1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter ended June 30, 1998 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 ($0.25 par value) there
were 3,192,893 shares outstanding as of June 30, 1998 (Net of Treasury).
2
PART I -FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
3
FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, December 31,
1998 1997
ASSETS
Cash and due from banks $ 11,859 $ 13,771
Federal funds sold 1,100 5,075
Investment securities -
Trading Investments-Stated at Market 0 0
Held to Maturity-amortized cost-Fair
Value of $24,048 at June 30, 1998
and $21,610 at December 31, 1997. 23,999 21,580
Available for Sale-Stated at Market 64,066 49,596
Loans (Excluding unearned income of
$1,742 at June 30, 1998 and
$1,622 at December 31, 1997) 270,945 229,277
Less: Allowance for loan losses 3,438 2,789
Net Loans 267,507 226,488
Premises and equipment 9,088 8,177
Intangible assets 3,439 133
Other assets 13,380 8,467
TOTAL ASSETS $394,438 $333,287
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $308,385 $267,590
Securities sold under agreement to
repurchase 20,194 21,765
Federal funds purchased and Other
Short Term Borrowing 3,075 0
Long-term debt - Note 3 19,395 7,813
Notes payable of employee stock
ownership plan 2,000 0
Other liabilities 4,439 2,994
Total Liabilities 357,488 300,162
Contingent liabilities
Stockholders' Equity:
Common stock, $0.25 Par value - 10,000,000
authorized; 3,194,544 issued and
outstanding at June 30, 1998;
3,002,872 issued and outstanding at
December 31, 1997 799 751
Surplus 15,037 10,669
Retained earnings 22,802 21,405
Obligation of Employee Stock
Ownership Plan (2,000) 0
Net Unrealized Gains (Losses) on Available
for Sale 348 307
Total Common Stock and Retained Earnings 36,986 33,132
Less-1,651 Treasury Shares, at Cost at
June 30, 1998 and 632 Shares at Cost at
December 31, 1997 (36) (7)
Total Stockholders' Equity 36,950 33,125
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $394,438 $333,287
NOTE: The balance sheet at December 31, 1997, has been taken from the
audited financial statements at that date and condensed. The
current period and prior period have been restated to reflect a
4:1 stock split.
4
FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
Interest Income
Interest and fees
on loans $ 6,385 $5,306 $12,115 $10,192
Interest on investment
securities:
Taxable 1,331 1,261 2,446 2,401
Tax-exempt 140 130 272 251
Other interest income 68 15 162 73
Lease financing income 0 0 0 0
Total Interest Income 7,924 6,712 14,995 12,917
Interest Expense
Interest on deposits 3,258 2,753 6,339 5,442
Other interest expense 714 415 1,025 708
Total Interest Expense 3,972 3,168 7,364 6,150
Net Interest Income 3,952 3,544 7,631 6,767
Provision for Loan
Losses 308 201 518 361
Net Interest Income
after Provision 3,644 3,343 7,113 6,406
Other Income
Securities gains
(losses) (35) 6 (9) 19
Other income 1,126 880 2,176 1,868
Total Other Income 1,091 886 2,167 1,887
Other expenses 3,115 2,585 5,984 5,099
Net income before
income taxes 1,620 1,644 3,296 3,194
Provision for income
taxes 542 547 1,110 1,082
Net income $1,078 $1,097 $2,186 $2,112
Earnings per share $ 0.35 $ 0.37 $ 0.71 $ 0.71
Weighted average number of
shares outstanding 3,071,426 2,970,764 3,071,426 2,970,764
1997 income data has been adjusted to reflect annual incentive bonus
accruals previously accounted for during fourth quarter and a 4:1 stock
split that took place in 1998.
The accompanying notes are an integral part of these financial
statements.
5
FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
(UNAUDITED)
Six Months Ended
June 30,
1998 1997 1996
Net Cash Provided by Operating
Activities $ 2,368 $ 1,017 $ 3,036
Investing Activities
Proceeds of Maturities of Held to
Maturity Securities 3,624 4,491 4,085
Purchase of Held to Maturity
Investments (6,043) (9,600) (1,500)
Proceeds from Maturities of
Available for Sale Securities 17,914 3,103 1,812
Proceeds from Sales of Available
for Sale Securities 9,074 1,934 7,600
Purchase of Available for Sale
Securities (41,458) (4,860) (17,125)
Increase in Loans-Net (41,537) (11,532) (17,445)
Payment for purchase of Bank of
Troy-Net of cash acquired (5,957) 0 0
Purchases of Premises and
Equipment (1,351) (561) (146)
Net Cash Provided by
Investing Activities (65,734) (17,025) (22,719)
Financing Activities
Net increase (decrease) in Demand
and Savings Accounts 10,271 1,779 862
Increase (decrease) in
Time Accounts 30,524 4,658 8,176
Increase (decrease) in Long
Term Debt 11,582 4,524 (591)
Treasury Stock Transactions (29) 1 (4)
Proceeds from Sale of Common Stock 4,416 272 154
Cash Dividends Paid (789) (607) (485)
Net increase (decrease) in
Short-term Borrowings 1,504 6,694 9,508
Net Cash Provided (used) by
Financing Activities 57,479 17,321 17,620
Increase (decrease) in Cash
and Cash Equivalents (5,887) 1,313 (2,063)
Cash and Cash Equivalents at
Beginning of Year 18,846 13,507 13,544
Cash and Cash Equivalents at
End of Year $12,959 $14,820 $11,481
Cash payments made for interest and income taxes during the years
presented are as follows:
1998 1997 1996
Interest $7,070 $6,358 $5,404
Income Taxes 1,764 1,163 833
NOTE: Net cash provided by operating activities was lower in 1997
due to the purchase of split dollar life insurance policies for
our officers. These policies are classified as other assets on
the balance sheet.
The accompanying notes are an integral part of these financial
statements.
6
FIRST CITIZENS BANCSHARES, INC.
STATEMENT OF COMPREHENSIVE INCOME
(IN THOUSANDS) EXCEPT PER SHARE AMOUNTS
June 30, 1998
THREE MONTHS SIX MONTHS
ENDED JUNE ENDED JUNE
1998 1997 1998 1997
Net Income $1,078 $1,097 $2,186 $2,112
Changes in Available
for Sale Securities 7 319 41 (30)
Tax Impact (Available for
Sale Securities) 3 128 16 (12)
Comprehensive Income $1,082 $1,288 $2,211 $2,094
7
FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
June 30, 1998
Note 1 - Consolidated Financial Statements
The consolidated balance sheet as of June 30, 1998, the
consolidated statements of income for the three months ended
June 30, 1998, 1997 and 1996, and the consolidated statement
of cash flows for the three months 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 instructions to Form 10-Q and Article 10 of Regulation
S - X. Accordingly they do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. In
the opinion of management, all adjustments necessary to
present fairly the financial position, results of operations
and cash flows at June 30, 1998 and for all periods
presented have been made. Operating results for the
reporting periods presented are not necessarily indicative
of results that may be expected for the year ended December
31, 1998. 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
June 30 June 30
1998 1997
Amount Outstanding-End of Period $23,269 $27,919
Weighted Average Rate of Outstanding 4.81% 4.76%
Maximum Amount of Borrowings at Month End $23,269 $27,919
Average Amounts Outstanding for Period $22,069 $24,991
Weighted Average Rate of Average Amounts 4.79% 4.64%
Note 4 - Long-Term Debt
Long term debt is comprised of Federal Home Loan Bank
Borrowings, 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 Variable
FHLB Borrowings-Loans $ 5,782 5.86% 7 Years
FHLB Borrowings-Invest. 10,858 5.77% 10 Years Monthly,Yearly
Finance Company Debt 1,000 6.00% 5 Years
Parent Company Debt 1,379 6.89% 7 Years Monthly
8
FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(IN THOUSANDS)
June 30, 1998
Note 5 - Statement of Cash Flows
June 30,
1998 1997 1996
Actual payments made
during the periods:
Interest $ 7,070 $ 6,358 $ 5,404
Income taxes 1,764 1,163 833
Note 6 - Contingent Liabilities
There are no material pending litigations as of the current
reportable date that should result in a liability.
Note 7 - Investment Securities
The differences between book values of investment securities
and market values at June 30, 1998 and December 31, 1997, total
$49 and $30 respectively. FASB 115 requires banks to classify
securities as held to maturity, available for sale, and
trading. First Citizens has $0 in the trading account.
Available for Sale securities values are adjusted to market
quarterly and the adjustments flow to the capital account (net
of tax). Held to maturity securities are stated at amortized
cost. Available for sale securities reflects a $68M increase
for the period ending June 1998 and, $41M net of tax, $41M
flowed to the capital account. 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 reported
periods.
Note 8 - Regulatory Capital Requirements
Regulatory agencies impose certain minimum capital requirements
on both First Citizens Bancshares, Inc. and First Citizens
National Bank. On December 16, 1988, the Federal Reserve Board
approved risk based capital guidelines for bank holding
companies. Presently, the holding company and First Citizens
National Bank exceed the required minimum standards established
by regulators. Tier 1 and tier 2 risk based capital ratios are
11.78% and 13.00% respectively.
Note 9 - Deferred Income Taxes
First Citizens adopted FASB 109 as of January 1, 1993. The
deferred tax account reflects an asset totaling $540M. 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, creating a reserve for impaired loans.
The following data reflects impaired totals for the reportable
periods:(in thousands)
Impaired Loan Balance or Recorded Balance $ 431
Amount of Recorded Balance with Related Allowance $ 165
Amount of Recorded Balance with no Related Allowance $ 266
9
FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(IN THOUSANDS)
June 30, 1998
Interest income recognized on impaired loans is recognized
on a cash basis. Cash receipts will be applied as cost recovery
or principal recovery first, consistent with OCC Regulations.
A quarterly assessment of the adequacy of the loan loss reserve,
including the reserve for impaired loans, will ensure that reserves are
sufficient to absorb future losses. The most recent assessment was
presented to the Board of Directors on June 17, 1998 and reflected that
reserves were more than adequate.
Note 11 - Asset Impairment
The Financial Accounting Standards Board issued Statement 121
addressing the accounting for the impairment of long-lived assets
that will be held and used, including certain identifiable
intangibles, and the good-will related to those assets. The
statement, which is effective for calendar-year 1996 financial
statements, also addresses accounting for long-lived assets and
certain identifiable assets to be disposed.
The statement requires that assets to be held and used be reviewed
for 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, with only
common stock outstanding. The method used for computing the weighted
average shares is based on a daily weighted average amount. First
Citizens has no preferred stock, redeemable stock, or other items that
would dilute basic earnings per share.
Note 14 - FASB 130 - Comprehensive Income
This statement establishes reporting and display requirements for
comprehensive income and its components. A separate financial statement
is presented that begins with net income from operations and includes
all other comprehensive income. 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 - APB 16 - Business Combination
On February 28, 1998, First Citizens Bancshares purchased Bank of Troy,
Troy, Tennessee. This acquisition adds $60 million in assets to the
company and opens up the Obion County market as projected in the Bank's
Strategic Plan. Total acquisition cost of $9.6 million were funded
through utilization of existing capital and a note payable to Suntrust
Bank, Nashville in the amount of $4.1 million. The excess of cost over
fair market value has been accounted for as goodwill and is being
written off at the rate of $219,000 annually, over a 15 year period.
All assets and liabilities have been marked to market in accordance with
purchase accounting rules. An employment contract with the former
President of Bank of Troy provides that he will remain in that position
until his 65th birthday in January of 2000. There are no other
agreements relative to this acquisition that would result in contingent
payments.
10
FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(IN THOUSANDS)
June 30, 1998
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. Troy's total assets and net income is
less than 20% of Bancshares's associated items.
Pro Forma Results (unaudited)
(In thousands except earnings per share)
1998 1997
Interest Income $15,721 $13,622
Interest Expense 7,776 6,552
Net Interest Income 7,945 7,070
Provision for Loan Losses 533 376
Net Interest Income After Provision 7,412 6,694
Other Income 2,209 1,927
Other Expenses 6,244 5,359
Net Income Before Income Taxes 3,377 3,262
Provision for Income Taxes 1,144 1,109
Net Income 2,233 2,153
Earnings Per Share 0.73 0.72
Weighted Average Number of Shares
Outstanding 3,071,426 2,970,764
Note 16 - FASB 132 - Employer's disclosures about pensions and other
post-retirement benefits.
First Citizens and its subs do not sponsor defined benefit plans or
postretirement benefits.
Note 17 - Leveraged ESOP
Origination Date: 06/25/98
Bancshares guaranteed a $2,000,000 loan on behalf of the Employee
Stock Ownership Plan payable to Suntrust Bank, Nashville at a rate
equal to Libor plus 1.2%. Both principal and interest are repayable
quarterly with interest payments commencing July 1, 1998 and principal
repayment beginning October 1, 1998. The loan is amortized over seven
years and will be funded through ESOP allocations as provided for in the
plan document which identifies the First Citizens National Bank Employee
Stock Ownership Plan and Trust. In exchange for payment by the ESOP to
the parent company of $2,000,000, a total of 85,106 shares of common
capital stock was issued at $23.50 per share. The price per share was
determined by a market appraisal performed by Mercer Capital Company,
Memphis, Tennessee.
First Citizens National Bank of Dyersburg Employee Stock Ownership Plan
and Trust is a money purchase/stock bonus plan administered by the
Investment Management and Trust Services Division of First Citizens
National Bank. Eligibility requirements dictate that an employee must
be 21 years of age and must have been employed for a minimum of one year
to participate in the plan by the Company.
11
FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(IN THOUSANDS)
June 30, 1998
The plan provides for minimum annual contributions of not less than 10%
of annual salary/bonus. An employee must be employed on the last day of
the year and have completed 1000 hours of service to qualify for a
contribution.
The current YTD Expense for ESOP is $216,000.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The purpose of the following discussion is to address material changes
in income and expense accounts when compared to the quarter ending June
30, 1998. Reference should be made to the financial statements included
as ITEM 1 for a more thorough understanding of the analysis. The
discussion relates mainly to activities of First Citizens National Bank
(First Citizens) in its banking business. However, the consolidated
statements of income reflect activities of both First Citizens and First
Citizens Bancshares Inc. (Bancshares). Limited activity to date by the
Holding Company does not materially affect the income report.
The Company's 1997-98 strategic planning efforts call for a continued
focus on asset and revenue growth through acquisitions that would
increase market share as well as return on assets. The first quarter
of 1998, First Citizens National Bank purchased one-half interest in
White and Associates Insurance Agency to form White and Associates/First
Citizens Insurance Agency, LLC. Assets of First Citizens Bancshares,
Inc. increased over 18% for the first half of 1998 primarily due to the
purchase of Bank of Troy. Combined assets resulted in loan and deposit
growth of 21.44% and 17.32%. Shareholder equity increased 17.06
percent. Net earnings year to date were $2,186,000 compared to
$2,112,000 as of the same time period in 1997, resulting in an increase
of 3.50 percent or .71 cents per common share. Return on Average assets
as of 6/30/98 was 1.21% compared to 1.31% as of 6/30/97. The slight
decrease in ROA is attributable to organization cost associated with the
Bank of Troy and White and Associates/First Citizens. A reorganization
of the Bank of Troy operations was necessary to align operations with
that of First Citizens. Cost associated with the realignment include
increased provision for loan loss reserve, a write off resulting from
the sale of investment securities and the installation of technology
associated equipment. One time expenses during March, 1998 resulted in
a net operating loss of $17,000 for the quarter. Loan loss provisions
for the first two quarters of 1998 totaled $182,000 increasing the
provision to 1.40% of total loans outstanding. Investment losses
totaled approximately $35,000 for the quarter. The reorganization
process of Troy will be completed in 1998 prior to converting Bank of
Troy to a branch of First Citizens in January, 1999. Organization cost
discussed resulted in a negative .08 cents impact to earnings per share.
Additional cost associated with the reorganization is not expected to
have a material impact on future performance ratios of Troy or First
Citizens National Bank. White and Associate/First Citizens purchased
the Durham Insurance Agency located in Union City, Tennessee during
second quarter, 1998 enabling White and Associate/First Citizens to
locate an insurance agency in the lobby of Bank of Troy as of July 1,
1998. Efforts are underway to expand our investment in Delta Finance,
the Bank's consumer finance subsidiary, through the opening of a second
branch office in Milan, Tennessee. In addition, the bank will focus on
growing its assets and revenue base by identifying quality banks in the
12
FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(IN THOUSANDS)
June 30, 1998
West Tennessee area receptive to a partnership with First Citizens.
Our investment in Lauderdale County will rise to a new level with the
construction of a branch facility located on the corner of Cleveland
Street and Walmart Drive, just off of Highway 51 in Ripley, Tennessee.
The facility is being designed to provide our Lauderdale County
customers the convenience of mortgage financing as well as insurance and
brokerage services. The new branch is projected to open late in first
quarter of 1999. An agreement was signed with Access Cash Southeast, a
deployer and processor of Automated Teller Machines, in the second
quarter to sponsor a program that calls for processing and location of
ATM's across the state of Tennessee. First Citizens will be the
recipient of a transaction processing fee for each transaction processed
from terminals placed as a result of the agreement. The bank will also
participate in locating ATM's in select strategic locations.
Dividends paid first and second quarters of 1998 were .50 cents per
share compared to .40 cents per share for each quarter in 1997. A 4 for
1 stock split was declared to shareholders of record as of June 1, 1998.
The distribution of shares resulted in an issuance of 3 additional
shares for each share owned as of the record date. The split was
accomplished on June 15, 1998. Book value of common stock ended June 30
at $11.57 compared to $10.58 for 1997. Banchshare's Return on Equity
for the two periods was 12.58% and 13.81% reflecting deployment of
capital to purchase Bank of Troy and an increase in the number of shares
outstanding as a result of purchases made through Bancshare's cash
option program. The cash option program is discussed further in the
capital section. Outstanding shares adjusted for the 4-for-1 split
increased from 2,984,000 as of June 30, 1997 to 3,193,000 as of June 30,
1998.
The bank's strategic plan calls for future efforts to be focused on
controlled growth, efficiency and diversification of operations and
products as outlined in the following goals:
(1) To remain an independent community bank serving the needs of
individuals, small businesses, corporations, and agriculture customers;
(2) To maximize the value of First Citizens to its shareholders by
providing the highest level of customer service and the widest selection
of products and services;
(3) To consistently generate earnings that are at a minimum equal to
that of peer banks;
(4) To attract and retain high quality personnel, while right sizing
levels to be more in line with peer banks; However staff will remain
higher than most peer banks due to the extended services the bank offers
to its market area;
(5) To continuously evaluate and invest in a product and service
distribution system that will provide our customers with personal access
as well as electronic delivery of products and services; and
(6) To continue to investigate and pursue other fee income producing
opportunities.
13
FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(IN THOUSANDS)
June 30, 1998
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. 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 in its market area. Operational efficiency is achieved
through planning and implementation of strategic action steps set in the
Bank's Technology Strategic Plan. The efficiency ratio at quarter end
was 58.54% compared to peer ratio at 55.70%. In 1997 the bank installed
a Document Imaging System to improve efficiency in back office
operations as well as improved customer service. The system has been
fully implemented providing access to all credit/documentation files
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. First Citizens currently offers touch tone telephone banking to
customer utilization of more than 17,000 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. Loan Administration is conscious of
the potential impact to the agricultural segment of the loan portfilio
that could result from unfavorable weather conditions which have existed
throughout the spring and summer of 1998. The loan portfolio consists
of agricultural loans totaling $32,033,789 or 13.33% of the total loan
portfolio. Certain areas of West Tennessee experienced considerable
rain fall during previous months and as a result, 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 bank's loan
portfolio. As of this report date, losses to local farmers is projected
to be at a manageable level.
Interstate Banking/Branching became a reality through legislation passed
September 13, 1994. The act permits full nationwide interstate
branching after June 1, 1997. First Citizens Bancshares, Inc. and First
Citizens National Bank are located in a highly competitive market,
competing for deposit dollars and earning assets with four other banks,
two of which are branches of large regional competitors. First
Tennessee Bank and Union Planters National Bank are two of the largest
financial institutions in the state. While First Citizens has
historically maintained in excess of 50% of local market share,
statistics reflect a gain of approximately 1.5% over the past five years
by both First Citizens and First Tennessee. A small banking franchise
located in four West Tennessee counties recently opened a branch in
Dyersburg. 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 thinking bank
offering products and services required for maintaining a satisfactory
customer relationship moving into the next decade and beyond.
14
YEAR 2000 PROJECT SUMMARY
The following table summarizes the status of the First Citizens National
Bank Year 2000 Program as of June 24, 1998. For ease of reference, the
project information has been summarized in phases that are similar to
the phases set forth in the Interagency Statement issued by the Federal
Financial Institutions Examination Council. First Citizens core
processing applications are turnkey systems. Turnkey applications are
defined as application in which First Citizens does not maintain or
change the processing code.
Total Project By Phase Approximate Percentage
Complete
Awareness Substantially Complete
Assessment Substantially Complete
Renovation Vendor Responsibility
Validation Third Quarter, 1998
Implementation Second Quarter, 1999
AWARENESS PHASE
The awareness phase for First Citizens National Bank Year 2000 Program
was the formation of the Year 2000 Plan. The year 2000 team was formed
with the primary responsibility of defining and recognizing Y2K issues
as they relate to the operations of First Citizens and its subsidiaries.
The Bank's Senior Operations Officer has been placed in charge of the
program with responsibility for reporting to the Executive Management
Team and the Board of Directors.
ASSESSMENT PHASE
The assessment phase focused on assessing the size and complexity of the
Year 2000 problem. A complete inventory list was created to identify
and monitor Y2K readiness for information systems (hardware, software,
utilities, vendors, and phone systems) as well as environmental systems
(security systems, elevators, etc.). The following documents were
formed complete with details of how the objectives of the Y2K Program
would be achieved: Year 2000 Project Plan (Master Schedule), Year 2000
Program Requirements, and the Year 2000 Certification Process. A Year
2000 Master Test Plan is in the development phase, and is more than 50%
complete.
RENOVATION PHASE
The renovation phase only encompasses the code remediation of in-house
developed code that resides on the IBM AS 400 for First Citizens
National Bank or other computer hardware for the bank's subsidiaries.
First Citizens and subsidiaries core processing is defined as "Turnkey"
applications meaning the bank does not write code, modify code or
maintain code for its processing applications. The Bank's Y2K Team is
responsible for monitoring code remediation according to it's primary
vendor Y2K project plan.
15
VALIDATION PHASE
The validation phase is designed to test the ability of year 2000 ready
hardware and software to accurately process date data (including, but
not limited to calculating, comparing, and sequencing) from, into and
between the 20th and 21st centuries, including leap year calculation. A
validation "test" plan for applications identified as "Mission Critical"
applications during the Assessment Phase is more than 50 percent
complete.
IMPLEMENTATION PHASE
The implementation phase places renovated/validated hardware and
software into production. This phase of the Y2K Plan will not be
concluded until an item is successfully tested and has completed the
validation phase.
First Citizens National Bank Year 2000 Program also provides post-implementation
support through the first quarter of 2000.
This report and other communications about the Year 2000 are
provided solely for information purposes.
The following table compares year-to-date non-interest income, and
expense of First Citizens as of June 30, 1998, 1997, and 1996:
Non-Interest Income
(in thousands)
June 30 June 30 June 30
1998 % of Change 1997 % of Change 1996
Service Charges
on Deposit
Accts. $879 6.29% $827 24.74% $663
Other Income $890 31.46% $677 (3.43%) $701
Trust Income $398 3.92% $383 2.96% $372
TOTAL NON-INTEREST
INCOME $2,167 14.84% $1,887 8.70% $1,736
Total Non-Interest Income of $2,167,000 is up 14.84% compared to
$1,887,000 at 6/30/97. 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 the 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 change of other income from $677,000 to $890,000, a 31.46%
increase. Service charge on deposits accounts increased 6.29% while
Trust income is up 3.92 percent. First quarter of 1997, the overdraft
fee for per item paid on an overdrawn deposit account increased from
$17.50 to $22.00.
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. First Citizens non-interest income as a percent of average
assets was 1.25% compared to peer group ratio of .85 percent.
16
Non-Interest Expense
1998 % of Change 1997 % of Change 1996
Salaries & Employee
Benefits $3,420 28.81% $2,655 4.70% $2,536
Net Occupancy
Expense $ 969 5.67% $ 917 1.78% $ 901
Other Operating
Expense $1,595 33.25% $1,197 (7.79%) $1,298
TOTAL NON-INTEREST
EXPENSE $5,984 25.48% $4,769 .72% $4,735
Non Interest Expense
Total non-interest expense for 1998 is $5,984,000 compared to $4,769,000
and $4,735,000 at 6/30/97 and 6/30/96 respectively. The 1998 increase
of 25.48% represents a 28.81% increase in salaries and benefits
resulting from the gain of 18 employees in the Bank of Troy acquisition
as well as additional employees associated with the expansion of
services offered in mortgage lending(Ripley market), insurance and
brokerage services (Dyersburg, Ripley, and Troy market). Full-time
equivalent employees as of June, 1998 is 172 compared to 155 at quarter
end 1997. Personnel expense as a percent of average assets was 1.94%
compared to peer group ratio of 1.48 percent. Assets per employee is
2.05 million compared to peer comparison of 2.53 million. Increased
investment in technology resulted in an increase in Computer Expense and
the related depreciation to those investments. An ongoing strategic
planning goal is to automate manual processes through technology and at
the same time meet the technological needs of our customer base. Net
occupancy expense is projected to increase as technology is installed to
accomplish this goal. Net occupancy expense is also projected to
increase with the construction of the Ripley, Tennessee Branch in 1998.
Cost associated with technology will be offset in part by the
reallocation of employees to fee income producing positions as well as
with additional income expected with the expansion of products and
services in our market area. Other operating expense increased
significantly (25.48%) with the organizational cost associated with the
Insurance Agency and Bank of Troy Acquisition. A peer comparison of non
interest expense as a percent of average assets reflects First Citizens
was 3.27% compared to peers at 2.91 percent.
Deposits
The average daily amount of deposits and average rates paid on such
deposits is summarized for the quarter ending June 30 for the years
indicated:
COMPOSITION OF DEPOSITS
(in thousands)
1998 1997 1996
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
Non-Interest
Bearing Demand
Deposits $33,353 - $ 27,096 - $ 26,303 -
Savings Deposits $92,429 3.23% $ 82,517 3.38% $ 73,362 3.12%
Time Deposits $185,511 5.63% $150,177 5.48% $145,941 5.61%
TOTAL DEPOSITS $311,293 4.19% $259,790 4.24% $245,606 4.27%
The increase in assets in 1998 and 1997 was funded primarily by
increases in deposits. Total deposits, for the company have
increased approximately 20 percent and 6 percent when comparing
1998 to 1997 and 1996. Growth in total deposits is attributed
primarily to deposits acquired in the Bank of Troy acquisition.
17
Deposit instruments are created to target local consumers,
professionals, and small businesses as it primary deposit base.
These instruments consist primarily of demand deposits, savings
accounts, certificates of deposits and individual retirement
accounts. Demand deposits increased approximately $6 million in
1998 while Savings deposits increased approximately $10,000,000.
The average rate paid on savings was 3.23% compared to 3.38% in
1997 and 3.12% in 1996. Time deposits increased over $35 million
with an average rate paid of 5.63% compared to 5.48% in 1997 and
4.27% in 1996. Growth in total deposits continues to be a
challenge for the banking industry with increased competition from
brokerage services, insurance agencies and other financial
services providers. The Company's market place is described as
highly competitive, with a fairly sophisticated customer base.
According to a market share analysis, Bancshares holds
approximately 52% of bank deposits domiciled in Dyer County. The
bank competes with First Tennessee Bank, N.A. (23% of total county
deposits), and Security Bank (14%). Union Planters hold market
share of approximately 11 percent. First Citizens also competes
with Dyersburg City Employees Credit Union, seven or more consumer
finance companies, three brokerage service providers, and other
types of financial service providers in the area. Competitor
marketing programs are aggressive in seeking new deposits dollars
with advertising programs that offers rates on certificates of
deposits at 6 percent rates and above.
Average rate paid on deposits (4.19%) continues to reflect sound
asset/liability management strategy to maintain interest margins
that are consistent with company goals. A deposit strategy
adopted in 1996 encourages the purchase of selected jumbo CD's
(i.e. State of Tennessee) as opposed to increasing funding costs,
by participating in "rate wars" to secure local retail deposits.
Total deposits consisted of approximately $19 million in the State
of Tennessee Funds at quarter end. The implementation of a
quality sales quality service program is also expected to increase
deposit sales as well as provide for the cross selling of
additional products to form a total customer relationship profile.
Quality Sales, Quality Service program was implemented in various
phases beginning the first quarter, 1997. An active Business
Development program is in place to generate new business and
provide support for existing customers.
Sweep account funds totaling $12,498,000 are not included in the
average balances for non-interest bearing demand deposits. The
"Sweep" total is included in the balance sheet category of
securities sold under agreement to repurchase totaling $20,000,000
earning 4.00% at 6/30/98. Repurchase Agreement "Sweep" is a
product offered to large balance customers and provides for funds
to automatically sweep daily from a demand deposit account into an
overnight repurchase agreement. This affords commercial customers
the opportunity to earn interest on excess collected funds while
providing availability of adequate funds to clear large
denomination checks as presented for payment. There were no
significant changes to products and services during the second
quarter.
Management is continuously monitoring and enhancing the bank's
product line in order to retain existing customers and to attract
new customer relationships. Among new products on the market are
the "Visa Check Card" and "The Nest Egg Certificate of Deposit".
The Visa Check Card is an electronic check that allows our
customers another convenient method of accessing their checking
account funds without writing a check. The Nest Egg Certificate
of Deposit was introduced as a college savings fund for parents
which allows for a low opening balance and unlimited ongoing
deposits. Imaged deposit account statements continue to be a
success with 99.9 percent acceptance.
18
The following table sets forth the maturity distribution of
Certificates of Deposit and other time deposits of $100,000.00 or
more outstanding on the books of First Citizens on June 30, 1998:
Maturity Distribution Of Time Certificates Of Deposit
In Amounts of $100,000.00 Or More As Of June 30, 1998
(in thousands)
Maturity Total Amount
3 months or less $18,075
3 through 12 months $26,786
1 year - 3 years $ 8,392
over 3 years $ 200
Total $53,453
A summary of average interest earning assets and interest bearing
liabilities is set forth in the following table together with
average yields on earnings assets and average costs on interest
bearing liabilities. The average yield on interest earning assets
reflects an increase when reviewing the information presented in
the table. Interest earning assets as of 6/30/98 were
$359,252,000 at an average rate of 8.90% compared to $296,955,000
average rate of 9.11% at 6/30/97. The average rate on total
interest bearing liabilities was 4.98%, 4.79%, and 4.78%, as of
June 30, 1998, 1997, and 1996. Net yield on average earning
assets was 4.48%, 4.84%, and 4.62%, reflecting a downward movement
in interest rates beginning in mid 1996 and continuing into 1998.
Maintaining interest rate margins achieved in prior years
continues to be a challenge. When interest rates rise, customers
are shopping banks to lock in the lowest rate possible on loans,
while deposit customers are shopping to lock in the highest rate
on deposits. In a declining rate environment, the competition for
deposit dollars increases and outflow to mutual funds increases.
The sensitivity to loan rates also increases as banks scramble to
retain quality customers being "courted" by the competition.
First Citizens has historically out performed peer banks with the
average rate earned on the loan portfolio. Asset/Liability
policies are in place to protect the company from material
negative impact of volatile swings in interest rates. Interest
margins are well managed to achieve acceptable profits and a
return on equity within policy guidelines.
19
First Citizens Bancshares
Quarter Ending June 30
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) $265,028 $6,385 9.64% $216,306 $5,306 9.82% $201,919 $4,828 9.57%
Investment Securities:
Taxable $ 80,158 $1,331 6.64% $ 69,205 $1,251 7.23% $ 65,866 $1,126 6.84%
Tax Exempt (4) $ 12,175 $ 218 7.16% $ 11,216 $ 197 7.03% $ 10,886 $ 208 7.65%
Interest Earning
Deposits $ 480 $ 6 5.00% $ 203 $ 3 5.92% $ 135 $ 2 5.93%
Trading Account $ - $ - - $ - $ - - $ - $ - -
Federal Funds Sold $ 1,411 $ 56 15.87% $ 25 $ 1 16.00% $ 83 $ 3 14.46%
Lease Financing $ - $ - - $ - $ - - $ 5 $ - -
Total Interest
Earning Assets $359,252 $7,996 8.90% $296,955 $6,758 9.11% $278,894 $6,167 8.85%
NON-INTEREST
EARNING ASSETS:
Cash and Due From
Banks $ 10,912 $ - - $ 9,395 $ - - $ 9,549 $ - -Bank Premises and
Equipment $ 9,110 $ - - $ 8,173 $ - - $ 8,585 $ - -
Other Assets $ 13,950 $ - - $ 8,347 $ - - $ 4,651 $ - -
Total Assets $393,224 $ - - $322,870 $ - - $301,679 $ - -
LIABILITIES AND
SHAREHOLDERS' EQUITY:
INTEREST BEARING
LIABILITIES:
Savings Deposits $ 92,429 $ 747 3.23% $ 82,517 $ 697 3.38% $ 73,362 $ 572 3.12%
Time Deposits $185,511 $2,511 5.63% $150,177 $2,056 5.48% $145,941 $2,046 5.61%
Federal Funds
Purchased and
Other Interest
Bearing
Liabilities $ 43,730 $ 714 6.53% $ 32,093 $ 415 5.18% $ 28,101 $ 333 4.74%
Total Interest
Bearing
Liabilities $318,759 $3,972 4.98% $264,787 $3,168 4.79% $247,404 $2,951 4.78%
NON-INTEREST
BEARING
LIABILITIES:
Demand Deposits $ 33,353 $ - - $ 27,096 $ - - $ 26,303 $ - -
Other Liab. $ 1,887 $ - - $ 1,847 $ - - $ 2,300 $ - -
Total Liab. $356,910 $ - - $293,730 $ - - $276,007 $ - -
SHAREHOLDERS'
EQUITY $ 36,314 $ - - $ 29,140 $ - - $ 25,672 $ - -
TOTAL LIABILITIES
AND SHAREHOLDERS'
EQUITY $393,224 $ - - $322,780 $ - - $301,679 $ - -
NET INTEREST
INCOME $ - $4,024 - $ - $3,590 - $ - $3,216 -
NET YIELD ON
AVERAGE EARNING
ASSETS
(ANNUALIZED) $ - $ - 4.48% $ - $ - 4.84% $ - $ - 4.62%
[FN]
(1) Loan totals are shown net of interest collected, not earned and
Loan Loss Reserve.
(2) Non-accrual loans are included in average total loans.
(3) Loan Fees are included in interest income and the computations of
the yield on loans.
(4) Interest and rates on securities which are non-taxable for Federal
Income Tax purposes are presented on a taxable equivalent basis.
20
COMPOSITION OF LOANS
Loan growth reflected in the Composition of Loans table has
resulted from increased loan production in all areas indicated
within the table. Real estate loans continue to represent a
significant increase in the portfolio. The Dyersburg/Dyer County
market continues to experience growth in new home starts as well
as refinancing of existing mortgages created by the low interest
rate environment. Commercial expansion in retail as well as
medical facility construction represents a significant volume
increase in total real estate loans. The Dyer County population
is approximately 41,000 based on 1997 estimates (Dyersburg Dyer
County Chamber of Commerce publication). Total loans as of
6/30/98 was 270,945,000 compared to $222,874,000 and $209,255,000
for the periods of 6/30/97 and 6/30/96. The target market is
primarily the bank's delineated market as defined by our CRA
Statement area, emphasizing improvement of the quality of life for
individuals and the expansion of business and commerce. Board
approved policies and reporting are in place to maintain a
diversified portfolio without a concentration of credits that
would represent significant risk to the portfolio. Agricultural
loans, up approximately $12 million since June 30, 1997, represent
20.72% of the total loan portfolio. First Citizens is the largest
agricultural lender in the State of Tennessee and is an approved
Farm Credit Services lender. Agriculture resources comprise a
significant portion of the Dyer County as well as surrounding
counties markets. Total farm land in production is approximately
231,000 acres with an estimated value of $449,501,000. Average
machinery value per farm is $76,449. First Citizens investment in
agricultural real estate loans total $20.7 million while crop
production and equipment loans total $14.9 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. Agricultural credits 30 days or more past due
in excess of $25,000 total approximately $66,851 or .0002% of
total loans. Agricultural credits listed on the bank's problem
list represent approximately 1.5 million with over 1.2 million
government guaranteed.
Growth in consumer loans has been controlled due to increased
numbers of reported bankruptcies in the State of Tennessee as well
as perceived deterioration in consumer credit in Dyer County.
The following table sets forth loan totals net of unearned income
by category for the past five years:
June 30
(in thousands)
1998 1997 1996 1995 1994
Real Estate Loans:
Construction $ 23,461 $ 20,579 $ 14,924 $ 12,619 $ 8,681
Mortgage $157,373 $130,584 $116,719 $102,235 $ 91,510
Commercial, Financial
and Agricultural Loans $ 56,166 $ 44,912 $ 53,279 $ 48,010 $ 44,164
Installment Loans to
Individuals $ 31,421 $ 24,485 $ 22,083 $ 20,518 $ 16,953
Other Loans $ 2,524 $ 2,314 $ 2,250 $ 1,978 $ 3,998
TOTAL LOANS $270,945 $222,874 $209,255 $185,360 $165,306
21
First Citizens is located in the Dyersburg/Dyer County trade area having
a population of approximately 41,000. The entire trade area has out
paced both the state and the nation in per capita personal income growth
since the early 1980's. Average per capita income is $18,512 and the
median household income is $27,514 (1994). Total personal income for
Dyer County is $568,000,000. Effective buying power for the County is
$460,425,000 (1994). The State of Tennessee projects that per capita
income in the area will be greater than the national average by the year
2000. A diversified mix of industry in the local economy has provided
stable, growing employment opportunities for residents under all
economic conditions. The Dyer County distribution of employment
consists primarily of service employers 14.9%, government 14.7%, trade
19.3%, and manufacturing of 40.5%. Dyer County's unemployment rate for
June was 4.3% down from 5.1% in June 1997 according to the Tennessee
Department of Employment Security. This compares to Tennessee's
unemployment rate of 5.0% for June.
The provision for loan losses increased in proportion to loan growth as
required by loan policy. Problems loans at 6/30/98 were $5.3 million up
$2.4 million from 6/30/97. Problem loans represent slightly over 15% of
gross capital funds. A total of $1.2 million of problem loans are
government guaranteed loans. The provision at 6/30/98 was 1.27% well in
excess of policy requirements of one percent of total loans.
Composition of Loans
Due after
Due in one one year but Due after
year or less within five years five years
(in thousands)
Real Estate $49,351 $105,641 $11,600
Commercial, Financial
and Agricultural $37,140 $30,918 $ 2,350
All Other Loans $ 7,084 $26,728 $ 133
TOTAL $93,575 $163,287 $14,083
Loans with Maturities After One Year for which:
(in thousands)
Interest Rates are Fixed or Predetermined $165,130
Interest Rates are Floating or Adjustable $ 12,240
Experience of Senior lenders and loan review staff as well as
adherence to policy lends a comfort level to the portfolio and
supports the Loan Loss allowance at the present level. Loan
Administration sets policy guidelines approved by the Board of
Directors regarding portfolio diversification and underwriting
standards. Loan policy includes board approved guidelines for
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%.
22
Diversification of the banks' real estate portfolio is a necessary
and desirable goal of the bank's real estate loan policy. In
order to achieve and maintain a prudent degree of diversity, given
the composition and general economic state of the bank's market
area, the bank will strive to maintain a real estate loan
portfolio diversification based on the following:
*Agricultural loans totaling in aggregate no more than 20% of the
Bank's total loans;
*Land acquisition and development loans totaling in aggregate no
more than 10% of the Bank's total loans;
*Commercial construction loans totaling in aggregate no more than
10% of the Bank's total loans;
*Residential construction loans totaling in aggregate no more than
10% of the Bank's total loans;
*Residential mortgage loans totaling in aggregate no more than 40%
of the Bank's total loans; and
*Commercial loans totaling in aggregate no more than 30% of the
Bank's total loans.
It is the policy of FCNB that no real estate loan will be made
(except in accordance with the provisions for certain loans in
excess of supervisory limits provided for hereinafter) that exceed
the loan-to-value percentage limitations ("LTV limits") designated
by category as follows:
Loan Category LTV Limit (%)
Raw Land 65
Land Development or Farmland 75
Construction:
Commercial, multi-family, and
other non-residential 80
1-to-4 family residential 80
Improved Property 80
Owner-occupied 1-to-4 family
and home equity 80
Multi-family construction loans include loans secured by
cooperatives and condominiums. Owner-occupied 1-to-4 family and
home equity loans which equal or exceed 90% LTV at origination
must have either private mortgage insurance or other readily
marketable collateral pledged in support of the credit.
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.
23
Amortization Schedules
Every loan must have a documented repayment arrangement. While
reasonable flexibility is necessary to meet the credit needs of
the Bank's customers, in general all loans should be repaid within
the following time frames:
Loan Category Amortized Period
Raw Land 10 years
Construction:
Commercial, multi-family, and
other non-residential 20 years
1-to-4 family residential 20 years
Improved Property Farmland 20 years
Owner-occupied 1-to-4 family
and home equity 20 years
The aggregate amount of unused guarantees, commitments to extend
credit and standby letters of credit was $44,030,000 as of
6/30/98.
The average yield on loans of First Citizens National Bank for the
second quarter of the years indicated is as follows:
1998 - 9.64%
1997 - 9.82%
1996 - 9.57%
1995 - 9.82%
1994 - 9.10%
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 $105,815,000 or 39.05% of the total portfolio are subject
to repricing with one year or carry a variable rate of interest.
The ratio is down slightly from 43.5% at 6/30/97. Maturities in
the one to five year category total $163,287,000, reflecting an
increase of $31.1 million when compared to 6/30/97.
NON-PERFORMING ASSETS
Total non performing loans as of quarter end represent .26 percent of
the loan portfolio compared to peer group .72% (3/31/98). Total non-
performing loans at 6/30/97 represent .54% of total loans compared to
peer group total of .76 percent. Non-accrual loans as of June 30, 1998
total $330,066 compared to $1,097,494 at 6/30/97 representing a net
decrease of $767,428.
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
24
circumstances, through collection efforts not involving legal action
which are reasonably expected to result in repayment of the debt or in
its restoration to a current status. Loans that represent a potential
loss to First Citizens are adequately reserved for in the provision for
loan losses.
Interest income on loans is recorded on an accrual basis. The accrual
of interest is discontinued on all loans, except consumer loans, which
become 90 days past due, unless the loan is well secured and in the
process of collection. Consumer loans which become past due 90 to 120
days are charged to the allowance for loan losses. Gross interest
income that would have been recorded for the six months ending 6/30/98
if all loans reported as non-accrual had been current in accordance with
their original terms and had been outstanding throughout the period is
$15,000. Interest income on loans reported as ninety days past due and
on interest accrual status was $16,000 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 loan total at June 30, 1998
was zero.
Loans classified by regulatory examiners and not reported under non-accrual,
past due or restructured pose no significant credit problems.
Loan Officers are required to develop a "Plan of Action" for each
problem loan within their portfolio. Adherence to each established plan
is monitored by Loan Administration and reevaluated at regular intervals
for effectiveness.
The following table sets forth the balance of non-performing loans as of
June 30, for the years indicated:
Non-Performing Loans
June 30
(in thousands)
90 Days Past Due
Year Non-Accrual Accruing Interest Total
1998 $ 316 $ 331 $ 647
1997 $1,097 $ 225 $1,322
1996 $1,725 $ 116 $1,841
1995 $ 869 $ 490 $1,359
1994 $ 889 $ 520 $1,409
LOAN LOSS EXPERIENCE AND
RESERVES FOR LOAN LOSSES
During the quarter just ended activity to the Reserve Account consisted
of (1) loan charge-offs - $146,000 (2) recovery of loans previously
charged off - $79,000 and (3) additions to Reserve - $308,000. Recovery
of loans previously charged off continues to be a priority to the bank.
One full time employee is assigned the responsibility for recovery of
charged off loans and deposit overdrafts. The Reserve for Loan Losses
Balance at quarter end was $3,438,000 or 1.27% of total loans. Bank
policy mandates a reserve balance equal to one percent of total loans.
Projected charge-offs for the year are approximately $650,000.
An analysis of the allocation of the allowance for Loan Losses is made
on a fiscal quarter at the end of the month, (February, May, August,
and November) and reported to the Board at its meeting immediately
preceding quarter-end. Requirements of FASB 114 & 118 have been
incorporated into the policy for Accounting by Creditor for Impairment
of a Loan. A loan is impaired when it is probable that a creditor will
25
be unable to collect all amounts due of principal and interest according
to the original contractional terms of the loan. First Citizens adopted
the following as a measure of impairment: (1) Impairment of a loan at
First Citizens shall exist when the present value of expected future
cash flows discounted at the loans effective interest rate impede full
collection of the contract; and (2) Fair Value of the collateral, if the
loan is collateral dependent, indicates unexpected collection of full
contract value. The Impairment decision will be reported to the Board
of Directors and other appropriate regulatory agencies as specified in
FASB 114 and 118. The bank will continue to follow regulatory
guidelines for income recognition for purposes of generally accepted
accounting principles, as well as regulatory accounting principles.
An annual review of the loan portfolio to identify risks will cover a
minimum of 70% of the gross portfolio less installment loans. In
addition, any single note or series of notes directly or indirectly
related to one borrower which equals 25% of the bank's legal lending
limit will be included in the review.
For analysis purposes loans reviewed will be separated into five
classifications:
1. Pass - Loans that have been reviewed and graded high quality or no
major deficiencies.
2. Watch - Loans which, because of unusual circumstances, need to be
supervised with slightly more attention than is customary.
3. Problem - Loans which require additional collection effort to
liquidate both principal and interest.
4. Specific Allocation - Impaired loans, in total or in part, in which
a future loss is possible.
5. Charge-Off
Examples of factors taken into consideration during the review are:
Industry or geographic economic problems, sale of business, change of or
disagreement among management, unusual growth or expansion of the
business, past due for either principal or interest 90 days, placed on
non-accrual or renegotiated status, renewed four times without principal
reduction, declining financial condition, adverse change in personal
life, frequent overdrafts, lack of cooperation by borrower, decline in
marketability or market value of collateral, insufficient cash flow, and
inadequate collateral values.
26
LOAN LOSS ALLOWANCE ANALYSIS
DATE
AVERAGE AVERAGE PERCENT CURRENT RESERVE
LOSS 3 YRS. BALANCE 3 YRS. BALANCE REQUIRED
I. CREDIT $ GROSS $ % $ $
CARDS
II. INSTALL. $ NET $ % $ $
LOANS
III. IMPAIRED WITH ALLOCATIONS $ $
IMPAIRED WITHOUT ALLOCATIONS $ $
ALLOWANCE
IV. DOUBTFUL 50% $ $
SUBSTANDARD 10%
WATCH 5%
OTHER LOANS NOT LISTED PREVIOUSLY .75%
LESS SBA/FMHA GUARANTEED PORTIONS
__________
TOTAL LOANS $
V. LETTERS OF CREDIT .75% $ $
VI. OTHER REAL ESTATE OWNED $
______
RESERVE REQUIRED $
RESERVE BALANCE $
EXCESS (DEFICIT) $
RESERVE AS % OF TOTAL LOANS %
PEER GROUP %
LOSS EXPERIENCE III & IV AVERAGE LAST 3 YEARS
.% OR $
Management estimates the approximate amount of charge-offs for the 12
month period ending 12/31/98 to be as follows:
Domestic Amount
Commercial, Financial & Agricultural $350,000
Real Estate-Construction -0-
Real Estate-Mortgage
Installment Loans to individuals & 100,000
credit cards 200,000
Lease financing -0-
Foreign N/A
01/01/98 through 12/31/98 Total $650,000
The book value of repossessed real property held by First Citizens at
6/30/98 is $131,000 compared to $164,000 at 6/30/97 and $853,000 at
6/30/96. 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 at 6/30/97 represents property purchased
for expansion of the branch located on Highway 51 ByPass valued at
$164,000. The first quarter of 1998, the property was transferred to
premises and equipment from the parent company to the Bank with no gain
or loss. Plans for construction of a new branch facility at this
location are currently underway. Repossessed real property of $131,000
is property held by First Citizens and Bank of Troy. 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.
27
All other real estate parcels held as ORE are appraised annually and the
carrying value adjusted to reflect the decline, if any, in its
realizable value. Such adjustments are charged directly to expense.
The following table summarizes the monthly average of net loans
outstanding; changes in the reserve for loan losses arising from loans
charged off and recoveries on loans previously charged off; additions to
the reserve which have been charged to operating expense; and the ratio
of net loans charged off to average loans outstanding.
Loan Loss Experience and Reserve for Loan Losses
Quarter ending June 30
(in thousands)
1998 1997 1996 1995 1994
Average Net Loans
Outstanding $265,028 $216,306 $201,924 $178,924 $156,658
Balance of Reserve
for Loan Losses
at Beginning of
Period $ 3,197 $ 2,446 $ 2,289 $ 2,115 $ 1,795
Loan Charge-Offs $ (146) $ (79)$ (96)$ (56) $ (50)
Recovery of Loans
Previously Charged Off $ 79 $ 38 $ 32 $ 41 $ 34
Net Loans Charged Off $ (67) $ (41)$ (64)$ (15) $ (16)
Additions to Reserve
Charged to Operating
Expense $ 308 $ 191 $ 134 $ 86 $ 100
Balance at End of
Period $ 3,438 $ 2,596 $ 2,359 $ 2,186 $ 1,879
Ratio of Net Charge-
Offs during quarter
to Average Net Loans
Outstanding .02% (.02%) (.04%) (.01%) (.01%)
The following table will identify charge-offs by category
for the period ending 6/30/98.
Charge-Offs: 1998 1997
Domestic
Commercial, Financial and Agricultural $ 38 $ 0
Real Estate - Construction 0 0
Real Estate - Mortgage 20 0
Installment Loans to Individuals 59 65
Lease Financing 0 0
Credit Cards 29 14
Total $146 $(79)
Recoveries:
Domestic:
Commercial, Financial and Agricultural $ 47 $ 14
Real Estate - Construction 0 0
Real Estate - Mortgage 1 1
Installment Loans to Individuals 26 19
Lease Financing 0 0
Credit Cards 5 4
Total $ 79 $ 38
Net $(67) $(41)
28
INVESTMENT SECURITIES
The book value of listed investment securities as of the dates
indicated are summarized as follows:
Composition of Investment Securities
June 30
(in thousands)
1998 1997 1996 1995 1994
U. S. Treasury &
Government Agencies $73,311 $66,322 $63,154 $53,754 $46,480
State & Political
Subdivisions $12,078 $11,321 $10,756 $10,019 $14,093
All Others $ 2,676 $ 3,032 $ 3,435 $ 4,151 $ 6,021
TOTALS $88,065 $80,675 $77,345 $67,924 $66,594
A major goal of the bank's investment portfolio management is to
maximize returns from investments while controlling the basic
elements of risk. The second goal is to provide liquidity and
meet financial needs of the community. Investment Securities also
serve as collateral for government and public fund deposits.
Investments for the second quarter, 1998 were up $8.6 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%.
Tax Free Investments total approximately $6,494,000 as of quarter
end. Securities purchased during the second quarter total $5
million with $1 million placed in the Held to Maturity account and
the balance placed in Available for Sale. Sales made from the
Available from Sale totaled $1 million for the quarter sold at a
profit of $9,108.68. Book value compared to market value resulted
in a positive variance of $550,902 for the quarter. The average
maturity of the portfolio is 8 years and 8 months compared to 5
years and 9.3 months for the same time period in 1997. The
average pretax yield at 6/30/98 was 6.87% compared to 6.84% at
6/30/97.
Fixed rate holdings currently have an expected average life of
2.4 years. It is estimated that this average life would extend
to 5.3 years should rates rise 100 basis points and 6.2 years
should rates increase 200 basis points. This is a result of some
extension occurring in the callable bonds and mortgage-backed
holdings as rates rise. Should rates decline 100 basis points the
average life would likely decrease to 1.7 years.
In terms of price sensitivity, we estimate that if rates were to
increase 100 basis points, market value of the portfolio would
fall by 3.1%, while rates rising 200 basis points would impact the
market value by a negative 7.9%. This is comparable with the
price sensitivity of the 4 to 5 year Treasury bond, which is
consistent with the current average life of the portfolio. If
rates go down 100 basis points we estimate that market value would
increase by 1.5%.
Adjustable rate holdings reprice on an annual or more frequent
basis and currently have an average life of 4.1 years. Due to the
structure of these holdings, we would expect very little extension
to occur in average life should interest rates rise, but could see
some shortening should rates fall. We estimate that the
adjustable rate holdings also have the price sensitivity of about
a 3-year Treasury, although this is more difficult to project on
adjustable rate holdings than on fixed rate holdings.
29
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, 1998 approximately 72% of the total portfolio was
placed in the Available-for-Sale account. The remaining 28% was
booked in the Held-to-Maturity account. FASB 115 also required
banks to Mark to Market the Available for Sale and Trading Account
Investments at the end of each calendar quarter. Held-To-Maturity
Account Investments are stated at amortized cost on the balance
sheet. Mark to Market, requirements of FASB 115 resulted in a
negative capital entry of $3,848 for the quarter.
Maturities in the portfolio are made up of 7% within one year, 30%
after one year and within five years, 41% after five years and
within 10 years, and 22% after 10 years. Policy provides for 20%
maturities on an annual basis. Maturities were extended from 5 to
10 years on most securities purchased since the latter half of
1995. Management made a conscious effort to extend maturities for
a higher yield on the portfolio. Securities purchased with
extended maturities bear call features ranging from 1 to 3 years.
First Citizens National Bank does not engage in derivative
activities as defined by paragraph 5 thru 7 of FASB 119 (reference
footnote 7).
Investment Securities
Held to Maturity Available for Sale
June 30, 1998
(in thousands)
Amortized Fair Amortized Fair
Cost Value Cost Value
U.S. Treasury Securities $ 0 $ 0 $ 5,053 $ 5,127
U.S. Government agency
and corporation obligations 17,505 17,518 50,085 50,679
Securities issued by states
and political subdivisions
in the U.S.:
Taxable securities N/A N/A N/A N/A
Tax-exempt securities 6,494 6,530 5,507 5,584
U. S. Securities:
Debt securities N/A N/A N/A N/A
Equity securities (including
Federal Reserve stock) 2,642 2,676
Foreign securities:
Debt securities N/A N/A N/A N/A
Equity securities N/A N/A
Total (sum of column a items 1
through 5.a. must equal Schedule
HC, item 2.a. and sum of column
D, items 1 through 5.b must equal
Schedule HC, item 2.b.) 23,999 24,048 63,287 64,066
(1) Includes equity securities without readily determinable fair values
at historical cost.
(2) Includes Small Business Administration "Guaranteed Loan Pool
Certificates," U.S. Maritime Administration obligations, and
Export-Import Bank participation certificates.
(3) Includes obligations (other than mortgage back 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.
(4) Includes Parent and Subsidiary.
30
Investment Securities
Unrealized Gains/(Losses)
June 30, 1998
Unrealized Unrealized Net
Gains Losses Gains/Losses
U.S. Treasury Securities 74 0 74
Obligations of U.S. Government
Agencies and Corp 534 128 406
Obligations of States and
Political Subdivisions 117 3 114
Fed Reserve & Corp Stock 34 0 0
Totals 759 131 628
Maturity and Portfolio Percentages June 30, 1998
(in thousands)
After One Year After Five Years After
Within One Year Within Five Years Within Ten Years Ten Years
Amount % Amount % Amount % Amount %
6/30/98 $ 6,358 (7%) $26,025 (30%) $36,238 (41%) $19,444 (22%)
6/30/97 $26,681 (33%) $25,832 (32%) $16,725 (21%) $11,437 (14%)
6/30/96 $ 5,329 (7%) $38,620 (50%) $22,895 (30%) $10,501 (13%)
6/30/95 $ 3,279 (5%) $49,381 (73%) $11,609 (17%) $ 3,655 (5%)
6/30/94 $16,058 (24%) $31,208 (47%) $13,604 (20%) $ 5,724 (9%)
Maturity and Yield on Securities June 30, 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 $ 4,450 6.88% $20,076 6.54% $31,527 6.58% $17,258 7.12%
State and Political
Subdivisions* $ 1,908 7.15% $ 5,949 6.57% $ 2,035 7.28% $ 2,186 7.62%
All Others $ - -% $ - -% $ 2,676 6.41% $ - -%
TOTALS $ 6,358 6.96% $26,025 6.55% $36,238 6.61% $19,444 7.18%
<FN>
*Yields on tax free investments are stated herein on a taxable
equivalent basis.
Parent Company's investments are included in the table.
31
Return on Equity and Assets
Return on assets is a measurement of the firms ability to
maximize asset utilization. Total assets at 6/30/98 was
$394,438,000. Efforts continue to focus on positioning the
company for future growth and profitability through
improvements in technology, solid growth in the deposit base
and efficient utilization of the branch distribution system.
Accelerated asset growth coupled with rising interest rates
had a significant impact on earnings in 1995. Results of
operations for the years following 1995 reflect continuous
improvement. Return on assets for 1998 reflects
organizational cost for Bank of Troy and White and
Associates/First Citizens Insurance Agency. Organizational
cost for the Bank of Troy reflects losses on sales of
investments and increased allocations to the loan loss
reserve (discussed further in results of operations).
The company's strategic plan addresses objectives to sustain
improved earnings, maintain a quality loan and investment
portfolio and to maintain market share by providing quality
customer service. The Bank's management and employees are
rewarded with incentive compensation based on various
factors including the level of ROA achieved at year end. A
return on assets of 2.00% is required if maximum benefits
are to be realized.
Total Shareholder's equity (including Loan Loss Reserve) of
First Citizens Bancshares as of 6/30/98 was $36,950,000
compared to $34,161,000 at 06/30/97.
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 to service the Cash Option and Dividend
Reinvestment Programs. The Board of Directors voted to re-open
the Cash Option program in the first quarter of 1998.
As a result 25,019 shares have been issued since February 2,
1998. Shares issued as a result of the Dividend
Reinvestment program total 11,269. Number of shares also
increased as a result of shares issued for the 50 percent
purchase of White and Associates Insurance Agency. A stock
repurchase program continues to be ineffective in creating
availability of shares. Shareholders are utilizing the cash
option as well as the Dividend Reinvestment Programs to
increase ownership in the company. Under the terms of the
repurchase program, the company would repurchase up to
$200,000 of Bancshare's 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
the company. The number 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. In June, 1998 a 4 for 1 stock split
was declared to holders of record as of June 1, 1998. The
number of shares outstanding increased proportionately with
no effect to capital.
A dividend of .50 shares per share was paid on 3/15/98 and
6/15/98. 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 1997
compared to .30 cents and .10 cents per share in 1996 and
1995.
32
The table below presents for First Citizens Bancshares, Inc.
certain operating ratios year-to-date as of June 30: (not
annualized)
1998 1997 1996 1995
Percentage of Net Income to:
Average Total Assets .61% .65% .59% .42%
Average Shareholders Equity 6.29% 6.91% 6.40% 4.65%
Percentage of Dividends Declared
Per Common Share to Net Income
Per Common Share 36.09% 26.09% 24.95% 32.28%
*Percentage of Average
Shareholders' Equity to
Average Total Assets 9.63% 10.23% 9.87% 9.98%
*Represents primary capital - including reserve for loan
losses account
LIQUIDITY AND INTEREST RATE SENSITIVITY
Liquidity is the ability to meet the needs of our customer
base for loans and deposit withdrawals by maintaining assets
which are convertible to cash equivalents with minimal
exposure to interest rate risks. Liquidity is determined by
a comparison of net liquid assets to net liabilities and
consistently remains between 10 and 15 percent. The
stability of our deposit base, sound/asset liability
management, a strong capital base and quality assets support
adequate liquidity. In addition funds are available from
approved lines of credit totaling $54,826,000. Membership
in the Federal Home Loans Banks provides approximately $36
million of the total. First Citizens has residential loans
totaling $84,208,000 that are available to serve as
collateral for Federal Home Loan borrowings. During the
quarter just ended borrowings from this liquidity source
averaged $16,640,000 per day. Strong loan demand and
seasonal growth in agricultural lines of credit historically
places the bank in a less liquid position May through
October. Loan to deposit ratio excluding repurchase
agreements and Federal Home Loan Bank borrowings is 92.14%
at 6/30/98.
Historical liquidity analysis of second and third quarter of
each year confirm an illiquid cash flow due to funding
agriculture lines of credit. However, by November of each
year the liquidity position improves and the bank moves from
borrowing short term funds to a position of selling short
term funds. Projected short term borrowings for July 1,
1998 to October 31, 1998 are expected to range from $6 - $12
million on a daily basis.
To address liquidity concerns the bank also has loans in
excess of $93 million maturing in one year or less; and (3)
Investment Securities totaling $16 million with maturity
dates of one year or less. Other sources of liquidity or
non-core fundings is the State of Tennessee (jumbo CDS).
The state has $19 million in CDS with First Citizens as of
6/30/98. The average rate associated with these deposits is
5.60%. These funds are utilized to earmark specific asset
needs.
33
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 more interest
rate sensitive than long-term investment securities and
fixed rate loans. The shorter term interest sensitive
assets and liabilities are the key to measurement of the
interest sensitivity gap. Simulations are utilized for
interest rate risk management over gap statements due to the
validity of the data. Gap statements do not reflect actual
characteristics of the bank.
The following condensed gap report provides an analysis of
interest rate sensitivity of earning assets and costing
liabilities. First Citizens Asset/Liability Management
Policy provides that net interest income exposure to Tier I
Capital shall not exceed 2.00%. Interest rate risk is
separated and analyzed according to the following categories
of risk: (1) repricing (2) yield curve (3) option risk (4)
price risk and (5) basis risk. Trading assets are utilized
infrequently and are addressed in the investment policy.
Any unfavorable trends reflected in interest rate margins
will cause an immediate adjustment to the bank's gap
position or asset/liability management strategies. The
following data schedule reflects a summary of First
Citizens' interest rate risk using simulations. The
projected 12 month exposure is based on 5 different rate
movements (flat, rising, or declining). Three different
rate scenarios were used for rising rates since First
Citizens is liability sensitive.
Interest Rate Risk
(in thousands)
1998 1997 1996
Fixed Rate Loans > 5 Years $21,460 $15,724 $9,620
$2 million of this is
matched with FHLB
Changes in net interest income
due to rates - 1998 vs 1997 - Actual results $ 59)
Changes in net interest income
due to rates - 1998 vs 1996 - Actual results ($143)
Rate Moves Prime Rate Net Interest
By Basis Pts Example Income
Declining -100 7.50% $12,007
Flat Rate 0 8.50% $12,047
Rising 1 100 9.50% $12,153
Rising 2 200 10.50% $11,715
Rising 3 300 11.50% $11,064
Ranges Ranges
Projected 12 month exposure $ 40 $ 332
Tier I Capital 29,760 29,760
Percent of Tier I Capital 0.13% 1.12%
Policy 2.00% 2.00%
**Notes**
The scenarios above were originated from the balance sheet as of
June 30,1998 and were simulated for the upcoming 12 months ending
May 31, 1999. Driver rates were utilized for each interest
bearing account - for example
Interest Bearing Group Driver Rates
Loans NY Prime
Investments Treasury Rates
Deposits-Savings Utilized our Rates
Deposits-Time Treasury Rates
FHLB Borrowings FHLB Rates
34
The five rate scenarios were used in the simulations. One
example is presented to show the impact of the associated rate
change. The applicable net interest income is also presented.
The rising 3 scenario was not utilized in the projected 12 month
exposure because it is based off a 300 basis point rise in rates.
This scenario is presented to reflect the impact should a
material move in rates take place. As evidenced with this
scenario, it would have a material impact on net interest income.
35
CONDENSED GAP REPORT
------------------------------------
FIRST CITIZENS NATIONAL BANK CURRENT BALANCES
DYERSBURG, TN -----------------------------------
06/30/98
(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 11,109 - - - - - - - 11,109
MONEY MARKET 750 750 - - - - - - -
TOTAL CASH & DUE FROM 11,859 750 - - - - - - 11,109
INVESTMENTS
US TREASURIES 5,053 - - - - 666 1,333 - 3,054
US AGENCIES 60,380 - - - - 816 1,634 3,137 54,793
VARIABLE AGENCIES 7,753 - - 998 501 4,754 1,500 - -
MUNICIPALS 12,001 - - - - 636 1,272 1,943 8,150
EQUITIES 2,878 - - - - - - - 2,878
TOTAL INVESTMENTS 88,065 - - 998 501 6,872 5,739 5,080 68,875
LOANS
COMMERCIAL FIXED 55,647 - 3,304 2,452 1,925 6,737 12,545 2,608 26,076
COMMERCIAL VARIABLE 14,462 1,900 12,562 - - - - - -
REAL ESTATE-VARIABLE 11,809 - 10,748 - - 1,061 - - -
REAL ESTATE FIXED 147,428 - 5,848 4,394 2,464 10,035 15,102 8,806 100,779
HOME EQUITY LOANS 5,466 - 4,330 - - 50 1,077 9 -
SEC MORTGAGE 1,889 - 1,889 - - - - - -
INSTALLMENT LOANS 31,421 - 542 267 281 927 2,543 5,359 21,502
FLOOR PLAN 299 - 299 - - - - - -
CREDIT CARDS 2,135 - - - - - 2,135 - -
FACTORING REC 31 - 31 - - - - - -
OVERDRAFTS 358 - 358 - - - - - -
TOTAL LOANS 270,945 1,900 39,911 7,113 4,670 18,810 33,402 16,782 148,357
LOAN LOSS RESERVE 3,438 - - - - - - - 3,438
NET LOANS 267,507 1,900 39,911 7,113 4,670 18,810 33,402 16,782 144,919
FED FUNDS SOLD 1,100 1,100
TOTAL FED FUNDS SOLD 1,100 1,100 - - - - - - -
TOTAL EARNING ASSETS 368,531 3,000 39,911 8,111 5,171 25,682 39,141 21,862 224,903
OTHER ASSETS
BUILDING, F&F & LAND 9,088 - - - - - - - 9,088
OTHER REAL ESTATE 131 - - - - - - - 131
OTHER ASSETS 16,688 - - - - - - - 16,688
TOTAL OTHER ASSETS 25,907 - - - - - - - 25,907
TOTAL ASSETS 394,438 3,135 39,911 8,111 5,171 25,682 39,141 21,862 250,810
DEMAND DEPOSITS 33,158 - - - - - - - 33,158
TOTAL DEMAND 33,158 - - - - - - - 33,158
36
CONDENSED GAP REPORT
------------------------------------
FIRST CITIZENS NATIONAL BANK CURRENT BALANCES
DYERSBURG, TN -----------------------------------
06/30/98
(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 20,788 - - - - - 1,192 2,385 17,211
NOW ACCOUNT 29,378 - - - - - 1,860 3,720 23,798
BUSINESS CHECKING 279 - - - - - - - 279
IMF MMDA 9,217 - - - - - - - 9,217
FIRST RATE ACCOUNT 27,669 27,669 - - - - - - -
DOGWOOD CLUB 5,133 - - - - - - - 5,133
TOTAL SAVINGS 92,464 27,669 - - - - 3,052 6,105 55,638
TIME DEPOSITS
CD 1-2 MONTHS 3,268 - 3,025 243 - - - - -
CD 3 MONTHS 7,850 - 2,642 2,548 2,569 91 - - -
CD 4-5 MONTHS 250 - - 27 - 223 - - -
CD 6 MONTHS 31,952 - 3,731 6,236 6,458 13,967 1,560 - -
CD 7-11 MONTHS 8,698 - 2,013 40 194 6,201 250 - -
CD 12 MONTHS 25,815 - 1,234 3,045 3,064 6,947 11,350 175 -
CD 13-17 MONTHS 25,710 - 838 2,399 1,282 5,580 12,099 3,512 -
CD 18-23 MONTHS 496 - 25 15 2 56 283 115 -
CD 24 MONTHS 9,074 - 249 - 75 139 4,651 2,760 1,200
CD 25-30 MONTHS 7,075 - 4 381 571 2,184 3,253 594 88
CD 31-59 MONTHS 12,751 - 132 - - 379 80 3,679 8,481
CD 31-59 MONTHS
VARIABLE 12 - - - - - - 12 -
CD 60 MONTHS 5,494 - 75 115 194 539 1,113 1,035 2,423
CD 60 MONTH VAR. 817 - 30 - - 50 428 60 249
CD SWEET 16 21,244 - 702 866 1,283 4,718 5,361 8,314 -
CD 7 MONTHS 1,536 - 116 235 523 534 128 - -
IRA FLOATING 112 - 112 - - - - - -
IRA FIXED 20,291 - 423 933 484 2,457 5,718 7,934 2,342
CHRISTMAS CLUB 318 - - - - - 318 - -
TOTAL TIME 182,763 - 15,351 17,083 16,699 44,065 46,592 28,190 14,783
TOTAL DEPOSITS 308,385 27,669 15,351 17,083 16,699 44,065 49,644 34,295 103,579
FED FUNDS PURCHASED 3,075 3,075 - - - - - - -
TT&L 1,000 1,000 - - - - - - -
SECURITIES SOLD-
SWEEP 12,498 12,498 - - - - - - -
SECURITIES SOLD-
FIXED 7,696 - 2,400 994 1,313 205 2,325 459 -
FHLB-LIBOR INVEST. 13,947 - 6,947 - - - 7,000 - -
FHLB-LONG TERM 2,764 - - - - - - - 2,764
NOTES PAYABLE- 4,684 - - - - - 1,000 253 -
TOTAL SHORT TERM
BORR. 45,664 16,573 9,347 994 1,313 205 10,325 712 2,764
OTHER LIABILITIES 3,439 - - - - - - - 3,439
TOTAL OTHER LIAB. 3,439 - - - - - - - 3,439
TOTAL LIABILITIES 357,488 44,242 24,698 18,077 18,012 44,270 59,969 35,007 109,782
CAPITAL
STOCK, SURPLUS,
P.I.C 15,800 - - - - - - - 15,800
UNREALIZED GAIN
(LOSSES) 348 - - - - - - - 348
UNDIVIDED PROFITS 20,802 - - - - - - - 20,802
TOTAL CAPITAL 36,950 - - - - - - - 36,950
TOTAL LIAB'S &
CAPITAL 394,438 44,242 24,698 18,077 18,012 44,270 59,969 35,007 146,732
GAP (SPREAD) --41,107 15,213 -9,966-12,841-18,588-20,828-13,145 101,262
GAP % TOTAL ASSETS - -10.43 3.86 -2.53 -3.26 -4.72 -5.29 -3.34 25.70
CUMULATIVE GAP --41,107-25,894-35,860-48,701-67,289-88,117-101,262 -
CUM GAP % TOTAL ASSETS - -10.43 -6.57 -9.10 -12.36 -17.08 -22.36 -25.70 -
SENSITIVITY RATIO - 0.07 0.62 0.59 0.54 0.55 0.58 0.59 1.00
37
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. For purposes of the presentation
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.
Based on policy the bank will attempt to limit net interest
income exposure to a maximum of 2.00% of tier I capital.
(Example .02 x $36,950,000 = $739,000). The goal of the
bank's Asset/Liability Committee is 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
06/30/98 gap report reflects an exposure of $90,000 to
$400,000 based on quarterly rate risk reports. (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.
38
Capital Resources
Total shareholders' equity of First Citizens Bancshares as of June
30, 1998, was $36,950,000. Capital as a percentage of total
assets for the quarter ending June 30, is presented in the
following table for the years indicated (excluding Loan Loss
Reserves):
1998 1997 1996 1995 1994
9.37% 9.48% 8.93% 9.09% 9.14%
A decrease in the capital ratio to 9.37% in 1998 from 9.48% in
1997 is a result of the investment in Bank of Troy. Management
will continue to seek opportunities to employ excess capital in
order that shareholders return on investment can be maximized.
Increasing the capital base of the Company is a vital part of
strategic planning. Although the present capital to asset ratio
remains well in excess of the level required by regulators for
banks our size, management is aware of the importance of this
base.
Risk-based capital focuses primarily on broad categories of credit
risk and incorporates elements of transfer, interest rate and
market risks. The calculation of risk-based capital ratio is
accomplished by dividing qualifying capital by weighted risk
assets. The minimum risk-based capital ratio established by the
Federal Reserve is 8 percent. At least one-half or 4% must
consist of core capital (Tier 1), and the remaining 4% may be in
the form of core (Tier 1) or supplemental capital (Tier 2). Tier
1 capital/core capital consists of common stockholders equity,
qualified perpetual stock and minority interests in consolidated
subsidiaries. Tier 2 Capital/Supplementary Capital consists of
the allowance for loan and lease losses, perpetual preferred
stock, term subordinated debt, and other debt and stock
instruments. Bancshares' capital consists entirely of Tier 1
components, with the exception of the allowance for loan and lease
losses.
Bancshares has historically maintained capital in excess of
minimum levels established by the Federal Reserve Board. The
risk-based capital ratio reflects continuous improvement when
reviewing years included in the above table. Risk-based capital
ratio as of 6/30/98 was 13.00%, significantly in excess of the 8%
mandated by Regulatory Authorities. Growth in capital will be
maintained through retained earnings. There is no reason to
assume that income levels will not be sufficient to maintain an
adequate capital ratio.
Effects of Inflation
Inflation has a significant impact on the growth of total assets
in the banking industry, resulting in a need to increase equity
capital in order to maintain an appropriate equity to asset ratio.
While the current inflationary environment appears stable, efforts
to monitor the situation for any indication of change will be
ongoing.
Operating expenses are directly affected by increases in salaries
and employee benefits, supplies, legal, audit and professional
fees, utilities, advertising and insurance. Now that interest
rates have been deregulated, inflation is a major key to the cost
of acquiring and retaining deposits.
39
A well managed asset/liability management program can maximize net
interest income; and at the same time, reduce the impact of
inflation on earnings.
Part II - Other Information
Item 1. Changes in Securities
Dividends paid to Shareholders of First Citizens Bancshares, Inc.
are funded by dividends to the Bank Holding Company from First
Citizens National Bank. Federal Reserve Bank regulators would be
critical of a bank holding company that pays cash dividends not
covered by earnings or that are funded from borrowings or unusual
or non-recurring gains, such as the sale of property or assets.
Under rules set forth by the Comptroller of the Currency in
Interpretive Ruling 7.6100, the board of directors of a national
bank may declare dividends as it may judge to be expedient,
subject to statutory limitations which deal with the balance of
the surplus account, sufficiency of net profits, dividend payments
on preferred stock, and default of any assessment due to the
Federal Deposit Insurance Corporation. Shareholders approved an
amendment to the Company's Charter in April 1998 to increase the
number of shares of authorized from 750,000 to 10,000,000.
Subsequently, a 4-for-1 stock split was declared which increased
shares outstanding from 2,252,754 to 2,324,739.
Item 6(b) No reports on Form 8-K were filed for the quarter ended
6/30/98
40
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
First Citizens Bancshares, Inc.
(Registrant)
Date: August 13, 1998 /s/Katie Winchester
Katie Winchester, President & CEO
Date: August 13, 1998 /s/Jeff Agee
Jeff Agee, Senior Vice President &
Chief Financial Officer
First Citizens National Bank
(Principal Subsidiary)