<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, 2000 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
3,716,361 (net of treasury) shares outstanding as of September 30, 2000.
<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,
2000 1999
(Unaudited) (Note)
ASSETS
Cash and due from banks $ 21,638 $ 17,410
Federal funds sold 0 0
Investment securities -
Trading Investments-Stated at Market 0 0
Held to maturity-amortized cost-fair
Value of $17,385 at September 30,
2000 and $19,768 at December 31,
1999. 17,742 20,345
Available for Sale-Stated at Market 80,871 78,792
Loans - (Excluding unearned income of
$1,641 at September 30, 2000
and $2,131 at December 31, 1999) 341,408 325,377
Less: Allowance for loan losses 3,976 3,718
Net Loans 337,432 321,659
Premises and equipment 14,354 13,417
Intangible assets 3,985 4,223
Other real estate 220 476
Other assets 17,698 16,348
TOTAL ASSETS $493,940 $472,670
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $360,437 $366,819
Securities sold under
agreement to repurchase 15,334 22,390
Federal funds purchased
and other short term borrowing 36,150 23,700
Long-term debt 31,514 11,264
Notes payable of employee stock
ownership plan 890 1,117
Other liabilities 3,714 3,700
TOTAL LIABILITIES 448,039 428,990
Stockholders' Equity
Common stock, no par value -
10,000,000 authorized; 3,717,593
issued and outstanding at
September 30, 2000; 3,705,165
issued and outstanding at
December 31, 1999 3,718 3,705
Surplus 15,297 15,034
Retained earnings 29,301 28,298
Obligation of employee stock ownership
plan (890) (1,117)
Net Unrealized Gains(Losses) on
available for sale (1,499) (2,036)
Total Common Stock and Retained
Earnings 45,927 43,884
Less-1,232 Treasury Shares, at Cost
at September 30, 1999 and 6,807
Shares at cost at December 31, 1999 (26) (204)
Total Stockholders' Equity 45,901 43,680
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $493,940 $472,670
NOTE: The balance sheet at December 31, 1999, 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
2000 1999 2000 1999
Interest Income
Interest and fees on loans $ 8,096 $ 7,474 $23,406 $21,814
Interest on investment
securities:
Taxable 1,443 1,472 4,260 4,500
Tax-exempt 168 147 478 467
Other interest income -
Fed Funds Sold 0 7 9 148
Other interest income -
checking 27 7 58 33
Lease financing income 0 0 0 0
Total Interest Income 9,734 9,107 28,211 26,962
Interest Expense
Interest on deposits 3,991 3,417 11,468 10,139
Other interest expense 1,192 775 2,666 2,429
Total Interest Expense 5,183 4,192 14,134 12,568
Net Interest Income 4,551 4,915 14,077 14,394
Provision for loan losses 239 122 620 524
Net interest income after
provision 4,312 4,793 13,457 13,870
Other Income
Securities gains (losses) (19) 0 (19) 95
Other income 1,455 1,455 4,449 4,188
Total Other Income 1,436 1,455 4,430 4,283
Other expenses 4,825 3,852 12,709 11,362
Net income before
income taxes 922 2,396 5,177 6,791
Provision for income
taxes 227 846 1,640 2,351
Net income 695 1,550 3,537 4,440
Earnings per share $ 0.19 $ 0.42 $ 0.95 $ 1.21
Weighted average number of
shares outstanding 3,707,187 3,654,633 3,707,187 3,654,633
<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
2000 1999 1998
Net cash provided by
operating activities $ 3,989 $ 5,347 $ 2,863
Investing Activities
Proceeds of maturities of held to
maturity securities 2,603 6,861 12,119
Purchase of held to maturity
investments 0 (2,500) (15,043)
Proceeds from maturities of available
for sale securities 1,827 10,506 19,887
Proceeds from sales of available for
sale securities 2,714 8,227 10,059
Purchase of available for sale
securities (5,725) (19,200) (59,428)
Increase in Loans-Net (16,393) (20,207) (45,150)
Payment for purchase of Bank of Troy-
Net of cash acquired 0 0 (5,957)
Purchases of premises and equipment (1,974) (2,779) (1,881)
Net cash provided
by investing activities (16,948) (19,092) (85,394)
Financing Activities
Net increase (decrease) in demand
and savings accounts (7,560) (1,036) 18,670
Increase (decrease) in time accounts 1,178 (3,300) 23,722
Increase (decrease) in long-term debt 20,250 7,002 11,844
Treasury stock transactions 180 (128) (52)
Proceeds from sale of common stock 278 450 5,070
Cash dividends paid (2,533) (2,115) (1,278)
Net increase (decrease) in short
term borrowings 5,394 (418) 17,327
Net cash provided (used) by
financing activities 17,187 455 75,303
Increase (decrease) in cash and
cash equivalents 4,228 (13,290) (7,228)
Cash and cash equivalents at
beginning of year 17,410 28,318 18,846
Cash and cash equivalents,
end of year 21,638 15,028 11,618
Cash payments made for interest and income taxes during the years presented are
as follows:
2000 1999 1998
Interest $13,995 $12,948 $11,564
Income Taxes $3,241 $2,142 $ 2,388
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, 2000
Three Months Ended Nine Months Ended
September September
2000 1999 2000 1999
Net Income $ 695 $1,550 $3,537 $4,440
Changes in Available
for Sale Securities 591 (510) 537 (3,288)
Tax Impact (Available
for Sale Securities) (236) 204 (215) 1,315
Comprehensive Income $1,050 $1,244 $3,859 $2,467
<PAGE>7
FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Stated in Thousands)
September 30, 2000
Note 1 - Consolidated Financial Statements
The consolidated balance sheet as of September 30, 2000, the consolidated
statements of income for the nine months ended September 30, 2000, 1999, and
1998, and the consolidated statement of cash flows for the nine months then
ended have been prepared by the company without an audit. The accompanying
reviewed 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, 2000
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, 2000. 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, 1999. 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
2000 1999
Amount Outstanding-End of Period $51,484 $37,688
Weighted Average Rate of Outstanding 6.36% 4.79%
Maximum Amount of Borrowings at Month End $54,600 $38,288
Average Amounts Outstanding for Period $54,554 $34,672
Weighted Average Rate of Average Amounts 6.45% 4.40%
Note 4 - Long-Term Debt
Long term debt is comprised of Federal Home Loan Bank Borrowings, ESOP DEBT and
Finance Company debt. The Finance 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 $29,433 6.02% 3 Years Fixed
Finance Company Debt 1,000 6.00% 5 Years Fixed
ESOP Obligation 920 7.90% 7 Years Monthly
<PAGE>8
FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(IN THOUSANDS)
September 30, 2000
Note 5 - Statement of Cash Flows
September 30,
2000 1999 1998
Actual payments made during the periods:
Interest $13,995 $12,948 $11,564
Income taxes 3,241 2,142 2,388
Note 6 - Contingent Liabilities
There are no material pending litigations as of the current reportable date that
would result in a liability.
Note 7 - Investment Securities
The differences between book values of investment securities and market values
at September 30, 2000 and December 31, 1999, total ($2,498) and ($3,394)
respectively. FASB 115 requires banks to classify securities into held to
maturity, available for sale, and trading. First Citizens has $0 in the Trading
Account. Available for Sale securities values are adjusted to market quarterly
and the adjustments flow to the capital section (net of tax). Held to maturity
securities are stated at amortized cost. Available for sale securities reflect a
$985 decrease for the period ending September 2000 and, net of tax, $591 flowed
to capital. These movements fluctuate with the bond market.
First Citizens engaged in a derivative activity (as defined by FASB 133) for the
reported period ended September 30, 2000. A corporate bond yielding a fixed rate
of 9.74% for 15 years was purchased September 2000. The cash flow of this
instrument was swapped for a variable cash flow stream priced at Libor plus 250
basis points. Our corporation is implementing strategies to reduce our liability
sensitive position for interest rate risk management. This derivative is a cash
flow hedging strategy. There have been no material changes in the fair value of
this derivative since it was implemented September 28, 2000.
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. The
consolidated tier 1 and tier 2 ratio are 12.76% and 13.93% respectively.
Note 9 - Deferred Income Taxes
First Citizens adopted FASB 109 as of January 1, 1993. The deferred tax account
reflects an asset totaling $435. Timing differences mainly consist of Reserve
for Loan Losses.
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, 2000
The following data reflects impaired totals for the reportable periods:
Impaired Loan Balance or Recorded Balance $2,452
Amount of Recorded Balance with Related Allowance $1,714
Amount of Recorded Balance with no Related Allowance $ 738
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 12 - FASB 128 and 129 - Earnings Per Share
First Citizens Bancshares has a simple capital structure, with only common stock
outstanding. The method used for computing the weighted average shares is based
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 13 - 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 14 - FASB 132 - Employers'disclosures about pensions and other
postretirement benefits.
First Citizens and its subsidiaries do not sponsor any defined benefit plans or
postretirement benefits.
<PAGE>10
FIRST CITIZENS BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(IN THOUSANDS)
September 30, 2000
Note 15 - Leveraged ESOP
Origination Date 6-25-98
First Citizens Bancshares guaranteed a loan in the amount of $2 million payable
to Suntrust Bank of Nashville, TN at the rate of Libor plus 1.20 percent.
Repayment terms consists of equal principal payments of $52,000 plus accrued
interest to be paid quarterly, with the first payment commencing July 1998.
Bancshares expects to pay the debt in full within seven years commencing with
the first payment date of July 1998. The source of repayment will be the lead
bank, First Citizens National Bank. First Citizens will record as an expense the
contributions for funding of the payments to the Employee Stock Ownership Plan.
Purpose of the loan was to provide funds for the ESOP to purchase 85,106 shares
of Bancshares stock at market/appraised price of $23.50 (price as of the
transaction date). Shares were issued from unissued shares resulting in recorded
transactions on Bancshares' books of a note payable and a contra equity account
referred to as unallocated ESOP shares. In October 2000, the ESOP also
established an additional line of credit in the amount of $3 million with
Suntrust Bank. The line was established to provide liquidity source, when
necessary, to fund payout obligations in excess of current cash held in the
plan. As of November 14, 2000 no funds had been advanced on the line.
First Citizens National Bank of Dyersburg Employee Stock Ownership Plan and
Trust is considered a money purchase/stock bonus plan. The plan trustee is the
Investment Management and Trust Services Division of First Citizens National
Bank. Eligibility requirements to participate in the plan are to complete one
year of service and attain the age of 21 years. An employee must be employed on
the last day of the calendar year and must have completed 1000 hours of service
to receive a contribution. Each year First Citizens National Bank has
contributed 10% of covered payroll to the money purchase pension plan. A change
to the ESOP document in third quarter 2000 resulted in a contribution of 7% of
covered payroll to the money purchase plan and a contribution of 3% of covered
payroll to a 401K Plan established third quarter 2000. Contributions to the
Stock Bonus Plan are discretionary and have not been utilized in the last
decade. The current ytd ESOP expense is $470 thousand.
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,
2000. 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.
Operations during third quarter were marked by increased funding costs, the
result of a series of interest rate increases which occurred over recent months.
Net interest margins at quarter end were 3.88% as compared to 4.07% one year
ago. The long term impact of rate increases will be modified over time as new
loans are placed in the portfolio which more nearly reflect the current rate
environment. A revised funds management strategy has been adopted which should
serve to moderate the impact to earnings brought about by future rate changes.
<PAGE>11
On July 19, 2000, the Board approved the organization of Nevada I, which is a
corporation organized and existing under the laws of the state of Nevada. The
sole activities of Nevada I are the ownership of stock in Nevada II and the
ownership of certain loans pursuant to a Participation Agreement. Nevada I will
neither own nor lease any tangible property. Nevada I will have an employee
located in the state of Nevada and officers and directors located in the state
of Tennessee. Permission was also granted to organize Nevada II, which is also a
corporation organized and existing under the laws of the state of Nevada. Nevada
II board of directors will consist of three persons, two Tennessee residents and
one Nevada resident. All board meeting will held in Las Vegas, Nevada. The
principal activity of Nevada II will be to acquire and sell investment
securities as well as collect the income from the portfolio. The sole purpose
will be to transfer the bank's investment activity to the Nevada II Corporation.
First Citizens National Bank income is projected to increase in excess of
$300,000 the first year of operations. In conjunction with the Nevada
Corporation and transfer of the investment portfolio, First Tennessee will
assume management of the portfolio. As a result, appropriate changes were made
to the Investment Management Policy. These changes are detailed in the section
labeled Investment Securities.
Net income for the quarter was further reduced by one-time payouts to two
individuals choosing to exercise contract options available as a result of
recent merger activity. Total payout exceeded $800,000.00 and represented the
extent of First Citizens' contract liability to employees of the merged bank.
Net income for the quarter ended September 30, 2000 and 1999 was $695 and
$1,550,000, resulting in earnings per common share of $0.19 and $0.42. Year to
date net income for 2000 decreased from $4,400,000 to $3,537,000, a 20.34%
decrease when compared to the same period in 1999, resulting in a decrease per
common share from $1.21 and $0.95 for 2000 and 1999 respectively.
Year to date returns on average assets and equity are .98% and 10.53%
respectively, compared to 1.27% and 13.62% for the same period in 1999. Both
performance ratios are earnings driven and, as a result, reflect the impact of
the contract options paid out during the third quarter as well as the pressures
that exist throughout the financial services industry.
As a whole, the banking industry has enjoyed record growth and profits over
recent years but now finds itself immersed in a period of adjustment. The
management team of First Citizens will use this period to rethink strategies,
adjust processes and explore opportunities to increase both income and assets.
We will focus on improving delivery of products and services to our customer
base as well as developing new and better products made possible through changes
in technology.
Asset growth for the twelve months ending 09/30/00 was 4.28%, slightly less than
the 4.5% reflected since year-end, 1999. Total loans were $341,408,000 and
$327,032,000 for the periods ending September 30, 2000 and 1999 respectively.
Loan growth during this period has been suppressed by a general slowing of the
economy and more specifically by continued pressures experienced by the
agricultural community. Low commodity prices and limited amounts of rainfall
throughout the area again present a profitable challenge as farmers complete the
current harvest season.
Asset quality remains high, with bankruptcy emerging as a key component to the
strength and quality of First Citizens underwriting standards. The risk in this
area will ultimately be tested by the endurance of both local and national
economies. Third quarter internal loan review report indicates that the loan
portfolio is in good condition based on the percentage of problem loans to gross
capital funds as of September 30, 2000. Total non-performing loans at 9/30/00
were 1.11% of the loan portfolio compared to .63% for peer group average
reported 6/30/00. Loans belonging to three agricultural borrowers added
approximately $2.6 million to the year to date non-performing loan total. For
further discussion of the loan portfolio refer to the section labeled
Composition of Loans.
<PAGE>12
Deposit growth has remained relatively flat increasing 1.32% to $360,437,000 at
9/30/00 compared to $355,746,000 at 9/30/99. The new "Wall Street Checking"
account introduced during third quarter is designed to support efforts to grow
the deposit base. This account combines benefits of unlimited checking and
earning rates competitive with those paid by brokers. The management of
liquidity needs has evolved as a major challenge to community banks. Making the
right investment choices, identifying and utilizing funding sources that impose
the least risk to First Citizens asset/liability management process and finding
creative ways to induce deposit growth will ensure our continued success as an
independent community bank.
Shareholder's equity at September 30, 2000 was $45,901,000, an increase of 4.28%
from $44,003,000 at September 30, 1999. Dividends to shareholders were increased
20% from the same period one year ago, paying .675 cents per share compared to
.563 cents per share the first three quarters of 1999. The number of shares
outstanding at September 30, 2000 was 3,717,593. The Dividend Reinvestment
Program was suspended after twelve years with payment of the June 15, 2000
dividend. The decision to suspend the program resulted from the inability to
purchase shares in the market place to support the needs of Dividend
Reinvestment. The Board determined that issuing new shares to fund the program
was not in the best interest of shareholders.
On July 19, 2000, the Board approved to reduce the ESOP Money Purchase
contribution from 10% to 7% and implement the Safe Harbor 401(K) effective
October 1, 2000. The 3% safe harbor contribution would be made for the last
quarter of 2000. For 15 years, 10% of total compensation of each qualified
employee has been contributed to the ESOP. These contributions were invested
almost totally in First Citizens Bancshares Stock. Over the past two years the
overall market in bank stocks has declined and as a result the performance of
our ESOP has been less impressive. These circumstances emphasize the need to
diversify the investment of employee retirement dollars.
During June, the Super Money Market Branch located inside the Kroger Supermarket
on Highway 78 was closed. Significant effort was expended to redirect customers
to other branches, with focus being on our new Green Village Office. The Super
Money Market office has for a number of years evolved to be a paying and
receiving station. Net losses continued to increase, with budget projections for
the current year at (-)$195,000. Monthly costs on a lease negotiated with NBC in
1986, increased with each renewal at five-year intervals, and are currently more
than twice the rental rate for comparable space in the Dyersburg area. Our
commitment on the current renewal period will expire in May of 2002. At that
time monthly lease payments will cease and the property will be released to
Kroger Company. The newly constructed 6400 square foot facility at Green Village
is designed to generate and service a much larger customer base than currently
exists. The addition of a commercial lender to staff, a small business center
designed to focus on the needs of local business and a full service postal
facility lay the groundwork for growth and development at this location.
First Citizens continues to take an aggressive approach to meeting customer
demands for internet based banking services. Testing of the nBusiness internet
based cash management application was suspended during third quarter due to
flaws in the application. A new nBusiness product is in the development phase.
Testing is projected to resume during the first half of 2001. The bank's Small
Business Center located at the Green Village Office will also support internet
based financial support services, such as development of a small business
financial plan, payroll and marketing. A focus on developing the Small Business
segment of our customer base has been significantly enhanced by the introduction
of a trio of Internet products that promote as "Surf Locally, Shop Locally"
theme. A web page development service, the ability to be a part of a virtual
Internet Mall and the introduction of First Citizens as an ISP provider will
place our organization well above the competition in this business segment.
<PAGE>13
The Gramm-Leach-Bliley Act, referred to as "Financial Modernization" was signed
into law November 12, 1999. The Act is the most significant piece of legislation
to be enacted in the last 50 years and is expected to dramatically change the
landscape of the financial services industry. In essence, the Act is a
conglomeration of numerous provisions that impact a broad range of issues within
the banking industry. Financial Modernization will pave the way for a new era in
banking.
The Act contains seven titles, each of which focuses on a different aspect of
the financial services industry. An overview of the Act can be summarized using
the following points:
o Removes barriers between insurance, banks, and securities by allowing these
entities to merge and sell each other's products under a holding company
structure with some exceptions.
o Reasserts the supremacy of state regulation of the business of insurance with
specific exceptions.
o Prohibits companies outside the financial services industry to purchase
(merge/affiliate) with insurers, banks, and/or securities firms.
o Allows banks to sell insurance and securities products as long as it discloses
to the purchasers that these products are not guaranteed by the Federal
Deposit Insurance System.
o Prohibits banks from tying the purchase of insurance and securities products
as conditions for loan approvals.
o Permits affiliated companies to share customers' personal data with each other
but gives the customer the right to prohibit the sharing of this data with
companies outside the holding company structure.
o Allows states to preempt federal laws that offer greater privacy protections
than those included in the Financial Services Modernization Act.
o Requires states to enact uniform laws and regulations governing the licensure
of individuals and entities authorized to sell and solicit the purchases of
insurance within and outside a state.
What does this mean for First Citizens? It means that First Citizens Bancshares,
Inc. has requested and been granted approval from the Federal Reserve Bank of
St. Louis to change its' Bank Holding Company status to a financial holding
company effective June 8, 2000. As a financial holding company, Bancshares may
engage in any type of financial activity, including any type of insurance or
securities activity, or become affiliated with any type of financial company. A
Financial Holding Company is subject to the same regulations as other bank
holding companies, including reporting, examination, supervision, and
consolidated capital requirements imposed by the Federal Reserve Board. There
are however, ways in which an FHC will be regulated differently than other bank
holding companies, including the conditions it must satisfy to be an FHC; and
the reduced requirements regarding notice and prior approval that will apply
when the company commences new activities or new affiliations. A second change
will be increased competition as large-scale independent investment bankers
(brokerage firms, insurance companies, mutual funds) are likely to begin
offering banking services in offices nationwide. The good news is, our focus on
diversification has placed the Company in a position to compete by offering the
same products and services at convenient locations by a staff our customers know
and trust. Through utilization of technology, we offer the same sophisticated
services as larger banks with offices nationwide. One example is our Internet
Banking Account that has drawn rave reviews from existing and new customers.
Customers of First Citizens Financial Plus have access to on-line trading and
White and Associates/First Citizens Insurance has established a web presence
that will progress toward on-line insurance sales.
<PAGE>14
Overall, opportunities available as a result of the new legislation are a plus
for community banks. Increased competition that is sure to develop from giant
financial services organizations simply means we will work harder to earn the
business of our customers. As community bankers, we recognize that bigger does
not always mean better, and knowing our customers affords us a tremendous
advantage as we strive to identify and serve their financial needs.
First Citizens intends to pursue challenges and opportunities presented by
"Financial Modernization". We have made the choice to compete and will do so in
an aggressive manner. We intend to maximize our potential for success as we
focus on the following:
o Market Awareness - Business decisions will be driven by a clear
understanding of the financial needs of existing and potential customers, a
focus on enhancing our ability to serve those needs and an awareness of
changes which might impact either or both.
o Strategic Planning - Establishing a clear direction for the future of First
Citizens, understanding what must be done to accomplish established goals
and recognizing signs that might indicate a need to rethink the strategy
are key components of the Plan. The management team, acting under guidance
of a diverse and committed Board of Directors is positioned to execute a
well thought out Strategic Plan.
o Technology Utilization - Automated customer information systems, electronic
banking and remote distribution of services are as available to First
Citizens as to the largest bank in America. We are committed to investing
resources in a manner that will allow us to remain competitive as the
information age continues to grow and mature.
o Staff Development - There is no one element within an organization more
important to success than is the quality of staff. In spite of automation
and the efficiencies of outsourcing, community banks still need
people. In response, a formalized Staff Development program was
introduced in 1999, which will support and enhance the quality of current
and future management of First Citizens at all levels. Recognizing
leadership skills, enhancing abilities through training and supporting
realistic career goals are primary objectives of this ongoing process.
The likely focus of the immediate future in this industry is the convergence of
financial services. Our emphasis on diversification in recent years has placed
First Citizens in the enviable position of being able to effectively compete in
this new environment.
Our strategy going forward into 2001 will be proactive. An all out effort will
be made to identify weaknesses in current systems, seek out new growth
opportunities and develop sound business strategies that will bring value to our
investors. We have employed a consulting firm to review and analyze each and
every process within the operating structure of First Citizens. Our ultimate
goal will be the development of a business culture that places service to our
customers above all else. Processes which directly serve the customer will be
identified and separated from back office activity that supports this effort.
The sales culture within our organization will continue to be a primary focus
and will be expanded by enhancement of a current Business Development Program to
include a formalized plan for involvement of each Director and Advisory Board
member in all markets.
<PAGE>15
The following table compares year to date non-interest income and expense of
First Citizens as of September 30, 2000, 1999, and 1998:
Non-Interest Income
(in thousands)
Sept. 30 Sept. 30 Sept. 30
2000 % of Change 1999 % of Change 1998
Service Charges on
Deposit Accounts $1,958 10.30% $1,775 31.28% $1,352
Trust Income $ 618 (6.50)% $ 661 18.24% $ 559
Other Income $1,854 .87% $1,838 40.41% $1,309
TOTAL NON-INTEREST INCOME $4,430 3.64% $4,274 32.73% $3,220
Total non-interest income increased 3.64% and 32.73% when comparing 2000 to and
1999 and 1998. The increase reflects a continued focus on fee income and the
bank's commitment to diversifying the income stream. Service Charges on Deposit
Accounts, which includes income from overdraft fees was up 10.30% when compared
to September 30, 1999. Sales in Broker Services and Insurance, reflective of the
bank's referral and sales program, resulted in a slight increase in Other
Income. Referrals resulting in closed sales increased 46% when comparing the
first three quarters of 2000 to 1999. Income received from Investment Management
and Trust Services was down 6.50% from last year. A large portion of fee income
in this area is calculated as a percent of portfolio market value. The
volatility in the financial markets has resulted in a decrease in market value
of many investment portfolios, thus negatively impacting derived income in this
area.
Non-Interest Expense
(in thousands)
Sept. 30 Sept. 30 Sept. 30
2000 % of Change 1999 % of Change 1998
Salaries and Employee
Benefits $6,674 3.82% $ 6,428 23.28% $5,214
Net Occupancy Expense $2,129 9.23% $ 1,949 29.41% $1,506
Other Operating Expense $3,906 30.85% $ 2,985 22.03% $2,446
TOTAL NON-INTEREST EXPENSE $12,709 11.85% $11,362 23.95% $9,166
Non-interest expense increased slightly to $12,709,000 in 2000 from $11,362,000
in 1999 reflecting ongoing efforts to monitor and control expense categories
such as salaries and benefits, net occupancy expense and other operating
expense. A comparison of staffing levels reveals that First Citizens maintains
one fulltime equivalent employee for every 2.4 million in assets. Peer banks
ratio as of 9/30/00 was 2.61 million dollars in assets per employee. Unlike most
peer banks, First Citizens maintains an Investment and Trust Services Division,
Brokerage Firm, Agricultural and Mortgage Lending Department, and a Finance
Company. Each of these entities adds additional staff, as does the extended
banking hours on Thursday, Friday, and Saturday. First Citizens is committed to
attracting and retaining well qualified personnel by offering salaries and
employee benefits which equal or exceed peer companies, paying bonuses when
productivity standards are met, and enhancing career opportunities by promoting
from within when possible.
<PAGE>16
Fulltime equivalent employees were 193 at 9/30/00 down from 207 at 6/30/99.
First Volunteer acquisition (21), Opening of Delta Finance II (2), and employees
hired to establish brokerage and mortgage lending service in Obion and
Lauderdale Counties (3) Electronic Banking/Call Center (3) increased FTE
approximately 30 employees in 1999. The opening of the new Green Village
facility, designed to generate and service a much larger customer base,
increased FTE by three employees with the addition of a Commercial Loan Officer,
Post Office employee and another Customer Service Representative.
Technology investments resulted in an increase in computer expense and the
related depreciation to those investments. Net occupancy and other operating
expense increased 9.23% and 30.85% respectively when compared to 9/30/99. In
2000, a focus on developing the Small Business segment of our customer base has
been significantly enhanced by the introduction of a trio of Internet products
that promote as "Surf Locally, Shop Locally" theme. A web page development
service, the ability to be a part of a virtual Internet Mall and the
introduction of First Citizens as an ISP provider will place our organization
well above the competition in this business segment. Installation of a Wide Area
Network was completed the last half of 1998. Other investments in technology
related equipment were the purchase and installation of computer related wiring
and equipment associated with bringing Bank of Troy and First Volunteer computer
systems online with those of First Citizens National Bank. Net occupancy expense
is projected to continue to increase as technology is installed to meet the
needs of our customer base. These costs will be offset in part by the
reallocation of employees to fee income producing positions. Other operating
expense increased in 1999 due to organizational cost associated with the
Insurance Agency, Bank of Troy and First Volunteer acquisitions.
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)
2000 1999 1998
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
Non-Interest
Bearing Demand
Deposits $ 38,144 0.00% $ 38,413 0.00% $ 32,747 0.00%
Savings
Deposits $110,312 2.91% $110,888 2.86% $ 95,597 3.26%
Time Deposits $210,803 6.04% $209,124 5.01% $178,169 5.66%
TOTAL DEPOSITS $359,259 4.44% $358,425 3.81% $306,513 4.31%
Deposits have remained flat reflecting an increase of only .23% when comparing
6/30/00 to the same period in 1999. Deposit growth in 1999 was 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.
<PAGE>17
Non-interest bearing and savings deposits decreased slightly from 1999 while
time deposits experienced an increase of less than one percent. Retention of
savings and time deposits continues to be a challenge with increased competition
by brokerage firms, insurance companies and other financial service providers.
The company's market place is considered highly competitive, with a fairly
sophisticated customer base. According to a market share analysis, Bancshares
holds approximately 54% of bank deposits domiciled in Dyer County. First
Tennessee Bank holds 21%, Union Planters National Bank 12%, Security Bank 15.5%
and City State Bank 2%. 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 aggressive in seeking new deposit
dollars with advertising programs that offers rates on certificates of deposits
in excess of 7 percent and above in some market areas. First Citizens holds in
excess of 15% of total deposits in Obion County and 4% 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 of 1999, 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. It is presently more cost
effective and efficient to borrow wholesale funds which can be earmarked for a
specific dollar amount and allow for a more precise management of maturities.
Therefore, aggressive pricing of deposits is based on total customer
relationship, and in some cases, high volume deposits. The new "Wall Street
Checking" account was introduced during the third quarter 2000. This innovative
checking account product was designed to support efforts to grow the deposit
base by combining the benefits of unlimited checking and earning rates
competitive with those paid by brokers. Rate of interest paid on the Wall Street
Checking Account has been 5.75% since inception date.
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 9/30/00 was 10.47% slightly above the
bank's policy range of 6.06% to 9.24%. 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 9/30/00 was
24.96% slightly above the maximum policy range of 24.65%.
Sweep accounts totaling $8.2 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.
<PAGE>18
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, 2000.
Maturity Distribution of Time Deposits
In Amounts of $100,000 Or More As Of September 30, 2000
(in thousands)
Maturity Total Amount
3 months or less $31,856
3 through 12 months $33,698
1 year through 3 years $ 6,383
over 3 years $ 230
Total $72,167
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, 8.98% reflects a slight increase compared to 8.60% at September
30, 1999. Interest earning assets at quarter end were $437,113,000 compared to
$426,890,000 and $363,510,000 at quarter end 1999 and 1998 respectively. The
average rate on interest bearing liabilities was 5.11%, 4.31% and 4.90% as of
quarter end of each year under discussion. Total interest bearing liabilities
was $405,102,000, $387,833,000 and $322,933,000 for September 30, 2000, 1999,
and 1998, respectively. A primary objective of the Asset Liability Committee is
maintaining interest rate margins that are consistent with projected
profitability ratios. Net yield on average earning assets was 4.24%, 4.68% and
4.48%. 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. In a rising rate environment,
the competition for deposit dollars increases and outflow to mutual funds,
brokered CD's and other non-traditional investments increases. 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. 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>19
<TABLE>
First Citizens National Bank
Quarter Ending September 30
Monthly Average Balances and Annualized Interest Rates
(in thousands)
2000 1999 1998
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)
and Leases $336,176 $8,096 9.63% $322,550 $7,474 9.26% $267,955 $6,474 9.66%
Investment
Securities:
Taxable $ 87,716 $1,443 6.58% $ 89,900 $1,461 6.50% $ 82,651 $1,335 6.46%
Tax Exempt (4) $ 11,513 $ 254 8.82% $ 13,380 $ 226 6.76% $ 11,974 $ 204 6.81%
Interest Earning
Deposits $ 1,708 $ 27 6.32% $ 500 $ 7 5.64% $ 741 $ 6 3.24%
Federal Funds
Sold and Securities
Purchased Under
an Agreement
to Resell $ 0 $ 0 0.00% $ 560 $ 7 5.00% $ 189 $ 3 6.35%
Total Interest
Earning Assets $437,113 $9,820 8.98% $426,890 $9,175 8.60% $363,510 $8,022 8.83%
NON-INTEREST
EARNING ASSETS:
Cash and Due
From Banks $ 20,306 $ 0 0.00% $ 12,646 $ 0 0.00% $ 9,213 $ 0 0.00%
Bank Premises and
Equipment $ 14,407 $ 0 0.00% $ 13,197 $ 0 0.00% $ 9,279 $ 0 0.00%
Other Assets $ 21,146 $ 0 0.00% $ 20,392 $ 0 0.00% $ 14,983 $ 0 0.00%
Total Assets $492,972 $ 0 0.00% $473,125 $ 0 0.00% $396,985 $ 0 0.00%
LIABILITIES AND
SHAREHOLDERS'
EQUITY:
INTEREST BEARING
LIABILITIES:
Savings Deposits $110,312 $ 804 2.91% $110,888 $ 794 2.86% $ 95,597 $ 779 3.26%
Time Deposits $210,803 $3,187 6.04% $209,124 $2,623 5.01% $178,169 $2,520 5.66%
Federal Funds
Purchased and
Other Interest
Bearing
Liabilities $ 83,987 $1,192 5.67% $ 67,821 $ 759 4.71% $ 49,167 $ 656 5.34%
Total Interest
Bearing
Liabilities $405,102 $5,183 5.11% $387,833 $4,176 4.31% $322,933 $3,955 4.90%
NON-INTEREST
BEARING
LIABILITIES:
Demand Deposits $ 38,138 $ 0 0.00% $ 38,413 $ 0 0.00% $ 32,747 $ 0 0.00%
Other Liabilities $ 3,830 $ 0 0.00% $ 2,876 $ 0 0.00% $ 3,304 $ 0 0.00%
Total Liabilities $447,070 $ 0 0.00% $429,122 $ 0 0.00% $358,984 $ 0 0.00%
SHAREHOLDERS'
EQUITY $ 45,902 $ 0 0.00% $ 44,003 $ 0 0.00% $ 38,001 $ 0 0.00%
TOTAL LIABILITIES
AND SHAREHOLDERS'
EQUITY $492,972 $ 0 0.00% $473,125 $ 0 0.00% $396,985 $ 0 0.00%
NET INTEREST
INCOME $ 0 $4,637 0.00% $ 0 $4,999 0.00% $ 0 $4,067 0.00%
NET YIELD ON
AVERAGE EARNING
ASSETS(ANNUALIZED)$ 0 $ 0 4.24% $ 0 $ 0 4.68% $ 0 $ 0 4.48%
</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>20
COMPOSITION OF LOANS
The loan portfolio is First Citizens largest earning asset. Total loans as of
9/30/00 were $341,048,000 compared to $327,032,000 at September 30, 1999. Loans
acquired in the merger and acquisition added approximately $58 million to the
loan portfolio in 1999. Real estate mortgage loans comprise over 69% of total
loans. 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 36% of total portfolio
compared to 35% in 1999. 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. New housing starts year-to-date 2000 totaled 43 in
Dyersburg and 82 in Dyer County, down from prior year as a result of the rising
rate environment experienced in the latter part of 1999 and the first half of
2000. 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, 2000 was 5.6% compared to State
of Tennessee rate of 3.8% and National (U.S.) rate of 3.9%. This rate is down
slightly from 5.9% at prior quarter end. Dyer County's unemployment rate
remained at 5.9% the first two quarters due to the closing of a local
warehousing and distribution facility in January 2000. The unemployment rate for
Obion County was 4.5% and Lauderdale County rate was 5.2%. Total problem loans
are up 1.5% for the quarter but down 4.2% when compared to 9/30/99.
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 $30.6 million or 8.96% of
total loans. Agricultural credit 90 days or more past due, total $1,121,634 or
.32% 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 and 2000 crop years. 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>21
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. Past due consumer loan total was
$1,194,000 or .34% of total loans.
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>22
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:
2000 - 9.63%
1999 - 9.26%
1998 - 9.66%
1997 - 9.70%
1996 - 9.75%
The aggregate amount of unused guarantees, commitments to extend credit and
standby letters of credit was $51,530,000 as of 9/30/00.
<PAGE>23
The following table sets forth loan totals net of unearned income by category
for the past five years:
September 30 (in thousands)
2000 1999 1998 1997 1996
Real Estate Loans:
Construction $ 33,938 $ 32,808 $ 25,232 $ 22,710 $ 16,712
Mortgage $201,856 $184,653 $142,281 $138,494 $123,612
Commercial, Financial
and Agricultural Loans $ 64,404 $ 68,222 $ 77,059 $ 45,592 $ 49,822
Installment Loans to
Individuals $ 38,009 $ 38,462 $ 27,404 $ 25,636 $ 23,290
Other Loans $ 3,201 $ 2,887 $ 2,506 $ 2,195 $ 2,107
TOTAL LOANS $341,408 $327,032 $274,482 $234,627 $215,543
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 $164,602,000 or 48.21% of the total portfolio are subject to
repricing within one year or carry a variable rate of interest. The ratio is up
from 35.69% at 9/30/99 reflecting efforts of the customer base to lock in lower
interest rates. Maturities in the one to five year category total $143,218,000,
reflecting a slight decrease when compared to $171,322,000 at 9/30/99. 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 $ 72,291 $ 96,345 $67,158
Commercial, Financial
and Agricultural $ 35,009 $ 24,500 $ 4,895
All Other Loans $ 18,535 $ 22,373 $ 302
TOTAL $125,835 $143,218 $72,355
Loans with Maturities After One Year for which:
(in thousands)
Interest Rates are Fixed or Predetermined $176,806
Interest Rates are Floating or Adjustable $ 38,767
NON-PERFORMING ASSETS
Non-performing loans for 9/30/00, 9/30/99 and 9/30/98 were $3,739,000,
$1,099,000, and $589,000,000 respectively. Total non-performing at quarter end
represents 1.11% of total loans compared to peer group ratio of .63%. Loans
belonging to only three agricultural borrowers added approximately $2.6 million
to the non-performing loan total during the 2nd quarter. Total non-performing
loans at 9/30/99 represent .33% of total loans compared to peer group ratio of
.73%. Non-accrual loan total at 9/30/00 increased to $1,842,960 from $654,669 at
9/30/00.
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>24
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 9/30/00 if all loans reported as non-accrual had been current
in accordance with their original terms and had been outstanding throughout the
period is $134,000. Interest income on loans reported as ninety days past due
and on interest accrual status was $135,000 for year-to-date 2000. 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,
2000 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
9/30/00 $1,862 $1,877 $3,739
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
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. During the quarter just ended activity to the Reserve
Account consisted of (1) loan charge-offs - $249,000 (2) recovery of loans
previously charged off - $88,000 and (3) additions to Reserve - $239,000.
Recovery of loans previously charged off continues to be a priority to the bank
to the bank. One full-time employee is assigned the responsibility for recovery
of charged off loans and deposit overdrafts. The Reserve for Loan Losses Balance
at quarter end was $3,976,000 or 1.18%. Bank policy mandates a reserve balance
equal to one percent of total loans. Projected charge-offs for the year 2000 are
approximately $800,000.
<PAGE>25
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 and 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.
3. 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>26
LOAN LOSS ALLOWANCE ANALYSIS
DATE
AVERAGE AVERAGE PERCENT CURRENT RESERVE
LOSS 3 YRS. BALANCE 3 YRS. BALANCE REQUIRED
I. CREDIT $ GROSS $ % $ $
CARDS
II. INSTALL. $ NET $ % $ $
LOANS
III. IMPAIRED WITH ALLOCATIONS $ $
IMPAIRED WITHOUT ALLOCATIONS $ $
ALLOWANCE
IV. DOUBTFUL 50% $ $
SUBSTANDARD 10%
WATCH 5%
OTHER LOANS NOT LISTED PREVIOUSLY .75%
LESS SBA/FMHA GUARANTEED PORTIONS
----------
TOTAL LOANS $
V. LETTERS OF CREDIT .75% $ $
VI. OTHER REAL ESTATE OWNED $
------
RESERVE REQUIRED $
RESERVE BALANCE $
EXCESS (DEFICIT) $
RESERVE AS % OF TOTAL LOANS %
PEER GROUP %
LOSS EXPERIENCE III and IV AVERAGE LAST 3 YEARS
.% OR $
The book value of repossessed real property held by the bank at 9/30/00 was
$220,000. The balance as of 9/30/99 was $283,000. Accounting for adjustments to
the value of Other Real Estate Owned when recorded subsequent to foreclosure is
accomplished on the basis of an independent appraisal. The asset is recorded at
the lesser of its appraised value or the loan balance.
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 12/31/00:
Domestic Amount (in thousands)
Commercial, Financial and Agricultural $200
Real Estate-Construction 0
Real Estate- Mortgage 200
Installment Loans to individuals and credit cards 400
Lease financing 0
Foreign 0
01/01/00 through 12/31/00 Total $800
<PAGE>27
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)
2000 1999 1998 1997 1996
Average Net Loans
Outstanding
Net of ICNE $336,176 $322,550 $267,955 $231,262 $212,718
Balance of Reserve
for Loan Losses
at Beginning of
Period $ 3,898 $ 3,878 $ 3,438 $ 2,596 $ 2,359
Loan Charge-Offs $ (249) $ (192)$ (166) $ (24) $ (50)
Recovery of Loans
Previously
Charged Off $ 88 $ 126 $ 90 $ 36 $ 39
Net Loans Charged Off $ (161) $ (66)$ (76) $ 12 $ (11)
Additions to Reserve
Charged to Operating
Expense $ 239 $ 122 $ 121 $ 180 $ 163
Balance at End of
Period $ 3,976 $ 3,934 $ 3,483 $ 2,788 $ 2,511
Ratio of Net Charge-
Offs during quarter
to Average Net Loans
Outstanding (.04%) (.02%) (.03%) .005% (.01%)
The following table will identify charge-offs by category for the period ending
9/30/00 and 9/30/99.
Charge-Offs: 2000 1999
Domestic
Commercial, Financial and Agricultural $13 $58
Real Estate - Construction 0 0
Real Estate - Mortgage 61 22
Installment Loans to Individuals 148 73
Lease Financing 0 0
Credit Cards 27 39
Total $(249) $(192)
Recoveries:
Domestic:
Commercial, Financial and Agricultural $ 12 $ 29
Real Estate - Construction 0 0
Real Estate - Mortgage 1 6
Installment Loans to Individuals 69 88
Lease Financing 0 0
Credit Cards 6 3
Total 88 126
Net $(161) $(66)
<PAGE>28
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)
2000 1999 1998 1997 1996
U. S. Treasury and
Government Agencies $82,824 $86,185 $88,559 $61,465 $60,718
State and Political
Subdivisions $10,399 $13,184 $12,330 $ 9,986 $10,807
All Others $ 5,390 $ 3,153 $ 2,696 $ 2,359 $ 3,457
TOTALS $98,613 $102,522 $103,585 $73,810 $74,982
A major function of the bank's investment portfolio is to maximize returns from
investments while controlling the basic elements of risk. The second goal is to
provide liquidity and meet financial needs of the community. Investment
Securities also serve as collateral for government and public fund deposits.
Total Investments as of 9/30/00 are $98,613,000 compared to $102,522,000 and
$103,585,000 for 9/30/99 and 9/30/98 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 6.66 years and the average yield is
6.45%. The average life is 5.82 years.
Total purchases for the quarter were $5.7 million, while sales from the
available-for-sale portfolio were $4.5 million. Book value compared to market
value resulted in a positive entry to capital account of approximately $591
thousand 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 5.5 years. It is
estimated that this average life would extend to 6.1 years should rates rise 100
basis points and 6.2 years should rates increase 200 basis points. This is a
result of some extension occurring in the callable bonds and mortgage-backed
holdings as rates rise. Should rates decline 100 basis points the average life
would likely decrease to 2.8 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 3.7%, while rates
rising 200 basis points would impact the market value by a negative 7.9%. 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 3.5%.
<PAGE>29
Adjustable rate holdings reprice on an annual or more frequent basis and
currently have an average life of 5.4 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.
On July 19, 2000, the Board approved the organization of Nevada I, which is a
corporation organized and existing under the laws of the state of Nevada. The
sole activities of Nevada I are the ownership of stock in Nevada II and the
ownership of certain loans pursuant to a Participation Agreement. Permission was
also granted to organize Nevada II. The principal activity of Nevada II will be
to acquire and sell investment securities as well as collect the income from the
portfolio. The sole purpose will be to transfer the bank's investment activity
to the Nevada II Corporation. First Citizens National Bank income is projected
to increase in excess of $300,000 the first year of operations. In conjunction
with the Nevada Corporation and transfer of the investment portfolio, First
Tennessee will assume management of the portfolio.
As a result, the following changes to the Investment Management Policy were
presented and approved on September 20, 2000:
1. Safety of Principal - Insulate the investment portfolio from undue
credit risk. Investment recommendations will emphasize government
issued securities, government guaranteed securities and other high
grade investments.
2. Adequate liquidity - Ensure that adequate liquidity is
maintained. Make investments more liquid than they have been in the
past.
3. Capital at Risk - Insulate GAAP capital against excessive changes in
market value which is not of the unrealizable gain and losses of the
investment portfolio. First Citizens has excessive capital on hand. A
plan to invest additional capital is a component of the investment
policy.
4. Earnings at Risk - Insulate earnings from excessive change. First
Citizens requires a stable Asset/Liability strategy to stabilize income
streams during times of excessive interest rate moves.
5. Investment Performance - Optimize investment performance. Four
recommendations to optimize investment performance were:
(a) Purchase securities with call protection; (b) concentrate funding
with growth in deposits; (c) Purchase securities with bullet-like
features; (d) Sell investments ranging from $2 - $3 million with five
year maturities and reinvest in long term municipals.
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 engaged in derivative activity as defined by FASB
133 (Reference footnote 7).
<PAGE>30
The portfolio currently contains the following unrealized gains and unrealized
losses in each investment category:
Investment Securities
Unrealized Gains/(Losses)
September 30, 2000
Unrealized Unrealized Net
Gains Losses Gains/Losses
U.S. Treasury Securities 1 31 (30)
Obligations of U.S. Government
Agencies and Corp 74 2844 (2770)
Obligations of States and
Political Subdivisions 115 170 (55)
Other Securities 0 0 0
Totals 190 3062 (2855)
Maturing and Portfolio Percentages on Securities September 30, 2000
(in thousands)
After One Year After Five Years After
Within One Year Within Five Years Within Ten Years Ten Years
Amount % Amount % Amount % Amount %
9/30/00 $ 4,443 4.50% $49,251 49.95% $36,084 36.59% $ 8,835 8.96%
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%
Maturity and Yield on Securities September 30, 2000
(in thousands)
Maturing
<TABLE>
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 $ 4,423 7.03% $44,321 5.99% $30,346 6.07% $ 3,734 6.33%
State and Political
Subdivisions* $ 20 5.10% $ 1,040 7.36% $ 5,738 6.89% $ 3,601 7.48%
All Others $ 0 0% $ 3,890 5.50% $ 0 0% $ 1,500 8.00%
TOTALS $ 4,443 7.02% $49,251 5.97% $36,084 6.20% $ 8,835 7.07%
</TABLE>
*Yields on tax free investments are stated herein on a taxable equivalent basis.
<PAGE>31
Investment Securities
September 30, 2000
(in thousands)
Held-to-maturity Available-for-sale
Column A Column B Column C Column D
Amortized Fair Amortized Fair
Cost Value Cost Value
U.S. Treasury Securities $ 0 $ 0 $ 2,029 $ 1,999
U.S. Government agency
obligations (exclude
mortgage-backed securities:
Issued by U.S. Government
Agencies (2) 0 0 5 5
Issued by U. S. Government
Sponsored agencies (3) 15,989 15,620 57,017 54,888
Securities issued by states and political subdivisions in the U.S.:
General obligations 1,048 1,053 6,913 6,811
Revenue obligations 637 644 1,866 1,883
Industrial development and
similar obligations 20 20 0 0
Mortgage-backed securities (MBS):
Pass-through securities:
Guaranteed by GNMA 48 48 2,803 2,758
Issued by FNMA and FHLMC 0 0 5,487 5,293
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 1,911 1,872
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 1,934 1,934
Foreign debt securities 0 0 0 0
Equity securities:
Investments in mutual funds and
other equity securities with
readily determinable fair values 0 0 10 34
All other equity securities (1) 0 0 3,394 3,394
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) 17,742 17,385 83,369 80,871
(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.
<PAGE>32
(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.
Return on Equity and Assets
Return on assets is a measurement of Bancshares' ability to maximize asset
utilization. Total assets at 9/30/00 were $493,940,000. 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. Results of operations for the
years under comparison 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 to the Loan Loss Reserve and losses incurred from the sale
of investments. Return on assets for 2000 reflect the payout of two employment
contracts purchased in the First Volunteer acquisition totaling approximately
$848,000.
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 9/30/00 was $45,901,000 compared to $44,003,000 at 09/30/99.
Percentage of Dividends declared per common share to net income per common share
increased on a consistent basis for the years under comparison. Shares
outstanding will remain flat due to termination of the Dividend Reinvestment
Program. 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 limited
to the 44,500 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.
Shareholder dividends paid in 1999 consisted of quarterly dividends of $.1875
per share and a special dividend of $.15 per share. Quarterly dividends of $.225
per share were paid the first three quarters of 2000.
<PAGE>33
The table below presents operating YTD ratios for First Citizens Bancshares,
Inc. for the quarter ending September 30 (not annualized):
2000 1999 1998 1997 1996
Percentage of Net Income to:
Average Total Assets .71% .94% .90% .97% .88%
Average Shareholders Equity 7.70% 10.19% 9.28% 10.17% 9.65%
Percentage of Dividends
Declared Per Common Share to
Net Income Per Common Share 71.61% 47.14% 38.17% 26.09% 24.38%
*Percentage of Average
Shareholders' Equity to
Average Total Assets 10.11% 10.10% 10.50% 10.37% 10.02%
*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 6.06% to 9.24% including balance
sheet and off balance sheet components. The liquidity ratio as of 9/30/00 was
10.47%. 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 at quarter end were $129,078,000. This total is comprised of
$90,578,000 through FHLB and lines of $38,500,000 through correspondent banks.
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 $130,278 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 20.28% to
24.65%. The dependency ratio as of 9/30/00 was 24.96%.
Community Bank Presidents in all counties reports slow deposit growth for their
prespective market areas. A report of competitive rates in the Lauderdale and
Obion County markets indicates rates as high as 7.05% being paid on 12 month
maturities.
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
<PAGE>34
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 2000
(in thousands)
Tier Capital $45,843
Projected 12
Month Exposure
Net Interest Rate Moves Current Possible
Income Levels In Basis Pts Position Scenarios Variance
Declining 4 -400 $15,366 $18,441 $3,075
Declining 3 -300 15,366 18,438 3,072
Declining 2 -200 15,366 17,457 2,091
Declining 1 -100 15,366 16,088 722
Most Likely-Base 50 15,366 15,366 0
Rising 1 100 15,366 14,941 (425)
Rising 2 200 15,366 13,880 (1,486)
Rising 3 300 15,366 13,450 (1,916)
Rising 4 400 15,366 11,776 (3,590)
Tier 1 % of Net Int % of Net Int
Capital at Income Income
Risk Actual Policy
Declining 4 6.71% 20.01% 20.00%
Declining 3 6.70% 19.99% 20.00%
Declining 2 4.56% 13.61% 20.00%
Declining 1 1.57% 4.70% 12.00%
Most Likely-Base 0.00% 0.00% 0.00%
Rising 1 -0.93% -2.77% -12.00%
Rising 2 -3.24% -9.67% -25.00%
Rising 3 -4.18% -12.47% -25.00%
Rising 4 -7.83% -23.36% -28.00%
Notes
Margin dilution is due to an increase in cost of funds and reduced loan fee
income. A material amount of FHLB Borrowings repriced during the quarter from
4.50% to 6.50%.
Net interest incomes presented are derived from various interest rate
projections. The 100-400 moving scenarios are presented to show what would
happen if rates rose immediately (100-400 basis points). The rate moves reflect
shocks because rates are changed immediately. Rate forecasts indicate that rates
are not likely to move suddenly 100 - 400 basis points. These scenarios reflect
worst case positions.
The most likely rate projection reflects a 50 basis point increase in rates (two
25 basis point increases). This scenario was used in the bank's budgeting
process. All rate scenarios are compared to the base.
The rising rate scenarios will dilute First Citizens net income because FCNB's
liabilities reprice faster than its assets. In a rising rate cycle, non-maturity
deposits will not reprice until a 250 or 300 basis point rise takes place. In a
declining rate cycle, non-maturity deposits will reprice with market conditions
until deposits hit a floor position. A 200 basis point rise in rates would cause
earnings to decrease because liabilities would reprice quicker than rate
sensitive assets.
<PAGE>35
<TABLE>
CONDENSED GAP REPORT
------------------------------------
CURRENT BALANCES
-----------------------------------
09/30/00
(in thousands)
O/N O/N 0-3 0-3 3-12 3-12
BAL RATE MONTHS BAL RATE MONTHS BAL RATE
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and Due From 0.00 0.00 0.00 0.00 0.00 0.00
Total Cash and Due From 0.00 0.00 0.00 0.00 0.00 0.00
US Treasury 0.00 0.00 0.00 0.00 1,500.02 6.34
US Agency 0.00 0.00 1,000.00 8.00 1,007.50 7.14
MBS 0.00 0.00 233.35 5.84 682.33 5.84
Agency 0.00 0.00 1,233.35 7.59 1,689.83 6.61
Municipals 0.00 0.00 0.00 0.00 0.00 0.00
Corp & Others 0.00 0.00 1,943.52 8.00 0.00 0.00
Equities 0.00 0.00 0.00 0.00 0.00 0.00
Unrealized G/L 0.00 0.00 0.00 0.00 0.00 0.00
Total Investments 0.00 0.00 3,176.87 7.84 3,189.85 6.48
Fed Funds Sold 0.00 0.00 0.00 0.00 0.00 0.00
Fed Funds Sold-Balance 0.00 0.00 0.00 0.00 0.00 0.00
Total Fed Funds Sold 0.00 0.00 0.00 0.00 0.00 0.00
Commercial Variable 0.00 0.00 12,141.17 9.96 9,055.55 9.71
Commercial Fixed 0.00 0.00 6,974.70 8.81 13,548.24 8.80
Contra Loans - Troy 0.00 0.00 43.45 8.65 135.00 8.50
Floor 0.00 0.00 131.93 0.00 0.00 0.00
Unearned 0.00 0.00 0.00 0.00 0.00 0.00
Total Commercial 0.00 0.00 19,291.25 9.47 22,688.80 9.16
Real Estate Variable 0.00 0.00 15,700.03 9.83 7,975.87 9.94
Real Estate Fixed 0.00 0.00 22,751.11 8.91 40,232.76 8.73
Home Equity +1 0.00 0.00 7,177.16 10.50 0.00 0.00
Home Equity +2 0.00 0.00 2,695.48 10.50 0.00 0.00
Home Equity 0.00 0.00 9,872.64 10.50 0.00 0.00
Secondary Mortgage 0.00 0.00 2,232.98 8.50 0.00 0.00
Total Real Estate 0.00 0.00 50,556.76 9.49 48,208.63 8.93
Installment Variable 0.00 0.00 70.30 9.63 91.71 9.11
Installment Fixed 0.00 0.00 4,834.08 9.80 12,783.49 9.83
Finance Company - 78s 0.00 0.00 0.00 0.00 0.00 0.00
Total Installment 0.00 0.00 4,904.37 9.79 12,875.20 9.82
Credit Cards 0.00 0.00 2,410.47 12.96 0.00 0.00
Overdrafts 0.00 0.00 845.09 0.00 0.00 0.00
Total Other Loans 0.00 0.00 3,255.56 9.60 0.00 0.00
Total Loans 0.00 0.00 78,007.94 9.51 83,772.62 9.13
Loan Loss Reserve 0.00 0.00 0.00 0.00 0.00 0.00
Total Net Loans 0.00 0.00 78,007.94 9.51 83,772.62 9.13
Building, Furniture & Fixtures 0.00 0.00 0.00 0.00 0.00 0.00
Other Real Estate 0.00 0.00 0.00 0.00 0.00 0.00
Other Assets 0.00 0.00 0.00 0.00 0.00 0.00
Total Assets 0.00 0.00 81,184.81 9.44 86,962.48 9.03
Liabilities:
Demand 0.00 0.00 0.00 0.00 0.00 0.00
Total Demand 0.00 0.00 0.00 0.00 0.00 0.00
Regular 0.00 0.00 0.00 0.00 4,610.13 3.00
NOW 0.00 0.00 0.00 0.00 8,144.23 1.50
Business 0.00 0.00 0.00 0.00 68.58 1.50
IMF 0.00 0.00 0.00 0.00 3,661.94 2.00
First Rate 0.00 0.00 0.00 0.00 10,953.33 4.35
Wall Street 5,656.55 5.75 0.00 0.00 0.00 0.00
Dogwood 0.00 0.00 0.00 0.00 2,217.43 1.50
Total Savings 5,656.55 5.75 0.00 0.00 29,655.64 2.85
CD 1-3 Months 0.00 0.00 11,791.97 6.31 235.54 5.61
CD 3-6 Months 0.00 0.00 9,883.85 6.52 13,028.25 6.69
CD 6-12 Months 0.00 0.00 17,243.08 5.95 16,344.29 6.13
CD 13 Months 0.00 0.00 4,773.64 5.47 19,892.42 6.04
CD 1-2 Years 0.00 0.00 15,831.71 5.46 45,035.44 6.14
CD 2-5 Years 0.00 0.00 2,166.16 5.93 1,210.30 5.38
CD 5 + Years 0.00 0.00 197.64 5.87 163.60 5.68
Total CD 0.00 0.00 61,888.06 5.94 95,909.83 6.18
</TABLE>
<PAGE>36
<TABLE>
CONDENSED GAP REPORT
------------------------------------
CURRENT BALANCES
-----------------------------------
09/30/00
(in thousands)
O/N O/N 0-3 0-3 3-12 3-12
BAL RATE MONTHS BAL RATE MONTHS BAL RATE
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
IRA Savings 0.00 0.00 0.00 0.00 0.00 0.00
IRA 1-2 Years 0.00 0.00 4,178.17 5.47 10,602.50 5.85
IRA 2-5 Years 0.00 0.00 9.91 5.75 241.82 5.17
IRA 5 + Years 0.00 0.00 369.70 4.27 308.26 4.97
Total IRA 0.00 0.00 4,557.78 5.38 11,152.59 5.81
Christmas Club 0.00 0.00 0.00 0.00 0.00 0.00
Total Time 0.00 0.00 66,445.84 5.91 107,062.42 6.14
Total Deposits 5,656.55 5.75 66,445.84 5.91 136,718.06 5.43
Fed Funds Purchased - Bal 0.00 0.00 0.00 0.00 0.00 0.00
Fed Funds Purchased 12,650.00 3.56 0.00 0.00 0.00 0.00
TT & L 999.50 6.69 0.00 0.00 0.00 0.00
Securities Sold-Sweep 8,036.33 4.19 0.00 0.00 0.00 0.00
Securities Sold - Fixed 0.00 0.00 618.42 6.85 6,313.51 6.86
FHLB Short Term 23,500.00 6.77 0.00 0.00 0.00 0.00
FHLB Long Term Fixed 0.00 0.00 0.00 0.00 0.00 0.00
FHLB Libor 0.00 0.00 1,500.00 6.47 0.00 0.00
FHLB Long Term-Callable 0.00 0.00 0.00 0.00 1,000.00 4.52
Note Payable-Finance-FCNB 0.00 0.00 0.00 0.00 0.00 0.00
Note Payable-Finance GE 0.00 0.00 0.00 0.00 0.00 0.00
Total Borrowing 45,185.83 5.41 2,118.42 6.58 7,313.51 6.54
Other Liabilities 0.00 0.00 0.00 0.00 0.00 0.00
Total Other Liabilities 45,185.83 5.41 2,118.42 6.58 7,313.51 6.54
Total Liabilities 50,842.38 5.45 68,564.27 5.93 144,031.56 5.48
Equity:
Retained Earnings 0.00 0.00 0.00 0.00 0.00 0.00
Stock, Surplus, PIC 0.00 0.00 0.00 0.00 0.00 0.00
Unrealized Gains/(Losses) 0.00 0.00 0.00 0.00 0.00 0.00
YTD NET INCOME 0.00 0.00 0.00 0.00 0.00 0.00
Total Equity 0.00 0.00 0.00 0.00 0.00 0.00
Total Liability/Equity 50,842.38 5.45 68,564.27 5.93 144,031.56 5.48
Period Gap (50,842.38) 0.00 12,620.54 0.00 (57,069.09) 0.00
Cumulative Gap (50,842.38) 0.00 (38,221.84) 0.00 (95,290.92) 0.00
RSA/RSL 0.00 0.00 1.18 0.00 0.60 0.00
Off Balance Sheet:
Total Off Balance Sheet 0.00 0.00 0.00 0.00 0.00 0.00
Period Gap (50,842.38) 0.00 12,620.54 0.00 (57,069.09) 0.00
Cumulative Gap (50,842.38) 0.00 (38,221.84) 0.00 (95,290.92) 0.00
RSA/RSL 0.00 0.00 1.18 0.00 0.60 0.00
</TABLE>
<PAGE>37
<TABLE>
CONDENSED GAP REPORT
------------------------------------
CURRENT BALANCES
-----------------------------------
09/30/00
(in thousands)
1-3 1-3 3-5 3-5 5-10 5-10
YEARS YEARS YEARS YEARS YEARS YEARS
BAL RATE BAL RATE BAL RATE
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and Due From 0.00 0.00 0.00 0.00 0.00 0.00
Total Cash and Due From 0.00 0.00 0.00 0.00 0.00 0.00
US Treasury 0.00 0.00 0.00 0.00 0.00 0.00
US Agency 20,616.40 6.26 18,257.33 5.59 27,282.09 6.00
MBS 2,778.58 6.08 2,668.80 6.61 3,063.94 6.77
Agency 23,394.99 6.24 20,926.14 5.72 30,346.03 6.07
Municipals 50.93 4.73 989.42 4.91 5,737.72 4.55
Corp & Others 0.00 0.00 0.00 0.00 0.00 0.00
Equities 3,393.80 5.50 0.00 0.00 0.00 0.00
Unrealized G/L 0.00 0.00 0.00 0.00 0.00 0.00
Total Investments 26,839.72 6.14 21,915.56 5.68 36,083.75 5.83
Fed Funds Sold 0.00 0.00 0.00 0.00 0.00 0.00
Fed Funds Sold-Balance 0.00 0.00 0.00 0.00 0.00 0.00
Total Fed Funds Sold 0.00 0.00 0.00 0.00 0.00 0.00
Commercial Variable 13.03 9.50 0.00 0.00 0.00 0.00
Commercial Fixed 12,048.10 8.71 5,751.49 8.74 1,659.60 7.39
Contra Loans - Troy 360.00 8.50 144.49 8.50 0.00 0.00
Floor 0.00 0.00 0.00 0.00 0.00 0.00
Unearned 0.00 0.00 0.00 0.00 0.00 0.00
Total Commercial 12,421.13 8.70 5,895.98 8.73 1,659.60 7.39
Real Estate Variable 3,210.71 9.51 2,275.20 9.06 0.00 0.00
Real Estate Fixed 76,715.44 8.53 54,706.80 8.20 0.00 0.00
Home Equity +1 0.00 0.00 0.00 0.00 0.00 0.00
Home Equity +2 0.00 0.00 0.00 0.00 0.00 0.00
Home Equity 0.00 0.00 0.00 0.00 0.00 0.00
Secondary Mortgage 0.00 0.00 0.00 0.00 0.00 0.00
Total Real Estate 79,926.15 8.57 56,982.00 8.23 0.00 0.00
Installment Variable 15.63 8.55 14.67 7.75 0.00 0.00
Installment Fixed 15,217.40 9.67 3,797.57 9.34 269.75 9.80
Finance Company - 78s 0.00 0.00 0.00 0.00 0.00 0.00
Total Installment 15,233.03 9.67 3,812.24 9.33 269.75 9.80
Credit Cards 0.00 0.00 0.00 0.00 0.00 0.00
Overdrafts 0.00 0.00 0.00 0.00 0.00 0.00
Total Other Loans 0.00 0.00 0.00 0.00 0.00 0.00
Total Loans 107,580.31 8.74 66,690.22 8.34 1,929.34 7.73
Loan Loss Reserve 0.00 0.00 0.00 0.00 0.00 0.00
Total Net Loans 107,580.31 8.74 66,690.22 8.34 1,929.34 7.73
Building, Furniture & Fixtures 0.00 0.00 0.00 0.00 0.00 0.00
Other Real Estate 0.00 0.00 0.00 0.00 0.00 0.00
Other Assets 0.00 0.00 0.00 0.00 0.00 0.00
Total Assets 134,420.02 8.22 88,605.78 7.68 38,013.09 5.93
Liabilities:
Demand 0.00 0.00 0.00 0.00 0.00 0.00
Total Demand 0.00 0.00 0.00 0.00 0.00 0.00
Regular 9,220.26 3.00 4,610.13 3.00 4,610.13 3.00
NOW 16,288.46 1.50 8,144.23 1.50 8,144.23 1.50
Business 137.15 1.50 68.58 1.50 68.58 1.50
IMF 3,661.94 2.00 0.00 0.00 0.00 0.00
First Rate 10,953.33 4.35 0.00 0.00 0.00 0.00
Wall Street 0.00 0.00 0.00 0.00 0.00 0.00
Dogwood 4,434.86 1.50 2,217.43 1.50 2,217.43 1.50
Total Savings 44,696.00 2.55 15,040.37 1.96 15,040.37 1.96
CD 1-3 Months 11.96 6.50 0.00 0.00 0.00 0.00
CD 3-6 Months 0.00 0.00 0.00 0.00 0.00 0.00
CD 6-12 Months 0.00 0.00 0.00 0.00 0.00 0.00
CD 13 Months 470.84 6.18 0.00 0.00 0.00 0.00
CD 1-2 Years 21,839.11 6.57 0.00 0.00 0.00 0.00
CD 2-5 Years 2,730.90 6.12 31.44 6.10 0.00 0.00
CD 5 + Years 2,175.31 5.99 1,860.25 5.93 10.02 4.75
Total CD 27,228.13 6.47 1,891.69 5.93 10.02 4.75
</TABLE>
<PAGE>38
<TABLE>
CONDENSED GAP REPORT
------------------------------------
CURRENT BALANCES
-----------------------------------
09/30/00
(in thousands)
1-3 1-3 3-5 3-5 5-10 5-10
YEARS YEARS YEARS YEARS YEARS YEARS
BAL RATE BAL RATE BAL RATE
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
IRA Savings 0.00 0.00 0.00 0.00 82.44 3.00
IRA 1-2 Years 3,459.30 6.39 27.91 5.85 0.00 0.00
IRA 2-5 Years 1,427.21 5.64 0.00 0.00 0.00 0.00
IRA 5 + Years 1,535.87 5.93 1,233.05 5.39 0.00 0.00
Total IRA 6,422.38 6.11 1,260.96 5.40 82.44 3.00
Christmas Club 610.74 2.50 0.00 0.00 0.00 0.00
Total Time 34,261.24 6.33 3,152.65 5.72 92.45 3.19
Total Deposits 78,957.25 4.19 18,193.02 2.61 15,132.82 1.97
Fed Funds Purchased - Bal 0.00 0.00 0.00 0.00 0.00 0.00
Fed Funds Purchased 0.00 0.00 0.00 0.00 0.00 0.00
TT & L 0.00 0.00 0.00 0.00 0.00 0.00
Securities Sold-Sweep 0.00 0.00 0.00 0.00 0.00 0.00
Securities Sold - Fixed 365.68 6.71 0.00 0.00 0.00 0.00
FHLB Short Term 0.00 0.00 0.00 0.00 0.00 0.00
FHLB Long Term Fixed 0.00 0.00 0.00 0.00 2,014.49 6.01
FHLB Libor 0.00 0.00 0.00 0.00 0.00 0.00
FHLB Long Term-Callable 3,000.00 4.50 0.00 0.00 23,000.00 5.96
Note Payable-Finance-FCNB 0.00 0.00 0.00 0.00 0.00 0.00
Note Payable-Finance GE 0.00 0.00 0.00 0.00 0.00 0.00
Total Borrowings 3,365.68 4.74 0.00 0.00 25,014.49 5.97
Other Liabilities 0.00 0.00 0.00 0.00 0.00 0.00
Total Other Liabilities 3,365.68 4.74 0.00 0.00 25,014.49 5.97
Total Liabilities 82,322.92 4.21 18,193.02 2.61 40,147.31 4.46
Equity:
Retained Earnings 0.00 0.00 0.00 0.00 0.00 0.00
Stock, Surplus, PIC 0.00 0.00 0.00 0.00 0.00 0.00
Unrealized Gains/(Losses) Mortgage 0.00 0.00 0.00 0.00 0.00 0.00
YTD NET INCOME 0.00 0.00 0.00 0.00 0.00 0.00
Total Equity 0.00 0.00 0.00 0.00 0.00 0.00
Total Liability/Equity 82,322.92 4.21 18,193.02 2.61 40,147.31 4.46
Period Gap 52,097.10 0.00 70,412.76 0.00 (2,134.22) 0.00
Cumulative Gap (43,193.83) 0.00 27,218.93 0.00 25,084.72 0.00
RSA/RSL 1.63 0.00 4.87 0.00 0.95 0.00
Off Balance Sheet:
Total Off Balance Sheet 0.00 0.00 0.00 0.00 0.00 0.00
Period Gap 52,097.10 0.00 70,412.76 0.00 (2,134.22) 0.00
Cumulative Gap (43,193.83) 0.00 27,218.93 0.00 25,084.72 0.00
RSA/RSL 1.63 0.00 4.87 0.00 0.95 0.00
</TABLE>
<PAGE>39
<TABLE>
CONDENSED GAP REPORT
------------------------------------
CURRENT BALANCES
-----------------------------------
09/30/00
(in thousands)
10-15 10-15 15 + 15 + NON-
YEARS YEARS YEARS YEARS SENSITIVE TOTAL
BAL RATE BAL RATE BAL BAL
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and Due From 0.00 0.00 0.00 0.00 19,919.08 19,919.08
Total Cash and Due From 0.00 0.00 0.00 0.00 19,919.08 19,919.08
US Treasury 0.00 0.00 528.64 6.13 0.00 2,028.66
US Agency 4,840.31 6.35 0.00 0.00 0.00 73,003.64
MBS 791.38 6.19 31.51 6.98 0.00 10,249.90
Agency 5,631.69 6.33 31.51 6.98 0.00 83,253.54
Municipals 3,493.18 4.94 220.60 5.50 0.00 10,491.85
Corp & Others 0.00 0.00 0.00 0.00 0.00 1,943.52
Equities 0.00 0.00 0.00 0.00 0.00 3,393.80
Unrealized G/L 0.00 0.00 0.00 0.00 (2,498.51) (2,498.51)
Total Investments 9,124.87 5.80 780.74 5.98 (2,498.51) 98,612.85
Fed Funds Sold 0.00 0.00 0.00 0.00 0.00 0.00
Fed Funds Sold-Balance 0.00 0.00 0.00 0.00 0.00 0.00
Total Fed Funds Sold 0.00 0.00 0.00 0.00 0.00 0.00
Commercial Variable 0.00 0.00 0.00 0.00 0.00 21,159.75
Commercial Fixed 1,213.89 8.01 1,233.26 8.23 0.00 42,429.29
Contra Loans - Troy 0.00 0.00 0.06 8.50 0.00 683.00
Floor 0.00 0.00 0.00 0.00 0.00 131.93
Unearned 0.00 0.00 0.00 0.00 0.00 0.00
Total Commercial 1,213.89 8.01 1,233.32 8.23 0.00 64,403.97
Real Estate Variable 0.00 0.00 0.00 0.00 0.00 29,161.80
Real Estate Fixed 0.00 0.00 0.00 0.00 0.00 194,406.10
Home Equity +1 0.00 0.00 0.00 0.00 0.00 7,177.16
Home Equity +2 0.00 0.00 0.00 0.00 0.00 2,695.48
Home Equity 0.00 0.00 0.00 0.00 0.00 9,872.64
Secondary Mortgage 0.00 0.00 0.00 0.00 0.00 2,232.98
Total Real Estate 0.00 0.00 0.00 0.00 0.00 235,673.53
Installment Variable 0.00 0.00 0.00 0.00 0.00 192.31
Installment Fixed 31.87 9.88 0.00 0.00 0.00 36,934.15
Finance Company - 78s 0.00 0.00 0.00 0.00 0.00 0.00
Total Installment 31.87 9.88 0.00 0.00 0.00 37,126.47
Credit Cards 0.00 0.00 0.00 0.00 0.00 2,410.47
Overdrafts 0.00 0.00 0.00 0.00 0.00 845.09
Total Other Loans 0.00 0.00 0.00 0.00 0.00 3,255.56
Total Loans 1,245.77 8.06 1,233.32 8.23 0.00 340,459.52
Loan Loss Reserve 0.00 0.00 0.00 0.00 (3,898.49) (3,898.49)
Total Net Loans 1,245.77 8.06 1,233.32 8.23 (3,898.49) 336,561.03
Building, Furniture & Fixtures 0.00 0.00 0.00 0.00 14,232.55 14,232.55
Other Real Estate 0.00 0.00 0.00 0.00 189.94 189.94
Other Assets 0.00 0.00 0.00 0.00 23,032.03 23,032.03
Total Other Assets 0.00 0.00 0.00 0.00 37,454.52 37,454.52
Total Assets 10,370.64 6.07 2,014.06 7.36 50,976.60 492,547.48
Liabilities:
Demand 0.00 0.00 0.00 0.00 39,451.97 39,451.97
Total Demand 0.00 0.00 0.00 0.00 39,451.97 39,451.87
Regular 0.00 0.00 0.00 0.00 0.00 23,050.66
NOW 0.00 0.00 0.00 0.00 0.00 40,721.15
Business 0.00 0.00 0.00 0.00 0.00 342.88
IMF 0.00 0.00 0.00 0.00 0.00 7,323.88
First Rate 0.00 0.00 0.00 0.00 0.00 21,906.66
Wall Street 0.00 0.00 0.00 0.00 0.00 5,656.55
Dogwood 0.00 0.00 0.00 0.00 0.00 11,087.15
Total Savings 0.00 0.00 0.00 0.00 0.00 110,088.93
CD 1-3 Months 0.00 0.00 0.00 0.00 0.00 12,039.48
CD 3-6 Months 0.00 0.00 0.00 0.00 0.00 22,912.10
CD 6-12 Months 0.00 0.00 0.00 0.00 0.00 33,587.37
CD 13 Months 0.00 0.00 0.00 0.00 0.00 25,136.90
CD 1-2 Years 0.00 0.00 0.00 0.00 0.00 82,706.26
CD 2-5 Years 0.00 0.00 0.00 0.00 0.00 6,138.81
CD 5 + Years 0.00 0.00 0.00 0.00 0.00 4,406.81
Total CD 0.00 0.00 0.00 0.00 0.00 186,927.73
</TABLE>
<PAGE>40
<TABLE>
CONDENSED GAP REPORT
------------------------------------
CURRENT BALANCES
-----------------------------------
09/30/00
(in thousands)
10-15 10-15 15 + 15 + NON- TOTAL
YEARS YEARS YEARS YEARS SENSITIVE BAL
BAL RATE BAL RATE BAL
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
IRA Savings 0.00 0.00 0.00 0.00 0.00 82.44
IRA 1-2 Years 0.00 0.00 0.00 0.00 0.00 18,267.89
IRA 2-5 Years 0.00 0.00 0.00 0.00 0.00 1,678.95
IRA 5 + Years 0.00 0.00 0.00 0.00 0.00 3,446.88
Total IRA 0.00 0.00 0.00 0.00 0.00 23,476.14
Christmas Club 0.00 0.00 0.00 0.00 0.00 610.74
Total Time 0.00 0.00 0.00 0.00 0.00 211,014.61
Total Deposits 0.00 0.00 0.00 0.00 39,451.97 360,555.51
Fed Funds Purchased - Bal 0.00 0.00 0.00 0.00 0.00 0.00
Fed Funds Purchased 0.00 0.00 0.00 0.00 0.00 12,650.00
TT & L 0.00 0.00 0.00 0.00 0.00 999.50
Securities Sold-Sweep 0.00 0.00 0.00 0.00 0.00 8,036.33
Securities Sold - Fixed 0.00 0.00 0.00 0.00 0.00 7,297.61
FHLB Short Term 0.00 0.00 0.00 0.00 0.00 23,500.00
FHLB Long Term Fixed 0.00 0.00 0.00 0.00 0.00 2,014.49
FHLB Libor 0.00 0.00 0.00 0.00 0.00 1,500.00
FHLB Long Term-Callable 0.00 0.00 0.00 0.00 0.00 27,000.00
Note Payable-Finance-FCNB 0.00 0.00 0.00 0.00 0.00 0.00
Note Payable-Finance GE 0.00 0.00 0.00 0.00 0.00 0.00
Total Borrowings 0.00 0.00 0.00 0.00 0.00 82,997.93
Other Liabilities 0.00 0.00 0.00 0.00 4,149.28 4,149.28
Total Other Liabilities 0.00 0.00 0.00 0.00 4,149.28 87,147.21
Total Liabilities 0.00 0.00 0.00 0.00 43,601.25 447,702.72
Equity:
Retained Earnings 0.00 0.00 0.00 0.00 26,783.48 26,783.48
Stock, Surplus, PIC 0.00 0.00 0.00 0.00 17,032.34 17,032.34
Unrealized Gains/(Losses) 0.00 0.00 0.00 0.00 (1,499.00) (1,499.00)
YTD NET INCOME 0.00 0.00 0.00 0.00 2,527.94 2,527.94
Total Equity 0.00 0.00 0.00 0.00 44,844.76 44,844.76
Total Liability/Equity 0.00 0.00 0.00 0.00 88,446.01 492,547.48
Period Gap 10,370.64 0.00 2,014.06 0.00 (37,469.41) 0.00
Cumulative Gap 35,455.36 0.00 37,469.42 0.00 0.01 0.00
RSA/RSL 0.00 0.00 0.00 0.00 0.58 0.00
Off Balance Sheet:
Total Off Balance Sheet 0.00 0.00 0.00 0.00 0.00 0.00
Period Gap 10,370.64 0.00 2,014.06 0.00 (37,469.41) 0.00
Cumulative Gap 35,455.36 0.00 37,469.42 0.00 0.01 0.00
RSA/RSL 0.00 0.00 0.00 0.00 0.58 0.00
</TABLE>
<PAGE>41
CONDENSED GAP REPORT
------------------------------------
CURRENT BALANCES
-----------------------------------
09/30/00
(in thousands)
TOTAL
RATE
----------------------------------------------------------------
Assets:
Cash and Due From 0.00
Total Cash and Due From 0.00
US Treasury 6.28
US Agency 6.04
MBS 6.41
Agency 6.08
Municipals 4.73
Corp & Others 8.00
Equities 5.50
Unrealized G/L 0.00
Total Investments 6.12
Fed Funds Sold 0.00
Fed Funds Sold-Balance 0.00
Total Fed Funds Sold 0.00
Commercial Variable 9.85
Commercial Fixed 8.67
Contra Loans - Troy 8.51
Floor 0.00
Unearned 0.00
Total Commercial 9.04
Real Estate Variable 9.76
Real Estate Fixed 8.52
Home Equity +1 10.50
Home Equity +2 10.50
Home Equity 10.50
Secondary Mortgage 8.50
Total Real Estate 8.76
Installment Variable 9.15
Installment Fixed 9.71
Finance Company - 78s 0.00
Total Installment 9.71
Credit Cards 12.96
Overdrafts 0.00
Total Other Loans 9.60
Total Loans 8.92
Loan Loss Reserve 0.00
Total Net Loans 9.03
Building, Furniture & Fixtures 0.00
Other Real Estate 0.00
Other Assets 0.00
Total Other Assets 0.00
Total Assets 7.39
Liabilities:
Demand 0.00
Total Demand 0.00
Regular 3.00
NOW 1.50
Business 1.50
IMF 2.00
First Rate 4.35
Wall Street 5.75
Dogwood 1.50
Total Savings 2.63
CD 1-3 Months 6.30
CD 3-6 Months 6.62
CD 6-12 Months 6.03
CD 13 Months 5.93
CD 1-2 Years 6.12
CD 2-5 Years 5.91
CD 5 + Years 5.94
Total CD 6.14
<PAGE>42
CONDENSED GAP REPORT
------------------------------------
CURRENT BALANCES
-----------------------------------
09/30/00
(in thousands)
Total
Rate
---------------------------------------------------------------------
IRA Savings 3.00
IRA 1-2 Years 5.87
IRA 2-5 Years 5.57
IRA 5 + Years 5.47
Total IRA 5.78
Christmas Club 2.50
Total Time 6.09
Total Deposits 4.37
Fed Funds Purchased - Bal 0.00
Fed Funds Purchased 3.56
TT & L 6.69
Securities Sold-Sweep 4.19
Securities Sold - Fixed 6.85
FHLB Short Term 6.77
FHLB Long Term Fixed 6.01
FHLB Libor 6.47
FHLB Long Term-Callable 5.75
Note Payable-Finance-FCNB 0.00
Note Payable-Finance GE 0.00
Total Borrowings 5.68
Other Liabilities 0.00
Total Other Liabilities 5.41
Total Liabilities 4.57
Equity:
Retained Earnings 0.00
Stock, Surplus, PIC 0.00
Unrealized Gains/(Losses) 0.00
YTD NET INCOME 0.00
Total Equity 0.00
Total Liability/Equity 4.15
Period Gap 0.00
Cumulative Gap 0.00
RSA/RSL 0.00
Off Balance Sheet:
Total Off Balance Sheet 0.00
Period Gap 0.00
Cumulative Gap 0.00
RSA/RSL 0.00
<PAGE>43
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'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.
Subsidiaries as well as the Parent Company will adhere to providing a
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>44
Capital Resources
Total shareholders' equity of First Citizens Bancshares as of September 30,
2000, was $45,901,000. 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):
2000 1999 1998 1997 1996
9.29% 9.28% 9.45% 10.50% 9.94%
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 9/30/00 was 13.93%, 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>45
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. While the current inflationary environment
appears stable, efforts to monitor the situation for any indication of change
will be ongoing.
Operating expenses are directly affected by increases in salaries and employee
benefits, supplies, legal, audit and professional fees, utilities, advertising
and insurance. 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>46
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 14, 2000 /s/Stallings Lipford
Stallings Lipford, Chairman
Date: November 14, 2000 /s/Jeff Agee
Jeff Agee,
Senior Vice President and
Chief Financial Officer
First Citizens National Bank
(Principal Subsidiary)
