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, 1999 Commission File Number 2-83542
FIRST CITIZENS BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
TENNESSEE
(State or other jurisdiction of 62-1180360
incorporation or organization) (I.R.S. Employer Identification No.)
P. O. Box 370
Court Street, Dyersburg, Tennessee 38024
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (901) 285-4410
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 3 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Of the registrant's only class of common stock ($1.00 par value) there were
3,703,204 shares outstanding as of June 30, 1999 (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,
1999 1998
ASSETS
Cash and due from banks $ 14,637 $ 14,223
Federal funds sold 0 2,000
Investment securities -
Trading Investments-Stated at Market 0 0
Held to Maturity-amortized cost-Fair
Value of $21,400 at June 30, 1999
and $25,798 at December 31, 1998. 21,734 25,710
Available for Sale-Stated at Market 83,353 77,153
Loans (Excluding unearned income of
$2,781 at June 30, 1999 and
$2,216 at December 31, 1998) 322,048 278,220
Less: Allowance for loan losses 3,822 3,496
Net Loans 318,226 274,724
Premises and equipment 12,779 9,880
Intangible assets 4,410 3,447
Other assets 15,994 14,084
TOTAL ASSETS $471,133 $421,221
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $353,386 $315,317
Securities sold under agreement to
repurchase 29,323 21,282
Federal funds purchased and Other
Short Term Borrowing 9,825 16,825
Long-term debt 29,702 24,342
Notes payable of employee stock
ownership plan 1,276 1,408
Other liabilities 3,996 2,766
Total Liabilities 427,508 381,940
Contingent liabilities
Stockholders' Equity:
Common stock, No Par value -
10,000,000 authorized; 3,705,165
issued and outstanding at June 30, 1999;
3,244,899 issued and outstanding at
December 31, 1998 3,705 3,245
Surplus 15,034 13,892
Retained earnings 27,365 23,200
Obligation of Employee Stock
Ownership Plan (1,276) (1,408)
Net Unrealized Gains (Losses) on Available
for Sale (1,186) 481
Total Common Stock and Retained Earnings 43,642 39,410
Less-1,961 Treasury Shares, at Cost at
June 30, 1999 and 4,584 Shares at Cost at
December 31, 1998 (17) (129)
Total Stockholders' Equity 43,625 39,281
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $471,133 $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)
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
Interest Income
Interest and fees
on loans $ 7,256 $6,385 $14,340 $12,115
Interest on investment
securities:
Taxable 1,576 1,331 3,028 2,446
Tax-exempt 156 140 320 272
Other interest income -
Fed Funds Sold 41 61 141 134
Other interest income -
Checking 11 7 26 28
Lease financing income 0 0 0 0
Total Interest Income 9,040 7,924 17,855 14,995
Interest Expense
Interest on deposits 3,328 3,258 6,722 6,339
Other interest expense 864 714 1,654 1,025
Total Interest Expense 4,192 3,972 8,376 7,364
Net Interest Income 4,848 3,952 9,479 7,631
Provision for Loan
Losses 196 308 402 518
Net Interest Income
after Provision 4,652 3,644 9,077 7,113
Other Income
Securities gains
(losses) 64 (35) 95 (9)
Other income 1,380 1,126 2,733 2,176
Total Other Income 1,444 1,091 2,828 2,167
Other expenses 3,774 3,115 7,510 5,984
Net income before
income taxes 2,322 1,620 4,395 3,296
Provision for income
taxes 789 542 1,505 1,110
Net income $1,533 $1,078 $2,890 $2,186
Earnings per share $ 0.42 $ 0.35 $ 0.80 $ 0.71
Weighted average number of
shares outstanding 3,633,556 3,071,426 3,633,556 3,071,426
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,
1999 1998 1997
Net Cash Provided by Operating
Activities $ 2,069 $ 2,368 $ 1,017
Investing Activities
Proceeds of Maturities of Held to
Maturity Securities 6,476 3,624 4,491
Purchase of Held to Maturity
Investments (2,500) (6,043) (9,600)
Proceeds from Maturities of
Available for Sale Securities 6,637 17,914 3,103
Proceeds from Sales of Available
for Sale Securities 8,227 9,074 1,934
Purchase of Available for Sale
Securities (16,200) (41,458) (4,860)
Increase in Loans-Net (15,157) (41,537) (11,532)
Payment for purchase of Bank of
Troy-Net of cash acquired 0 (5,957) 0
Purchases of Premises and
Equipment (2,125) (1,351) (561)
Net Cash Provided by
Investing Activities (14,642) (65,734) (17,025)
Financing Activities
Net increase (decrease) in Demand
and Savings Accounts (7,890) 10,271 1,779
Increase (decrease) in
Time Accounts 1,194 30,524 4,658
Increase (decrease) in Long
Term Debt 5,360 11,582 4,524
Treasury Stock Transactions 112 (29) 1
Proceeds from Sale of Common Stock 485 4,416 272
Cash Dividends Paid (1,410) (789) (607)
Net increase (decrease) in
Short-term Borrowings 1,041 1,504 6,694
Net Cash Provided (used) by
Financing Activities (1,108) 57,479 17,321
Increase (decrease) in Cash
and Cash Equivalents (13,681) (5,887) 1,313
Cash and Cash Equivalents at
Beginning of Year 28,318 18,846 13,507
Cash and Cash Equivalents at
End of Year $14,637 $12,959 $14,820
Cash payments made for interest and income taxes during the years presented are
as follows:
1999 1998 1997
Interest $8,856 $7,070 $6,358
Income Taxes 941 1,764 1,163
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 FLOW
(UNAUDITED)
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
(IN THOUSANDS) EXCEPT PER SHARE AMOUNTS
June 30, 1999
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
1999 1998 1999 1998
Net Income $1,533 $1,078 $2,890 $2,186
Changes in Available
for Sale Securities (1,890) 7 (2,779) 41
Tax Impact (Available for
Sale Securities) (756) 3 (1,112) 16
Comprehensive Income $ 399 $1,082 $1,223 $2,211
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FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
June 30, 1999
Note 1 - Consolidated Financial Statements
The consolidated balance sheet as of June 30, 1999, the consolidated statements
of income for the three months ended June 30, 1999, 1998 and 1997, 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, 1999 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, 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
June 30 June 30
1999 1998
Amount Outstanding-End of Period $39,148 $23,269
Weighted Average Rate of Outstanding 4.79% 4.81%
Maximum Amount of Borrowings at Month End $49,148 $23,269
Average Amounts Outstanding for Period $46,354 $22,069
Weighted Average Rate of Average Amounts 4.77% 4.79%
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 $22,958 5.80% 5 Years Fixed
Finance Company Debt 1,000 6.00% 5 Years Fixed
Parent Company Debt 1,360 6.14% 2 Years Monthly
ESOP Obligation 1,369 6.14% 3 Years Monthly
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FIRST CITIZENS BANCSHARES,INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(IN THOUSANDS)
June 30, 1999
Note 5 - Statement of Cash Flows
June 30,
1999 1998 1997
Actual payments made
during the periods:
Interest $8,856 $ 7,070 $ 6,358
Income taxes 941 1,764 1,163
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 differences between book values of investment securities and market values
at June 30, 1999 and December 31, 1998, total $334 and $87 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 $1,977
decrease for the period ending June 1999 and, net of tax, ($1,186) flowed to
the capital account. These movements can fluctuate with the bond market.
First Citizens has not engaged in derivative activities (as defined by
paragraphs 5-7 of FASB 119) for any of the reported periods.
Note 8 - Regulatory Capital Requirements
Regulatory agencies impose certain minimum capital requirements on both First
Citizens Bancshares, Inc. and First Citizens National Bank. On December 16,
1988, the Federal Reserve Board approved risk based capital guidelines for bank
holding companies. Presently, the holding company, First Citizens National
Bank, and the Bank of Troy exceed the required minimum standards established by
regulators. The consolidated Tier 1 ratio and Tier 2 ratio are 12.43% and
13.62% respectively.
Note 9 - Deferred Income Taxes
First Citizens adopted FASB 109 as of January 1, 1993. The deferred tax account
reflects an asset totaling $726. Timing differences mainly consist of Reserve
for Loan Loss timing differences.
Note 10 - Reserve for Loan Losses
FASB 114 and 118 was implemented during the first quarter of 1995. This new
FASB requires companies to set aside reserves for impaired loans.
9
FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(IN THOUSANDS)
June 30, 1999
The following data reflects impaired totals for the reportable periods:
Impaired Loan Balance or Recorded Balance $ 987
Amount of Recorded Balance with Related Allowance $ 567
Amount of Recorded Balance with no Related Allowance $ 420
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.
First Citizens will continue to make sure the overall reserve is adequate in
addition to the impaired loans.
Note 11 - Asset Impairment
The Financial Accounting Standards Board issued Statement 121
addressing the accounting for 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, having 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 January 1, 1999, First Citizens Bancshares purchased First Volunteer Bank,
Union City, Tennessee. The newly acquired bank purchased as a subsidiary of
the Parent Company was merged into First Citizens National Bank on June 14,
1999. The acquisition was funded by issuing 445,000 shares of common stock and
was accounted for by the pooling accounting method. Total cost of the
acquisition was $11 million. There were no material accounting adjustments of
net assets of the combining companies and no changes in retained earnings as
both companies have December 31 year ends. Year-to-date net income of $300,000
is consolidated into Bancshares' totals.
10
FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(IN THOUSANDS)
June 30, 1999
Note 16 - FASB 132-Employer's Disclosures about pensions and other
postretirement benefits.
First Citizens and its subs do not sponsor any defined benefit plans or
postretirement benefits.
Note 17 - Leveraged ESOP
Origination Date: 06/25/98
First Citizens Bancshares guaranteed a $2,000,000 loan payable to Suntrust
Bank, Nashville at a rate of Libor plus 1.2%. Accrued interest is payable
quarterly commencing July 1, 1998. Principal shall be paid in equal quarterly
payments of $52,000 commencing October 1, 1998. There are no prepayment
penalties associated with this loan and 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 source of repayment of this loan will be the lead bank
(First Citizens National Bank). First Citizens will record as an expense the
contributions for the funding of the payments to the ESOP.
First Citizens National Bank of Dyersburg Employee Stock Ownership Plan and
Trust is a money purchase/stock bonus plan. The plan trustee is the Investment
Management and Trust Services Division of First Citizens National Bank.
Eligibility requirements to participate in the plan are: completed 1 year of
service and attained age 21.
Contributions to the stock bonus plan are discretionary. 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 $286,000.
11
FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(IN THOUSANDS)
June 30, 1999
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, 1999.
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.
Second quarter earnings of $1,533,000 reflect an increase in excess of 42% when
compared to second quarter 1998. Improvement is noted in both net interest
income (32%) and fee income (30%). Return on average assets of 1.24% and
average equity of 13.37% should continue to improve as efficiencies are gained
through the combination of accounting and processing systems. Ongoing
improvements 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 .71 cents per shares in the second
quarter, 1998 to .80 cents per share in the quarter just ended. Year to date
trading in Bancshares stock has been active, with over 21,000 shares trading at
$30.00 per share. The increase of 562,130 in weighted average number of shares
outstanding reflects shares exchanged with First Volunteer shareholders, and
shares issued to meet demand of our Dividend Reinvestment Program.
Year to date dividends of .375 cents per share are up 50% from the .250 cents
per share paid 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 13.35% from 12.58%, the level as of June 30, 1998. Management
will continue efforts to invest excess capital in a manner that compliments
earnings and enhances the potential to increase shareholder return. Book value
of Bancshares stock increased only .23 cents when compared to 1998 as a direct
result of Mark to Market requirements of FASB 115. Mark to Market dictates that
investment securities held in the Available for Sale portion of the securities
portfolio be marked up or down to account for fluctuations in market value
created by changes in interest rates. The effect to capital is temporary if
securities are held to maturity. Excluding the FASB adjustment, book value
would have increased 5.88%.
Other significant activity occurring in 1999 was the merger of First Volunteer
Bank in Union City with First Citizens National Bank. Total assets increased to
$471,000,000 and doubled our presence in Obion County. The increase in assets
in excess of 19% is inclusive of $48 million of merged assets and $28 million
in internal growth. Throughout the remaining half of 1999, attention will be
focused on branch delivery of Brokerage, Trust, Insurance and Mortgage services
12
FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(IN THOUSANDS)
June 30, 1999
in all markets. A new branch facility was opened in Ripley, Tennessee on
July 1, 1999. The newly constructed branch facility provided accommodation for
these expanded services in Lauderdale County.
Net interest margins continue to shrink when comparing 4.07% at 6/30/99 to
4.19% at 6/30/98. Margin trends reflect a ratio of 4% or higher in the years
of 1997-1998.
Quality of the loan portfolio continues to be a primary focus of bank
management. Total loans as of June 30, 1999 were $322,048,000 compared to
$240,228,903 at June 30, 1998. Non-performing loans represent a 4.17% increase
over last years total. Non-performing loans at 6/30/99 were $917,000 compared
to $647,000 at 6/30/98. Non-performing assets reflect problems encountered by
West Tennessee farmers during the 1998 crop year. The entire U.S. agricultural
economy is operating under extreme financial pressures brought about by the
lowest commodity prices in decades. Reduced export demand combined with
improved production efficiencies have created surplus inventories that will
likely suppress prices in the immediate future, creating additional concerns
for the 1999 crop year. As the leading Agriculture lender in West Tennessee,
First Citizens loan portfolio is impacted by these conditions. Recognizing
that the situation is temporary in nature, management is committed to working
with our farm and Ag related customers to minimize the long term effect to this
vital segment of our economy. Problem loans total $8.9 million representing a
$3.6 million increase over June 30, 1998 total of $5.3 million. Problem loans
represent 2.76% 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 June 30, 1999. For further information on
the loan portfolio refer to the section labeled Composition of Loans.
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 mergers and acquisitions as well as an
aggressive referral and sales program. The Bank of Troy and First Volunteer
acquisitions increased total assets approximately $110 million. Management is
receptive to future mergers and acquisitions that will enhance shareholder
value.
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 II is not
projected to post a profit until late 1999. First Citizens purchased 50 percent
of White and Associates Insurance Agency in Dyersburg, Dyer County, Tennessee.
The company posted year to date income levels of $102,000. In addition other
profit centers established as a part of the White and Associates/First Citizens
Insurance Agency are the credit life insurance company, and the Halls Insurance
Agency, the leading provider of crop insurance in the State of Tennessee.
Operating efficiency is achieved through implementation of action steps set in
the Bank's Technology Strategic Plan. The bank's efficiency ratio at quarter
end was 62% compared to peer ratio of 60%. Recent technological advancements
have been the development and installation of Internet based banking. First
Citizens plans to introduce its full, interactive transaction based Internet
banking site to the market on September 1, 1999. Customers can access account
information, statement activity, apply for a deposit or loan and pay bills by
signing on to firstcitizens-bank.com. The cost of Internet banking is free to
13
FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(IN THOUSANDS)
June 30, 1999
customers, while bill pay will be offered at a competitive price. First
Citizens currently offers touch-tone telephone banking with customer
utilization exceeding 23,158 calls a month. A Call Center is in the first stage
of planning and will provide more efficient customer support from account
inquiry to electronic banking products and service.
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 of the
agricultural segment of the loan portfolio that could result from low commodity
prices coupled with dry weather conditions which have existed through the
summer of 1999. Agricultural conditions were discussed early within this
section. 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 enjoyed
over 50% of the local market share and reflected 52% as of the last market
survey. 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 a large regional
competitor, 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 survey indicates a
remarkably strong performance by First Citizens in satisfying customer
expectations in the areas of personnel, service and convenience.
YEAR 2000 PROJECT SUMMARY
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 made us aware
of the level of concern among those with whom we do business. Customer
confidence in First Citizens now and after year 2000 is a top priority. For
this reason resources were dedicated to ensure that the millennium date
change is a nonevent. First Citizens has reviewed and tested all mission
critical core processing systems, AS/400 and distributed applications,
data communication, 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 all mission critical systems. Our efforts to bring 100% of our systems
into compliance in a timely manner have been and will continue to be monitored
by our primary regulator, the Comptroller of the Currency on a quarterly
basis. A Year 2000 Contingency Plan has been developed and will be fully tested
by September 30, 1999. The plan has been reviewed by Internal Audit as well as
the Office of the Comptroller of the Currency with no recommendations being
made. First Citizens will continue to focus on Year 2000 issues until the
millennium date change occurs.
14
The following table compares year-to-date non-interest income, and expense of
First Citizens as of June 30, 1999, 1998, and 1997:
Non-Interest Income
(in thousands)
June 30 June 30 June 30
1999 % of Change 1998 % of Change 1997
Service Charges
on Deposit
Accts. $1,140 29.70% $ 879 6.29% $ 827
Other Income $1,194 34.16% $ 890 31.46% $ 677
Trust Income $ 494 24.12% $ 398 3.92% $ 383
TOTAL NON-INTEREST
INCOME $2,828 30.51% $2,167 14.84% $1,887
Total non-interest income as of June 30, 1999 was $2,828,000 compared to
$2,167,000 and $1,887,000 for the same time period in the two previous years.
A strong focus on fee income and diversification of the income stream is
reflected in the 30.51% and 14.84% increases noted. Service Charges on Deposit
Accounts, which includes income from overdraft fees was up 29.70% when compared
to June 30, 1998. Other income category consists of year-to-date income of
$363,000 received from Financial Plus, Inc; $155,000 White and Associates/First
Citizens Insurance subsidiary and $293,000 Mortgage Lending Income. Increased
sales in these categories are a result of the bank's newly established sales
and referral program. Referrals resulting in closed sales increased 50% when
comparing the first half of 1999 to 1998. Income received from Investment
Management and Trust Services is up 24.12% from last 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.
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
1999 % of Change 1998 % of Change 1997
Salaries & Employee
Benefits $4,272 24.92% $3,420 28.81% $2,655
Net Occupancy
Expense $1,256 29.69% $ 969 5.67% $ 917
Other Operating
Expense $1,982 24.27% $1,595 33.25% $1,197
TOTAL NON-INTEREST
EXPENSE $7,510 25.51% $5,984 25.48% $4,769
15
Non Interest Expense
Non-Interest expense for 1999 is $7,510,000 compared to $5,984,000 and
$4,769,000 for the previous two years. Expense incurred in 1998 slightly
distort its' comparison with 1999 because of the application of purchase
accounting in the acquisition of Bank of Troy. Purchase accounting permits only
expenses incurred from date of purchase. Bank of Troy was purchased March `98
thereby eliminating expenses for the months of January and February `98 from
year-to-date totals. Salaries and benefits increased 24.92% and 28.81%
resulting from 37 employees acquired in the Bank of Troy and First Volunteer
acquisitions as well as additional employees associated with the expansion of
services offered in mortgage lending, brokerage, and insurance in Union City,
Troy, and Ripley. Fulltime equivalent employees as of June 30, 1999 was 203
compared to 172 at June 30, 1998 and 155 at June 30, 1997. Assets per employee
is 2.3 million compared to peer group ratio of 2.5 million. Increased
investment in technology resulted in an increase in Computer Expense and the
related depreciation to those investments. Conversion and other related
equipment cost associated with merger and acquisition activity caused other
operating expense to increase 24.27% and 25.48% when comparing the three years
under comparison.
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)
1999 1998 1997
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
Non-Interest
Bearing Demand
Deposits $ 37,139 0.00% $ 33,353 0.00% $ 27,096 0.00%
Savings Deposits $119,609 2.88% $ 92,429 3.23% $ 82,517 3.38%
Time Deposits $190,227 5.26% $185,511 5.63% $150,177 5.48%
TOTAL DEPOSITS $346,975 3.87% $311,293 4.19% $259,790 4.24%
Total deposits for the company have increased approximately 11.46% when
comparing 1999 to 1998. Deposit growth is attributed to deposits acquired in
Bank of Troy and First Volunteer acquisition. Deposit instruments are created
to target local consumers, professionals, and small businesses as its primary
deposit base. These instruments consist primarily of demand deposits, savings
accounts, certificates of deposits and individual retirement accounts. Senior
products consist of discount service charges and other benefits designed for
that market segment.
Non-interest bearing deposits increased $10 million since 1997. Retention of
Savings and time deposits continues to be a challenge with increased
competition by brokerage firms, insurance companies and other financial service
providers. The company's market place is considered highly competitive, with a
fairly sophisticated customer base. According to a market share analysis,
Bancshares holds over 50% of bank deposits domiciled in Dyer County. First
Citizens competes with First Tennessee Bank, N.A. (23% of total deposits),
Union Planters National Bank (11%), and Security Bank (14%) in the Dyer County
market. The bank also competes with the Dyersburg Dyer County City Employees
Credit Union, several finance companies, three brokerage firms, and numerous
other types of financial services providers. First Citizens competes with 2
16
or more large community bank competitors in the Obion County as well as all
other types of financial service providers. Competitor marketing programs are
aggressive in seeking new deposit dollars with advertising programs that offers
rates on certificates of deposits in excess of 6 percent and above in some
market areas. First Citizens holds in excess of 17% of total deposits in Obion
County and 4.82% in Lauderdale County.
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-end 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.
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 reflected a shift 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. In order to stimulate deposit growth moving into the
third quarter, a decision was made to increase deposit rates to a level more in
line or slightly above Dyer County market rates. The decision to pay higher
rates was based on the need to acquire or retain a total customer relationship
and to attract deposits to fund aggressive loan demand. A Nine Month
Certificate of Deposit was introduced on which the level of interest paid is
determined in part by whether or not the customer has an existing relationship.
The new certificate was also designed to encourage customers to lock in a
maturity past January 1, 2000.
The bank determines the level 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 11.76% well within the
policy range of 10.84% to 13.88%. 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 as of 6/30/99 was
15.60% within policy guidelines of 15.13% to 17.25%.
Sweep accounts totaling $17,699,000 are not included in the average balances
for demand deposits. The "Sweep" total is included in the balance sheet
category of securities sold under agreement to repurchase. Repurchase
agreements ("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.
17
COMPOSITION OF LOANS
Real Estate Mortgage loans comprise in excess of 56% of First Citizens' total
loan portfolio.
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, 1999:
Maturity Distribution Of Time Certificates Of Deposit
In Amounts of $100,000.00 Or More As Of June 30, 1999
(in thousands)
Maturity Total Amount
3 months or less $19,453
3 through 12 months $33,950
1 year - 3 years $ 3,365
over 3 years $ 102
Total $56,870
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 information
presented in the table. Interest earning assets as of 6/30/99 were
$426,108,000 at an average rate of 8.57% compared to $359,252,000 average
rate of 8.90% at 6/30/98. The average rate on total interest bearing
liabilities was 4.34%, 4.98%, and 4.79%, as of June 30, 1999, 1998, and 1997.
Net yield on average earning assets was 4.65%, 4.98%, and 4.84%. 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 a material negative impact
brought about by volatile swings in interest rates. Interest margins are well
managed to achieve acceptable profits and a return on equity within policy
guidelines.
18
First Citizens Bancshares
Quarter Ending June 30
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) $310,911 $7,256 9.33% $265,028 $6,385 9.64% $216,306 $5,306 9.82%
Investment Securities:
Taxable $ 96,798 $1,576 6.52% $ 80,158 $1,331 6.64% $ 69,205 $1,251 7.23%
Tax Exempt (4) $ 14,233 $ 240 6.75% $ 12,175 $ 218 7.16% $ 11,216 $ 197 7.03%
Interest Earning
Deposits $ 971 $ 11 4.54% $ 480 $ 6 5.00% $ 203 $ 3 5.92%
Trading Account $ 0 $ 0 0.00% $ 0 $ 0 0.00% $ 0 $ 0 0.00%
Federal Funds Sold $ 3,195 $ 41 5.14% $ 1,411 $ 56 15.87% $ 25 $ 1 16.00%
Lease Financing $ 0 $ 0 0.00% $ 0 $ 0 0.00% $ 0 $ 0 0.00%
Total Interest
Earning Assets $426,108 $9,124 8.57% $359,252 $7,996 8.90% $296,955 $6,758 9.11%
NON-INTEREST
EARNING ASSETS:
Cash and Due From
Banks $ 14,190 $ 0 0.00% $ 10,912 $ 0 0.00% $ 9,395 $ 0 0.00%
Bank Premises and
Equipment $ 12,313 $ 0 0.00% $ 9,110 $ 0 0.00% $ 8,173 $ 0 0.00%
Other Assets $ 18,910 $ 0 0.00% $ 13,950 $ 0 0.00% $ 8,347 $ 0 0.00%
Total Assets $471,521 $ 0 0.00% $393,224 $ 0 0.00% $322,870 $ 0 0.00%
LIABILITIES AND
SHAREHOLDERS' EQUITY:
INTEREST BEARING
LIABILITIES:
Savings Deposits $119,609 $ 861 2.88% $ 92,429 $ 747 3.23% $ 82,517 $ 697 3.38%
Time Deposits $190,227 $2,499 5.26% $185,511 $2,511 5.63% $150,177 $2,056 5.48%
Federal Funds
Purchased and
Other Interest
Bearing
Liabilities $ 77,138 $ 832 4.32% $ 43,730 $ 714 6.53% $ 32,093 $ 415 5.18%
Total Interest
Bearing
Liabilities $386,974 $4,192 4.34% $318,759 $3,972 4.98% $264,787 $3,168 4.79%
NON-INTEREST
BEARING
LIABILITIES:
Demand Deposits $ 37,139 $ 0 0.00% $ 33,353 $ 0 0.00% $ 27,096 $ 0 0.00%
Other Liab. $ 3,087 $ 0 0.00% $ 1,887 $ 0 0.00% $ 1,847 $ 0 0.00%
Total Liab. $427,200 $ 0 0.00% $356,910 $ 0 0.00% $293,730 $ 0 0.00%
SHAREHOLDERS'
EQUITY $ 44,321 $ 0 0.00% $ 36,314 $ 0 0.00% $ 29,140 $ 0 0.00%
TOTAL LIABILITIES
AND SHAREHOLDERS'
EQUITY $471,521 $ 0 0.00% $393,224 $ 0 0.00% $322,780 $ 0 0.00%
NET INTEREST
INCOME $ 0 $4,932 0.00% $ 0 $4,024 0.00% $ 0 $3,590 0.00%
NET YIELD ON
AVERAGE EARNING
ASSETS
(ANNUALIZED) $ 0 $ 0 4.63% $ 0 $ 0 4.48% $ 0 $ 0 4.84%
(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.
19
COMPOSITION OF LOANS
Total loans as of 6/30/99 were $322,048,000 compared to $270,945,000 at
6/30/98. Loans acquired in merger and acquisition activity added approximately
$58 million to the loan portfolio. Real Estate Mortgage loans comprise over
56% of First Citizens' total loan 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
expansions in retail as well as medical facility construction represent a
significant volume in total real estate loans. One to Four Family Residential
and Home Equity loans comprise approximately 35% of total portfolio compared to
26% in 1998. The Dyer County population is approximately 41,000 based on 1997
estimates (Dyersburg/Dyer County Chamber of Commerce Publication). The upward
trend in residential mortgages is not only attributed to acquired loans but, to
growth in population and new home starts in Dyer and the surrounding counties.
Monthly new housing starts in Dyer County average 142. Demographics from the
Dyersburg/Dyer County Chamber of Commerce reflect Dyersburg as 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 based on 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 surrounding counties. The
1996 per capita income for trade area counties list Dyer County at $19,930,
Obion at $20,675, and Lauderdale at $16,101. Other surrounding counties range
from $11,814 to $19,029. The State of Tennessee predicts that per capita
income in the area will be greater than the national average by year 2000. A
diversified mix of employment opportunities has provided a stable, growing
economy. 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 June, 1998 was 3.9% compared to
5.2% at March, 1999. The unemployment rate for Obion County was 4.3%, and
State of Tennessee rate was 3.1%.
First Citizens is the largest agricultural lender in the state of Tennessee and
is an approved Farm Credit Services lender. Agriculture comprises a
significant portion of the Dyer County Market. Total farm land in production
is approximately 231,000 acres or 56% of Dyer County land. Farming is a $79
million industry in the county with Dyer County being Tennessee's no. 1
producer of soybeans, grain, sorghum, and commercial vegetables. Other
important crops are wheat, cotton, and corn. The county's 509 farm operations
average 453 acres with an average value of $499,501. Agricultural credit 90
days or more past due total $14,867 or .09% of total loans. Problem loans
total $1.8 million or .54% of total loans.
Growth in the consumer loan portfolio slowed in early 1997, because of an
increase in the number of bankruptcies in the State of Tennessee as well as
perceived deterioration in consumer credit within Dyer County. Loan
Administration developed credit scoring tools as well as tighter consumer
lending policies to manage consumer losses.
The following table sets forth loan totals net of unearned income by category
for the past five years:
June 30
(in thousands)
1999 1998 1997 1996 1995
Real Estate Loans:
Construction $ 31,072 $ 23,461 $ 20,579 $ 14,924 $ 12,619
Mortgage $181,101 $157,373 $130,584 $116,719 $102,235
Commercial, Financial
and Agricultural Loans $ 68,735 $ 56,166 $ 44,912 $ 53,279 $ 48,010
Installment Loans to
Individuals $ 38,387 $ 31,421 $ 24,485 $ 22,083 $ 20,518
Other Loans $ 2,753 $ 2,524 $ 2,314 $ 2,250 $ 1,978
TOTAL LOANS $322,048 $270,945 $222,874 $209,255 $185,360
20
The provision for loan losses increased in proportion to loan growth as
required by bank loan policy. The provision at 6/30/99 was $3,822,000 or
1.19% of total loans. Policy requires a provision of at least one percent
of total loans. Experience of the lending staff and adherence to loan policy
lends a comfort level to the portfolio that supports the Loan Loss Allowance at
the present level. Problem loans at 6/30/99 are $8.9 million or 2.76% of
total loan portfolio.
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 $58,560 $111,172 $42,441
Commercial, Financial
and Agricultural $42,672 $20,174 $ 5,889
All Other Loans $ 7,433 $32,329 $ 1,378
TOTAL $108,665 $163,675 $49,708
Loans with Maturities After One Year for which:
(in thousands)
Interest Rates are Fixed or Predetermined $177,411
Interest Rates are Floating or Adjustable $ 35,972
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 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;
21
*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.
22
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 $56,132,000 as of 6/30/99.
The average yield on loans of First Citizens National Bank for the second
quarter of the years indicated is as follows:
1999 - 9.33%
1998 - 9.64%
1997 - 9.82%
1996 - 9.57%
1995 - 9.82%
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 $144,637,000 or 44.91% of the total portfolio
are subject to repricing within one year or carry a variable rate of interest.
The ratio is up from 39.05% at 6/30/98. Maturities in the one to five year
category total $163,675,000.
NON-PERFORMING ASSETS
Total non performing loans as of quarter end represent .29% of the loan
portfolio compared to peer group .82% (3/31/99). Total non-performing loans at
6/30/98 represent .26% of total loans compared to peer group total of .72%.
Non-accrual loans as of June 30, 1999 total $869,000 compared to $330,066 at
6/30/98 representing a net decrease of $539,934.
Categorization of a loan as non-performing is not in itself a reliable
indicator of potential loan loss. 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.
23
For purposes of applying the 90 day past due test for the non-accrual of
interest discussed above, the date on which an asset reaches non-accrual
status is determined by its contractual term. A debt is well secured if it is
secured (1) by collateral in the form of liens or pledges or real or personal
property, including securities that have a realizable value sufficient to
discharge the debt (including accrued interest) in full, or (2) by the
guaranty of a financially responsible party. A debt is considered to be
proceeding in due course either through legal action, including judgement
enforcement procedures, or, in appropriate circumstances, through collection
efforts not involving legal action which are reasonably expected to result
in repayment of the debt or in its restoration to a current status. Loans
that represent a potential loss to First Citizens are adequately reserved for
in the provision for loan losses.
Interest income on loans is recorded on an accrual basis. The accrual of
interest is discontinued on all loans, except consumer loans, which become 90
days past due, unless the loan is well secured and in the process of
collection. Consumer loans which become past due 90 to 120 days are charged to
the allowance for loan losses. Gross interest income that would have been
recorded for the six months ending 6/30/99 if all loans reported as non-accrual
had been current in accordance with their original terms and had been
outstanding throughout the period is $31,000. Interest income on loans reported
as ninety days past due and on interest accrual status was $24,000 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
loan total at June 30, 1999 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
1999 $ 662 $ 255 $ 917
1998 $ 316 $ 331 $ 647
1997 $1,097 $ 225 $1,322
1996 $1,725 $ 116 $1,841
1995 $ 869 $ 490 $1,359
LOAN LOSS EXPERIENCE AND
RESERVES FOR LOAN LOSSES
During the quarter just ended activity to the Reserve Account consisted of (1)
loan charge-offs - $158,000 (2) recovery of loans previously charged off -
$38,000 and (3) additions to Reserve - $196,000. 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 $3,822,000
or 1.19% of total loans. Bank policy mandates a reserve balance equal to one
percent of total loans. Projected charge-offs for the year are approximately
$550,000.
24
An analysis of the allocation of the allowance for Loan Losses is made on a
fiscal quarter at the end of the month, (February, May, August, and November)
and reported to the Board at its meeting immediately preceding quarter-end.
Requirements of FASB 114 & 118 have been incorporated into the policy for
Accounting by Creditor for Impairment of a Loan. A loan is impaired when it is
probable that a creditor will be unable to collect all amounts due of principal
and interest according to the original contractional terms of the loan. First
Citizens adopted the following as a measure of impairment: (1) Impairment of a
loan at First Citizens shall exist when the present value of expected future
cash flows discounted at the loans effective interest rate impede full
collection of the contract; and (2) Fair Value of the collateral, if the loan
is collateral dependent, indicates unexpected collection of full contract
value. The Impairment decision will be reported to the Board of Directors and
other appropriate regulatory agencies as specified in FASB 114 and 118. The
bank will continue to follow regulatory guidelines for income recognition for
purposes of generally accepted accounting principles, as well as regulatory
accounting principles.
An annual review of the loan portfolio to identify risks will cover a minimum
of 70% of the gross portfolio less installment loans. In addition, any single
note or series of notes directly or indirectly related to one borrower which
equals 25% of the bank's legal lending limit will be included in the review.
For analysis purposes loans reviewed will be separated into five
classifications:
1. Pass - Loans that have been reviewed and graded high quality or no major
deficiencies.
2. Watch - Loans which, because of unusual circumstances, need to be
supervised with slightly more attention than is customary.
3. Problem - Loans which require additional collection effort to liquidate
both principal and interest.
4. Specific Allocation - Impaired loans, in total or in part, in which a
future loss is possible.
5. Charge-Off
Examples of factors taken into consideration during the review are: Industry or
geographic economic problems, sale of business, change of or disagreement among
management, unusual growth or expansion of the business, past due for either
principal or interest 90 days, placed on non-accrual or renegotiated status,
renewed four times without principal reduction, declining financial condition,
adverse change in personal life, frequent overdrafts, lack of cooperation by
borrower, decline in marketability or market value of collateral, insufficient
cash flow, and inadequate collateral values.
25
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 12/31/99 to be as follows:
Domestic Amount
Commercial, Financial & Agricultural $300,000
Real Estate-Construction 0
Real Estate-Mortgage 0
Installment Loans to individuals 250,000
Lease financing 0
Foreign N/A
01/01/99 through 12/31/99 Total $550,000
The book value of repossessed real property held by the bank at 6/30/99 was
$226,000. The balance as of 6/30/98 was $131,000. The balance increased
slightly due to the addition of foreclosed property in the Obion County market.
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 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)
1999 1998 1997 1996 1995
Average Net Loans
Outstanding $310,911 $265,028 $216,306 $201,924 $178,924
Balance of Reserve
for Loan Losses
at Beginning of
Period $ 3,940 $ 3,197 $ 2,446 $ 2,289 $ 2,115
Loan Charge-Offs $ (158)$ (146) $ (79)$ (96)$ (56)
Recovery of Loans
Previously Charged Off $ 38 $ 79 $ 38 $ 32 $ 41
Net Loans Charged Off $ (120)$ (67) $ (41)$ (64)$ (15)
Additions to Reserve
Charged to Operating
Expense $ 196 $ 308 $ 191 $ 134 $ 86
Changes incident to
Mergers $ 0 $ 0 $ 0 $ 0 $ 0
Balance at End of
Period $ 3,822 $ 3,438 $ 2,596 $ 2,359 $ 2,186
Ratio of Net Charge-
Offs during quarter
to Average Net Loans
Outstanding (.03%) .02% (.02%) (.04%) (.01%)
The following table will identify charge-offs by category for the period ending
6/30/99.
Charge-Offs: 1999 1998
Domestic
Commercial, Financial and Agricultural $ 12 $ 38
Real Estate - Construction 0 0
Real Estate - Mortgage 0 20
Installment Loans to Individuals 121 59
Lease Financing 0 0
Credit Cards 25 29
Total ($158) $146
Recoveries:
Domestic:
Commercial, Financial and Agricultural $ 0 $ 47
Real Estate - Construction 0 0
Real Estate - Mortgage 0 1
Installment Loans to Individuals 38 26
Lease Financing 0 0
Credit Cards 0 5
Total $ 38 $ 79
Net $(120) $(67)
27
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)
1999 1998 1997 1996 1995
U. S. Treasury &
Government Agencies $88,321 $73,311 $66,322 $63,154 $53,754
State & Political
Subdivisions $13,606 $12,078 $11,321 $10,756 $10,019
All Others $ 3,160 $ 2,676 $ 3,032 $ 3,435 $ 4,151
TOTALS $105,087 $88,065 $80,675 $77,345 $67,924
A major function of the bank's investment portfolio is to maximize returns from
investments while controlling the basic elements of risk. A second goal is to
provide liquidity and meet financial needs of the customer base. Investment
Securities also serve as collateral for government and public funds deposits.
Investments for the second quarter, 1999 were up approximately $17 million.
Sales made from the Available for Sale account totaled over $7.4 million. Book
value compared to market value resulted in a negative entry to the capital
account of $2.4 million for the year. FASB 115 requires banks to mark to
market investment securities held in the Available for Sale portion of the
Investment portfolio. Mark to market dictates that these investments be marked
up or down to account for fluctuation in market value created by changes in
interest rates. The effect to capital is temporary if securities are held to
maturity. The average maturity of the portfolio is 8 years and 8 months. The
average pretax yield at 6/30/99 was 6.27% compared to 6.87% at 6/30/98. Tax
free investments total approximately $13.5 million as of quarter end.
Securities purchased during the quarter total $2.5 million while securities
sold total $7.4 million. Sale of securities was made from the Available for
Sale Account.
Fixed rate holdings currently have an expected average life of 5.3 years. It is
estimated that this average life would extend to 6.6 years should rates rise
100 basis points and 6.8 years should rates increase 200 basis points. This
is a result of some extension occurring in the callable bonds and
mortgage-backed holdings as rates rise. Should rates decline 100 basis points
the average life would likely decrease to 2.6 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 6.0%, while rates
rising 200 basis points would impact the market value by a negative 0.5%. This
is comparable with the price sensitivity of a Treasury bond with a term of
about 7 years. If rates drop 100 basis points, we estimate that the market
value would increase by 3.6%.
Adjustable rate holdings reprice on an annual or more frequent basis and
currently have an average life of 5.3 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.
28
Maturities in the portfolio are made up of 13% within one year, 38% after one
year and within five years, 43% after five years and within 10 years, and 6%
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 second 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 5 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 $ 2,028 $ 2,009
U.S. Government agency
and corporation obligations 17,719 17,373 70,414 68,593
Securities issued by states
and political subdivisions
in the U.S.:
Taxable securities 0 0 0 0
Tax-exempt securities 4,015 4,027 9,759 9,591
U. S. Securities:
Debt securities 0 0 0 0
Equity securities (including
Federal Reserve stock) 3,128 3,160
Foreign securities:
Debt securities N/A N/A N/A N/A
Equity securities N/A N/A
Total 21,734 21,400 85,329 83,353
29
Investment Securities
Unrealized Gains/(Losses)
June 30, 1999
Unrealized Unrealized Net
Gains Losses Gains/Losses
U.S. Treasury Securities 18 37 (19)
Obligations of U.S. Government
Agencies and Corp 140 2,274 (2,134)
Obligations of States and
Political Subdivisions 49 206 (157)
Fed Reserve & Corp Stock 32 0 0
Totals 239 2,517 (2,278)
Maturity and Portfolio Percentages June 30, 1999
(in thousands)
After One Year After Five Years After
Within One Year Within Five Years Within Ten Years Ten Years
Amount % Amount % Amount % Amount %
6/30/99 $13,557 (13%) $39,451 (38%) $45,560 (43%) $ 6,519 (6%)
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%)
Maturity and Yield on Securities June 30, 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 $11,722 6.71% $35,050 5.45% $38,360 5.19% $ 3,189 5.32%
State and Political
Subdivisions* $ 1,835 6.15% $ 4,401 6.46% $ 4,040 6.58% $ 3,330 6.99%
All Others $ 0 0.00% $ 0 0.00% $ 3,160 6.47% $ 0 0.00%
TOTALS $13,557 6.63% $39,451 5.56% $45,560 5.40% $ 6,519 6.17%
*Yields on tax free investments are stated herein on a taxable equivalent basis.
Parent Company's investments are included in the table.
30
Return on Equity and Assets
Return on assets is a measurement of Bancshares' ability to maximize asset
utilization. Total assets at 6/30/99 was $471,133,000. 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 costs for the Bank of Troy, First Volunteer Bank and White and
Associates 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 6/30/99 was $43,623,000 compared to $36,950,000 at 06/30/98.
Percentage of Dividends declared per common share to net income per common
share increased on a consistent basis for the years under comparison. Number of
shares outstanding continues to increase as a result of shares issued to
service the Dividend Reinvestment Program. Shares issued as a result of the
Dividend Reinvestment program total 8,108. 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 Dividend
Reinvestment Program 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. 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.
Quarterly dividends of .125 cents per share were paid the first two quarters of
1998. On May 20, 1998 the Board of Directors approved a 4 for 1 stock split
which provided for the issuance of 3 additional shares for each share owned of
record June 1, 1998. Third and fourth quarter dividends were .15 cents per
share in addition to a special fourth quarter dividend of 20 cents per share.
Dividends declared the first two quarters of 1999 were .1875 cents per share.
31
The table below presents for First Citizens Bancshares, Inc. certain operating
ratios year-to-date as of June 30: (not annualized)
1999 1998 1997 1996
Percentage of Net Income to:
Average Total Assets .62% .61% .65% .59%
Average Shareholders Equity 6.62% 6.29% 6.91% 6.40%
Percentage of Dividends Declared
Per Common Share to Net Income
Per Common Share 48.79% 36.09% 26.09% 24.95%
*Percentage of Average
Shareholders' Equity to
Average Total Assets 10.21% 9.63% 10.23% 9.87%
*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.
Policy sets a projected liquidity range of 10.84% to 13.88% including balance
sheet and off balance sheet components. The liquidity ratio as of 6/30/99 was
11.76%. 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 were $81 million 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 anticipated
that these sources of funds will continue to be utilized as a tool for managing
liquidity. In addition, we will continue to search for other sources of
funding. As a result the company has experienced no problem with liquidity
during any of the years under review and anticipates that liquidity
requirements will be effectively met in the future. Other sources available
to meet liquidity needs include loans and investments totaling $126 million
that mature within one year or less. The dependency ratio reflects the degree
that volatile liabilities are depended upon to fund longer term assets. Lower
ratios reflect a higher degree of liquidity. Asset/Liability policy sets a
dependency range of 15.13% to 17.25%. The dependency ratio as of 6/30/99 was
15.60%.
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% being 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.
32
A decision was made at quarter end to increase interest rates to a level equal
to or slightly above current market rates. The decision to pay higher rates is
to acquire new customers and to retain existing customer relationships. The
bank's base rate used for pricing loans was increased by 25 basis points.
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)
1999 1998 1997
Fixed Rate Loans > 5 Years $30,701 $21,460 $15,724
$2 million of this is
matched with FHLB
% of Tier 1
Capital
Rate Changes in 1999 vs 1998 -
Actual results $ (172) (0.42%)
Rate Changes in 1998 vs 1997 -
Actual results $ (59) (0.14%)
Tier 1 Capital $40,991
Policy 2.00%
Projected 12
Month Exposure
Net Interest Rate Moves % of Tier 1
Income Levels In Basis Pts Flat Others Variance Capital
Declining 1 (100) $18,950 $19,141 $191 0.47%
Flat Rate 0 $18,950 $18,950 0 0.00%
Rising 1 100 $18,950 $18,901 ($ 49) (0.12%)
Rising 2 200 $18,950 $18,610 ($340) (0.83%)
Rising 3 300 $18,950 $18,101 ($849) (2.07%)
NOTES
The fixed rate loan amounts reflect the demand of customers and competition.
The actual net interest income changes due to interest rate moves is presented.
Projected net interest incomes are presented. They are derived off various
interest rate projections. The last rate scenario is presented to show what
would happen if rates rose quickly (300 basis points). We do not feel like
this will happen, but rising 3 reflects a material dilution in the Bank's
earnings.
33
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.
34
CONDENSED GAP REPORT
------------------------------------
FIRST CITIZENS NATIONAL BANK CURRENT BALANCES
DYERSBURG, TN -----------------------------------
06/30/99
(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 13,790 0 0 0 0 0 0 0 13,790
MONEY MARKET 354 354 0 0 0 0 0 0 0
TOTAL CASH & DUE FROM 14,144 354 0 0 0 0 0 0 13,790
INVESTMENTS
US TREASURIES 2,009 0 0 0 0 0 0 1,480 529
US AGENCIES 81,212 0 0 1,985 2,123 110 2,404 1,958 72,632
VARIABLE AGENCIES 5,100 0 0 0 0 4,600 500 0 0
MUNICIPALS 13,607 0 0 340 0 590 905 2,100 9,672
EQUITIES 3,159 0 0 0 0 0 0 0 3,159
TOTAL INVESTMENTS 105,087 0 0 2,325 2,123 5,300 3,809 5,538 85,992
LOANS
COMMERCIAL FIXED 55,868 0 5,832 1,194 2,760 9,291 11,937 3,398 21,456
COMMERCIAL VARIABLE 12,639 0 10,913 273 101 202 169 286 695
REAL ESTATE-VARIABLE 15,201 0 10,089 485 36 1,126 695 1,025 1,745
REAL ESTATE FIXED 187,320 0 9,352 4,230 4,189 9,374 9,368 17,260 133,547
HOME EQUITY LOANS 8,132 0 7,055 35 32 187 787 36 0
SEC MORTGAGE 1,520 0 0 0 0 0 0 0 1,520
INSTALLMENT LOANS 38,387 0 1,251 642 630 1,704 3,206 5,823 25,131
FLOOR PLAN 173 0 0 0 0 0 0 0 173
CREDIT CARDS 2,310 0 0 0 0 0 0 0 2,310
FACTORING REC 55 0 0 0 0 0 0 0 55
OVERDRAFTS 443 0 0 0 0 0 0 0 443
TOTAL LOANS 322,048 0 44,492 6,859 7,748 21,884 26,162 27,828 187,075
LOAN LOSS RESERVE 3,822 0 0 0 0 0 0 0 3,822
NET LOANS 318,226 0 44,492 6,859 7,748 21,884 26,162 27,828 183,253
FED FUNDS SOLD
TOTAL EARNING ASSETS 423,313 0 44,492 9,184 9,871 27,184 29,971 33,366 269,245
OTHER ASSETS
BUILDING, F&F & LAND 12,779 0 0 0 0 0 0 0 12,779
OTHER REAL ESTATE 226 0 0 0 0 0 0 0 226
OTHER ASSETS 19,858 0 0 0 0 0 0 0 19,858
TOTAL OTHER ASSETS 32,863 0 0 0 0 0 0 0 32,863
TOTAL ASSETS 470,320 354 44,492 9,184 9,871 27,184 29,971 33,366 315,898
DEMAND DEPOSITS 36,586 0 0 0 0 0 0 0 36,586
TOTAL DEMAND 36,586 0 0 0 0 0 0 0 36,586
35
CONDENSED GAP REPORT
------------------------------------
FIRST CITIZENS NATIONAL BANK CURRENT BALANCES
DYERSBURG, TN -----------------------------------
06/30/99
(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 23,664 0 0 0 0 0 0 0 23,664
NOW ACCOUNT 44,130 0 0 0 0 0 0 0 44,130
BUSINESS CHECKING 273 0 0 0 0 0 0 0 273
IMF MMDA 7,284 0 0 0 0 0 0 0 7,284
FIRST RATE ACCOUNT 30,851 0 0 0 0 0 10,284 20,567 0
DOGWOOD CLUB 10,430 0 0 0 0 0 0 0 10,430
TOTAL SAVINGS 116,632 0 0 0 0 0 10,284 20,567 85,781
TIME DEPOSITS
CD 1-2 MONTHS 6,040 0 467 5,557 13 0 3 0 0
CD 3 MONTHS 773 0 262 174 241 96 0 0 0
CD 4-5 MONTHS 17,255 0 24 8 3,000 12,223 2,000 0 0
CD 6 MONTHS 27,633 0 2,320 3,266 4,375 15,277 2,395 0 0
CD 7-11 MONTHS 9,131 0 65 3,091 69 74 5,832 0 0
CD 12 MONTHS 27,382 0 1,316 1,507 1,504 6,541 15,795 719 0
CD 13-17 MONTHS 35,758 0 1,178 1,777 3,500 8,371 14,837 6,095 0
CD 18-23 MONTHS 446 0 0 0 0 31 118 297 0
CD 24 MONTHS 6,021 0 94 78 199 865 2,048 2,690 47
CD 25-30 MONTHS 1,515 0 79 65 13 178 229 834 117
CD 31-59 MONTHS 9,227 0 115 15 82 211 3,302 4,994 508
CD 31-59 MONTHS
VARIABLE 12 0 0 0 0 0 12 0 0
CD 60 MONTH 4,277 0 100 300 0 82 517 387 2,891
CD 60 MONTH VAR. 515 0 0 0 0 0 60 130 325
CD SWEET 16 14,837 0 1,274 2,786 1,557 2,985 3,254 2,981 0
CD 7 MONTH 1,189 0 0 0 26 948 215 0 0
TROY CD'S 12,940 0 1,899 1,108 905 2,887 5,548 561 32
IRA FLOATING 95 0 95 0 0 0 0 0 0
IRA FIXED 24,911 0 1,208 1,490 1,103 5,045 8,884 4,620 2,561
CHRISTMAS CLUB 432 0 0 0 0 0 432 0 0
TOTAL TIME 200,389 0 10,496 21,222 16,587 55,814 65,481 24,308 6,481
TOTAL DEPOSITS 353,607 0 10,496 21,222 16,587 55,814 75,765 44,875 128,848
FED FUNDS PURCHASED 800 800 0 0 0 0 0 0 0
TT&L 1,000 1,000 0 0 0 0 0 0 0
SECURITIES SOLD-
SWEEP 17,699 17,699 0 0 0 0 0 0 0
SECURITIES SOLD-
FIXED 11,624 0 4,560 2,526 855 737 2,946 0 0
FHLB-SHORT TERM 9,025 9,025 0 0 0 0 0 0 0
FHLB-LONG TERM 29,424 0 5,000 0 0 6,000 5,000 5,000 8,424
TOTAL SHORT TERM
BORR. 69,572 28,524 9,560 2,526 855 6,737 7,946 5,000 8,424
OTHER LIABILITIES 2,950 0 0 0 0 0 0 0 2,950
TOTAL OTHER LIAB. 2,950 0 0 0 0 0 0 0 2,950
TOTAL LIABILITIES 426,129 28,524 20,056 23,748 17,442 62,551 83,711 49,875 140,222
CAPITAL
STOCK, SURPLUS,
P.I.C 17,032 0 0 0 0 0 0 0 17,032
UNREALIZED GAIN
(LOSSES) (1,186) 0 0 0 0 0 0 0 (1,186)
UNDIVIDED PROFITS 28,345 0 0 0 0 0 0 0 28,345
TOTAL CAPITAL 44,191 0 0 0 0 0 0 0 44,191
TOTAL LIAB'S &
CAPITAL 470,320 28,524 20,056 23,748 17,442 62,551 83,711 49,875 184,413
GAP (SPREAD) 0 (28,170) 24,436 (14,564) (7,571) (35,367) (53,740) (16,509) 131,485
GAP % TOTAL ASSETS 0 (5.99) 5.20 (3.10) (1.61) (7.52) (11.43) (3.51) 27.96
CUMULATIVE GAP 0 (28,170) (3,734) (18,298) (25,869) (61,236)(114,976)(131,485) 0
CUM GAP % TOTAL ASSETS 0 (5.99) (0.79) (3.89) (5.50) (13.02) (24.45) (27.96) 0
SENSITIVITY RATIO 0 0.01 0.92 0.75 0.71 0.60 0.51 0.54 1.00
36
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.
37
Capital Resources
Total shareholders' equity of First Citizens Bancshares as of June 30, 1999,
was $43,625,000. 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):
1999 1998 1997 1996 1995
9.26% 9.37% 9.48% 8.93% 9.09%
A decrease in the capital ratio when comparing June 1999 to June 1998 was a
result of the following factors: (1) A special dividend of .20 cents per share
paid fourth quarter 1999; (2) The cash purchase of Bank of Troy in 1998; and
(3) Mark to market adjustment of Available for Sale Investments, a year-to-date
net effect to capital of approximately $2.4 million. The Mark to Market
adjustment, a requirement of FASB 115, requires banks to mark to market
investments held in the Available for Sale account. The adjustment is made to
the capital account and is temporary in nature if the investments are held to
maturity before being sold. First Citizens has no plans at this time to sell
securities from the Available for Sale account prior to maturity.
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 6/30/99 was 13.62%, 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.
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Operating expenses are directly affected by increases in salaries and employee
benefits, supplies, legal, audit and professional fees, utilities, advertising
and insurance. Now that interest rates have been deregulated, inflation is a
major key to the cost of acquiring and retaining deposits.
A well managed asset/liability management program can maximize net interest
income; and at the same time, reduce the impact of inflation on earnings.
Part II - Other Information
Item 1. Legal Proceedings
There are no legal proceedings filed against First Citizens Bancshares or its
subsidiaries as of this report date.
Item 2. Changes in Securities
Dividends paid to Shareholders of First Citizens Bancshares, Inc. are funded by
dividends to the Bank Holding Company from First Citizens National Bank.
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 6/30/99
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SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
First Citizens Bancshares, Inc.
(Registrant)
Date: August 12, 1999 /s/Katie Winchester
Katie Winchester, President & CEO
Date: August 12, 1999 /s/Jeff Agee
Jeff Agee, Senior Vice President &
Chief Financial Officer
First Citizens National Bank
(Principal Subsidiary)