[DESCRIPTION] LIVE FORM 10-Q FOR SUBMISSION
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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 September 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 747,655 (net of treasury) shares outstanding as of September 30,
1997.
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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
(Stated in thousands)
September 30, December 31,
1997 1996
(Unaudited) (Note)
ASSETS
Cash and due from banks $ 14,605 $ 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 $27,209,000 at September 30,
1997 and $28,097,000 at December 31,
1996. 27,204 28,059
Available for Sale-Stated at Market 46,606 47,688
Loans - (Excluding unearned income of
$1,587,000 at September 30, 1997
and $1,521,000 at December 31, 1996) 234,627 211,389
Less: Allowance for loan losses 2,788 2,282
Net Loans 231,839 209,107
Premises and equipment 8,140 8,135
Other assets 9,823 6,575
TOTAL ASSETS $338,217 $313,071
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $257,342 $256,414
Securities sold under
agreement to repurchase 23,369 21,225
Federal funds purchased
and other short term borrowing 12,025 0
Long-term debt - Note 3 9,360 2,997
Other liabilities 3,415 2,832
Total Liabilities 305,511 283,468
Contingent Liabilities
Stockholders' Equity
Common stock, $1 par value -
2,000,000 authorized; 747,814
issued and outstanding at
September 30, 1997; 741,516
issued and outstanding at
December 31, 1996 748 741
Surplus 10,465 10,097
Retained earnings 21,261 18,679
Net Unrealized Gains(Losses) on
available for Sale 239 95
Total Common Stock and Retained
Earnings 32,713 29,612
Less-159 Treasury Shares, at Cost
at September 30, 1997 and 40
Shares at cost at December 31, 1996 (7) (9)
Total Stockholders' Equity 32,706 29,603
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $338,217 $313,071
NOTE: The balance sheet at December 31, 1996, has been taken from the
audited financial statements at that date and condensed.
The accompanying notes are an integral part of these financial
statements.
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FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
Interest Income
Interest and fees on loans $ 5,605 $ 5,189 $15,797 $14,705
Interest on investment
securities:
Taxable 1,142 1,124 3,543 3,331
Tax-exempt 119 124 370 374
Other interest income 11 16 84 64
Lease financing income 0 0 0 1
Total Interest Income 6,877 6,453 19,794 18,475
Interest Expense
Interest on deposits 2,775 2,679 8,217 7,860
Other interest expense 538 424 1,246 1,053
Total Interest Expense 3,313 3,103 9,463 8,913
Net Interest Income 3,564 3,350 10,331 9,562
Provision for loan losses 180 163 541 402
Net interest income after
provision 3,384 3,187 9,790 9,160
Other Income
Securities gains (losses) 48 13 67 192
Other income 864 741 2,732 2,298
Total Other Income 912 754 2,799 2,490
Other expenses 2,500 2,334 7,269 7,069
Net income before
income taxes 1,796 1,607 5,320 4,581
Provision for income
taxes 631 565 1,828 1,595
Net income 1,165 1,042 3,492 2,986
Earnings per share $ 1.57 $ 1.42 $ 4.69 $ 4.06
Weighted average number of
shares outstanding 743,934 735,344 743,934 735,344
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 FLOWS
(UNAUDITED)
(STATED IN THOUSANDS)
Nine Months Ended September 30
1997 1996 1995
Operating Activities
Net cash provided by
operating activities $ 4,118 $ 3,224 $2,043
Investing Activities
Proceeds of maturities of held to
maturity securities 10,468 4,405 12,968
Purchase of held to maturity
investments (9,600) (1,500) (13,000)
Proceeds from maturities of available
for sale securities 14,478 3,876 812
Proceeds from sales of available for
sale securities 1,954 8,600 1,206
Purchase of available for sale
securities (15,110) (17,125) (4,603)
Increase in Loans-Net (23,273) (23,742) (23,454)
Purchases of premises and equipment (719) (245) (1,119)
Net cash provided
by investing activities (21,802) (25,731) (27,190)
Financing Activities
Net increase (decrease) in demand
and savings accounts 384 4,754 (3,335)
Increase (decrease) in time accounts 544 10,493 23,930
Increase (decrease) in long-term debt 6,363 (637) 2,571
Treasury stock transactions 2 (4) 0
Proceeds from sale of common stock 375 233 650
Cash dividends paid (911) (728) (665)
Net increase (decrease) in short
term borrowings 12,025 6,476 739
Net cash provided (used) by
financing activities 18,782 20,587 23,870
Increase (decrease) in cash and cash
equivalents (1,098) (1,920) (1,277)
Cash and cash equivalents at
beginning of year 13,507 13,544 12,684
Cash and cash equivalents,
end of year 14,605 11,624 11,407
Cash payments made for interest and income taxes during the years
presented are as follows:
1997 1996 1995
Interest $9,682 $9,065 $7,706
Income Taxes $1,763 $1,329 $1,141
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)
(Stated in Thousands)
September 30, 1997
Note 1 - Consolidated Financial Statements
The consolidated balance sheet as of September 30, 1997, the
consolidated statements of income for the nine month periods ended
September 30, 1997, 1996, and 1995, and the consolidated statements of
cash flows for the nine 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 September 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
9/30/97 9/30/96
Amount Outstanding-End of Period $35,394 $26,221
Weighted Average Rate of Outstanding 5.01% 4.40%
Maximum Amount of Borrowings at Month End 35,394 32,902
Average Amounts Outstanding for Period 34,355 30,255
Weighted Average Rate of Average Amounts 4.64% 4.75%
Note 4 - Long-Term Debt
The long term debt is comprised of Federal Home Loan Bank Borrowings and
our newly organized finance company debt. The finance company debt is
classified as long term debt due to our intent to renew. The average
life is as presented and the FHLB funds are matched with loans and
securities.
Average Average Average
Volume Rate Maturity
FHLB Borrowings-Loans $1,999 5.86% 10 Years
FHLB Borrowings-Libor 2,080 5.75% 7 Years
FHLB Borrowings-Prime 2,110 5.77% 2 Years
Finance Company Debt 1,000 6.50% 1.5 Years
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Note 5 - Statement of Cash Flows
September September September
1997 1996 1995
Actual payments made
during the periods:
Interest $9,682 $9,065 $7,706
Income taxes $1,763 $1,329 $1,141
Note 6 - Contingent Liabilities
There are no pending litigations as of the current reportable date that
would result in a liability.
Note 7 - Investment Securities
The differences between book values of investment securities and market
values at September 30, 1997 and December 31, 1996, total $403 and $38
respectively. FASB 115 states that a bank has to classify securities
into Held to Maturity, Available for Sale, and Trading. First Citizens
has $0 in the Trading Account. The Available for Sale Securities values
are adjusted to market each quarter and the adjustments flow to the
Capital section (Net of Tax). The Held to Maturity securities are
stated at amortized cost. The available for sale securities reflects a
$398 increase for the ending period of September 1997 and, net of tax,
$239 flowed to capital. These movements 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 reporting 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 the regulators. Tier 1 Ratio and Tier 2 Ratio
are 13.56% and 14.73% respectively.
Note 9 - Deferred Income Taxes
First Citizens adopted FASB 109 as of January 1, 1993. The deferred tax
account reflects an asset totaling $152. The timing differences mainly
consist of reserve for loan loss timing differences.
Note 10 - Reserve for Loan Losses
FASB 114 and 118 was implemented during the first quarter of 1995. This
new FASB requires companies to set aside reserves for impaired loans.
The following data reflects impaired totals for the reportable periods:
Impaired Loan Balance or Recorded Balance $632
Amount of Recorded Balance with a Related Allowance 165
Amount of Recorded Balance with a No Related Allowance 467
Interest income recognized on impaired loans will be recognized on a
cash basis. Cash receipts will be applied as cost recovery first or
principal recovery first. This is consistent with OCC Regulations.
First Citizens will continue to ensure the overall reserve is adequate
over and above the allocation for impaired loans.
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Note 11 - Asset Impairment
The financial 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 1997 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
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset in question may not be recoverable.
As of the reportable date, there are no FASB 121 adjustments.
Note 12 - The following FASB issuances will be implemented in the near
future, but will not have a material impact on the financials of First
Citizens Bancshares:
FASB 125-Transfers and servicing of Financial Assets and Liabilities
FASB 128-Earnings Per Share
FASB 130-Comprehensive Income
FASB 131-Disclosures about Segments
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
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 September 30, 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.
Net earnings for the third quarter of 1997 were $1,165,000 or $1.57 per
common share compared to net earnings for the same period a year ago of
$1,042,000 or $1.42 per common share. For the first nine months of
1997, net earnings were $3,492,000 compared to $2,986,000 for the same
time period in 1996. Year to date return on average assets and average
common equity were 1.43% and 14.94% respectively. This compares to
1.31% return on assets and 14.25% return on equity for the same time
period in 1996. Strong loan portfolio growth since year end resulted in
an increase in net interest income in excess of 8 percent. Improved
profitability in both mortgage lending and the brokerage subsidiary,
First Citizens Financial Plus support the year to date increase in
overall net income. Non-interest income for the third quarter was
$912,000 up 20 percent from third quarter of 1996. Non-interest expense
for the quarter was up 7.1%. Year to date non-interest income was up
12.4% while the increase in non-interest expense was 2.8 percent.
The balance sheet as of September 30, 1997 reflected total assets of
$338,217,000, total loans of $234,627,000 and total shareholders equity
of $32,706,000. This represents growth since 12/31/96 of 8 percent in
assets, 11 percent in loans and 10.5 percent in shareholder equity.
Non-performing assets as of September 30, 1997 were $817,759 or .35% of
total loans and foreclosed property. For the same period in 1996, non-
performing assets were $1,694,614 or .78% of loans and foreclosed
properties. As evidenced by these numbers, portfolio quality remains
high. In spite of this, the provision for loan losses increased from
$163,000 during third quarter 1996 to $180,000 the same quarter in 1997
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in support of $12 million in loan growth during the three months ending
9/30/97.
Efforts to expand the income beyond net interest margins continue. The
finance company opened first quarter of 1997 is now reflecting growth
and profitability. Management is presently in negotiations with White
and Associates Insurance which will result in a 50/50 partnership of
their Dyersburg Agency to be operated out of First Citizens Newbern
Branch pending regulatory approval.
The potential for growth in assets remains high. In July, 1997 First
Citizens announced its intent to purchase the Bank of Troy, Troy,
Tennessee, total assets $57 million (as of June 30, 1997). The due
diligence review is currently underway. Pending regulatory approval,
the purchase should be accomplished early in the first quarter of 1998.
Purchase of the Bank of Troy will provide for market share expansion in
Obion County, northeast of Dyersburg, Dyer County. On completion of
the acquisition, First Citizens plans to continue operating the Bank of
Troy as a separate bank under its current name and charter with
independent Board of Directors. However, as soon as practical it is
management's intent to bring Troy in as a branch but to retain the Bank
of Troy name in its community.
Liquidity ratio (net liquid assets as a percent of net liabilities) at
9/30/97 was 10.90% including approved lines of credit. 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 91.17 percent.
Available for Sale investments are considered another viable source to
meet current liquidity needs. Available for Sale Investments as a
percent of volatile liabilities was 49.62% at quarter end. Cost of funds
at 9/30/97 was 4.39% up slightly from 4.35% at 6/30/97.
First Citizens' strategic plan calls for future efforts to focus on
controlled growth, efficiency and diversification of operations and
products. The bank's mission statement sets the stage for First
Citizens to become the leading community bank in the state of Tennessee
in terms of asset growth and profitability. Key business objectives
call for a Return on Assets of 2 percent on assets totaling $500,000,000
or more by the year 2002. Net income will be in excess of $10,000,000
to reach a return on assets of 2 percent. Other business 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 attract and retain high quality
personnel; (4) 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;
(5) To establish and implement a quality sales and amazing service
program over the next 3 years that focuses on relationship strategies;
(6) To continue to focus on non-interest income streams as a method of
achieving financial goals; and (7) To build the ground work for a high
performing institution through continuing education and career
development of employees.
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Another strategic action to improve operating efficiency and customer
service is the bank's Technology Strategic Plan. Action goals set in
the Technology Plan include the following: (1) Installation of Document
Imaging; (2) Installation of a Marketing CIF System to identify
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 wide area network as a secondary communication
structure; (4) Evaluation of the market, selection, and implementation
of Home Banking and Corporate Cash Management. In response to these
goals, a document imaging system was installed in 1997 and backfile
conversion of loan documents, currently in process, is expected to be
completed by year end 1997. Additional plans include imaging of all
documents that must be archived and frequently accessed by bank
personnel. The Marketing CIF is producing desired results in
identification of products that meet customer specifications in certain
market segments as well as a support system for the Quality Sales and
Amazing Service program. The first phase of Quality Sales and Amazing
Service program was introduced the first quarter of 1997. Product and
service as well as customer referral training was initiated as standard
ongoing training programs in 1997. The 1997 training plan also includes
other critical components of a quality sales program such as supervisor
training in time management, coaching skills, and team management. Time
management training is scheduled for November, 1997. Home banking
market surveys indicated a demand for telephone and Personal Computer
home banking products. First Citizens currently offers touchtone
banking service at no cost to the customer. Research conducted in 1997
resulted in a two year plan for the selection of an Internet based
homebanking product. Strategic plan calls for a decision by mid 1998 in
the selection of a homebanking vendor partnership; testing through
employee and customer support groups by year end 1998; and full
implementation of Internet banking by year end 1999. Another phase of
the Internet Banking project is full awareness and addressing of public
concerns for Internet based banking transactions.
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 exist 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 in 1994.
The act permitted full nationwide interstate branching after June 1,
1997. First Citizens Bancshares, Inc. and First Citizens National Bank
have experienced no change in market share as a result of interstate
banking. First Citizens is 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 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 percent of local market share,
statistics reflect a gain of approximately 1.5 percent 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 which were subsequently
acquired by Union Planters National Bank. Interstate banking could
possible bring about the location of large out of state banks to the
area. However, as of 9/30/97 no other large regional or out of state
bank has expressed an open interest to locate in the Dyer County/West
Tennessee market. If another large financial institution located in the
bank's market area, then First Citizens would continue to operate as it
has in the past, focusing on the wants and needs of existing and
potential customers.
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The quality of service and individual attention afforded by an
independent community bank cannot be matched by large regional
competitor, managed by a corporate team unfamiliar with the local
market.
First Citizens designated market area is constantly expanding with the
purchase of the Ripley, Tennessee branch (Lauderdale County) and the
Bank of Troy located in Troy, Tennessee (Obion County). Demographic
studies indicate the population in Dyer, Lauderdale and Obion County at
the end of 1996 was 36,193, 23,972, and 32,053 respectively. Projected
population growth by the year 2000 is expected to rise to 42,500,
22,475, and 30,657. The median household income in Dyer County is
approximately $26,562 slightly above the median household income level
for the State of Tennessee. Employment consists of 44.85% in
manufacturing and construction, 24.19% personal, professional and small
business, 19.13% trade, wholesale and retail, 4.34% transport/
communication, 3.93% public administration, and 3.57% agriculture,
forest and fishing. Blue collar occupations employ approximately 8,226,
while other white collar occupations employ approximately 4,672.
Executive and other professional occupations employ approximately 3,200.
First Citizens marketing strategy is to offer financial products and
services designed to meet the needs of the market place. A demographic
study indicated that First Citizens market was primarily in the 38 age
group and above. More convenient products and services that appeal to
the Generation X market are included in the bank's technology and
marketing five year strategic plan.
The following table compares year to date non-interest income and
expense of First Citizens as of September 30, 1997, 1996 and 1995:
Non-Interest Income
(in thousands)
Sept. 30 Sept. 30 Sept. 30
1997 % of Change 1996 % of Change 1995
Service Charges on
Deposit Accounts $1,239 18.12% $1,049 10.89% $ 946
Trust Income $ 554 4.34% $ 531 14.44% $ 464
Other Income $1,006 10.55% $ 910 38.51% $ 657
TOTAL NON-INTEREST INCOME $2,799 12.41% $2,490 20.47% $2,067
Total non-interest income is up 12.41% and 20.47% when comparing
September, 1997 to June 1996 and September, 1995. The increase reflects
managements commitment to diversifying the income stream as well as a
focus on fee income. Results of these efforts are evident when
reviewing financial results in the areas of brokerage, overdraft fees,
and insurance commissions. 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. Income received 3rd
quarter from the life insurance investment was $148,000. Third quarter
other income included a one time fee of $40,000 collected for the
origination of a letter of credit.
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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 deposit account was 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 on an overdrawn
deposit account increased from $20.00 to $22.00.
Non-Interest Expense
(in thousands)
Sept. 30 Sept. 30 Sept. 30
1997 % of Change 1996 % of Change 1995
Salaries & Employee
Benefits $3,999 5.30% $3,798 4.26% $3,643
Net Occupancy Expense $1,419 (.36%) $1,424 34.60% $1,058
Other Operating Expense $1,851 .22% $1,847 (13.09%) $2,125
TOTAL NON-INTEREST EXPENSE $7,269 2.83% $7,069 3.56% $6,826
Total non-interest expense reflects a marginal 2.83 percent increase
when comparing 9/30/97 to 9/30/96. A comparison of non-interest expense
for 9/30/96 and 9/30/95 reflects a modest 3.56 percent increase.
Salaries and employee benefits increased 5.30% in 1997 reflecting
increased salaries as well as additions to staff. Full-time equivalent
employees at 9/30/97 was 154 compared to 147 at 9/30/96. The increase
is due to the employment of (1) three employees for Delta Finance
Company, a bank owned subsidiary opened first quarter 1996. (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) five
temporary staff members employed as relief staff during vacations and
peak time periods. Full-time equivalent employees compared to high
performing peer banks reflects the banks efforts to bring FTE more in
line with peer ratios. However, when comparing the FTE ratio it must be
noted that First Citizens employs approximately 16.5 employees to
support non-traditional bank services. These services include Trust
Department 10 employees, Mortgage Lending 3.5 employees; and Brokerage
Service 3 employees. Full time equivalent per one million in assets at
9/30/97 was 2.16 compared to 2.31 for peer banks. Net occupancy expense
registered a .36 percent decrease due to full depreciation of various
hardware and software purchased in the conversion process from the
Altell Mainframe division to the Community Bank AS/400 division.
However, future strategic goals calls for increased investment in
Technology which will result in increased computer expense and related
depreciation to those investments. Management's 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
increased .22 percent, reflecting efforts to control inventory,
professional services and other expense related categories.
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Deposits
The average daily amount of deposits and average rates paid on such
deposits is summarized for the quarter ending September 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 $ 28,055 - $ 26,180 - $ 25,063 -
Savings
Deposits $ 79,419 3.42% $ 73,121 3.24% $ 64,920 3.08%
Time Deposits $150,248 5.58% $148,519 5.62% $140,396 6.07%
TOTAL DEPOSITS $257,722 4.26% $247,820 4.32% $230,379 4.57%
Deposit growth continues to represent 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 holds approximately 51 percent or more (excluding
overnight and fixed term repurchase agreements) of the banks deposits
domiciled in Dyer County. The bank competes with First Tennessee Bank,
N.A. (23% of total county deposits), Security Bank (14%) and Union
Planters 11%. First Citizens also competes with Dyersburg City
Employees Credit Union, seven or more finance companies, 2 brokerage
firms, and other types of financial service providers. Competitor
marketing programs are aggressive in seeking new deposits with
advertising programs that offer rates on certificate of deposits that
are often 50 basis points higher than rates paid in the market place.
Average rates paid on deposits of 4.26 percent (up from 4.24% paid at
last quarter end) 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
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, Amazing Service program is also
expected to increase deposits as well as provide for the cross selling
of additional products to form a total customer relationship profile.
An active business development program is in place to generate new
business and provide support for existing customers.
Total deposit growth was approximately $10 million and $27 million when
comparing 1997 to 1996 & 1995. A review of 1996 total deposits reflects
the purchase of $8 million in deposits in the Ripley Branch acquisition.
Other deposit growth was centered in savings and time deposits. Non-Interest
Bearing Demand deposits has remained relatively flat since
1995. Sweep account funds totaling $14,350,000 are not included in the
average balance 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 $30 million. 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 funds to clear large
denomination checks as presented for payment. There were no significant
changes to products or services during the third quarter. However two
14
new IRA products, the Roth IRA and Simple IRA are currently in
development stages to be introduced in 1998.
Management is continuously monitoring and enhancing the bank's product
and service line in order to retain existing customers and to attract
new customer relationships. Among new products on the market in 1997
was 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. In September and October of 1997 approximately
8,000 Visa Check Cards were issued to existing customers. 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 accounts 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 or more outstanding on
the books of First Citizens on September 30, 1997. The overall total
increased in excess of $7 million when comparing to September, 1996.
Maturity Distribution of Time Deposits
In Amounts of $100,000 Or More As Of September 30, 1997
(in thousands)
Maturity Total Amount
3 months or less $20,481
3 through 12 months $19,529
1 year through 3 years $ 5,663
over 3 years $ 300
Total $45,973
A summary of average interest earning assets and interest bearing
liabilities is set forth in the following table together with average
yields on earning assets and average costs on interest bearing
liabilities. The average yield on interest earning assets reflects a
decrease when reviewing information presented in the table. Interest
earning assets as of 9/30/97 totaled $308,068,000 at an average rate of
8.98% compared to $288,965,000 at an average rate of 9.02% and
$257,317,000 at an average rate of 9.07% at 9/30/96 and 9/30/95
respectively. The reduction in average rate when comparing the three
years reflects strong competition in the market for new loan business as
well as a declining rate declining rate environment. Market
demographics and competition are discussed in the MD&A and deposit
section of this report. Interest bearing liabilities for the same time
periods were $271,724,000 average rate 4.88%, $256,530,000 average rate
4.84%, and $229,914,999 at 5.13%. Net yield on average earning assets
was 4.68%, 4.72%, and 4.47% at 9/30/97, 9/30/96 and 9/30/95. The net
yield reflects management efforts to control interest margins in
accordance with financial goals as well as 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 significant challenge. The low interest rates environment in 1996-97
coupled with customer awareness of the economic benefit in shopping
for the lowest rate charged on loans and the highest return paid on
deposits has resulted in creative loan products designed to meet
15
competitive conditions. First Citizens currently offers a low rate on 6
month construction loans with a commitment for long term financing at
current market rates for permanent financing. Other rates on loans are
set by policy and determined according to financial strength of the
borrower and total relationship with the bank. Rates on deposits are
set according to current economic and market conditions as well as
availability of other sources of funds. First Citizens has historically
out performed peer banks with the average rate earned on the loan
portfolio. Asset/Liability polices 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.
16
First Citizens National Bank
Quarter Ending September 30
Monthly Average Balances and Annualized 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 (123)
& Leases $231,262 $5,605 9.70% $212,718 $5,184 9.75% $187,478 $4,646 9.91%
Investment
Securities:
Taxable $ 66,072 $1,125 6.81% $ 65,323 $1,116 6.84% $ 57,272 $ 951 6.64%
Tax Exempt (4) $ 10,477 $ 180 6.88% $ 10,759 $ 207 7.70% $ 10,383 $ 198 7.63%
Interest Earning
Deposits $ 230 $ 3 5.22% $ 146 $ 2 5.48% $ 146 $ 2 5.47%
Federal Funds
Sold & Securities
Purchased Under
an Agreement
to Resell $ 27 $ 1 5.22% $ 19 $ 1 21.06% $ 2,038 $ 32 6.28%
Total Interest
Earning Assets $308,068 $6,914 8.98% $288,965 $6,510 9.02% $257,317 $5,829 9.07%
NON-INTEREST
EARNING ASSETS:
Cash and Due
From Banks $ 9,782 $ - - $ 10,415 $ - - $ 9,048 $ - -
Bank Premises &
Equipment $ 8,228 $ - - $ 8,421 $ - - $ 8,840 $ - -
Other Assets $ 6,339 $ - - $ 2,715 $ - - $ 5,338 $ - -
Total Assets $332,417 $ - - $310,516 $ - - $280,543 $ - -
LIABILITIES AND
SHAREHOLDERS'
EQUITY:
INTEREST BEARING
LIABILITIES:
Savings Deposits $ 79,419 $ 679 3.42% $ 73,121 $ 592 3.24% $ 64,920 $ 501 3.08%
Time Deposits $150,248 $2,096 5.58% $148,519 $2,085 5.62% $140,396 $2,134 6.07%
Federal Funds
Purchased and
Other Interest
Bearing
Liabilities $ 42,057 $ 538 5.12% $ 34,890 $ 426 4.89% $ 24,598 $ 315 5.12%
Total Interest
Bearing
Liabilities $271,724 $3,313 4.88% $256,530 $3,103 4.84% $229,914 $2,950 5.13%
NON-INTEREST
BEARING
LIABILITIES:
Demand Deposits $ 28,036 $ - - $ 26,180 $ - - $ 25,063 $ - -
Other Liabilities $ 2,070 $ - - $ 1,807 $ - - $ 2,116 $ - -
Total Liabilities $301,830 $ - - $284,517 $ - - $257,093 $ - -
SHAREHOLDERS'
EQUITY $ 30,587 $ - - $ 25,999 $ - - $ 23,450 $ - -
TOTAL LIABILITIES
AND SHAREHOLDERS'
EQUITY $332,417 $ - - $310,516 $ - - $280,543 $ - -
NET INTEREST
INCOME $ - $3,601 - $ - $ 3,407 - $ - $ 2,873 -
NET YIELD ON
AVERAGE EARNING
ASSETS $ - $ - 4.68% $ - $ - 4.72% $ - $ - 4.47%
(ANNUALIZED)
(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.
17
COMPOSITION OF LOANS
The bank's loan portfolio has experienced exceptional loan growth as
reflected in the Composition of Loans table. Total loans increased $19
million or 8.85% when comparing September 30, 1997 to September 30,
1996. The largest percentage of growth is centered in Real Estate
Mortgage and Construction loans. Mortgage loans have increased
approximately $15 million or 12 percent, while construction loans
increased approximately $6 million or 35 percent. A marketing strategy,
set second quarter of 1997, provided for a low rate construction
contract (currently 8.5%) coupled with the customers commitment for
First Citizens to provide long term financing. The program has been
successful as reflected in construction and mortgage loan growth
percentages. The upward trend in real estate growth is also contributed
to substantial growth in both population and number of households
recorded in Dyer County over the past decade. Housing starts in Dyer
County for 1996 were 158. Commercial, financial and agriculture loan
category has posted a decline in third quarter since 1994.
Agricultural loan volume continues to be a viable source of loan growth
with the largest annual outstanding balance posted at 9/30/97. The
agriculture economy has experienced a reduction in yield due to a wetter
than usual spring causing delays of more than 30 days in planting of
soybeans. Soybeans is the largest agriculture production crop in Dyer
County. Management projects no significant effect to credit quality
due to these conditions. Commercial businesses (mostly manufacturing)
located in the area consists primarily of large out of state companies
with their primary banking institution located in the state of their
corporate headquarters. These commercial businesses often use First
Citizens to meet local banking needs with capital needs financed by the
primary bank. A decision was made in 1995 to tighten standards on
account receivable loans and other types of commercial lending that
involved a higher risk rating factor. Financial loans in the portfolio
consist primarily of participations purchased from other financial
institutions. The purchase of quality participation loans has presented
more of a challenge in 1997 than in past years.
First Citizens is located in the Dyersburg/Dyer County trade area with a
branch facility located in Ripley/Lauderdale trade area. The Dyer County
area has a population of approximately 35,000 with a projected growth
rate in excess of 42,000 by the year of 2000. 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 manufacturing and construction 44.85%, personal
professional and business 24.19% and Trade, wholesale and retail 19.13%.
Dyer County unemployment rate for September, 1997 was 5.10% up from July
rate of 5.8%. The unemployment rate at 6/30/97 was 5.10%. Expansion of
two local manufacturing firms in 1997-98 will add jobs for people in
Dyer County for the next year. An article published in the Memphis
Business Journal (September, 1997 edition) referred to Dyer County
leadership as extremely aggressive in the development of business,
highway systems, and other viable economic indicators that effect Dyer
County and the surrounding areas. Retailers report that sales are
gaining strength. Local economic conditions are stable and represent no
immediate threat
18
to the loan portfolio. Loans for agriculture purpose are considered to
be a quality asset. The Dyer County economy is posed for continuing
long term growth. In summary a good business climate coupled with
innovative experienced leadership set the stage for a growing, thriving
economy for Dyer County and West Tennessee.
The provision for loan losses increased in proportion to loan growth as
required by loan policy. Problem loans at 9/30/97 were $2,708,000
compared to $3,485,000 at 9/30/96 reflecting a 22.30 percent decrease.
Non-performing assets for the same time periods were $817,000 compared
to $1,694 representing a 51.77% decrease. Total non-performing at
9/30/97 was .35% of the total loan portfolio compared to peer group at
6/30/97 at .76 percent. Past due loans continue to decline with 90 days
or more ending September 30 at $303,000. Problem loans declined due to
the workout and repayment status of the Bennett Funding debt during the
last quarter. Bennett Funding has been discussed in previous 10Q
reports as in being bankruptcy with no additional financial loss
projected for First Citizens. Total loans graded by Internal Loan
Review within the last twelve months comprise $121,674,544 or 59.24
percent of the loan portfolio.
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 periods 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 Discussed herein 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 of the bank's market area and the general economic state of
the market area, the bank will strive to maintain a real estate loan
portfolio diversification based upon the following:
* Agricultural loans totaling in the aggregate no more than 20% of the
Bank's total loans.
* Land acquisition and development loans totaling in the aggregate no
more than 10% of the Bank's total loans.
19
* Commercial construction loans totaling in the aggregate no more than
10% of the Bank's total loans.
* Residential construction loans totaling in the aggregate no more
than 10% of the Bank's total loans.
* Residential mortgage loans totaling in the aggregate no more than
40% of the Bank's total loans.
* Commercial loans totaling in the aggregate no more than 30% of the
Bank's total loans.
It is the policy of FCNB that no real estate loan will be made (except
in accordance with the provisions for certain loans in excess of
supervisory limits provided for hereinafter) that exceed the loan-to-value
percentage limitations ("LTV limits") designated by category as
follows:
Loan Category LTV Limit (%)
Raw Land 65
Land Development or Farmland 75
Construction:
Commercial, multi-family, and
other non-residential 80
1-to-4 family residential 80
Improved Property 80
Owner-occupied 1-to-4 family
and home equity 80
Multi-family construction loans include loans secured by cooperatives
and condominiums. Owner-occupied 1-to-4 family and home equity loans
which equal or exceed 90% LTV at origination must have either private
mortgage insurance or other readily marketable collateral pledged in
support of the credit.
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
20
The average yield on loans of First Citizens National Bank for the third
quarter of the years indicated is as follows:
1997 - 9.70%
1996 - 9.75%
1995 - 9.91%
1994 - 9.22%
1993 - 9.58%
The aggregate amount of unused guarantees, commitments to extend credit
and standby letters of credit was $34,488,000 as of 9/30/97.
The following table sets forth loan totals net of unearned income by
category for the past five years:
September 30 (in thousands)
1997 1996 1995 1994 1993
Real Estate Loans:
Construction $ 22,710 $ 16,712 $ 12,330 $ 9,748 $ 7,642
Mortgage $138,494 $123,612 $105,640 $ 94,501 $ 84,540
Commercial, Financial
and Agricultural Loans $ 45,592 $ 49,822 $ 50,212 $ 47,382 $ 37,339
Installment Loans to
Individuals $ 25,636 $ 23,290 $ 21,564 $ 17,868 $ 15,545
Other Loans $ 2,195 $ 2,107 $ 2,424 $ 3,986 $ 5,642
TOTAL LOANS $234,627 $215,543 $192,170 $173,485 $150,708
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 $100,344,000 or 43% of
the total portfolio are subject to repricing within one year or carry a
variable rate of interest. The ratio is up from 42.60% at 9/30/96
reflecting efforts of the customer base to lock in lower interest rates.
Maturities in the one to five year category total $130,113,000,
reflecting a slight increase when compared to $124,102,000 at 9/30/96.
The trend exhibited by consumers in recent years to lock in interest
rates is projected to continue.
Due after
Due in one one year but Due after
year or less within five years five years
(in thousands)
Real Estate $45,909 $ 91,755 $23,540
Commercial, Financial
and Agricultural $27,534 $ 16,639 $ 1,419
All Other Loans $ 5,966 $ 21,719 $ 146
TOTAL $79,409 $130,113 $25,105
Loans with Maturities After One Year for which:
(in thousands)
Interest Rates are Fixed or Predetermined $134,283
Interest Rates are Floating or Adjustable $ 20,935
NON-PERFORMING ASSETS
Non-performing assets as of 9/30/97 were approximately $800,000 or .35%
of the total portfolio. Non-performing loans were up second quarter of
1997 due to the addition of one credit totaling more than $700,000.
Bennett Funding declared bankruptcy and was in the process of collection
21
until the third quarter, 1997 when an repayment agreement was reached.
Non-performing loans continue to be at a manageable level and are below
peer group ratio of .76 percent.
Categorization of a loan as non-performing is not in itself a reliable
indicator of potential loan loss. The banks' policy states that the
Bank shall not accrue interest or discount on (1) any asset which is
maintained on a cash basis because of deterioration in the financial
position of the borrower, (2) any asset for which payment-in-full of
interest or principal is not expected, or (3) any asset upon which
principal or interest has been in default for a period of 90 days or
more unless it is both well secured and in the process of collection.
For purposes of applying the 90 day due test for the non-accrual of
interest discussed above, the date on which an asset reaches non-accrual
status is determined by its contractual term. A debt is considered 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 nine months ending 9/30/97
if all loans reported as non-accrual had been current in accordance with
their original terms and had been outstanding throughout the period is
$37,000. Interest income on loans reported as ninety days past due and
on interest accrual status was $21,000 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 loans as of September 30, 1997 are 0.
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-accrual loans as of
September 30, for the years indicated:
Non Performing Loans
September 30
(in thousands)
90 Days Past Due
Year Non-Accrual Accruing Interest Total
9/30/97 $ 514 $ 290 $ 807
9/30/96 $1,523 $ 171 $1,694
9/30/95 $ 893 $ 315 $1,208
9/30/94 $ 816 $ 150 $ 966
9/30/93 $1,399 $ 545 $1,944
22
Loan Loss Experience and
Reserves for Loan Losses
During the quarter just ended activity to the Reserve Account consisted
of (1) loan charge-offs - $24,000; (2) recovery of loans previously
charged-off - $36,000; and (3) additions to reserve - $180,000.
Information reported to the Board of Directors on August 31, 1997 in a
report from Internal Loan Review indicated the following: The Loan Loss
Reserve Allowance is determined by using a three year loss average on
credit and installment loans, making specific allocations for impaired
loans, using 50% of Doubtful loans, 10% of Substandard loans, 5% of
Watch loans, .75% of other loans not listed previously less SBA/FmHA
guaranteed portions, .75% of Letter of Credit, and 1% of A/R Factoring.
The reserve requirement as of this reporting date was 1.16% of total
loans exceeding policy requirements of 1%. Based on the analysis of
loan review the reserve was considered more than adequate. The reserve
balance at quarter end was $2,788,000 or 1.19% of total loans.
An analysis of the allocation of the allowance for Loan Losses is made
on a fiscal quarter at the end of the month (February, August, and
November) and reported to the board at its meeting immediately preceding
quarter-end. Requirements of FASB 114 & 118 have been incorporated into
the policy for Accounting by Creditor for Impairment of a loan. A loan
is impaired when it is probable that a creditor will be unable to
collect all amounts due of principal and interest according to the
original contractional terms of the loan. First Citizens adopted the
following as a measure of impairment: (1) Impairment of a loan at First
Citizens shall exist when the present value of expected future cash
flows discounted at the loans effective interest rate impede full
collection of the contract; and (2) Fair Value of the collateral, if the
loan is collateral dependent, indicates unexpected collection of full
contract value. The Impairment decision will be reported to the Board
of Directors and other appropriate regulatory agencies as specified in
FASB 114 and 118. The bank will continue to follow regulatory
guidelines for income recognition for purposes of generally accepted
accounting principles, as well as regulatory accounting principles.
An annual review of the loan portfolio to identify the risks will cover
a minimum of 70% of the gross portfolio less installment loans. In
addition, any single note or series of notes directly or indirectly
related to one borrower which equals 25% of the bank's legal lending
limit will be included in the annual review.
For analysis purposes, the loan portfolio is separated into four
classifications:
1. Pass - Loans that have been reviewed and graded high quality or no
major deficiencies.
2. Watch - Loans which, because of unusual circumstances, need to be
supervised with slightly more attention than is common.
3. Problem - Loans which require additional collection efforts to
liquidate both principal and interest.
4. Specific Allocation - Loans, in total or in part, in which a future
loss is possible.
Examples of factors taken into consideration during the review are:
Industry or geographic economic problems, sale of business, change of or
disagreement among management, unusual growth or expansion of the
business, past due status of either principal or interest for 90 days,
placed on non-accrual or renegotiated status, declining financial
condition, adverse change in personal life, frequent overdrafts, lack of
cooperation by borrower, decline in marketability or market value of
collateral, insufficient cash flow, and inadequate collateral values.
23
Identification of impaired loans from non-performing assets as well as
bankrupt and doubtful loans is paramount to the reserve analysis.
Special allocations shall support these loans found to be collateral or
interest cash flow deficient. In addition an allowance shall be
determined for pools of loans including all other criticized assets as
well as small homogeneous loans managed by delinquency. In no
circumstance shall the reserve fall below 1% of total loans less
government guarantees. The following is a sample of information
analyzed quarterly to determine the allowance for loan losses.
LOAN LOSS ALLOWANCE ANALYSIS
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 $
The book value of repossessed real property held by Bancshares and First
Citizens National Bank at 9/30/97 is $164,000 compared to $687,000 at
9/30/96. 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. There
is no balance as of this reporting date for Other Real Estate for First
Citizens National Bank.
Accounting for adjustments to the value of Other Real Estate when
recorded subsequent to foreclosure is accomplished on the basis of an
independent appraisal. The asset is recorded at the lesser of its
appraised value or the loan balance. Any reduction in value is charged
to the allowance for possible loan losses. All other real estate
parcels are appraised annually and the carrying value is adjusted to
reflect the decline, if any, in its realizable value. Such adjustments
are charged directly to expense.
Management's estimates of approximate charge-offs for period ending
12/31/97:
24
Domestic Amount (in thousands)
Commercial, Financial & Agricultural $ 50
Real Estate-Construction 0
Real Estate- Mortgage 50
Installment Loans to individuals & credit cards 150
Lease financing 0
Foreign 0
01/01/97 through 12/31/97 Total $250
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 expenses; and the ratio
of net loans charged off to average loans outstanding.
First Citizens National Bank
Loan Loss Experience and Reserve for Loan Losses
Quarter ending September 30
(in thousands)
1997 1996 1995 1994 1993
Average Net Loans
Outstanding
Net of ICNE $231,262 $212,718 $187,478 $167,373 $145,567
Balance of Reserve
for Loan Losses
at Beginning of
Period $ 2,596 $ 2,359 $ 2,186 $ 1,879 $ 1,920
Loan Charge-Offs $ (24) $ (50) $ (80) $ (44) $ (56)
Recovery of Loans
Previously
Charged Off $ 36 $ 39 $ 34 $ 48 $ 67
Net Loans Charged Off $ 12 $ (11) $ (54) $ 4 $ 11
Additions to Reserve
Charged to Operating
Expense $ 180 $ 163 $ 107 $ 102 $ 119
Balance at End of
Period $ 2,788 $ 2,511 $ 2,247 $ 1,985 $ 2,050
Ratio of Net Charge-
Offs during quarter
to Average Net Loans
Outstanding .005% (.01%) (.029%) .002% .008%
The following table will identify charge-offs by category for the
period ending 9/30/97 and 9/30/96.
Charge-Offs: 1997 1996
Domestic
Commercial, Financial and Agricultural $ 0 $ 4
Real Estate - Construction 0 0
Real Estate - Mortgage 0 1
Installment Loans to Individuals 19 40
Lease Financing 0 0
Credit Cards 5 5
Total $(24) $(50)
Recoveries:
Domestic:
Commercial, Financial and Agricultural $ 15 $ 14
Real Estate - Construction 0 0
Real Estate - Mortgage 0 0
Installment Loans to Individuals 19 21
Lease Financing 0 0
Credit Cards 2 4
Total 36 39
Net $ 12 $(11)
25
Investment Securities
The book value of listed investment securities as of the dates
indicated are summarized as follows:
Composition of Investment Securities
September 30
(in thousands)
1997 1996 1995 1994 1993
U. S. Treasury &
Government Agencies $61,465 $60,718 $53,336 $43,457 $47,317
State & Political
Subdivisions $ 9,986 $10,807 $10,516 $12,644 $11,259
All Others $ 2,359 $ 3,457 $ 3,568 $ 7,245 $ 5,459
TOTALS $73,810 $74,982 $67,420 $63,346 $64,035
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 third quarter, 1997
decreased approximately $1 million when compared to the same time period in
1996. The investment portfolio, which currently totals $74 million, is
primarily comprised of U. S. Treasury and U. S. Agency obligations, as well
as Municipal obligations. Fixed rate holdings comprise 90% of the
portfolio, while adjustable rates comprise the remaining 10%.
Fixed rate holdings currently have an expected average life of 2.9 years.
It is estimated that this average life would extend to 5.2 years at rates
up 100 basis points and 5.6 years at rates up 200 basis points. This is a
result of some extension occurring in the callable bonds and mortgage-
backed holdings as rates rise. Should rates decline 100 basis points the
average life would decrease to 2.0 years.
In terms of price sensitivity, we estimate that at rates up 100 basis
points the market value of the portfolio would fall by 3.5, while rates
rising 200 basis points would impact the market value by a negative 7.6%.
This is equal to the price sensitivity of the 4-5 year Treasury bond, which
is consistent with the current average life of the portfolio. If rates go
down 100 basis points we estimate the market value would increase by 2.1%.
The adjustable rate holdings all reprice on an annual or more frequent
basis and currently have an average life of 5.1 years. We estimate that the
adjustable rate holdings 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 accounts
for Held-to-Maturity, Available for Sale, and Trading Account Investments.
As of June 30, 1997 approximately 59.47% of the total portfolio was placed
in the Available-for-Sale account. The remaining 40.53% was booked in the
Held-to-Maturity account. FASB 115 also requires banks to Mark to Market
the Available for Sale and Trading Account investments at the end of each
calendar quarter. Held-to-Maturity account investments are stated at
amortized cost on the balance sheet. Mark to Market resulted in a positive
capital entry of $398,813 as reflected on the 9/30/97 balance sheet. Mark
to Market impact to capital on 9/30/96 was a negative $148,351.
Maturities in the portfolio are made up of 9.41% within one year, 50.11%
after one year and within five years, and 40.48% after five 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.
26
During the quarter just ended there were no transfers between the
investment portfolio accounts. The trading account for the entire quarter
maintained a zero balance.
First Citizens National Bank has not engaged in any Derivative activities
as defined by paragraphs 5 thru 7 of FASB 119 (Reference footnote 7).
The portfolio currently contains the following unrealized gains and
unrealized losses in each investment category:
Investment Securities
Unrealized Gains/(Losses)
September 30, 1997
Unrealized Unrealized Net
Gains Losses Gains/Losses
U.S. Treasury Securities 67 6 61
Obligations of U.S. Government
Agencies and Corp 422 139 651
Obligations of States and
Political Subdivisions 67 11 56
Other Securities 0 0 0
Totals 556 156 400
Yields on Investment Securities slightly decreased the twelve month period
ending 9/30/97 from 6.70% to 6.62%. This is reflective of the overall
interest rate market. Also reflected in the following table is the result
of efforts to shorten maturities within the portfolio:
Maturing and Portfolio Percentages on Securities September 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 %
9/30/97 $12,557 17.02% $22,042 29.87% $29,558 40.05% $ 9,633 13.06%
9/30/96 $ 7,050 9.41% $37,574 50.11% $21,351 28.48% $ 9,007 12.00%
9/30/95 $ 2,746 4.07% $47,071 69.81% $14,547 21.59% $ 3,056 4.53%
9/30/94 $ 9,368 14.74% $39,502 62.36% $12,876 20.33% $ 1,600 2.52%
Maturity and Yield on Securities September 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 $11,398 6.63% $15,884 6.68% $25,460 6.96% $8,723 7.53%
State and Political
Subdivisions* $ 1,159 6.50% $ 6,158 6.75% $ 1,739 7.59% $ 930 7.65%
All Others $ - -% $ - -% $ 2,359 6.69% $ - -%
TOTALS $12,557 6.62% $22,042 6.70% $29,558 6.98% $9,653 7.55%
*Yields on tax free investments are stated herein on a
taxable equivalent basis.
27
Investment Securities
September 30, 1997
(in thousands)
Held to Maturity Available for Sale
Amortized Fair Amortized Fair
Cost Value Cost Value
U.S. Treasury Securities $ 2,000 $ 2,000 $5,499 $ 5,559
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) 17,640 17,625 27,249 27,501
Securities issued by states
and political subdivisions
in the U.S.:
General obligations 2,526 2,532 3,686 3,715
Revenue obligations 3,030 3,038 701 715
Industrial development
and similar obligations 0 0 0 0
Mortgage-backed securities
(MBS):
Pass-through securities:
Guaranteed by GNMA 224 230 2,726 2,778
Issued by FNMA and FHLMC 640 645 323 323
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 1,144 1,139 3,666 3,657
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 0 0 0 0
Foreign debt securities 0 0 0 0
Equity securities:
Investments in mutual funds
& other equity securities with
readily determinable fair
values 0 0 300 300
All other equity securities(1) 0 0 2,058 2,058
Total (sum of items 1 through 6)
(total of column A must equal
Schedule RC, item 2.a)
(total of column D must
equal Schedule RC, item 2.b) 27,204 27,209 46,208 46,606
(1) Includes equity securities without readily determinable fair values
at historical cost in item 6.c, column D.
(2) Includes Small Business Administration "Guaranteed Loan Pool Certi-
ficates," U. S. Maritime Administration obligations, and Export-
Import Bank participation certificates.
(3) Includes obligations (other than mortgage-backed securities) 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.
28
Return on Equity and Assets
Return on assets is a measure of the firms ability to maximize asset
utilization. Total assets at 9/30/97 were $338,217,000. 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 operation for 1996
and through third quarter 1997 reflect continuous improvement.
The company's strategic plan addresses objectives to sustain improved
earnings, maintain quality loan and investment portfolio and to maintain
market share by providing amazing 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. The company vision statement calls for a 2 percent ROA, $500
million in assets and $10 million in net income by the year 2002. Other
strategic goals set to achieve the 2 percent ROA is the addition of a
second Finance Company and Insurance Company in 1998. Delta Finance
(First Citizens subsidiary) exceeded budget projections in 1997 in both
loan growth and income. A 50/50 partnership has been established with a
thriving local insurance agent to open a Insurance Office in Newbern, TN
subject to regulatory approval (located approximately 7 miles from
Dyersburg). Revenue generated from Delta Finance and the sale of
insurance company products is expected to significantly boost ROA in
1998.
Total Shareholder's equity (including loan loss reserve) of First
Citizens Bancshares as of 9/30/97 was $32,706,000 compared to
$28,786,000 at 9/30/96.
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 proven to be
ineffective in creating availability of shares. Shareholders continue
to express an interest in buying additional shares rather than selling
shares. Under terms of the repurchase program, the company would
purchase up to $200,000 of Bancshares stock 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 number of shares
authorized from 750,000 to 2,000,000. 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 number of
shares outstanding increased proportionately with no effect to capital.
The table below presents operating ratios for First Citizens Bancshares,
Inc. for the quarter ending September 30 (not annualized):
1997 1996 1995 1994 1993
Percentage of Net Income to:
Average Total Assets 1.08% .99% .78% .95% .93%
Average Shareholders Equity 11.21% 10.69% 8.45% 10.29% 10.78%
Percentage of Dividends
Declared Per Common Share to
Net Income Per Common Share 26.09% 24.38% 31.35% 24.19% 23.96%
Percentage of Average Shareholders'
*Equity to Average Total Assets 10.37% 10.02% 10.09% 9.98% 9.40%
*Includes Average Reserve for Loan Loss Account
29
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 credit line exceeding $7,000,000. During the quarter just
ended borrowings from this liquidity source averaged $41,544,000 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 91.17% at 9/30/97. Deposit
growth since year end was only .36%, while loan growth exceeded 10.99%.
Loan to asset ratio for the same period is 69.09%.
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 $100,344 million maturing in one year or less;
and (3) Investment Securities totaling $12,557 million with maturity
dates of one year or less. At September 30, 1997 Federal Home Loan
Borrowings totaled $6 million. Other sources of liquidity or non-core
fundings is the State of Tennessee (jumbo CDs). The state has
approximately $18 million in CDs with First Citizens as of 9/30/97. The
average rate associated with these deposits is 5.60%.
Interest rate sensitivity varies with various 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 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 are not reflective of 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
September 1997 1997 1996 1995
(in thousands)
Fixed Rate Loans > 5 years $13,310 $9,976 $12,614
$2 million matched with FHLB
1997 vs 1996 - Net interest income variance
due to rates $ 48 positive
1997 vs 1995 - Net interest income variance
due to rates $327 positive
Ranges Ranges
Projected 12 month exposure, utilizing 5
Rate scenarios (pos or neg) $ 94 $ 300
Tier I Capital $30,975 $30,975
Percent of Tier I Capital 0.30% 0.97%
Policy 2.00% 2.00%
30
CONDENSED GAP REPORT
------------------------------------
CURRENT BALANCES
-----------------------------------
09/30/97
(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 13,444 - - - - - - - 13,444
MONEY MARKET 257 257 - - - - - - -
TOTAL CASH & DUE FROM 13,701 257 - - - - - - 13,444
INVESTMENTS
US TREASURIES 7,560 - - - - 3,572 - 1,500 2,488
US AGENCIES 53,705 - 2,500 2,778 4,281 1,427 5,690 1,806 35,223
MUNICIPALS 9,986 - - - - 1,159 - 1,833 6,994
EQUITIES 2,359 - - - - - - - 2,359
TOTAL INVESTMENTS 73,610 - 2,500 2,778 4,281 6,158 5,690 5,139 47,064
LOANS
COMMERCIAL FIXED 31,644 - 1,512 1,545 2,454 6,738 5,775 2,582 11,038
COMMERCIAL VARIABLE 13,354 13,354 - - - - - - -
REAL ESTATE-VARIABLE 17,308 17,308 - - - - - - -
REAL ESTATE FIXED 136,646 - 7,314 3,641 5,221 8,935 12,737 15,260 83,538
HOME EQUITY LOANS 5,290 5,290 - - - - - - -
SEC MORTGAGE 1,960 - - - - - - - 1,960
INSTALLMENT LOANS 24,558 - 517 321 360 813 1,728 4,259 16,560
INSTALLMENT VARIABLE 32 32 - - - - - - -
FINANCE COMPANY 1,046 - - - - 500 546 - -
FLOOR PLAN 594 594 - - - - - - -
CREDIT CARDS 1,742 - - - - - - 1,742 -
FACTORING REC 74 - 74 - - - - - -
OVERDRAFTS 379 - 379 - - - - - -
TOTAL LOANS 234,627 36,578 9,796 5,507 8,035 16,986 20,786 23,843 113,096
LOAN LOSS RESERVE 2,788 - - - - - - - 2,788
NET LOANS 231,839 36,578 9,796 5,507 8,035 16,986 20,786 23,843 110,308
FED FUNDS SOLD
TOTAL EARNING
ASSETS 305,449 36,578 12,296 8,285 12,316 23,144 26,476 28,982 157,372
OTHER ASSETS
BUILDING, F&F & LAND 8,140 - - - - - - - 8,140
OTHER ASSETS 9,538 - - - - - - - 9,538
TOTAL OTHER ASSETS 17,678 - - - - - - - 17,678
TOTAL ASSETS 336,828 36,835 12,296 8,285 12,316 23,144 26,476 28,982 188,494
DEMAND DEPOSITS 29,705 - - - - - - - 29,705
TOTAL DEMAND 29,705 - - - - - - - 29,705
31
CONDENSED GAP REPORT
------------------------------------
CURRENT BALANCES
-----------------------------------
09/30/97
(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 16,297 16,297 - - - - - - -
NOW ACCOUNT 23,991 23,991 - - - - - - -
BUSINESS CHECKING 315 315 - - - - - - -
IMF-MMDA 10,512 10,512 - - - - - - -
FIRST RATE ACCOUNT 22,473 22,473 - - - - - - -
DOGWOOD CLUB 4,489 4,489 - - - - - - -
TOTAL SAVINGS 78,077 78,077 - - - - - - -
TIME DEPOSITS
CD 1-2 MONTHS 3,768 - 3,742 26 - - - - -
CD 3 MONTHS 877 - 430 180 225 42 - - -
CD 4-5 MONTHS 14,354 - 8,203 2,105 20 4,026 - - -
CD 6 MONTHS 19,880 - 2,454 4,266 2,762 9,728 670 - -
CD 7-11 MONTHS 1,390 - 303 165 26 635 261 - -
CD 12 MONTHS 14,552 - 1,700 419 849 2,122 8,203 1,259 -
CD 13-17 MONTHS 13,892 - - 14 - 9 10,661 3,208 -
CD 18-23 MONTHS 726 - 99 108 - - 213 306 -
CD 24 MONTHS 6,599 - 237 98 51 398 1,622 4,058 135
CD 25-30 MONTHS 7,865 - 17 - 74 57 1,829 5,739 149
CD 31-59 MONTHS 12,236 - 847 94 663 263 3,222 586 6,561
CD 31-59 MONTHS VAR. 87 - - - - 15 60 - 12
CD 60 MONTHS 5,945 - - 62 330 348 1,131 1,985 2,089
CD 60 MONTH VAR. 1,033 - - 62 - 63 90 577 241
CD SWEET 16 23,647 - 423 788 1,004 4,964 10,237 6,231 -
CD 7 MONTHS 1,925 - 70 - 265 1,360 230 - -
IRA FLOATING 177 - 177 - - - - - -
IRA FIXED 20,216 - 456 624 580 2,560 3,788 7,596 4,612
CHRISTMAS CLUB 401 - - - - - 401 - -
TOTAL TIME 149,570 - 19,158 9,011 6,849 26,590 42,618 31,545 13,799
TOTAL DEPOSITS 257,352 78,077 19,158 9,011 6,849 26,590 42,618 31,545 43,504
FED FUNDS PURCHASED 4,875 4,875 - - - - - - -
TT&L 1,000 1,000 - - - - - - -
SECURITIES
SOLD-SWEEP 14,350 14,350 - - - - - - -
SECURITIES
SOLD-FIXED 9,019 - 2,538 - 100 4,382 1,680 217 102
FHLB-SHORT TERM 7,150 7,150 - - - - - - -
FHLB-LIBOR INVEST. 3,947 3,947 - - - - - - -
FHLB-LONG TERM 2,916 - - - - - - 1,000 1,916
FHLB-PRIME RATE
ADVANCE 1,497 - - - - - - - 1,497
TOTAL SHORT TERM
BORR. 44,754 31,322 2,538 - 100 4,382 1,680 1,217 3,515
OTHER LIABILITIES 3,387 - - - - - - - 3,387
TOTAL OTHER LIAB. 3,387 - - - - - - - 3,387
TOTAL LIABILITIES 305,493 109,399 21,696 9,011 6,949 30,972 44,298 32,762 50,406
CAPITAL
STOCK, SURPLUS,
P.I.C 6,000 - - - - - - - 6,000
UNREALIZED GAIN
(LOSSES) 239 - - - - - - - 239
UNDIVIDED PROFITS 25,098 - - - - - - - 25,098
TOTAL CAPITAL 31,337 - - - - - - - 31,337
TOTAL LIAB'S &
CAPITAL 336,830 109,399 21,696 9,011 6,949 30,972 44,298 32,762 81,743
GAP (SPREAD) - -72,564 -9,400 -726 5,367 -7,828 -17,822 -3,780 106,751
GAP % TOTAL ASSETS - -21.54 -2.79 -0.22 1.59 -2.32 -5.29 -1.12 31.69
CUMULATIVE GAP - -72,564 -81,964-82,690 -77,323 -85,151-102,973 -106,753 -2
CUM GAP % TOTAL ASSETS - -21.54 -24.33 -24.55 -22.96 -25.28 -30.57 -31.69 -
SENSITIVITY RATIO - 0.34 0.37 0.41 0.47 0.52 0.54 0.58 1.00
32
NOTES TO THE GAP REPORT
1. The gap report reflects the interest sensitivity
positions during a flat rate environment. These
time frames could change if rates rise or fall.
2. Repricing over-rides maturities in various time
frames.
3. Demand deposits, considered to be core, are placed
in the last time frame due to lack of interest
sensitivity.
4. Savings accounts, also considered core, are placed
into the +2 year time frame. In a flat rate
environment, saving accounts tend not to reprice or
liquidate and become price sensitive only 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.
5. Simulations will be utilized to reflect the impact
of multiple rate scenarios on net interest income.
Decisions should be made that increase net interest
income, while always considering the impact on
interest rate risk. Overall, the bank will manage
the gap between rate sensitive assets and rate
sensitive liabilities to expand and contract with
the rate cycle phase. Approximately 20% - 30% of
our CD customers have maturities of 6 months or
less. First Citizens will attempt to minimize
interest rate risk by increasing the volume of
variable rate loans within the portfolio. The bank
will attempt to limit the net interest income
exposure to a maximum of 2.00% of tier I capital.
(Example .02 x $30,975,000 = $ 619,000). The bank's
Asset/Liability Committee will attempt to improve
net interest income through volume increases and
better pricing techniques. Long term fixed rate
positions will be held to a minimum by increasing
variable rate loans. The over 5 year fixed rate
loans should be held to less than 25% of assets,
unless they are funded with Federal Home Loan Bank
matched funds. These maximum limits are the high
points and the ACLO will strive to keep the amount
below this point. The 9/30/97 dynamic gap reports
reflects an exposure of $94,000 to $300,000.
(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 should this occur.
33
Capital Resources
Total capital (including Reserve for Loan Losses) as a
percentage of total assets for the quarter ending September
30 is presented in the following table for the years
indicated:
1997 1996 1995 1994 1993
10.50% 9.94% 9.28% 9.97% 9.01%
Increasing the capital base of First Citizens is a vital
part of strategic planning. Although the present capital to
asset ratio remains in excess of the level required by
Regulators for banks our size, management is aware of the
importance of strengthening this base.
The Federal Reserve Bank adopted a risk-based capital
measure for use in evaluating the capital adequacy of bank
holding companies effective January 1, 1991. The risk-based
capital measure focuses primarily on broad categories of
credit risk and incorporates elements of transfer, interest
rate and market risk. The calculation of risk-based capital
is accomplished by dividing qualifying capital by weighted
risk assets. The minimum risked based capital ratio is 8%,
at least one-half or 4.00% must consist of core capital
(Tier 1), and the remaining 4.00% may be in the form of core
(Tier 1) or supplemental capital (Tier 2). Tier 1
capital/core capital consists of common stockholders equity,
qualified perpetual stock and minority interests in
consolidated subsidiaries. Tier 2 capital/supplementary
capital consists of the allowance for loan and lease losses,
perpetual preferred stock, term subordinated debt, and other
debt and stock instruments.
Bancshares has historically maintained capital in excess of
minimum levels established by the Federal Reserve Board.
The risked-based capital ratio as of 9/30/97 was 14.46%,
significantly above the 8.00% required by regulation. With
the exception of the Reserve for Loan and Lease Losses, all
capital is Tier 1 level. Growth in capital will be
maintained through retained earnings. There is no reason to
assume that income levels will not be sufficient to maintain
an adequate capital ratio.
Common Stock
A Stock Repurchase Program approved by the Board of
Directors in 1994 provides for the purchase of the company's
common stock to service the Dividend Reinvestment Program.
The Company may repurchase up to $200,000 of Bancshares'
stock in a calendar quarter on a first come, first served
basis.
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 is the 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. Legal Proceedings
There are no legal proceedings that would result in a
significant impact to the bank's financial statement as of
this date.
Item 2. Changes in Securities
Dividends paid to Shareholders of First Citizens Bancshares,
Inc. are funded by dividends to the Bank Holding Company
from First Citizens National Bank and other cash available
at the holding company level. 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 9/30/97.
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: November 13, 1997 /s/Stallings Lipford
Stallings Lipford,
Chairman
Date: November 13, 1997 /s/Jeff Agee
Jeff Agee,
Senior Vice President &
Chief Financial Officer
First Citizens National Bank
(Principal Subsidiary)