1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter ended March 31, 1999 Commission File Number 0-11709
FIRST CITIZENS BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
TENNESSEE
(State or other jurisdiction of 62-1180360
incorporation or organization) (I.R.S. Employer Identification No.)
P. O. Box 370
Court Street, Dyersburg, Tennessee 38024
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (901) 285-4410
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 3 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Of the registrant's only class of common stock (No par value) there were
3,698,232 shares outstanding as of March 31, 1999(net of treasury stock).
2
PART I -FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
3
FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(stated in thousands)
March 31, December 31,
1999 1998
(Unaudited) (Note)
ASSETS
Cash and due from banks $17,442 $14,223
Federal funds sold $3,000 $2,000
Investment securities
Trading Investments-stated at market $0 $0
Held to maturity-amortized cost-fair
value of $22,297 at March 31,
1999 and $25,798 at December 31,
1998. $22,426 $25,710
Available for sale-stated at market $90,413 $77,153
Loans (Excluding unearned income of
$2,754 at March 31, 1999 and
$2,216 at December 31, 1998) $310,391 $278,220
Less: Allowance for loan losses $3,940 $3,496
Net Loans $306,451 $274,724
Premises and equipment $11,748 $9,880
Intangible Assets $4,493 $3,447
Other assets $14,020 $14,084
TOTAL ASSETS $469,993 $421,221
LIABILITIES AND STOCKHOLDERS EQUITY
Deposits $351,269 $315,317
Securities sold under Agreements
to Repurchase $22,060 $21,282
Federal Funds Purchased & Other
Short Term Borrowing $20,175 $16,825
Long term debt $27,984 $24,342
Notes Payable of Employee Stock
Ownership Plan $1,330 $1,408
Other liabilities $3,492 $2,766
TOTAL LIABILITIES $426,310 $381,940
Stockholders' Equity
Common stock, No par value-
10,000,000 authorized; 3,698,258
issued and outstanding at March
31, 1999; 3,244,899 issued and
outstanding at December 31, 1998 $3,698 $3,245
Surplus $14,831 $13,892
Retained earnings $26,537 $23,200
Obligation of Employee Stock
Ownership Plan ($1,330) ($1,408)
Net unrealized gains (losses)
on available for sale ($52) $481
Total Common Stock and
Retained Earnings $43,684 $39,410
Less-26 treasury shares, at
cost at March 31, 1999 and 4,584
shares at December 31, 1998 ($1) ($129)
TOTAL STOCKHOLDERS' EQUITY $43,683 $39,281
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $469,993 $421,221
NOTE: The balance sheet at December 31, 1998 has been taken from
the audited financial statements at that date and condensed.
4
FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(stated in thousands except E.P.S. and shares outstanding)
Three Month Periods Ended
March 31, March 31,
1999 1998
INTEREST INCOME
Interest and fees on loans $7,084 $5,730
Interest on investment securities:
Taxable $1,452 $1,115
Tax-exempt $164 $132
Other interest income-Fed Funds Sold $100 $94
Other interest income-Checking $15 $0
Lease financing income $0 $0
TOTAL INTEREST INCOME $8,815 $7,071
INTEREST EXPENSE
Interest on deposits $3,394 $3,081
Other interest expense $790 $311
TOTAL INTEREST EXPENSE $4,184 $3,392
NET INTEREST INCOME $4,631 $3,679
Provision for loan losses $206 $210
Net interest income
after provision $4,425 $3,469
Other Income
Securities gains (losses) $31 $26
Other income $1,353 $1,050
Total Other Income $1,384 $1,076
Other expenses $3,736 $2,869
Net income before
income taxes $2,073 $1,676
Provision for income taxes $716 $568
Net Income $1,357 $1,108
Earnings Per Share $0.38 $0.36
Weighted average number of
shares outstanding 3562501 3043212
1998 earnings per share data has been adjusted to reflect a 4:1 split (the
weighted average number of shares outstanding were adjusted for a more
comparable review).
5
FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED, STATED IN THOUSANDS)
Three Months Ended March 31
1999 1998 1997
OPERATING ACTIVITIES
Net cash provided by
operating activities $ 1,566 $ 2,990 $ 161
INVESTING ACTIVITIES
Proceeds of maturities
of held to maturity
securities $ 5,284 $ 3,992 $ 4,499
Purchase of held to
maturity investments ($ 2,000) ($ 5,043) ($ 8,990)
Proceeds from maturities
of available for sale
securities $ 6,942 $ 5,463 $ 3,103
Proceeds from sales of
available for sale
securities $ 839 $ 1,500 $ 1,000
Purchase of available
for sale securities ($14,200) ($25,163) ($ 4,860)
Increase in loans-net ($ 3,186) ($30,395) ($ 3,167)
Payment for purchase of
Bank of Troy-net of cash
acquired $ 0 ($ 5,957) $ 0
Purchases of premises
and equipment ($820) ($ 1,192) ($ 349)
Net Cash provided by
investing activities ($ 7,141) ($56,795) ($ 8,764)
FINANCING ACTIVITIES
Net Increase (Decrease)
in Demand & Savings
Accounts ($ 1,541) $ 7,966 $ 5,237
Increase (Decrease) in
Time Accounts ($ 7,271) $34,275 ($ 4,776)
Increase (Decrease) in
Long term Debt $ 2,718 $10,087 $ 4,460
Treasury Stock
Transactions $ 128 ($ 9) $ 1
Proceeds from Sale of
Common Stock $ 240 $ 1,811 $ 100
Cash Dividends Paid ($ 703) ($ 391) ($ 302)
Net Increase (Decrease)in
Short Term Borrowings $ 4,128 $ 856 $ 4,195
Net Cash provided (used)by
Financing Activities ($ 2,301) $54,595 $ 8,915
Increase (Decrease) in
Cash & Cash
Equivalents ($ 7,876) $ 790 $ 312
Cash and Cash
Equivalents at
beginning of year $28,318 $18,846 $13,507
Cash and Cash Equivalents
at end of year $20,442 $19,636 $13,819
Cash Payments made for interest and income taxes during the years
presented are as follows:
1999 1998 1997
Interest $ 4,668 $ 3,263 $ 3,106
Income Taxes $ 140 $ 725 $ 263
A non cash transaction took place on January 1, 1999 to purchase First
Volunteer Bank and its holding company. The following parent company
amounts were purchased by issuing 445,000 shares of our stock. The First
Volunteer investment comprises various assets and liabilities.
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FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (CONT.)
(UNAUDITED, STATED IN THOUSANDS)
Assets Liabilities
Cash $ 1
Due From $ 10
Prepaids $ 85
First Volunteer Bank Invest. $3,997
Plateau $ 3
Accrued Interest $ 3
Accrued Taxes $ 10
Other Payables $ 56
Note Payable $ 225
Capital $3,802
TOTALS $4,096 $4,096
FIRST CITIZENS BANCSHARES, INC.
STATEMENT OF COMPREHENSIVE INCOME
STATED IN THOUSANDS EXCEPT PER SHARE AMOUNTS
Three Months Ended March
1999 1998
Net Income $1,357 $1,108
Changes in Available for Sale Securities ($888) $57
Tax Impact (Available for Sale Securities) $355 ($23)
Comprehensive Income $824 $1,142
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FIRST CITIZENS BANCSHARES, INC.,
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(stated in thousands)
MARCH 31, 1999
NOTE 1-CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet as of March 31, 1999, the consolidated
statements of income for the three month periods ended March 31, 1999, 1998,
and 1997, and the consolidated statements of cash flows for the three month
periods then ended have been prepared by the company without an audit. The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments necessary to present fairly the financial position, results of
operations and cash flows at March 31, 1999 and for all periods presented have
been made. Operating results for the reporting periods presented are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999. 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, 1998.
NOTE 2-ORGANIZATION
First Citizens Bancshares, Inc. is a Bank Holding Company chartered on December
14, 1982, under the laws of the State of Tennessee. On September 23, 1983 all
of the outstanding shares of common stock of First Citizens National Bank were
exchanged for an equal number of shares in First Citizens Bancshares, Inc.
NOTE 3-SHORT TERM BORROWINGS
03/31/99 03/31/98
Amount outstanding-end of period $42,235 $22,621
Weighted average rate of outstanding 4.75% 4.71%
Maximum amount of borrowings at
month ends $42,235 $22,621
Average amounts outstanding for period $39,750 $21,019
Weighted average rate of average amounts 4.77% 4.51%
NOTE 4-LONG TERM DEBT
Long term debt is comprised of Federal Home Loan Bank Borrowings and finance
company debt, and new debt associated with the Troy acquisition. The finance
company debt is classified as long term debt due to our intent to renew. The
parent company debt is with Suntrust-Nashville. The average life is as
presented and the FHLB funds are matched with loans and investments.
Average Average Average Repricing
Volume Rate Maturity Frequency
FHLB Borrowings $22,958 5.80% 8 years Fixed
Finance Company Debt $1,000 6.00% 5 years Fixed
Parent Company Debt $1,360 6.89% 2 years Monthly
ESOP Obligation $1,369 6.89% 3 years Monthly
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FIRST CITIZENS BANCSHARES, INC.,
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(UNAUDITED)
(stated in thousands)
MARCH 31, 1999
NOTE 5-STATEMENT OF CASH FLOWS
March March March
1999 1998 1997
Actual payments made
during the periods:
Interest $4,668 $3,263 $3,106
Income taxes $ 140 $ 725 $ 263
NOTE 6-CONTINGENT LIABILITIES
There are no material pending litigations as of the current
reportable date that would result in a liability.
NOTE 7-INVESTMENT SECURITIES
The difference between book values of investment securities and
market values at March 31, 1999 and December 31, 1998, total
$129 and $87 respectively. FASB 115 requires banks to
classify securities into Held to Maturity, Available for Sale,
and Trading. First Citizens has $0 in the trading account. The
available for sale securities values are adjusted to market every
quarter and the adjustments flow to the capital section (net of tax). The
Held to Maturity securities are stated at amortized cost. The available for
sale securities reflects a negative $888 decrease for the ending period of
March 1999 and, net of tax ($533) flowed to capital. These movements can
fluctuate with the bond market.
First Citizens has not engaged in any derivative activities (as defined by
paragraphs 5-7 of FASB 119) for any of the reported periods.
NOTE 8-REGULATORY CAPITAL REQUIREMENTS
Regulatory agencies impose certain minimum capital requirements
on both First Citizens Bancshares, Inc., and First Citizens
National Bank. On December 16, 1988, the Federal Reserve Board
approved the Risk Based Capital Guidelines for Bank Holding
Companies. Presently, the Holding Company and First Citizens
National Bank, exceed the required minimum standards set by the Regulators.
The consolidated Tier 1 Ratio and Tier 2 Ratio are 11.83% and 13.02%
respectively.
NOTE 9-DEFERRED INCOME TAXES
First Citizens adopted FASB 109 as of January 1, 1993. The
deferred tax liability account reflects an asset totaling
$647. The timing differences mainly consist of Reserve for
Loan Loss timing differences.
NOTE 10-RESERVE FOR LOAN LOSSES
FASB 114 and 118 were implemented during the first quarter of
1995. This new FASB requires companies to set aside reserves
for impaired loans.
9
FIRST CITIZENS BANCSHARES, INC.,
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(UNAUDITED)
(stated in thousands)
MARCH 31, 1999
The following data reflects impaired totals for the reportable
periods:
Impaired Loan Balance or Recorded Balance $1,389
Amount of Recorded Balance with Related Allowance $1,128
Amount of Recorded Balance with no Related Allowance $ 261
Interest income is recognized on impaired loans on a cash basis. Cash receipts
are applied as cost recovery or principal recovery first, consistent with OCC
Regulations.
First Citizens will continue to make sure the overall reserve is adequate in
addition to the impaired loans.
Note 11 - Asset Impairment
The financial standards board issued statement 121 addressing
accounting for the impairment of long-lived assets that will be held and used,
including certain identifiable intangibles, and good-will related to those
assets. The statement addresses accounting for long lived assets and certain
identifiable assets to be disposed. The statement requires that assets to be
held and used be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset in question may
not be recoverable.
As of the reportable date, there are no FASB 121 adjustments.
Note 12-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 off a daily weighted average amount. First Citizens has no preferred
stock, redeemable stock, or any items that would dilute basic earnings per
share.
Note 13-FASB 130-Comprehensive Income
This statement establishes reporting and displays requirements for
comprehensive income and its components. A separate financial statement is
presented that starts with net income from operations and then includes other
comprehensive incomes. Bancshares has only one comprehensive income item
(Changes in the Market Value of Available for Sale Investment Securities).
This total is carried to the balance sheet net of tax (unrealized gain or loss
on available for sale).
10
FIRST CITIZENS BANCSHARES, INC.,
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(UNAUDITED)
(stated in thousands)
MARCH 31, 1999
Note 14-Accounting Research Bulletin 16-Business Combination
On January 1, 1999, First Citizens Bancshares purchased the First Volunteer
Bank (Union City, TN). The newly acquired bank is a subsidiary of the Parent
Company. First Volunteer has total assets of approximately $49 million. The
bank is located in the County of Obion and will expand Bancshare's market as
projected in our strategic plan. The acquisition was funded by issuing 445,000
shares of stock and was accounted for by the pooling accounting method. The
assets, liabilities, and stockholder's equity amounts were combined using the
pooling accounting method (continuation of acquiree books onto our books). The
total cost of the acquisition was $11 million. There were no material
accounting adjustments of net assets of the combining companies to adopt
similar accounting practices. There were no changes in retained earnings due
to the changing of the companies' fiscal year end. Both companies have
December 31 year ends. First Volunteer produced a YTD net income of $137,000
for the first three months, which is consolidated into
bancshare's totals.
Note 15-FASB 132-Employers' Disclosures about Pensions and Other Postretirement
Benefits.
First Citizens and its subsidiaries do not sponsor any defined benefit plans or
postretirement benefits.
Note 16-Leveraged ESOP
Origination Date: 6/25/98
First Citizens Bancshares has guaranteed a $2,000 loan payable to Suntrust Bank
of Nashville, Tennessee at the rate of Libor plus 1.20%. Accrued interest is
payable quarterly commencing July 1, 1998. Principal shall be paid in equal
quarterly payments of $52 comencing October 1, 1998. There are no prepayment
penalties associated with this loan. It is our intent to pay this loan off
within 3 years. First Citizens Bancshares issued 85,106 shares at the current
market/appraised price of $23.50 to use for the ESOP purchase/leverage. The
parent company also recorded a note payable and a contra equity account for
this transaction. The contra equity account is called unallocated ESOP shares.
The source of repayment of this loan will be the lead bank (First Citizens
National Bank). First Citizens will record as an expense the contriubtions for
the funding of the payments to the ESOP. First Citizens National Bank
contributes 10% of covered payroll on an annual basis to the ESOP.
First Citizens National Bank of Dyersburg Employee Stock Ownership Plan and
Trust is considered a money purchase/stock bonus plan. The plan trustee is the
Investment Management and Trust Services Division of First Citizens National
Bank. The eligibility requirements to participate in the plan are: an employee
must complete 1 year of service and attain the age of 21. Each year, First
Citizens National Bank will contribute 10% to the money purchase pension plan
and the contributions to the stock bonus plan will be discretionary. The stock
bonus plan has not been utilized in the 1990's. An employee has to be employed
on the last day of the year and have completed 1000 hours of service to receive
a contribution. The current YTD expense of our ESOP is $136 thousand.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
First quarter earnings of $1,357,000 reflect an increase in excess of 22% when
compared to first quarter,1998. Improvement is noted in both net interest
income (26%) and fee income (29%). Return on average assets of 1.20% and
average equity of 12.72% should continue to improve as efficiencies are gained
through the combination of accounting and processing systems. Ongoing
improvement in fee income should be realized as subsidiaries grow and mature.
A Business Development Plan which focuses on increased relationships per
customer has generated excellent sales results and increased volume for White
and Associates/First Citizens Insurance, First Citizens Financial Plus and
Mortgage Lending as well as improving the number of banking relationships per
household.
Net income per common share increased from 36 cents per share in first quarter,
1998 to 38 cents in the quarter just ended. Year to date trading in Bancshares
stock has been active, with 22,581 shares being traded at $30.00 per share.
The increase of 614,000 in number of shares exchanged with First Volunteer
shareholders, and an additional 169,000 shares to meet demands of our Dividend
Reinvestment Program.
First quarter dividends of .1875 cents per share are up 50% when compared to
the same quarter in 1998. Growth in shareholder return is made possible by
continued improvement in Company earnings and is in line with goals of the
Capital Plan. The equity position of Bancshares remains strong, increasing to
9.29% from 9.10% for the twelve month period ending March 31, 1999. Management
will continue efforts to invest excess capital in a manner that compliments
earnings and enhances the potential to increase shareholder dividends.
Other significant activity occurring first quarter, 1999 was the merger of
First Volunteer Bank in Union City with First Citizens National Bank. Total
assets increased to $470 million and doubled our presence in Obion County.
Throughout the remaining three quarters of 1999, attention will be focused on
branch delivery of Brokerage, Trust, Insurance and Mortgage services in all
markets.
Net interest margins continue to improve when comparing 3.88% at 3/31/99 to
4.27% at 3/31/98. Margin trends reflect a ratio of 4% or higher in the years
of 1997-1998. Total Asset growth of 19.89% reflects the purchase of First
Volunteer Bank effective January 1, 1999. Quality in the loan portfolio
continues to be a primary focus of Bank management. Non-performing loans
represent $1,809,000 or.46% of total loans, slightly better than peer ratio of
.82%. Non performing loans at 3/31/98 was .26% of total loans. Problem
loans total $7,866,872, representing 2.53% of total loans. The internal loan
review report indicates that the loan portfolio is in good condition based on
the percentage of problem loans to gross capital funds as of 3/31/99. For
further information on the loan portfolio refer to the section labeled
Composition of Loans.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CON'T.)
First Citizens National Bank continues to focus on controlled growth,
efficiency and diversification of operations and products. The Bank's Strategic
Plan supports management objectives through strategic action steps that call
for asset growth through acquisitions as well as an aggressive referral and
sales program. The Bank of Troy acquisition and First Volunteer merger
increased total assets approximately $110 million.
A strong focus is also placed on increasing fee income by establishing bank
subsidiaries that have potential to enhance net income. Expansion of Delta
Finance in Milan, TN. was accomplished in late 1998. Delta Finance I and Delta
Finance II together posted a net profit of $5,000 first quarter. Delta Finance
II is not projected to post a profit until late 1999. First Citizens purchased
50 percent of White and Associates Insurance Agency, the largest insurance
agency in Dyersburg, Dyer County, Tennessee. The company posted year to date
income levels of $64,000. In addition, White and Associates/First Citizens
newly established credit life insurance company posted $6,000 year-to-date
income.
Operating efficiency is achieved through implementation of action steps set in
the Bank's Technology Strategic Plan. Recent technological advancements have
been the development and installation of Internet based banking. First
Citizens signed a contract with nFront based in Atlanta, Georgia to offer a
full service, interactive internet banking site. First Citizens Internet
Banking site will be available for customer signup on or before July 1, 1999 at
the Bank's domain location, FirstCitizens-Bank.Com. First Citizens currently
offers touch-tone telephone banking to its customers with utilization of over
18,000 calls monthly.
There are no known trends, events or uncertainties that are likely to have a
material effect on First Citizens' liquidity, capital resources or results of
operations. There currently exists no recommendation by regulatory authorities
which if implemented, would have such an effect. Interstate Banking/Branching
became a reality 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 place, 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 the two largest
financial institutions in the state. First Citizens has historically
maintained in excess of 50% of local market share and reflected 52% as of June
1998. Interstate banking could possibly bring about the location of large out
of state banks to the area. If so, First Citizens would continue to operate as
it has in the past, focusing on the wants and needs of existing and potential
customers. The quality of service and individual attention afforded by an
independent community bank cannot be matched by large regional competitors,
managed by a corporate team unfamiliar to the area. First Citizens is a
forward moving bank offering products and services required for maintaining a
satisfactory customer relationship moving into the next decade and beyond. The
most recent market analysis indicates a remarkably strong performance by First
Citizens in satisfying customer expectations in the areas of personnel, service
and convenience.
13
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CON'T.)
Every industry which interprets or stores data formats has been posed with the
year 2000 challenge. In year 2000 related issues are a widely recognized
universal problem related to the way in which computer systems process dates.
The numerous inquiries received from both customers and vendors have made us
aware of the level of concern among those with whom we do business. Customer
confidence in First Citizens National Bank now and after year 2000 is a top
priority. For this reason we have dedicated the resources necessary to ensure
that the millennium change will not change the way we service our customers.
As early as 1997 a plan was developed based on guidelines suggested by the
Federal Financial Institution Examination Council and approved by the bank's
Board of Directors. A Year 2000 Team was formed, led by the Chief
Operations Officer, and supported by Senior staff of the Information Systems
Division of First Citizens.
Will First Citizens National Bank be ready for Year 2000?
Yes! We have reviewed all mission critical core processing systems, AS/400 and
distributed applications, data communications, physical plant, building
security and desktop applications to ensure that they are capable of
functioning through and beyond year 2000. As of December 31, 1998 we had
identified, renovated or replaced and successfully tested in excess of 90% of
all mission critical systems. Our efforts to bring 100% of our systems into
compliance in a timely manner will be monitored by our primary regulator, the
Comptroller of the Currency on a quarterly basis during 1999.
The following table compares year-to-date non-interest income,
and expense of First Citizens as of March 31, 1999, 1998, and 1997:
Non-Interest Income
(in thousands)
March 31
% of % of
1999 Change 1998 Change 1997
Service Charges on
Deposit Accounts $534 29.93% $411 3.01% $399
Other Income $630 46.85% $429 17.54% $365
Trust Income $220 (6.78%) $236 (.43%) $237
TOTAL NON-INTEREST
INCOME $1,384 28.62% $1,076 7.50% $1,001
Total non-interest income increased 28.62% and 7.50% when comparing 1999 to
1998 and 1997. The increase reflects a continued focus on fee income and the
bank's commitment to diversifying the income stream. Results of these efforts
are evident when comparing first quarter 1999 other income category to previous
years. Increased sales in Mortgage Lending, Broker Services and Insurance,
reflective of the bank's newly established referral and sales program, resulted
in a 46.85% increase in Other Income. Referrals resulting in closed sales
increased over 50% when comparing first quarter, 1999 to first quarter, 1998.
A decrease in Trust Income of 6.78% is reflective of a one time credit of fee
income resulting from a large estate settlement in first quarter, 1998.
Without the settlement Trust income would have remained flat when compared to
previous year. 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.
14
In the event of the death of the insured officer, the Bank's original
investment plus accrued interest will be repaid, as well as a death benefit
paid to the designated beneficiaries. The plan is in effect at 800+ banks and
is in full compliance with regulatory parameters as defined by the Office of
the Comptroller of the Currency.
Non-Interest Expense
(in thousands)
March 31
% of % of
1999 Change 1998 Change 1997
Salaries & Employee
Benefits $2,121 28.62% $1,649 11.72% $1,476
Net Occupancy
Expense $ 625 26.52% $ 494 6.47% $ 464
Other Operating
Expense $ 990 36.36% $ 726 26.48% $ 574
TOTAL NON-INTEREST
EXPENSE $3,736 30.22% $2,869 14.12% $2,514
Non-interest expense reflects ongoing efforts to monitor and control non-
interest expense categories such as salaries and benefits, net occupancy
expense and other operating expense. A comparison of staffing levels reveals
that First Citizens maintains one fulltime equivalent employee for every 2.6
million in assets. Peer banks ratio as of 12/31/98 was 2.5 million dollars in
assets per employee. Unlike most peer banks, First Citizens maintains an
Investment and Trust Services Division, Brokerage Firm, Agricultural and
Mortgage Lending Department, and a Finance Company. Each of these entities
adds additional staff, as does the extended banking hours on Thursday, Friday,
and Saturday. First Citizens is committed to attracting and retaining well
qualified personnel by offering salaries and employees benefits which equal or
exceed peer companies, paying bonuses when productivity standards are met, and
enhancing career opportunities by promoting from within when possible.
Fulltime equivalent employees were 172 at 3/31/98. First Volunteer acquisition
(21), Opening of Delta Finance II (2), and employees hired to establish
brokerage and mortgage lending service in Obion and Lauderdale Counties (3)
increased FTE approximately 27 employees in 1999.
Technology investments resulted in an increase in computer expense and the
related depreciation to those investments. Net occupancy and other operating
expense increased 26.52% when compared to 3/31/98. Installation of a Wide Area
Network was completed the last half of 1998. Other investments in technology
related equipment were the purchase and installation of computer related wiring
and equipment associated with bringing Bank of Troy and First Volunteer
computer systems online with those of First Citizens National Bank. Net
occupancy expense is projected to continue to increase as technology is
installed to meet the needs of our customer base. These costs will be offset
in part by the reallocation of employees to fee income producing positions.
Other operating expense increased due to organizational cost associated with
the Insurance Agency, Bank of Troy and First Volunteer acquisitions.
15
DEPOSITS
The average daily amount of deposits and average rates paid on such deposits
are summarized for the quarters ending March 31 for the years indicated:
COMPOSITION OF DEPOSITS
(in thousands)
1999 1998 1997
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
Non
Interest Bearing
Demand Deposits $ 36,923 0% $ 30,918 0% $ 26,974 0%
Savings Deposits $121,371 2.84% $ 85,943 3.30% $ 82,994 3.27%
Time Deposits $192,720 5.21% $162,885 5.57% $147,971 5.44%
TOTAL DEPOSITS $351,014 3.84% $279,746 4.26% $257,939 4.17%
Deposit growth continues to be a challenge for First Citizens National Bank.
The Company's marketplace is described as highly competitive, with a fairly
sophisticated customer base. Competition is aggressive for both loans and
deposits. A recent market survey indicates that First Citizens holds
approximately 51% of total deposits domiciled in Dyer County. The bank
competes with First Tennessee Bank, N.A. (20%), Security Bank (15%), Union
Planters, another large regional bank holds approximately 12 percent of total
deposits. All others hold the remaining 2% of total deposits. First Citizens
also competes with a Credit Union, Finance Companies, Brokerage Firms, and
other types of financial service providers. Total deposits increased only
3.84% when comparing 3/31/99 to 3/31/98. Total deposits purchased in the Bank
of Troy and First Volunteer acquisitions were approximately $82 million.
Economic indicators for the West Tennessee area are extremely optimistic. We
expect the population to grow at a marginal rate, in the three counties in
which we have banking locations. Dyer County is projected to grow from the
1998 population of 36,489 to 37,400 by the year 2003. Previous expectations of
Lauderdale County were for the population to decline. However, current
projections call for an increase from 31,960 to 32,055, a gain of less than 1
percent. The population of Obion County is projected to increase slightly in
the next five years. First Citizens holds in excess of 17% of total deposits in
Obion County and 4.82% in Lauderdale.
Average rates paid on deposits continue to reflect sound asset/liability
management strategy to maintain interest margins that are consistent with
company goals. A deposit strategy adopted in 1996 was a shifting from paying
higher rates to obtain retail deposits to the purchase of wholesale deposits.
Interest cost of wholesale deposits in comparison to market rates paid on
retail deposits often provides for net interest margins that compliment the
bank's capital plan. The first quarter of 1999 the Asset/Liability Management
Team made a decision to become more aggressive in paying rates to acquire or
retain a total customer relationship. As a result of the decision, Marketing
developed the "Nine Month Certificate of Deposit" on which interest rates paid
are determined by the existing relationship or a newly established
relationship. The new Certificate was also developed to encourage customers
to lock in maturities on CDs past January 1, 2000.
The bank measures its degree to which short-term and marketable assets are
available to fund short term liabilities and outflow of deposits through its
liquidity ratio. The liquidity ratio at 3/31/99 was 22.82% including approved
lines of credit totaling $89,500,000. The projected liquidity range set in the
Asset/Liability policy is 22.26% to 27.57%. Another measure of liquidity is
the dependency ratio that indicates the degree to which volatile liabilities
are being relied upon to fund longer term assets. The lower the dependency
ratio, the more liquid the bank. First Citizens dependency ratio at 3/31/99
was 8.84% well within policy guidelines of 6.92% to 9.62%.
16
Sweep Account Funds totaling $10,270,000 are not included in the average
balances for demand deposits. The "Sweep" total is included in the balance
sheet category of securities sold under an agreement to repurchase totaling
$22,000,000 with an average rate of 4.00 percent at 3/31/99. Repurchase
Agreement "Sweep" is a product offered to large balance customers which
provides for funds to automatically sweep daily from a demand deposit account
into an overnight repurchase agreement. This affords commercial customers the
opportunity to earn interest on excess collected funds while providing
availability of adequate funds to clear large denomination checks as presented
for payment.
The following table sets forth the maturity distribution of Certificates of
Deposit and other time deposits of $100,000.00 or more outstanding
on the books of First Citizens on March 31, 1999:
Maturity Distribution Of Time Certificates Of Deposit
In Amounts of $100,000 Or More As Of March 31, 1999
(in thousands)
Maturity Total Amount
3 months or less $17,761
3 through 12 months $23,408
1 year through 5 years $ 4,363
over 5 years $ 0
Total $45,532
Interest earning assets as of 3/31/99 were $423,021,000 at an average rate of
8.44% compared to $320,342,000, average rate of 8.92% at 3/31/98. The average
rate on total interest bearing liabilities was 4.38%, 4.82% and 4.65% as of
March 31, 1999, 1998, and 1997. Net yield on average earning assets was 4.48%,
4.68%, and 4.56%, reflecting an increased competitive environment. Maintaining
interest rate margins achieved in prior years continues to be a challenge.
Customers are shopping banks to lock in the lowest rate possible on loans,
while deposit customers are shopping to lock in the highest rate on deposits.
First Citizens has historically out performed peer banks with the average rate
earned on the loan portfolio. Asset/Liability policies are in place to protect
the company from the negative effects of volatile swings in interest rates.
Interest margins are well managed to achieve acceptable profits and a return on
equity within policy guidelines.
A summary of average interest earning assets and interest bearing
liabilities is set forth in the following table together with average yields on
earning assets and average costs on interest bearing liabilities. The average
yield on interest earning assets dropped when reviewing the information
presented in the table.
17
First Citizens Bancshares, Inc.
Quarter Ending March 31
Monthly Average Balances and Interest Rates
(in thousands)
1999 1998 1997
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
ASSETS
INTEREST EARNING
ASSETS:
Loans (1)(2)(3) $306,742 $7,084 9.24% $235,315 $5,730 9.74% $207,667 $4,884 9.41%
Investment Securities:
Taxable $ 96,406 $1,452 6.02% $ 66,998 $1,115 6.66% $ 66,522 $1,134 6.82%
Tax Exempt (4) $ 15,249 $ 273 7.16% $ 11,392 $ 199 6.99% $ 10,568 $ 201 7.61%
Interest Earning
Deposits $ 492 $ 15 12.19% $ 436 6 5.51% $ 201 $ 2 3.98%
Federal Funds Sold $ 4,132 $ 100 9.68% $ 6,201 $ 88 5.68% $ 3,096 $ 43 5.56%
Lease Financing $ 0 $ 0 0% $ 0 $ 0 0% $ 0 $ 0 0%
Total Interest
Earning Assets $423,021 $8,924 8.44% $320,342 $7,138 8.92% $288,054 $6,264 8.70%
NON-INTEREST
EARNING ASSETS:
Cash and Due From
Banks $ 14,696 $ 0 0% $ 10,978 $ 0 0% $ 10,403 $ 0 0%
Bank Premises and
Equipment $ 11,664 $ 0 0% $ 8,107 $ 0 0% $ 8,144 $ 0 0%
Other Assets $ 16,194 $ 0 0% $ 10,436 $ 0 0% $ 7,338 $ 0 0%
Total Assets $465,575 $ 0 0% $349,863 $ 0 0% $313,939 $ 0 0%
LIABILITIES AND
SHAREHOLDERS' EQUITY:
INTEREST BEARING
LIABILITIES:
Savings Deposits $121,371 $ 862 2.84% $ 85,943 $ 708 3.30% $ 82,994 $ 678 3.27%
Time Deposits $192,720 $2,511 5.21% $162,885 $ 2,268 5.57% $147,971 $ 2,011 5.44%
Federal Funds
Purchased and
Other Interest
Bearing
Liabilities $ 67,963 $ 811 4.77% $ 32,784 $ 416 5.08% $ 25,560 $ 293 4.59%
Total Interest
Bearing
Liabilities $382,054 $4,184 4.38% $281,612 $3,392 4.82% $256,525 $ 2,982 4.65%
NON-INTEREST
BEARING LIABILITIES:
Demand Deposits $36,923 $ 0 0% $ 30,918 $ 0 0% $ 26,974 $ 0 0%
Other Liabilities $ 3,597 $ 0 0% $ 3,814 $ 0 0% $ 2,194 $ 0 0%
Total Liabilities $422,574 $ 0 0% $316,344 $ 0 0% $285,693 $ 0 0%
SHAREHOLDERS'
EQUITY $ 43,001 $ 0 0% $ 33,525 $ 0 0% $ 28,246 $ 0 0%
TOTAL LIABILITIES
AND SHAREHOLDERS'
EQUITY $465,575 $ 0 0% $349,869 $ 0 0% $313,939 $ 0 0%
NET INTEREST
INCOME $ 0 $4,740 0% $ 0 $ 3,746 0% $ 0 $ 3,382 0%
NET YIELD ON
AVERAGE EARNING
ASSETS $ 0 $ 0 4.48% $ 0 $ 0 4.68% $ 0 $ 0 4.56%
(Annualized)
18
(1) Loan totals are shown net of interest collected, not earned
and Loan Loss Reserve.
(2) Nonaccrual loans are included in average total loans.
(3) Loan Fees are included in interest income and the
computations of the yield on loans.
(4) Interest and rates on securities which are non-taxable for
Federal Income Tax purposes are presented on a taxable
equivalent basis.
COMPOSITION OF LOANS
The loan portfolio totaling $310,391,000 at 3/31/99 is First Citizens largest
earning asset. Total loans at 3/31/98 were $259,870,000. Loans acquired in
the Bank of Troy and First Volunteer acquisitions added approximately $58
million to the loan portfolio. Exceptional loan growth has been the experience
of the bank for the years reflected in the Composition of Loan table. A
comparison of portfolio growth indicates the largest percentage of growth is
centered in Commercial & Agriculture loans. Loans in this category increased
$46,429,000 or 14.95%. Real estate loans, consisting primarily of Mortgage and
Construction loans increased over $28 million or 9.07%. The upward trend in
mortgage loans is not only attributed to loans acquired in the acquisitions,
but to substantial growth in the population and new home starts in Dyer and the
surrounding Counties. Monthly new housing starts in 1997 totaled approximately
48 in Dyersburg, Tennessee and 135 in Dyer County, Tennessee. Demographics
from the Dyersburg Dyer County Chamber of Commerce reflects that Dyersburg,
Tennessee is one of the fastest-growing communities in Tennessee. During the
1980's the population increased 16.4%. Tennessee named Dyer County a Three-
Star Community for 15 consecutive years for its community economic development
preparedness. Dyersburg/Dyer County is a regional, retail, medical,employment
and cultural center for more than 300,000 people who live in 10 counties. The
1996 Per Capital Income for trade area counties list Dyer County at $19,930,
Obion County $20,675, and Lauderdale County at $16,101. Other surrounding
counties range from $11,814 to $19,029.
First Citizens is the largest agriculture lender in the state of Tennessee and
is an approved Farm Credit Services Lender. Agriculture services comprise a
significant portion of the Dyer County market. Total farm land in production
is approximately 231,000 acres or 56% of Dyer County land. The average value
of farm land is $449,501. Farming is a $79 million industry in the county.
Dyer County is Tennessee's no. 1 producer of soybeans, grain, sorghum,
commercial vegetables and rice. Other important crops are wheat, cotton and
corn. The county's 509 farm operations average 453 acres. Agricultural credits
30 days or more past due total $1.2 million. Agricultural credits listed on
the bank's problem list total approximately $2.4 million with more than $1
million guaranteed by FCS. Agricultural loans total $28,384,211 or 9.16% of
total loan portfolio. The agricultural economy experienced a downturn in 1998
due to a combination of drought, flooding and low commodity prices. Each year
since 1993 farmers in the Mississippi River delta have experienced flooding
along the river and its tributaries. However, many of the farmers were
successful in planting late beans and averting a total disaster. The scenario
changed in 1998 when most farmers in this area suffered flooding or some form
of water damage and the farmers in the "hills" suffered from too much water
early and then not enough water during the late summer months. When disastrous
weather is coupled with low grain and live stock prices this could mean that
West Tennessee farmers could experience financial difficulties, depending on
financial strength of the farmer. Grain prices are projected at low levels in
1999 due to the fragile economic conditions in Asia and Latin America
19
plus above average grain production (for previous years) in South America.
Loan Administration is continuously assessing the potential effect of
uncontrolled factors to the banks loan portfolio. As of this report date,
losses to local farmers and the bank's portfolio are projected to be at a
manageable level.
Growth in the consumer loan portfolio was slowed in early 1997 due to an
increase in the number of bankruptcies in the State of Tennessee as well as
perceived deterioration in consumer credit in Dyer County. Loan Administration
developed credit scoring tools as well as tighter consumer lending policies to
manage consumer loan losses.
First Citizens is located in the Dyersburg/Dyer County trade area having a
population of approximately 41,000. The entire trade area has outpaced both
the state and the nation in per capita personal income growth since the early
1980's. The State of Tennessee projects that per capita income in the area
will be greater than the national average by the year 2000. A diversified mix
of industry in the local economy has provided stable, growing employment
opportunities for residents under all economic conditions. The Dyer County
distribution of employment consists primarily of service employers 14.9%,
government 14.7%, trade 19.3%, and manufacturing 40.5%. Dyer County's
unemployment rate for March was 5.2% compared to February's rate at 5.8%,
according to the Tennessee Department of Employment Security. This compares to
Tennessee's unemployment rate of 4.3% at 3/31/99.
The provision for loan losses increased in proportion to loan growth as
required by loan policy. The provision at 3/31/99 was 1.26% of total loans
well in excess of policy requirements of one percent. Experience of the
lending staff and adherence to policy lends a comfort level to the portfolio
that supports the Loan Loss Allowance at the present level. Problem loans at
3/31/99 were $7,886,892 reflecting an increase of $3 million when compared to
the 3/31/98 total of $4,868,855. Problem loans represent 2.54% of total loans
as of 3/31/99.
Loan Administration sets policy guidelines approved by the Board of Directors
regarding portfolio diversification and underwriting standards. Loan policy
includes board approved guidelines for collateralization, loans in excess of
loan to value limits, maximum loan amount, maximum maturity and amortization
period for each loan type. Policy guidelines for loan to value ratio and
maturities related to various collateral are as follows:
Collateral Max. Amortization Max. LTV
Real Estate Amort. discussed herein Amort. discussed herein
Equipment 5 Years 75%
Inventory 5 Years 50%
A/R 5 Years 75%
Livestock 5 Years 80%
Crops 1 Year 50%
*Securities 10 Years 75% (Listed)
50% (Unlisted)
*Maximum LTV on margin stocks (stocks not listed on a national exchange) when
proceeds are used to purchase or carry same, shall be 50%.
Diversification of the banks' real estate portfolio is a necessary and
desirable goal of the bank's real estate loan policy. In order to achieve and
maintain a prudent degree of diversity, given the composition and general
economic state of the bank's market area, the bank will strive to maintain a
real estate loan portfolio diversification based upon the following:
20
* 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.
21
Amortization Schedules. Every loan must have a documented repayment
arrangement. While reasonable flexibility is necessary to meet the credit
needs of the Bank's customers, in general all loans should be repaid within the
following time frames:
Loan Category Amortized Period
Raw Land 10 years
Construction:
Commercial, multi-family, and
other non-residential 20 years
1-to-4 family residential 20 years
Improved Property Farmland 20 years
Owner-occupied 1-to-4 family
and home equity 20 years
The average yield on loans of First Citizens National Bank as of March 31 in
the years indicated is as follows:
Year Yield
1999 9.24%
1998 9.74%
1997 9.41%
1996 9.78%
1995 9.57%
The aggregate amount of unused guarantees, commitments to extend credit
and standby letters of credit was $52,936,000 as of 3/31/99.
The following table sets forth loan totals net of unearned income by
category for the past five years:
March 31
(in thousands)
1999 1998 1997 1996 1995
Real Estate Loans:
Construction $ 28,966 $ 23,313 $ 17,643 $ 13,875 $ 11,457
Mortgage $159,150 $137,002 $129,317 $112,732 $ 95,763
Commercial,
Financial and
Agricultural
Loans $ 88,207 $ 41,778 $ 41,802 $ 46,691 $ 45,467
Installment
Loans to
Individuals $ 31,810 $ 27,679 $ 23,630 $ 21,739 $ 19,885
Other Loans $ 2,258 $ 1,929 $ 2,168 $ 2,164 $ 1,878
TOTAL LOANS $310,391 $259,870 $214,560 $197,201 $174,450
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 $160,047,000 or 52% of the total
portfolio are subject to repricing within one year or carry a variable rate of
interest. The ratio is up from 20% at 3/31/98. Maturities in the one to five
year category total $161,677,000, reflecting a slight decrease when compared to
3/31/98 total of $162,854,000.
22
Due after
Due in one one year but Due after
year or less within five years five years
(in thousands)
Real Estate $ 53,002 $108,241 $26,873
Commercial,
Financial and
Agricultural $ 60,879 $ 24,095 $ 3,233
All Other Loans $ 4,727 $ 29,341 $ 0
TOTAL $118,608 $161,677 $30,106
NON-PERFORMING ASSETS
Total Non Performing Assets were $1,809,000 or .58% of the loan portfolio as of
3/31/99 compared to peer group ratio of .82% as of 12/31/98. First Citizens
Non Performing loans were $890,000 or .28% of total loans at 3/31/98 compared
to peer group ratio of .72% as of the same time period. Allowance for loan
losses as a percent of total loans was 1.27 percent. Loan policy calls for an
allowance balance of at least 1% of total loans. Continued improvements
reflected in financial ratios are indicative of well communicated loans
policies and procedures.
Categorization of a loan as non-performing is not in itself a reliable
indicator of potential loan loss. The banks' policy states that the Bank shall
not accrue interest or discount on (1) any asset which is maintained on a cash
basis because of deterioration in the financial position of the borrower, (2)
any asset for which payment-in-full of interest or principal is not expected,
or (3) any asset upon which principal or interest has been in default for a
period of 90 days or more unless it is both well secured and in the process of
collection. For purposes of applying the 90 day past due test for the non-
accrual of interest discussed above, the date on which an asset reaches non-
accrual status is determined by its contractual term. A debt is well secured
if it is secured (1) by collateral in the form of liens or pledges or real or
personal property, including securities that have a realizable value sufficient
to discharge the debt (including accrued interest) in full, or (2) by the
guaranty of a financially responsible party. A debt is considered to be
proceeding in due course either through legal action, including judgement
enforcement procedures, or, in appropriate circumstances, through collection
efforts not involving legal action which are reasonably expected to result in
repayment of the debt or in its restoration to a current status. Loans that
represent a potential loss to First Citizens are adequately reserved
for in the provision for loan losses.
Interest income on loans is recorded on an accrual basis. The accrual of
interest is discontinued on all loans, except consumer loans, which become 90
days past due, unless the loan is well secured and in the process of
collection. Consumer loans which become past due 90 to 120 days are charged to
the allowance for loan losses. The gross interest income that would have been
recorded for the three months ending 3/31/99 if all loans reported as non-
accrual had been current in accordance with their original terms and had been
outstanding throughout the period is $19,000. Interest income on loans
reported as ninety days past due and on interest accrual status was $23,000 for
year-to-date 1999.
Loans on which terms have been modified to provide for a reduction of either
principal or interest as a result of deterioration in the financial position of
the borrower are considered to be Restructured Loans. Restructured Loans at
March 31, 1999 were zero.
23
Loans classified by regulatory examiners and not reported under non-accrual,
past due or restructured pose no significant credit problems. Loan Officers
are required to develop a "Plan of Action" for each problem loan within their
portfolio. Adherence to each established plan is monitored by Loan
Administration and reevaluated at regular intervals for effectiveness.
The following table sets forth the balance of non-performing loans as of March
31, for the years indicated:
Non-Performing Loans
March 31
(in thousands)
90 Days Past Due
Year Non-Accrual Accruing Interest Total
1999 $ 829 $ 980 $1,809
1998 $ 418 $ 472 $ 890
1997 $1,069 $1,152 $2,221
1996 $ 740 $ 427 $1,167
1995 $ 721 $1,404 $2,125
LOAN LOSS EXPERIENCE AND
RESERVES FOR LOAN LOSSES
During the quarter just ended activity to the Reserve Account consisted
of (1) loan charge-offs - $219,000 (2) recovery of loans previously charged off
- - $80,000 and (3) additions to Reserve - $206,000. Recovery of loans
previously charged off continues to be a priority to the bank. One full time
employee is assigned the responsibility for recovery of charged off loans and
overdrawn deposit accounts.
An analysis of the allocation of the allowance for Loan Losses is made
on a fiscal quarter at the end of the month, (February, May, August, and
November) and reported to the Board at its meeting immediately preceding
quarter-end. Requirements of FASB 114 & 118 have been incorporated into the
policy for Accounting by Creditor for Impairment of a Loan. A loan is impaired
when it is probable that a creditor will be unable to collect all amounts due of
principal and interest according to the original contractional terms of the
loan. First Citizens adopted the following as a measure of impairment: (1)
Impairment of a loan at First Citizens shall exist when the present value of
expected future cash flows discounted at the loans effective interest rate
impede full collection of the contract; and (2) Fair Value of the collateral,
if the loan is collateral dependent, indicates unexpected collection of full
contract value. The Impairment decision will be reported to the Board of
Directors and other appropriate regulatory agencies as specified in FASB 114
and 118. The bank will continue to follow regulatory guidelines for income
recognition for purposes of generally accepted accounting principles, as well
as regulatory accounting principles.
An annual review of the loan portfolio to identify risks will cover a
minimum of 70% of the gross portfolio less installment loans. In
addition, any single note or series of notes directly or indirectly
related to one borrower which equals 25% of the bank's legal lending limit will
be included in the review.
For analysis purposes loans reviewed will be separated into five
classifications:
1. Pass - Loans that have been reviewed and graded high quality or
no major deficiencies.
2. Watch - Loans which, because of unusual circumstances, need to be
supervised with slightly more attention than is customary.
24
3. Problem - Loans which require additional collection effort to
liquidate both principal and interest.
4. Specific Allocation - Impaired loans, in total or in part, in
which a future loss is possible.
5. Charged-Off
Examples of factors taken into consideration during the review are:
Industry or geographic economic problems, sale of business, change of or
disagreement among management, unusual growth or expansion of the
business, past due for either principal or interest 90 days, placed on
non-accrual or renegotiated status, renewed four times without principal
reduction, declining financial condition, adverse change in personal life,
frequent overdrafts, lack of cooperation by borrower, decline in marketability
or market value of collateral, insufficient cash flow, and inadequate
collateral values.
25
LOAN LOSS ALLOWANCE ANALYSIS
DATE
The following table disclosed the formula for the Analysis for the Loan
Loss Allowance:
AVERAGE AVERAGE PERCENT CURRENT RESERVE
LOSS 3 YRS. BALANCE 3 YRS. BALANCE REQUIRED
I. CREDIT $ GROSS $ % $ $
CARDS
II. INSTALL. $ NET $ % $ $
LOANS
III. IMPAIRED WITH ALLOCATIONS $ $
IMPAIRED WITHOUT ALLOCATIONS $ $
ALLOWANCE
IV. DOUBTFUL 50% $ $
SUBSTANDARD 10%
WATCH 5%
OTHER LOANS NOT LISTED PREVIOUSLY .75%
LESS SBA/FMHA GUARANTEED PORTIONS
__________
TOTAL LOANS $
V. LETTERS OF CREDIT .75% $ $
VI. OTHER REAL ESTATE OWNED $
______
RESERVE REQUIRED $
RESERVE BALANCE $
EXCESS (DEFICIT) $
RESERVE AS % OF TOTAL LOANS %
PEER GROUP %
LOSS EXPERIENCE III & IV AVERAGE LAST 3 YEARS
.% OR $
Management estimates the approximate amount of charge-offs for the 12
month period ending 12/31/99 to be as follows:
Domestic Amount
Commercial, Financial & Agricultural $300,000
Real Estate-Construction 0
Real Estate-Mortgage 50,000
Installment Loans to individuals &
credit cards 150,000
Lease financing 0
Foreign N/A
01/01/99 through 12/31/99 Total $500,000
The book value of repossessed real property held by Bancshares and First
Citizens National Bank at 3/31/99 is $232,000 compared to $0 at 3/31/98, and
$164,000 at 3/31/97. The balance held in repossessed real property represents
property purchased for expansion of the branch located on Highway 51 Bypass
valued at $164,000. In the 4th quarter of 1997, the property was reclassified
from ORE to bank premises and equipment. Expansion of the Midtown branch is
planned for in 1999. Accounting for adjustments to the value of Other Real
Estate when recorded subsequent to foreclosure is accomplished on the basis of
an independent appraisal. The asset is recorded at the lesser of its appraised
value or the loan balance.
26
All other real estate parcels are appraised annually and the carrying
value adjusted to reflect the decline,if any,in its realizable value.
Such adjustments are charged directly to expense.
The following table summarizes the monthly average of net loans
outstanding; changes in the reserve for loan losses arising from
loans charged off and recoveries on loans previously charged off;
additions to the reserve which have been charged to operating
expense; and the ratio of net loans charged off to average loans
outstanding.
First Citizens National Bank
Loan Loss Experience and Reserve for Loan Losses
(in thousands)
Quarter ending March 31
1999 1998 1997 1996 1995
Average Net Loans
Outstanding $306,742 $235,315 $207,667 $191,653 $167,965
Balance of Reserve
for Loan Losses
at Beginning of
Period $ 3,530 $ 3,159 $ 2,282 $ 2,216 $ 2,054
Loan Charge-Offs $ (219) $ (248) $ (39) $ (72) $ (60)
Recovery of Loans
Previously Charged Off $ 80 $ 76 $ 33 $ 40 $ 56
Net Loans Charged Off $ (139) $ (172) $ (6) $ (32) $ (4)
Additions to Reserve
Charged to Operating
Expense $ 206 $ 210 $ 170 $ 105 $ 65
Changes incident to
Mergers $ 343 $ 0 $ 0 $ 0 $ 0
Balance at End of
Period $ 3,940 $ 3,197 $ 2,446 $ 2,289 $ 2,115
Ratio of Net Charge-Offs
during quarter to Average
Net Loans Outstanding .04% (.08%) (.01%) (.02%) (.00%)
27
The following table will identify charge-offs by category for the
periods ending 3/31/99, 3/31/98 and 3/31/97:
Charge-offs: 1999 1998 1997
Domestic:
Commercial, Financial and Agricultural $ 75 $ 139 $ 8
Real Estate-Construction 0 0 0
Real Estate-Mortgage 40 0 0
Installment Loans to individuals 104 109 31
Lease financing 0 0 0
Foreign N/A N/A N/A
Total 219 248 39
Recoveries:
Domestic:
Commercial, Financial and Agricultural $ 30 $ 36 $ 10
Real Estate-Construction 0 0 0
Real Estate-Mortgage 6 0 0
Installment Loan individuals 44 40 23
Lease Financing 0 0 0
Foreign N/A N/A N/A
Total $ 80 $ 76 $ 33
Net Charge-offs $(139) $(172) $ (6)
Investment Securities
Bancshares' book value of listed investment securities as of the
dates indicated are summarized as follows:
Composition of Investment Securities
(March 31)
1999 1998 1997 1996 1995
U. S. Treasury &
Government Agencies $ 93,733 $75,644 $66,923 $62,387 $60,735
State & Political
Subdivisions $ 15,207 $12,662 $10,630 $11,013 $10,426
All Others $ 3,899 $ 2,822 $3,009 $ 3,637 $ 4,393
TOTALS $112,839 $91,128 $80,562 $77,037 $75,554
A major goal of the bank's investment portfolio management is to
maximize returns from investments while controlling the basic
elements of risk. The second goal is to provide liquidity and meet
financial needs of the community. Investment Securities also serve
as collateral for government and public fund deposits. Investments
for the first quarter, 1999 were up $21.7 million when compared to
the same time period in 1998. Securities contained within the
portfolio consist primarily of U. S. Treasury, and other U. S.
Government Agency Securities and tax exempt obligations of States
and Political Subdivisions. Fixed rate holdings comprise 90% of the portfolio,
while adjustable rates comprise the remaining
10%.
Purchases made during the first quarter, 1999 totaled $16.2 million
consisting of Government Backed and Municipal Securities. Securities totaling
$2 million were placed in the Held-To-Maturity Account while securities
totaling $142 million were booked in the Available for Sale account.
First quarter sales totaled $839,000 at a gain of $31,000. Sales were made
from the available for sale account. The sale of securities was a strategic
decision made during a low rate period to achieve maximum bond value.
28
Fixed rate holdings currently have an expected average life of 3.7
years. It is estimated that this average life would extend to 6.2
years should rates rise 100 basis points and 7.1 years should rates
increase 200 basis points. This is a result of some extension
occurring in the callable bonds and mortgage-backed holdings as
rates rise. Should rates decline 100 basis points the average life
would decrease 2.0 years.
In terms of price sensitivity, we estimate that if rates rise 100
basis points the market value of the portfolio would fall by 4.3%,
while rates rising 200 basis points would impact the market value by a negative
9.4%. This is consistent with the price sensitivity of the 5 year Treasury
bond. If rates go down 100 basis points we estimate that the market value would
increase by 2.3%.
Adjustable rate holdings reprice on an annual or more frequent
basis and currently have an average life of 4.4 years. Due to the
structure of these holdings, we would expect little extension
to occur in average life should interest rates rise, but could see
some further shortening if rates fall. We estimate the adjustable rate
holdings also have the price sensitivity of a 3-year Treasury,
although this is more difficult to project on adjustable rate
holdings than on fixed rate holdings.
FASB 115 requires banks to maintain separate investment portfolios
for Held-To-Maturity, Available-For-Sale, and Trading Account
Investments. As of March 31, 1999 approximately 20% of the total
portfolio was placed in the Held-To-Maturity account. The remaining
80% was booked in the Available-For-Sale account. FASB 115 requires
banks to Mark to Market the Available for Sale and Trading Account
Investments at the end of each calendar quarter. Held-To-
Maturity Account Investments are stated at amortized cost on the
balance sheet. Mark to Market resulted in a negative capital entry
of $533,000 during the quarter ended 3/31/99.
Maturities in the portfolio are made up of 10% within one year, 39%
after one year and within five years, and 51% after five years.
Policy provides for 20% maturities on an annual basis. Maturities
were extended from 5 to 10 years on most securities purchased after
1995. Management made a conscious effort to extend maturities for a
higher yield on the portfolio. Securities purchased with extended
maturities bear call features ranging from 1 to 3 years.
Securities ranging from $10 - $17 million could be called in the next 12
months. Maturities on investments purchased are structured to meet
loan demand as well as projected changes in interest rates.
First Citizens National Bank has not engaged in derivative
activities as defined by paragraph 5 thru 7 of FASB 119 (reference
footnote 7).
29
Investment Securities
Held to Maturity Available for Sale
March 31, 1999
(in thousands)
Amortized Fair Amortized Fair
Cost Value Cost Value
U.S. Treasury Securities $ 0 $ 0 $ 3,552 $ 3,622
U.S. Government agency
and corporation obligations 17,763 $17,644 $72,589 $72,348
Securities issued by states
and political subdivisions
in the U.S.:
Taxable securities $ 0 $ 0 $ 0 $ 0
Tax-exempt securities $ 4,663 $ 4,653 $10,466 $10,544
U.S. securities:
Debt securities 0 0 751 752
Equity securities
(including Federal
Reserve stock) 0 0 3,122 3,147
Foreign securities:
Debt securities 0 0 0 0
Equity securities 0 0 0 0
Total 22,426 22,297 90,480 90,413
Investment Securities
Unrealized Gains/(Losses)
March 31, 1999
Unrealized Unrealized Net
Gains Losses Gains/Losses
U. S. Treasury Securities 70 0 70
Obligations of U.S.
Government Agencies &
Corp. 23 1,151 1,128
Obligations of States and
Political Subdivisions 170 0 170
Other Securities 0 0 0
Totals 263 1,151 (888)
Maturity and Yield on Securities March 31, 1999
(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 $18,157 6.10% $32,514 5.63% $43,062 5.52% $ 0 0%
State and Political
Subdivisions* $ 2,663 6.36% $ 5,469 6.40% $ 2,655 6.58% $ 4,420 6.99%
All Others $ 0 0% $ 0 0% $ 3,899 6.47% $ 0 0%
TOTALS $20,820 6.13% $37,983 5.74% $49,616 5.65% $ 4,420 6.99%
* Yields on tax free investments are stated herein on a taxable
equivalent basis.
30
Return on Equity and Assets
The table below presents for Bancshares certain operating
ratios for the quarters ending March 31st: (Not Annualized)
1999 1998 1997 1996 1995
Percentage of Net
Income to:
Average Total Assets .29% .32% .32% .30% .21%
Average Shareholders
Equity 3.15% 3.31% 3.39% 3.12% 2.29%
Percentage of
Dividends Declared
Per Common Share
to Net Income
Per Common Share 51.80% 35.29% 27.04% 25.56% 33.90%
Percentage of Average
Shareholders'
Equity to Average
Total Assets 10.00% 10.63% 10.14% 10.07% 9.18%
Ratios for first quarter, 1999 reflect a positioning of the company for future
asset growth and earnings potential. Efforts in the years of 1998 and 1999
reflect acquired assets totaling $110 million. Diversification of the income
stream has been underway to position the Bank for increased earnings beyond net
interest margins. Asset utilization was 59% in 1995, increasing to the current
ratio of 62% at quarter end. The purchase of Bank of Troy and First Volunteer
increased asset utilization to the current ratio of 62 percent. Asset
utilization in 1998 was 60 percent. Going forward we will continue to employ
and maximize asset utilization to achieve peer ratios of 60 percent. 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 amazing customer service. The Bank's management and employees are
rewarded with incentive compensation based on various factors including the
level of ROA achieved at year end. A return on assets of 2.00% is required if
maximum benefits are to be realized. The company vision statement calls for
$600 million in assets and $8,500,000 million in net income by the year 2003
and return on equity of 13%. Other strategic goals set to achieve ROA goals is
the addition of a second Finance Company and Insurance Company in 1998. Delta
Finance (First Citizens subsidiary) exceeded budget projections in 1998 in both
loan growth and income. A 50/50 partnership was established with a thriving
local insurance agencey to open White and Associates/First Citizens Insurance
Agency in February 1998. Revenue generated from fee income is expected
to significantly boost ROA in 1999.
Total Shareholder's equity (including Loan Loss Reserve) of
First Citizens Bancshares as of 3/31/99 was $43.6 million
compared to $38.8 million at 12/31/98.
Percentage of Dividends declared per common share to net
income per common share increased on a consistent basis for
the years under comparison when 1995 is excluded. Suppressed
earnings in 1995 distorted the ratio. Number of shares
outstanding continues to increase as a result of shares
issued on a quarterly basis to service the Dividend
Reinvestment and Cash Option Program. Number of shares outstanding
also increased as a result of shares issued for the 50% purchase of White and
Associates Insurance. A stock repurchase program
has been proven to be ineffective in creating availability of
31
shares. Shareholders continue to express an interest in buying
additional stock rather than selling shares. Under the
terms of the repurchase program, the company would
repurchase up to $200,000 of Bancshares' stock in a calendar
quarter on a first come first served basis. 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.
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.
Policy sets a projected liquidity range of 22.26% to 27.57% including balance
sheet and off balance sheet components. The liquidity ratio as of 3/31/99 was
22.82%. Slower deposit growth in recent years has forced banks to seek
alternative funding sources in order to meet loan demand. First Citizens has
resolved this issued by becoming a member of the Federal Home Loan Bank and
establishing lines of credit sufficient to meet all liquidity needs. Total
lines available including FHLB was $89,500,000 at quarter end. Funds made
available through the Federal Home Loan Bank establish a fixed level of credit
at a predetermined rate. Correspondent Bank lines provide additional liquidity
required for daily settlement of the bank's books. It is anticpated that these
sources of funds will continue to be utilized as a tool for managing liquidity.
As a result the company has experienced no problem with liquidity during any of
the years under review and anticipates that all liquidity requirements will be
effectively met in the future. Other sources available to meet liquidity needs
are loans and investments totaling $139 million that mature within one year or
less and other investments totaling $90 million placed in the available for
sale account. The dependency ratio reflects the degree that volatile
liabilities depended upon to fund longer term assets. Lower ratios reflect a
higher degree of liquidity. Asset/Liability policy sets a dependency range of
6.92% to 9.62%. The dependency ratio as of 3/31/99 was 8.84%.
In April, 1999 a new 9 month Certificate of Deposit was introduced that pays a
higher interest rate depending on total relationship balances. Rates paid on
the Certificate range from 4.50% to 4.89%. A report of competitive rates in
the Lauderdale County market indicates that a rate as high as 5.75% is paid on
12 month maturities. Rates in Obion County range from 4.50% to 5.25% for 12
month maturities. Community Bank Presidents in all counties reports slow
deposit growth for their prespective market areas.
Interest rate sensitivity varies with different types of
interest-earning assets and interest-bearing liabilities.
Overnight federal funds, on which rates change daily, and
loans which are tied to the prime rate are much more
sensitive than long-term investment securities and fixed
rate loans. The shorter term interest sensitive assets and
liabilities are the key to measurement of the interest
sensitivity gap. Minimizing this gap is a continual
challenge and is a primary objective of the asset/liability
management program.
32
The following condensed gap report provides an analysis of
interest rate sensitivity of earning assets and costing
liabilities. First Citizens Asset/Liability Management
Policy provides that the net interest income exposure to
Tier I Capital shall not exceed 2.00%. Interest rate risk is
separated and analyzed according to the following categories
of risk: (1) repricing (2) yield curve (3) option risk (4)
price risk and (5) basis risk. Trading assets are utilized
in-frequently and are addressed in the investment policy.
Any unfavorable trends reflected in interest rate margins
will cause an immediate adjustment to the bank's gap
position or asset/liability management strategies.
The following data schedule reflects a summary of First
Citizens= interest rate risk using simulations. The
projected 12 month exposure is based on 5 different rate
movements (flat, rising, or declining). Three different
rate scenarios were used for rising rates since First
Citizens is liability sensitive. Interest rate risk at
3/31/99, when compared to the same time period in 1998 was
.35% or a negative 1% of Tier 1 Capital.
33
CONDENSED GAP REPORT
------------------------------------
CURRENT BALANCES
-----------------------------------
03/31/99
(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 16,950 0 0 0 0 0 0 0 17,246
MONEY MARKET 442 492 0 0 0 0 0 0 0
TOTAL CASH &
DUE FROM 17,442 492 0 0 0 0 0 0 17,246
INVESTMENTS
US TREASURIES 3,622 0 500 0 0 0 749 750 1,623
US AGENCIES 82,406 0 0 151 1,262 1,285 6,519 1,741 71,448
VARIABLE AGENCIES 7,691 0 0 500 1,000 3,592 2,599 0 0
MUNICIPALS 15,222 0 465 180 0 570 1,448 924 11,635
CORP & OTHERS 751 0 0 0 751 0 0 0 0
EQUITIES 3,147 0 0 0 0 0 0 0 3,147
TOTAL INVESTMENTS 112,839 0 965 831 3,013 5,447 11,315 3,415 87,853
LOANS
COMMERCIAL FIXED 63,546 0 5,394 2,512 4,218 9,940 13,488 5,832 22,162
COMMERCIAL VARIABLE 23,212 12,567 10,645 0 0 0 0 0 0
REAL ESTATE-VAR. 11,539 0 11,539 0 0 0 0 0 0
REAL ESTATE FIXED 170,391 0 8,996 1,989 3,203 11,050 10,058 15,512 119,583
HOME EQUITY LOANS 6,688 0 5,383 1 14 0 1,271 19 0
SEC MORTGAGE 769 0 0 0 0 0 0 0 769
INSTALLMENT LOANS 31,810 0 680 243 367 988 1,986 6,780 20,766
FLOOR PLAN 179 0 179 0 0 0 0 0 0
CREDIT CARDS 1,897 0 0 0 0 0 1,897 0 0
FACTORING REC (1) 0 0 0 0 0 0 0 (1)
OVERDRAFTS 361 0 0 0 0 0 0 0 361
TOTAL LOANS 310,391 12,567 42,816 4,745 7,802 21,978 28,700 28,143 163,640
LOAN LOSS RESERVE 3,940 0 0 0 0 0 0 0 3,940
NET LOANS 306,451 12,567 42,816 4,745 7,802 21,978 28,700 28,143 159,700
FED FUNDS SOLD 3,000 3,000 0 0 0 0 0 0 0
TOTAL EARNING
ASSETS 423,468 15,567 430,781 5,576 10,815 27,425 40,015 31,558 248,731
OTHER ASSETS
BUILDING, F&F
& LAND 11,748 0 0 0 0 0 0 0 11,748
OTHER REAL ESTATE 244 0 0 0 0 0 0 0 244
OTHER ASSETS 18,269 0 0 0 0 0 0 0 18,269
TOTAL OTHER ASSETS 30,261 0 0 0 0 0 0 0 30,261
TOTAL ASSETS 469,993 15,763 43,781 5,576 10,815 27,425 40,015 31,558 295,060
DEMAND DEPOSITS 37,412 0 0 0 0 0 0 0 37,412
TOTAL DEMAND 37,412 0 0 0 0 0 0 0 37,412
34
CONDENSED GAP REPORT
------------------------------------
CURRENT BALANCES
-----------------------------------
03/31/99
(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 24,064 0 0 0 0 24 48 814 23,178
NOW ACCOUNT 50,456 0 0 0 0 40 80 1,910 48,426
BUSINESS CHECKING 287 0 0 0 0 0 0 0 287
IMF MMDA 9,527 0 0 0 0 266 530 623 8,108
FIRST RATE ACCOUNT 30,574 0 0 0 0 0 0 0 30,574
DOGWOOD CLUB 7,143 0 0 0 0 0 0 0 7,143
TOTAL SAVINGS 122,051 0 0 0 0 330 658 3,347 117,716
TIME DEPOSITS
CD 1-2 MONTHS 29,945 0 2,230 2,819 2,534 7,315 12,079 2,890 78
CD 3 MONTHS 612 0 270 75 205 62 0 0 0
CD 4-5 MONTHS 10,277 0 3,223 0 2,000 3,054 2,000 0 0
CD 6 MONTHS 18,628 0 2,032 3,196 2,395 9,550 1,455 0 0
CD 7-11 MONTHS 3,540 0 9 27 23 3,296 185 0 0
CD 12 MONTHS 10,099 0 261 675 999 1,464 6,187 513 0
CD 13-17 MONTHS 36,028 0 1,579 1,279 4,061 7,593 17,546 3,970 0
CD 18-23 MONTHS 458 0 36 0 13 0 117 292 0
CD 24 MONTHS 3,899 0 350 151 300 156 763 2,172 7
CD 25-30 MONTHS 1,554 0 74 0 22 177 248 980 53
CD 31-59 MONTHS 9,303 0 110 0 50 122 601 7,645 775
CD 31-59 MONTHS VAR. 12 0 0 0 0 0 12 0 0
CD 60 MONTHS 4,566 0 0 153 179 423 310 635 2,866
CD 60 MONTH VAR. 539 0 0 25 0 0 40 150 324
CD SWEET 16 18,464 0 715 761 1,134 5,553 6,507 3,794 0
CD 7 MONTHS 1,291 0 401 316 190 56 328 0 0
CD TROY 19,069 0 1,935 2,462 2,021 40,601 7,335 624 91
IRA FLOATING 107 0 107 0 0 0 0 0 0
IRA FIXED 23,172 0 1,341 1,486 1,076 3,655 7,740 5,306 2,568
CHRISTMAS CLUB 243 0 0 0 0 0 243 0 0
TOTAL TIME 191,806 0 14,673 13,425 17,202 47,077 63,696 28,971 6,762
TOTAL DEPOSITS 351,269 0 14,673 13,425 17,202 47,407 64,354 32,318 161,890
FED FUNDS PURCHASED 10,150 10,150 0 0 0 0 0 0 0
TT&L 361 361 0 0 0 0 0 0 0
SECURITIES SOLD-
SWEEP 10,270 9,839 0 0 0 431 0 0 0
SECURITIES SOLD-
FIXED 11,790 0 2,614 3,203 517 3,571 553 1,332 0
FHLB-SHORT TERM 10,025 10,025 0 0 0 0 0 0 0
FHLB-LONG TERM 28,314 0 0 2,000 0 2,000 6,000 7,000 11,314
NOTES PAYABLE-
FINANCE 1,000 0 0 0 0 0 1,000 0 0
TOTAL SHORT TERM
BORROWINGS 71,910 30,375 2,614 5,203 517 6,002 7,553 8,332 11,314
OTHER LIABILITIES 3,131 0 0 0 0 0 0 0 3,131
TOTAL OTHER LIAB. 3,131 0 0 0 0 0 0 0 3,131
TOTAL LIABILITIES 426,310 30,375 17,287 18,628 17,719 53,409 71,907 40,650 176,335
CAPITAL
STOCK, SURPLUS,
P.I.C. 18,529 0 0 0 0 0 0 0 18,529
UNREALIZED GAIN
(LOSSES) (52) 0 0 0 0 0 0 0 (52)
UNDIVIDED PROFITS 25,206 0 0 0 0 0 0 0 25,206
TOTAL CAPITAL 43,683 0 0 0 0 0 0 0 43,683
TOTAL LIAB'S &
CAPITAL 469,993 30,375 17,287 18,628 17,719 53,409 71,907 40,650 220,018
GAP (SPREAD) 0 (14,612) 26,494(13,052)(6,904)(25,984)(31,892) (9,092) 75,042
GAP % TOTAL ASSETS 0 (3.23) 5.86 (2.89) (1.53) (5.74) (6.79) (1.93) 15.97
CUMULATIVE GAP 0 (14,612) 11,882 (1,170)(8,074)(34,058)(65,950)(75,042) 0
CUM GAP % TOTAL ASSETS 0 (3.23) 2.63 (0.26) (1.79) (7.53) (14.03) (15.96) 0
35
NOTES TO THE GAP REPORT
1. The gap report reflects interest sensitivity
positions during a flat rate environment. These
time frames could change if rates rise or fall.
2. Repricing over-rides maturity in various time
frames.
3. Demand deposits are placed in the last time frame
due to lack of interest sensitivity. Our demand
deposits are considered core deposits.
4. Savings accounts are placed into the +2 year time
frame. In a flat rate environment, saving accounts
tend not to reprice or liquidate. Savings deposits
become price sensitive after a major increase in
the 6 month CD rate. These accounts are placed in
this category instead of the variable position due
to history and characteristics. These accounts are
considered core deposits.
5. Simulations will be utilized to reflect the impact
of multiple rate scenarios on net interest income.
Decisions should be made that increase net interest
income, while always considering the impact on
interest rate risk. Overall, the bank will manage
the gap between rate sensitive assets and rate
sensitive liabilities to expand and contract with
the rate cycle phase. First Citizens will attempt to
minimize interest rate risks by increasing the volume
of variable rate loans within the portfolio. The bank
should limit the net interest income exposure to a
maximum of 2.00% of tier I capital. (Example .02 x
$39,242,000 = $784,000). The bank's Asset/Liability
Committee will try to improve net interest income through
volume increases and better pricing techniques.
Long term fixed rate positions should be held to a
minimum, by increasing variable rate loans. The
over 5 year fixed rate loans should be held to less
than 25% assets, unless they are funded with Federal
Home Loan Bank matched funds. These maximum limits
are the high points and the ALCO will strive to keep
the amount below this point. The dynamic 03/31/99
gap reports reflects an exposure of $100,000 to
$600,000 if rates go up or down using multiple rate
scenarios. The Board of Directors should receive
interest rate risk reports on a quarterly basis.
(Examples: historical margins graphed and multiple
scenarios reflecting income exposure and as a
percent of tier I capital.
Subsidiaries as well as the Parent Company will
adhere to providing above average margins and
reviewing the various risks, if material. New
products and services will be reviewed for the
various risks by the Product Development Committee.
6. FCNB would benefit from a flat rate environment. If
interest rates rise rapidly, net interest income
could be adversely impacted. First Citizens
Liquidity would be negatively impacted should
interest rates drop prompting an increase in loan
demand. Adequate lines of credit are available to
handle liquidity needs.
36
Capital Resources
Total shareholders' equity of First Citizens Bancshares as
of March 31, 1999 was $43,683,000, compared to $35,679,000
at March 31, 1998. Capital as a percentage of total assets
for the quarter ending March 31 is presented in the
following table for the years indicated (excluding Loan Loss
Reserves):
Leveraged Capital Ratio(s) as of March 31
1999 1998 1997 1996 1995
9.29% 9.10% 9.33% 9.31% 9.06%
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.
The Capital Plan states that a risked based capital ratio in excess of the
minimum level required by regulation will be accomplished by: (1) controlling
asset growth, (2) increasing profits (3) adjusting dividend payouts, and/or (4)
raising additional capital when necessary. The bank will strive to maintain
off-balance sheet liabilities at levels equal to the present percentage of risk
weighted assets. The Capital analysis reflects activites affecting capital
within the next five years. Our bank will continually strive to satisfy
shareholders with dividend payments and market value increases. The bank's
goal is to maintain a level of capital adequate to meet the company's needs,
while investing excess capital in a manner that will enhance profitability.
As an additional source of capital, authorized but unissued stock can be issued
to satisfy the needs of the Dividend Reinvestment Program. Earnings per share
are expected to continually increase as expenses decrease, maintain a strong
net interest margin, and maximizing employee utilization. As bank earnings
improve, dividends to shareholders will be increased to provide a return on
investment comparable to or better than that of other well managed peer banks.
A dividend of .1875 cents per share was declared to shareholders of record as
of February 15, 1999 payable March 15, 1999. Dividends paid to shareholders
in 1998 were enhanced by a special dividend declared during fourth quarter.
This process utilized in the past five years serves to raise payout ratios to
levels targeted by the bank's capital plan. In addition a 4 for 1 stock split
increased the numbers of shares outstanding to 3,194,544 as of 12/31/99.
Dividend payouts for each year under comparison were .75 cents in
1998, .50 cents in 1997 and .40 cents in 1996.
Risk-based capital focuses primarily on broad categories of
credit risk and incorporates elements of transfer, interest
rate and market risks. Calculation of the risk-based
capital ratio is accomplished by dividing qualifying capital
by weighted risk assets. The minimum risk-based capital
ratio established by Federal Reserve regulation is 8%. At
least one-half or 4% must consist of core capital (Tier 1),
and the remaining 4% may be in the form of core (Tier 1) or
supplemental capital (Tier 2). Tier 1 capital/core capital
consists of common stockholders equity, qualified perpetual
stock and minority interests in consolidated subsidiaries.
Tier 2 capital/supplementary capital consists of the
allowance for loan and lease losses, perpetual preferred
stock, term subordinated debt, and other debt and stock
instruments. Bancshares' capital consists entirely of Tier
1 components, with the exception of the allowance for loan
37
and lease losses. The Risk-Based Capital Ratio as of 3/31/99
was 13.02% significantly above the 8.00% required by regulation.
Growth in Bancshares Capital will be maintained through retained earnings.
There is no reason to assume that income levels will
not be sufficient to maintain an adequate capital ratio.
Risk-Based Capital Ratio(s) as of March 31
1999 1998 1997 1996 1995
13.02% 12.23% 14.32% 14.19% 14.06%
Effects of Inflation
Inflation has a significant impact on the growth of total
assets in the banking industry, resulting in a need to
increase equity capital in order to maintain an appropriate
equity to asset ratio.
Operating expenses are directly affected by increases in
salaries and employee benefits, supplies, legal, audit and
professional fees, utilities, advertising and insurance.
Inflation and competition are major keys to the cost of
acquiring and retaining deposits.
A well managed asset/liability management program can
maximize net interest income; and at the same time, reduce
the impact of inflation on earnings.
Part II - Other Information
Item 1. Legal Proceedings
There are no legal proceedings against the bank at this
time.
Item 2. Changes in Securities
Dividends paid to Shareholders of First Citizens Bancshares,
Inc. are funded by dividends to the Bank Holding Company
from First Citizens National Bank and accumulated cash at
the Holding Company level. Regulators would be critical of
a bank holding company that pays cash dividends not covered
by earnings or that are funded from borrowings or unusual or
non recurring gains, such as the sale of property or assets.
Under rules set forth by the Comptroller of the Currency in
Interpretive Ruling 7.6100, the board of directors of a
national bank may declare dividends as it may judge to be
expedient, subject to statutory limitations which deal with
the balance of the surplus account, sufficiency of net
profits, dividend payments on preferred stock, and default
of any assessment due to the Federal Deposit Insurance
Corporation.
Shareholders approved an amendment to the company=s Charter in
April 1998 to increase the number of shares authorized from
750,000 to 10,000,000.
Item 6(b) No reports on Form 8-K were filed for the quarter
ended 3/31/99.
38
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
First Citizens Bancshares, Inc.
(Registrant)
Date: May 14, 1999 Stallings Lipford
Stallings Lipford, Chairman
Date: May 14, 1999 Jeff Agee
Jeff Agee, Vice President &
Chief Financial Officer