<PAGE>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 September 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 (no par value) there
were 3,696,611 (net of treasury) shares outstanding as of September 30, 1999.
<PAGE>2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
<PAGE>3
FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(Stated in thousands)
September 30, December 31,
1999 1998
(Unaudited) (Note)
ASSETS
Cash and due from banks $ 15,028 $ 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 $20,967 at September 30,
1999 and $25,798 at December 31,
1998. 21,349 25,710
Available for Sale-Stated at Market 81,173 77,153
Loans - (Excluding unearned income of
$2,585 at September 30, 1999
and $2,216 at December 31, 1998) 327,032 278,220
Less: Allowance for loan losses 3,878 3,496
Net Loans 323,154 274,724
Premises and equipment 13,101 9,880
Intangible assets 4,326 3,447
Other assets 15,538 14,084
TOTAL ASSETS $473,669 $421,221
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $355,746 $315,317
Securities sold under
agreement to repurchase 21,789 21,282
Federal funds purchased
and other short term borrowing 15,900 16,825
Long-term debt 31,344 24,342
Notes payable of employee stock
ownership plan 1,197 1,408
Other liabilities 3,690 2,766
TOTAL LIABILITIES 429,666 381,940
Contingent Liabilities
Stockholders' Equity
Common stock, no par value -
10,000,000 authorized; 3,705,165
issued and outstanding at
September 30, 1999; 3,244,899
issued and outstanding at
December 31, 1998 3,705 3,245
Surplus 15,034 13,892
Retained earnings 28,209 23,200
Obligation of employee stock ownership
plan (1,196) (1,408)
Net Unrealized Gains(Losses) on
available for sale (1,492) 481
Total Common Stock and Retained
Earnings 44,260 39,410
Less-8,554 Treasury Shares, at Cost
at September 30, 1999 and 4,584
Shares at cost at December 31, 1998 (257) (129)
Total Stockholders' Equity 44,003 39,281
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $473,669 $421,221
NOTE: The balance sheet at December 31, 1998, has been taken from the
audited financial statements at that date and condensed.
<PAGE>4
FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
Interest Income
Interest and fees on loans $ 7,474 $ 6,474 $21,814 $18,589
Interest on investment
securities:
Taxable 1,472 1,335 4,500 3,781
Tax-exempt 147 135 467 407
Other interest income -
Fed Funds Sold 7 3 148 136
Other interest income -
checking 7 6 33 35
Lease financing income 0 0 0 0
Total Interest Income 9,107 7,953 26,962 22,948
Interest Expense
Interest on deposits 3,417 3,299 10,139 9,638
Other interest expense 775 656 2,429 1,681
Total Interest Expense 4,192 3,955 12,568 11,319
Net Interest Income 4,915 3,998 14,394 11,629
Provision for loan losses 122 121 524 639
Net interest income after
provision 4,793 3,877 13,870 10,990
Other Income
Securities gains (losses) 0 48 95 39
Other income 1,455 1,005 4,188 3,181
Total Other Income 1,455 1,053 4,283 3,220
Other expenses 3,752 3,182 11,362 9,166
Net income before
income taxes 2,396 1,748 6,791 5,044
Provision for income
taxes 886 586 2,351 1,696
Net income 1,550 1,162 4,440 3,348
Earnings per share $ 0.42 $ 0.37 $ 1.21 $ 1.07
Weighted average number of
shares outstanding 3,654,633 3,117,127 3,654,633 3,117,127
1997 income data has been adjusted to reflect annual incentive bonus accruals
previously accounted for during fourth quarter and a 4.1 stock split that took
place in 1998.
<PAGE>5
FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(STATED IN THOUSANDS)
Operating Activities
Nine Months Ended September 30
1999 1998 1997
Net cash provided by
operating activities $ 5,347 $ 2,863 $4,118
Investing Activities
Proceeds of maturities of held to
maturity securities 6,861 12,119 10,468
Purchase of held to maturity
investments (2,500) (15,043) (9,600)
Proceeds from maturities of available
for sale securities 10,506 19,887 14,478
Proceeds from sales of available for
sale securities 8,227 10,059 1,954
Purchase of available for sale
securities (19,200) (59,428) (15,110)
Increase in Loans-Net (20,207) (45,150) (23,273)
Payment for purchase of Bank of Troy-
Net of cash acquired 0 (5,957) 0
Purchases of premises and equipment (2,779) (1,881) (719)
Net cash provided
by investing activities (19,092) (85,394) (21,802)
Financing Activities
Net increase (decrease) in demand
and savings accounts (1,036) 18,670 384
Increase (decrease) in time accounts (3,300) 23,722 544
Increase (decrease) in long-term debt 7,002 11,844 6,363
Treasury stock transactions (128) (52) 2
Proceeds from sale of common stock 450 5,070 375
Cash dividends paid (2,115) (1,278) (911)
Net increase (decrease) in short
term borrowings (418) 17,327 12,025
Net cash provided (used) by
financing activities 455 75,303 18,782
Increase (decrease) in cash and
cash equivalents (13,290) (7,228) 1,098
Cash and cash equivalents at
beginning of year 28,318 18,846 13,507
Cash and cash equivalents,
end of year 15,028 11,618 14,605
Cash payments made for interest and income taxes during the years presented
are as follows:
1999 1998 1997
Interest $12,948 $11,564 $9,682
Income Taxes $2,142 $ 2,388 $1,763
The accompanying notes are an integral part of these financial statements.
<PAGE>6
FIRST CITIZENS BANCSHARES, INC.
STATEMENT OF COMPREHENSIVE INCOME
(IN THOUSANDS) EXCEPT PER SHARE AMOUNTS
SEPTEMBER 30, 1999
Three Months Ended Nine Months Ended
September September
1999 1998 1999 1998
Net Income $1,550 $1,162 $4,440 $3,348
Changes in Available
for Sale Securities (510) 339 (3,288) 379
Tax Impact (Available
for Sale Securities) (204) 136 (1,315) 152
Comprehensive Income $1,244 $1,365 $2,467 $3,575
<PAGE>7
FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Stated in Thousands)
September 30, 1999
Note 1 - Consolidated Financial Statements
The consolidated balance sheet as of September 30, 1999, the consolidated
statements of income for the nine months ended September 30, 1999, 1998, and
1997, and the consolidated statement of cash flows for the nine 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
September 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
September 30 September 30
1999 1998
Amount Outstanding-End of Period $37,688 $39,092
Weighted Average Rate of Outstanding 4.79% 5.15%
Maximum Amount of Borrowings at Month End $38,288 $39,092
Average Amounts Outstanding for Period $34,672 $30,467
Weighted Average Rate of Average Amounts 4.40% 4.71%
Note 4 - Long-Term Debt
Long term debt is comprised of Federal Home Loan Bank Borrowings and Finance
Company debt and Employee Stock Ownership Plan debt. The Finnace Company
debt is classified as long term debt due to the intent to renew. The parent
company ESOP 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% 2 Years Fixed,Callable
Finance Company Debt 1,000 6.00% 5 Years Fixed
Parent Company Debt Paid debt off third quarter of 1999.
ESOP Obligation 1,197 6.70% 3 Years Monthly
<PAGE>8
FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(IN THOUSANDS)
September 30, 1999
Note 5 - Statement of Cash Flows
September 30,
1999 1998 1997
Actual payments made
during the periods:
Interest $12,948 $11,564 $ 9,682
Income taxes 2,142 2,388 1,763
Note 6 - Contingent Liabilities
There are no material pending litigations as of the current reportable date
that should result in a liability.
Note 7 - Investment Securities
The differences between book values of investment securities and market
values at September 30, 1999 and December 31, 1998, total ($382) 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 $2,487 decrease for the period ending September 1999
and, net of tax, ($1,492) flowed to the capital account. These movements
fluctuate with the bond market.
First Citizens has not engaged in derivative activities (as defined by
paragraphs 5-7 of FASB 119) for any of the reported periods.
Note 8 - Regulatory Capital Requirements
Regulatory agencies impose certain minimum capital requirements on both First
Citizens Bancshares, Inc. and First Citizens National Bank. On December 16,
1988, the Federal Reserve Board approved risk based capital guidelines for bank
holding companies. Presently, the holding company and First Citizens National
Bank exceed the required minimum standards established by regulators. Tier 1
and tier 2 risk based capital ratios are 12.41% and 13.59% 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 were implemented during the first quarter of 1995, creating a
reserve for impaired loans.
<PAGE>9
FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(IN THOUSANDS)
September 30, 1999
The following data reflects impaired totals for the reportable periods:
Impaired Loan Balance or Recorded Balance $1,092
Amount of Recorded Balance with Related Allowance $ 346
Amount of Recorded Balance with no Related Allowance $ 746
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 the impairment of long-lived assets that will be held and used,
including certain identifiable intangibles, and the good-will related to those
assets. The statement, which was effective for calendar-year 1996 financial
statements, also addresses accounting for long-lived assets and certain
identifiable assets to be disposed.
The statement requires that assets to be held and used be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset in question may not be recoverable.
As of the reportable date, there are no material FASB 121 adjustments.
Note 13 - FASB 128 and 129 - Earnings Per Share
First Citizens Bancshares has a simple capital structure, with only common
stock outstanding. The method used for computing the weighted average shares
is based on a daily weighted average amount. First Citizens has no preferred
stock, redeemable stock, or other items that would dilute basic earnings per
share.
Note 14 - FASB 130 - Comprehensive Income
This statement establishes reporting and display requirements for comprehensive
income and its components. A separate financial statement is presented that
begins with net income from operations and includes all other comprehensive
income. Bancshares has only one comprehensive income item (changes in the
market value of available for sale investment securities). This total is
carried to the Balance Sheet Net of Tax(unrealized gain or loss on available
for sale).
Note 15 - APB 16 - Business Combination
On January 1, 1999, First Citizens Bancshares purchased First Volunteer Bank
of Union City, Tennessee. The newly acquired bank was converted to a branch
of FCNB (June 1999). First Volunteer has total assets of approximately $49
million. The Bank is located in the county of Obion and will expand
Bancshares' market as projected in our strategic plan. The acquisition was
funded by issuing 445 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.
<PAGE>10
FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(IN THOUSANDS)
September 30, 1999
There were no material accounting adjustments 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 $300 for the first 6 months, which is consolidated into bancshares'
totals.
Note 16 - FASB 132 Employers' disclosures about pensions and other post-
retirement benefits.
First Citizens and its subs do not sponsor any defined benefit plans or post-
retirement benefits.
Note 17 - Leveraged ESOP
Origination Date: 06/25/98
Bancshares guaranteed a $2,000,000 loan on behalf of the Employee Stock
Ownership Plan payable to Suntrust Bank, Nashville at 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 commencing 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 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 contributions 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 a money purchase/stock bonus plan administered by the Investment
Management and Trust Services Division of First Citizens National Bank.
Eligibility requirements dictate that an employee must be 21 years of age and
must have been employed for a minimum of one year to participate in the plan
by the Company. 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
1900'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 $421,000.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
The purpose of the following discussion is to address significant changes in
income and expense accounts when compared to the quarter ending September 30,
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 First Citizens and First Citizens Bancshares, Inc. (Bancshares).
Limited activities to date by the Holding Company do not materially affect the
income report.
<PAGE>11
In spite of recent stock market volatility and global economic problems, third
quarter performance of First Citizens Bancshares, Inc. remained strong. Net
income of $1,596,000 for the three months ending September 30, 1999 was up 37%
from the $1,162,000 earned the same period in 1998. Year to date net income
through September totaled $4,440,000 up from $3,348,000 at September 30, 1998.
The increase in net income reflects acquisition activity in addition to growth
in the loan portfolio. Non interest income increased 31% from the same time
period one year ago, an indicator of continued efforts to increase fee income
through diversification of business lines. Earnings per share increased 19%,
to 44 cents per share from 37 cents in the third quarter of 1998. Earnings per
share for the first nine months of 1999 were $1.23 up from $1.07 earned during
the same time period in 1998. Return on average assets was 1.27% at
quarter end compared to 1.20% this time last year. Return on Average Equity
was 13.62% at quarter end compared to 12.37% as of September 30, 1998. Book
Value of Bancshares stock at quarter end was $11.91 compared to $12.13 as of
quarter end one year ago. The Financial Accounting Standards Board requires
financial institutions to evaluate investments held in the Available-For-Sale
portfolio on a quarterly basis and to adjust value according to current market.
The quarterly accounting adjustments derived from the market evaluation are
then marked against the bank's capital account. Third quarter capital
adjustments decreased capital approximately $306,000 or $0.08 net effect to
book value of Bancshares stock. Book value of Bancshares' stock has decreased
$0.53 per share as a result of mark to market adjustments to the capital
account from December 1998 to September 30, 1999. Changes to the capital
account as a result of FASB 115 are classified as a book entry and write-downs
only effect the capital account if sold prior to maturity. Market value of
Bancshares' stock remains firm at $30.00 per share in spite of market pressure
placed on per share prices of bank stocks. Since Bancshares stock is not
publicly traded on any exchange, it has escaped the volatility that has
impacted stock prices of even the best performing banks. The bank's loan
portfolio continues to be the bank's largest earning asset. Total loans
increased 32.76% when comparing September 30,1999 to September 30, 1998.
Quality of the loan portfolio remains at levels above peer averages when
comparing past due and non-performing assets. An Internal Loan Review report
dated August 31, 1999 indicates that the loan portfolio is in good condition
based on percentage of problem loans to gross capital funds. Problem loans
total $8,845,913 and represent 19.72% of gross capital funds. The loan
portfolio is discussed in more detail within the section of this report titled
Loan Portfolio Analysis. Loan to deposit ratio is 91.87% compared to 92.67%
at 9/30/98. Loan to asset ratio at quarter end was 69.09%, down slightly from
69.61% for the same quarter last year.
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
Bank 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 in 1999. First Citizens Insurance Agency,
established in 1999, posted year to date income levels of $143,000 compared to
$70,000 last year. In addition other profit centers established as a part of
the Insurance Company are a credit life insurance company, title insurance
company, and the purchase of the Halls Insurance Agency, the leading provider
of crop insurance in the State of Tennessee.
<PAGE>12
First Citizens introduced Internet based banking to the market place September
1, 1999. The service allows customers to 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 customers,
while bill pay is offered at a competitive price. 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 services. An internet based
cash management product for small businesses will be announced to the market
the first half of next year. A wide area network was installed and fully
operational in the second quarter of 1998. Applications such as E-mail, fax
capabilities, Microsoft Office suite were installed on the network server and
allow sharing of data files and customer information. The Wide area network
will position First Citizens technology advancements into software that
requires a personal computer based infrastructure rather than an AS/400.
There are no known trends, events or uncertainties that are likely to have a
material affect 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 discussed early within this section.
There currently exists no recommendation by regulatory authorities if
implemented, would have such an affect. Interstate Banking/Branching
became a full nationwide reality through legislation passed in 1994. First
Citizens Bancshare's 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 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 the bank in satisfying customer expectations in the areas of
personnel, service and convenience.
First Citizens' designated market area is constantly expanding with the
purchase of the Ripley, Tennessee branch (Lauderdale County), the Bank of
Troy located in Troy, Tennessee (Obion County) and First Volunteer Bank, Union
City, Tennessee (Obion County). Demographic studies indicate the population
in Dyer, Lauderdale and Obion County at the end of 1996 was 36,193, 23,972,
and 32,053 respectively. Projected population by the year 2000 is 42,000,
22,475, and 30,657 respectively. The median household income in Dyer County
is approximately $26,562 slightly above the median household income level for
the State of Tennessee. Employment consists of 44.85% in manufacturing and
construction, 24.19% personal, professional and small business, 19.13% trade,
wholesale and retail, 4.34% transport/communication, 3.93% public
administration, and 3.57% agriculture, forest and fishing. Blue collar
occupations employ approximately 8,226, while other white collar occupations
employ approximately 4,672. Executive and other professional occupations
employ approximately 3,200. First Citizens marketing strategy is to offer
financial products and services designed to meet the needs of the market place.
A demographic study indicated that First Citizens market was primarily in the
38 age group and above. More convenient products and services that appeal to
the generation X market are included in the bank=s technology and marketing
five year strategic plan.
<PAGE>13
YEAR 2000 PROJECT SUMMARY
Every industry which interprets or stores data formats has been posed with the
Year 2000 challenge. Year 2000 related issues is 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 which 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 is Year 2000 ready. The bank has reviewed and
tested all mission critical core processing systems, AS/400 and distributed
applications, data communication, building security and desktop applications to
ensure they are capable of functioning through and beyond year 2000. 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. Our year 2000
efforts has been examined by the Office of the Comptroller of the Currency and
has met or surpassed all necessary guidelines set forth by the OCC. The OCC
has reviewed the bank's Year 2000 program each and every quarter since the
first quarter of 1998. First Citizens will continue to focus on Year 2000
issues until the millennium date change occurs.
The following table compares year to date non-interest income and
expense of First Citizens as of September 30, 1999, 1998 and 1997:
Non-Interest Income
(in thousands)
Sept. 30 Sept. 30 Sept. 30
1999 % of Change 1998 % of Change 1997
Service Charges on
Deposit Accounts $1,775 31.28% $1,352 9.12% $1,239
Trust Income $ 661 18.24% $ 559 .01% $ 554
Other Income $1,838 40.41% $1,309 30.12% $1,006
TOTAL NON-INTEREST INCOME $4,274 32.73% $3,220 15.04% $2,799
Total non-interest income is $4,274,000, up 37.73% when compared to September
30, 1998. Total non-interest income increased over 15% when comparing the two
previous time periods listed in the table. A strong focus on fee income and
diversification of the income stream is reflected in the increased percentages
as well as additional revenue earned as a result of the First Volunteer merger.
Service Charge on deposits account increased over 31% when comparing the two
time periods. Trust income continues to grow over previous years reflecting
increased trust assets and review and realignment of the pricing policy.
Other income increased 40.41% and 30.12% when comparing September 30, 1999 to
September 30, 1998 and 1997. Improved earnings are attributed to income
received year-to-date from Financial Plus, Inc. of $93,000; First Citizens
Insurance $143,000; and income received from the sale of a branch office
located in Troy, Tennessee at a net profit of approximately $100,000.
Non-Interest Expense
(in thousands)
Sept. 30 Sept. 30 Sept. 30
1999 % of Change 1998 % of Change 1997
Salaries & Employee
Benefits $ 6,428 23.28% $5,214 15.94% $4,497
Net Occupancy Expense $ 1,949 29.41% $1,506 6.13% $1,419
Other Operating Expense $ 2,897 18.43% $2,446 32.14% $1,851
TOTAL NON-INTEREST EXPENSE $11,274 22.99% $9,166 18.01% $7,767
<PAGE>14
Total non-interest expense for 1999 is $11,274,000 compared to $9,166,000 for
the same time period resulting in a 22.99% increase. Expense incurred in 1998
slightly distorts its comparison with 1999 because of the application of
purchase accounting in the acquisition of Bank of Troy. Purchase accounting
permits only expense incurred from date of purchase. Bank of Troy was
purchased March 1998 thereby eliminating expenses for the months of January
and February 1998 from year-to-date totals. Salaries and benefits increased
23.28% and 15.94% 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, insurance
in Union City, Troy, and Ripley. Fulltime equivalent employees as of September
30, 1999 was 207 compared to 181 at September 30,1998. Assets per employee are
$2.3 million compared to peer group comparison of $2.5 million. The efficiency
ratio is a measure of the bank's ability to produce income in comparison to
fulltime equivalent ratio. Efficiency ratio at 9/30/99 was slightly above 60%
compared to 58.66% at 9/30/98. An ongoing strategic plan is to automate manual
processes through technology and at the same time meet the technological
needs of our customer base. Net occupancy expense is projected to increase as
technology is installed to accomplish this goal. Net occupancy expense is also
projected to increase with the construction of the Green Village Branch.
Construction of the branch commenced in October 1999 with completion of the
facility projected in spring, 2000. Other operating expense increased over 18%
with the organization cost associated with merger of Bank of Troy and First
Volunteer Bank in 1999.
Deposits
The average daily amount of deposits and average rates paid on such deposits
is summarized for the quarter ending September 30 for the years indicated:
COMPOSITION OF DEPOSITS
(in thousands)
1999 1998 1997
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
Non-Interest
Bearing Demand
Deposits $ 38,413 0.00% $ 32,747 0.00% $ 28,055 0.00%
Savings
Deposits $110,888 2.86% $ 95,597 3.26% $ 79,419 3.42%
Time Deposits $209,124 5.01% $178,169 5.66% $150,248 5.58%
TOTAL DEPOSITS $358,425 3.81% $306,513 4.31% $257,722 4.26%
Deposit growth in 1999 is attributed primarily to deposits acquired in the
Bank of Troy and First Volunteer acquisitions. 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 $5.6 million since 9/30/98 and $16
million from 9/30/97. 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, Bankchares holds over 50% of bank
deposits domiciled in Dyer County. First Tennessee Bank holds 23%, Union
Planters National Bank 11%, and Security Bank 14%. First Citizens competes
with 2 or more large community banks in the Obion County market as well as
other types of financial service providers. Competitor marketing programs are
<PAGE>15
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.
The population is expected to grow at a marginal rate in the three counties in
which First Citizens has 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 for 31,960 to 32,055, a gain of less
than 1 percent. The population for 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 late 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 deposits rates to a level more
in line or slightly above Dyer County market rates. The decision to pay
higher rates was based on a need to acquire or retain a total customer
relationship and to attract deposits to fund aggressive loan demand. Net
interest margins at quarter end was 3.99% compared to 4.18% at September 30,
1998. The competition reacted to this strategy with increased deposit rates
in the Obion and Lauderdale County markets. 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 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 9/30/99 was 7.44% well within the
bank's policy range of 6.35% to 9.76%. 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 9/30/99 was
20.26% slightly above the maximum policy range of 19.11%.
Sweep accounts totaling $11.2 million 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.
The following table sets forth the maturity distribution of Certificates of
Deposit and other time deposits of $100,000 or more outstanding on the books
of First Citizens on September 30, 1999.
Maturity Distribution of Time Deposits
In Amounts of $100,000 Or More As Of September 30, 1999
(in thousands)
Maturity Total Amount
3 months or less $41,900
3 through 12 months $21,335
1 year through 3 years $ 4,127
over 3 years $ 104
Total $67,466
<PAGE>16
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, 8.60% reflects a slight decrease compared to 8.83%
at September 30, 1998. The decreased yield is reflective of current market
conditions as well as competitive pressure in local markets. Interest earning
assets at quarter end were $426,890,000 compared to $363,510,000 and
$308,068,000 at quarter end 1998 and 1997 respectively. The average rate on
interest bearing liabilities was 4.31%, 4.90% and 4.88% as of quarter end of
each year under discussion. Total interest bearing liabilities was
$387,833,000 $322,933,000 and $271,722,000 for September 30, 1999, 1998, and
1997 respectively. A primary objective of the Asset Liability Committee is
maintaining interest rate margins that are consistent with projected
profitability ratios. Net interest margins at 9/30/99 were 3.99%, slightly
below (0.19%) below September 30, 1998 ratio of 4.18%. Maintaining interest
rate margins achieved in prior years continues to be a challenge. When
interest rates begin to 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 possible on deposits. The sensitivity to loan rates also
increases as banks scramble to retain quality customers being courted by the
competition. First Citizens has historically outperformed peer banks with the
average rate earned on the loan portfolio, even in today's rate environment.
The challenge of the last three years has been pricing deposits to retain the
core deposit base as well as acquire deposit growth required for funding
double digit loan growth. Deposit growth has been relatively flat, while loan
growth has been above budget projections. 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.
<PAGE>17
<TABLE>
<CAPTION> First Citizens National Bank
Quarter Ending September 30
Monthly Average Balances and Annualized Interest Rates
(in thousands)
1999 1998 1997
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
INTEREST EARNING
ASSETS:
Loans (123)
& Leases $322,550 $7,474 9.26% $267,955 $6,474 9.66% $231,262 $5,605 9.70%
Investment
Securities:
Taxable $ 89,900 $1,461 6.50% $ 82,651 $1,335 6.46% $ 66,072 $1,125 6.81%
Tax Exempt (4) $ 13,380 $ 226 6.76% $ 11,974 $ 204 6.81% $ 10,477 $ 180 6.88%
Interest Earning
Deposits $ 500 $ 7 5.64% $ 741 $ 6 3.24% $ 230 $ 3 5.22%
Federal Funds
Sold & Securities
Purchased Under
an Agreement
to Resell $ 560 $ 7 5.00% $ 189 $ 3 6.35% $ 27 $ 1 5.22%
Total Interest
Earning Assets $426,890 $9,175 8.60% $363,510 $8,022 8.83% $308,068 $6,914 8.98%
NON-INTEREST
EARNING ASSETS:
Cash and Due
From Banks $ 12,646 $ 0 0.00% $ 9,213 $ 0 0.00% $ 9,782 $ 0 0.00%
Bank Premises &
Equipment $ 13,197 $ 0 0.00% $ 9,279 $ 0 0.00% $ 8,228 $ 0 0.00%
Other Assets $ 20,392 $ 0 0.00% $ 14,983 $ 0 0.00% $ 6,339 $ 0 0.00%
Total Assets $473,125 $ 0 0.00% $396,985 $ 0 0.00% $332,417 $ 0 0.00%
LIABILITIES AND
SHAREHOLDERS'
EQUITY:
INTEREST BEARING
LIABILITIES:
Savings Deposits $110,888 $ 794 2.86% $ 95,597 $ 779 3.26% $ 79,419 $ 679 3.42%
Time Deposits $209,124 $2,623 5.01% $178,169 $2,520 5.66% $150,248 $2,096 5.58%
Federal Funds
Purchased and
Other Interest
Bearing
Liabilities $ 67,821 $ 759 4.71% $ 49,167 $ 656 5.34% $ 42,057 $ 538 5.12%
Total Interest
Bearing
Liabilities $387,833 $4,176 4.31% $322,933 $3,955 4.90% $271,724 $3,313 4.88%
NON-INTEREST
BEARING
LIABILITIES:
Demand Deposits $ 38,413 $ 0 0.00% $ 32,747 $ 0 0.00% $ 28,036 $ 0 0.00%
Other Liabilities $ 2,876 $ 0 0.00% $ 3,304 $ 0 0.00% $ 2,070 $ 0 0.00%
Total Liabilities $429,122 $ 0 0.00% $358,984 $ 0 0.00% $301,830 $ 0 0.00%
SHAREHOLDERS'
EQUITY $ 44,003 $ 0 0.00% $ 38,001 $ 0 0.00% $ 30,587 $ 0 0.00%
TOTAL LIABILITIES
AND SHAREHOLDERS'
EQUITY $473,125 $ 0 0.00% $396,985 $ 0 0.00% $332,417 $ 0 0.00%
NET INTEREST
INCOME $ 0 $4,999 0.00% $ 0 $4,067 0.00% $ 0 $3,601 0.00%
NET YIELD ON
AVERAGE EARNING
ASSETS(ANNUALIZED)$ 0 $ 0 4.68% $ 0 $ 0 4.48% $ 0 $ 0 4.68%
</TABLE>
(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.
<PAGE>18
COMPOSITION OF LOANS
The loan portfolio is First Citizens largest earning asset. Total loans as
of 9/30/99 were $327,032,000 compared to $274,482,000 at September 30, 1999.
Loans acquired in the merger and acquisition added approximately $58 million
to the loan portfolio. Real estate mortgage loans comprise over 56% of total
loans. 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 September, 1999 was 3.9%
compared to State of Tennessee rate of 3.2% and National (U.S.) rate of 4.1%.
The unemployment rate for Obion County was 4.5%, and Lauderdale County rate
was 7.28%.
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
loans total $30.9 million or 9.44% of total loans. Agricultural credit 90
days or more past due are total .26% of total loans.
The entire U.S. agricultural economy is operating under extreme pressures
brought about by the lowest commodity prices in decades. Reduction in export
demand combined with improved production methods have created surplus
inventories that suppressed prices for the 1999 crop year. In addition to
suppressed commodity prices, the West Tennessee area has experienced a weather
related draught causing below average yields. 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 agriculture related customers to
minimize exposure to the bank's loan portfolio as well as the long term effect
to this vital segment of our economy.
<PAGE>19
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 practices to manage consumer losses.
Loan Administration sets policy guidelines approved by the Board of Directors
regarding portfolio diversification and underwriting standards. Loan policy
also includes board approved guidelines for collateralization, loans in excess
of loan to value limits, maximum loan amount, maximum maturity and amortization
periods for each loan type. Policy guidelines for loan to value ratio and
maturities related to various collateral are as follows:
Collateral Max. Amortization Max. LTV
Real Estate Discussed herein Discussed herein
Equipment 5 Years 75%
Inventory 5 Years 50%
A/R 5 Years 75%
Livestock 5 Years 80%
Crops 1 Year 50%
*Securities 10 Years 75% (Listed)
50% (Unlisted)
*Maximum LTV on margin stocks (stocks not listed on a national exchange) when
proceeds are used to purchase or carry same, shall be 50%.
Diversification of the banks' real estate portfolio is a necessary and
desirable goal of the bank's real estate loan policy. In order to achieve and
maintain a prudent degree of diversity, given the composition of the bank's
market area and the general economic state of the market area, the bank will
strive to maintain a real estate loan portfolio diversification based upon the
following:
* Agricultural loans totaling in the aggregate no more than 20% of the
Bank's total loans.
* Land acquisition and development loans totaling in the aggregate no
more than 10% of the Bank's total loans.
* Commercial construction loans totaling in the aggregate no more than
10% of the Bank's total loans.
* Residential construction loans totaling in the aggregate no more than
10% of the Bank's total loans.
* Residential mortgage loans totaling in the aggregate no more than 40%
of the Bank's total loans.
* Commercial loans totaling in the aggregate no more than 30% of the
Bank's total loans.
It is the policy of FCNB that no real estate loan will be made (except in
accordance with the provisions for certain loans in excess of supervisory
limits provided for hereinafter) that exceed the loan-to-value percentage
limitations ("LTV limits") designated by category as follows:
Loan Category LTV Limit (%)
Raw Land 65
Land Development or Farmland 75
Construction:
Commercial, multi-family, and
other non-residential 80
1-to-4 family residential 80
Improved Property 80
Owner-occupied 1-to-4 family
and home equity 80
<PAGE>20
Multi-family construction loans include loans secured by cooperatives and
condominiums. Owner-occupied 1-to-4 family and home equity loans which equal
or exceed 90% LTV at origination must have either private mortgage insurance
or other readily marketable collateral pledged in support of the credit.
On occasion, the Loan Committee may entertain and approve a request to lend
sums in excess of the LTV limits as established by policy, provided that:
a. The request is fully documented to support the fact that other
credit factors justify the approval of that particular
loan as an exception to the LTV limit;
b. The loan, if approved, is designated in the Bank's records and
reported as an aggregate number with all other such loans
approved by the full Board of Directors on at least a quarterly
basis;
c. The aggregate total of all loans so approved, including the
extension of credit then under consideration, shall not exceed
50% of the Bank's total capital; and
d. Provided further that the aggregate portion of these loans in
excess of the LTV limits that are classified as commercial,
agricultural, multi-family or non-1-to-4 family residential
property shall not exceed 30% of the Bank's total capital.
Amortization Schedules. Every loan must have a documented repayment
arrangement. While reasonable flexibility is necessary to meet the credit
needs of the Bank's customers, in general all loans should be repaid within
the following time frames:
Loan Category Amortized Period
Raw Land 10 years
Construction:
Commercial, multi-family, and
other non-residential 20 years
1-to-4 family residential 20 years
Improved Property Farmland 20 years
Owner-occupied 1-to-4 family
and home equity 20 years
The average yield on loans of First Citizens National Bank for the third
quarter of the years indicated is as follows:
1999 - 9.26%
1998 - 9.66%
1997 - 9.70%
1996 - 9.75%
1995 - 9.91%
The aggregate amount of unused guarantees, commitments to extend credit and
standby letters of credit was $57,423,000 as of 9/30/99.
<PAGE>21
The following table sets forth loan totals net of unearned income by category
for the past five years:
September 30 (in thousands)
1999 1998 1997 1996 1995
Real Estate Loans:
Construction $ 32,808 $ 25,232 $ 22,710 $ 16,712 $ 12,330
Mortgage $184,653 $142,281 $138,494 $123,612 $105,640
Commercial, Financial
and Agricultural Loans $ 68,222 $ 77,059 $ 45,592 $ 49,822 $ 50,212
Installment Loans to
Individuals $ 38,462 $ 27,404 $ 25,636 $ 23,290 $ 21,564
Other Loans $ 2,887 $ 2,506 $ 2,195 $ 2,107 $ 2,424
TOTAL LOANS $327,032 $274,482 $234,627 $215,543 $192,170
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 $116,742,000 or 35.69% of the total portfolio are
subject to repricing within one year or carry a variable rate of interest.
The ratio is down from 40.76% at 9/30/98 reflecting efforts of the customer
base to lock in lower interest rates. Maturities in the one to five year
category total $171,322,000, reflecting a slight increase when compared to
$154,012,000 at 9/30/98. The trend exhibited by consumers in recent years to
lock in interest rates is projected to continue.
Due after Due
Due in one one year but after
year or less within five years five years
(in thousands)
Real Estate $43,242 $115,424 $58,795
Commercial, Financial
and Agricultural $36,212 $ 23,606 $ 8,404
All Other Loans $ 7,572 $ 32,292 $ 1,405
TOTAL $87,026 $171,322 $68,684
Loans with Maturities After One Year for which:
(in thousands)
Interest Rates are Fixed or Predetermined $263,828
Interest Rates are Floating or Adjustable $ 29,716
NON-PERFORMING ASSETS
Non-performing assets for 9/30/98, 9/30/97 & 9/30/96 were $1,099,000,
$589,000,000 and $817,000,000 respectively. Total non-performing at quarter
end represents .33% of total loans compared to peer groups ratio of .73%.
Past due loans continue to decline with 90 days or more past due (net of
non-performing) ending September 30 at .13% of total loans. The increase in
loan performance ratios is attributed to the addition of loans acquired in
bank acquisitions and mergers. The increase is perceived to be temporary in
nature as efforts are concentrated in removing these credits from the
portfolio. Watch list loans total $150,583 decreasing $9,477 since prior
quarter from payments applied to debt. Projected chargeoffs for 1999 are
$600,000.
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.
<PAGE>22
For purposes of applying the 90 day due test for the non-accrual of interest
discussed above, the date on which an asset reaches non-accrual status is
determined by its contractual term. A debt is considered well secured if it
is secured (1) by collateral in the form of liens or pledges or real or
personal property, including securities that have a realizable value sufficient
to discharge the debt (including accrued interest) in full, or (2) by the
guaranty of a financially responsible party. A debt is considered to be
proceeding in due course either through legal action, including judgement
enforcement procedures, or, in appropriate circumstances, through collection
efforts not involving legal action which are reasonably expected to result in
repayment of the debt or in its restoration to a current status. Loans that
represent a potential loss to First Citizens are adequately reserved for in
the provision for loan losses.
Interest income on loans is recorded on an accrual basis. The accrual of
interest is discontinued on all loans, except consumer loans, which become 90
days past due, unless the loan is well secured and in the process of
collection. Consumer loans which become past due 90 to 120 days are charged to
the allowance for loan losses. The gross interest income that would have been
recorded for the nine months ending 9/30/99 if all loans reported as non-
accrual had been current in accordance with their original terms and had
been outstanding throughout the period is $15,000. Interest income on loans
reported as ninety days past due and on interest accrual status was $10,000
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 as of September 30, 1999 are 0.
Loans classified by the bank Loan Review Officer and regulatory examiners and
not reported under non-accrual, past due or restructured pose no significant
credit problems. Loan Officers are required to develop a "Plan of Action" for
each problem loan within their portfolio. Adherence to each established plan
is monitored by Loan Administration and reevaluated at regular intervals for
effectiveness.
The following table sets forth the balance of non-accrual loans as of
September 30, for the years indicated:
Non Performing Loans
September 30
(in thousands)
90 Days Past Due
Year Non-Accrual Accruing Interest Total
9/30/99 $ 655 $ 444 $1,099
9/30/98 $ 358 $ 301 $ 659
9/30/97 $ 514 $ 290 $ 807
9/30/96 $1,523 $ 171 $1,694
9/30/95 $ 893 $ 315 $1,208
Loan Loss Experience and
Reserves for Loan Losses
The Loan Loss Reserve Allowance is determined by using a one year actual loss
on credit card and installment loans, making a specific allocation for
impaired loans, using 50% of doubtful loans, 10% of substandard loans, 5% of
watch loans, .75% of other loans not listed previously less SBA/FSA guaranteed
portions and .75% of Letters of Credit. The reserve balance as of quarter end
was determined to be in excess of the 1.00% of total loans required by bank
policy. The reserve balance as of the last analysis performed on August 31,
1999 was 1.23% of total loans. Problem loans at 9/30/99 were $8,536,155
compared to $6,997,000 and $2,708,000 at 9/30/98 and 9/30/97 respectively.
<PAGE>23
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 the risks will cover a
minimum of 70% of the gross portfolio less installment loans. In addition,
any single note or series of notes directly or indirectly related to one
borrower which equals 25% of the bank's legal lending limit will be included
in the annual review.
For analysis purposes, the loan portfolio is separated into four
classifications:
1. Pass - Loans that have been reviewed and graded high quality or no
major deficiencies.
2. Watch - Loans which, because of unusual circumstances, need to be
supervised with slightly more attention than is common.
3. Problem - Loans which require additional collection efforts to
liquidate both principal and interest.
4. Specific Allocation - Loans, in total or in part, in which a future
loss is possible.
Examples of factors taken into consideration during the review are: Industry
or geographic economic problems, sale of business, change of or disagreement
among management, unusual growth or expansion of the business, past due status
of either principal or interest for 90 days, placed on non-accrual or
renegotiated status, declining financial condition, adverse change in personal
life, frequent overdrafts, lack of cooperation by borrower, decline in
marketability or market value of collateral, insufficient cash flow, and
inadequate collateral values.
Identification of impaired loans from non-performing assets as well as
bankrupt and doubtful loans is paramount to the reserve analysis. Special
allocations shall support these loans found to be collateral or interest cash
flow deficient. In addition an allowance shall be determined for pools of
loans including all other criticized assets as well as small homogeneous loans
managed by delinquency. In no circumstance shall the reserve fall below 1% of
total loans less government guarantees. The following is a sample of
information analyzed quarterly to determine the allowance for loan losses.
<PAGE>24
LOAN LOSS ALLOWANCE ANALYSIS
DATE
AVERAGE AVERAGE PERCENT CURRENT RESERVE
LOSS 3 YRS. BALANCE 3 YRS. BALANCE REQUIRED
I. CREDIT $ GROSS $ % $ $
CARDS
II. INSTALL. $ NET $ % $ $
LOANS
III. IMPAIRED WITH ALLOCATIONS $ $
IMPAIRED WITHOUT ALLOCATIONS $ $
ALLOWANCE
IV. DOUBTFUL 50% $ $
SUBSTANDARD 10%
WATCH 5%
OTHER LOANS NOT LISTED PREVIOUSLY .75%
LESS SBA/FMHA GUARANTEED PORTIONS
__________
TOTAL LOANS $
V. LETTERS OF CREDIT .75% $ $
VI. OTHER REAL ESTATE OWNED $
______
RESERVE REQUIRED $
RESERVE BALANCE $
EXCESS (DEFICIT) $
RESERVE AS % OF TOTAL LOANS %
PEER GROUP %
LOSS EXPERIENCE III & IV AVERAGE LAST 3 YEARS
.% OR $
The book value of repossessed real property held by the bank at 9/30/99 was
$283,000. The balance as of 9/30/98 was $131,000. The account balance
consists of property held by First Citizens National Bank in Other Real Estate
Owned account.
Any reduction in value is charged to the allowance for possible loan losses.
All other real estate parcels are appraised annually and the carrying value is
adjusted to reflect the decline, if any, in its realizable value. Such
adjustments are charged directly to expense.
Management=s estimates of approximate charge-offs for period ending 12/31/99:
Domestic Amount (in thousands)
Commercial, Financial & Agricultural $300
Real Estate-Construction 0
Real Estate- Mortgage 0
Installment Loans to individuals & credit cards 300
Lease financing 0
Foreign 0
01/01/99 through 12/31/99 Total $600
<PAGE>25
The following table summarizes the monthly average of net loans outstanding;
changes in the reserve for loan losses arising from loans charged off and
recoveries on loans previously charged off; additions to the reserve which
have been charged to operating expenses; and the ratio of net loans charged
off to average loans outstanding.
First Citizens National Bank
Loan Loss Experience and Reserve for Loan Losses
Quarter ending September 30
(in thousands)
1999 1998 1997 1996 1995
Average Net Loans
Outstanding
Net of ICNE $322,550 $267,955 $231,262 $212,718 $187,478
Balance of Reserve
for Loan Losses
at Beginning of
Period $ 3,878 $ 3,438 $ 2,596 $ 2,359 $ 2,186
Loan Charge-Offs $ (192)$ (166) $ (24) $ (50) $ (80)
Recovery of Loans
Previously
Charged Off $ 126 $ 90 $ 36 $ 39 $ 34
Net Loans Charged Off $ (66)$ (76) $ 12 $ (11) $ (54)
Additions to Reserve
Charged to Operating
Expense $ 122 $ 121 $ 180 $ 163 $ 107
Balance at End of
Period $ 3,934 $ 3,483 $ 2,788 $ 2,511 $ 2,247
Ratio of Net Charge-
Offs during quarter
to Average Net Loans
Outstanding (.02%) (.03%) .005% (.01%) (.029%)
The following table will identify charge-offs by category for the
period ending 9/30/99 and 9/30/98.
Charge-Offs: 1999 1998
Domestic
Commercial, Financial and Agricultural $58 $ 2
Real Estate - Construction 0 0
Real Estate - Mortgage 22 36
Installment Loans to Individuals 73 119
Lease Financing 0 0
Credit Cards 39 9
Total $(192) $(166)
Recoveries:
Domestic:
Commercial, Financial and Agricultural $ 29 $ 47
Real Estate - Construction 0 0
Real Estate - Mortgage 6 4
Installment Loans to Individuals 88 26
Lease Financing 0 0
Credit Cards 3 13
Total 126 90
Net $(66) $(76)
<PAGE>26
Investment Securities
The book value of listed investment securities as of the dates
indicated are summarized as follows:
Composition of Investment Securities
September 30
(in thousands)
1999 1998 1997 1996 1995
U. S. Treasury &
Government Agencies $86,185 $88,559 $61,465 $60,718 $53,336
State & Political
Subdivisions $13,184 $12,330 $ 9,986 $10,807 $10,516
All Others $ 3,153 $ 2,696 $ 2,359 $ 3,457 $ 3,568
TOTALS $102,522 $103,585 $73,810 $74,982 $67,420
The bank's investment portfolio is used 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. Total
Investments as of quarter end are $102,522,000 compared to $103,585,000 and
$73,810,000 for the two previous quarters respectively. Investment Securities
increased significantly in 1998 due to the addition of approximately $23
million acquired in the Bank of Troy acquisition. The Investment Portfolio
consists primarily of Government, Agencies, Mortgage Backs, Remics, CMOS, and
GNMA Pools. The average maturity of the portfolio is 7.38 years and the
average yield is 6.35%. The average life is 4.93 years.
Investment activity during the third quarter was restricted by loan demand in
excess of budget projections. Total purchases for the quarter were only $3
million, while sale from the available-for-sale portfolio were zero. Book value
compared to market value resulted in a negative entry to capital account of
approximately 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 investments be marked up
or down to account for fluctuations in market value created by changes in
interest rates. They effect to capital is temporary if the investments are
held to maturity.
Fixed rate holdings currently have an expected average life of 4.9 years. It
is estimated that this average life would extend to 6.5 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 2.4 years.
In terms of price sensitivity, we estimate that if rates were to increase 100
basis points, market value of the portfolio would fall by 3.8%, while rates
rising 200 basis points would impact the market value by a negative 8.5%.
This is comparable with the price sensitivity of a Treasury bond with a term
of about 5 years. If rates drop 100 basis points, we estimate that the market
value would increase by 4.4%.
<PAGE>27
Adjustable rate holdings reprice on an annual or more frequent basis and
currently have an average life of 5.2 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.
During the quarter just ended there were no transfers between the investment
portfolio accounts. The trading account for the entire quarter maintained a
zero balance.
First Citizens National Bank has not engaged in any Derivative activities as
defined by paragraphs 5 thru 7 of FASB 119 (Reference footnote 7).
The portfolio currently contains the following unrealized gains and unrealized
losses in each investment category:
Investment Securities
Unrealized Gains/(Losses)
September 30, 1999
Unrealized Unrealized Net
Gains Losses Gains/Losses
U.S. Treasury Securities 14 46 (32)
Obligations of U.S. Government
Agencies and Corp 113 2723 (2610)
Obligations of States and
Political Subdivisions 30 282 (252)
Other Securities 0 0 0
Totals 157 3051 (2894)
Maturing and Portfolio Percentages on Securities September 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 %
9/30/99 $ 8,120 7.92% $40,761 39.76% $34,974 34.11% $18,667 18.21%
9/30/98 $17,408 16.81% $36,622 35.35% $33,617 32.45% $15,938 15.39%
9/30/97 $12,557 17.02% $22,042 29.87% $29,558 40.05% $ 9,633 13.06%
9/30/96 $ 7,050 9.41% $37,574 50.11% $21,351 28.48% $ 9,007 12.00%
Maturity and Yield on Securities September 30,
1999 (in thousands)
<TABLE>
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
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and
Government Agencies $ 5,125 6.78% $34,694 6.00% $30,990 6.27% $15,376 6.55%
State and Political
Subdivisions* $ 2,995 6.31% $ 2,914 6.45% $ 3,984 6.56% $ 3,291 6.98%
All Others $ 0 0% $ 3,153 6.64% $ 0 0% $ 0 0%
TOTALS $ 8,120 6.61% $40,761 6.08% $34,974 6.30% $18,667 6.63%
</TABLE>
*Yields on tax free investments are stated herein on a taxable equivalent
basis.
<PAGE>28
Investment Securities
September 30, 1999
(in thousands)
U.S. Treasury Securities $ 0 $ 0 $ 2,029 $ 1,997
U.S. Government agency
obligations (exclude
mortgage-backed securities:
Issued by U.S. Government
Agencies (2) 0 0 22 22
Issued by U. S. Government
Sponsored agencies (3) 17,482 17,103 56,833 54,873
Securities issued by states
and political subdivisions
in the U.S.:
General obligations 2,059 2,058 8,196 7,970
Revenue obligations 1,530 1,526 1,562 1,540
Industrial development and
similar obligations 85 85 0 0
Mortgage-backed securities (MBS):
Pass-through securities:
Guaranteed by GNMA 102 104 3,352 3,284
Issued by FNMA and FHLMC 91 91 6,544 6,359
Other pass-through
Securities 0 0 0 0
Other mortgage-backed securities
(include CMOs, REMICs, and
stripped MBS):
Issued or guaranteed by
FNMA, FHLMC, or GNMA 0 0 1,993 1,975
Collateralized by MBS issued
or guaranteed by FNMA,
FHLMC, or GNMA 0 0 0 0
All other mortgage-backed
securities 0 0 0 0
Other debt securities:
Other domestic debt securities 0 0 0 0
Foreign debt securities 0 0 0 0
Equity securities:
Investments in mutual funds and
other equity securities with
readily determinable fair values 0 0 11 36
All other equity securities (1) 0 0 3,117 3,117
Total (sum of items 1 through 6)
(total of column A must equal
Schedule RC, item 2.a) (total
of column D must equal Schedule
RC, item 2.b) 21,349 20,967 83,659 81,173
(1) Includes equity securities without readily determinable fair values
at historical cost.
(2) Includes Small Business Administration "Guaranteed Loan Pool Certi-
ficates," U. S. Maritime Administration obligations, and Export-
Import Bank participation certificates.
(3) Includes obligations (other than mortgage-backed securities) issued
by the Farm Credit System, the Federal Home Loan Bank System, the
Federal Home Loan Mortgage Corporation, the Federal National Mortgage
Association, the Financing Corporation, Resolution Funding Corporation,
the Student Loan Marketing Association, and the Tennessee Valley
Authority.
<PAGE>29
Return on Equity and Assets
Return on assets is a measurement of Bancshares' ability to maximize asset
utilization. Total assets at 9/30/99 were $473,669,000. 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 systems. 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 and 1999 reflect acquisition cost of
the Bank of Troy, First Volunteer Bank and White and Associates/First Citizens
Insurance Agency. Other costs associated with bank acquisitions affecting
Return on Assets in 1998 and 1999 were increased allocations and to the Loan
Loss Reserve and losses incurred from the sale of investments.
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 9/30/99 was $44,003,000 compared to $39,281,000 at 09/30/98.
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 8,573. Generally accepted accounting
principles impose limitations on the number of shares of treasury stock that
may be purchased by a company within a 24 month period of utilization of
pooling of interest accounting method. The pooling of interests of First
Citizens and First Volunteer limits to 44,500 the number of shares Bancshares
may purchase over a 24 month period beginning January 1, 1999 and ending
December 31, 2000. Year to date purchases prompted the Board of Directors to
allocate the remaining shares available to be purchased to 2,000 per quarter
on a first come first serve basis through December 31, 2000. Based on these
facts, the stock repurchase program is temporarily suspended until accounting
requirements are satisfied. 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 three quarters of 1999 were .1875
cents per share.
<PAGE>30
The table below presents operating YTD ratios for First Citizens Bancshares,
Inc. for the quarter ending September 30 (not annualized):
1999 1998 1997 1996 1995
Percentage of Net Income to:
Average Total Assets .94% .90% .97% .88% .67%
Average Shareholders Equity 10.19% 9.28% 10.17% 9.65% 7.41%
Percentage of Dividends
Declared Per Common Share to
Net Income Per Common Share 47.14% 38.17% 26.09% 24.38% 31.35%
*Percentage of Average
Shareholders' Equity to
Average Total Assets 10.10% 10.50% 10.37% 10.02% 10.09%
*Includes Average Reserve for Loan Loss 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 6.35% to 9.76% including balance
sheet and off balance sheet components. The liquidity ratio as of 9/30/99 was
7.44%. 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 $95,744,000 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 16.15% to 19.11%. The dependency ratio as of 9/30/99 was
20.26%.
Rates paid on the Certificate range from 5.10% to 5.30%. A report of
competitive rates in the Lauderdale County market indicates that a rate as
high as 6.75% being paid on 12 month maturities. Rates in Obion County range
from 5.50% to 6.25% for 12 month maturities. Community Bank Presidents in all
counties reports slow deposit growth for their prespective market areas.
<PAGE>31
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
September 1999
(in thousands)
1999 1998 1997
Fixed Rate Loans > 5 years $43,585 $19,112 $15,724
$2 million matched with FHLB
% of Tier 1
Capital
Exposure - 1999 vs 1998 - Actual Results (185) (0.44%)
Exposure - 1999 vs 1997 - Actual Results ( 42) (0.10%)
Tier 1 Capital $41,984
Policy 2.00%
Projected 12 month exposure Rate Moves % of Tier 1
Net Interest Income Levels in Basis Pts Flat Others Variance Capital
Declining 1 (100) $17,750 $18,241 $491 1.17%
Flat Rate 0 $17,750 $17,941 $191 0.45%
Rising 1 100 $17,750 $17,327 ($423) (1.01%)
Rising 2 200 $17,750 $16,988 ($762) (1.81%)
Notes: The fixed rate loan amounts reflect the demand of customers and
competition. The actual net interest income changes due to interest rate
moves as presented. Projected net interest incomes are presented. They are
derived off various interest rate projections. The last rate scenario
presents the effect to income if rate suddenly rose 300 basis points. The
probability of a quick move of this nature is not likely with sound economic
policies controlling changes in interest that are in place.
<PAGE>32
<TABLE>
<CAPTION>
CONDENSED GAP REPORT
------------------------------------
CURRENT BALANCES
-----------------------------------
09/30/99
(in thousands)
DAILY 0-1 1-2 2-3
TOTAL FLOATING MONTH MONTHS MONTHS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CASH AND DUE FROM
CASH AND DUE FROM 15,028 0 0 0 0
TOTAL CASH & DUE FROM 15,028 0 0 0 0
INVESTMENTS
US TREASURIES 1,997 0 0 0 0
US AGENCIES 82,089 0 91 0 68
VARIABLE AGENCIES 2,099 0 0 1,000 599
MUNICIPALS 13,184 0 330 0 260
EQUITIES 3,153 0 0 0 0
TOTAL INVESTMENTS 102,522 0 421 1,000 927
LOANS
COMMERCIAL FIXED 53,314 0 2,940 1,671 6,722
COMMERCIAL VARIABLE 13,512 13,512 0 0 0
REAL ESTATE-VARIABLE 15,084 15,084 0 0 0
REAL ESTATE FIXED 193,068 0 8,561 4,231 5,191
HOME EQUITY LOANS 8,684 8,684 0 0 0
SEC MORTGAGE 1,151 0 0 0 0
INSTALLMENT LOANS 39,193 0 1,072 709 661
FLOOR PLAN 139 139 0 0 0
CREDIT CARDS 2,353 0 0 0 0
FACTORING REC 85 0 0 0 0
OVERDRAFTS 449 0 0 0 0
TOTAL LOANS 327,032 37,419 12,573 6,611 12,574
LOAN LOSS RESERVE 3,878 0 0 0 0
NET LOANS 323,154 37,419 12,573 6,611 12,574
FED FUNDS SOLD
TOTAL EARNING ASSETS 425,676 37,419 12,994 7,611 13,501
OTHER ASSETS
BUILDING, F&F & LAND 13,101 0 0 0 0
OTHER REAL ESTATE 283 0 0 0 0
OTHER ASSETS 19,581 0 0 0 0
TOTAL OTHER ASSETS 32,965 0 0 0 0
TOTAL ASSETS 473,669 37,419 12,994 7,611 13,501
DEMAND DEPOSITS 38,718 0 0 0 0
TOTAL DEMAND 38,718 0 0 0 0
</TABLE>
<PAGE>33
<TABLE>
<CAPTION>
CONDENSED GAP REPORT
------------------------------------
CURRENT BALANCES
-----------------------------------
09/30/99
(in thousands)
3-6 6-12 1-2 2+
MONTHS MONTHS YEARS YEARS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH AND DUE FROM
CASH AND DUE FROM 0 0 0 15,028
TOTAL CASH & DUE FROM 0 0 0 15,028
INVESTMENTS
US TREASURIES 0 0 1,497 500
US AGENCIES 1,498 1,369 1,226 77,837
VARIABLE AGENCIES 500 0 0 0
MUNICIPALS 120 2,285 801 9,388
EQUITIES 0 0 0 3,153
TOTAL INVESTMENTS 2,118 3,654 3,524 90,878
LOANS
COMMERCIAL FIXED 7,898 9,454 3,222 21,407
COMMERCIAL VARIABLE 0 0 0 0
REAL ESTATE-VARIABLE 0 0 0 0
REAL ESTATE FIXED 12,698 8,176 19,768 134,443
HOME EQUITY LOANS 0 0 0 0
SEC MORTGAGE 0 0 1,151 0
INSTALLMENT LOANS 1,800 3,201 9,519 22,231
FLOOR PLAN 0 0 0 0
CREDIT CARDS 0 0 2,353 0
FACTORING REC 0 0 0 85
OVERDRAFTS 0 0 0 449
TOTAL LOANS 22,396 20,831 36,013 178,615
LOAN LOSS RESERVE 0 0 0 3,878
NET LOANS 22,396 20,831 36,013 174,737
FED FUNDS SOLD
TOTAL EARNING ASSETS 24,514 24,485 39,537 265,615
OTHER ASSETS
BUILDING, F&F & LAND 0 0 0 13,101
OTHER REAL ESTATE 0 0 0 283
OTHER ASSETS 0 0 0 19,581
TOTAL OTHER ASSETS 0 0 0 32,965
TOTAL ASSETS 24,514 24,485 39,537 313,068
DEMAND DEPOSITS 0 0 0 38,718
TOTAL DEMAND 0 0 0 37,718
</TABLE>
<PAGE>34
<TABLE>
<CAPTION>
CONDENSED GAP REPORT
------------------------------------
CURRENT BALANCES
-----------------------------------
09/30/99
(in thousands)
DAILY 0-1 1-2 2-3
TOTAL FLOATING MONTH MONTHS MONTHS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SAVINGS ACCOUNTS
REGULAR SAVINGS 24,021 24,021 0 0 0
NOW ACCOUNT 35,561 35,561 0 0 0
BUSINESS CHECKING 347 347 0 0 0
IMF-MMDA 8,067 8,067 0 0 0
FIRST RATE ACCOUNT 28,743 28,743 0 0 0
DOGWOOD CLUB 10,421 10,421 0 0 0
TOTAL SAVINGS 107,160 107,160 0 0 0
TIME DEPOSITS
CD 1-2 MONTHS 16,165 0 2,477 13,684 0
CD 3 MONTHS 626 0 0 0 626
CD 4-5 MONTHS 16,491 0 0 0 0
CD 6 MONTHS 32,907 0 0 0 0
CD 7-11 MONTHS 11,273 0 21 33 19
CD 12 MONTHS 28,504 0 1,189 1,341 3,420
CD 13-17 MONTHS 32,678 0 1,774 2,925 2,610
CD 18-23 MONTHS 448 0 0 26 5
CD 24 MONTHS 5,670 0 157 347 330
CD 25-30 MONTHS 1,347 0 100 70 8
CD 31-59 MONTHS 9,046 0 100 0 38
CD 31-59 MONTHS VAR. 12 0 0 0 0
CD 60 MONTHS 3,891 0 0 50 32
CD 60 MONTH VAR. 499 0 0 0 0
CD SWEET 16 14,494 0 956 1,033 860
CD 7 MONTH 1,185 0 224 404 317
TROY CD'S 9,015 0 788 1,279 837
IRA FLOATING 92 92 0 0 0
IRA FIXED 24,936 0 1,704 1,307 1,836
CHRISTMAS CLUB 589 0 0 0 0
TOTAL TIME 209,868 92 9,490 22,499 10,938
TOTAL DEPOSITS 355,746 107,252 9,490 22,499 10,938
FED FUNDS PURCHASED 8,875 8,875 0 0 0
TT&L 1,000 1,000 0 0 0
SECURITIES SOLD-SWEEP 14,248 14,248 0 0 0
SECURITIES SOLD-FIXED 7,541 0 1,332 0 0
FHLB-SHORT TERM 7,025 7,025 0 0 0
FHLB-LONG TERM 30,344 0 0 0 7,000
TOTAL SHORT TERM
BORR. 69,033 31,148 1,332 0 7,000
OTHER LIABILITIES 4,887 0 0 0 0
TOTAL OTHER LIAB. 4,887 0 0 0 0
TOTAL LIABILITIES 429,666 138,400 10,822 22,499 17,938
CAPITAL 44,003 0 0 0 0
TOTAL CAPITAL 44,003 0 0 0 0
TOTAL LIAB=S &
CAPITAL 473,669 138,400 10,822 22,499 17,938
GAP (SPREAD) 0 -100,981 2,172 -14,888 -4,437
GAP % TOTAL ASSETS 0 -21.32 0.46 -3.14 -0.94
CUMULATIVE GAP 0 -100,981 -98,809 -113,697 -118,134
CUM GAP % TOTAL ASSETS 0 -21.32 -20.86 -24.00 -24.94
</TABLE>
<PAGE>35
<TABLE>
<CAPTION>
CONDENSED GAP REPORT
------------------------------------
CURRENT BALANCES
-----------------------------------
09/30/99
(in thousands)
3-6 6-12 1-2 2+
MONTHS MONTHS YEARS YEARS
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SAVINGS ACCOUNTS
REGULAR SAVINGS 0 0 0 0
NOW ACCOUNT 0 0 0 0
BUSINESS CHECKING 0 0 0 0
IMF-MMDA 0 0 0 0
FIRST RATE ACCOUNT 0 0 0 0
DOGWOOD CLUB 0 0 0 0
TOTAL SAVINGS 0 0 0 0
TIME DEPOSITS
CD 1-2 MONTHS 0 4 0 0
CD 3 MONTHS 0 0 0 0
CD 4-5 MONTHS 16,491 0 0 0
CD 6 MONTHS 32,907 0 0 0
CD 7-11 MONTHS 4,842 6,358 0 0
CD 12 MONTHS 7,554 13,370 1,630 0
CD 13-17 MONTHS 6,867 15,494 3,008 0
CD 18-23 MONTHS 86 272 59 0
CD 24 MONTHS 749 2,026 2,042 19
CD 25-30 MONTHS 67 265 742 95
CD 31-59 MONTHS 394 5,421 2,682 411
CD 31-59 MONTHS VAR. 12 0 0 0
CD 60 MONTHS 225 417 264 2,903
CD 60 MONTH VAR. 40 20 130 309
CD SWEET 16 3,197 4,789 3,659 0
CD 7 MONTH 215 25 0 0
TROY CD'S 5,413 244 443 11
IRA FLOATING 0 0 0 0
IRA FIXED 6,361 6,970 3,815 2,943
CHRISTMAS CLUB 0 0 589 0
TOTAL TIME 85,420 55,675 19,063 6,691
TOTAL DEPOSITS 85,420 55,675 19,063 45,409
FED FUNDS PURCHASED 0 0 0 0
TT&L 0 0 0 0
SECURITIES SOLD-SWEEP 0 0 0 0
SECURITIES SOLD-FIXED 3,336 2,659 214 0
FHLB-SHORT TERM 0 0 0 0
FHLB-LONG TERM 0 12,000 5,000 6,344
TOTAL SHORT TERM BORR. 3,336 14,659 5,214 6,344
OTHER LIABILITIES 0 1,000 1,491 2,396
TOTAL OTHER LIAB. 0 1,000 1,491 2,396
TOTAL LIABILITIES 88,756 71,334 25,768 54,149
CAPITAL 0 0 0 44,003
TOTAL CAPITAL 0 0 0 44,003
TOTAL LIAB'S &
CAPITAL 88,756 71,334 25,768 98,152
GAP (SPREAD) -64,242 -46,849 13,769 215,456
GAP % TOTAL ASSETS -13.56 -9.89 2.91 45.36
CUMULATIVE GAP -182,376 -229,225 -215,456 0
CUM GAP % TOTAL ASSETS -38.50 -48.39 -45.49 0
</TABLE>
<PAGE>36
NOTES TO THE GAP REPORT
1. The gap report reflects the interest sensitivity positions during
a flat rate environment. These time frames could change if rates
rise or fall.
2. Repricing over-rides maturities in various time frames.
3. Demand deposits, considered to be core, are placed in the last
time frame due to lack of interest sensitivity.
4. Savings accounts, also considered core, are placed into the +2
year time frame. In a flat rate environment, saving accounts
tend not to reprice or liquidate and become price sensitive
only after a major increase in the 6 month CD rate. These
accounts are placed in this category instead of the variable
position due to history and characteristics.
5. Simulations will be utilized to reflect the impact of multiple
rate scenarios on net interest income. Decisions should be made
that increase net interest income, while always considering the
impact on interest rate risk. Overall, the bank will manage the
gap between rate sensitive assets and rate sensitive liabilities
to expand and contract with the rate cycle phase.
Approximately 20% - 30% of our CD customers have maturities of 6
months or less. First Citizens will attempt to minimize
interest rate risk by increasing the volume of variable rate
loans within the portfolio. The bank will attempt
to limit the net interest income exposure to a maximum of 2.00%
of tier I capital. The bank=s Asset/Liability Committee
will attempt to improve net interest income through volume
increases and better pricing techniques. Long term fixed
rate positions will be held to a minimum by increasing variable
rate loans. The over 5 year fixed rate loans should be
held to less than 25% of assets, unless they are funded with
Federal Home Loan Bank matched funds. These maximum limits
are the high points and the ACLO will strive to keep the amount
below this point. The 9/30/99 dynamic gap reports reflects an
exposure of $50,000 to $450,000. (Examples: historical margins
graphed and multiple scenarios reflecting income exposure and as
a percent of tier I capital.
Subsidiaries as well as the Parent Company will adhere to
providing above average margins and reviewing the various
material risks. New products and services will be reviewed for
risk by the Product Development Committee.
6. Bancshares could benefit from a flat or declining rate
environment. If interest rates rise rapidly, net interest income
could be adversely impacted. First Citizens Liquidity could be
negatively impacted should interest rates drop prompting an
increase in loan demand. Adequate lines of credit are available
to handle liquidity needs should this occur.
<PAGE>37
Capital Resources
Total shareholders' equity of First Citizens Bancshares as of September 30,
1999, was $44,003,000. Capital as a percentage of total assets for the
quarter ending September 30, is presented in the following table for the years
indicated (excluding Loan Loss Reserves):
1999 1998 1997 1996 1995
9.28% 9.45% 10.50% 9.94% 9.28%
A decrease in the capital ratio when comparing September 1999 to September
1998 was a result of the following factors: (1) A special dividend of 20
cents per share paid fourth quarter 1998; (2) The cash purchase of Bank of
Troy in 1998; and (3) Mark to market adjustment of Available for Sale
Investments. 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 9/30/99 was 9.28%, 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.
<PAGE>38
Common Stock
Generally accepted accounting principles impose limitations on the number of
shares of treasury stock that may be purchased by a company within a 24 month
period of utilization of pooling of interest accounting method. The pooling
of interests of First Citizens and First Volunteer limits to 44,500 the number
of shares Bancshares may purchase over a 24 month period beginning January 1,
1999 and ending December 31, 2000. Year to date purchases prompted the Board
of Directors to allocate the remaining shares available to be purchased to
2,000 per quarter on a first come first serve basis through December 31, 2000.
Based on these facts, the stock repurchase program is temporarily suspended
until accounting requirements are satisfied.
Effects of Inflation
Inflation has a significant impact on the growth of total assets in the
banking industry, resulting in a need to increase equity capital in order
to maintain an appropriate equity to asset ratio.
Operating expenses are directly affected by increases in salaries and
employee benefits, supplies, legal, audit and professional fees, utilities,
advertising and insurance. Inflation is the major key to the cost of
acquiring and retaining deposits.
A well managed asset/liability management program can maximize net interest
income; and at the same time, reduce the impact of inflation on earnings.
Part II - Other Information
Item 1. Legal Proceedings
There are no legal proceedings that would result in a significant impact to
the bank's financial statement as of this date.
Item 1. Changes in Securities
Dividends paid to Shareholders of First Citizens Bancshares, Inc. are funded
by dividends to the Bank Holding Company from First Citizens National Bank.
Federal Reserve Bank regulators would be critical of a bank holding company
that pays cash dividends not covered by earnings or that are funded from
borrowings or unusual or non-recurring gains, such as the sale of property or
assets. Under rules set forth by the Comptroller of the Currency in
Interpretive Ruling 7.6100, the board of directors of a national bank may
declare dividends as it may judge to be expedient, subject to statutory
limitations which deal with the balance of the surplus account, sufficiency of
net profits, dividend payments on preferred stock, and default of any
assessment due to the Federal Deposit Insurance Corporation. Shareholders
approved an amendment to the Company=s Charter in April 1998 to increase the
number of shares of authorized from 750,000 to 10,000,000. Subsequently, a
4-for-1 stock split was declared which increased shares outstanding from
2,252,754 to 2,324,739.
Item 6(b) No reports on Form 8-K were filed for the quarter ended 9/30/99.
<PAGE>39
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
First Citizens Bancshares, Inc.
(Registrant)
Date: November 15, 1999 /s/Stallings Lipford
Stallings Lipford, Chairman
Date: November 15, 1999 /s/Jeff Agee
Jeff Agee,
Senior Vice President &
Chief Financial Officer
First Citizens National Bank
(Principal Subsidiary)
<PAGE>1
DATA STATED IN THOUSANDS
VOLUNTARY SCHEDULE - CERTAIN FINANCIAL INFORMATION
THIRD THIRD YEAR
REGULATION STATEMENT CAPTION QTR. QTR. TO DATE
1999 1998 1999 1998
5-02 (1) Cash and Cash Items 15028 11618 15028 11618
5-02 (2) Marketable Securities 102522 103585 102522 103585
5-02 (3)(b)(1) Notes Receivable 327032 274482 327032 274482
5-02 (4) Allowance for Doubtful
Accounts 3878 3483 3878 3483
5-02 (15) Total Assets 473669 413367 473669 413367
5-02 (24) Other Liabilities 429666 374317 429666 374317
5-02 (30) Common Stock 3705 3222 3705 3222
5-02 (31)(a)(2) Additional Capital Other 15034 13268 15034 13268
5-02 (31)(a)(3)(ii) Retained Earnings - 25521 24163 25521 24163
Unappropriated
Treasury Stock (257) (59) (257) (59)
5-03 (b)(1)(e) Other Revenues 10542 9006 31245 26168
5-03 (b)(2)(e) Cost of Other Revenues 3974 3303 11886 9805
5-03 (b)(8) Interest and Amortization
of Debt Discount 4192 3955 12568 11319
5-03 (b)(10) Income Before Taxes and
Other Items 2396 1748 6791 5044
5-03 (b)(11) Income Tax Expense 846 586 2351 1696
5-03 (b)(14) Income/Loss from
Continuing Operations 1550 1162 4440 3348
5-03 (b)(19) Net Income or Loss 1550 1162 4440 3348
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