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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, 1996 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, 1996 was $31,570,000.
Of the registrant's only class of common stock ($1.00 par value) there
were 741,516 shares outstanding as of December 31, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the
Proxy Statement dated March 17, 1997 (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 and Dyer 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)
1996 1995 1994
Total Assets $313,069 $291,412 $256,685
Total Deposits 256,413 237,160 209,481
Total Net Loans 209,107 189,690 166,727
Total Equity Capital 29,603 27,103 23,879
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 with peer group banks. Presented in
the following chart are comparisons of First Citizens with
peer group banks for the periods indicated:
12/31/96 12/31/95 12/31/94
FCNB PEER GRP FCNB PEER GRP FCNB PEER GRP
Average Assets/
Net Interest
Income 4.27% 4.33% 4.07% 4.40% 4.31% 4.43%
Average Assets/
Net Operating
Income 1.32% 1.28% .94% 1.29% 1.09% 1.26%
Net loan losses/
Average total
loans .07% .15% .11% .14% .01% .12%
Primary Capital/
Average Assets 8.62% 8.35% 8.41% 9.04% 8.51% 9.02%
Cash Dividends/
Net Income ** 5.54% 41.18% 8.29% 43.28% 19.03% 43.50%
*Performance as of 12/31/96 is compared to peer group totals
as of 09/30/96
(Most recent UBPR available)
EXPANSION
Bancshares may, subject to regulatory approval, acquire
existing banks or organize new banks. The Federal Reserve
Board permits bank holding companies to engage in non-banking
activities closely related to banking or managing or
controlling banks, subject to Board approval. In making such
determination, the Federal Reserve Board 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 Bank 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 National Bank through its strategic planning
process has stated its intention to acquire other financial
institutions within the West Tennessee Area. The Bank's
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
the Board of Bancshares, Inc. would be deemed to be in the
best interest of Bancshares and its shareholders.
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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."
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 System.
As a bank holding company, Bancshares is required to file with
the Federal Reserve Board 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 Board 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 super-visory agency,
such as the Comptroller of the Currency is required under the Bank Merger Act.
Relocation of a sub-sidiary bank of a BHC from one state to another requires
prior approval of the Federal Reserve Board and is subject to the
prohibitions of the Douglas Amendment.
The Bank Holding Company Act provides that the Federal Reserve
Board shall not approve any acquisition, merger or consolid-ation 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 Board may not
approve any other proposed acquisition, merger, or consolid-ation, 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 the
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 Board 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
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the banks and bank holding companies concerned. The Board
also considers the record of the applicant and its affiliates
in fulfilling commitments to conditions imposed by the Board
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 Board 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 Board, and they
and their subsidiaries are subject to examination by the
Board.
First Citizens Bancshares, Inc. is subject to capital adequacy
requirements imposed by the Federal Reserve Bank. In
addition, First Citizens National Bank (the principal
subsidiary of the corporation) is restricted by the Office of
the Comptroller of the Currency 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 National Bank "the bank" to comply with
regulatory requirements for the payment of dividends. The
Federal Reserve Bank 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 4:00% may be in the form of core (Tier 1) or
supplemental capital (Tier 2). Tier 1 capital/core capital
consists of common stockholders equity, qualified perpetual
stock and minority interests in consolidated subsidiaries.
Tier 2 capital/supplementary capital consists of the allowance
for loan and lease 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 Board. 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. The banks' policy states that before declaring a
dividend the following ratios will be achieved: (1) Risked
Based Capital Tier 1 will be 8.34% or above; Return on year-
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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, 1996
Name Age Position and Office
Stallings Lipford 66 Chairman of the Board of
First Citizens Bancshares, Inc and First
Citizens National Bank. 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 1960 until 1996.
Katie Winchester 56 President and CEO of First Citizens
Bancshares and First Citizens;
employed by First Citizens National
Bank in 1961; served as Executive
Vice President and Secretary of the
Board from 1986 to 1992. She was
appointed CEO of First Citizens
Bancshares and First Citizens
National Bank 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.
H. Hughes Clardy 54 Vice President of First Citizens Bancshares, Inc.;
Senior Vice President and Senior Trust Officer
of First Citizens National Bank.
Employed by First Citizens National
Bank in 1993. Mr. Clardy was
employed as Vice President and
Senior Trust Officer at Crestar
Bank from January, 1987 to January, 1991 and
as a Vice President of Dominion Trust Company
of Tennessee from 1991 to 1993.
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Ralph Henson 55 Vice President of First Citizens
Bancshares, Inc.; Executive Vice President of
Loan Administration of First Citizens National Bank.
Employed by First Citizens National Bank in 1964.
Mr. Henson served the Bank as Senior Vice President
and Senior Lending Officer until his appointment as
Executive Vice President of Loan Administration in
February, 1993.
Jeffrey Agee 36 Vice President and Chief Financial
Officer of Bancshares, Inc. and
First Citizens as of April, 1994.
Employed by First Citizens National
Bank in 1982. Served the bank
previous to April, 1994 as Vice
President and Accounting Officer.
Appointed Senior Vice President and
Chief Financial Officer of First
Citizens National Bank, April 17,
1996.
Barry Ladd 56 Appointed Executive Vice President
and Chief Administrative Officer of
First Citizens National Bank and
First Citizens Bancshares in 1996.
Senior Vice President and Senior
Lending Officer of First Citizens
National Bank from April 20, 1994
to January 17, 1996. Employed by
the Bank in 1972. Mr. Ladd served
First Citizens as Vice President
and Lending Officer previous to his
appointment as Senior Vice President.
Bennett Ragan, Jr. 48 Executive Vice President and Senior
Lending Officer of First Citizens
National Bank. Senior Vice
President and Senior Lending
Officer from April 20, 1994 to
January 17, 1996. Employed by the
Bank in 1970. Mr. Ragan served the
Bank as Vice President and Lending
Officer since 1986.
Judy Long 42 Senior Vice President,
Administrative Officer and
Secretary to the Board of Directors
of First Citizens National Bank.
Ms. Long also serves as Secretary
to the Board of First Citizens
Bancshares. Employed by the Bank
on July 19,1974. Previously served
as Vice President and Loan
Operations Manager (1992 - 1996).
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Jimmy Welch 50 Senior Vice President and
Commercial Loan Officer. Employed
by the bank on April 20,1987.
Served as Senior Vice President and
Consumer Lending Manager from
October 25, 1990 to April 19, 1995.
Promoted to Senior Vice President
and Consumer Lending Manager on
April 19, 1995. Appointed to the
position of Commercial Loan Officer
August 20, 1996.
BANKING BUSINESS
First Citizens operates a general retail banking business in
Dyer County, Tennessee. The bank expanded its banking
operations into Lauderdale County with the purchase of a
branch bank in Ripley, Tennessee in January, 1995. 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 the bank. 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. 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.
First Citizens National Bank is located in a community
supported by a well diversified economy. Dyer County is home
for over 393 full time farm operators of 603 farms with a
total land acreage of 230,906. Total Farm operators and farm
laborers represent a small percentage of the Dyer County
population (Dyer County Statistical Information, 1992-93). At
12/31/96 agriculture loans outstanding totaled $25,895,000
representing 15.28% of total loans. $16,890,000 was well
secured with farmland, including farms, residential and other
improvements, while $9,005,000 were secured loans to finance
agricultural production and equipment purchases. Approximately
$3,211,000 of agricultural loans were 90% FmHA guaranteed.
Dyer County is also the home base for over 45 manufacturing
firms employing in excess of 40% of the population.
Distribution of employment in other areas consist of 14.9%
services, 14.8% government, and 19.3% trade. While First
Citizens is dependent upon the debtors ability to honor their
obligations, there are no concentrations of credit in any one
borrower, type of loan or industry that would represent a
material affect to the net income of the Bank.
First Citizens Financial Plus, Inc., a Bank Service
Corporation wholly owned by First Citizens National Bank is a
licensed Brokerage Service. This allows the bank to compete
on a limited basis with numerous non-bank entities who pose a
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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, 1996 were in excess of $132,892,000.
Services offered by the Investment Management and Trust
Services Division include but are not limited to estate
settlement, trustee of living trusts, testamentary trustee,
court appointed conservator and guardian, agent for investment
accounts, and trustee of pension and profit sharing trusts.
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, 1996.
Dyer County Market
(All Financial Institutions)
(in thousands)
Total Deposits % of Market Share
Bank Name 06/30/96 06/30/96
First Citizens
National Bank $234,684* 51.10%
First Tennessee
Bank 105,089 22.88%
Security Bank 63,457 13.82%
Union Planters, FSB 52,776 11.48%
Dyersburg City Employees
Credit Union 3,301 .72%
Total $459,307 100.00%
*Does not include deposits of $21,225,000 categorized as
Overnight and fixed term Repurchase Agreements.
At December 31, 1996 Bancshares and its subsidiary, First
Citizens National Bank, employed a total of 145 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.
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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 System, or twenty-four percent (24%),
whichever 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, are
governed by the Industrial Loan and Thrift Companies Act.
On September 29, 1994, President Clinton signed into law the
Reigle-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 will take 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
may opt out of interstate branching. If a state does not opt
out of interstate branching prior to May 31, 1997, then a bank
in that state may merge with a bank in another state provided
that neither of the states have opted out. States may either
enact laws opting out of interstate branching before June 1,
1997 or permit interstate merges transactions earlier than
June 1, 1997, by statute at their option. A state also may
impose conditions on any interstate merger transaction that
occurs before June 1, 1997 if the conditions do not
discriminate against out-of-state banks, are not preempted by
federal law, and do not apply or require performance after May
31, 1997.
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The Federal Reserve in September, 1996 gave bank holding
company section 20 units the right to exclude some securities
earnings from the 10% cap on underwriting revenue. It later
tore down three firewalls, one of which prevented the same
bank employee from selling underwriting services, loans and
transactions accounts. The Fed 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 adopting its
controversial operating-subsidiary rule in November,
established a procedure that national banks may use to create
subsidiaries to underwrite securities sell insurance, or
conduct scores of other activities the banks may engage in
directly. Change in the law for securities underwriting will
have no impact on First Citizens National Bank since the bank
does not engage in this practice.
The OCC's operating-subsidiary rule also streamlined national
banks' applications for new branches. It sets a strict 45-day
deadline for OCC action on all applications, with a 10 day
extension possible when serious CRA issues are raised. The
OCC provision closely parallel proposed changes to Regulation
Y issued by the Fed in August, 1996. Those changes expected
to be finalized soon, would give the Fed 15 days to process
most merger applications. It would also expand data
processing powers, eliminate tying restriction on nonbanks,
and allow bank-run trusts to buy mutual funds advised by the
bank.
The Supreme Court ruled in February, 1996 that states must
permit national banks to sell insurance from places with fewer
than 5,000 residents. In the fall of 1996, the OCC issued
guidelines that limit the authority of states to regulate
insurance sales by national banks and allowing bankers to sell
insurance to customers outside of small towns, including from
bank branches in major cities.
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. Interstate Banking/Branching
became a reality by legislation passed September 13, 1994.
The act permits full nationwide interstate branching after
June 1, 1997. First Citizens Bancshares, Inc. and First
Citizens National Bank are located in a highly competitive
market. There are presently four banks competing 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 could possibly bring about the
location of large out of state banks to the area. If so,
First Citizens would continue to operate as it has in the
past, focusing on the wants and needs of existing and
potential customers. The quality of service and individual
attention afforded by an independent community bank cannot be
matched by large regional competitors, managed by a corporate
team unfamiliar to the area. First Citizens is a forward
moving bank offering products and services that are required
for maintaining satisfactory customer relationships moving
into the next decade and beyond.
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Monetary policies of regulatory authorities, including the
Federal Reserve Board, have a significant effect on operating
results of bank holding companies and their subsidiary banks.
The Federal Reserve Board 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
Board 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 Board 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, of which approximately 3,508 square feet is
rented to various tenants. 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.
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. During 1993, the
Board of Directors made a decision to locate a branch office
at 2211 St. John Avenue near the Industrial Park, eliminating
the need to expand the Midtown Branch. In 1996 the property
was moved from Premises and Equipment to Other Real Estate.
The 1.747 acres valued at $164,000, is now offered for sale.
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.
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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.
In November, 1993 First Citizens National Bank leased space in
the Wal-Mart Store #677 located at 2650 Lake Road in
Dyersburg, Tennessee to locate an Automatic Teller Machine
(ATM). The ATM was installed in December, 1993. In January,
1995 the ATM was relocated in the newly constructed Super Wal-Mart Store at
the same address.
The Ripley Branch of First Citizens National Bank, purchased
January 16, 1995, is located at 292 South Washington Street in
Ripley, Tennessee (Lauderdale County). The Branch contains
approximately 1,450 square feet and was built in 1984 on a
quarter acre of land. The Ripley Branch is a full service
banking facility that also offers drive-up teller and twenty
four hour ATM services. On July 14, 1995 the bank purchased
1.151 acres located on Cleveland Street in Ripley, Tennessee.
The land was purchased for future expansion of the Ripley
Branch.
There are no liens or encumbrances against any of the
properties owned by First Citizens.
ITEM 3. LEGAL PROCEEDINGS
On June 8, 1995, William M. Boehmler resigned without notice
from his position as President and Director of First Citizens
Financial Plus, Inc. a brokerage subsidiary owned by First
Citizens National Bank. A subsequent lawsuit was filed by
First Citizens Financial Plus, Inc. against Boehmler and the
firm who employed him, J. B. Hilliard, W. L. Lyons, Inc.,
seeking compensatory and punitive damages because Boehmler
took information and records allegedly belonging to the
subsidiary. An injunction was issued by the circuit court
prohibiting use of the information by the rival brokerage firm
until the matter could be resolved. In January, 1996, an
arbitration panel of the National Association of Securities
Dealers awarded Boehmler and his current employer $134,045.87
from Financial Plus. The arbitrators ordered Boehmler to pay
Financial Plus $9,500.00 for data reclamation costs. A letter
issued by the arbitration panel stating their decision gave no
reason for the ultimate outcome of the hearing. Based on
advice of legal council, management made the decision not to
pursue an appeal of the arbitration panel's decision.
14
All costs associated with the matter have been included in
1995 financial statements as required by Financial Accounting
Standards.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year ending December 31,
1996, 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, 1996 there were 645 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, 1996 $44.00 $44.00
June 30, 1996 $49.10 $44.00
September 30, 1996 $49.10 $44.00
December 31, 1996 $55.00 $49.10
March 31, 1995 $40.00 $37.40
June 30, 1995 $42.00 $37.90
September 30, 1995 $42.00 $41.99
December 31, 1995 $44.00 $42.00
Dividends paid each quarter of 1996 were 32.5 cents per share.
In addition a special dividend of 30 cents per share was paid
during the fourth quarter, bringing total dividends paid per
share during 1996 to $1.60. Dividends paid per share during
1995 were 30 cents per share. A special dividend of 10 cents
per share was declared during the fourth quarter of 1995.
Dividends - 1996
Dividend Quarter
Per Share Declared
.325 1st
.325 2nd
.325 3rd
.325 4th
.30* 4th
Total $1.60
*Special dividend paid in fourth quarter, 1996.
Future dividends will depend on Bancshares' earnings and
financial condition and other factors which the Board of
Directors of Bancshares considers relevant.
15
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)
1996 1995 1994 1993 1992
Net Interest &
Fee Income (5) $ 12,822 $ 11,283 $ 10,444 $ 10,220 $ 9,733
Gross Interest
Income(5) $ 24,781 $ 22,465 $ 18,415 $ 17,481 $ 18,237
Income From
Continuing
Operations $ 3,709 $ 2,706 $ 2,946 $ 2,638 $ 2,175
Long Term
Obligations(4) $ 2,997 $ 4,652 $ 4,125 $ 0 $ 0
Income Per Share
from Continuing
Operation(1) $ 5.04 $ 3.72 $ 4.15 $ 3.76 $ 3.39
Net Income per
Common Share
(2)(3) $ 5.04 $ 3.72 $ 4.15 $ 3.94 $ 3.39
Cash Dividends
Declared
per Common
Share(2)(3) $ 1.60 $ 1.30 $ 1.19 $ .99 $ .94
Total Assets at
Year End $313,069 $291,412 $256,687 $234,892 $239,897
Allowance for
Loan Losses
as a % Loans 1.08% 1.16% 1.22% 1.13% 1.26%
Allowance for
Loan Losses as
a % of Non-
Performing Loans 176.08% 707.99% 196.75% 520.50% 967.62%
Loans 90 Days
Past Due as a
% of Loans .09% .17% .62% .22% .13%
(1)Restated to reflect 10% stock dividend on December 15,
1992.
(2)Restated to reflect 2.5 for 1 Stock Split on October 15,
1993.
(3)The $1.60 dividend for 1996 reflects $.325 x 4 plus a
special dividend of $.30.
(4)Long Term Obligations is FHLB Borrowings matched with Loans
& Investments.
(5)Reclassified 1992 to 1994 Overdraft Fee Income. It is not
included on this line item.
Credit Card annual fees were restated from loan fees to other
income in years 1992 to 1995.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
To understand the following analysis, reference should be made
to the consolidated financial statements and other selected
financial data presented elsewhere in this report. For
purposes of the following discussion, net interest income and
net interest margins are presented on a fully taxable
equivalent basis. Per share data is adjusted to reflect all
stock dividends declared through December 31, 1996.
1996 was a record year for First Citizens National Bank. Net
income was $3,709,904 compared to $2,705,656 and $2,946,249 in
1995 and 1994 respectively. Earnings per common share was
$5.03, $3.72 and $4.15 for the years under comparison.
Weighted average shares outstanding slightly increased to
736,436 from 726,489 at year end 1995 and 709,434 year end
1994. Shares were issued from previously authorized unissued
stock to satisfy the requirements of the Dividend Reinvestment
Program. Book and Market value continue to reflect a strong
earnings performance. Book value of Bancshares' stock is up
$2.88 or 7.78% at 12/31/96. Market value was $55.00 a share
compared to $44.00 at 12/31/95. Total Assets net of reserve
for loan losses were $313,079,000, up from $291,412,000 in
1995. Return on average assets was 1.23 percent after payment
of 1996 bonuses, while ROA for 1995 was .96 percent. Double
digit loan growth, experienced again in 1996, ended the year
with total gross loans of $211,389,000. Nonaccruals, non-performing assets
and problem loans were up slightly due to the addition of one credit of
approximately $991,000 in April, 1996. The credit is discussed further in
the non-performing asset section of this report. Return on average equity
of 13.14 percent improved 2.89% from year end 1995. Management's
continued focus on the reduction of cost of funds is reflected
in the .13 percent decline when comparing 4.24 percent at
12/31/96 to 4.37 percent at 12/31/95.
Intense strategic planning is credited with the record earning
performance reflected. The earnings performance was not only
driven by strong loan demand, but is also a result of
improved operating efficiencies driven by the bank's ongoing
efforts to accomplish established goals.
Management and staff of First Citizens has made a concentrated
effort to achieve a performance level comparable to its peers.
Aggressive goals of the Bank's Strategic Plan include the
following: (1) To achieve loan growth in excess of 7 percent
annually. (2) To remain an independent community bank serving
the needs of individuals, small businesses, corporations, and
agriculture customers; (3) To maximize the value of First
Citizens to its shareholders by providing the highest level of
customer service and the widest selection of quality products
and services; (4) To attract and retain high quality
personnel; while rightsizing staffing levels to be more in
line with peer banks; (5) To continuously evaluate and invest
in a product and service distribution system that will provide
our customers with personal access as well as electronic
delivery of products and services; (6) To establish a bank
owned finance company as well as investigate the addition of
insurance sales to the bank's products.
17
Customer satisfaction surveys indicate that First Citizens
provides high quality products and services. The bank
currently holds over 51% of its designated market. Two new
branches were opened to expand the development of new and
future business in 1995. Fulltime equivalent employees
reached high performance peer levels in the last half of 1995,
and have remained at that level throughout 1996. The bank's
Automated Teller distribution (First Connection) was converted
from Deluxe, Inc. To Internet/Most, Reston, Virginia in June,
1996. The "check connection", Visa Check Card was tested and
available to the market at year end 1996. In March, 1997 Delta
Finance, a Tennessee Corporation will open its doors to offer
consumer financing to the surrounding counties. Delta Finance
incorporated in August, 1996, was established as a subsidiary
of First Citizens National Bank. 1997 Budget projects loan
volume ranging from $1,200,000 to $1,500,000. The company is
expected to reach the breakeven point at $1.5 million within
1997.
The Bank's Strategic Plan (a three year plan that is reviewed
and updated annually) calls for the addition of insurance
sales to the banks' product and services provided to its
customers. The bank is exploring the possibility of offering
property and casualty insurance products through a source
provided by Tennessee Bankers Association known as Bank
Insure. BankInsure is a pilot program established in eight
states, including Tennessee. The banks efforts to establish
insurance sales will be intensified beginning the first
quarter 1997. Contacts with independent agents will be
explored to determine if a bank owned insurance company would
be a more profitable alternative than forming an alliance with
BankInsure.
Another strategic action to improve operating efficiency and
customer service was the development of a Technology Strategic
Plan. Action goals were adopted that include the following:
(1) Installation of Document Imaging. (2) Evaluation of a
Marketing CIF system which will allow for the identification
of needs and opportunities which exist in the current and
potential customer base. (3) Maintaining the IBM AS/400 as
the bank's primary technology infrastructure with a local area
network as a secondary communication structure. (4) Surveying
the market to identify the potential for Home Banking and
Corporate Cash Management. In response to these goals, a
contract was signed with Southern Data, Atlanta Georgia for a
document imaging system in December, 1996. Installation is
scheduled for the second quarter, 1997. Harland Corporation
MCIF system was installed the last quarter, 1996; a marketing
director was hired in January 1996, and a contract was
negotiated with Alex Schessunoff to develop a bankwide Quality
Sales Quality Service Program. Results of a Home Banking
survey completed by a Jackson, Tennessee, Marketing firm
indicated a demand for telephone and P.C. home banking
product. First Citizens currently offers a touchtone
telephone banking service at no cost to its customers. A
search for PC home banking will begin the second quarter,
1997.
Changes in Financial Accounting Standards
FASB NO. 114 (Accounting by creditors for impairments of
loans). Effective date is fiscal years beginning after
December 15, 1994. FASB 114 requires a bank to recognize
impairment of a loan if the present value of expected future
cash flows discounted at the loan's effective interest rate
18
(or alternatively, the observable market price of the loan or
the fair value of the collateral) is less than the recorded
investment. If the fair value used is at least equal or
greater than the recorded amount, there is no impairment.
Impaired loans are usually considered loans in non-accrual
status, 90 days or more past due that will not pay full
interest and principal due, or have been classified as a
problem loan. First Citizens National Bank has implemented
procedures that capture average balances of impaired loans,
interest income associated with impaired loans, and
allocations made to the reserve for loan losses associated
with impaired loans. There has been no material affect to
Bancshares or the Bank as a result of the implementation of
FASB 114.
FASB NO. 115 (Accounting for certain investments in Debt and
Equity Securities). Effective January 1, 1994, the Company
adopted FASB 115 and classified securities contained in its
investment portfolio according to stated specifications: Held-to-maturity
(includes securities which the company has the
intent and ability to hold to maturity); Trading securities
(includes investment securities which are held for short-term
resale); and Available-for-sale (includes all other investment
securities). The cumulative effect of FASB 115 on the
investment portfolio for 1995 was a positive $485,000 and the
1996 cumulative effect was a positive $95,000 (net of tax).
FASB NO. 118 (Accounting by Creditors for Impairment of a Loan
- - Income Recognition and Disclosures) amends FASB Statement
114 to allow a creditor to use exiting methods for recognizing
interest income on impaired loans. Implementation of
procedures discussed in FASB 114 includes accounting
requirements for income recognition on impaired loans.
FASB NO. 119 (Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments) amends
FASB 105 (Disclosure of Information about Financial
Instruments with Off-Balance-Sheet Risk and Financial
Instruments with Concentrations of Credit Risk), and FASB 107
(Disclosures about Fair Value of Financial Instruments).
Effective for years after December 15, 1994. Statement No. 119
requires disclosures about the amounts, nature, and terms of
derivatives that are not subject to statement 105 because they
do not result in off-balance-sheet risk of accounting loss.
It requires banks to make a distinction between financial
instruments held or issued for trading purposes and for
purposes other than trading. Derivative products held in the
banks investment portfolio are reported on a quarterly basis
to the banks investment committee and Board of Directors.
Reports presented include disclosure requirements stated in
FASB 119. First Citizens National Bank has $0 investment in
derivative instruments.
FASB NO. 121 (Impairment of Long Lived Assets). FASB 121
establishes accounting standards for the impairment of long
lived assets, certain identifiable intangibles, and good will
related to those assets to be held and used and for long lived
assets and certain identifiable intangibles to be disposed of.
An impaired loss is recognized as the amount by which the
carrying amount of the asset exceeds the fair market value of
the assets. FASB 121 is effective for years beginning after
December 15, 1995. We do not project any material write downs
at this time.
19
NON-INTEREST INCOME
The following table reflects non-interest income for the years
ending December 31, 1996, 1995, and 1994:
December 31
Change from prior year
(in thousands)
Increase Increase
Total (Decrease) Total (Decrease) Total
1996 Amount Percentage 1995 Amount Percentage 1994
Service Charges on
Deposit Accounts $1,457 $ 152 11.65% $1,305 $ 189 16.94% $1,116
Other Service Charges,
Commissions & Fees $ 674 $ 181 36.72% $ 493 $(242) (33.93%) $ 735
Other Income $1,238 $ 288 30.32% $ 950 $(101) (9.61%) $1,051
TOTAL NON-INTEREST
INCOME $3,369 $ 621 22.60% $ 48 $(154) (5.31%) $ 902
Total non-interest income is up over 22 percent when comparing
December 31, 1996 to December 31, 1995 after declining 5.3
percent when comparing the previous two year ends. Service
charges on deposit accounts contributed $1.4 million to total
income in 1996. Service charge income rose 11.65% from 1995
and is projected to increase approximately $100,000 in 1997.
In January, 1997 the per item overdraft fee increased from
$20.00 to $22.00. In addition, a daily overdraft charge of
$5.00 per day is assessed for each day the account is
overdrawn after a 5 day grace period. The overdraft fee was
increased in April, 1995 from $17.50 to $20.00 and the per day
overdraft charge was increased from $3.00 per day to $5.00 per
day. Overdraft income was reclassified from interest and fees
on loans into other income for prior years and restated within
the table. Non interest income in 1995 decreased when
compared to 1994 due to (1) a gross profit of $297,000
resulting from the sale of the Jackson (Madison County),
Tennessee property in 1994; and (2) A decrease in fee income
of $160,000 received from the Bank's Subsidiary, Financial
Plus, Inc. The broker/dealer experienced a change in
management that resulted in legal proceedings (explained in
the legal proceeding section of this report). Other income
increased in 1996 due to a one time refund of $70,705 from
bankruptcy trustees of Southeast Fort Worth Ltd., increased
fee income from Financial Plus, Inc. and security gains
realized from the sale of Securities from the banks'
investment portfolio. The Southeast refund partially
reimbursed the bank for settlement made to trust customers by
the bank in December 1989. Trust income improved in excess of
25 percent in 1996. Fees charged for services rendered were
restructured in 1995. Other service charges, commissions &
fees were restated for prior years to eliminate overdraft and
annual fees on the credit cards. Other income was restated to
include those fees.
NON-INTEREST EXPENSE
December 31
Change from prior year
(in thousands)
Increase Increase
Total (Decrease) Total (Decrease) Total
1996 Amount Percentage 1995 Amount Percentage 1994
Salaries & Employee
Benefits $5,497 $ 325 6.29% $5,172 $ 202 4.07% $4,970
Net Occupancy Expense 446 105 30.80% $ 341 $ 23 7.24% $ 318
Other Operating Expense 3,895 (220) 5.25% $4,115 $ 593 16.84% $3,522
TOTAL NON-INTEREST EXPENSE $9,889 $ 261 2.71% $9,628 $ 818 7.79% $8,810
20
Management efforts to control non-interest expense continues
to be reflected when reviewing non-interest expense categories
for the years under comparison. Non-interest expense, up
slightly at 2.71%, was maintained below the consumer inflation
rate of 3 percent. Salaries and benefits increased 6.29% in
response to payment of bonus incentives offered for improved
financial performance. This trend is likely to continue,
given the bank's agressive earnings goals. Fulltime equivalent
employees remain at 145 for the years 1995 and 1996. Fulltime
equivalent at 12/31/94 was 150. FTE remained flat in 1996 in
spite of the employment of 4 tellers on the shelf hired to
fill vacancies created by absence or special projects. Assets
per employee totaled $2.1 million at 12/31/96, $1.9 million at
12/31/95. This compares to $2.3 million for peer group banks
at 12/31/96. Increased operating expense of 16.84% in 1995 is
attributed to settlement and professional fees of $261,000
incurred as a result of arbitration between Financial Plus,
Inc. and William M. Boehmler and Hilliard Lyons, Inc.
December 31 Asset Per Employee-Peer
Assets Per Employee-FCNB Groups
(in thousands) (in thousands)
1996 $2,159 $2,300
1995 $1,969 $1,900
1994 $1,695 $1,900
1993 $1,563 $1,900
1992 $1,643 $1,900
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)
1996 1995 1994
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
Non-Interest
Bearing Demand
Deposits $ 26,641 - $ 25,375 - $ 24,989 -
Savings Deposits $ 73,908 3.19% $ 65,996 3.05% $ 64,912 2.69%
Time Deposits $146,562 5.63% $136,631 5.91% $111,268 4.79%
TOTAL DEPOSITS $247,111 8.39% $228,002 4.43% $201,169 3.52%
Growth in total deposits continues to be a challenge for First
Citizens National Bank. The company's marketplace is
described as highly competitive, with a fairly sophisticated
customer base. Competition is aggressive for both loans and
deposits. According to a market share analysis, Bancshares
hold approximately 51% (excluding overnight and fixed term
repurchase agreements) of the bank deposits domiciled in Dyer
County. The bank competes with First Tennessee Bank, N.A.
(23% of total county deposits), and Security (14%). Union
Planters, another regional bank also hold market share of 11
percent. First Citizens also competes with Dyersburg City
Employees Credit Union, seven or more consumer finance
companies, and other types of financial service providers in
the area. In spite of aggressive competition, total deposits
increased $19.1 million and $26.8 million when comparing
12/31/96 to 12/31/95 and 12/31/94. A review of the
composition of deposits in 1996 reflects growth of $8 million
21
in savings deposits and approximately $10 million in time
deposits. Approximately $32 million of total deposit growth
in 1995 was centered in time deposits. Other factors
contributing to deposit growth was higher rates paid on
deposits than paid in 1994 and the purchase of $8 million in
deposits through the Ripley Branch acquisition. An analysis
of 1994 reflects customers response to low interest rates and
their reluctance to recommit funds into bank Certificates of
Deposits. Demand deposits have remained relatively flat when
reviewing the years under comparison. However, sweep account
funds totaling $14,844,000 are not included in the average
balances for non-interest bearing demand deposits. The
"Sweep" total is included in the balance sheet category of
Securities Sold Under Agreement to Repurchase totaling $21.2
million. The average rate paid on interest bearing liabilities
at 12/31/96 was 4.02% compared to 4.89% at 12/31/95 and 4.81%
at 12/31/94. Pricing of deposits is based on local market
competition and Treasury Bill rates.
SHORT TERM BORROWINGS
12/31/96 12/31/95
Amount outstanding-end of Period $21,225 $19,745
Weighted Average Rate of Outstanding 4.31% 4.59%
Maximum Amount of Borrowings at
Month End 32,902 18,624
Average Amounts Outstanding for
Period 20,883 17,033
Weighted Average Rate of Average
Amounts 4.48% 4.66%
Management is continuously monitoring and enhancing the bank's
product line in order to retain existing customers and to
attract new customer relationships. Among new products
offered In 1996 was a "Visa Check Card" and "The Nest Egg
Certificate of Deposit". The Visa Check Card is an electronic
check that allows our customers another convenient method of
accessing their checking account funds without writing a
check. The Nest Egg Certificate of Deposit was introduced as
a college savings fund for parents requiring a savings
instrument with a low opening balance and as often as weekly
deposits made to the account. Imaged deposit accounts
statements offered to the market in 1996, continue to be a
success with 99.9 percent acceptance.
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, 1996. The overall total increased in excess of $9 million
when compared to the prior year.
MATURITY DISTRIBUTION OF TIME DEPOSITS IN AMOUNTS OF $100,000
AND OVER
December 31
(in thousands)
1996 1995
Amount Percent Amount Percent
Maturing in:
3 months or less $13,960 36.57% $ 3,577 13.40%
Over 3 through 12 months $16,902 44.26% $13,928 52.16%
Over 12 months $ 7,319 19.17% $ 9,201 34.44%
TOTAL $38,181 100.00% $26,706 100.00%
22
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)
1996 1995 1994
FUNDING USES Average Increase Average Increase Average
Balance (Decrease) Balance (Decrease) Balance
Amount % Amount % Amount
INTEREST-EARNING
ASSETS:
Loans (Net of
Unearned Discounts
& Reserve) $203,663 $ 20,645 11.28% $183,018 $22,764 14.21% $160,254
Taxable Investment
Securities $ 64,392 $ 5,032 8.48% $ 59,360 $10,593 21.73% $ 48,767
Non-Taxable
Investment
Securities $ 10,825 $ 358 3.42% $ 10,467 $(2,817)(21.21%) $ 13,284
Federal Funds
Sold $ 1,166 $(1,437)(55.21%)$ 2,603 $ (84) (3.13%) $ 2,687
Interest Earning
Deposits In
Banks $ 196 $ 83 73.46% $ 113 $ (43)(27.57%) $ 156
TOTAL INTEREST-
EARNING ASSETS $280,242 $24,681 9.66% $255,561 $30,413 13.51% $225,148
Other Uses $ 23,478 $ 2,540 12.14% $ 20,938 $ 187 .91% $ 20,751
TOTAL FUNDING
USES $303,720 $27,221 9.85% $276,499 $30,600 12.45% $245,899
INTEREST-BEARING
LIABILITIES:
Savings
Deposits $ 73,908 $ 7,912 11.99% $ 65,996 $ 1,084 1.15% $ 64,912
Time Deposits $146,562 $ 9,931 7.27% $136,631 $25,363 22.80% $111,268
Federal Funds
Purchased and
Other Interest
Bearing
Liabilities $ 28,470 $ 4,857 20.57% $ 23,613 $ 967 4.27% $ 22,646
TOTAL INTEREST-
BEARING
LIABILITIES $248,940 $ 22,700 10.04% $226,240 $27,414 13.79% $198,826
Demand Deposits $ 26,641 $ 1,266 4.99% $ 25,375 $ 386 1.55% $ 24,989
Other Sources $ 28,139 $ 3,255 13.08% $ 24,884 $ 2,800 12.68% $ 22,084
TOTAL FUNDING
SOURCES: $303,720 $ 27,221 9.85% $276,499 $30,600 12.45% $245,899
23
SUMMARY - AVERAGE BALANCE SHEET AND NET INTEREST INCOME ANALYSIS
(FIRST CITIZENS NATIONAL BANK)
Monthly Average Balances and Interest Rates
(in thousands)
1996 1995 1994
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
ASSETS
INTEREST EARNING
ASSETS:
Loans (1)(2)
(3) $203,658 $19,768 9.71% $182,997 $ 17,718 9.69% $160,217 $ 14,619 9.12%
Investment
Securities:
Taxable $ 64,392 $ 4,353 6.76% $ 59,360 $ 3,948 6.65% $ 48,767 $ 2,978 6.11%
Tax Exempt (4) $ 10,825 $ 755 6.98% $ 10,467 $ 730 6.98% $ 13,284 $ 908 6.84%
Interest Earning
Deposits $ 196 $ 7 3.58% $ 113 $ 7 6.20% $ 156 $ 5 3.21%
Federal Funds
Sold $ 1,166 $ 69 5.92% $ 2,603 $ 158 6.07% $ 2,687 $ 113 4.21%
Lease Financing $ 5 $ 1 20.00% $ 21 $ 2 9.53% $ 37 $ 4 10.81%
Total Interest
Earning Assets $280,242 $24,953 8.91% $255,561 $ 22,563 8.83% $225,148 $ 18,627 8.27%
NON-INTEREST
EARNING ASSETS:
Cash and Due From
Banks $ 10,048 $ - - $ 9,457 $ - - $ 8,876 $ - -
Bank Premises and
Equipment $ 8,499 $ - - $ 8,699 $ - - $ 8,008 $ - -
Other Assets $ 4,931 $ - - $ 2,782 $ - - $ 3,867 $ - -
Total Assets $303,720 $ - - $276,499 $ - - $245,899 $ - -
LIABILITIES AND
SHAREHOLDERS'
EQUITY:
INTEREST BEARING
LIABILITIES:
Savings Deposits $ 73,908 $ 2,355 3.19% $ 65,996 $ 2,009 3.05% $ 64,912 $ 1,746 2.69%
(5)
Time Deposits $146,562 $ 8,246 5.63% $136,631 $ 8,063 5.91% $111,268 $ 5,335 4.79%
Federal Funds
Purchased and
Other Interest
Bearing
Liabilities $ 28,470 $ 1,358 4.77% $ 23,613 $ 1,184 5.02% $ 22,646 $ 912 4.03%
Total Interest
Bearing
Liabilities $248,940 $11,959 4.81% $226,240 $ 11,256 4.98% $198,826 $ 7,993 4.02%
NON-INTEREST
BEARING
LIABILITIES:
Demand Deposits $ 26,641 $ - - $ 25,375 $ - - $ 24,989 $ - -
Other
Liabilities $ 2,213 $ - - $ 1,972 $ - - $ 1,553 $ - -
Total
Liabilities $277,794 $ - - $253,587 $ - - $225,368 $ - -
SHAREHOLDERS'
EQUITY $ 25,926 $ - - $ 22,912 $ - - $ 20,530 $ - -
24
TOTAL LIABILITIES
AND SHAREHOLDERS'
EQUITY $303,720 $ - - $276,499 $ - - $245,899 $ - -
NET INTEREST
INCOME $ - $12,994 - $ - $11,307 - $ - $10,634 -
NET YIELD ON
AVERAGE EARNING
ASSETS $ - $ - 4.64% $ - $ - 4.43% $ - $ - 4.72%
(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 1996 Compared to 1995 1995 Compared to 1994
National Bank) Due to Changes in: Due to Changes in:
Total Total
Average Average Increase Average Average Increase
Volume Rate (Decrease) Volume Rate (Decrease)
(in thousands)
Interest Earned On:
Loans $ 2,002 $ 48 $ 2,050 $ 2,987 $ 112 $ 3,099
Taxable Investments 335 70 405 647 323 970
Tax Exempt Investment
Securities 25 - 25 (193) 15 (178)
Interest Bearing
Deposits with Other
Banks 5 (5) 0 1 1 2
Federal Funds Sold and
Securities purchased
under agreements to
resell (87) (2) (89) (4) 49 45
Lease Financing (1) - (1) (4) 2 (2)
TOTAL INTEREST EARNING
ASSETS $ 2,279 $ 111 $ 2,390 $ 3,434 $ 502 $ 3,936
Interest Paid On:
Savings Deposits 241 105 346 29 234 263
Time Deposits 587 (404) 183 1,215 1,513 2,728
Federal Funds Purchased
and Securities Sold
Under Agreement to
Repurchase 244 (70) 174 39 233 272
TOTAL INTEREST BEARING
LIABILITIES $ 1,072 $ (369) $ 703 $ 1,283 $ 1,980 $ 3,263
INTEREST EARNINGS $ 1,207 $ 480 $ 1,687 $ 2,151 $(1,478) $ 673
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 9.66% and 13.51% when comparing 1996
to 1995 and 1994. Total interest bearing liabilities
25
increased 10.04% and 13.79% when comparing 1996, 1995 and 1994
respectively. Total interest earning assets averaged
$280,242,000 at an average rate of 8.91% while total interest
bearing liabilities averaged $248,940,000 at an average rate
of 4.81%. Net yield on average earning assets (annualized)
was 4.64%, 4.43%, and 4.72% for the years 1996, 1995, and
1994, reflecting an upward swing in interest rates in 1994.
Maintaining interest rate margins achieved in prior years
proved more difficult in 1995 due to higher rates paid on
deposits. However, 1996 Cost of funds was reduced, 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)
1996 1995 1994 1993 1992
Real Estate Loans:
Construction $ 17,130 $ 12,954 $ 10,511 $ 7,675 $ 5,272
Mortgage $127,080 $107,844 $ 97,310 $ 87,314 $ 79,376
Commercial, Financial
and Agricultural Loans $ 42,067 $ 45,061 $ 38,843 $ 35,626 $ 33,931
Installment Loans to
Individuals $ 22,743 $ 23,718 $ 19,117 $ 15,901 $ 15,077
Other Loans $ 2,369 $ 2,329 $ 3,000 $ 2,806 $ 2,005
TOTAL LOANS $211,389 $191,906 $168,781 $149,322 $135,661
CHANGES IN LOAN CATEGORIES
December 31, 1996 as compared to December 31, 1995
(in thousands)
Amount of Increase % of Increase
Loan Category (Decrease) (Decrease)
Real Estate $23,412 19.39%
Commercial, Financial
and Agricultural $(2,994) (6.65%)
Installment Loans to
Individuals $ (975) (4.11%)
Other Loans $ 40 1.72%
TOTAL LOANS $19,483 10.16%
The bank's loan portfolio has experienced exceptional loan growth as
reflected in the Composition of Loans table. Total loans at 12/31/96 was
$211,389,000 compared to $191,906 000 for the same time period in 1995.
A comparison of growth in the portfolio indicates the largest percentage
of growth (19.39%) is centered in Real Estate. Mortgage and con-struction
loans increased approximately $23 million in 1996. Growth in
this category in 1995 exceeded 19 percent. The upward trend is
attributed to substantial growth in both population and number of
households recorded in Dyer county over the past decade. Loan categories
26
reflecting a decrease from 1995 are Commercial, Financial and Agriculture
loans ($2,994,000 or 6.65%) and Installment Loans to Individuals
($975,000 or 4.11%). Agricultural resources comprise a significant part
of the Dyer County market. In 1996, crop production as well as commodity
prices were higher than in previous years, thereby accounting for a
significant pay down in agriculture loans at year end. Problem and non-
performing loans increased after April, 1996 due to the addition of
Bennett Funding Group, Inc. loan in the amount of $991,029. First
Citizens was made aware that the company had filed a Chapter 11
Bankruptcy and that legal claims had been filed against the company's CFO
claiming among other things the selling of fictitious leases. Assets of
the corporation were frozen as a result of the bankruptcy filing. First
Citizens National Bank is a holder of outstanding debt on Bennett Funding
Group, Inc. totaling $991,029 down from the beginning balance of
$1,699,880. As of December 31, 1996 approximately $300,000 of the debt
was charged off. An allocation of $400,000 had been added to the loan
loss reserve to cover any exposure to the bank. The bank holds 176
outstanding leases securing the debt. Of the total, 25 have been
contacted using the acceptable language provided by Bennett. Response
received indicate that the equipment securing the leases is in place and
in working order. All leases have been reinspected and we have no reason
to believe there are fictitious or fraudulent leases in our portfolio.
First Citizens joined with other banks, also purchases of leases from
Bennett Funding, to employ legal representation as a group until all
facts can be sorted out.
First Citizens is located in the Dyersburg/Dyer County Trade Area, having
a population of 40,000. The entire trade area has out paced both the
state and the nation in per capita personal income growth since the early
1980's. The State of Tennessee projects that per capita income in the
area will be greater than the national average by the year 2000. The mix
of industry in the local economy has provided stable, growing employment
opportunities for residents under all economic conditions. The Dyer
County distribution of employment consists primarily of service employers
14.9%, government 14.7%, trade 19.3%, and manufacturing 40.5%. Dyer
County's unemployment rate at year end was 6.8% down from November's rate
of 7.2%, but higher than the State of Tennessee's rate of 4.2%. The loan
portfolio is made up of quality loans, and is well diversified with no
concentrations of credit in any one industry. Problem loans totaled
$2,856,235 at 12/31/96, while watch loan total was slightly above $5,000.
Total non-performing loans were .61% of total portfolio, at 12/31/95
compared to .73% for peer group banks. Experience of the lending staff
and adherence to policy lends a comfort level to the portfolio that
supports the Loan Loss Allowance at the present level.
The book value of repossessed real property held by Bancshares at year
end was $194,000 compared to $935,000 at 12/31/95 and $1,119,000 at
12/31/94. The balance was significantly reduced as a result of the sale
of the Strip Shopping Center (at a loss of $18,000) in November, 1996.
The remaining balance held in repossessed real property represents real
estate held by First Citizens National Bank with exception to property
purchased for expansion of the branch located on Highway 51 Bypass valued
at $164,000. 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.
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 collateral-ization,
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:
27
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%.
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:
28
. 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
. 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:
1996 - 9.71%
1995 - 9.69%
1994 - 9.12%
1993 - 9.46%
1992 - 10.05%
The aggregate amount of unused guarantees, commitments to extend credit
and standby letters of credit was $34,023,000 at 12/31/96.
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 $37,390 $91,237 $15,583
Commercial, Financial
and Agricultural $25,639 $15,332 $ 1,096
All Other Loans $ 6,330 $18,599 $ 183
TOTALS $69,359 $125,168 $16,862
Loans with Maturities After One Year for which:
(in thousands)
Interest Rates are Fixed or Predetermined $125,933
Interest Rates are Floating or Adjustable $ 16,097
The degree of interest rate risk that a bank is subject to 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
29
variable rate loans. Loans totaling $84,456,000 or 39.95% 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 $125,165,000 at 12/31/96 from $115,163,000 at 12/31/95 as a
result of customer demand to lock in fixed rates for a longer period of
time. The trend exhibited by consumers in recent years to lock in
interest rates is projected to continue in 1997.
NON-PERFORMING LOANS
Nonaccrual, Restructured and Past Due Loans and Foreclosed Properties
(First Citizens National Bank)
December 31
(in thousands)
1996 1995 1994 1993 1992
Nonaccrual Loans $1,118 $ 836 $ 945 $1,079 $1,743
Restructured Loans 0 0 0 0 0
Foreclosed Property
Other Real Estate, 50 111 148 98 550
Other Repossessed
Assets 0 0 0 0 0
Loans and leases 90 days
Past due and still
accruing interest 177 313 1,044 322 176
Total Nonperforming
Assets $1,295 $1,260 $2,137 $1,499 $2,469
Nonperforming assets
as a percent of
loans and leases
plus foreclosed
property at end
of year .62% .66% 1.27% 1.01% 1.82%
Allowance as a percent of:
Nonperforming
assets 176.22% 175.88% 96.12% 111.81% 68.98%
Gross Loans 1.08% 1.16% 1.22% 1.12% 1.27%
Addition to Reserve as a
percent of Net
Charge-Offs 112.16% 180.20% 1,675.00% 93.69% 63.82%
Loans and leases 90 days
past due as a percent of
loans and leases at year
end .09% .17% .62% .22% .13%
Recoveries as a
percent of Gross
Charge-Offs 20.15% 44.66% 87.10% 28.79% 36.17%
Total Non Performing Assets were $1,295,000 as of 12/31/96 compared to
$1,260,000 at year end in 1995. Non performing Assets as a percent of
loans was .62% compared to .66% in 1995 and .73% for peer group banks.
Allowance for Loan Losses as a percent of Nonperforming assets and total
loans was 176.22% and 1.08% respectively. 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 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 it 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
30
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 12/31/96 if all loans
reported as non-accrual had been current in accordance with their original
terms and had been outstanding throughout the period is $201,000. Interest
income on loans reported as ninety days past due and on interest accrual
status was $48,000 for 1995. 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)
1996 1995 1994 1993 1992
Average Net Loans
Outstanding $203,663 $183,018 $160,254 $141,664 $134,514
Balance of Reserve
for Loan Losses
at Beginning of
Period $ 2,216 $ 2,054 $ 1,676 $ 1,703 $ 1,936
Loan Charge-Offs $ (680) $ (365) $ (186) $ (601) $ (1,009)
Recovery of Loans
Previously Charged Off $ 137 $ 163 $ 162 $ 173 $ 365
Net Loans Charged Off $ (543) $ (202) $ (24) $ (428) $ (644)
Additions to Reserve
Charged to Operating
Expense $ 609 $ 364 $ 402 $ 401 $ 411
Balance at End of
Period $ 2,282 $ 2,216 $ 2,054 $ 1,676 $ 1,703
Ratio of Net Charge-
Offs to Average Net
Loans Outstanding .27% .11% .01% .30% .48%
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 (1) Loans charged
off of $680,000 (2) Recovery of loans previously charged off $137,000 and
(3) Additions to reserves totaling $609,000.
An analysis of the allocation of the allowance for Loan Losses is made on a
fiscal quarter at the end of the month, (February, 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
31
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.
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.
32
LOAN LOSS ALLOWANCE ANALYSIS
AVERAGE AVERAGE PERCENT CURRENT RESERVE
LOSS 3 YRS. BALANCE 3 YRS. BALANCE REQUIRED
I. CREDIT $ GROSS $ % $ $
CARDS
II. INSTALL. $ NET $ % $ $
LOANS
III. IMPAIRED WITH ALLOCATIONS $ $
IMPAIRED WITHOUT ALLOCATIONS $ $
ALLOWANCE
IV. DOUBTFUL 50.00% $ $
SUBSTANDARD 10.00%
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 $
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.
33
Management estimates the approximate amount of charge-offs for the 12 month
period ending 12/31/97 to be as follows:
Domestic Amount
Commercial, Financial & Agricultural $200,000
Real Estate-Construction 0
Real Estate-Mortgage 80,000
Installment Loans to individuals & credit cards 120,000
Lease financing 0
01/01/97 through 12/31/97 Total $400,000
The following table will identify charge-offs by category for the periods
ending December 31 as indicated:
Year Ending December 31
(in thousands)
1996 1995 1994
Charge-offs:
Domestic:
Commercial, Financial & Agricultural $ 432 $ 54 $ 32
Real Estate-Construction 0 0 0
Real Estate-Mortgage 20 113 22
Installment Loans to individuals
& credit cards 228 198 132
Lease financing 0 0 0
Total $ 680 $ 365 $ 186
Recoveries:
Domestic:
Commercial, Financial & Agricultural $ 32 $ 38 $ 30
Real Estate-Construction 0 0 0
Real Estate-Mortgage 3 19 12
Installment Loans to individuals
& credit cards 102 106 120
Lease financing 0 0 0
Total $ 137 $ 163 $ 162
Net Charge-offs $ 543 $ 202 $ 24
COMPOSITION OF INVESTMENT SECURITIES
December 31
(in thousands)
1996 1995 1994 1993 1992
U. S. Treasury &
Government Agencies $62,194 $59,462 $47,042 $42,502 $59,019
State & Political
Subdivisions $10,569 $10,776 $10,883 $12,774 $ 9,300
All Others $ 2,984 $ 3,654 $ 4,801 $ 5,471 $ 6,129
TOTALS $75,747 $73,892 $62,726 $60,747 $74,448
34
MATURITY AND YIELD ON SECURITIES - DECEMBER 31, 1996
(in thousands)
Maturing Maturing Maturing
Maturing After One Year After Five Years After
Within One Year Within Five Years Within Ten Years Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield
U. S. Treasury
and Government
Agencies $ 9,788 5.97% $26,161 6.79% $18,369 7.05% $ 7,876 7.29%
State and
Political
Subdivisions* $ 1,835 7.01% $ 6,652 6.72% $ 1,557 7.85% $ 525 7.72%
All Others $ 500 6.00% $ --- --- $ 2,484 5.60% $ ---- ---
TOTALS $12,123 6.13% $32,813 6.78% $22,410 6.95% $ 8,401 7.32%
*Yields on tax free investments are stated herein on a taxable
equivalent basis.
HELD TO MATURITY & AVAILABLE FOR SALE SECURITIES - DECEMBER 31, 1996
Held to Maturity Available for Sale
(in thousands)
Amortized Fair Amortized Fair
Cost Value Cost Value
U.S. Treasury Securities 3,005 3,002 6,971 7,050
U.S. Government Agency & Corporation
obligations (exclude mortgage-backed
securities):
Issued by U.S. Govt. Agencies (2) 0 0 0 0
Issued by U.S. Govt.-Sponsored
Agencies (3) 16,027 16,009 26,760 26,819
Securities issued by states & political
subdivisions in the U.S.:
General Obligations 3,549 3,556 3,412 3,413
Revenue Obligations 2,699 2,699 901 908
Industrial development &
similar obligations 310 319 2,896 2,911
Mortgage-backed Securities (MBS):
Pass-through securities:
Guaranteed by GNMA 786 793 362 368
Issued by FNMA & FHLMC 0 0 0 0
Other pass-through securities 0 0 0 0
Other mortgage-backed securities
(include CMOs, REMICs and stripped
MBS):
Issued or guaranteed by FNMA & FHLMC
or GNMA 1,144 1,146 3,754 3,739
Collateralized by MBS
issued or guaranteed by
FNMA, FHLMC or GNMA 35 35 0 0
All other mortgage-backed securities 0 0 0 0
Other Debt Securities:
Other domestic debt securities 500 501 0 0
Foreign debt securities 0 0 0 0
Equity Securities:
Investments in Mutual Funds 0 0 0 0
Other equity securities with readily
determinable fair values 0 0 749 757
All other equity securities (1) 0 0 1,726 1,727
Total 28,055 28,060 47,531 47,692
(1) Includes equity securities without readily determinable fair values
at historical cost.
(2) Includes Small Business Administration "Guaranteed Loan Pool
Certificates," U.S. Maritime Administration obligations, and Export-
Import Bank participation certificates.
(3) Includes obligations (other than pass-through securities, CMOs, and
REMICs) issued by the Farm Credit System, the Federal Home Loan Bank
System, the Federal Home Loan Mortgage Corporation, the Federal
National Mortgage Association, the Financing Corporation, Resolution
Funding Corporation, the Student Loan Marketing Association, and the
Tennessee Valley Authority.
35
A major goal of the bank's investment portfolio management is to
maximize returns from investments while controlling the basic elements
of risk. The second goal is to provide liquidity and meet financial
needs of the community. Investment Securities also serve as collateral
for government and public funds deposits. Investment activity for 1996
was driven by strong loan demand and Financial Accounting Standard No.
115 (further explanation is contained within this section as well as
footnotes included in the Auditors Report) which addresses Accounting in
Certain Investments in Debt and Equity Securities. The investment
portfolio, which currently totals $75,747,000, is comprised of U. S.
Treasury and U. S. Agency Obligations of $62,194,000, Municipal
Obligations of $10,569,000, and all other investments totaling
$2,984,000. Fixed rate holdings comprise 90% of the portfolio, while
adjustable rates comprise the remaining 10%.
The fixed rate holdings currently have an expected average life of 3.1
years. It is estimated that this average life would extend to 4.6 years
should rates go up by 100 basis points and 4.9 years if rates increase
200 basis points. This is a result of some extension occurring in the
callable bonds and mortgage-backed holdings as rates rise. Should rates
decline 100 basis points, the average life would decrease to 1.9 years.
In terms of price sensitivity, we estimate that if rates go up 100 basis
points the market value of the portfolio would fall by 3.3%, while rates
up 200 basis points would impact the market value by a negative 6.8%.
This is equal to the price sensitivity of the 4-year Treasury bond,
which is consistent with the current average life of the portfolio. If
rates go down 100 basis points, we estimate that the market value would
increase by 2.3%.
The adjustable rate holdings reprice on an annual or more frequent basis
and currently have an average life of 6.8 years. Due to the structure
of these holdings, we would expect very little extension to occur in
average life should interest rates rise, but could see some shortening
should rates fall. We estimate that the adjustable rate holdings also
have the price sensitivity of a 3-year Treasury, although this is more
difficult to project on adjustable rate holdings than on fixed rate
holdings.
FASB 115 required banks to maintain separate investment portfolios for
Held-to-Maturity, Available for Sale, and Trading Account Investments.
As of 12/31/96 approximately 63 percent of the bank's total portfolio
was placed in the Held For Sale Account while the remaining 37 percent
is contained in the Held to Maturity Account. FASB 115 also requires
banks to mark to market the Available for Sale and Trading Account
investments at the end of each calendar quarter. Held-to-Maturity
account investments are stated at amortized cost on the balance sheet.
Mark to market resulted in a positive capital entry of $159,542 as
reflected on the 12/31/96 balance sheet. Mark to market impact to
capital on 12/31/95 was a positive $745,000. All purchase and sale
transactions in 1996 were made in accordance with specifications set
forth in FASB 115. During the fourth quarter of 1995 transfers were
made from the Held to Maturity account to the Held for Sale account to
provide for future liquidity. The Financial Accounting Standards Board
provided a grace period under FASB 115 from November 15 thru December
31, 1995 to allow banks to reclassify investments contained in the three
portfolios. The trading account at 12/31/96 maintained a zero balance.
First Citizens has not engaged in Derivative activities as defined by
paragraphs 5 thru 7 of FASB 119.
36
Maturities in the portfolio are made up of 16.00% within one year, and
43.3% maturing after one year and within five years. Maturities on
future investment purchases will be structured to meet loan demand as
well as projected changes in interest rates.
Gains/Losses reflected in year-end income statements attributable to
trading account securities:
Year Ended
12/31 Gains Losses Net
1996 $ 0.00 $ 0.00 $ 0.00
1995 $ 0.00 $ 0.00 $ 0.00
1994 $ 0.00 $ 0.00 $ 0.00
The following table allocates by category unrealized Gains/Losses within
the portfolio as of December 31, 1995 (in thousands):
Unrealized Net
Gains Losses Gains/Losses
U.S. Treasury
Securities $ 103 $ 27 $ 76
Obligations of U.S.
Government Agencies
and Corporations $ 266 $ 352 $ (86)
Obligations of States
and Political
Subdivisions $ 41 $ 26 $ 15
Federal Reserve and
Corporate Stock $ 0 $ 0 $ 0
TOTALS $ 410 $ 405 $ 5
LIQUIDITY AND INTEREST RATE SENSITIVITY
Liquidity is the ability to meet the needs of our customer base for loan
and deposit withdrawals by maintaining assets which are convertible to
cash equivalents with minimal exposure to interest rate risk.
Liquidity, which is determined by a comparison of net liquid assets to
net liabilities, remains between 10% and 15%. The stability of our
deposit base, sound asset/liability management, a strong capital base
and quality assets assure adequate liquidity. Loan to deposit ratio at
12/31/96 was 82%. Two factors primarily affecting liquidity in 1996,
were loan demand in excess of budget projections and customer demand to
lock in low interest rates for longer periods of time. Solid deposit
growth centered primarily in time deposits provided a steady source of
funds to meet liquidity needs. During the last half of 1994 interest
rates started to climb upward, causing consumers to move funds from
Annuities and Mutual Funds into bank certificates of deposits. Asset
growth was approximately 7% for 1996. Other sources available to meet
liquidity needs were (1) approved lines of credit with Federal Home Loan
Bank and correspondent banks totaling $20 million (2) Loans and
investments in excess of $84,343,000 maturing within one year and (3)
approximately 63% of the banks' total investments placed in the held-for-
sale account. As of year end approximately $3 million was drawn on
approved lines of credit. The borrowings were maturity matched with
loans and investments on the books of the bank.
There are no known trends or uncertainties that are likely to have a
material affect on First Citizens liquidity or capital resources. There
currently exists no recommendations by regulatory authorities which if
implemented, would have such an affect. There are no matters of which
management is aware that have not been disclosed.
37
Interest rate sensitivity varies with different types of interest-earning
assets and interest-bearing liabilities. Overnight federal
funds, on which rates change daily, and loans which are tied to the
prime rate are much more sensitive than long-term investment securities
and fixed rate loans. The shorter term interest sensitive assets and
liabilities are the key to measurement of the interest sensitivity gap.
Minimizing this gap is a continual challenge and a primary objective of
the asset/liability management program.
The following condensed gap report provides an analysis of interest rate
sensitivity of earning assets and costing liabilities. First Citizens
Asset/Liability Management Policy provides that the cumulative gap as a
percent of assets shall not exceed 10% for categories up to 12 months
and one to two year categories and 20% for categories in excess of two
years. As evidenced by the following table, our current position is
significantly below this level, with annual income exposure determined
to be less than the $150,000 limitation established by policy.
38
CONDENSED GAP REPORT
12/31/96 CURRENT BALANCES
(in thousands)
DAILY 0-1 1-2 2-3 3-6 6-12
TOTAL FLOATING MONTHS MONTHS MONTHS MONTHS MONTHS
CASH AND DUE FROM:
CASH AND DUE FROM 10,871 - - - - - -
MONEY MARKET 196 196 - - - - -
TOTAL CASH & DUE FROM 11,067 196 - - - - -
INVESTMENTS
US TREASURIES 75,549 - - 4,777 1,000 8,633 5,000
TOTAL INVESTMENTS 75,549 - - 4,777 1,000 8,633 5,000
LOANS:
COMMERCIAL FIXED 25,394 - 4,875 1,127 1,471 1,913 3,199
COMMERCIAL VARIABLE 15,940 - 15,940 - - - -
REAL ESTATE VARIABLE 19,844 - 18,703 - 13 1,128 -
REAL ESTATE FIXED 118,591 - 6,100 1,902 2,754 3,869 9,624
HOME EQUITY LOANS 5,007 - 4,303 - 29 272 402
SEC MORTGAGE 768 - - - - - -
INSTALLMENT LOANS 22,669 - 717 182 294 913 1,781
INSTALLMENT VARIABLE 74 - 74 - - - -
FLOOR PLAN 733 - - - - - -
CREDIT CARDS 1,759 - - - - - -
FACTORING REC 184 - - - - - -
OVERDRAFTS 426 - - - - - -
TOTAL LOANS 211,389 - 50,712 3,211 4,561 8,095 15,006
LOAN LOSS RESERVE 2,282 - - - - - -
NET LOANS 209,107 - 50,712 3,211 4,561 8,095 15,006
FED FUNDS SOLD 1,000 - - - - - -
TOTAL FED FUNDS SOLD 1,000 - - - - - -
TOTAL EARNING ASSETS 285,656 - 50,712 7,988 5,561 16,728 20,006
OTHER ASSETS:
BUILDING, F&F & LAND 8,135 - - - - - -
OTHER REAL ESTATE 50 - - - - - -
OTHER ASSETS 6,256 - - - - - -
TOTAL OTHER ASSETS 14,441 - - - - - -
TOTAL ASSETS 311,164 196 50,712 7,988 5,561 16,728 20,006
DEMAND DEPOSITS:
DEMAND DEPOSITS 27,894 - - - - - -
TOTAL DEMAND 27,894 - - - - - -
SAVINGS ACCOUNTS:
REGULAR SAVINGS 16,886 - 1,000 - - - -
NOW ACCOUNT 26,809 - - - - - -
BUSINESS CHECKING 278 - - - - - -
IMF-MMDA 12,578 1,000 - - - - -
FIRST RATE ACCOUNT 17,820 17,820 - - - - -
DOGWOOD CLUB 5,139 1,139 - - - - -
TOTAL SAVINGS 79,510 19,959 1,000 - - - -
39
CONDENSED GAP REPORT
12/31/95 CURRENT BALANCES
(in thousands)
1-2 2+
YEARS YEARS
CASH AND DUE FROM:
CASH AND DUE FROM - 10,871
MONEY MARKET - -
TOTAL CASH & DUE FROM - 10,871
INVESTMENTS
US TREASURIES 7,530 48,609
TOTAL INVESTMENTS 7,530 48,609
LOANS
COMMERCIAL FIXED 4,476 8,333
COMMERCIAL VARIABLE - -
REAL ESTATE VARIABLE - -
REAL ESTATE FIXED 20,739 73,603
HOME EQUITY LOANS - 1
SEC MORTGAGE - 768
INSTALLMENT LOANS 4,035 14,747
INSTALLMENT VARIABLE - -
FLOOR PLAN - 733
CREDIT CARDS - 1,759
FACTORING REC - 184
OVERDRAFTS - 426
TOTAL LOANS 29,250 100,554
LOAN LOSS RESERVE - 2,282
NET LOANS 29,250 98,272
FED FUNDS SOLD - 1,000
TOTAL FED FUNDS SOLD - 1,000
TOTAL EARNING ASSETS 36,780 147,881
OTHER ASSETS:
BUILDING, F&F & LAND - 8,135
OTHER REAL ESTATE - 50
OTHER ASSETS - 6,256
TOTAL OTHER ASSETS - 14,441
TOTAL ASSETS 36,780 173,193
DEMAND DEPOSITS:
DEMAND DEPOSITS - 27,894
TOTAL DEMAND - 27,894
SAVINGS ACCOUNTS:
REGULAR SAVINGS - 15,886
NOW ACCOUNT