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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31, 1999 Commission File Number
0-11709
FIRST CITIZENS BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
TENNESSEE
(State or other jurisdiction of 62-1180360
incorporation or organization) (I.R.S. Employer Identification No.)
P. O. Box 370
First Citizens Place, Dyersburg, Tennessee 38025-0370
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (901) 285-4410
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
(Title of Class)
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 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
The aggregate market value of voting stock held by nonaffiliates of the
registrant at December 31, 1999 was $111,154,950.
Of the registrant's only class of common stock (no par value) there were
3,698,358 shares outstanding as of December 31, 1999 (net of Treasury Stock).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the
Proxy Statement dated March 15, 2000 (Part III)
Filed by Electronic Submission
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PART I
ITEM 1. BUSINESS
GENERAL
First Citizens Bancshares, Inc. ("Bancshares") was organized December, 1982 as a
Tennessee Corporation and commenced operations in September, 1983, with the
acquisition of all Capital Stock of First Citizens National Bank of Dyersburg
("First Citizens").
First Citizens was chartered as a national bank in 1900 and presently operates a
general retail banking business in Dyersburg (Dyer County), Ripley (Lauderdale
County), and Troy and Union City (Obion County), Tennessee, providing customary
banking services. First Citizens operates under the supervision of the
Comptroller of the Currency, is insured up to applicable limits by the Federal
Deposit Insurance Corporation and is a member of the Federal Reserve System.
First Citizens operates under the day-to-day management of its own officers and
directors; and formulates its own policies with respect to lending practices,
interest rates, service charges and other banking matters.
Bancshares' primary source of income is dividends received from First Citizens.
Dividend payments are determined in relation to First Citizens' earnings,
deposit growth and capital position in compliance with regulatory guidelines.
Management anticipates that future increases in the capital of First Citizens
will be accomplished through earnings retention or capital injection.
The following table sets forth a comparative analysis of Assets, Deposits, Net
Loans, and Equity Capital of Bancshares as of December 31, for the years
indicated:
December 31
(in thousands)
1999 1998 1997
Total Assets $472,670 $472,153 $384,184
Total Deposits 366,819 360,699 309,975
Total Net Loans 321,659 303,459 259,253
Total Equity Capital 43,680 43,082 36,706
Individual bank performance is compared to industry standards through
utilization of the Uniform Bank Performance Report (UBPR), published quarterly
by the Federal Financial Institution's Examination Council.
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This report provides comparisons of significant operating ratios of First
Citizens Bancshares with peer group banks. Presented in the following chart are
comparisons of First Citizens with peer group banks for the periods indicated:
*12/31/99 12/31/98 12/31/97
BANCSHARES PEER GRP BANCSHARES PEER GRP BANCSHARES PEER GRP
Average Assets/
Net Interest
Income 4.15% 4.18% 4.05% 4.20% 4.36% 4.31%
Average Assets/
Net Operating
Income 1.26% 1.13% 1.05% 1.16% 1.31% 1.20%
Net loan losses/
Average total
loans .22% .18% .23% .22% .09% .21%
Primary Capital/
Average Assets 9.29% 9.06% 9.32% 9.23% 9.94% 9.46%
Cash Dividends/
Net Income ** 58.35% 23.49% 57.51% 26.22% 35.77% 25.84%
*Performance as of 12/31/99 is compared to peer group ratios as of 09/30/99
(Most recent Federal Reserve Report)
EXPANSION
Bancshares may, subject to regulatory approval, acquire existing banks or
organize new banks. The Federal Reserve permits bank holding companies to engage
in non-banking activities closely related to banking or managing or controlling
banks, subject to Board approval or notification. In making such determination,
the Federal Reserve considers whether the performance of such activities by a
bank holding company would offer advantages to the public which outweigh
possible adverse effects. Approval by the Federal Reserve of a Bank Holding
Company's application to participate in a proposed activity is not a
determination that the activity is a permitted non-bank activity for all bank
holding companies. Approval applies only to the applicant, although it suggests
the likelihood of approval in a similar case.
First Citizens through its strategic planning process has stated its
intention to seek profitable opportunities that would utilize excess capital and
maximize income within the West Tennessee Area. First Citizens' objective in
acquiring other banking institutions would be for asset growth and
diversification into other market areas. Acquisitions would afford the bank
increased economies of scale within the data processing function and better
utilization of human resources. Any acquisition approved by Bancshares, would be
deemed to be in the best interest of Bancshares and its shareholders.
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On March 5, 1997 an Acquisition Agreement was executed for the purchase of the
Bank of Troy, Troy, TN, total assets approximately $57 million. The Bank of
Troy was converted to a branch of First Citizens National Bank in February,
1999. A Merger Agreement was signed between First Citizens National Bank ("The
Bank") and First Volunteer Bank, Union City, TN. on January 1, 1999. First
Volunteer Assets totaling approximately $47 million was converted as a branch
of First Citizens National Bank in June 1999.
Beginning in 1997 First Citizens started to expand financial services to
include a finance company and insurance agency. Delta Finance, located on St.
John Avenue, Dyersburg, TN was opened in early 1997 and a second finance
company was opened 4th quarter 1998 in Milan, TN. White and Associates/First
Citizens Insurance, LLC was opened in early 1998. Insurance services include a
full line of insurance products as well as financial services. In 1998
insurance products were expanded to include a credit insurance company and
crop insurance. A second Insurance Agency was opened in Obion County second
quarter of 1998. In 1999, a title insurance company was established and a full
time insurance agent was placed in the Ripley office.
On September 29, 1994, President Clinton signed into law the Riegel-Neal
Interstate Banking and Branching Efficiency Act of 1994. The Act provides for
nationwide interstate banking and branching within certain limitations. A more
detailed description of the act is discussed within the section entitled
"Usury, Recent Legislation and Economic Environment."
On November 12, 1999 the Gramm-Leach-Bliley Act was signed into law. The act
contains seven titles, each of which focuses on a different aspect of the
financial services industry. This new law will significantly change the way we
do business and still pave the way for a new era in banking.
SUPERVISION AND REGULATION
Bancshares is a one-bank holding company under the Bank Holding Company Act of
1956, as amended, and is subject to supervision and examination by the Board
of Governors of the Federal Reserve.
As a bank holding company, Bancshares is required to file with the Federal
Reserve annual reports and other information regarding the business
obligations of itself and its subsidiaries. Board approval must be obtained
before Bancshares may:
(1) Acquire ownership or control of any voting securities of a bank or
Bank Holding Company where the acquisition results in the BHC owning or
controlling more than 5 percent of a class of voting securities of that bank
or BHC;
(2) Acquire substantially all assets of a bank or BHC or merge with
another BHC.
Federal Reserve approval is not required for a bank subsidiary of a BHC to
merge with or acquire substantially all assets of another bank if prior
approval of a federal supervisory agency, such as the Comptroller of the
Currency is required under the Bank Merger Act. Relocation of a subsidiary
bank of a BHC from one state to another requires prior approval of the Federal
Reserve and is subject to the prohibitions of the Douglas Amendment.
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The Bank Holding Company Act provides that the Federal Reserve shall not
approve any acquisition, merger or consolidation which would result in a
monopoly or which would be in furtherance of any combination or conspiracy to
monopolize or attempt to monopolize the business of banking in any part of the
United States. Further, the Federal Reserve may not approve any other proposed
acquisition, merger, or consolidation, the effect of which might be to
substantially lessen competition or tend to create a monopoly in any section
of the country, or which in any manner would be in restraint of trade, unless
the anti-competitive effect of the proposed transaction is clearly outweighed
in favor of public interest by the probable effect of the transaction in
meeting convenience and needs of the community to be served. An amendment
effective February 4, 1993 further provides that an application may be denied
if the applicant has failed to provide the Federal Reserve with adequate
assurances that it will make available such information on its operations and
activities, and the operations and activities of any affiliate, deemed
appropriate to determine and enforce compliance with the Bank Holding Company
Act and any other applicable federal banking statutes and regulations. In
addition, consideration is given to the competence, experience and integrity
of the officers, directors and principal shareholders of the applicant and any
subsidiaries as well as the banks and bank holding companies concerned. The
Federal Reserve also considers the record of the applicant and its affiliates
in fulfilling commitments to conditions imposed by the Federal Reserve in
connection with prior applications.
A bank holding company is prohibited with limited exceptions from engaging
directly or indirectly through its subsidiaries in activities unrelated to
banking or managing or controlling banks. One exception to this limitation
permits ownership of a company engaged solely in furnishing services to banks;
another permits ownership of shares of the company, all of the activities of
which the Federal Reserve has determined after due notice and opportunity for
hearing, to be so closely related to banking or managing or controlling banks,
as to be a proper incident thereto. Moreover, under the 1970 amendments to the
Act and to the Board's regulations, a bank holding company and its
subsidiaries are prohibited from engaging in certain "tie-in" arrangements in
connection with any extension of credit or provision of any property or
service. Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act on any extension of credit to
the bank holding company or to any of its other subsidiaries, or investments
in the stock or other securities thereof, and on the taking of such stock or
securities as collateral for loans to any borrower.
Bank holding companies are required to file an annual report of their
operations with the Federal Reserve, and they and their subsidiaries are
subject to examination by the Federal Reserve.
Bancshares is subject to capital adequacy requirements imposed by the Federal
Reserve Bank. In addition, First Citizens (the principal subsidiary of the
corporation) is restricted by the Office of the Comptroller of the Currency
(Comptroller)from paying dividends in any years which exceed the net earnings
of the current year plus retained profits of the preceding two years. It is
the policy of First Citizens to comply with regulatory requirements for the
payment of dividends. The Federal Reserve adopted a risk-based capital measure
for use in evaluating the capital adequacy of bank holding companies effective
January 1, 1991. The risk-based capital measure focuses primarily on broad
categories of credit risk and incorporates elements of transfer, interest rate
and market rate risk. The calculation of risk-based capital is accomplished by
dividing qualifying capital by weighted risk assets. The minimum risked-base
capital ratio is 8%, at least one-half or 4.00% must consist of core capital
(Tier 1), and the remaining 4% may be in the form of core (Tier 1)
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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 loses, perpetual preferred stock, term subordinated
debt, and other debt and stock instruments. Bancshares has historically
maintained capital in excess of minimum levels established by the Federal
Reserve. A risked based capital analysis is performed on a quarterly basis to
test for compliance with Federal Reserve and bank policy guidelines before
declaring a dividend or increasing a dividend. First Citizens' policy states
that before declaring a dividend the following ratios will be achieved: (1)
Risked Based Capital Tier 1 will be 8.25% or above; Return on year-to-date
average equity 9.00%; Asset growth and projected one year future asset growth
less than 20.00%; and non performing assets to capital less than 30%. Non
performing assets include 90 day past due and non accrual loans.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following information relates to the principal executive officers of
Bancshares and its principal subsidiary, First Citizens National Bank as
of December 31, 1999
Name Age Position and Office
Stallings Lipford 69 Chairman of the Board of Bancshares
and First Citizens. Mr. Lipford
joined First Citizens in 1950. He
became a member of the Board of
Directors in 1960 and President in
1970. He was made Vice Chairman of
the Board in 1982. He served as
Vice Chairman of the Board of
Bancshares from September, 1982 to
February, 1984. The Board elected
Mr. Lipford Chairman of both First
Citizens and Bancshares on February
14, 1984. He served as President of
First Citizens and Bancshares from
1983 to 1992, and as CEO of
Bancshares and First Citizens from
1992 until 1996.
Katie Winchester 59 President and CEO of Bancshares and
First Citizens; employed by First
Citizens in 1961; served as Executive
Vice President and Secretary of the
Board from 1986 to 1992. She was
appointed CEO of Bancshares and First
Citizens in 1996; and President of
Bancshares and First Citizens in 1992.
Ms. Winchester was elected to the
Board of both First Citizens and
Bancshares in 1990.
Ralph Henson 58 Vice President of Bancshares;
Executive Vice President of Loan
Administration of First Citizens.
Employed by First Citizens in 1964.
Mr. Henson served First Citizens as
Senior Vice President and Senior
Lending Officer until his appointment
as Executive Vice President of Loan
Administration in February, 1993.
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Jeffrey Agee 39 Vice President and Chief Financial
Officer of Bancshares. Appointed
Executive Vice President and CFO of
First Citizens National Bank in
August 1999. Mr. Agee served as
Senior Vice President and CFO of First
Citizens prior to this appointment.
Employed by First Citizens in 1982.
Served First Citizens previous to
April, 1994 as Vice President and
Accounting Officer. Appointed Senior
Vice President and Chief Financial
Officer of First Citizens, April 17,
1996.
Barry Ladd 59 Appointed Executive Vice President
and Chief Administrative Officer of
First Citizens and Bancshares in 1996.
Senior Vice President and Senior
Lending Officer of First Citizens
from April 20, 1994 to January 17,
1996. Employed by First Citizens in
1972. Mr. Ladd served First Citizens
as Vice President and Lending Officer
previous to his appointment as Senior
Vice President.
Judy Long 45 Vice President and Secretary to the
Board of First Citizens Bancshares.
Appointed Executive Vice President
and Chief Operations Officer and
Secretary to First Citizens National
Bank in August 1999. Ms. Long served
as Senior Vice President and Chief
Operations Officer and Secretary to
First Citizens prior to this
appointment. She served as Senior Vice
President and Administrative Officer
previous to November 1997; Vice
President and Loan Operations Manager
(1992-1996). Employed by First
Citizens on July 19, 1974.
BANKING BUSINESS
First Citizens operates a general retail banking business in Dyer County,
Tennessee. The bank expanded its banking operations into Lauderdale County in
1995 with the purchase of $8 million in assets and Obion County in 1997 and
1998, purchasing approximately $104 million in assets. All persons who live in
either community or who work in or have a business or economic interest in
either county are considered as forming a part of the area serviced by First
Citizens. First Citizens provides customary banking services, such as checking
and savings accounts, funds transfers, various types of time deposits, and safe
deposit facilities. It also finances commercial transactions and makes and
services both secured and unsecured loans to individuals, firms, and
corporations. Commercial lending operations include various types of credit
services for its customers. Agricultural services are provided that include
operating loans as well as financing for the purchase of equipment and farm
land. The installment lending department makes direct loans to individuals for
personal, automobile, real estate, home improvement, business and collateral
needs. Mortgage lending makes available long term fixed and variable rate loans
to finance the purchase of residential real estate.
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These loans are sold in the secondary market without retaining servicing rights.
Credit cards and open-ended credit lines are available to both commercial
customers and consumers.
Corporate Offices for First Citizens Bancshares and First Citizens National Bank
are located in Dyersburg/Dyer County, Tennessee. Dyersburg/Dyer County is
located in northwest Tennessee and sits on the banks of the Mississippi River.
It is 78 miles northeast of Memphis, Tennessee, 165 miles west of Nashville and
230 miles south of St. Louis, Missouri. Dyer County is equidistant between
Chicago and New Orleans with direct rail, Amtrak, highway and interstate service
to major industrial and consumer markets. Dyersburg/Dyer County is an anchor in
the region that blends education, transportation, industry agribusiness and
retail trade to serve the tristate and service the encompassing Northwest
Tennessee, Northwest Arkansas, and the Missouri Bootheel area. Dyer County is a
mix of agriculture and industry. Fifty-six percent of the land in Dyer County is
in agricultural production and farming is a $79 million industry in the county.
Dyer County is Tennessee's number one producer of soybeans, grain sorghum,
commercial vegetables and rice. Other important crops are wheat, cotton, and
corn. The county's 509 farm operations average 435 acres as of December 31,
1998. Agriculture loans outstanding on the books of First Citizens National Bank
totaled $27,491,929 or 18 percent of total loans. Agriculture loans totaling
$13,307,617 are well secured with real estate, including farmland, residential
property, and other improvements, while $11,489,254 are secured loans to finance
crop production and the purchase of equipment. Approximately $2.7 million in
agriculture loans are 90% guaranteed by Farm Credit Services (a government
agency). There are 61 manufacturers and processors distributed throughout the
county employing approximately 7,500 people. The local economy appears to be
solid and growing. In December 1999, Dyer County unemployment rate was 3.7%
compared to the State of Tennessee unemployment rate of 3.8%. The labor force
increased 18.4% from 1980 to 1995. (Statistics Source: Economic Overview,
Council for Urban Economic Development, July 28, 1998).
First Citizens National Bank expanded its base of operations into Obion County
in 1998. Obion County is located approximately 27 miles north of Dyersburg and
is adjacent to Dyer County. Economic conditions in Obion County appear to be
solid and growing. The unemployment rate as of December 31, 1999 was 4.1%
compared to the State of Tennessee Unemployment rate of 3.8%. The County is a
mix of industry, service and retail business. Goodyear Manufacturing, a builder
of tires, is the largest employer in the county, employing approximately 3700
workers at year end 1999. Total Assets of First Citizens National Bank - Obion
County offices in Troy and Union City are approximately $95 million consisting
primarily of consumer and retail business loans. Total assets of the Lauderdale
County office in Ripley have increased to approximately $15 million consisting
primarily of commercial, business and agriculture loans. Unemployment in
Lauderdale County as of December 31, 1999 was 6.1% compared to 4.1% for the
state.
First Citizens Financial Plus, Inc., a Bank Service Corporation wholly owned by
First Citizens is a licensed Brokerage Service. This allows the bank to compete
on a limited basis with numerous non-bank entities who pose a continuing threat
to our customer base, and are free to operate outside regulatory control.
First Citizens was granted trust powers in 1925 and has maintained an active
Trust Department since that time. Assets as of December 31, 1999 were in excess
of $174,000,000. Services offered by the Investment Management and Trust
Services Division include but are not limited to estate settlement, trustee of
living trusts,
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testamentary trustee, court appointed conservator and guardian, agent for
investment accounts, and trustee of pension and profit sharing trusts.
Delta Finance, a finance company wholly owned by First Citizens National Bank
offers financial service to the retail market. Services offered by Delta Finance
and Delta Finance II consists primarily of consumer and residential real estate
loans.
On February 9, 1998, White and Associates/First Citizens Insurance, LLC was
chartered by the State of Tennessee. The principal office of White and
Associates/First Citizens, originally located at 104 North Monroe Street,
Newbern, Tennessee, has relocated to the Main Office of First Citizens in
Dyersburg, with one full-time agent remaining at the Newbern location. White and
Associates/First Citizens is a general insurance agency offering a full line of
insurance products including casualty, Life and Health, and crop insurance.
A second location of White and Associates/First Citizens Insurance was opened in
Bank of Troy on July 1, 1998 with the purchase of Durham Insurance, Union City,
Tennessee. On December 28, 1998 a credit insurance company was formed and will
be known as First Citizens/White and Associates Insurance Company. In January
1999, First Citizens merged with First Volunteer Bank of Union City and the
primary office for Obion County was relocated to the Union City Branch. Halls
Insurance Agency, a primary provider of Crop Insurance in the state of
Tennessee, was acquired by White & Associates/First Citizens Insurance LLC and a
full time agent was placed in the Agricultural Department at the Main Bank.
Another full time insurance agent was placed in the Ripley Office. In addition,
a Title Insurance Company established in 1999, is two-thirds owned by White and
Associates/First Citizens, LLC.
The business of providing financial services is highly competitive. The
competition involves not only other banks but non-financial enterprises as well.
In addition to competing with other commercial banks in the service area, First
Citizens competes with savings and loan associations, insurance companies,
savings banks, small loan companies, finance companies, mortgage companies, real
estate investment trusts, certain governmental agencies, credit card
organizations, and other enterprises.
The following tabular analysis sets forth the competitive position of First
Citizens when compared with other financial institutions in the service area for
the period ending June 30, 1999.
Dyer County Market
(Bank's Only)
(in thousands)
Total Deposits % of Market Share
Bank Name 06/30/99 06/30/99
First Citizens
National Bank $264,220 53.75%
First Tennessee
Bank 102,513 20.87%
Security Bank 76,142 15.49%
City State Bank 11,727 2.38%
Union Planters, FSB 36,909 7.51%
--------
Total $491,511 100.00%
*Does not include deposits of $22,390,000 categorized as Overnight and fixed
term Repurchase Agreements.
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At December 31, 1999 Bancshares and its subsidiary, First Citizens, employed a
total of 203 full time equivalent employees. Having been a part of the local
community in excess of 100 years, First Citizens has been privileged to enjoy a
major share of the financial services market. Dyersburg and Dyer County are
growing and with this growth come demands for more sophisticated financial
products and services. Strategic planning has afforded the Company both the
physical resources and data processing technology necessary to meet the
financial needs generated by this growth.
USURY, RECENT LEGISLATION AND ECONOMIC ENVIRONMENT
Tennessee usury laws limit the rate of interest that may be charged by banks.
Certain Federal laws provide for preemption of state usury laws. Legislation
enacted in 1983 amends Tennessee usury laws to permit interest at an annual rate
of interest four (4) percentage points above the average prime loan rate for the
most recent week for which such an average rate has been published by the Board
of Governors of the Federal Reserve, or twenty-four percent (24%), which ever is
less (TCA 47-14-102(3)). The "Most Favored Lender Doctrine" permits national
banks to charge the highest rate permitted by any state lender.
Specific usury laws may apply to certain categories of loans, such as the
limitation placed on interest rates on single pay loans of $1,000.00 or less for
one year or less. Rates charged on installment loans, including credit cards, as
well as other types of loans may be governed by the Industrial Loan and Thrift
Companies Act.
On September 29, 1994, President Clinton signed into law the Riegel-Neal
Interstate Banking and Branching Efficiency Act of 1994 ("Act"). The Act
provides for nationwide interstate banking and branching with certain
limitations. The Act permits bank holding companies to acquire banks without
regard to state boundaries after September 29, 1995. The Federal Reserve may
approve an interstate acquisition only if, as a result of the acquisition, the
bank holding company would control less than 10% of the total amount of insured
deposits in the United States or 30% of the deposits in the home state of the
bank being acquired. The home state can waive the 30% limit as long as there is
no discrimination against out-of-state institutions.
Pursuant to the Act, interstate branching took effect on June 1, 1997, except
under certain circumstances. Once a bank has established branches in a host
state (a state other than its headquarters state) through an interstate merger
transaction, the bank may establish and acquire additional branches at any
location in the host state where any bank involved in the interstate merger
transaction could have established or acquired branches under applicable federal
or state law.
The Act further provides that individual states might opt out of interstate
branching, prior to May 31, 1997. A bank in that state may merge with a bank in
another state provided that neither of the states have opted out.
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The Federal Reserve in September, 1996 gave bank holding companies the right to
exclude some securities earnings from the 10% cap on underwriting revenue
through "Section 20 Units". It later removed three firewalls, one of which
prevented the same bank employee from selling underwriting services, loans and
transactions accounts. The Federal Reserve on December 20 more than doubled, to
25% the amount of revenue section 20 units may earn underwriting and dealing in
commercial securities. The Office of the Comptroller of the Currency in adopting
its controversial operating-subsidiary rule in November 1996, established a
procedure that allows national banks to create subsidiaries to underwrite
securities, sell insurance, or conduct other activities that the banks may
engage in directly. Change in the law for securities underwriting will have no
impact on First Citizens since the bank does not engage in this practice.
Legislation being considered would possibly limit this action to operating
Subsidiaries of the Holding Company only.
The Comptrollers's operating-subsidiary rule also streamlined national banks'
applications for new branches. It sets a strict 45-day deadline for Comptroller
action on all applications, with a 10 day extension possible when serious CRA
issues are raised. The Comptroller provisions closely parallel changes to
Regulation Y issued by the Federal Reserve in August, 1996. Those changes give
the Federal Reserve 15 days to process most merger applications. It also expands
data processing powers, eliminates tying restriction on nonbanks, and allows
bank-run trusts to buy mutual funds advised by the bank.
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.
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What does this mean for First Citizens? The primary impact 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 is
progressing toward on-line insurance sales.
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.
13
There are no known trends, events or uncertainties that are likely to have a
material effect on First Citizens liquidity, capital resources or results of
operation. There currently exists no recommendation by regulatory authorities
which if implemented, would have such an effect. There are no matters which have
not been disclosed. Bancshares and First Citizens are located in a highly
competitive market. There are numerous banks located within markets served by
First Citizens who compete for deposit dollars and earning assets, two of whom
are branches of large regional competitors. First Tennessee Bank and Union
Planters National Bank are two of the largest financial institutions in the
state. Interstate banking as permitted by recent federal legislation as
discussed herein could possibly bring about the location of large out of state
banks to the area. If so, First Citizens would continue to operate as it has in
the past, focusing on the wants and needs of existing and potential customers
and maximizing the use of technology. The quality of service and individual
attention afforded by an independent community bank cannot be matched by large
regional competitors, managed by a corporate team unfamiliar to the area. First
Citizens is a forward thinking bank offering products and services required to
maintain satisfactory customer relationships as we move into the twenty-first
century.
Monetary policies of regulatory authorities, including the Federal Reserve have
a significant effect on operating results of bank holding companies and their
subsidiary banks. The Federal Reserve regulates the national supply of bank
credit by open market operations in United States Government securities, changes
in the discount rate on bank borrowings, and changes in reserve requirements
against bank deposits. A tool once extensively used by the Federal Reserve to
control growth and distribution of bank loans, investments and deposits has been
eliminated through deregulation. Competition, not regulation, dictates rates
which must be paid and/or charged in order to attract and retain customers.
Federal Reserve monetary policies have materially affected the operating results
of commercial banks in the past and are expected to do so in the future. The
nature of future monetary policies and the effect of such policies on the
business and earnings of the company and its subsidiaries cannot be accurately
predicted.
ITEM 2. PROPERTIES
First Citizens owns and occupies a six-story building in Dyersburg, Tennessee
containing approximately 50,453 square feet of office space, bearing the
municipal address of First Citizens Place (formerly 200 West Court). An
expansion program completed during 1988 doubled the available floor space of the
existing facility. The space was utilized to combine all lending and loan
related functions. First Citizens owns the Banking Annex containing total square
footage of 12,989 which provides operating space for banking departments i.e.
agricultural services, training and public relations, as well as the bank's
Brokerage subsidiaries. The municipal address of the bank occupied portion of
the Annex is 215-219 Masonic Street.
The land and building occupied by the Downtown Drive-In Branch located at 113
South Church Street, Dyersburg, Tennessee is owned by First Citizens. The
building, containing approximately 1,250 square feet, is located on a lot which
measures 120 feet square. Also located at this address is a separate ATM
facility wholly owned by the Bank.
14
The Midtown Branch of First Citizens is located at 620 U.S. 51 By-Pass adjacent
to the Green Village Shopping Center. The building contains 1,920 square feet
and has been owned by First Citizens since construction. The land on which this
Branch is located, having previously been leased, was purchased during 1987. In
June of 1992 an additional 1.747 acres adjoining the Midtown Branch property was
purchased to accommodate future growth and expansion. Construction of a larger
facility at this location commenced during the third quarter of 1999 with a
completion date of June 30, 2000. In addition to financial services, the branch
will house a U.S. Postal Service location which will be available twenty-four
hours a day, seven days a week.
In addition, the Midtown Branch Motor Bank is located on .9 acres adjoining the
Midtown Branch. This property consists of a servicing facility and six remote
teller stations and is owned in its entirety by the Bank. A drive-through ATM
was located at this facility during 1994. This location will be combined with
the full service branch location now under construction and will be identified
as the Green Village Office.
The Newbern Branch, also owned by First Citizens, is located on North Monroe
Street, Newbern, Tennessee. The building contains approximately 4,284 square
feet and occupies land which measures approximately 1.5 acres. A separate
facility located in Newbern on the corner of Highway 51 and RoEllen Road houses
an ATM. Both land and building are owned by the Bank.
The Super Money Market Branch in the Kroger Supermarket on Highway 78 is
operated under a franchise obtained through National Bank of Commerce, Memphis,
Tennessee. While the fixtures are owned by First Citizens, space is made
available from the Kroger Company through the franchise agreement. An ATM is
also located near the branch in the Kroger facility.
The Industrial Park Branch located at 2211 St. John Avenue is a full service
banking facility that offers drive-thru Teller and ATM services. The building
owned by First Citizens National Bank contains approximately 2,773 square feet
and is located on 1.12 acres of land. The Industrial Park Branch, became
operational In November, 1994.
Construction of the new branch office in Lauderdale County was completed during
the second quarter of 1999. The building contains approximately 3,500 square
feet and was built on 1.151 acres of land located at 316 Cleveland Street in
Ripley, providing a larger, more efficient facility to better serve our
customers in Lauderdale County. The Ripley Office offers full serving banking
with drive up teller lanes, twenty-four hour drive up ATM as well as Mortgage,
Trust, Brokerage and Insurance services. Customers and staff celebrated a move
to the new location on July 1, 1999. First Citizens continues to retain title to
the original building. The building contains approximately 1,450 square feet and
was built in 1984 on a quarter acre of land located at 292 Washington Street in
Ripley. This location offers twenty-four hour ATM access, with exception to
accepting deposits. The building will be considered in terms of future expansion
of the Ripley franchise, or will be sold if no future utilization can be
identified.
The Bank of Troy was purchased by First Citizens National Bank in early 1998.
The Troy Branch is located on Harper Street just west of Highway 51 in Troy,
Tennessee. The building is two story brick and siding. The site consists of
three lots with maximum dimensions on each side being 272 feet and 260 feet. The
first floor in the main building contains 5,896 square feet and houses a full
service branch facility. Most of the building was constructed in 1970 with
additions and renovations being made since that time. The Troy Branch also
offered limited drive-through services at a location on Highway 51 which was
closed May 1, 1999. Permission to close this location was granted by the OCC
based on the limited volume of business conducted by customers compared to the
cost of operations.
15
First Volunteer Bank in Union City was purchased by First Citizens early in
January 1999. The Union City branch operates two full service facilities, a
motor branch and two ATM's in Obion County. The main office is located at 100
Washington Avenue in Union City. The brick building consists of 52,500 square
feet on three floors and is a combination of two buildings. The bank occupies
10,000 square feet of the ground floor. An additional 3,750 square feet are used
for storage space. The other 3,750 square feet of the ground floor are leased to
Snappy Tomato Pizza Company. A motor branch is located at First and Harrison
Streets across from the main office. The East branch facility and ATM are
located at 1509 East Reelfoot Avenue in Union City. The other ATM is located in
the Goodyear Manufacturing facility in Union City.
As a result of the Union City acquisition, First Citizens acquired a 5,123
square foot building having a street address of 500 South First Street,
currently leased by Radio Shack. This building will be considered in terms of
future expansion of the Union City franchise, or will be sold if no future
utilization can be identified.
There are no liens or encumbrances against any of the properties owned by First
Citizens.
ITEM 3. LEGAL PROCEEDINGS
First Citizens is involved in routine legal issues. However, the outcome of
these issues are not expected to have a material adverse effect to the bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year ending December 31, 1999, there were no
meetings, annual or special, of the shareholders of Bancshares. No matters were
submitted to a vote of the shareholders nor were proxies solicited by management
or any other person.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
As of December 31, 1999 there were 978 shareholders of Bancshares' stock.
Bancshares common stock is not actively traded on any market. Per share prices
reflected in the following table are based on records of actual sales during
stated time periods. These records may not include all sales during these time
periods if sales were not reported to First Citizens for transfer.
Quarter Ended High Low
March 31, 1999 $30.00 $30.00
June 30, 1999 $30.00 $30.00
September 30, 1999 $30.00 $30.00
December 31, 1999 $30.00 $30.00
March 31, 1998 $23.50 $22.75
June 30, 1998 $23.50 $22.75
September 30, 1998 $30.00 $23.50
December 31, 1998 $30.00 $30.00
16
Dividend payouts per share adjusted for the split were .90 cents in 1999, .75
cents in 1998 and .50 cents in 1997.
Dividends - 1999
Dividend Quarter
Per Share Declared
.1875 1st
.1875 2nd
.1875 3rd
.3375 4th
Total $ .9000
All dividends are restated to reflect the 4:1 stock split in June 1998.
*Special dividend paid in fourth quarter, 1999 and 1998.
Future dividends will depend on Bancshares' earnings and financial condition
and other factors which the Board of Directors of Bancshares considers relevant.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents information for Bancshares effective December 31
for the years indicated.
(in thousands)
(except per share data)
1999 1998 1997 1996 1995
Net Interest &
Fee Income $ 19,305 $ 17,964 $ 16,021 $ 14,956 $ 13,417
Gross Interest
Income $ 36,085 $ 35,252 $ 30,698 $ 28,862 $ 26,546
Income From
Continuing
Operations $ 5,799 $ 4,474 $ 4,730 $ 4,254 $ 3,024
Long Term
Obligations(1) $ 11,264 $ 25,486 $ 12,146 $ 6,997 $ 8,652
Income Per Share
from Continuing
Operation(2) $ 1.58 $ 1.25 $ 1.38 $ 1.22 $ .89
Net Income per
Common Share (2)
$ 1.58 $ 1.25 $ 1.38 $ 1.22 $ .89
Cash Dividends
Declared
per Common
Share(2) $ .90 $ .75 $ .50 $ .40 $ .33
Total Assets at
Year End $472,670 $472,153 $384,183 $357,269 $332,778
Allowance for
Loan Losses
as a % Loans 1.14% 1.25% 1.21% 1.07% 1.15%
Allowance for
Loan Losses as
a % of Non-
Performing Loans 445.26% 509.62% 461.76% 176.08% 707.99%
Loans 90 Days
Past Due as a
% of Loans .10% .14% .00% .09% .17%
17
(1)Long Term Obligations consist of FHLB Borrowings and an ESOP Obligation.
(2)Restated to reflect 4 for 1 Stock Split on June 15, 1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Significant events highlighted 1999 as a record year for First Citizens
Bancshares, Inc. First Citizens National Bank was declared Year 2000 compliant;
Bank of Troy and First Volunteer were successfully converted as full service
offices; First Citizens/White and Associates Insurance chartered both a Credit
Insurance Company and a Title Insurance Company. Construction of the Ripley
Office facility was completed, while construction was commenced on a 6400 square
foot facility at our Green Village location. The Electronic Banking Department
and Call Center were established to support electronic delivery channels and
enhance customer service.
Assets:
Total assets ended the year at $472,670,000 up 30% when compared to totals
previous to the acquisition of First Volunteer Bank. First Citizens acquired
First Volunteer Bank, Union City, Tennessee, with assets totaling $49 million as
of January 1, 1999. The acquisition was consummated February 12, 1999, in a
transaction recorded as a pooling-of-interests which involved the issuance of
445,251 shares of First Citizens Bancshares, Inc. common stock. Accordingly, the
Financial Accounting Standards Board required a restatement of the prior year(s)
financial reports to reflect assets acquired from First Volunteer Bank. The
restated balance sheet reflects total assets at December 31, 1999 of
$472,670,000 compared to $472,153,000 as of December 31, 1998, up less than one
percent. Traditionally, banks which move into new markets through acquisitions,
lose market share in the first year, gain back some of the loss the second year
and by the end of the third year, regain lost market share. First Citizens
marketing efforts are and will continue to be directed toward business
development and growth in market share. Officers, Employees, and Directors are
charged with the implementation of a business development program designed to
improve service to existing customers, identify the potential for new
relationships and cross sell a wide array of products and services to customers,
based on a needs assessment. As evidence of the success of these efforts market
share in Dyer County increased to 53.75 percent in 1999 from 52.33 percent in
1998. Both Obion and Lauderdale County lost market share in 1999 as certain
competitors offered above market rates on deposits in an effort to gain market
share.
Loans:
The loan portfolio is First Citizens largest earning asset. Total loans as of
December 31, 1999 increased approximately 6%, exclusive of acquisitions, when
compared to December 31, 1998. Loans acquired in acquisition and merger
activities added approximately $58 million in volume. The portfolio is comprised
primarily of commercial, agricultural and real estate loans, with real estate
comprising in excess of 56% of total loan volume. New building starts in Dyer
and surrounding counties presented growth opportunities for First Citizens in
areas of one-to-four family residential loans as well as commercial and retail
business expansions. Competition for loans continues to place pressure on the
yield and term customers are willing to accept. Loan Administration has taken a
conservative position in dealing with situations which deviate from established
underwriting standards, while recognizing the need to maintain quality loan
growth.
18
First Citizens is the largest agricultural lender in the State of Tennessee and
is an approved Farm Credit Services lender. The Ag segment of the West Tennessee
economy was dealt a major blow two years running when every primary crop was
subjected to some form of natural disaster. In addition, reduced export demand
forced down commodity prices to levels not seen in more than a decade. At
December 31, 1999, First Citizens' loan portfolio contained approximately $29
million in agriculturally related loans with only 1.35% reported as past due.
Some of these loans presented a challenge to our customers and to First Citizens
as lender. Recognizing that the situation is temporary in nature, Loan
Administration 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 of this vital segment of our economy. An adequate loan loss reserve,
strong underwriting standards and a 90% guaranty of Farm Credit services on many
loans should minimize the impact to future earnings of the company.
Asset quality within the loan portfolio remains strong with the provision for
loan losses at a level which management believes adequate to absorb potential
losses. Non-Performing loans at year-end were .27 percent of total loans
compared to peer bank ratio of .78 percent. Problem loans at December 31, 1999
increased to 1.53 percent of total loans compared to 1.06 percent at year-end
1998. Problem loan totals as well as loans charged-off are reflective of
variations in underwriting standards associated with the merged banks and First
Citizens National Bank. The ratio of net charge-offs to average net loans
outstanding for 1999 and 1998 are .13 percent, .09 percent respectively.
Deposits:
One of the most critical issues facing banks today is the ability to attract and
retain deposits. The exaggerated returns investors have enjoyed from equities
and mutual funds have resulted in stripping funds from lower yielding bank
certificate of deposits. Conversely, the competitive nature of the lending
market forces down the rate of return, placing pressure on the ability to
maintain acceptable net interest margins. As a result, community banks have
turned to the Federal Home Loan Bank as a liquidity source.
Deposit growth, of 34.85 percent is reflective of deposits acquired in merger
and acquisition activities in 1999. However, a comparison of the restated
balance sheet for the periods ending 1999 and 1998 reflects actual growth of
1.7%. The restated balance sheet accounts for deposits of First Volunteer Bank
as if those deposit were booked on the balance sheet of First Citizens National
Bank as of December 31, 1998. Deposits acquired from First Volunteer and Bank of
Troy and remaining on the books at year-end total $77 million.
Sweep accounts balances totaling $ 14,685,000 are excluded from deposit totals.
The "Sweep" product is offered to large balance customers, and provides for
funds to automatically sweep daily from a demand deposit account into an
overnight repurchase agreement. This product 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.
Earnings:
Return on average assets is a measure of Bancshares' ability to maximize asset
utilization. Return on average assets was impacted in both 1999 and 1998 as a
result of non-recurring organizational costs associated with merger and
acquisition activities. Return on average assets in 1999 and 1998 were 1.26
percent and 1.29 percent. Net Interest Income is the primary source of income
for Bancshares. Interest income for the years under comparison in Bancshares'
income statement is $36,085,000, $35,252,000, and $30,698,000. Improved interest
income levels for 1998 and 1999 is primarily
19
reflective of an increased loan volume. Yields on interest earning assets i.e.
loans and investments, decreased from 9.08% in 1997 to 8.48% in 1999, while the
cost on interest bearing liabilities decreased from 4.80% to 4.36%. Reduced
funding cost is attributable to utilization of Federal Home Loan Bank as an
alternative source of funds. As a result, we are better able to manage the cost
of funds and restore net interest margins to a more acceptable level.
Growth in non-interest income makes a substantial contribution to Bank earnings.
Components in this category include service charges on deposit accounts, loan
fees and other service charges, and income received from Subsidiaries.
Non-interest income improved from $ 4 million or 13.56 percent in 1998 to $5.7
million or 23.57 percent in 1999.
Non-interest expense increased approximately 5 percent in 1999 compared to 23
percent in 1998. Salaries and benefits increased less than 5% in 1999 after a
24% increase in 1998, a result of added staff created by the acquisition of Bank
of Troy and a buy out of an executive contract. The previous years total
reflected additional employees of Bank of Troy, Delta Finance, and in support
positions at First Citizens National Bank, while 1999 increase can be attributed
to the addition of First Volunteer and annual payroll increases. Occupancy
expense, up13 percent in '99, reflects additional depreciation expenses
associated with acquired facilities; construction of new facilities; and
computer cost associated with Bank of Troy and First Volunteer conversions. Data
processing expense increased 15% in 1998 as a result of software enhancements,
the installation of a Wide Area Network and cost of addressing year 2000 issues.
A consistent and disciplined Asset/Liability Management policy provides the
necessary focus on interest rate risk and rate sensitivity. An executive level
Asset/Liability Management Committee functions in accordance with board approved
policies to monitor pricing, maturity, growth and mix strategies. This oversight
allows management to make informed decisions that limit interest rate risk and
ensure a consistent and ever increasing level of earnings.
Shareholder Return and Equity Capital:
Stockholder equity has grown consistently, supported by strong earnings and
quality assets. Total equity capital increased to $43,680,000 at year end 1999
from $36,786,000 in 1998. The purchase of the Bank of Troy was funded with
equity capital totaling $5.5 million and a loan from SunTrust Bank in the amount
of $4.1 million. The Sun Trust loan was repaid in full in 1999. In June 1998 the
Employee Stock Ownership Plan entered into a loan agreement with SunTrust Bank
in the amount of $2,000,000 to fund the purchase of previously authorized and
unissued stock. The stock will be utilized to satisfy future allocations to ESOP
participants in accordance with the plan document approved by the Board of
Directors in December 1985. The balance remaining on the ESOP loan, which is
fully guaranteed by Bancshares, was $1,117,000 as of December 31, 1999.
Net income of $5,799,000 at year-end 1999 was up $1.3 million or 30% when
compared to 1998. A comparison of 1998 net income to 1997 reflects a decrease of
$256,000 or 6 percent. Earnings per share for the same time period were $1.58,
$1.25, and $1.38 respectively. Earnings decrease in 1998 is reflective of
one-time costs associated with the purchase and conversion of Bank of Troy.
Increased net income for 1999 reflects both merger activity as well as growth in
total loans. Management will continue to invest excess capital in a manner that
compliments earnings and enhances the potential increase to shareholder return.
20
Cash dividends paid for the years of 1999, 1998 and 1997 were $.90, $.75, $.50.
Shareholder dividends paid in 1999 consisted of quarterly dividends of $.1875
per share and a special dividend of $.15 per share. 1998 dividend was enhanced
by a 4 for 1 stock split distributed to shareholders June 15, 1998. As a result
of the split, the number of shares outstanding increased to 3,194,544. This
action followed a 2.5 for 1 split October 15, 1993 and a 10% stock dividend
December 15, 1992.
During 1999, per share price of banks stocks came under tremendous pressure.
Because Bancshares stock is not publicly traded, it has thus far escaped the
level of volatility that has impacted stock prices of even the best performing
banks. Uncertainty of the future direction of interest rates, a decrease in
merger and acquisition activity and a leveling off of earnings have combined to
dampen the enthusiasm of investors and create an unstable stock market.
Bancshares stock traded at $30.00 per share through December 31, 1999. However,
first quarter 2000, market value declined to a per share price of $24.00.
Book value per share fell from $12.12 at year-end 1998 to $11.81 as of December
31, 1999, as a direct result of Mark-to-Market requirements of FASB 115.
Mark-to-Market dictates that investment securities held in the Available for
Sale portion of the securities portfolio be marked up or down to account for
fluctuations in market value created by changes in interest rates. The
adjustment derived from the market evaluation is then marked against the banks'
capital. Changes to the capital account as a result of FASB 115 are classified
as book entry and write-downs are temporary if securities are held to maturity.
Write downs in 1999 as a result of Mark to Market Accounting was approximately
$3.4 million First Citizens has no plans to sell securities held in Available
for Sale prior to the maturity of the investment.
Changes in Financial Accounting Standards
FASB Statements 135 through 137 - Pooling of Interests Method
The pooling of interests method accounts for a business combination as the
uniting of the ownership interests of two or more companies by exchange of
equity securities. No acquisition is recognized because the combination is
accomplished without disbursing resources of the constituents. Ownership
interests continue and the former bases of accounting are retained. The recorded
assets and the liabilities of the constituents are carried forward to the
combined corporation at their recorded amounts. Income of the combined
corporation includes income of the constituents for the entire fiscal period in
which the combination occurs. The reported income of the constituents for prior
periods is combined and restated as income of the combined corporation.
NON-INTEREST INCOME
The following table reflects restated non-interest income for the years ending
December 31, 1999, 1998, and 1997:
December 31
Change from prior year
(in thousands)
Increase Increase
Total (Decrease) Total (Decrease) Total
1999 Amount Percentage 1998 Amount Percentage 1997
Service Charges on
Deposit Accounts $2,408 $ 331 15.93% $2,077 $ 160 8.34% $1,917
Other Service Charges,
Commissions & Fees $1,657 $ 544 48.87% $1,113 $ 278 33.29% $ 835
Other Income $1,606 $ 207 14.79% $1,399 $ 110 8.53 $1,289
TOTAL NON-INTEREST
INCOME $5,671 $1,082 23.57% $4,589 $ 548 13.56% $4,041
21
Growth in non-interest income is key to sustaining increases in overall net
income as net interest margins continue to be squeezed. The components of First
Citizens non-interest income include service charges on deposit accounts, other
fees and service charges, fiduciary income, ATM/POS interchange fees, and other
income from subsidiaries (Financial Plus, White and Associates/First Citizens
Insurance, Delta Finance, Trust Department). Total non-interest income in 1999
increased 23.6% to $5,671,000 compared to a 13.6% increase in 1998. Service
charges on deposit accounts increased 16% from 1998 to 1999 primarily due to
increased overdraft fee income. A strong focus on fee income and diversification
of the income stream is reflected in the increased percentages in 1999 of 49% in
other service charges and fees and 15% in other income. Improved earnings are
attributed to continued growth in income received from Financial Plus, Inc.;
First Citizens Insurance; and the Trust Department. These numbers are also
reflective of income received from the sale of a branch office located in Troy,
TN at a net profit of approximately $100,000.
NON-INTEREST EXPENSE
December 31
Change from prior year
(in thousands)
Increase Increase
Total (Decrease) Total (Decrease) Total
1999 Amount Percentage 1998 Amount Percentage 1997
Salaries & Employee
Benefits $ 8,672 $ 384 4.63% $ 8,288 $1,580 23.55% $6,708
Occupancy Expense $ 2,726 $ 311 12.87% $ 2,415 113 .49% $2,302
Other Operating Expense $ 4,011 $ 71 1.80% $ 3,940 998 33.92% $2,942
TOTAL NON-INTEREST EXPENSE $15,409 $ 766 5.23% $14,643 $2,691 22.51% $11,952
Total non-interest expense increased approximately 5% in 1999 and 23% in 1998
reflecting growth in salaries and benefits of additional employees at First
Volunteer Bank, Bank of Troy, Mortgage Lending, Financial Plus, Delta Finance
and in support positions at First Citizens National Bank. The Bank of Troy,
Troy, TN and First Volunteer Bank, Union City, TN were converted to the books of
First Citizens National Bank in 1999 as branches of the bank. These conversions
allowed for a reduction in number of employees as well as provide for economies
of scale in information systems. Non-recurring expense incurred at Bank of Troy
in 1998 exceeded $1.3 million and included benefit plans, additional loan loss
reserves and buy out of an employment contract of the Bank's former CEO.
Full-time equivalent employees were 203 at December 31, 1999 compared to 172 at
December 31, 1998. Assets per employee at December 31, 1999 was $2.3 million,
remaining stable when compared to $2.3 at December 31, 1998. Data processing
expense increased in 1998 and 1999 as a result of software enhancements, the
installations of a Wide Area Network, cost of addressing year 2000 issues,
associated merger costs, and the introduction of Online Banking to our
customers. The increase does not reflect the time and attention of key staff
members to ensure that systems were compliant and would deal efficiently with
the new millennium date change. Increase in occupancy expense from 1998 to 1999
was greatly influenced by the construction of the new branch office in Ripley,
early construction stages of the new Green Village Office, and increased
depreciation expense.
Efficiencies implemented over the past five years have reduced and/or controlled
non-interest expense in an acceptable manner. Going forward, management will
focus on increasing the potential to generate non-interest income through
investment in non-banking subsidiaries such as insurance agencies, consumer
finance companies, and our brokerage business. In addition, we will concentrate
on internal income growth in the bank's mortgage lending and trust services
departments.
22
December 31
Assets Per Employee Asset Per Employee
FCNB Peer Groups
(in thousands)
1999 $2,328 $2,540
*1998 $2,354 $2,400
1997 $2,151 $2,400
1996 $2,159 $2,300
1995 $1,969 $1,900
*1998 includes Bank of Troy and Delta Finance II. Assets per
employee increased due to Troy's positive position.
COMPOSITION OF DEPOSITS
The average daily amounts of deposits and rates paid on such deposits are
summarized for the periods indicated:
December 31
(in thousands)
1999 1998 1997
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
Non-Interest
Bearing Demand
Deposits $ 39,805 - $ 37,742 - $ 32,368 -
Savings Deposits $111,278 2.99% $106,259 3.20% $ 92,562 3.37%
Time Deposits $208,908 4.91% $202,370 5.62% $176,155 5.51%
TOTAL DEPOSITS $359,991 3.77% $346,371 4.27% $301,085 4.25%
Deposits increased 3.9% in 1999 in comparison to 15% in 1998 which included Bank
of Troy deposits. A comparison of the composition of deposits for 1999 and 1998
reflects deposit growth of only 3.9% in 1999 as compared to 15% when comparing
1998 to 1997. Total deposits have been restated as required by FASB Accounting
Standards for pooling-of-interests, triggered by the First Volunteer merger, as
discussed in the MDA on page 17 in the section titled Assets. Actual deposit
growth in 1999 including deposits acquired from mergers and acquisitions, was
34.85 percent. The company's marketplace is described as highly competitive,
with a fairly sophisticated customer base. Competition is aggressive for both
loans and deposits. Retention of savings and time deposits continues to be a
challenge with increased competition by brokerage firms, insurance companies and
other financial service providers. Competitor marketing programs are aggressive
in seeking new deposit dollars with advertising programs that offer rates on
certificates of deposits in excess of 6% and above in some market areas.
According to a recent survey First Citizens maintains approximately 54% of Dyer
County market share; 16% of Obion County market share and 4% of Lauderdale
County market share. In the Dyer County market the bank competes with Union
Planters (7.5%), First Tennessee Bank (20.9%), Security Bank (15.5%), and City
State Bank (2.4%). The bank's largest competitor in Lauderdale County is Bank of
Ripley (36.2%). Competition in Obion County ranks First State Bank 42.1% market
share, Commercial Bank and Trust 17.1%, Union Planters 9.7%, and Reelfoot Bank
12.8%.
23
Deposit growth, without acquired deposits, remained relatively flat in 1999. The
average rate paid on total deposits continued to decline from 4.27% in 1998 to
3.77% in 1999. However, an increase in rates by the Federal Reserve prompted a
reversal of this trend during the fourth quarter of 1999. The utilization of
deposits to fund loan growth is no longer an option for the banking industry.
Returns generated on investments in stocks and mutual funds, combined with a
high level of customer confidence in the national economy have negated the value
of FDIC Insurance as a tool for attracting and holding deposits. First Citizens
has turned to other sources provided by approved lines of credit through
Correspondent Banks and Federal Home Loan Bank. As a result we have more control
on maintaining acceptable interest rate margins. Deposit growth is projected at
2% to 3% by the 2000 budget. Management is continuously monitoring and enhancing
the bank's product line in order to retain existing customers and to attract new
customer relationships. First Citizens introduced Internet based banking to the
market place September 1, 1999. The service allows customers to access account
information, statement activity, apply for a deposit or loan and pay bills by
signing on to firstcitizens-bank.com. The cost of Internet banking is free to
customers, while bill pay is offered at a competitive price. A Call Center is in
the early planning stages and will provide more efficient customer support from
account inquiry to electronic banking products and services. An Internet based
cash management product for small businesses will be announced to the market
during the first half of 2000.
SHORT TERM BORROWINGS
12/31/99 12/31/98
Amount outstanding-end of Period $46,090 $38,107
Weighted Average Rate of Outstanding 4.56% 4.38%
Maximum Amount of Borrowings at
Month End 47,470 38,107
Average Amounts Outstanding for
Period 32,759 27,777
Weighted Average Rate of Average
Amounts 4.46% 4.46%
Long term debt for 1999 is comprised of Federal Home Loan Bank borrowings
totaling $33,963,571 and Delta Finance Company obligation of $1,000,000. Other
long term obligations consist of a note payable of Employee Stock Ownership Plan
to Suntrust Bank, balance at 12/31/99 of $1,117,000. 1998 long term debt
included Federal Home Loan Bank borrowings totaling $35,010,053, Debt for the
purchase of Troy Bank, balance at year-end of $682,295, and Delta Finance
Company debt. The Employee Stock Ownership Plan loan balance at 12/31/98 was
$1,408.000.
Average Average Average Variable
Volume Rate Maturity
FHLB Borrowings-Loans 2,264 5.86% 5 years
FHLB Borrowings-Other 10,264 5.12% 1-5 years Monthly, Yearly
Finance Company Debt 1,000 6.00% 5 years
ESOP Obligation 1,117 6.89% 6 years Monthly
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 December 31, 1999. The overall total increased in excess of
$25 million when compared to the prior year.
MATURITY DISTRIBUTION OF TIME DEPOSITS IN AMOUNTS OF $100,000 AND OVER
December 31
(in thousands)
1999 1998
Amount Percent Amount Percent
Maturing in:
3 months or less $44,946 63.42% $18,719 41.22%
Over 3 through 12 months $22,980 32.43% $22,525 49.60%
Over 12 months $ 2,936 4.15% $ 4,170 9.18%
TOTAL $70,862 100.00% $45,414 100.00%
24
The following table sets forth an analysis of sources and uses of funds for the
years under comparison.
SOURCES AND USES OF FUNDS
(in thousands)
1999 1998 1997
FUNDING USES Average Increase Average Increase Average
Balance (Decrease) Balance (Decrease) Balance
Amount % Amount % Amount
INTEREST-EARNING
ASSETS:
Loans (Net of
Unearned Discounts
& Reserve) $323,047 $33,631 11.62% $289,416 $37,431 14.85% $251,985
Taxable Investment
Securities $ 89,368 $ 5,449 6.49% $ 83,919 $12,682 17.80% $ 71,237
Non-Taxable
Investment
Securities $ 13,072 ($ 1,127)(7.93%)$ 14,199 $ 2,664 23.09% $ 11,535
Federal Funds
Sold $ 2,690 ($ 6,060)69.25% $ 8,750 $ 1,750 25.00% $ 7,000
Interest Earning
Deposits In
Banks $ 1,031 $ 51 5.20% $ 980 $ 685 232.20% $ 295
TOTAL INTEREST-
EARNING ASSETS $429,208 $31,944 8.04% $397,264 $55,212 16.14% $342,052
Other Uses $ 43,376 $ 5,218 13.67% $ 38,158 $ 5,580 17.12% $ 32,578
TOTAL FUNDING
USES $472,584 $37,162 8.53% $435,422 $60,792 16.22% $374,630
INTEREST-BEARING
LIABILITIES:
Savings
Deposits $111,278 $ 5,019 4.72% $106,259 $13,697 14.79% $ 92,562
Time Deposits $208,908 $ 6,538 3.23% $202,370 $26,215 14.88% $176,155
Federal Funds
Purchased and
Other Interest
Bearing
Liabilities $ 64,918 $18,418 39.60% $ 46,500 $ 8,601 22.69% $ 37,899
TOTAL INTEREST-
BEARING
LIABILITIES $385,104 $29,975 8.44% $355,129 $48,513 15.82% $306,616
Demand Deposits $ 39,805 $ 2,063 5.46% $ 37,742 $ 5,374 16.60% $ 32,368
Other Sources $ 47,675 $ 5,124 12.04% $ 42,551 $ 6,905 19.37% $ 35,646
TOTAL FUNDING
SOURCES: $472,584 $37,162 8.53% $435,422 $60,792 16.22% $374,630
25
SUMMARY - AVERAGE BALANCE SHEET AND NET INTEREST INCOME ANALYSIS
(FIRST CITIZENS NATIONAL BANK)
Monthly Average Balances and Interest Rates
(in thousands)
1999 1998 1997
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
ASSETS
INTEREST EARNING
ASSETS:
Loans (1)(2)
(3) $323,047 $29,382 9.10% $289,416 $28,502 9.84% $251,985 $24,907 9.88%
Investment
Securities:
Taxable $ 89,368 $ 5,903 6.61% $ 83,919 $ 5,405 6.44% $ 71,237 $ 4,957 6.95%
Tax Exempt (4) $ 13,072 $ 938 7.18% $ 14,199 $ 1,085 7.64% $ 11,535 $ 903 7.82%
Interest Earning
Deposits $ 1,031 $ 42 4.07% $ 980 $ 55 5.61% $ 295 $ 11 3.73%
Federal Funds
Sold $ 2,690 $ 148 5.50% $ 8,751 $ 639 7.30% $ 7,000 $ 281 4.01%
Lease Financing $ 0 $ 0 0% $ 0 $ 0 0% $ 0 $ 0 0%
Total Interest
Earning Assets $429,208 $36,413 8.48% $397,264 $35,686 8.98% $342,052 $31,059 9.08%
NON-INTEREST
EARNING ASSETS:
Cash and Due From
Banks $ 13,531 $ 0 0% $ 12,005 $ 0 0% $ 11,210 $ 0 0%
Bank Premises and
Equipment $ 13,035 $ 0 0% $ 10,180 $ 0 0% $ 9,131 $ 0 0%
Other Assets $ 16,810 $ 0 0% $ 15,973 $ 0 0% $ 12,237 $ 0 0%
Total Assets $472,584 $ 0 0% $435,422 $ 0 0% $374,630 $ 0 0%
LIABILITIES AND
SHAREHOLDERS'
EQUITY:
INTEREST BEARING
LIABILITIES:
Savings Deposits $111,278 $ 3,324 2.99% $106,259 $ 3,400 3.20% $ 92,562 $ 3,119 3.37%
(5)
Time Deposits $208,908 $10,262 4.91% $202,370 $11,391 5.62% $176,155 $ 9,690 5.50%
Federal Funds
Purchased and
Other Interest
Bearing
Liabilities $ 64,918 $ 3,194 4.92% $ 46,500 $ 2,497 5.36% $ 37,899 $ 1,868 4.92%
Total Interest
Bearing
Liabilities $385,104 $16,780 4.36% $355,129 $17,288 4.86% $306,616 $14,677 4.80%
NON-INTEREST
BEARING
LIABILITIES:
Demand Deposits $ 39,805 $ 0 0% $ 37,742 $ 0 0% $ 32,368 $0 0%
Other
Liabilities $ 3,993 $ 0 0% $ 2,688 $ 0 0% $ 2,221 $0 0%
Total
Liabilities $427,762 $ 0 0% $395,559 $ 0 0% $341,205 $0 0%
SHAREHOLDERS'
EQUITY $ 43,682 $ 0 0% $ 39,863 $ 0 0% $ 33,425 $0 0%
26
TOTAL LIABILITIES
AND SHAREHOLDERS'
EQUITY $472,584 $ 0 0% $435,422 $ 0 0% $374,630 $0 0%
NET INTEREST
INCOME $ 0 $19,633 0% $ 0 $18,398 0% $ 0 $16,382 0%
NET YIELD ON
AVERAGE EARNING
ASSETS $ 0 $ 0 4.57% $ 0 $ 0 4.63% $ 0 $0 4.78%
(1) Loan totals are shown net of interest collected, not earned
and loan loss reserves.
(2) Fee Income is included in interest income and the computations
of the yield on loans. Overdraft Fee Income is excluded from
the totals.
(3) Includes loans on nonaccrual status.
(4) Interest and rates on securities which are non-taxable for Federal
Income Tax purposes are presented on a taxable equivalent basis.
(5) Includes Insured Money Fund, NOW, Club Accounts, and other Savings.
VOLUME/RATE ANALYSIS
(First Citizens 1999 Compared to 1998 1998 Compared to 1997
National Bank) Due to Changes in: Due to Changes in:
Total Total
Average Average Increase Average Average Increase
Volume Rate (Decrease) Volume Rate (Decrease)
Interest Earned On: (in thousands)
Loans $3,309 $(2,429) $ 880 $3,698 $ (103) $3,595
Taxable Investments 351 147 498 8,814 (8,366) 448
Tax Exempt Investment
Securities (86) (61) (147) 208 (26) 182
Interest Bearing
Deposits with Other
Banks 3 (16) (13) 26 18 44
Federal Funds Sold and
Securities purchased
under agreements to
resell (442) (49) (491) 70 288 358
Lease Financing 0 0 0 0 0 0
TOTAL INTEREST EARNING
ASSETS $3,135 $(2,408) $ 727 $12,816 (8,189) $4,627
Interest Paid On:
Savings Deposits 161 (237) (76) 462 (181) 281
Time Deposits 367 (1,496) (1,129) 1,441 260 1,701
Federal Funds Purchased
and Securities Sold
Under Agreement to
Repurchase 987 (290) 697 423 206 629
TOTAL INTEREST BEARING
LIABILITIES $1,515 $(2,023) $ (508) $ 2,326 $ 285 $2,611
INTEREST EARNINGS $1,620 $ (385) $1,235 $10,490 (8,474) $2,016
27
A summary of average interest earning assets and interest bearing liabilities
is set forth in the preceding table together with average yields on the
earning assets and average cost on the interest bearing liabilities. Total
interest earning assets increased 8.04% and 16.14% when comparing 1999 to 1998
and 1997. Total interest bearing liabilities increased 8.44% and 15.82% when
comparing 1999, 1998 and 1997 respectively. Total interest earning assets
averaged $429,208,000 at an average rate of 8.48% while total interest bearing
liabilities averaged $385,104,000 at an average rate of 4.36%. Net yield on
average earning assets (annualized) was 4.57%, 4.63%, and 4.78% for the years
1999, 1998, and 1997. Strategic planning efforts dictate a reduction in cost
of funds, thereby improving interest rate margins. Asset/Liability policies
are in place to protect the company from the negative effects of volatile
swings in interest rates. Interest margins are well managed to achieve
acceptable profits and a return on equity within policy guidelines.
LOAN PORTFOLIO ANALYSIS
COMPOSITION OF LOANS
December 31
(in thousands)
1999 1998 1997 1996 1995
Real Estate Loans:
Construction $ 34,431 $ 28,048 $ 23,378 $ 21,564 $ 19,618
Mortgage $189,787 $159,637 $151,333 $142,079 $122,944
Commercial, Financial
and Agricultural Loans $ 60,446 $ 87,927 $ 52,212 $ 46,581 $ 45,402
Installment Loans to
Individuals $ 37,595 $ 29,197 $ 26,904 $ 23,743 $ 24,718
Other Loans $ 3,118 $ 2,522 $ 2,512 $ 2,479 $ 2,425
TOTAL LOANS $325,377 $307,331 $256,339 $236,446 $215,107
CHANGES IN LOAN CATEGORIES
December 31, 1999 as compared to December 31, 1998
(in thousands)
Amount of Increase % of Increase
Loan Category (Decrease) (Decrease)
Real Estate $36,533 19.46%
Commercial, Financial
and Agricultural ($27,481) (31.25%)
Installment Loans to
Individuals $ 8,398 28.76%
Other Loans $ 596 23.63%
TOTAL LOANS $18,046 5.87%
Outstanding loans at year-end increased 5.87% when compared to year-end 1998.
The 1998 total loan balance has been restated to include loans acquired from
First Volunteer totaling $28.7 million. Loan growth consisted of increased
volume in Installment and Real Estate categories. Commercial, Financial and
Agricultural Loans reflected a 31.25% decrease from 1998 to 1999 primarily due
to paydowns in commercial loans. The expansion into Obion County affords new
lending opportunities, which would support future growth projections, while at
the same time building on existing customer relationships. Net loan growth for
the five years ending December, 1999 was approximately 51 percent. Competition
for quality loans continues to place pressure on the yield and terms customers
are willing to accept. Loan Administration has taken a conservative position in
dealing with situations which deviate from established underwriting procedures,
while at the same time recognizing the need to maintain loan growth.
28
Growth in 1996 of 9.9% and 1997 of 8.4% is an indicator of increased
competition for high quality loans. An increase of 22% for the year ending
December 31, 1998 reflects loans acquired as a result of the Troy acquisition.
The agricultural segment of the West Tennessee economy(statistics discussed in
the Banking Business section of this report) was dealt a major blow two years
running when every primary crop was subjected to some form of natural
disaster. In addition, reduced export demand forced down commodity prices to
levels not seen in more than a decade. At December 31, 1999 First Citizens
loan portfolio contained more than $27 million in agricultural related loans.
Some of these loans presented a challenge to our customers and to First
Citizens. An adequate loan loss reserve, strong underwriting standards and a
90% guaranty from farm credit services on many of the loans should minimize
the impact to future earnings.
Mortgage loans have experienced continued growth of more than 57% since 1995,
with a 19.5% increase from 1998 to 1999. The upward trend is attributed to
substantial growth in Dyer County population as well and the number of
households recorded in Dyer county in the past decade. Market information and
employment rates are published in this report in the section titled Banking
Business.
The First Citizens loan portfolio is made up of quality credits, and is well
diversified with a concentration of credit in real estate related loans. Real
estate related loans total over $224 million. Problem loans increased
$2,140,149 when compared to December 31, 1998. Problem loans at December 31,
1999 was $7.1 million or 2.18% of total loans. The provision for loan losses
increased in proportion to loan growth as required by loan policy.
The book value of repossessed real property held by First Citizens was
$390,458 at December 31,1999 compared to $136,937 at December 31, 1998.
Accounting for adjustments to the value of Other Real Estate when recorded
subsequent to foreclosure is accomplished on the basis of independent
appraisal. The asset is recorded at the lesser of its appraised value or the
loan balance.
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 period for each loan type. Policy guidelines for loan to value
ratio and maturities related to various collateral as follows:
Collateral Max. Amortization Max. LTV
---------- ----------------- --------
Real Estate Various (see discussion) Various (see discussion)
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%.
29
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%
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:
. 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;
. 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;
. 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
30
. 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 years
indicated are as follows:
1999 - 9.10%
1998 - 9.72%
1997 - 9.70%
1996 - 9.71%
1995 - 9.69%
The aggregate amount of unused guarantees, commitments to extend credit and
standby letters of credit was $56,803,000 at December 31, 1999.
LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
Due after
Due in one one year but Due after
year or less within five years five years
(in thousands)
Real Estate $46,854 $118,621 $58,743
Commercial, Financial
and Agricultural $29,577 $19,733 $11,136
All Other Loans $ 7,989 $31,527 $ 1,197
TOTALS $84,420 $169,881 $71,076
Loans with Maturities After One Year for which:
(in thousands)
Interest Rates are Fixed or Predetermined $223,711
Interest Rates are Floating or Adjustable $ 17,246
The degree of interest rate to which a bank is subjected can be controlled
through a well managed asset/liability management program. First Citizens
controls interest rate risk by matching assets and liabilities, (by employing
interest-sensitive funds in assets that are also interest sensitive). One tool
used to ensure market rate return is variable rate loans. Loans totaling
$101,666,000 or 31.24% of the total portfolio are subject to repricing within
one year or carry a variable rate of interest. Loan maturities in the one to
five year category increased to $169,881,000 at December 31, 1999 from
$153,923,000 at December 31, 1998 as a result of customer demand to lock in
fixed rates for a longer period of time.
31
NON-PERFORMING LOANS
Nonaccrual, Restructured and Past Due Loans and Foreclosed Properties
(First Citizens National Bank)
December 31
(in thousands)
1999 1998 1997 1996 1995
Nonaccrual Loans $ 500 $ 303 $ 440 $1,118 $ 836
Restructured Loans 0 0 0 0 0
Foreclosed Property
Other Real Estate, 390 177 0 50 111
Other Repossessed
Assets 0 0 0 0 0
Loans and leases 90 days
Past due and still
accruing interest 335 425 164 177 313
Total Nonperforming
Assets $1,225 $ 905 $ 604 $1,295 $1,260
Nonperforming assets
as a percent of
loans and leases
plus foreclosed
property at end
of year .37% .33% .27% .62% .66%
Allowance as a percent of:
Nonperforming
assets 303.51% 386.30% 461.76% 176.22% 175.88%
Gross Loans 1.14% 1.26% 1.22% 1.08% 1.16%
Addition to Reserve as a
percent of Net
Charge-Offs 59.30% 154.27% 364.07% 112.16% 180.20%
Loans and leases 90 days
past due as a percent of
loans and leases at year
end .10% .15% .08% .09% .17%
Recoveries as a
percent of Gross
Charge-Offs 27.92% 34.77% 41.11% 20.15% 44.66%
Total Non Performing Assets were $1,225,000 as of December 31, 1999 compared to
$905,000 at year end in 1998. Non performing Assets as a percent of loans was
.37% compared to .33% in 1998 and .27% in 1997. Allowance for Loan Losses as a
percent of Nonperforming assets and total loans were 303.51%, 386.30% and
461.76% for each year ending December 31, 1999, 1998 and 1997. Loan policy calls
for an allowance balance of at least 1% of total loans. Continued improvements
reflected in the financial ratios are indicative of well communicated loan
policies and procedures. Categorization of a loan as non-performing is not in
itself a reliable indicator of potential loan loss. The banks' policy states
that the bank shall not accrue interest or discount on (1) any asset which is
maintained
32
on a cash basis because of deterioration in the financial position of the
borrower, (2) any asset for which payment-in-full of interest or principal is
not expected, or (3) any asset upon which principal or interest has been in
default for a period of 90 days or more unless it is both well secured and in
the process of collection. For purposes of applying the 90 day due test for the
non-accrual of interest discussed above, the date on which an asset reaches
non-accrual status is determined by its contractual term. A debt is well secured
if it is secured (1) by collateral in the form of liens or pledges or real or
personal property, including securities that have a realizable value sufficient
to discharge the debt (including accrued interest) in full, 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
twelve months ending December 31, 1999 if all loans reported as non-accrual had
been current in accordance with their original terms and had been outstanding
throughout the period is $46,000. Interest income on loans reported as ninety
days past due and on interest accrual status was $30,000 for 1999. Loans on
which terms have been modified to provide for a reduction of either principal or
interest as a result of deterioration in the financial position of the borrower
are considered to be "Restructured Loans". First Citizens has no Restructured
Loans for the period being reported.
Certain loans contained on the bank's Internal Problem Loan List are not
included in the listing of non-accrual, past due or restructured loans.
Management is confident that, although certain of these loans may pose credit
problems, any potential for loss has been provided for by specific allocations
to the Loan Loss Reserve Account. 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 re-evaluated at regular
intervals for effectiveness.
LOAN LOSS EXPERIENCE & RESERVE FOR LOAN LOSSES (in thousands)
1999 1998 1997 1996 1995
Average Net Loans
Outstanding $323,047 $259,416 $ 220,985 $203,663 $183,018
Balance of Reserve
for Loan Losses
at Beginning of
Period $ 3,496 $ 2,789 $ 2,282 $ 2,216 $ 2,054
Loan Charge-Offs $ (1,214) $ (952) $ (326) $ (680) $ (365)
Recovery of Loans
Previously Charged
Off $ 339 $ 331 $ 134 $ 137 $ 163
Net Loans Charged
Off $ (875) $ (621) $ (192) $ (543) $ (202)
Additions to Reserve
Charged to Expense $ 720 $ 958 $ 699 $ 609 $ 364
33
Changes Incident
to Mergers $ 377 $ 370 $ 0 $ 0 $ 0
Balance at End of
Period $ 3,718 $ 3,496 $ 2,789 $ 2,282 $ 2,216
Ratio of Net Charge-
Offs to Average Net
Loans Outstanding .27% .13% .09% .27% .11%
The preceding table summarizes activity posted to the Loan Loss Reserve Account
for the past five years. The summary includes the average 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. Changes to the Reserve Account for the quarter just
ended consisted of Loans charged off of $1,214,000 (2) Recovery of loans
previously charged off $339,000 and (3) Additions to reserves totaling $720,000.
An analysis of the allocation of the allowance for Loan Losses is made on a
fiscal quarter at the end of the month, (February, May, August, and November)
and reported to the board at its meeting immediately preceding quarter-end.
Requirements of FASB 114 & 118 have been incorporated into the policy for
Accounting by Creditor for Impairment of a loan. A loan is impaired when it is
probable that a creditor will 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
review automatically.
For analysis purposes, the loan portfolio is separated into four
classifications:
1. Pass - Loans that have been reviewed and graded high quality or no
major deficiencies.
2. Watch - Loans which, because of unusual circumstances, need to be
supervised with slightly more attention than is common.
3. Problem - Loans which require additional collection efforts to
liquidate both principal and interest.
4. Specific Allocation - Loans, in total or in part, in which a future
loss is possible.
33
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 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.
LOAN LOSS ALLOWANCE ANALYSIS
AVERAGE PERCENT CURRENT RESERVE
LOSS 1 YR. BALANCE 1 YR. BALANCE REQUIRED
I. CREDIT $ GROSS $ % $ $
CARDS
II. INSTALL. $ NET $ % $ $
LOANS
III. IMPAIRED WITH ALLOCATIONS $ $
IMPAIRED WITHOUT ALLOCATIONS $ $
ALLOWANCE
IV. DOUBTFUL 50.00% $ $
SUBSTANDARD 10.00%
ACCOUNTS RECEIVABLE FACTORING 1.00%
WATCH 5.00%
OTHER LOANS NOT LISTED PREVIOUSLY .75%
LESS SBA/FMHA GUARANTEED PORTIONS
TOTAL LOANS $
V. LETTERS OF CREDIT .75% $ $
VI. OTHER REAL ESTATE OWNED $
RESERVE REQUIRED $
RESERVE BALANCE $
EXCESS (DEFICIT) $
RESERVE AS % OF TOTAL LOANS %
PEER GROUP %
LOSS EXPERIENCE III & IV
(AVERAGE LAST 3 YEARS) % OR $
34
Accounting for adjustments to the value of Other Real Estate when recorded
subsequent to foreclosure is accomplished on the basis of an independent
appraisal. The asset is recorded at the lesser of its appraised value or the
loan balance. 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 estimates the approximate amount of charge-offs for the 12 month
period ending December 31, 2000 to be as follows:
Domestic Amount
Commercial, Financial & Agricultural $300,000
Real Estate-Construction 0
Real Estate-Mortgage 100,000
Installment Loans to individuals & credit cards 200,000
Lease financing 0
01/01/00 through 12/31/00 Total $600,000
The following table will identify charge-offs by category for the periods ending
December 31 as indicated:
Year Ending December 31
(in thousands)
1999 1998 1997 1996
Charge-offs:
Domestic:
Commercial, Financial &
Agricultural $ 236 $ 228 $ 23 $ 432
Real Estate-Construction 0 0 0 0
Real Estate-Mortgage 142 158 0 20
Installment Loans to
individuals & credit cards 836 566 303 228
Lease financing 0 0 0 0
Total $1,214 $ 952 $ 326 $ 680
Recoveries:
Domestic:
Commercial, Financial &
Agricultural $ 89 $ 165 $ 43 $ 32
Real Estate-Construction 0 0 0 0
Real Estate-Mortgage 6 9 2 3
Installment Loans to
individuals & credit cards 244 157 89 102
Lease financing 0 0 0 0
Total $ 339 $ 331 $ 134 $ 137
Net Charge-offs $ (875) $(621) $(192) $(543)
35
COMPOSITION OF INVESTMENT SECURITIES
December 31
(in thousands)
1999 1998 1997 1996 1995
U. S. Treasury &
Government Agencies $83,372 $ 89,410 $62,976 $66,194 $63,462
State & Political
Subdivisions $12,515 $ 17,113 $11,799 $11,729 $11,776
All Others $ 3,250 $ 3,207 $ 2,740 $ 3,649 $ 3,964
TOTALS $99,137 $109,730 $77,515 $81,572 $79,202
MATURITY AND YIELD ON SECURITIES - DECEMBER 31, 1999
(in thousands)
Maturing Maturing
Maturing After One After Five Maturing
Within One Year Within Years Within After Ten
Year Five Years Ten Years Years
Amount Yield Amount Yield Amount Yield Amount Yield
U. S. Treasury
and Government
Agencies $ 1,251 6.36% $36,373 6.40% $33,184 6.80% $12,564 7.40%
State and
Political $ 1,605 6.30% $ 3,764 6.41% $ 3,933 6.57% $ 3,213 7.04%
Subdivisions*
All Others $ 0 0% $ 0 0% $ 3,250 6.40% $ 0 0%
------- ----- ------- ----- ------- ----- ------- -----
TOTALS $ 2,856 6.33% $40,137 6.40% $40,367 6.74% $15,777 7.32%
*Yields on tax free investments are stated herein on a taxable equivalent basis.
HELD TO MATURITY & AVAILABLE FOR SALE SECURITIES - DECEMBER 31, 1999
Held to Maturity Available for Sale
(in thousands)
Amortized Fair Amortized Fair
Cost Value Cost Value
U.S. Treasury Securities 0 0 2,029 1,969
U.S. Government Agency and
corporation obligations 17,063 16,588 67,376 64,340
Securities issued by states & political
subdivisions in the U.S.:
Taxable Securities 0 0 0 0
Tax-exempt Securities 3,282 3,265 9,557 9,233
U. S. Securities:
Debt Securities 0 0 0 0
Equity Securities
(Including Federal Reserve Stock) 3,223 3,250
Foreign Securities:
Debt Securities