1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter ended March 31, 1998 Commission File Number 0-11709
FIRST CITIZENS BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
TENNESSEE
(State or other jurisdiction of 62-1180360
incorporation or organization) (I.R.S. Employer Identification No.)
P. O. Box 370
Court Street, Dyersburg, Tennessee 38024
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (901) 285-4410
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 3 months and
(2) has been subject to such filing requirements for the past 90
days. Yes X No
Of the registrant's only class of common stock ($1.00 par value)
there were 770,590 shares outstanding as of March 31, 1998(net of
treasury stock).
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PART I -FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
3
FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(stated in thousands)
March 31, December 31,
1998 1997
(Unaudited) (Note)
ASSETS
Cash and due from banks $13,236 $13,771
Federal funds sold $6,400 $5,075
Investment securities
Trading Investments-stated at market $0 $0
Held to maturity-amortized cost-fair
value of $22,813 at March 31,
1998 and $21,610 at December 31,
1997. $22,764 $21,580
Available for sale-stated at market $68,364 $49,596
Loans (Excluding unearned income of
$1,563 at March 31, 1998 and
$1,622 at December 31, 1997) $259,870 $229,277
Less: Allowance for loan losses $3,197 $2,789
Net Loans $256,673 $226,488
Premises and equipment $9,129 $8,177
Intangible Assets $3,388 $133
Other assets $12,057 $8,467
TOTAL ASSETS $392,011 $333,287
LIABILITIES AND STOCKHOLDERS EQUITY
Deposits $309,831 $267,590
Securities sold under Agreements
to Repurchase $20,521 $21,765
Federal Funds Purchased & Other
Short Term Borrowing $2,100 $0
Long term debt-note 3 $17,900 $7,813
Notes Payable of Employee Stock
Ownership Plan $0 $0
Other liabilities $5,980 $2,994
TOTAL LIABILITIES $356,332 $300,162
Contingent Liabilities
Stockholders' Equity
Common stock, $1 par value-
2,000,000 authorized; 770,805
issued and outstanding at March
31, 1998; 750,718 issued and
outstanding at December 31, 1997 $771 $751
Surplus $12,460 $10,669
Retained earnings $22,123 $21,405
Obligation of Employee Stock
Ownership Plan $0 $0
Net unrealized gains (losses)
on available for sale $341 $307
Total Common Stock and
Retained Earnings $35,695 $33,132
Less-215 treasury shares, at
cost at March 31, 1998 and 158
shares at December 31, 1997 $(16) $(7)
TOTAL STOCKHOLDERS' EQUITY $35,679 $33,125
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $392,011 $333,287
NOTE: The balance sheet at December 31, 1997 has been taken from
the audited financial statements at that date and condensed.
4
FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(stated in thousands except E.P.S. and
shares outstanding)
Three Month Periods Ended
March 31, March 31,
1998 1997
INTEREST INCOME
Interest and fees on loans $5,730 $4,886
Interest on investment securities:
Taxable $1,115 $1,140
Tax-exempt $132 $121
Other interest income $94 $58
Lease financing income $0 $0
TOTAL INTEREST INCOME $7,071 $6,205
INTEREST EXPENSE
Interest on deposits $3,081 $2,689
Other interest expense $311 $293
TOTAL INTEREST EXPENSE $3,392 $2,982
NET INTEREST INCOME $3,679 $3,223
Provision for loan losses $210 $160
Net interest income
after provision $3,469 $3,063
Other Income
Securities gains (losses) $26 $13
Other income $1,050 $988
Total Other Income $1,076 $1,001
Other expenses $2,869 $2,514
Net income before
income taxes $1,676 $1,550
Provision for income taxes $568 $537
Net Income $1,108 $1,013
Earnings Per Share $1.46 $1.37
Weighted average number of
shares outstanding 760803 741690
1997 income data has been adjusted to reflect annual incentive
bonus accruals previously accounted for during fourth quarter.
5
FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED, STATED IN THOUSANDS)
Three Months Ended March 31
1998 1997 1996
OPERATING ACTIVITIES
Net cash provided by
operating activities $ 2,990 $ 161 $ 2,217
INVESTING ACTIVITIES
Proceeds of maturities
of held to maturity
securities $ 3,992 $ 4,499 $ 2,309
Purchase of held to
maturity investments ($ 5,043) ($ 8,990) ($ 1,500)
Proceeds from maturities
of available for sale
securities $ 5,463 $ 3,103 $ 1,191
Proceeds from sales of
available for sale
securities $ 1,500 $ 1,000 $ 3,100
Purchase of available
for sale securities ($25,163) ($ 4,860) ($ 8,660)
Increase in loans-net ($30,395) ($ 3,167) ($ 5,327)
Payment for purchase of
Bank of Troy-net of cash
acquired ($ 5,957) $ 0 $ 0
Purchases of premises
and equipment ($ 1,192) ($ 349) ($ 64)
Net Cash provided by
investing activities ($56,795) ($ 8,764) ($ 8,951)
FINANCING ACTIVITIES
Net Increase (Decrease)
in Demand & Savings
Accounts $ 7,966 $ 5,237 $ 1,300
Increase (Decrease) in
Time Accounts $34,275 ($ 4,776) $ 1,992
Increase (Decrease) in
Long term Debt $10,087 $ 4,460 ($ 545)
Treasury Stock
Transactions ($ 9) $ 1 ($ 3)
Proceeds from Sale of
Common Stock $ 1,811 $ 100 $ 76
Cash Dividends Paid ($ 391) ($ 302) ($ 242)
Net Increase (Decrease)in
Short Term Borrowings $ 856 $ 4,195 $ 700
Net Cash provided (used)by
Financing Activities $54,595 $ 8,915 $ 3,278
Increase (Decrease) in
Cash & Cash
Equivalents $ 790 $ 312 ($ 3,456)
Cash and Cash
Equivalents at
beginning of year $18,846 $13,507 $13,544
Cash and Cash Equivalents
at end of year $19,636 $13,819 $10,088
Cash Payments made for interest and income taxes during the years
presented are as follows:
1998 1997 1996
Interest $3,263 $3,106 $2,913
Income Taxes $ 725 $ 263 $ 332
NOTE: Net cash provided by operating activities was lower in 1997
due to the purchase of split dollar life insurance policies for
bank officers.
These policies are classified as other assets on the balance
sheet.
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FIRST CITIZENS BANCSHARES, INC.
STATEMENT OF COMPREHENSIVE INCOME
STATED IN THOUSANDS EXCEPT PER SHARE AMOUNTS
Three Months Ended March
1998 1997
Net Income $1,108 $1,013
Changes in Available for Sale Securities $57 ($582)
Tax Impact (Available for Sale Securities) $23 ($233)
Comprehensive Income $1,142 $664
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FIRST CITIZENS BANCSHARES, INC.,
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1997
NOTE 1-CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet as of March 31, 1998, the
consolidated statements of income for the three month periods
ended March 31, 1998, 1997, and 1996, and the consolidated
statements of cash flows for the three 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 March 31, 1998 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, 1997.
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
(stated in thousands)
03/31/98 03/31/97
Amount outstanding-end of period $22,621 $25,420
Weighted average rate of outstanding 4.71% 4.63%
Maximum amount of borrowings at month end $22,621 $25,420
Average amounts outstanding for period $21,019 $21,054
Weighted average rate of average amounts 4.51% 4.39%
NOTE 4-LONG TERM DEBT (stated in thousands)
Long term debt is comprised of Federal Home Loan Bank Borrowings
and finance company debt, and new debt associated with the Troy
acquisition. The finance company debt is classified as long term
debt due to our intent to renew. The parent company debt is with
Suntrust-Nashville. The average life is as presented and the
FHLB funds are matched with loans and investments.
Average Average Average
Volume Rate Maturity
FHLB Borrowings-loans $6,012 5.86% 7 years
FHLB Borrowings-Libor $2,850 5.75% 9 years
Finance Company Debt $1,122 6.61% 5 years
Parent Company Debt $1,379 6.89% 7 years
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FIRST CITIZENS BANCSHARES, INC.,
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(UNAUDITED)
MARCH 31, 1998
NOTE 5-STATEMENT OF CASH FLOWS
(stated in thousands)
March March March
1998 1997 1996
Actual payments made
during the periods:
Interest $3,263 $3,106 $2,913
Income taxes $ 725 $ 263 $ 332
NOTE 6-CONTINGENT LIABILITIES
There are no material pending litigations as of the current
reportable date that would result in a liability.
NOTE 7-INVESTMENT SECURITIES
(stated in thousands)
The difference between book values of investment securities and
market values at March 31, 1998 and December 31, 1997, total
$49,000 and $30,000 respectively. FASB 115 requires banks 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 every
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 negative
$568,000 increase for the ending period of March 1998 and, net of
tax $341,000 flowed to capital. These movements can fluctuate
with the bond market.
First Citizens has not engaged in any derivative activities (as
defined by paragraphs 5-7 of FASB 119) for any of the reported
periods.
NOTE 8-REGULATORY CAPITAL REQUIREMENTS
Regulatory agencies impose certain minimum capital requirements
on both First Citizens Bancshares, Inc., and First Citizens
National Bank. On December 16, 1988, the Federal Reserve Board
approved the Risk Based Capital Guidelines for Bank Holding
Companies. Presently, the Holding Company and First Citizens
National Bank, and Bank of Troy (subsidiary of Bank) exceed the
required minimum standards set by the Regulators. The
consolidated Tier 1 Ratio and Tier 2 Ratio are 11.66% and 12.83%
respectively.
NOTE 9-DEFERRED INCOME TAXES
(stated in thousands)
First Citizens adopted FASB 109 as of January 1, 1993. The
deferred tax liability account reflects an asset totaling
$84. The timing differences mainly consist of Reserve for
Loan Loss timing differences.
NOTE 10-RESERVE FOR LOAN LOSSES
(stated in thousands)
FASB 114 and 118 were implemented during the first quarter of
1995. This new FASB requires companies to set aside reserves
for impaired loans.
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FIRST CITIZENS BANCSHARES, INC.,
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(UNAUDITED)
MARCH 31, 1998
The following data reflects impaired totals for the reportable
periods:
Impaired Loan Balance or Recorded Balance $544
Amount of Recorded Balance with Related Allowance $204
Amount of Recorded Balance with no Related Allowance $340
Interest income is recognized on impaired loans on a cash basis.
Cash receipts are applied as cost recovery or principal recovery
first, consistent with OCC Regulations.
Note 11 - Asset Impairment
The financial standards board issued statement 121 addressing
accounting for the impairment of long-lived assets that will be
held and used, including certain identifiable intangibles, and
good-will related to those assets. The statement, which was
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 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 13-FASB 128 and 129-Earnings Per Share.
First Citizens Bancshares has a simple capital structure, that
is, those with only common stock outstanding. The method used
for computing the weighted average shares is based off a daily
weighted average amount. First Citizens has no preferred stock,
redeemable stock, or any items that would dilute basic earnings
per share.
Note 14-FASB 130-Comprehensive Income
This statement establishes reporting and displays requirements
for comprehensive income and its components. A separate
financial statement is presented that starts with net income from
operations and then includes other comprehensive incomes.
Bancshares has only one comprehensive income item (Changes in the
Market Value of Available for Sale Investment Securities). This
total is carried to the balance sheet net of tax (unrealized gain
or loss on available for sale).
Note 15-ARB 16-Business Combination
On February 28, 1998, First Citizens Bancshares purchased the
Bank of Troy (Troy, TN). The newly acquired bank is a subsidiary
of the Parent Company. Troy has total assets of approximately
$60 million. Troy is located in the County of Obion and will
expand Bancshare's market as projected in our strategic plan. The
acquisition was purchased with cash and a note payable to
Suntrust-Nashville. Troy's figures included in the consolidated
totals include only the month of March or 1 month. The total
cost of the acquisition was $9.6 million. A note payable was
established in the amount of $4.1 million to help fund the
purchase. The excess of cost over fair market value was
attributed to goodwill. Goodwill amounted to $3.2 million and is
being written off over 15 years on the straight line basis. This
yearly amortization amounts to $219,900 per year.
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All assets and liabilities were marked to market or its net
realizable value due to purchase accounting. There are no
contingent payments. In this acquisition, First Citizens
committed to employ the President of Bank of Troy through 1999.
The following table presents unaudited pro forma combined
historical results as if the Bank of Troy was acquired at the
beginning of fiscal year 1997. The pro forma results are not
necessarily indicative of what actually would have occurred if
the acquisition had been completed as of the beginning of fiscal
year 1997, nor are they necessarily indicative of future
consolidated results.
Pro Forma Results (Unaudited)
Dollars in thousands (except earnings per share)
1998 1997
Interest Income $7,797 $6,910
Interest Expense $3,804 $3,384
Net Interest Income $3,993 $3,526
Provision for Loan Losses $225 $175
Net Interest Income after Provision $3,768 $3,351
Other Income $1,118 $1,041
Other Expenses $3,129 $2,774
Net Income Before Income Taxes $1,757 $1,618
Provision for Income Taxes $595 $550
Net Income $1,162 $1,068
Earnings Per Share $1.53 $1.44
Weighted Average Number of Shares
Outstanding 760803 741690
Note: 16-FASB 132-Employers' disclosures about pensions and other
postretirement benefits.
First Citizens and its subs do not sponsor any defined benefit
plans or postretirement benefits.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The purpose of the following discussion is to address significant
changes in income and expense accounts when compared to the
quarter ending March 31, 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 activities to
date by the Holding Company do not materially affect the income
report.
Operating results for the first quarter of 1998 produced net
income of $1,108,000 up from $1,013,000 at 3/31/97. Earnings per
share for the quarter just ended was $1.46 compared to $1.37 one
year ago. First quarter dividend was .50 cents per share
11
compared to .40 cents per share each quarter of 1997. Book value
of common stock ended March 31, 1998 at $46.30 and March 31, 1997
at $40.52. Net Interest Margins reflect a slight increase from
4.05% to 4.09%. Bancshare's annualized returned on assets was
1.29% compared to 1.27% at 3/31/97. Return on Average Equity for
the two periods under comparison was 9.10% (1998) and 9.33%
(1997) reflecting the deployment of capital to purchase Bank of
Troy. Non-Performing Assets to Capital indicated significant
improvement decreasing from 7.39% in 1997 to 1.91% in 1998. The
market price of Bancshares, Inc. ranged from $58.00 the first
quarter of 1997 to $94.00 the first quarter of 1998. Total
average assets ended March at $343,565,000 compared to
$318,236,000 in 1997. Outstanding shares continue to increase
with shares issued for the purchase of 50% interest in White and
Associates Dyersburg Insurance Agency and Cash Option and
Dividend reinvestment Programs. Shares Outstanding were 771,000
at quarter end compared to 743,000 at quarter end in 1997.
Financial Ratios presented were adjusted to reflect the
acquisition of Bank of Troy, Troy, TN. And White and
Associates/First Citizens Insurance Agency. Ratios presented for
1997 were adjusted for bonus accruals.
Total Asset growth of 17.61% reflects the purchase of Bank of
Troy as of 2/28/98. Quality in the loan portfolio continues to be
a primary focus of Bank management. Non-performing loans
represent $890,000 or .34 percent of the total loan portfolio.
The internal Loan Review Report indicates that the loan portfolio
is in good condition based on the percentage of problem loans to
gross capital funds as of 2/28/98. Problem loans total
$4,899,803 or 14.04% of gross capital funds as of the report
date. The report indicated that the bank had a zero balance in
Other Real Estate Owned. The Loan Loss Reserve was also
determined to be adequate using the formula required by FASB
ruling 114 and 118. The Reserve for Loan Loss Balance as of the
report date was 1.27% of total portfolio. Bank policy requires
the Reserve Balance to be maintained at least one percent of
total loans.
First Citizens National Bank is the leading agricultural lender
in West Tennessee and is a Certified Rural Economic Development
Lender. The loan portfolio consist of agriculture loans totaling
$28,384,211 or 10.92% of the total portfolio. Certain areas of
West Tennessee have experienced considerable rainfall in March
and April of this year. As a result of the excessive rain, some
flooding has occurred along the Mississippi River as well as
other rivers that empty into the Mississippi. Loan
Administration is continuously accessing the potential effect of
excessive rain and flooding to the banks loan portfolio. As of
this report date, losses to local farmers and the bank's
portfolio are projected to be minimal.
First Citizens National Bank continues to focus on controlled
growth, efficiency and diversification of operations and
products. The Bank's Strategic Plan supports management
objectives through strategic action steps that call for asset
growth through acquisitions as well as an aggressive sales
program. The acquisition of the Bank of Troy, Troy, TN. was
finalized in February, 1998. The Bank's President & CEO
announced that the bank would continue to focus on asset growth
through acquisitions at the 1998 Annual Shareholders Meeting. An
aggressive sales program was established in January, 1997 and
continues to be a driving force in achieving a seven percent
asset growth goal set in the 1998 budget process as well as
maintaining market share. Most recent numbers published by FFIEC
indicates that First Citizens holds 52 percent of total deposits
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in its market area. A strong focus is also placed on increasing
fee income by establishing other bank subsidiaries such as
Finance and Insurance Companies. Delta Finance, a bank owned
finance company was established in 1997. The company posted a
loss of approximately $6,000 the first year of operations, but
has been profitable each month in 1998. First Citizens purchased
50 percent of White and Associates Insurance Agency, the largest
Insurance Agency in Dyersburg, Dyer County, TN. The company
posted a 17 percent return on the bank's investment the first
month of Operations. Operation efficiency is achieved through
planning and implementation of strategic action steps set in the
Bank's Technology Strategic Plan. In 1997 the bank installed a
Document Imaging System to improve operations efficiency in the
back office as well as improved customer service. The system was
fully implemented with all credit/documentation file access
obtained through a personal computer network. The most recent
customer service survey indicates that the bank provides quality
service that meets customer expectations. Results of a home
banking survey indicated a demand for Telephone and P. C. Home
Banking. First Citizens made a decision to offer an Internet
based Home Banking service before the year 2000. A Home Banking
Team has been established and is scheduled to begin the project
in June, 1998. First Citizens currently offers touch tone
telephone banking to its customers with utilization of over
16,000 calls monthly.
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. Interstate Banking/
Branching became a reality by legislation passed September 13,
1994. The act permits full nationwide interstate branching after
June 1, 1997. First Citizens Bancshares, Inc. and First Citizens
National Bank are located in a highly competitive market place,
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 the two
largest financial institutions in the state. First Citizens has
historically maintained in excess of 50% of local market share
and reflected 52% as of June 1997. 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. The most recent market analysis indicates a
remarkably strong performance by First Citizens in satisfying
customer expectations in the areas of personnel, service and
convenience.
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The following table compares year-to-date non-interest income,
and expense of First Citizens as of March 31, 1998, 1997, and
1996:
Non-Interest Income
(in thousands)
March 31
% of % of
1998 Change 1997 Change 1996
Service Charges on
Deposit Accounts $411 3.01% $399 20.91% $330
Other Income $429 17.54% $365 (10.98%) $410
Trust Income $236 (.43%) $237 50.00% $158
TOTAL NON-INTEREST
INCOME $1,076 7.50% $1,001 11.47% $898
Total Non-Interest Income increased 7.50% and 11.47% when
comparing March 1998, 1997 and 1996. 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 first quarter 1998 Other Income Category to previous
years. Increased income in the areas of Mortgage Lending,
Broker Services and Insurance Commissions is reflected in the
17.54% increase. Trust Income remained flat when compared to
first quarter, 1997. However, a 50% increase was realized in
1997 when compared to 1996.
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 the death of the insured officer, the Bank's
original investment plus accrued interest will be repaid, as well
as a death benefit paid to the 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.
Non-Interest Expense
(in thousands)
March 31
% of % of
1998 Change 1997 Change 1996
Salaries & Employee
Benefits $1,649 11.72% $1,476 1.10% $1,460
Net Occupancy
Expense $ 494 6.47% $ 464 7.41% $ 432
Other Operating
Expense $ 726 26.48% $ 574 (13.95%) $ 667
TOTAL NON-INTEREST
EXPENSE $2,869 14.12% $2,514 (1.76%) $2,559
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 11.72 % when comparing
March, 1998 to the same time period in 1997. Full-time
equivalent employees was 172 at 3/31/98 compared to 149 at
3/31/97 and 149 at 3/31/96. FTE increased in 1998 when compared
to previous years due to the addition of (1) 3 FTE staff members
to accomplish a conversion of the bank's Customer Information
File; (2) A part-time staff member at the Super Money Market
Branch to accommodate extended service hours as well as to
accomplish the branch sales goals; and (3) A full-time staff
member at Delta Finance Company. It is anticipated that FTE will
14
increase the second quarter due to the hiring of 4 staff members
for the Traveling Customer Service Associate Program. Part-time
C.S.A. are trained and maintained on the bank's staff to support
additional staffing needs during peak hours, summer vacation
periods, and to support extended banking hours. Eighteen
employees were added with Bank of Troy acquisition. Increased
investment in technology resulted in a increase in computer
expense and the related depreciation to those investments causing
net occupancy expense to increase 6.47% and 7.41% in 1998 and
1997. Net occupancy expense is projected to continue to increase
as technology is installed to meet the needs of our customer
base. These cost will be offset in part by the reallocation of
employees to fee income producing positions. Other Operating
Expense increased due to organizational cost of the Insurance
Agency and Bank of Troy Acquisitions.
DEPOSITS
The average daily amount of deposits and average rates paid on
such deposits are summarized for the quarters ending March 31 for
the years indicated:
COMPOSITION OF DEPOSITS
(in thousands)
1998 1997 1996
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
Non
Interest Bearing
Demand Deposits $ 30,918 - $ 26,974 - $ 26,019 -
Savings Deposits $ 85,943 3.30% $ 82,994 3.27% $ 71,530 3.10%
Time Deposits $162,885 5.57% $147,971 5.44% $141,216 5.70%
TOTAL DEPOSITS $279,746 4.26% $257,939 4.17% $238,765 4.30%
Growth in total deposits continues to be a challenge for First
Citizens. 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 recent market share analysis, Bancshares holds approximately
52% (excluding overnight and fixed term repurchase agreements) of
the bank deposits domiciled in Dyer County. The bank competes with
First Tennessee Bank, N.A. (22% of total deposits), Security Bank
(13%), Union Planters, another regional bank also holds market
share of 13 percent. First Citizens also competes with a Credit
Union, seven or more Finance Companies, Three Brokerage Services,
and other types of financial service providers in the area. In
spite of aggressive competition, total deposits increased
approximately $40 million in 1998 attributed primarily to the
acquisition of the Bank of Troy, Troy Tennessee. First Citizens
will continue to focus on controlled deposit growth through
acquisitions that would provide investment funds for the bank's
investment and loan portfolio's.
Average rates paid on deposits continue to reflect sound
asset/liability management strategy to maintain interest margins
that are consistent with company goals. A deposit pricing strategy
adopted in 1996 was a shifting from paying higher rates to obtain
retail deposits to the purchase of wholesale deposits. Interest
cost of wholesale deposits in comparison to market rates paid on
retail deposits often provides for net interest margins that
compliment the bank's capital plan. Total deposits consisted of
approximately $17 million in the State of Tennessee funds at
15
quarter end. Quality Sales, Quality Service program along with the
Bank's Officer Call Program is in place to generate new business
and provide support for existing customers. Deposit growth in the
1998 budget is projected at 7 percent.
Sweep Account Funds totaling $12,975,000 are not included in the
average balances for demand deposits. The "Sweep" total is
included in the balance sheet category of securities sold under an
agreement to repurchase totaling $20,521,000 with an average rate
of 5.08 percent at 3/31/98. Repurchase Agreement "Sweep" is a
product offered to large balance customers which provides for funds
to automatically sweep daily from a demand deposit account into an
overnight repurchase agreement. This affords commercial customers
the opportunity to earn interest on excess collected funds while
providing availability of adequate funds to clear large
denomination checks as presented for payment. There were no
significant changes to products and services during the first
quarter of 1998.
Management is continuously monitoring and enhancing the bank's
product and service lines 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 Travelers Club. The Visa
Check Card (a Debit/ATM card all in one )replaced the Bank's ATM
Card Program in 1997. Point of sale transactions as well as ATM
transactions rose significantly the fourth quarter of 1997 and has
continued into 1998. Fee income from surcharging and interchange
is expected to close the gap on the bank's return on its
investment cost. The Travelers Club was formed in 1998 and offers
additional services and periodic trips to depositors having
balances of $2,000 or more. The Club is promoted to grow Bank
Deposit relationships.
The following table sets forth the maturity distribution of
Certificates of Deposit and other time deposits of $100,000.00 or
more outstanding on the books of First Citizens on March 31, 1998:
Maturity Distribution Of Time Certificates Of Deposit
In Amounts of $100,000.00 Or More As Of March 31, 1998
(in thousands)
Maturity Total Amount
3 months or less $23,293
3 through 12 months $29,041
1 year through 5 years $ 4,543
over 5 years $ 0
Total $56,877
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
continues to climb upward when reviewing the information presented
in the table. Interest earning assets as of 3/31/98 were
$320,342,000 at an average rate of 8.92% compared to $288,054,000,
average rate of 8.70% and $268,298,000 average rate of 8.91% at
3/31/97 and 3/31/96 respectively. The average rate on total
interest bearing liabilities was 5.08%, 4.59%, and 4.74% as of
March 31, 1998, 1997, and 1996. Net yield on average earning
assets was 4.68%, 4.56%, and 4.65%, reflecting an increased
competitive environment. Maintaining interest rate margins
achieved in prior years continues to be a challenge. 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 the negative
effects of volatile swings in interest rates. Interest margins are
well managed to achieve acceptable profits and a return on equity
within policy guidelines.
16
First Citizens Bancshares, Inc.
Quarter Ending March 31
Monthly Average Balances and Interest Rates
(in thousands)
1998 1997 1996
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
ASSETS
INTEREST EARNING
ASSETS:
Loans (1)(2)(3) $235,315 $5,730 9.74% $207,667 $4,884 9.41% $191,649 $4,685 9.78%
Investment Securities:
Taxable $ 66,998 $1,115 6.66% $ 66,522 $1,134 6.82% $ 63,718 $1,051 6.60%
Tax Exempt (4) $ 11,392 $ 199 6.99% $ 10,568 $ 201 7.61% $ 10,948 $ 208 7.60%
Interest Earning
Deposits $ 436 6 5.51% $ 201 $ 2 3.98% $ 49 $ 1 8.17%
Federal Funds Sold $ 6,201 $ 88 5.68% $ 3,096 $ 43 5.56% $ 1,930 $ 27 5.60%
Lease Financing $ 0 $ 0 0% $ 0 $ 0 0% $ 4 $ 0 0%
Total Interest
Earning Assets $320,342 $7,138 8.92% $288,054 $6,264 8.70% $268,298 $5,972 8.91%
NON-INTEREST
EARNING ASSETS:
Cash and Due From
Banks $ 10,978 $ - -% $ 10,403 $ - -% $ 9,958 $ - -%
Bank Premises and
Equipment $ 8,107 $ - -% $ 8,144 $ - -% $ 8,748 $ - -%
Other Assets $ 10,436 $ - -% $ 7,338 $ - -% $ 4,343 $ - -%
Total Assets $349,863 $ - -% $313,939 $ - -% $291,347 $ - -%
LIABILITIES AND
SHAREHOLDERS' EQUITY:
INTEREST BEARING
LIABILITIES:
Savings Deposits $ 85,943 $ 708 3.30% $ 82,994 $ 678 3.27% $ 71,530 $ 553 3.10%
Time Deposits $162,885 $ 2,268 5.57% $147,971 $ 2,011 5.44% $141,216 $2,010 5.70%
Federal Funds
Purchased and
Other Interest
Bearing
Liabilities $ 32,784 $ 416 5.08% $ 25,560 $ 293 4.59% $ 25,024 $ 296 4.74%
Total Interest
Bearing
Liabilities $281,612 $3,392 4.82% $256,525 $ 2,982 4.65% $237,770 $2,859 4.81%
NON-INTEREST
BEARING LIABILITIES:
Demand Deposits $ 30,918 $ - -% $ 26,974 $ - -% $ 26,019 $ - -%
Other Liabilities $ 3,814 $ - -% $ 2,194 $ - -% $ 2,570 $ - -%
Total Liabilities $316,344 $ - -% $285,693 $ - -% $266,359 $ - -%
SHAREHOLDERS'
EQUITY $ 33,525 $ - -% $ 28,246 $ - -% $ 24,988 $ - -%
TOTAL LIABILITIES
AND SHAREHOLDERS'
EQUITY $349,869 $ - -% $313,939 $ - -% $291,347 $ - -%
NET INTEREST
INCOME $ - $ 3,746 -% $ - $ 3,382 -% $ - $3,113 -%
NET YIELD ON
AVERAGE EARNING
ASSETS $ - $ - 4.68% $ - $ - 4.56% $ - $ - 4.65%
(Annualized)
17
(1) Loan totals are shown net of interest collected, not earned
and Loan Loss Reserve.
(2) Nonaccrual loans are included in average total loans.
(3) Loan Fees are included in interest income and the
computations of the yield on loans. Overdraft fees are
excluded.
(4) Interest and rates on securities which are non-taxable for
Federal Income Tax purposes are presented on a taxable
equivalent basis.
COMPOSITION OF LOANS
Total loans at 3/31/98 were $259,870,000 compared to $214,560,000 at
3/31/97 and $197,201,000 at 3/31/96. The bank's loan portfolio has
experienced exceptional loan growth as reflected in the Composition of
Loan table. A comparison of growth in the portfolio indicates the
largest percentage of growth is centered in Real Estate. Mortgage and
Construction Loans increased approximately $32 million since 3/31/96,
again reflecting Bank of Troy acquisition. Financial and Agricultural
Loans have remained flat, while Consumer Loans increased approximately
$4 million. The upward trend in Mortgage Loans is attributed to
substantial growth in both population and number of households recorded
in Dyer County over the past decade. Construction of new homes as well
as Commercial Businesses continue to provide a source of loan activity
for First Citizens. First Citizens is the largest agriculture lender in
the State of Tennessee and is an approved Farm Credit Services Lender.
Slow growth in agriculture loans is due to a delay in draw downs of
operating lines of credit. Spring of 1998 has produced a wetter than
normal spring season causing delays in farm operations. Agriculture
resources comprise a significant portion of the Dyer County Market.
Total farm land in production is approximately 231,000 acres with an
average value of $449,501. Average machinery value per farm is
$76,449. First Citizens investment in agriculture real estate loans
totals $16.1 million while crop production and equipment loans total
$12.2 million. Total gross agriculture income posted in 1997 from the
sale of agriculture products was $79,203,850. Dyer County ranks as the
number one producer of soybeans, grain sorghum, commercial vegetables
and rice in the state of Tennessee. Agriculture credits 30 days or
more past due in excess of $25,000 total approximately $475,500.
Agriculture credits listed on the banks problem list total
approximately $1.5 million with over $700,000 guaranteed by FmHA.
Growth in consumer loans was slowed in 1997 due to increased number of
reported bankruptcies in the state of Tennessee as well as perceived
deterioration in consumer credit in Dyer County.
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 March was 4.1% compared to February's rate at
4.5%, according to the Tennessee Department of Employment Security.
This compares to Tennessee's unemployment rate of 4.7% at 3/31/98.
18
The provision for loan losses increased in proportion to loan growth as
required by loan policy. The provision at 3/31/98 was 1.27% of total
loans well in excess of policy requirements of one percent. Experience
of the lending staff and adherence to policy lends a comfort level to
the portfolio that supports the Loan Loss Allowance at the present
level. Problem loans at 3/31/98 were $4,868,855 reflecting an increase
of $1,640,424 when compared to the 3/31/97 total of $3,228,431.
Problem loans represent 1.87% of total loans as of 3/31/98.
Loan Administration sets policy guidelines approved by the Board of
Directors regarding portfolio diversification and underwriting
standards. Loan policy includes board approved guidelines for
collateralization, loans in excess of loan to value limits, maximum
loan amount, maximum maturity and amortization period for each loan
type. Policy guidelines for loan to value ratio and maturities related
to various collateral are as follows:
Collateral Max. Amortization Max. LTV
Real Estate Amort. discussed herein Amort. discussed herein
Equipment 5 Years 75%
Inventory 5 Years 50%
A/R 5 Years 75%
Livestock 5 Years 80%
Crops 1 Year 50%
*Securities 10 Years 75% (Listed)
50% (Unlisted)
*Maximum LTV on margin stocks (stocks not listed on a national
exchange) when proceeds are used to purchase or carry same, shall be
50%.
Diversification of the banks' real estate portfolio is a necessary and
desirable goal of the bank's real estate loan policy. In order to
achieve and maintain a prudent degree of diversity, given the
composition and general economic state of the bank's market area, the
bank will strive to maintain a real estate loan portfolio
diversification based upon the following:
* Agricultural loans totaling in aggregate no more than 20% of the
Bank's total loans;
* Land acquisition and development loans totaling in aggregate no
more than 10% of the Bank's total loans;
* Commercial construction loans totaling in aggregate no more than
10% of the Bank's total loans;
* Residential construction loans totaling in aggregate no more than
10% of the Bank's total loans;
* Residential mortgage loans totaling in aggregate no more than 40%
of the Bank's total loans; and
* Commercial loans totaling in aggregate no more than 30% of the
Bank's total loans.
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:
19
Loan Category LTV Limit (%)
Raw Land 65
Land Development or Farmland 75
Construction:
Commercial, multi-family, and
other non-residential 80
1-to-4 family residential 80
Improved Property 80
Owner-occupied 1-to-4 family
and home equity 80
Multi-family construction loans include loans secured by cooperatives
and condominiums. Owner-occupied 1-to-4 family and home equity loans
which equal or exceed 90% LTV at origination must have either private
mortgage insurance or other readily marketable collateral pledged in
support of the credit.
On occasion, the Loan Committee may entertain and approve a request to
lend sums in excess of the LTV limits as established by policy,
provided that:
a. The request is fully documented to support the fact that other
credit factors justify the approval of that particular loan as an
exception to the LTV limit;
b. The loan, if approved, is designated in the Bank's records and
reported as an aggregate number with all other such loans approved
by the full Board of Directors on at least a quarterly basis;
c. The aggregate total of all loans so approved, including the
extension of credit then under consideration, shall not exceed 50%
of the Bank's total capital; and
d. Provided further that the aggregate portion of these loans in
excess of the LTV limits that are classified as commercial,
agricultural, multi-family or non-1-to-4 family residential
property shall not exceed 30% of the Bank's total capital.
Amortization Schedules. Every loan must have a documented repayment
arrangement. While reasonable flexibility is necessary to meet the
credit needs of the Bank's customers, in general all loans should be
repaid within the following time frames:
Loan Category Amortized Period
Raw Land 10 years
Construction:
Commercial, multi-family, and
other non-residential 20 years
1-to-4 family residential 20 years
Improved Property Farmland 20 years
Owner-occupied 1-to-4 family
and home equity 20 years
The average yield on loans of First Citizens National Bank as of March
31 in the years indicated is as follows:
Year Yield
1998 9.74%
1997 9.41%
1996 9.78%
1995 9.57%
1994 8.77%
The aggregate amount of unused guarantees, commitments to extend credit
and standby letters of credit was $45,336,000 as of 3/31/98.
20
The following table sets forth loan totals net of unearned income by
category for the past five years:
March 31
(in thousands)
1998 1997 1996 1995 1994
Real Estate Loans:
Construction $ 23,313 $ 17,643 $ 13,875 $ 11,457 $ 7,598
Mortgage $137,002 $129,317 $112,732 $ 95,763 $ 90,537
Commercial,
Financial and
Agricultural
Loans $ 41,778 $ 41,802 $ 46,691 $ 45,467 $ 35,784
Installment
Loans to
Individuals $ 27,679 $ 23,630 $ 21,739 $ 19,885 $ 16,212
Other Loans $ 1,929 $ 2,168 $ 2,164 $ 1,878 $ 2,711
TOTAL LOANS $259,870 $214,560 $197,201 $174,450 $152,842
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 $84,506,000 or 32.52% of the total
portfolio are subject to repricing within one year or carry a variable
rate of interest. The ratio is down from 39.84% at 3/31/97 and 43.89% at
3/31/96. Maturities in the one to five year category total $162,854,000,
reflecting an increase of $28.6 and $19.5 million when compared to 3/31/97
and 3/31/96.
Due after
Due in one one year but Due after
year or less within five years five years
(in thousands)
Real Estate $36,936 $107,275 $31,222
Commercial,
Financial and
Agricultural $18,751 $ 24,780 $ 3,473
All Other Loans $ 6,533 $ 30,799 $ 101
TOTAL $62,220 $162,854 $34,796
Loans with Maturities After One Year for which:
(in thousands)
Interest Rates are Fixed or Predetermined $175,364
Interest Rates are Floating or Adjustable $22,286
NON-PERFORMING ASSETS
Total Non Performing Assets were $890,000 or .28% of the loan portfolio as
of 3/31/98 compared to peer group ratio of .69% as of 12/31/97. First
Citizens Non Performing loans were $2,221,000 or 1.04% of total loans at
3/31/97 compared to peer group ratio of .78% as of the same time period.
Total non-performing loans at 12/31/97 were $604,000 compared to
$1,295,000 at year end 1996. Allowance for loan losses as a percent of
total loans was 1.27 percent. Loan policy calls for an allowance balance
of at least 1% of total loans. Continued improvements reflected in the
financial ratios are indicative of well communicated loans policies and
procedures.
21
Categorization of a loan as non-performing is not in itself a reliable
indicator of potential loan loss. The banks' policy states that the
Bank shall not accrue interest or discount on (1) any asset which is
maintained on a cash basis because of deterioration in the financial
position of the borrower, (2) any asset for which payment-in-full of
interest or principal is not expected, or (3) any asset upon which
principal or interest has been in default for a period of 90 days or
more unless it is both well secured and in the process of collection.
For purposes of applying the 90 day 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. The gross interest
income that would have been recorded for the three months ending
3/31/98 if all loans reported as non-accrual had been current in
accordance with their original terms and had been outstanding
throughout the period is $26,000. Interest income on loans reported as
ninety days past due and on interest accrual status was $28,000 for
year-to-date 1998. 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 at March 31,
1998 were zero.
Loans classified by regulatory examiners and not reported under
non-accrual, past due or restructured pose no significant credit
problems. Loan Officers are required to develop a "Plan of Action" for
each problem loan within their portfolio. Adherence to each established
plan is monitored by Loan Administration and reevaluated at regular
intervals for effectiveness.
The following table sets forth the balance of non-performing loans as
of March 31, for the years indicated:
Non-Performing Loans
March 31
(in thousands)
90 Days Past Due
Year Non-Accrual Accruing Interest Total
1998 $ 418 $ 472 $ 890
1997 $1,069 $1,152 $2,221
1996 $ 740 $ 427 $1,167
1995 $ 721 $1,404 $2,125
1994 $1,051 $ 439 $1,490
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 - $248,000 (2) recovery of loans previously
charged off - $76,000 and (3) additions to Reserve - $210,000.
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.
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. Charged-Off
Examples of factors taken into consideration during the review are:
Industry or geographic economic problems, sale of business, change of
or disagreement among management, unusual growth or expansion of the
business, past due for either principal or interest 90 days, placed on
non-accrual or renegotiated status, renewed four times without
principal reduction, declining financial condition, adverse change in
personal life, frequent overdrafts, lack of cooperation by borrower,
decline in marketability or market value of collateral, insufficient
cash flow, and inadequate collateral values.
23
LOAN LOSS ALLOWANCE ANALYSIS
DATE
The following table disclosed the formula for the Analysis for the Loan
Loss Allowance:
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 12/31/98 to be as follows:
Domestic Amount
Commercial, Financial & Agricultural $300,000
Real Estate-Construction None
Real Estate-Mortgage 75,000
Installment Loans to individuals &
credit cards 100,000
Lease financing None
Foreign N/A
01/01/98 through 12/31/98 Total $475,000
The book value of repossessed real property held by Bancshares and
First Citizens National Bank at 3/31/98 is $0 compared to $164,000 at
3/31/97 and $861,000 at 3/31/96. The balance was significantly reduced
as a result of the sale of a strip shopping center in November 1996.
The remaining balance previsouly held in repossessed real property
represented property purchased for expansion of the branch located on
Highway 51 Bypass valued at $164,000. In the 4th quarter of 1997, the
property was reclassified from ORE to bank premises and equipment.
Expansion of the Midtown branches planned for in 1999. 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.
24
All other real estate parcels are appraised annually and the carrying
value adjusted to reflect the decline, if any, in its realizable value.
Such adjustments are charged directly to expense.
The following table summarizes the monthly average of net loans
outstanding; changes in the reserve for loan losses arising from
loans charged off and recoveries on loans previously charged off;
additions to the reserve which have been charged to operating
expense; and the ratio of net loans charged off to average loans
outstanding.
First Citizens National Bank
Loan Loss Experience and Reserve for Loan Losses
(in thousands)
Quarter ending March 31
1998 1997 1996 1995 1994
Average Net Loans
Outstanding $235,315 $207,667 $191,653 $167,965 $149,438
Balance of Reserve
for Loan Losses
at Beginning of
Period $ 3,159 $ 2,282 $ 2,216 $ 2,054 $ 1,676
Loan Charge-Offs $ (248) $ (39) $ (72) $ (60) $ (24)
Recovery of Loans
Previously Charged Off $ 76 $ 33 $ 40 $ 56 $ 44
Net Loans Charged Off $ (172) $ (6) $ (32) $ (4) $ 20
Additions to Reserve
Charged to Operating
Expense $ 210 $ 170 $ 105 $ 65 $ 99
Balance at End of
Period $ 3,197 $ 2,446 $ 2,289 $ 2,115 $ 1,795
Ratio of Net Charge-Offs
during quarter to Average
Net Loans Outstanding (.08%) (.01%) (.02%) (.00%) .01%
The following table will identify charge-offs by category for the
periods ending 3/31/98, 3/31/97 and 3/31/96:
Charge-offs: 1998 1997 1996
Domestic:
Commercial, Financial and Agricultural $ 139 $ 8 $ 43
Real Estate-Construction 0 0 0
Real Estate-Mortgage 0 0 0
Installment Loans to individuals 109 31 29
Lease financing 0 0 0
Foreign N/A N/A N/A
Total 248 39 72
Recoveries:
Domestic:
Commercial, Financial and Agricultural $ 36 $ 10 $ 8
Real Estate-Construction 0 0 0
Real Estate-Mortgage 0 0 1
Installment Loan individuals 40 23 31
Lease Financing 0 0 0
Foreign N/A N/A N/A
Total $ 76 $ 33 $ 40
Net Charge-offs $(172) $ (6) $(32)
25
Investment Securities
Bancshares' book value of listed investment securities as of the
dates indicated are summarized as follows:
Composition of Investment Securities
(March 31)
1998 1997 1996 1995 1994
U. S. Treasury &
Government Agencies $75,644 $66,923 $62,387 $60,735 $42,353
State & Political
Subdivisions $12,662 $10,630 $11,013 $10,426 $13,665
All Others $ 2,822 $ 3,009 $ 3,637 $ 4,393 $ 5,519
TOTALS $91,128 $80,562 $77,037 $75,554 $61,537
A major goal of the bank's investment portfolio management is to
maximize returns from investments while controlling the basic
elements of risk. The second goal is to provide liquidity and meet
financial needs of the community. Investment Securities also serve
as collateral for government and public fund deposits. Investments
for the first quarter, 1998 were up $10.5 million when compared to
the same time period in 1997. Securities contained within the
portfolio consist primarily of U. S. Treasury, and other U. S.
Government Agency Securities and tax exempt obligations of States
and Political Subdivisions. Fixed rate holdings comprise 90% of the
portfolio, while adjustable rates comprise the remaining 10%.
Purchases made during the first quarter, 1998 totaled $11.5 million
consisting of Government Backed and Municipal Securities. Securities
totaling $3 million were placed in the Held-To-Maturity Account while
securities totaling $8.5 million were booked in the Available for Sale
account.
First quarter sales totaled $1,500,000 at a gain of $10,978. Sales
were made from the available for sale account.
Fixed rate holdings currently have an expected average life of 2.9
years. It is estimated that this average life would extend to 5.6
years should rates rise 100 basis points and 6.3 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 decrease 1.7 years.
In terms of price sensitivity, we estimate that if rates rise 100
basis points the market value of the portfolio would fall by 3.7%,
while rates rising 200 basis points would impact the market value by
a negative 8.4%. This is consistent with the price sensitivity of
the 4 to 5 year Treasury bond. If rates go down 100 basis points we
estimate that the market value would increase by 1.8%.
The adjustable rate holdings reprice on an annual or more frequent
basis and currently have an average life of 6.4 years. Due to the
structure of these holdings, we would expect little extension
to occur in average life should interest rates rise, but could see
some further shortening if rates fall. We estimate the adjustable rate
holdings also have the price sensitivity of a 3-year Treasury,
although this is more difficult to project on adjustable rate
holdings than on fixed rate holdings.
26
FASB 115 required banks to maintain separate investment portfolios
for Held-To-Maturity, Available-For-Sale, and Trading Account
Investments. As of March 31, 1998 approximately 40% of the total
portfolio was placed in the Held-To-Maturity account. The remaining
60% was booked in the Available-For-Sale account. FASB 115 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 $568,285 during the quarter ended 3/31/98.
Maturities in the portfolio are made up of 10% within one year, 39%
after one year and within five years, and 51% after five years.
Policy provides for 20% maturities on an annual basis. Maturities
were extended from 5 to 10 years on most securities purchased after
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.
Securities ranging from $10 - $17 million could be called in the next
12 months. Maturities on investments purchased are structured to meet
loan demand as well as projected changes in interest rates.
First Citizens National Bank has not engaged in derivative
activities as defined by paragraph 5 thru 7 of FASB 119 (reference
footnote 7).
27
Investment Securities
Held to Maturity Available for Sale
March 31, 1998
(in thousands)
Amortized Fair Amortized Fair
Cost Value Cost Value
U.S. Treasury Securities $ 0 $ 0 $ 6,044 $ 6,126
U.S. Government agency
and corporation obligations
(exclude mortgage-backed
securities):
Issued by U.S. Government
agencies (2) 0 0 69 69
Issued by U.S. Government-
sponsored agencies (3) 14,236 14,234 34,211 34,513
Securities issued by states
and political subdivisions
in the U.S.:
General obligations 4,066 4,083 4,584 4,648
Revenue obligations 3,002 3,031 948 971
Industrial development
and similar obligations 0 0 0 0
Mortgage-backed securities (MBS):
Pass-through securities:
Guaranteed by GNMA 193 198 7,644 7,685
Issued by FNMA and FHLMC 478 482 5,429 5,427
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 789 785 6,101 6,128
Collateralized by MBS
issued or guaranteed by
FNMA, FHLMC, or GNMA 0 0 0 0
All other privately-
issued 0 0 0 0
Other debt securities:
Other domestic debt
securities 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
All other equity securities (1) - - 2,765 2,797
Total 22,764 22,813 67,795 68,364
(1) Includes equity securities without readily determinable fair
values at historical cost.
(2) Includes Small Business Administration "Guaranteed Loan Pool
Certificates," U.S. Maritime Administration Obligations, and
Export-Import Bank Participation Certificates.
(3) Includes obligations (other than pass-through securities,
CMOs, and REMICs) issued by the Farm Credit System, the
Federal Home Loan Bank System, the Federal Home Loan
Mortgage Corporation, the Federal National Mortgage
Association, the Financing Corporation, Resolution Funding
Corporation, the Student Loan Marketing Association, and the
Tennessee Valley Authority.
28
Investment Securities
Unrealized Gains/(Losses)
March 31, 1998
Unrealized Unrealized Net
Gains Losses Gains/Losses
U. S. Treasury Securities 82 0 82
Obligations of U.S.
Government Agencies &
Corp. 484 113 371
Obligations of States and
Political Subdivisions 132 0 132
Other Securities
Totals 698 113 585
Maturity and Yield on Securities March 31, 1998
(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 $10,299 6.68% $17,929 6.54% $31,662 6.67% $15,754 7.32%
State and Political
Subdivisions* $ 1,510 7.30% $ 5,370 6.58% $ 3,355 7.43% $ 2,427 7.62%
All Others $ - -% $ - -% $ 2,822 6.42% $ - -%
TOTALS $11,809 6.76% $23,299 6.56% $37,839 6.72% $18,181 7.36%
* Yields on tax free investments are stated herein on a taxable
equivalent basis.
Return on Equity and Assets
The table below presents for Bancshares certain operating
ratios for the quarters ending March 31st: (Not Annualized)
1998 1997 1996 1995 1994
Percentage of Net
Income to:
Average Total Assets .32% .32% .30% .21% .32%
Average Shareholders
Equity 3.31% 3.39% 3.12% 2.29% 3.39%
Percentage of
Dividends Declared
Per Common Share
to Net Income
Per Common Share 35.29% 27.04% 25.56% 33.90% 22.73%
Percentage of Average
Shareholders'
Equity** to Average
Total Assets 10.63% 10.14% 10.07% 9.18% 10.03%
Return on assets is a measurement of the firms ability to
maximize asset utilization. Total assets at 3/31/98 were
$392,011,000. 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 from 1996 and through first quarter 1998 reflect
continuous improvement. The company's strategic plan addresses
objectives to sustain improved earnings, maintain a quality
29
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. Delta Finance
posted a loss of approximately $6,000 in 1997. A 50/50 partnership
was established with a thriving local insurance agencey to open White
and Associates/First Citizens Insurance Agency in February 1998.
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 3/31/98 was $38,876,000
compared to $30,170,000 at 12/31/97.
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 and Cash Option Program. Number of shares outstanding
also increased due to share issued for the 50% purchase of White
and Associates Insurance. 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 the
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. During the
third quarter, of 1993 a 2.5 for 1 stock split was declared
to holders of record as of October 15, 1993 on the common
capital stock of Bancshares. The numbers of shares
outstanding increased proportionately with no effect on
capital. An amendment to the Company's Charter by the
shareholders in April, 1998 approved an increase in the
number of shares authorized from 750,000 to 10,000,000.
A dividend of .50 cents per share was paid on 3/15/98.
A quarterly dividend declared for each quarter in 1997 was
.40 cents per share compared to 32.5 cents and .30 cents per
share in 1996 and 1995. A special dividend of .40 cents per
share was also declared the fourth quarter compared to .30
and .10 cents per share in 1996 and 1995.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Liquidity is the ability to meet the needs of our customer
base for loans and deposit withdrawals by maintaining assets
which are convertible to cash equivalents with minimal
exposure to interest rate risks. Liquidity is determined by
a comparison of net liquid assets to net liabilities and
consistently remains between 10% and 15%. The stability of
our deposit base, sound/asset liability management, and a
strong capital base combined with expanded lines of credit
with the Federal Home Loan Bank assure adequate liquidity.
Strong loan demand and seasonal growth in agriculture lines
30
of credit place the bank in a tight liquidity position May
through October each year. The bank's liquidity ratio at
quarter end including approved lines of credit was 24.03%.
Loan to deposit ratio including repurchase agreements and
matched federal home loan bank borrowings is 88.59% at 3/31/98
compared to 83.52% at 3/31/97.
To address liquidity concerns the bank has the following
sources available: (1) Approved lines of credit with the
Federal Home Loan Bank and correspondent banks totaling
$54.8 million; (2) Loans in excess of $62 million maturing
in one year or less; and (3) Investment Securities totaling
$11 million with maturity dates of one year or less. At
March 31, 1998 Federal Home Loan Borrowings totaled $12.7
million. Other sources of liquidity or non-core fundings
is the State of Tennessee (jumbo CDS). The state has $17
million in CDS with First Citizens as of 3/31/98. The
average rate associated with these deposits is 5.60%. These
funds are utilized to earmark specific asset needs.
Interest rate sensitivity varies with different types of
interest-earning assets and interest-bearing liabilities.
Overnight federal funds, on which rates change daily, and
loans which are tied to the prime rate are much more
sensitive than long-term investment securities and fixed
rate loans. The shorter term interest sensitive assets and
liabilities are the key to measurement of the interest
sensitivity gap. Minimizing this gap is a continual
challenge and is a primary objective of the asset/liability
management program.
The following condensed gap report provides an analysis of
interest rate sensitivity of earning assets and costing
liabilities. First Citizens Asset/Liability Management
Policy provides that the 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
in-frequently 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.
31
CONDENSED GAP REPORT
------------------------------------
CURRENT BALANCES
-----------------------------------
03/31/98
(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 12,498 - - - - - - - 12,498
MONEY MARKET 738 738 - - - - - - -
TOTAL CASH &
DUE FROM 13,236 738 - - - - - - 12,498
INVESTMENTS
US TREASURIES 5,598 - - - - 857 1,714 999 2,028
US AGENCIES 72,456 - 3,000 - 4 1,880 2,844 3,867 60,861
MUNICIPALS 10,618 - - - - 503 1,007 1,875 7,233
EQUITIES 2,456 - - - - - - - 2,456
TOTAL INVESTMENTS 91,128 - 3,000 - 4 3,240 5,565 6,741 72,578
LOANS
COMMERCIAL FIXED 55,943 - 4,565 1,529 2,997 7,449 7,171 6,212 26,020
COMMERCIAL VARIABLE 14,197 2,000 12,197 - - - - - -
REAL ESTATE-VAR. 12,814 - 12,814 - - - - - -
REAL ESTATE FIXED 140,563 - 10,775 2,433 2,970 6,941 14,123 9,642 93,679
HOME EQUITY LOANS 4,953 - 4,661 - - - 277 15 -
SEC MORTGAGE 2,941 - - - - - - - 2,941
INSTALLMENT LOANS 24,608 - 439 402 300 755 2,121 4,117 16,474
INSTALLMENT VARIABLE 3 - 3 - - - - - -
FINANCE COMPANY 1,075 - - - - - 1,075 - -
FLOOR PLAN 411 - - - - - - - 411
CREDIT CARDS 2,067 - - - - - 437 - 1,630
FACTORING REC 36 - - - - - - - 36
OVERDRAFTS 259 - - - - - - - 259
TOTAL LOANS 259,870 2,000 45,454 4,364 6,267 15,145 25,204 19,986 141,450
LOAN LOSS RESERVE 3,197 - - - - - - - 3,197
NET LOANS 256,673 2,000 45,454 4,364 6,267 15,145 25,204 19,986 138,253
FED FUNDS SOLD 6,400 6,400 - - - - - - -
TOTAL EARNING
ASSETS 354,201 8,400 48,454 4,364 6,271 18,385 30,769 26,727 210,831
OTHER ASSETS
BUILDING, F&F
& LAND 9,129 - - - - - - - 9,129
OTHER ASSETS 15,445 - - - - - - - 15,445
TOTAL OTHER ASSETS 24,574 - - - - - - - 24,574
TOTAL ASSETS 392,011 9,138 48,454 4,364 6,271 18,385 30,769 26,727 247,903
DEMAND DEPOSITS 32,664 - - - - - - - 32,664
TOTAL DEMAND 32,664 - - - - - - - 32,664
32
CONDENSED GAP REPORT
------------------------------------
CURRENT BALANCES
-----------------------------------
03/31/98
(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 20,587 - - - - - - 1,121 19,466
NOW ACCOUNT 24,318 - - - - - 8,106 16,212 -
BUSINESS CHECKING 273 - - - - - 91 182 -
IMF MMDA 8,312 79 - - - - 2,744 5,489 -
FIRST RATE ACCOUNT 25,402 - - - - - 8,467 16,935 -
DOGWOOD CLUB 5,030 - - - - - 1,676 3,354 -
TOTAL SAVINGS 83,922 79 - - - - 21,084 43,293 19,466
TIME DEPOSITS
CD 1-2 MONTHS 3,267 - 3,229 38 - - - - -
CD 3 MONTHS 10,191 - 347 147 9,645 52 - - -
CD 4-5 MONTHS 3,274 - 3,210 20 17 27 - - -
CD 6 MONTHS 23,844 - 2,140 3,397 2,637 14,761 909 - -
CD 7-11 MONTHS 25,693 - 190 134 109 2,246 23,014 - -
CD 12 MONTHS 16,194 - 400 1,029 1,535 4,965 8,099 166 -
CD 13-17 MONTHS 29,500 - 228 3,012 1,363 5,150 9,897 4,914 4,936
CD 18-23 MONTHS 1,576 - - - 50 152 282 1,092 -
CD 24 MONTHS 6,294 - 121 413 415 615 2,882 1,833 15
CD 25-30 MONTHS 9,596 - 3 123 736 976 5,304 547 1,907
CD 31-59 MONTHS 12,571 - 3,167 15 59 47 379 772 8,132
CD 31-59 MONTHS
VARIABLE 72 - - - 60 - - 12 -
CD 60 MONTHS 5,748 - 106 240 150 512 1,231 1,167 2,342
CD 60 MONTH VAR. 857 - 40 20 - 30 453 65 249
CD SWEET 16 22,342 - 2,568 2,248 1,430 3,792 7,264 5,040 -
CD 7 MONTHS 1,578 - 180 28 - 1,029 341 - -
IRA FLOATING 117 - 117 - - - - - -
IRA FIXED 20,330 - 942 397 430 2,124 5,002 8,644 2,791
CHRISTMAS CLUB 201 - - - - - 201 - -
TOTAL TIME 193,245 - 16,988 11,261 18,636 36,478 65,258 24,252 20,372
TOTAL DEPOSITS 309,831 79 16,988 11,261 18,636 36,478 86,342 67,545 72,502
FED FUNDS PURCHASED 2,100 2,100 - - - - - - -
TT&L 566 566 - - - - - - -
SECURITIES SOLD-
SWEEP 12,975 12,975 - - - - - - -
SECURITIES SOLD-
FIXED 7,546 - 100 342 1,451 3,890 1,658 - 105
FHLB-LIBOR INVEST. 11,947 2,000 - - - - - - 9,947
FHLB-LONG TERM 2,816 - - - - - - - 2,816
NOTES PAYABLE-
FINANCE 5,137 5,137 - - - - - - -
TOTAL SHORT TERM
BORROWINGS 43,087 22,778 100 342 1,451 3,890 1,658 - 12,868
OTHER LIABILITIES 3,414 - - - - - - - 3,414
TOTAL OTHER LIAB. 3,414 - - - - - - - 3,414
TOTAL LIABILITIES 356,332 22,857 17,088 11,603 20,087 40,368 88,000 67,545 88,784
CAPITAL
STOCK, SURPLUS,
P.I.C. 13,215 - - - - - - - 13,215
UNREALIZED GAIN
(LOSSES) 341 - - - - - - - 341
UNDIVIDED PROFITS 22,123 - - - - - - - 22,123
TOTAL CAPITAL 35,679 - - - - - - - 35,679
TOTAL LIAB'S &
CAPITAL 392,011 22,857 17,088 11,603 20,087 40,368 88,000 67,545 124,463
GAP (SPREAD) - -13,719 31,366 -7,239-13,816 -21,983 -57,231 -40,818 123,440
GAP % TOTAL ASSETS - -3.50 8.00 -1.85 -3.52 -5.61 -14.60 -10.41 31.49
CUMULATIVE GAP - -13,719 17,647 10,408 -3,408 -25,391 -82,622 -123,440 -
CUM GAP % TOTAL ASSETS - -3.50 4.50 2.66 -0.87 -6.48 -21.08 -31.49 -
SENSITIVITY RATIO - 0.40 1.44 1.20 0.95 0.77 0.59 0.54 1.00
33
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. Approximately 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 net interest income through
volume increases and better pricing techniques.
Long term fixed rate positions should be held to a
minimum, by increasing variable rate loans. The
over 5 year fixed rate loans should be held to less
than 25% assets, unless they are funded with Federal
Home Loan Bank matched funds. These maximum limits
are the high points and the ALCO will strive to keep
the amount below this point. The dynamic 03/31/98
gap reports reflects an exposure of $121,000 to
$338,000 if rates go up or down using multiple rate
scenarios. The Board of Directors should receive
interest 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 risks, if material. New
products and services will be reviewed for the
various risks 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 would be negatively impacted should
interest rates drop prompting an increase in loan
demand. Adequate lines of credit are available to
handle liquidity needs.
34
Capital Resources
Total shareholders' equity of First Citizens Bancshares as
of March 31, 1998 was $35,679,000, compared to $30,170,000
at March 31, 1997. Capital as a percentage of total assets
for the quarter ending March 31 is presented in the
following table for the years indicated (excluding Loan Loss
Reserves):
Leveraged Capital Ratio(s) as of March 31
1998 1997 1996 1995 1994
9.10% 9.33% 9.31% 9.06% 9.37%
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. Calculation of the risk-based
capital ratio is accomplished by dividing qualifying capital
by weighted risk assets. The minimum risk-based capital
ratio established by Federal Reserve regulation is 8%. At
least one-half or 4% must consist of core capital (Tier 1),
and the remaining 4% may be in the form of core (Tier 1) or
supplemental capital (Tier 2). Tier 1 capital/core capital
consists of common stockholders equity, qualified perpetual
stock and minority interests in consolidated subsidiaries.
Tier 2 capital/supplementary capital consists of the
allowance for loan and lease losses, perpetual preferred
stock, term subordinated debt, and other debt and stock
instruments. Bancshares' capital consists entirely of Tier
1 components, with the exception of the allowance for loan
and lease losses. The Risk-Based Capital Ratio as of 3/31/98
was 12.23% significantly above the 8.00% required by regulation.
Growth in Bancshares 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.
Risk-Based Capital Ratio(s) as of March 31
1998 1997 1996 1995 1994
12.23% 14.32% 14.19% 14.06% 14.17%
Effects of Inflation
Inflation has a significant impact on the growth of total
assets in the banking industry, resulting in a need to
increase equity capital in order to maintain an appropriate
equity to asset ratio.
Operating expenses are directly affected by increases in
salaries and employee benefits, supplies, legal, audit and
professional fees, utilities, advertising and insurance.
Inflation and competition are major keys to the cost of
acquiring and retaining deposits.
A well managed asset/liability management program can
maximize net interest income; and at the same time, reduce
the impact of inflation on earnings.
35
Part II - Other Information
Item 1. Legal Proceedings
There are no legal proceedings against the bank at this
time.
Item 2. Changes in Securities
Dividends paid to Shareholders of First Citizens Bancshares,
Inc. are funded by dividends to the Bank Holding Company
from First Citizens National Bank and accumulated cash at
the Holding Company level. Regulators would be critical of
a bank holding company that pays cash dividends not covered
by earnings or that are funded from borrowings or unusual or
non recurring gains, such as the sale of property or assets.
Under rules set forth by the Comptroller of the Currency in
Interpretive Ruling 7.6100, the board of directors of a
national bank may declare dividends as it may judge to be
expedient, subject to statutory limitations which deal with
the balance of the surplus account, sufficiency of net
profits, dividend payments on preferred stock, and default
of any assessment due to the Federal Deposit Insurance
Corporation.
Shareholders approved an amendment to the company's Charter in
April 1998 to increase the number of shares authorized from
$750,000 to $10,000,000.
Item 6(b) No reports on Form 8-K were filed for the quarter
ended 3/31/98.
36
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
First Citizens Bancshares, Inc.
(Registrant)
Date: May 13, 1998 Stallings Lipford
Stallings Lipford, Chairman
Date: May 13, 1998 Jeff Agee
Jeff Agee, Vice President &
Chief Financial Officer