditor will be unable to collect all amounts due of
principal and interest according to the original contractional
terms of the loan. First Citizens adopted the following as a
measure of impairment: (1) Impairment of a loan at First Citizens
shall exist when the present value of expected future cash flows
discounted at the loans effective interest rate impede full
collection of the contract; and (2) Fair Value of the collateral,
if the loan is collateral dependent, indicates unexpected
collection of full contract value. The Impairment decision will
be reported to the Board of Directors and other appropriate
regulatory agencies as specified in FASB 114 and 118. The bank
will continue to follow regulatory guidelines for income
recognition for purposes of generally accepted accounting
principles, as well as regulatory accounting principles.
An annual review of the loan portfolio to identify risks will
cover a minimum of 70% of the gross portfolio less installment
loans. In addition, any single note or series of notes directly
or indirectly related to one borrower which equals 25% of the
bank's legal lending limit will be included in the review.
For analysis purposes loans reviewed will be separated into five
classifications:
1. Pass - Loans that have been reviewed and graded high quality
or no major deficiencies.
2. Watch - Loans which, because of unusual circumstances, need
to be supervised with slightly more attention than is
customary.
3. Problem - Loans which require additional collection effort to
liquidate both principal and interest.
4. Specific Allocation - Impaired loans, in total or in part, in
which a future loss is possible.
5. Charge-Off
Examples of factors taken into consideration during the review
are: Industry or geographic economic problems, sale of business,
change of or disagreement among management, unusual growth or
expansion of the business, past due for either principal or
interest 90 days, placed on non-accrual or renegotiated status,
renewed four times without principal reduction, declining
financial condition, adverse change in personal life, frequent
overdrafts, lack of cooperation by borrower, decline in
marketability or market value of collateral, insufficient cash
flow, and inadequate collateral values.
21
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 12/31/97 to be as follows:
Domestic Amount
Commercial, Financial & Agricultural $ 50,000
Real Estate-Construction -0-
Real Estate-Mortgage
Installment Loans to individuals &
credit cards 150,000
Lease financing -0-
Foreign N/A
01/01/97 through 12/31/97 Total $200,000
The book value of repossessed real property held by Bancshares and
First Citizens National Bank at 6/30/97 is $164,000 compared to
$853,000 at 6/30/96 and $941,000 at 6/30/95. The balance was
significantly reduced as a result of the sale of a strip shopping
center in November 1996. The remaining balance held in
repossessed real property represents 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.
22
All other real estate parcels held as ORE are appraised annually
and the carrying value adjusted to reflect the decline, if any, in
its realizable value. Such adjustments are charged directly to
expense.
The following table summarizes the monthly average of net loans
outstanding; changes in the reserve for loan losses arising from loans
charged off and recoveries on loans previously charged off; additions to
the reserve which have been charged to operating expense; and the ratio
of net loans charged off to average loans outstanding.
Loan Loss Experience and Reserve for Loan Losses
Quarter ending June 30
(in thousands)
1997 1996 1995 1994 1993
Average Net Loans
Outstanding $216,306 $201,924 $178,924 $156,658 $140,410
Balance of Reserve
for Loan Losses
at Beginning of
Period $ 2,446 $ 2,289 $ 2,115 $ 1,795 $ 1,832
Loan Charge-Offs $ (79) $ (96)$ (56) $ (50) $ (69)
Recovery of Loans
Previously Charged Off $ 38 $ 32 $ 41 $ 34 $ 38
Net Loans Charged Off $ (41) $ (64)$ (15) $ (16) $ (31)
Additions to Reserve
Charged to Operating
Expense $ 191 $ 134 $ 86 $ 100 $ 119
Balance at End of
Period $ 2,596 $ 2,359 $ 2,186 $ 1,879 $ 1,920
Ratio of Net Charge-
Offs during quarter
to Average Net Loans
Outstanding (.02%) (.04%) (.01%) (.01%) (.02%)
The following table will identify charge-offs by category
for the period ending 6/30/97.
Charge-Offs: 1997 1996
Domestic
Commercial, Financial and Agricultural $ 0 $42
Real Estate - Construction 0 0
Real Estate - Mortgage 0 10
Installment Loans to Individuals 65 40
Lease Financing 0 0
Credit Cards 14 4
Total $(79) $(96)
Recoveries:
Domestic:
Commercial, Financial and Agricultural $ 14 $ 6
Real Estate - Construction 0 0
Real Estate - Mortgage 1 1
Installment Loans to Individuals 19 21
Lease Financing 0 0
Credit Cards 4 4
Total $ 38 $ 32
Net $(41) $(64)
23
INVESTMENT SECURITIES
The book value of listed investment securities as of the dates
indicated are summarized as follows:
Composition of Investment Securities
June 30
(in thousands)
1997 1996 1995 1994 1993
U. S. Treasury &
Government Agencies $66,322 $63,154 $53,754 $46,480 $53,792
State & Political
Subdivisions $11,321 $10,756 $10,019 $14,093 $ 8,496
All Others $ 3,032 $ 3,435 $ 4,151 $ 6,021 $ 5,144
TOTALS $80,675 $77,345 $67,924 $66,594 $67,432
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 second quarter, 1997 were up $3.3 million when
compared to the same time period in 1996. 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%.
Tax Free Investments total approximately $11,321,000. Book value
of Municipal securities totaling $850,000 were purchased and
placed in the Held to Maturity account during the second quarter,
1997. Second quarter sales totaled $967,456.92. Sales made from
the available for sale account reflected a profit of $5,944.
Investment activity, which decelerated during second quarter as a
result of increased loan demand, is expected to remain suppressed
through 1997. Book value compared to market value resulted in a
positive variance of $44,000. The average maturity of the
portfolio is 5 years and 9.3 months. The average pretax yield at
6/30/97 was 6.84%.
Fixed rate holdings currently have an expected average life of
2.9 years. It is estimated that this average life would extend
to 4.9 years should rates rise 100 basis points and 5.3 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. Should rates decline 100 basis points the
average life would likely decrease to 2.0 years.
In terms of price sensitivity, we estimate that if rates were to
increase 100 basis points, market value of the portfolio would
fall by 3.0%, while rates rising 200 basis points would impact the
market value by a negative 7.0%. This is comparable with the
price sensitivity of the 3 to 4 year Treasury bond, which is
consistent with the current average life of the portfolio. If
rates go down 100 basis points we estimate that market value would
increase by 2.4%.
Adjustable rate holdings reprice on an annual or more frequent
basis and currently have an average life of 9.0 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.
24
FASB 115 required banks to maintain separate investment portfolio
accounts for Held-To-Maturity, Available-For-Sale, and Trading
Account Investments.
As of June 30, 1997 approximately 58.83% of the total portfolio
was placed in the Available-for-Sale account. The remaining
41.17% was booked in the Held-to-Maturity 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-Maturity Account Investments are stated at amortized cost
on the balance sheet. Mark to Market, requirements of FASB 115
resulted in a positive capital entry of $65,000.
Maturities in the portfolio are made up of 7% within one year, 50%
after one year and within five years, 30% after five years and
within 10 years, and 13% after 10 years. Policy provides for 20%
maturities on an annual basis. Maturities were extended from 5 to
10 years on most securities purchased since the latter half 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.
25
First Citizens National Bank does not engage in derivative
activities as defined by paragraph 5 thru 7 of FASB 119 (reference
footnote 7).
Investment Securities
Held to Maturity Available for Sale
June 30, 1997
(in thousands)
Amortized Fair Amortized Fair
Cost Value Cost Value
U.S. Treasury Securities $ 2,002 $ 2,000 $ 5,990 $ 6,025
U.S. Government agency
and corporation obligations
(exclude mortgage-backed
securities):
Issued by U.S. Government
agencies (2) 0 0 0 0
Issued by U.S. Government-
sponsored agencies (3) 21,659 21,618 26,592 26,614
Securities issued by states
and political subdivisions
in the U.S.:
General obligations 3,678 3,681 3,687 3,700
Revenue obligations 3,230 3,232 701 713
Industrial development and
similar obligations 0 0 0 0
Mortgage-backed securities (MBS):
Pass-through securities:
Guaranteed by GNMA 277 283 3,750 3,784
Issued by FNMA and FHLMC 725 729 338 335
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 1,127 3,766 3,759
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 500 500 0 0
Foreign debt securities 0 0 0 0
Equity securities:
Investments in mutual funds
Other equity securities with
readily determinable fair
values 0 0 749 752
All other equity securities (1) 0 0 1,779 1,779
Total (4) 33,214 33,170 47,352 47,461
(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 mortgage back securitites) 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.
(4) Includes Parent and Subsidiary.
26
Investment Securities
Unrealized Gains/(Losses)
June 30, 1997
Unrealized Unrealized Net
Gains Losses Gains/Losses
U.S. Treasury Securities 68 33 (35)
Obligations of U.S. Government
Agencies and Corp 354 355 (1)
Obligations of States and
Political Subdivisions 56 25 (31)
Fed Reserve & Corp Stock 0 0 0
Totals 478 413 65
Maturity and Portfolio Percentages June 30, 1997
(in thousands)
After One Year After Five Years After
Within One Year Within Five Years Within Ten Years Ten Years
Amount % Amount % Amount % Amount %
6/30/97 $26,681 (33%) $25,832 (32%) $16,725 (21%) $11,437 (14%)
6/30/96 $ 5,329 (7%) $38,620 (50%) $22,895 (30%) $10,501 (13%)
6/30/95 $ 3,279 (5%) $49,381 (73%) $11,609 (17%) $ 3,655 (5%)
6/30/94 $16,058 (24%) $31,208 (47%) $13,604 (20%) $ 5,724 (9%)
6/30/93 $17,023 (25%) $41,179 (61%) $ 1,407 (2%) $ 7,823 (12%)
Maturity and Yield on Securities June 30, 1997
(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 $23,817 6.64% $19,536 6.87% $12,458 6.94% $10,511 7.33%
State and Political
Subdivisions* $ 2,364 7.03% $ 6,296 6.73% $ 1,735 7.59% $ 926 7.65%
All Others $ 500 6.12% $ - -% $ 2,532 6.92% $ - -%
TOTALS $26,681 6.67% $25,832 6.57% $16,725 7.01% $11,437 7.36%
<FN>
*Yields on tax free investments are stated herein on a taxable
equivalent basis.
Parent Company's investments are included in the table.
27
Return on Equity and Assets
Return on assets is a measurement of the firms ability to
maximize asset utilization. Total assets at 6/30/97 was
$333,020,000. Efforts continue to focus on positioning the
company for future growth and profitability through
improvements in technology, solid growth in the deposit base
and efficient utilization of the branch distribution system.
Accelerated asset growth coupled with rising interest rates
had a significant impact on earnings in 1995. Results of
operations for 1996 and second quarter of 1997 reflect
continuous improvement.
The company's strategic plan addresses objectives to sustain
improved earnings, maintain a quality loan and investment
portfolio and to maintain market share by providing quality
customer service. The Bank's management and employees are
rewarded with incentive compensation based on various
factors including the level of ROA achieved at year end. A
return on assets of 2.00% is required if maximum benefits
are to be realized.
Total Shareholder's equity (including Loan Loss Reserve) of
First Citizens Bancshares as of 6/30/97 was $34,161,000
compared to $27,728,000 at 06/30/96.
Percentage of Dividends declared per common share to net
income per common share increased on a consistent basis for
the years under comparison when 1995 is excluded. Suppressed
earnings in 1995 distorted the ratio. Number of shares
outstanding continues to increase as a result of shares
issued on a quarterly basis to service the Dividend
Reinvestment Program. A stock repurchase program has been
proven to be ineffective in creating availability of shares.
Shareholders continue to express an interest in buying
additional stock rather than selling shares. Under terms of
the repurchase program, the company would repurchase up to
$200,000 of Bancshares' stock in a calendar quarter on a
first come first served basis. Second quarter, 1997
"Application was made to increase the allocation of stock to
service the Dividend Reinvestment Program by 200,000
shares". 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.
28
The table below presents for First Citizens Bancshares, Inc.
certain operating ratios year-to-date as of June 30: (not
annualized)
1997 1996 1995 1994
Percentage of Net Income to:
Average Total Assets .72% .65% .50% .65%
Average Shareholders Equity 7.61% 7.09% 5.51% 7.06%
Percentage of Dividends Declared
Per Common Share to Net Income
Per Common Share 26.09% 24.95% 32.28% 23.81%
*Percentage of Average
Shareholders' Equity to
Average Total Assets 10.23% 9.87% 9.98% 9.92%
*Represents primary capital - including reserve for loan
losses account
LIQUIDITY AND INTEREST RATE SENSITIVITY
Liquidity is the ability to meet the needs of our customer
base for loans and deposit withdrawals by maintaining assets
which are convertible to cash equivalents with minimal
exposure to interest rate risks. Liquidity is determined by
a comparison of net liquid assets to net liabilities and
consistently remains between 10 and 15 percent. The
stability of our deposit base, sound/asset liability
management, a strong capital base and quality assets support
adequate liquidity. In addition, membership in the Federal
Home Loan Bank avails the bank of a potential creidt line
exceeding $45,000,000. During the quarter just ended
borrowings from this liquidity source averaged $31,416,000
per day. Strong loan demand and seasonal growth in
agricultural lines of credit historically places the bank in
a tight liquidity position May through October. Loan to
deposit ratio excluding repurchase agreements and Federal
Home Loan Bank borrowings is 84.74% at 6/30/97. Deposit
growth since year end was slightly over 2.5%, while loan
growth exceeded 5.44 percent. Loan to asset ratio for the
same period is 66.68%.
Historical liquidity analysis of second and third quarter of
each year confirm an illiquid cash flow due to funding
agriculture lines of credit. However, by November of each
year the liquidity position improves and the bank moves from
borrowing short term funds to a position of selling short
term funds. Projected short term borrowings for July 1,
1997 to October 31, 1997 are expected to range from $6 - $12
million.
To address liquidity concerns the bank has the following
sources available: (1) Approved lines of credit with the
Federal Home Loan Bank totaling $14.5 million and
correspondent banks totaling $8.5 million; (2) Loans in
excess of $67 million maturing in one year or less; and (3)
Investment Securities totaling $26 million with maturity
dates of one year or less. At June 30, 1997 Federal Home
Loan Borrowings totaled $10 million. Other sources of
liquidity or non-core fundings is the State of Tennessee
(jumbo CDs). The state has $20 million in CDs with First
Citizens as of 6/30/97. The average rate associated with
these deposits is 5.60%. These funds are utilized to
earmark specific asset needs.
29
Interest rate sensitivity varies with different type
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 more interest
rate 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. Simulations are utilized for
interest rate risk management over gap statements due to the
validity of the data. Gap statements do not reflect actual
characteristics of the bank.
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 net interest income exposure to
Tier I Capital shall not exceed 2.00%. Interest rate risk
is separated and analyzed according to the following
categories of risk: (1) repricing (2) yield curve (3) option
risk (4) price risk and (5) basis risk. Trading assets are
utilized infrequently and are addressed in the investment
policy. Any unfavorable trends reflected in interest rate
margins will cause an immediate adjustment to the bank's gap
position or asset/liability management strategies. The
following data schedule reflects a summary of First
Citizens' interest rate risk using simulations. The
projected 12 month exposure is based on 5 different rate
movements (flat, rising, or declining). Three different
rate scenarios were used for rising rates since First
Citizens is liability sensitive.
Interest Rate Risk
(in thousands)
1997 1996
Fixed Rate Loans > 5 Years $15,724 $9,620
$2 million of this is
matched with FHLB
Exposure - 1997 vs 1996 -
Actual results from prior year $ 94 positive
Exposure - 1997 vs 1995 -
Actual results from prior year $155 positive
Ranges Ranges
Projected 12 month exposure,
utilizing 5 rate scenarios
(Pos or Neg) $ 87 $ 345
Tier I Capital 31,374 31,374
Percent of Tier I Capital 0.28% 1.10%
Policy 2.00% 2.00%
30
CONDENSED GAP REPORT
------------------------------------
FIRST CITIZENS NATIONAL BANK CURRENT BALANCES
DYERSBURG, TN -----------------------------------
06/30/97
(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
CASH AND DUE FROM 14,026 - - - - - - - 14,026
MONEY MARKET 204 204 - - - - - - -
TOTAL CASH &
DUE FROM 14,230 204 - - - - - - 14,026
INVESTMENTS
US TREASURIES 8,027 - - - - 1,700 1,777 1,987 2,563
US AGENCIES 44,105 - - - - 3,424 3,423 4,052 33,206
VARIABLE AGENCIES 13,493 - - 3,500 500 5,000 4,493 - -
MUNICIPALS 11,321 - - - - 1,000 1,364 1,683 7,274
CORP & OTHERS 500 - - - 500 - - - -
EQUITIES 2,531 - - - - - - - 2,531
TOTAL INVESTMENTS 79,977 - - 3,500 1,000 11,124 11,057 7,722 45,574
LOANS
COMMERCIAL FIXED 29,806 - 2,299 1,219 550 3,426 9,492 2,226 10,594
COMMERCIAL
VARIABLE 13,777 - 13,777 - - - - - -
REAL ESTATE-
VARIABLE 17,877 - 16,765 - 4 1,108 - - -
REAL ESTATE FIXED 127,472 - 1,977 4,470 1,734 12,339 11,868 17,782 77,302
HOME EQUITY LOANS 5,052 - 4,432 - - - 620 - -
SEC MORTGAGE 762 - - - - - - - 762
INSTALLMENT LOANS 23,348 - 545 295 296 823 1,737 4,142 15,510
INSTALLMENT VARIABLE 39 - 39 - - - - - -
FINANCE COMPANY 1,098 - - - - - 1,098 - -
FLOOR PLAN 445 445 - - - - - - -
CREDIT CARDS 1,689 - - - - - 1,689 - -
FACTORING REC 136 - - - - - - 136 -
OVERDRAFTS 489 - 489 - - - - - -
NON-ACCRUAL LOANS 884 - - - - - - - 884
TOTAL LOANS 222,874 445 40,323 5,984 2,584 17,696 26,504 24,286 105,052
LOAN LOSS RESERVE 2,596 - - - - - - - 2,596
NET LOANS 220,278 445 40,323 5,984 2,584 17,696 26,504 24,286 102,456
FED FUNDS SOLD
TOTAL EARNING
ASSETS 300,255 445 40,323 9,484 3,584 28,820 37,561 32,008 148,030
OTHER ASSETS
BUILDING, F&F
& LAND 8,239 - - - - - - - 8,239
OTHER ASSETS 8,729 - - - - - - - 8,729
TOTAL OTHER ASSETS 16,968 - - - - - - - 16,968
TOTAL ASSETS 331,453 649 40,323 9,484 3,584 28,820 37,56 132,008 179,024
DEMAND DEPOSITS 26 - - - - - - - 26
TOTAL DEMAND 26 - - - - - - - 26
31
CONDENSED GAP REPORT
------------------------------------
FIRST CITIZENS NATIONAL BANK CURRENT BALANCES
DYERSBURG, TN -----------------------------------
06/30/97
(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 17,234 17,234 - - - - - - -
NOW ACCOUNTT 25,490 25,490 - - - - - - -
BUSINESS CHECKING 201 201 - - - - - - -
IMF MMDA 12,160 12,160 - - - - - - -
FIRST RATE
ACCOUNT 22,988 22,988 - - - - - - -
DOGWOOD CLUB 4,442 4,442 - - - - - - -
TOTAL SAVINGS 82,515 82,515 - - - - - - -
TIME DEPOSITS
CD 1-2 MONTHS 6,868 - 4,237 629 2,002 - - - -
CD 3 MONTHS 898 - 435 185 230 48 - - -
CD 4-5 MONTHS 14,857 - 726 2,026 2,000 10,105 - - -
CD 6 MONTHS 22,003 - 4,341 2,690 3,191 10,644 1,137 - -
CD 7-11 MONTHS 2,846 - 643 549 669 604 381 - -
CD 12 MONTHS 14,511 - 513 2,047 2,118 4,295 5,366 172 -
CD 13-17 MONTHS 7,974 - - - 111 14 5,167 2,682 -
CD 18-23 MONTHS 742 - - - 47 208 70 417 -
CD 24 MONTHS 6,836 - 258 59 19 539 1,364 4,587 10
CD 25-30 MONTHS 7,682 - 17 - 6 121 913 6,521 104
CD 31-59 MONTHS 12,456 - 1,868 198 607 1,581 3,439 506 4,257
CD 31-59 MONTHS
VARIABLE 102 - - 12 - - 75 - 15
CD 60 MONTHS 6,296 - 299 120 107 417 966 2,071 2,316
CD 60 MONTH VAR. 1,052 - - - - 1,052 - - -
CD SWEET 16 25,475 - 1,805 1,962 2,042 2,330 11,322 6,014 -
CD 7 MONTHS 2,259 - 609 546 276 405 423 - -
IRA FLOATING 183 - 183 - - - - - -
IRA FIXED 20,347 - 581 911 663 1,751 4,241 6,414 5,786
CHRISTMAS CLUB 295 - - - - - 295 - -
TOTAL TIME 153,682 - 16,515 11,934 14,088 34,114 35,159 29,384 12,488
TOTAL DEPOSITS 236,223 82,515 16,515 11,934 14,088 34,114 35,159 29,384 12,514
FED FUNDS
PURCHASED 2,400 - 2,400 - - - - - -
TT&L 1,000 1,000 - - - - - - -
SECURITIES SOLD-
SWEEP 14,159 14,159 - - - - - - -
SECURITIES SOLD-
FIXED 7,385 - 5,600 499 600 200 - 386 100
FHLB-SHORT TERM 3,975 3,975 - - - - - - -
FHLB-LIBOR INVEST.1,947 - 1,947 - - - - - -
FHLB-LONG TERM 1,965 - - - - - - - 1,965
FHLB-PRIME RATE
ADVANCE 2,497 2,497 - - - - - - -
NOTES PAYABLE-
FINANCE 1,112 112 - - - - 1,000 - -
TOTAL SHORT TERM
BORR. 36,440 21,743 9,947 499 600 200 1,000 386 2,065
OTHER LIAB. 2,147 - - - - - - - 2,147
TOTAL OTHER LIAB. 2,147 - - - - - - - 2,147
TOTAL LIAB. 274,810 104,258 26,462 12,433 14,688 34,314 36,159 29,770 16,726
CAPITAL
STOCK, SURPLUS,
P.I.C 6,000 - - - - - - - 6,000
UNREALIZED GAIN
(LOSSES) 66 - - - - - - - 66
UNDIVIDED
PROFITS 23,936 - - - - - - - 23,936
TOTAL CAPITAL 30,002 - - - - - - - 30,002
TOTAL LIAB'S &
CAPITAL 304,812 104,258 26,462 12,433 14,688 34,314 36,159 29,770 46,728
GAP (SPREAD) - -103,609 13,861 -2,949 -11,104 -5,494 1,402 2,238 132,296
GAP % TOTAL ASSETS - -31.26 4.18 -0.89 -3.35 -1.66 0.42 0.68 39.91
CUMULATIVE GAP - -103,609-89,748-92,697-103,801-109,295-107,893-105,655 -26,641
CUM GAP %
TOTAL ASSETS - -31.26 -27.08 -27.97 -31.32 -32.97 -32.55 -31.88 8.04
SENSITIVITY RATIO - 0.01 0.31 0.35 0.34 0.43 0.53 0.59 1.09
32
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. Simulations will be utilized to reflect the impact of
multiple rate scenarios on net interest income. Decisions
should be made that increase net interest income, while
always considering the impact on interest rate risk.
Overall, the bank will manage the gap between rate sensitive
assets and rate sensitive liabilities to expand and contract
with the rate cycle phase. Approxiamtely 20% - 30% of our CD
customers have maturities of 6 months or less. First Citizens
will attempt to minimize interest rate risks by increasing
the volume of variable rate loans within the portfolio. The
bank should limit the net interest income exposure to a
maximum of 2.00% of tier I capital. (Example .02 x
$26,857,000 = $537,140). The bank's Asset/Liability
Committee will try to improve nee interest income through
volume increases and better pricing techniques. Long term
fixed rate positions should be held to a minimum, by
increasing variable rate loans. The over 5 year fixed rate
loans should be held to less than 25% assets, unless they are
funded with Federal Home Loan Bank matched funds. These
maximum limits are the high points and the ALCO will strive
to keep the amount below this point. The dynamic 03/31/96 gap
reports reflects an exposure of $121,000 to $338,000 if rate
risk reports on a quarterly basis. (Examples: historical
margins graphed and multiple scenarios reflecting income
exposure and as a percent of tier I capital.
Subsidiaries as well as the Parent Company will adhere to
providing above average margins and reviewing the various
material risks. New products and services will be reviewed
for risk by the Product Development Committee.
6. FCNB would benefit from a flat rate environment. If interest
rates rise rapidly, net interest income could be adversely
impacted. First Citizens Liquidity could be negatively
impacted should interest rates drop prompting an increase in
loan demand. Adequate lines of credit are available to
handle liquidity needs.
33
Capital Resources
Total shareholders' equity of First Citizens Bancshares as of June
30, 1997, was $31,565,000. Capital as a percentage of total
assets for the quarter ending June 30, is presented in the
following table for the years indicated (excluding Loan Loss
Reserves):
1997 1996 1995 1994 1993
9.48% 8.93% 9.09% 9.14% 8.82%
Increasing the capital base of the Company is a vital part of
strategic planning. Although the present capital to asset ratio
remains well in excess of the level required by regulators for
banks our size, management is aware of the importance of this
base.
Risk-based capital focuses primarily on broad categories of credit
risk and incorporates elements of transfer, interest rate and
market risks. The calculation of risk-based capital ratio is
accomplished by dividing qualifying capital by weighted risk
assets. The minimum risk-based capital ratio established by the
Federal Reserve is 8 percent. At least one-half or 4% must
consist of core capital (Tier 1), and the remaining 4% may be in
the form of core (Tier 1) or supplemental capital (Tier 2). Tier
1 capital/core capital consists of common stockholders equity,
qualified perpetual stock and minority interests in consolidated
subsidiaries. Tier 2 Capital/Supplementary Capital consists of
the allowance for loan and lease losses, perpetual preferred
stock, term subordinated debt, and other debt and stock
instruments. Bancshares' capital consists entirely of Tier 1
components, with the exception of the allowance for loan and lease
losses.
Bancshares has historically maintained capital in excess of
minimum levels established by the Federal Reserve Board. The
risk-based capital ratio reflects continuous improvement when
reviewing years included in the above table. Risk-based capital
ratio as of 6/30/97 was 14.82%, significantly in excess of the 8%
mandated by Regulatory Authorities. Growth in capital will be
maintained through retained earnings. There is no reason to
assume that income levels will not be sufficient to maintain an
adequate capital ratio.
Effects of Inflation
Inflation has a significant impact on the growth of total assets
in the banking industry, resulting in a need to increase equity
capital in order to maintain an appropriate equity to asset ratio.
While the current inflationary environment appears stable, efforts
to monitor the situation for any indication of change will be
ongoing.
Operating expenses are directly affected by increases in salaries
and employee benefits, supplies, legal, audit and professional
fees, utilities, advertising and insurance. Now that interest
rates have been deregulated, inflation is a major key to the cost
of acquiring and retaining deposits.
A well managed asset/liability management program can maximize net
interest income; and at the same time, reduce the impact of
inflation on earnings.
34
Part II - Other Information
Item 1. Changes in Securities
Dividends paid to Shareholders of First Citizens Bancshares, Inc.
are funded by dividends to the Bank Holding Company from First
Citizens National Bank. Federal Reserve Bank regulators would be
critical of a bank holding company that pays cash dividends not
covered by earnings or that are funded from borrowings or unusual
or non-recurring gains, such as the sale of property or assets.
Under rules set forth by the Comptroller of the Currency in
Interpretive Ruling 7.6100, the board of directors of a national
bank may declare dividends as it may judge to be expedient,
subject to statutory limitations which deal with the balance of
the surplus account, sufficiency of net profits, dividend payments
on preferred stock, and default of any assessment due to the
Federal Deposit Insurance Corporation.
Item 6(b) No reports on Form 8-K were filed for the quarter ended
6/30/97.
35
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
First Citizens Bancshares, Inc.
(Registrant)
Date: August 12, 1997 /s/Katie Winchester
Katie Winchester, President & CEO
Date: August 12, 1997 /s/Jeff Agee
Jeff Agee, Senior Vice President &
Chief Financial Officer
First Citizens National Bank
(Principal Subsidiary)