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1
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, 1998 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, 1998 was $97,347,000.
Of the registrant's only class of common stock (no par value) there
were 3,240,315 shares outstanding as of December 31, 1998 (net of
Treasury Stock).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the
Proxy Statement dated March 15, 1998 (Part III)
Filed by Electronic Submission
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PART I
ITEM 1. BUSINESS
GENERAL
First Citizens Bancshares, Inc. ("Bancshares") was organized
December, 1982 as a Tennessee Corporation and commenced
operations in September, 1983, with the acquisition of all
Capital Stock of First Citizens National Bank of Dyersburg
("First Citizens").
First Citizens was chartered as a national bank in 1900 and
presently operates a general retail banking business in
Dyersburg (Dyer County), Ripley (Lauderdale County), and Troy
and Union City (Obion County), Tennessee, providing customary
banking services. First Citizens operates under the
supervision of the Comptroller of the Currency, is insured up
to applicable limits by the Federal Deposit Insurance
Corporation and is a member of the Federal Reserve System.
First Citizens operates under the day-to-day management of its
own officers and directors; and formulates its own policies
with respect to lending practices, interest rates, service
charges and other banking matters.
Bancshares' primary source of income is dividends received
from First Citizens. Dividend payments are determined in
relation to First Citizens' earnings, deposit growth and
capital position in compliance with regulatory guidelines.
Management anticipates that future increases in the capital of
First Citizens will be accomplished through earnings retention
or capital injection.
The following table sets forth a comparative analysis of
Assets, Deposits, Net Loans, and Equity Capital of Bancshares
as of December 31, for the years indicated:
December 31
(in thousands)
1998 1997 1996
Total Assets $421,221 $333,288 $313,069
Total Deposits 315,317 267,590 256,413
Total Net Loans 274,724 226,488 209,107
Total Equity Capital 39,281 33,125 29,603
Individual bank performance is compared to industry standards
through utilization of the Uniform Bank Performance Report
(UBPR), published quarterly by the Federal Financial
Institution's Examination Council.
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This report provides comparisons of significant operating
ratios of First Citizens Bancshares with peer group banks.
Presented in the following chart are comparisons of First
Citizens with peer group banks for the periods indicated:
*12/31/98 12/31/97 12/31/96
BANCSHARES PEER GRP BANCSHARES PEER GRP BANCSHARES PEER GRP
Average Assets/
Net Interest
Income 4.00% 4.15% 4.36% 4.31% 4.28% 4.31%
Average Assets/
Net Operating
Income 1.13% 1.19% 1.31% 1.20% 1.21% 1.14%
Net loan losses/
Average total
loans .16% .17% .09% .21% .26% .23%
Primary Capital/
Average Assets 9.45% 9.27% 9.94% 9.46% 9.46% 9.07%
Cash Dividends/
Net Income ** 38.17% 24.44% 35.77% 25.96% 32.27% 23.62%
*Performance as of 12/31/98 is compared to peer group totals as of
09/30/98
(Most recent Federal Reserve Report)
EXPANSION
Bancshares may, subject to regulatory approval, acquire existing banks
or organize new banks. The Federal Reserve permits bank holding
companies to engage in non-banking activities closely related to banking
or managing or controlling banks, subject to Board approval or
notification. In making such determination, the Federal Reserve
considers whether the performance of such activities by a bank holding
company would offer advantages to the public which outweigh possible
adverse effects. Approval by the Federal Reserve of a Bank Holding
Company's application to participate in a proposed activity is not a
determination that the activity is a permitted non-bank activity for all
bank holding companies. Approval applies only to the applicant,
although it suggests the likelihood of approval in a similar case.
First Citizens through its strategic planning process has stated its
intention to acquire other financial institutions within the West
Tennessee Area. First Citizens' objective in acquiring other banking
institutions would be for asset growth and diversification into other
market areas. Acquisitions would afford the bank increased economies of
scale within the data processing function and better utilization of
human resources. Any acquisition approved by Bancshares, would be
deemed to be in the best interest of Bancshares and its shareholders.
4
On March 5, 1997 an Acquisition Agreement was executed for the purchase
of the Bank of Troy, Troy, TN, total assets approximately $57 million.
The Bank of Troy was converted to a branch of First Citizens National
Bank in February, 1999. A Merger Agreement was signed between First
Citizens National Bank ("The Bank") and First Volunteer Bank, Union
City, TN. on January 1, 1999. First Volunteer Assets totaling
approximately $47 million will be converted as a branch of First
Citizens National Bank on June 11, 1999.
Beginning in 1997 First Citizens started to expand financial services to
include a finance company and insurance agency. Delta Finance, located
on St. John Avenue, Dyersburg, TN. was opened in early 1997 and a second
finance company was opened 4th quarter 1998 in Milan, TN. White and
Associates/First Citizens Insurance, LLC was opened in early 1998.
Insurance services include a full line of insurance products as well as
financial services. In 1998 insurance products were expanded to include
a credit insurance company and crop insurance. A second Insurance
Agency was opened in Obion County second quarter of 1998.
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.
As a bank holding company, Bancshares is required to file with the
Federal Reserve annual reports and other information regarding the
business obligations of itself and its subsidiaries. Board approval
must be obtained before Bancshares may:
(1) Acquire ownership or control of any voting securities of a bank or
Bank Holding Company where the acquisition results in the BHC
owning or controlling more than 5 percent of a class of voting
securities of that bank or BHC;
(2) Acquire substantially all assets of a bank or BHC or merge with
another BHC.
Federal Reserve approval is not required for a bank subsidiary of a BHC
to merge with or acquire substantially all assets of another bank if
prior approval of a federal supervisory agency, such as the Comptroller
of the Currency is required under the Bank Merger Act. Relocation of a
subsidiary bank of a BHC from one state to another requires prior
approval of the Federal Reserve and is subject to the prohibitions of
the Douglas Amendment.
The Bank Holding Company Act provides that the Federal Reserve shall not
approve any acquisition, merger or consolidation which would result in a
monopoly or which would be in furtherance of any combination or
conspiracy to monopolize or attempt to monopolize the business of
banking in any part of the United States. Further, the Federal Reserve
may not approve any other proposed acquisition, merger, or 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 with
adequate assurances that it will make available such information on its
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operations and activities, and the operations and activities of any
affiliate, deemed appropriate to determine and enforce compliance with
the Bank Holding Company Act and any other applicable federal banking
statutes and regulations. In addition, consideration is given to the
competence, experience and integrity of the officers, directors and
principal shareholders of the applicant and any subsidiaries as well as
the banks and bank holding companies concerned. The Federal Reserve
also considers the record of the applicant and its affiliates in
fulfilling commitments to conditions imposed by the Federal Reserve in
connection with prior applications.
A bank holding company is prohibited with limited exceptions from
engaging directly or indirectly through its subsidiaries in activities
unrelated to banking or managing or controlling banks. One exception to
this limitation permits ownership of a company engaged solely in
furnishing services to banks; another permits ownership of shares of the
company, all of the activities of which the Federal Reserve has
determined after due notice and opportunity for hearing, to be so
closely related to banking or managing or controlling banks, as to be a
proper incident thereto. Moreover, under the 1970 amendments to the Act
and to the Board's regulations, a bank holding company and its
subsidiaries are prohibited from engaging in certain "tie-in"
arrangements in connection with any extension of credit or provision of
any property or service. Subsidiary banks of a bank holding company are
subject to certain restrictions imposed by the Federal Reserve Act on
any extension of credit to the bank holding company or to any of its
other subsidiaries, or investments in the stock or other securities
thereof, and on the taking of such stock or securities as collateral for
loans to any borrower.
Bank holding companies are required to file an annual report of their
operations with the Federal Reserve, and they and their subsidiaries are
subject to examination by the Federal Reserve.
Bancshares is subject to capital adequacy requirements imposed by the
Federal Reserve Bank. In addition, First Citizens (the principal
subsidiary of the corporation) is restricted by the Office of the
Comptroller of the Currency (Comptroller)from paying dividends in any
years which exceed the net earnings of the current year plus retained
profits of the preceding two years. It is the policy of First Citizens
to comply with regulatory requirements for the payment of dividends.
The Federal Reserve adopted a risk-based capital measure for use in
evaluating the capital adequacy of bank holding companies effective
January 1, 1991. The risk-based capital measure focuses primarily on
broad categories of credit risk and incorporates elements of transfer,
interest rate and market rate risk. The calculation of risk-based
capital is accomplished by dividing qualifying capital by weighted risk
assets. The minimum risked-base capital ratio is 8%, at least one-half
or 4.00% must consist of core capital (Tier 1), and the remaining 4.00%
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. A risked based capital analysis is performed on
a quarterly basis to test for compliance with Federal Reserve and bank
policy guidelines before declaring a dividend or increasing a dividend.
First Citizens' policy states that before declaring a dividend the
following ratios will be achieved: (1) Risked Based Capital Tier 1 will
be 8.25% or above; Return on year-to-date average equity 9.00%; Asset
growth and projected one year future asset growth less than 20.00%; and
non performing assets to capital less than 30%. Non performing assets
include 90 day past due and non accrual loans.
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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, 1998
Name Age Position and Office
Stallings Lipford 68 Chairman of the Board of Bancshares
and First Citizens. Mr. Lipford joined First
Citizens in 1950. He became a member of the
Board of Directors in 1960 and President in
1970. He was made Vice Chairman of the Board
in 1982. He served as Vice Chairman of the
Board of Bancshares from September, 1982 to
February, 1984. The Board elected Mr.
Lipford Chairman of both First Citizens and
Bancshares on February 14, 1984. He served
as President of First Citizens and Bancshares
from 1983 to 1992, and as CEO of Bancshares
and First Citizens from 1992 until 1996.
Katie Winchester 58 President and CEO of Bancshares and First
Citizens; employed by First Citizens in 1961;
served as Executive Vice President and
Secretary of the Board from 1986 to 1992.
She was appointed CEO of Bancshares and First
Citizens in 1996; and President of Bancshares
and First Citizens in 1992. Ms. Winchester
was elected to the Board of both First
Citizens and Bancshares in 1990.
Ralph Henson 57 Vice President of Bancshares; Executive Vice
President of Loan Administration of First
Citizens. Employed by First Citizens in 1964.
Mr. Henson served First Citizens as Senior
Vice President and Senior Lending Officer
until his appointment as Executive Vice
President of Loan Administration in February,
1993.
Jeffrey Agee 38 Vice President and Chief Financial Officer of
Bancshares and First Citizens as of April,
1994. Employed by First Citizens in 1982.
Served First Citizens previous to April, 1994
as Vice President and Accounting Officer.
Appointed Senior Vice President and Chief
Financial Officer of First Citizens, April
17, 1996.
Barry Ladd 58 Appointed Executive Vice President and Chief
Administrative Officer of First Citizens and
Bancshares in 1996. Senior Vice President
and Senior Lending Officer of First Citizens
from April 20, 1994 to January 17, 1996.
Employed by First Citizens in 1972. Mr. Ladd
served First Citizens as Vice President and
Lending Officer previous to his appointment
as Senior Vice President.
Judy Long 44 Senior Vice President and Chief Operations
Officer and Secretary to First Citizens
National Bank. Ms. Long also serves as Vice
President and Secretary to the Board of
Bancshares. Served First Citizens previous
to November, 1997, as Senior Vice President
and Administrative Officer. Employed by
First Citizens on July 19, 1974. Previously
served as Vice President and Loan Operations
Manager (1992-1996).
7
BANKING BUSINESS
First Citizens operates a general retail banking business in Dyer
County, Tennessee. The bank expanded its banking operations into
Lauderdale County in 1995 with the purchase of $8 million in assets and
Obion County in 1997 and 1998, purchasing approximately $104 million in
assets. All persons who live in either community or who work in or have
a business or economic interest in either county are considered as
forming a part of the area serviced by First Citizens. First Citizens
provides customary banking services, such as checking and savings
accounts, funds transfers, various types of time deposits, and safe
deposit facilities. It also finances commercial transactions and makes
and services both secured and unsecured loans to individuals, firms, and
corporations. Commercial lending operations include various types of
credit services for its customers. Agricultural services are provided
that include operating loans as well as financing for the purchase of
equipment and farm land. The installment lending department makes
direct loans to individuals for personal, automobile, real estate, home
improvement, business and collateral needs. Mortgage lending makes
available long term fixed and variable rate loans to finance the
purchase of residential real estate. These loans are sold in the
secondary market without retaining servicing rights. Credit cards and
open-ended credit lines are available to both commercial customers and
consumers.
Corporate Offices for First Citizens Bancshares and First Citizens
National Bank is located in Dyersburg/Dyer County, Tennessee.
Dyersburg/Dyer County is located in northwest Tennessee and sits on the
banks of the Mississippi River. It is 78 miles northeast of Memphis,
Tennessee, 165 miles west of Nashville and 230 miles south of St. Louis,
Missouri. Dyer County is equidistant between Chicago and New Orleans
with direct rail, Amtrak, highway and interstate service to major
industrial and consumer markets. Dyersburg/Dyer County is an anchor in
the region that blends education, transportation, industry agribusiness
and retail trade to serve the tristate and service the encompassing
Northwest Tennessee, Northwest Arkansas, and the Missouri Bootheel area.
Dyer County is a mix of agriculture and industry. Fifty-six percent of
the land in Dyer County is in agricultural production and farming is a
$79 million industry in the county. Dyer County is Tennessee's number
one producer of soybeans, grain sorghum, commercial vegetables and rice.
Other important crops are wheat, cotton, and corn. The county's 509
farm operations average 435 acres as of December 31, 1998. Agriculture
loans outstanding on the books of First Citizens National Bank totaled
24,916,979 or 10 percent of total loans. Agriculture loans totaling
$12,300,046 are well secured with real estate, including farmland,
residential property, and other improvements, while $12,616,933 are
secured loans to finance crop production and the purchase of equipment.
Approximately $2.3 million in agriculture loans are 90% guaranteed by
Farm Credit Services (a government agency). There are 61 manufacturers
and processors distributed throughout the county employing approximately
7,500 people. The local economy appears to be solid and growing. In
December 1998, Dyer County unemployment rate was 6.9% compared to the
State of Tennessee unemployment rate of 4.1%. The labor force increased
18.4% from 1980 to 1995. (Statistics Source: Economic Overview,
Council for Urban Economic Development, July 28, 1998).
First Citizens National Bank expanded its' base of operations into Obion
County in 1998. Obion County is located approximately 27 miles north of
Dyersburg and is adjacent to Dyer County. Economic conditions in Obion
County appear to be solid and growing. Unemployment rate in Obion
County as of December 31, 1998 was 5.3% compared to the State of
Tennessee Unemployment rate of 4.1%. Obion County is a mix of
industry, service and retail business. Goodyear Manufacturing, a
builder of tires, is the largest employer in the county, employing
approximately 3700 workers by year end 1999. Total Assets of First
Citizens National Bank - Troy Branch and First Volunteer Bank are
approximately $104 million consisting primarily of consumer and retail
business loans.
8
First Citizens Financial Plus, Inc., a Bank Service Corporation wholly
owned by First Citizens is a licensed Brokerage Service. This allows
the bank to compete on a limited basis with numerous non-bank entities
who pose a continuing threat to our customer base, and are free to
operate outside regulatory control.
First Citizens was granted trust powers in 1925 and has maintained an
active Trust Department since that time. Assets as of December 31, 1998
were in excess of $167,352,000. 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.
Delta Finance, a finance company wholly owned by First Citizens National
Bank offers finance service to the retail market. Services offered by
Delta Finance and Delta Finance II consist of but are not limited to
consumer and residential real estate loans.
On February 9, 1998, White and Associates/First Citizens Insurance LLC
was chartered by the state of Tennessee. The principal office of White
and Associates/First Citizens is located at 104 North Monroe Street,
Newbern, Tennessee. White and Associates/First Citizens is a general
insurance agency with products offered as property and casualty, Life
and Health, and Securities.
A second location of White and Associates/First Citizens Insurance was
opened in Bank of Troy on July 1, 1998 with the purchase of Durham
Insurance, Union City, Tennessee. As of year end, 1998 negotiations to
purchase the Halls Insurance Agency resulted in an agreement to be
acquired by White and Associates/First Citizens Insurance LLC effective
January 1, 1999. The Halls Insurance Agency was a primary provider of
Crop Insurance coverage in the State of Tennessee. On December 28, 1998
a credit insurance company was formed and will be known as First
Citizens/White and Associates Insurance Company.
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, 1998.
Dyer County Market
(Bank's Only)
(in thousands)
Total Deposits % of Market Share
Bank Name 06/30/98 06/30/98
First Citizens
National Bank $262,726* 52.33%
First Tennessee
Bank 102,693 20.46%
Security Bank 76,460 15.23%
Union Planters, FSB 60,156 11.98%
Total $502,035 100.00%
*Does not include deposits of $21,282,000 categorized as Overnight and
fixed term Repurchase Agreements.
9
At December 31, 1998 Bancshares and its subsidiary, First Citizens,
employed a total of 179 full time equivalent employees. Having been a
part of the local community in excess of 100 years, First Citizens has
been privileged to enjoy a major share of the financial services market.
Dyersburg and Dyer County are growing and with this growth come demands
for more sophisticated financial products and services. Strategic
planning has afforded the Company both the physical resources and data
processing technology necessary to meet the financial needs generated by
this growth.
USURY, RECENT LEGISLATION AND ECONOMIC ENVIRONMENT
Tennessee usury laws limit the rate of interest that may be charged by
banks. Certain Federal laws provide for preemption of state usury laws.
Legislation enacted in 1983 amends Tennessee usury laws to permit
interest at an annual rate of interest four (4) percentage points above
the average prime loan rate for the most recent week for which such an
average rate has been published by the Board of Governors of the
Federal Reserve, or twenty-four percent (24%), which ever is less (TCA
47-14-102(3)). The "Most Favored Lender Doctrine" permits national
banks to charge the highest rate permitted by any state lender.
Specific usury laws may apply to certain categories of loans, such as
the limitation placed on interest rates on single pay loans of $1,000.00
or less for one year or less. Rates charged on installment loans,
including credit cards, as well as other types of loans may be governed
by the Industrial Loan and Thrift Companies Act.
On September 29, 1994, President Clinton signed into law the Riegel-Neal
Interstate Banking and Branching Efficiency Act of 1994 ("Act"). The
Act provides for nationwide interstate banking and branching with
certain limitations. The Act permits bank holding companies to acquire
banks without regard to state boundaries after September 29, 1995. The
Federal Reserve may approve an interstate acquisition only if, as a
result of the acquisition, the bank holding company would control less
than 10% of the total amount of insured deposits in the United States or
30% of the deposits in the home state of the bank being acquired. The
home state can waive the 30% limit as long as there is no discrimination
against out-of-state institutions.
Pursuant to the Act, interstate branching took effect on June 1, 1997,
except under certain circumstances. Once a bank has established
branches in a host state (a state other than its headquarters state)
through an interstate merger transaction, the bank may establish and
acquire additional branches at any location in the host state where any
bank involved in the interstate merger transaction could have
established or acquired branches under applicable federal or state law.
The Act further provides that individual states might opt out of
interstate branching, prior to May 31, 1997. A bank in that state may
merge with a bank in another state provided that neither of the states
have opted out.
There are no known trends, events or uncertainties that are likely to
have a material effect on First Citizens liquidity, capital resources or
results of operation. There currently exists no recommendation by
regulatory authorities which if implemented, would have such an effect.
There are no matters which have not been disclosed. Bancshares and First
Citizens are located in a highly competitive market. There are
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 as permitted by recent
federal legislation as discussed herein could possibly bring about the
location of large out of state banks to the area. If so, First Citizens
would continue to operate as it has in the past, focusing on the wants
and needs of existing and potential customers. The quality of service
and individual attention afforded by an independent community bank
cannot be matched by large regional competitors, managed by a corporate
10
team unfamiliar to the area. First Citizens is a forward moving bank
offering products and services required to maintain satisfactory
customer relationships moving into the next decade and beyond.
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 removed three firewalls, one of which
prevented the same bank employee from selling underwriting services,
loans and transactions accounts. The Federal Reserve on December 20
more than doubled, to 25% the amount of revenue section 20 units may
earn underwriting and dealing in commercial securities. The Office of
the Comptroller of the Currency in adopting its controversial operating-
subsidiary rule in November 1996, established a procedure that allows
national banks to create subsidiaries to underwrite securities sell
insurance, or conduct other activities that the banks may engage in
directly. Legislation being considered would possibly limit this action
to operating Subsidiaries of the Holding Company only.
The Comptrollers's operating-subsidiary rule also streamlined national
banks' applications for new branches. It sets a strict 45-day deadline
for Comptroller action on all applications, with a 10 day extension
possible when serious CRA issues are raised. The Comptroller provisions
closely parallel changes to Regulation Y issued by the Federal Reserve
in August, 1996. Those changes give the Federal Reserve 15 days to
process most merger applications. It also expands data processing
powers, eliminates tying restriction on nonbanks, and allows bank-run
trusts to buy mutual funds advised by the bank.
The 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 Comptroller 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.
Every industry which interprets or stores data formats has been posed
with the year 2000 challenge. In year 2000 related issues are a widely
recognized universal problem related to the way in which computer
systems process dates. The numerous inquiries received from both
customers and vendors have made us aware of the level of concern among
those with whom we do business. Customer confidence in First Citizens
National Bank now and after year 2000 is a top priority. For this
reason we have dedicated the resources necessary to ensure that the
millennium change will not change the way we service our customers. As
early as 1997 a plan was developed based on guidelines suggested by the
Federal Financial Institution Examination Council and approved by the
bank's Board of Directors. A Year 2000 Team was formed, led by
Operations Officer Judy Long, and supported by Senior staff of the
Information Systems Division of First Citizens.
Will First Citizens National Bank be ready for Year 2000?
Yes! We have reviewed all mission critical core processing systems,
mainframe and distributed applications, data communications, physical
plant, building security and desktop applications to ensure that they
are capable of functioning through and beyond year 2000. As of December
31, 1998 we had identified, renovated or replaced and successfully
testing in excess of 90% of all mission critical systems. Our efforts
to bring 100% of our systems into compliance in a timely manner will be
monitored by our primary regulator, the Comptroller of the Currency on a
quarterly basis during 1999.
11
Monetary policies of regulatory authorities, including the Federal
Reserve have a significant effect on operating results of bank holding
companies and their subsidiary banks. The Federal Reserve regulates the
national supply of bank credit by open market operations in United
States Government securities, changes in the discount rate on bank
borrowings, and changes in reserve requirements against bank deposits.
A tool once extensively used by the Federal Reserve to control growth
and distribution of bank loans, investments and deposits has been
eliminated through deregulation. Competition, not regulation, dictates
rates which must be paid and/or charged in order to attract and retain
customers.
Federal Reserve monetary policies have materially affected the operating
results of commercial banks in the past and are expected to do so in the
future. The nature of future monetary policies and the effect of such
policies on the business and earnings of the company and its
subsidiaries cannot be accurately predicted.
ITEM 2. PROPERTIES
First Citizens owns and occupies a six-story building in Dyersburg,
Tennessee containing approximately 50,453 square feet of office space,
bearing the municipal address of First Citizens Place (formerly 200 West
Court). An expansion program completed during 1988 doubled the
available floor space of the existing facility. The space was utilized
to combine all lending and loan related functions. First Citizens owns
the Banking Annex containing total square footage of 12,989 which
provides operating space for banking departments i.e. agricultural
services, training and public relations, as well as the bank's Brokerage
subsidiaries. The municipal address of the bank occupied portion of the
Annex is 215-219 Masonic Street.
The land and building occupied by the Downtown Drive-In Branch located
at 113 South Church Street, Dyersburg, Tennessee is owned by First
Citizens. The building, containing approximately 1,250 square feet, is
located on a lot which measures 120 feet square. Also located at this
address is a separate ATM facility wholly owned by the Bank.
The Midtown Branch of First Citizens is located at 620 U.S. 51 By-Pass
adjacent to the Green Village Shopping Center. The building contains
1,920 square feet and has been owned by First Citizens since
construction. The land on which this Branch is located, having
previously been leased, was purchased during 1987. In June of 1992 an
additional 1.747 acres adjoining the Midtown Branch property was
purchased to accommodate future growth and expansion. Construction of
a larger facility at this location is scheduled to begin third quarter
of 1999.
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.
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.
12
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.
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 for
construction of a branch facility. Construction of the branch is
underway and expected to be completed by May 1999.
The Bank of Troy was purchased by First Citizens National Bank in early
1998. Property purchased by the Bank is located in Troy, Tennessee.
The Troy Branch has two locations; a main bank building located on
Harper Street just west of Highway 51 and a drive up branch located on
Highway 51.
The main building is a two story brick and siding building. The site
consists of three lots with maximum dimensions on each side being 272
feet and 260 feet. The first floor in the main building contains 5,896
square feet and houses a full service branch facility. Most of the
building was built in 1970 with additions and renovations being made
since that time.
The branch building is a one story brick building. The site is 231 feet
by 100 feet. It houses a drive-thru window and also has an enclosed
ATM. The building was built in 1975. First Citizens National Bank has
been granted permission by the Office of the Comptroller of the Currency
to close this facility on May 1, 1999. Permission was granted based on
volume of business compared to renovation cost as well as cost of
security and communication equipment required to offer safe, amazing
service to our customers.
The Troy Branch also owns and operates a full service ATM located on
Walmart Drive in Union City, Tennessee.
There are no liens or encumbrances against any of the properties owned
by First Citizens.
ITEM 3. LEGAL PROCEEDINGS
First Citizens is involved in routine legal issues. However, the
outcome of these issues are not expected to have a material adverse
effect to the bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year ending December 31, 1998, 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.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
As of December 31, 1998 there were 846 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, 1998 $23.50 $22.75
June 30, 1998 $23.50 $22.75
September 30, 1998 $30.00 $23.50
December 31, 1998 $30.00 $30.00
March 31, 1997 $14.50 $13.75
June 30, 1997 $17.39 $13.75
September 30, 1997 $17.50 $16.25
December 31, 1997 $22.75 $22.75
Dividend payouts per share adjusted for the split were .75 cents in
1998, .50 cents in 1997 and .40 cents in 1996.
Dividends - 1998
Dividend Quarter
Per Share Declared
.125 1st
.125 2nd
.150 3rd
.150 4th
.200* 4th
Total $ .750
All dividends are restated to reflect the 4:1 stock split in June 1998.
*Special dividend paid in fourth quarter, 1998.
Future dividends will depend on Bancshares' earnings and financial
condition and other factors which the Board of Directors of Bancshares
considers relevant.
14
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)
1998 1997 1996 1995 1994
Net Interest &
Fee Income $ 15,937 $ 13,887 $ 12,822 $ 11,283 $ 10,444
Gross Interest
Income $ 31,153 $ 26,617 $ 24,781 $ 22,465 $ 18,415
Income From
Continuing
Operations $ 4,223 $ 4,246 $ 3,709 $ 2,706 $ 2,946
Long Term
Obligations(1) $ 24,342 $ 7,813 $ 2,997 $ 4,652 $ 4,125
Income Per Share
from Continuing
Operation(2) $ 1.34 $ 1.42 $ 1.26 $ .93 $ 1.04
Net Income per
Common Share (2)
$ 1.34 $ 1.42 $ 1.26 $ .93 $ 1.04
Cash Dividends
Declared
per Common
Share(2) $ .75 $ .50 $ .40 $ .33 $ .30
Total Assets at
Year End $421,221 $333,288 $313,069 $291,412 $256,687
Allowance for
Loan Losses
as a % Loans 1.26% 1.22% 1.08% 1.16% 1.22%
Allowance for
Loan Losses as
a % of Non-
Performing Loans 509.62% 461.76% 176.08% 707.99% 196.75%
Loans 90 Days
Past Due as a
% of Loans .14% .00% .09% .17% .62%
(1)Long Term Obligations consist of FHLB Borrowings matched with
Loans & Investments, and an ESOP Obligation.
(2)Restated to reflect 4 for 1 Stock Split on June 15, 1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
1998 was a year of significant events for First Citizens Bancshares,
Inc. The purchase of Bank of Troy in February, 1998 and the agreement to
merge with First Volunteer in January, 1999 will expand our market into
Obion County and offer numerous opportunities for future growth of the
First Citizens franchise. Product lines were further diversified by our
entry into the insurance business through a partnership with White and
Associates Insurance. The relocation and expansion of our brokerage
subsidiary, First Citizens Financial Plus and the opening of a second
office of Delta Finance will also serve to strengthen earnings going
forward.
15
Assets:
At December 31, 1998 total assets were reflected on the balance sheet at
$421,220,664, up 26% from year-end 1997. The five year compound growth
in assets of 64% reflects a commitment to remain an independent
community bank, large enough to survive in a highly competitive
environment yet small enough to continue the tradition of quality
personalized service our customers have grown to expect.
Asset growth is important to the future of First Citizens. Our capital
base is extremely strong and would support a significant expansion in
assets. However, management's focus will continue to be on growth that
fits the objectives of a well thought out strategic plan.
Loans:
Outstanding loans at year-end increased 22%, with growth primarily
concentrated in commercial, agricultural and real estate. The expansion
into Obion County affords new lending opportunities which would support
future growth, while at the same time building on existing customer
relationships. Net loan growth for the five years ending December 31,
1998 was 65%. Competition for quality loans continues to place pressure
on the yield and terms customers are willing to accept. Loan
Administration has taken a conservative position in dealing with
situations which deviate from established underwriting standards, while
recognizing the need to maintain quality loan growth.
Increased loan demand in 1995 is reflective of our entry into the
Lauderdale County market and opportunities made available as a result of
the acquisition. Growth in 1996 of 10.2% and in 1997 of 8.3% is an
indicator of increased competition for high quality loans. An increase
of 22% for the year ending December 31, 1998 reflects loans acquired as
a result of the Troy acquisition. Excluding the portion of the
increase, loan growth in 1998 was comparable to the prior two year
periods.
The agricultural segment of the West Tennessee economy was dealt a major
blow in 1998 when every primary crop was subjected to some form of
natural disaster. In addition, reduced export demand forced down
commodity prices to levels not seen in more than a decade. At December
31, 1998, First Citizens' loan portfolio contained $25 million in
agriculturally related loans. Many of these loans presented a challenge
to our customers and to First Citizens as lender. An adequate loan loss
reserve, strong underwriting standards and a 90% guaranty of Farm Credit
Services on many of the loans should minimize the impact to future
earnings of the company.
Asset quality within the loan portfolio remains strong with the
provision with the provision for loan losses at a level which Management
believes adequate to absorb potential losses. The provision was
increased $370,311 in 1998 in response to an analysis of loans acquired
through purchase of Bank of Troy. At year-end, the Reserve for Loan
Losses was 1.26% of total portfolio. Non-performing loans as a
percentage of total loans were 0.24% at year-end, level with the 1997
ratio and significantly below peer group bank's ratio of 0.91%.
Deposits:
The utilization of deposits to fund overall loan growth is no longer an
option for the banking industry. Returns generated on investments in
Stocks and Mutual Funds, combined with a high level of customer
confidence in the economy have negated the value of FDIC insurance as a
tool for attracting and holding deposits. Conversely, the competitive
16
nature of the lending market forces down the rate of return, placing
pressure on the ability to maintain acceptable net interest margins. As
a result, community banks have turned to the Federal Home Loan Bank as a
liquidity source. The ability to negotiate a fixed level of funding at
a predetermined rate lends significant support to the asset/liability
management process. It is anticipated that this source will continue to
be utilized as a tool in managing liquidity.
Deposit growth of 17.8% in 1998 includes Bank of Troy deposits, and
follows two years of single digit increases in 1996 and 1997. An
increase of 13.2% in 1995 is a result of the acquisition of the Ripley
Branch.
Earnings:
Return on average assets was impacted by acquisition and non-recurring
organizational costs in 1998 totaling in excess of $1.3 million.
Performance ratios for First Citizens National Bank were less impacted
as a result of acquisition costs being dealt with at the Holding company
level.
The primary source of earnings for Bancshares continues to be net
interest income. A comparison of earnings generated from this source
for the three years ending December 31, 1998, 1997 and 1996 reflect
increases of 14.8%, 8.2% and 13.35%. Improvement for the most recent
period under comparison is the direct result of increased volume.
Yields on interest earning assets, i.e. loans and investments, decreased
from 8.97% in 1997 to 8.87% in 1998, while the cost on interest bearing
liabilities increased slightly from 4.80% in 1997 to 4.83% in the year
just ended. The rise in cost of funds is attributable to a
significantly higher yield on acquired deposits and is being addressed.
Increased funding costs in 1994 of 9.8% was the determining factor in
the decision to utilize the Federal Home Loan Bank as an additional
funding source. As a result, we are better able to manage the cost of
funds and restore net interest margins to more acceptable levels.
A consistent and disciplined asset/liability management policy provides
the necessary focus on interest rate risk and rate sensitivity. An
executive level Asset/Liability Management Committee functions in
accordance with board approved policies to monitor pricing, maturity,
growth and mix strategies. This oversight allows management to make
informed decisions that limit interest rate risk and ensure a consistent
and every increasing level of earnings.
Growth in non-interest income is key to sustaining increases in over all
net income. The components of non-interest income include service
charges on deposit accounts, fiduciary income, ATM interchange fees, and
income from subsidiaries (Financial Plus, White and Associates/First
Citizens Insurance, Delta Finance). Total non-interest income in 1998
increased 14.2% to $4,277,616. This follows an 11.2% increase in 1997,
and represents the focus on strengthening overall earnings of the
Company.
Non-interest expense increased 23% in 1998, reflecting growth in
salaries and benefits of additional employees at Bank of Troy, Delta
Finance and in support positions at First Citizens National Bank.
Bringing Bank of Troy in as a branch of First Citizens in 1999 will
allow for a reduction in the number of employees and enhance the
earnings potential of the Company. Data processing expense increased
15.5% in 1998 as a result of software enhancements, the installation of
a Wide Area Network and addressing issues related to year 2000. This
increase does not reflect the expense of diverting the time and
attention of key staff members to ensure that systems are compliant and
will deal efficiently with the millennium date change.
17
At the Holding Company level, the ROA in 1998 was 1.08%, compared to
1.32% in 1997 and 1.21% in 1996. Return on Average Assets of First
Citizens National Bank were 1.29%,1.31% and 1.23% respectively for 1998,
1997 and 1996. Returns on average equity were also impacted with the
Bank reporting 14.34%, 14.21% and 14.39% for the years ending December
31, 1998, 1997 and 1996. ROAE at the Holding Company level also
reflected the impact of acquisition expense with returns of 11.0%, 13.5%
and 13.1% for 1998, 1997 and 1996.
Shareholder Return:
Dividends paid to Shareholders in 1998 were again enhanced by a special
dividend declared during fourth quarter. This process utilized in each
of the past five years, serves to raise payout ratios to levels targeted
by the bank's capital plan. In addition a 4 for 1 stock split
distributed to shareholders June 15, 1998 increased the number of shares
outstanding to 3,194,544. This action follows a 2.5 for 1 split October
15, 1993 and a 10% stock dividend December 15, 1992. Dividend payouts
per share adjusted for the 1998 split, were 75 cents in 1998, 50 cents
in 1997 and 40 cents in 1996.
Stockholder equity has grown consistently supported by strong earnings
and quality assets. Total capital increased 18.6% in 1998, following an
increase by 11.9% in 1997. The purchase of Bank of Troy was funded with
existing equity capital totaling $5.5 million and a loan from SunTrust
Bank in the amount of $4.1 million. The balance remaining on the note
as of December 31, 1998 was $682,000. In June 1998, the Employee Stock
Ownership Plan entered into a loan agreement with SunTrust Bank in the
amount of $2,000,000 to fund the purchase of previously authorized and
unissued stock. The stock will be utilized to satisfy future
allocations to plan participants in accordance with the plan document
approved by the Board of Directors in December 1985. The balance
remaining on the ESOP loan, which is fully guaranteed by Bancshares, was
$1,407,762 as of December 31, 1998.
Equity Capital:
Risk based and leverage capital levels are well in excess of Regulatory
requirements. As of December 31, 1998 Bancshares risk based capital was
13.59%, compared to 8% required by Regulation and 10% which is used as a
benchmark to define a well capitalized bank.
Year 2000 Readiness Disclosure:
Year 2000 related issues are a widely recognized, universal problem
related to the way in which computer systems process dates. Numerous
inquiries received from both customers and vendors have made us aware of
the level of concern among those with whom we do business. Customer
confidence in First Citizens National Bank now and after Year 2000 is a
top priority. For this reason we have dedicated the resources necessary
to ensure that the millennium change will not change the way we service
our customers.
As early as 1997, a plan was developed based on guidelines suggested by
the Federal Financial Institutions Examination Council and approved by
the bank's Board of Directors. A year 2000 Team was formed, led by
Senior Vice President and Chief Operations Officer Judy Long, and
supported by senior staff of the Information Systems Division of First
Citizens.
Will First Citizens National Bank be ready for Year 2000?
18
Yes! We have reviewed all core operating systems (AS/400), and
distributed applications, data communications, physical plant, building
security and desktop applications to ensure that they are capable of
functioning through and beyond Year 2000.
As of December 31, 1998, we had identified, renovated or replaced and
successfully tested in excess of 90% of all mission critical systems.
Our efforts to bring 100% of our systems into compliance in a timely
manner will be monitored by our primary regulator, the Comptroller of
the Currency on a quarterly basis during 1999.
Changes in Financial Accounting Standards
FASB 128 (Earnings per share) and FASB 129 (Disclosure of information
about capital structures). FASB 128 simplifies the computation
guidelines for earnings per share. Bancshares has a simple capital
structure and these new FASBs will not have a material impact due to our
capital not having dilutive or convertible capital instruments. These
two FASBs are effective for financial statements for periods ending
after December 15, 1997.
FASB 130 (Reporting comprehensive income). FASB 130 establishes
reporting and display requirements for comprehensive income and its
components and is effective for fiscal years beginning after December
15, 1997. Comprehensive income is defined as all changes in equity
during a period except those resulting from investments by owners and
distributions to owners. This will impact our reporting format, mainly
due to changes in available for sale market values, but FASB 130 should
not pose a material impact on our financials.
FASB 131 (Disclosure about segments of an enterprise and related
information). This statement establishes standards for the way that
public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises
report selected information about operating segments in interim
financial reports issued to shareholders. This statement does not apply
to non-public companies. This statement is effective for financial
statements for periods beginning after December 15, 1997. This could be
applicable in our new business ventures.
NON-INTEREST INCOME
The following table reflects non-interest income for the years ending
December 31, 1998, 1997, and 1996:
December 31
Change from prior year
(in thousands)
Increase Increase
Total (Decrease) Total (Decrease) Total
1998 Amount Percentage 1997 Amount Percentage 1996
Service Charges on
Deposit Accounts $1,830 $ 144 8.54% $1,686 $ 229 15.72% $1,457
Other Service Charges,
Commissions & Fees $1,159 $ 308 36.19% $ 851 $ 177 26.27% $ 674
Other Income $1,288 $ 78 6.45% $1,210 $ (28) (2.27%) $1,238
TOTAL NON-INTEREST
INCOME $4,277 $ 530 14.14% $3,747 $ 378 11.22% $3,369
Growth in non-interest income is key to sustaining increases
in overall net income as net interest margins continue to be
squeezed. The components of First Citizens non-interest
income include service charges on deposit accounts, other fees
and service charges, fiduciary income, ATM/POS interchange
fees , and other income from subsidiaries (Financial Plus,
White and Associates/First Citizens Insurance, Delta Finance).
Total non-interest income in 1998 increased 14.2% to
19
$4,277,616 compared to a 11% increase in 1997. Growth in non-interest
income represents the banks focus on strengthening
overall earnings of the company. 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 and security gains realized from the sale
of securities. The Southeast refund partially reimbursed the
bank for settlement made to trust customers by the bank in
December 1996.
NON-INTEREST EXPENSE
December 31
Change from prior year
(in thousands)
Increase Increase
Total (Decrease) Total (Decrease) Total
1998 Amount Percentage 1997 Amount Percentage 1996
Salaries & Employee
Benefits $ 7,390 $1,410 27.85% $ 5,980 $ 483 8.79% $5,497
Net Occupancy Expense $ 2,090 $ 126 6.42% $ 1,964 56 2.94% $1,908
Other Operating Expense $ 3,463 $ 889 34.53% $ 2,574 90 3.63% $2,484
TOTAL NON-INTEREST EXPENSE $12,943 $2,425 23.05% $10,518 $ 629 6.36% $9,889
Total non-interest expense increased 23% in 1998 reflecting growth in
salaries and benefits of additional employees at Bank of Troy, Mortgage
Lending, Financial Plus, Delta Finance and in support positions at First
Citizens National Bank. The Bank of Troy, Troy, TN was converted to the
books of First Citizens National Bank in February, 1999 as a branch of
the bank. Bringing Troy in as a branch allows for a reduction in number
of employees as well as provide for economies of scale in information
systems. Non-recurring expense incurred at Bank of Troy in 1998 exceeded
$1.3 million and included benefit plans, additional loan loss reserves and
buy out of an employment contract of the Bank's former CEO. Full-time
equivalent employees were 172 at December 31, 1998 compared to 155 at
December 31, 1997. Assets per employee at December 31, 1998 was $2.3
million compared to $2.4 at December 31, 1997. Data processing expense
increased 15.5% in 1998 as a result of software enhancements, the
installations of a Wide Area Network and cost of addressing year 2000 issues.
The increase does not reflect the time and attention of key staff members to
ensure that systems are compliant and will deal efficiently with the new
millennium date change.
Efficiencies implemented over the past five years have reduced and/or
controlled non-interest expense in an acceptable manner. Going forward,
management will focus on increasing the potential to generate non-interest
income through investment in non-banking subsidiaries such as
insurance agencies, consumer finance companies, and our brokerage
business. In addition, we will concentrate on internal income growth in
the bank's mortgage lending and trust services departments.
December 31
Assets Per Employee Asset Per Employee
FCNB Peer Groups
(in thousands)
*1998 $2,354 $2,400
1997 $2,151 $2,400
1996 $2,159 $2,300
1995 $1,969 $1,900
1994 $1,695 $1,900
*1998 includes Bank of Troy and Delta Finance II. The assets
per employee increased due to Troy's positive position.
20
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)
1998 1997 1996
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
Non-Interest
Bearing Demand
Deposits $ 33,142 - $ 27,868 - $ 26,641 -
Savings Deposits $ 94,759 3.20% $ 81,562 3.37% $ 73,908 3.19%
Time Deposits $174,685 5.60% $149,655 5.54% $146,562 5.63%
TOTAL DEPOSITS $302,586 4.24% $259,085 4.26% $247,111 8.39%
Deposit growth of 17.87% in 1998 includes Bank of Troy
deposits, and follows two years of single digit increases in
1996 and 1997. The company's marketplace is described as
highly competitive, with a fairly sophisticated customer base.
Competition is aggressive for both loans and deposits. A
recent Market study indicates that 60.2 percent of survey
respondents use only one bank in Dyer County, 65% in
Lauderdale County, and 76.6% in Obion County. First Citizens
was rated highest among competitive banks in Dyer County for
providing customer service, hours of operations and being a
hometown bank that makes local decisions. According to the
survey First Citizens maintains approximately 47% of Dyer
County market share; 24% of Obion County market share and 9.3%
of Lauderdale market share. In the Dyer County market the bank
competes with Union Planters (25.4% market share), First
Tennessee Bank (14.9%), Security Bank (9.0%), as well as
credit unions and finance companies (3.0%). The bank's
largest competitor in Lauderdale County is Bank of Ripley
54.7%. Competition in Obion County ranks Commercial Bank and
Trust at 22.9% market share, First State Bank 20.0%, Union
Planters 17.1%, and First Citizens - Bank of Troy and First
Volunteer a total of 28% market share.
Time deposits reflect the largest percentage of growth in the
deposit categories of approximately $25,000,000 since 1997.
The average rate on total deposits have reduced significantly
from 8.39% in 1996 to 4.24% in 1998. The utilization of
deposits to fund loan growth is no longer an option for the
banking industry. Returns generated on investments in stocks
and mutual funds, combined with a high level of customer
confidence in the national economy have negated the value of
FDIC Insurance as a tool for attracting and holding deposits.
First Citizens has turned to other sources provided by
approved lines of credit through Correspondent Banks and
Federal Home Loan Bank. As a result we have more control on
maintaining acceptable interest rate margins. Deposit growth
is projected at 7% or below in the 1999 bank budget.
Management is continuously monitoring and enhancing the bank's
product line in order to retain existing customers and to
attract new customer relationships. There were no new
products or services offered in 1998. However in 1998 an
Internet Banking solution was selected to provide customers
with electronic banking over the Internet. Nfront, Atlanta,
Georgia is the software provider for the bank's Internet
banking solution. Beginning in March, 1999 the site will be
open for bank employees and customer focus group testing.
According to the American Banker dated Monday, March 1, 1998
21
only 200 banks with less than $1 billion of assets operate a
Web site and only 20% of those are interactive. First
Citizens will operate an interactive Web site with transaction
and application processing. Bill Pay is also an interactive
Web service that will be extended to the bank's customers. One
new product offered in 1997 was a Visa Check Card. 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. Imaged deposit statements
offered to the market in 1996 continue to be a success with
99.9% acceptance rate.
SHORT TERM BORROWINGS
12/31/98 12/31/97
Amount outstanding-end of Period $38,107 $21,766
Weighted Average Rate of Outstanding 4.38% 4.35%
Maximum Amount of Borrowings at
Month End 38,107 36,585
Average Amounts Outstanding for
Period 27,777 26,585
Weighted Average Rate of Average
Amounts 4.46% 4.64%
The long term debt is comprised of Federal Home Loan Bank
borrowings, Finance Company debt, and new debt associated with
the Troy acquisition. The Finance Company debt is classified
as long term debt due to our intent to renew. The Parent
Company debt is with SunTrust-Nashville. The average life is
as presented and the FHLB funds are matched with loans and
investments.
Average Average Average
Volume Rate Maturity Variable
FHLB Borrowings-Loans 5,201 5.86% 7 years
FHLB Borrowings-Invest. 10,527 5.77% 10 years Monthly, Yearly
Finance Company Debt 1,000 6.00% 5 years
Parent Company Debt 2,303 6.89% 2 years Monthly
ESOP Obligation 1,400 6.89% 7 years Monthly
The following table sets forth the maturity distribution of Certificates
of Deposit and other time deposits of $100,000 or more outstanding on
the books of First Citizens on December 31, 1998. The overall total
increased in excess of $10 million when compared to the prior year.
MATURITY DISTRIBUTION OF TIME DEPOSITS IN AMOUNTS OF $100,000 AND OVER
December 31
(in thousands)
1998 1997
Amount Percent Amount Percent
Maturing in:
3 months or less $18,719 41.22% $13,778 28.33%
Over 3 through 12 months $22,525 49.60% $29,237 60.12%
Over 12 months $ 4,170 9.18% $ 5,620 11.55%
TOTAL $45,414 100.00% $48,635 100.00%
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)
1998 1997 1996
FUNDING USES Average Increase Average Increase Average
Balance (Decrease) Balance (Decrease) Balance
Amount % Amount % Amount
INTEREST-EARNING
ASSETS:
Loans (Net of
Unearned Discounts
& Reserve) $259,416 $38,431 17.39% $220,985 $ 17,322 8.51% $203,663
Taxable Investment
Securities $ 79,419 $13,382 20.26% $ 66,037 $ 1,645 4.79% $ 64,392
Non-Taxable
Investment
Securities $ 12,199 $ 1,664 15.79% $ 10,535 $ (290)(2.68%)$ 10,825
Federal Funds
Sold $ 2,608 $ 1,633 167.49% $ 975 $ (191)(16.38%)$ 1,166
Interest Earning
Deposits In
Banks $ 980 $ 685 232.20% $ 295 $ 99 50.51% $ 196
TOTAL INTEREST-
EARNING ASSETS $354,622 $55,795 18.67% $298,827 $ 15,585 6.64% $280,242
Other Uses $ 35,343 $ 8,640 32.36% $ 26,703 $ 3,225 13.74% $ 23,478
TOTAL FUNDING
USES $389,965 $64,435 19.79% $325,530 $21,810 7.18% $303,720
INTEREST-BEARING
LIABILITIES:
Savings
Deposits $ 94,759 $13,197 16.18% $ 81,562 $ 7,654 10.36% $ 73,908
Time Deposits $174,685 $25,030 16.73% $149,655 $ 3,093 2.11% $146,562
Federal Funds
Purchased and
Other Interest
Bearing
Liabilities $ 45,500 $11,101 32.27% $ 34,399 $ 5,929 20.83% $ 28,470
TOTAL INTEREST-
BEARING
LIABILITIES $314,944 $49,328 18.57% $265,616 $16,676 6.70% $248,940
Demand Deposits $ 33,142 $ 5,330 19.16% $ 27,812 $ 1,171 4.40% $ 26,641
Other Sources $ 41,879 $ 9,777 30.46% $ 32,102 $ 3,963 14.09% $ 28,139
TOTAL FUNDING
SOURCES: $389,965 $64,435 19.79% $325,530 $21,810 7.18% $303,720
23
SUMMARY - AVERAGE BALANCE SHEET AND NET INTEREST INCOME ANALYSIS
(FIRST CITIZENS NATIONAL BANK)
Monthly Average Balances and Interest Rates
(in thousands)
1998 1997 1996
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
ASSETS
INTEREST EARNING
ASSETS:
Loans (1)(2)
(3) $259,416 $25,222 9.72% $220,985 $21,422 9.70% $203,658 $ 19,768 9.71%
Investment
Securities:
Taxable $ 79,419 $ 5,166 6.50% $ 66,037 $ 4,563 6.91% $ 64,392 $ 4,353 6.76%
Tax Exempt (4) $ 12,199 $ 855 7.01% $ 10,535 $ 741 7.04% $ 10,825 $ 755 6.98%
Interest Earning
Deposits $ 980 $ 55 5.61% $ 295 $ 11 3.73% $ 196 $ 7 3.58%
Federal Funds
Sold $ 2,608 $ 155 5.94% $ 975 $ 59 6.06% $ 1,166 $ 69 5.92%
Lease Financing $ 0 $ 0 0% $ 0 $ 0 0% $ 5 $ 1 20.00%
Total Interest
Earning Assets $354,622 $31,453 8.87% $298,827 $26,796 8.97% $280,242 $ 24,953 8.91%
NON-INTEREST
EARNING ASSETS:
Cash and Due From
Banks $ 10,355 $ - - $ 10,009 $ - - $ 10,048 $ - -
Bank Premises and
Equipment $ 9,015 $ - - $ 8,181 $ - - $ 8,499 $ - -
Other Assets $ 15,973 $ - - $ 8,513 $ - - $ 4,931 $ - -
Total Assets $389,965 $ - - $325,530 $ - - $303,720 $ - -
LIABILITIES AND
SHAREHOLDERS'
EQUITY:
INTEREST BEARING
LIABILITIES:
Savings Deposits $ 94,759 $ 3,031 3.20% $ 81,562 $ 2,747 3.37% $ 73,908 $ 2,355 3.19%
(5)
Time Deposits $174,685 $ 9,784 5.60% $149,655 $ 8,280 5.54% $146,562 $ 8,246 5.63%
Federal Funds
Purchased and
Other Interest
Bearing
Liabilities $ 45,500 $ 2,400 5.27% $ 34,399 $ 1,713 4.98% $ 28,470 $ 1,358 4.77%
Total Interest
Bearing
Liabilities $314,944 $15,215 4.83% $265,616 $12,740 4.80% $248,940 $ 11,959 4.81%
NON-INTEREST
BEARING
LIABILITIES:
Demand Deposits $ 33,142 $ - - $ 27,812 $ - - $ 26,641 $ - -
Other
Liabilities $ 3,480 $ - - $ 2,177 $ - - $ 2,213 $ - -
Total
Liabilities $351,566 $ - - $295,605 $ - - $277,794 $ - -
SHAREHOLDERS'
EQUITY $ 38,399 $ - - $ 29,925 $ - - $ 25,926 $ - -
24
TOTAL LIABILITIES
AND SHAREHOLDERS'
EQUITY $389,965 $ - - $325,530 $ - - $303,720 $ - -
NET INTEREST
INCOME $ - $16,238 - $ - $14,056 - $ - $12,994 -
NET YIELD ON
AVERAGE EARNING
ASSETS $ - $ - 4.57% $ - $ - 4.71% $ - $ - 4.64%
(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 1998 Compared to 1997 1997 Compared to 1996
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 $ 3,728 72 $3,800 $ 1,682 $ (28) $1,654
Taxable Investments 925 (322) 603 111 99 210
Tax Exempt Investment
Securities 117 (3) 114 (20) 6 (14)
Interest Bearing
Deposits with Other
Banks 26 18 44 3 0 3
Federal Funds Sold and
Securities purchased
under agreements to
resell 158 (62) 96 (11) 1 (10)
Lease Financing 0 0 0 0 0 0
TOTAL INTEREST EARNING
ASSETS $4,954 $(297) $4,657 $1,765 $ 78 $1,843
Interest Paid On:
Savings Deposits 445 (161) 284 244 148 392
Time Deposits 1,387 117 1,504 174 (140) 34
Federal Funds Purchased
and Securities Sold
Under Agreement to
Repurchase 553 134 687 282 73 355
TOTAL INTEREST BEARING
LIABILITIES $2,385 $ 90 $2,473 $ 700 $ 81 $ 781
INTEREST EARNINGS $2,569 $(387) $2,182 $1,065 $ (3) $1,062
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 9.40% and 6.63% when comparing 1998
to 1997 and 1996. Total interest bearing liabilities
25
increased 28.31% and 10.35% when comparing 1998, 1997 and 1996
respectively. Total interest earning assets averaged
$4,954,000 at an average rate of 8.87% while total interest
bearing liabilities averaged $2,385,000 at an average rate of
4.83%. Net yield on average earning assets (annualized) was
4.57%, 4.71%, and 4.64% for the years 1998, 1997, and 1996.
Strategic plan beginning 1996 called for a reduction in cost
of funds, thereby improving interest rate margins.
Asset/Liability policies are in place to protect the company
from the negative effects of volatile swings in interest
rates. Interest margins are well managed to achieve
acceptable profits and a return on equity within policy
guidelines.
LOAN PORTFOLIO ANALYSIS
COMPOSITION OF LOANS
December 31
(in thousands)
1998 1997 1996 1995 1994
Real Estate Loans:
Construction $ 27,048 $ 22,697 $ 17,130 $ 12,954 $ 10,511
Mortgage $143,097 $136,333 $127,080 $107,844 $ 97,310
Commercial, Financial
and Agricultural Loans $ 77,642 $ 41,929 $ 42,067 $ 45,061 $ 38,843
Installment Loans to
Individuals $ 27,984 $ 25,904 $ 22,743 $ 23,718 $ 19,117
Other Loans $ 2,449 $ 2,414 $ 2,369 $ 2,329 $ 3,000
TOTAL LOANS $278,220 $229,277 $211,389 $191,906 $168,781
CHANGES IN LOAN CATEGORIES
December 31, 1998 as compared to December 31, 1997
(in thousands)
Amount of Increase % of Increase
Loan Category (Decrease) (Decrease)
Real Estate $11,115 6.90%
Commercial, Financial
and Agricultural $35,713 85.17%
Installment Loans to
Individuals $ 2,080 8.03%
Other Loans $ 35 1.44%
TOTAL LOANS $48,943 21.34%
Outstanding Loans at year-end increased 22%, with growth primarily
concentrated in Commercial, Agricultural, and Real Estate. The expansion
into Obion County affords new lending opportunities, which would support
future growth projections, while at the same time building on existing
customer relationships. Net loan growth for the five years ending
December, 1998 was approximately 65 percent. Competition for quality
loans continues to place pressure on the yield and terms customers are
willing to accept. Loan Administration has taken a conservative position
in dealing with situations which deviate from established underwriting
procedures, while at the same time recognizing the need to maintain loan
growth. Increased loan demand in 1995 is reflective of our entrance into
the Lauderdale county market and opportunities made available as a result
26
of the acquisition. Growth in 1996 of 10.2% and 1997 of 8.3% is an
indicator of increased competition for high quality loans. An increase
of 22% for the year ending December 31, 1998 reflects loans acquired as a
result of the Troy acquisition. The agricultural segment of the West
Tennessee economy(statistics discussed in the Banking Business section of
this report) was dealt a major blow in 1998 when every primary crop was
subjected to some form of natural disaster. In addition, reduced export
demand forced down commodity prices to levels not seen in more than a
decade. At December 31, 1998 First Citizens loan portfolio contained
more than $25 million in agricultural related loans. Many of these loans
presented a challenge to our customer and to First Citizens. An adequate
loan loss reserve, strong underwriting standards and a 90% guaranty from
farm credit services on many of the loans should minimize the impact to
future earnings.
Mortgage loans continue to increase at substantial rate. Growth in this
category exceeded 1997 and 1996 by 4.96% and 7.28%. The upward trend is
attributed to substantial growth in Dyer County population as well and
the number of households recorded in Dyer county in the past decade. The
decrease noted in 1998 is attributed to customers desire to lock in lower
interest rates for 15 years or more in the long term market. Market
information and employment rates are published in this report in the
section titled Banking Business.
The First Citizens loan portfolio is made up of quality credits, and is
well diversified with a concentration of credit in agricultural related
loans. A concentration of credit is equal to or greater than 25% of gross
Capital funds or $10,958,051. Agriculture related loans total over $29
million. Problem loans increased $935,779 when compared to December 31,
1997. Problem loans at December 31,1998 was $4.9 million or 1.76% of total
loans. The provision for loan losses increased in proportion to loan
growth as required by loan policy.
The book value of repossessed real property held by First Citizens was
$177,000 at December 31,1998 compared to $0 at December 31, 1997.
Accounting for adjustments to the value of Other Real Estate when
recorded subsequent to foreclosure is accomplished on the basis of
independent appraisal. The asset is recorded at the lesser of its
appraised value or the loan balance.
Loan Administration sets policy guidelines approved by the Board of
Directors regarding portfolio diversification and underwriting standards.
Loan policy also includes board approved guidelines for collateralization,
loans in excess of loan to value limits, maximum loan amount,
maximum maturity and amortization period for each loan type. Policy
guidelines for loan to value ratio and maturities related to various
collateral as follows:
Collateral Max. Amortization Max. LTV
Real Estate Various (see discussion) Various (see discussion)
Equipment 5 Years 75%
Inventory 5 Years 50%
A/R 5 Years 75%
Livestock 5 Years 80%
Crops 1 Year 50%
*Securities 10 Years 75% (Listed)
50% (Unlisted)
*Maximum LTV on margin stocks (stocks not listed on a national exchange)
when proceeds are used to purchase or carry same, shall be 50%.
27
Diversification of the banks' real estate portfolio is a necessary and
desirable goal of the bank's real estate loan policy. In order to
achieve and maintain a prudent degree of diversity, given the composition
of the bank's market area and the general economic state of the market
area, the bank will strive to maintain a real estate loan portfolio
diversification based upon the following:
. Agricultural loans totaling in the aggregate no more than 20% of the
Bank's total loans.
. Land acquisition and development loans totaling in the aggregate no
more than 10% of the Bank's total loans.
. Commercial construction loans totaling in the aggregate no more than
10% of the Bank's total loans.
. Residential construction loans totaling in the aggregate no more than
10% of the Bank's total loans.
. Residential mortgage loans totaling in the aggregate no more than 40%
of the Bank's total loans.
. Commercial loans totaling in the aggregate no more than 30% of the
Bank's total loans.
It is the policy of FCNB that no real estate loan will be made (except in
accordance with the provisions for certain loans in excess of supervisory
limits provided for hereinafter) that exceed the loan-to-value percentage
limitations ("LTV limits") designated by category as follows:
Loan Category LTV Limit
Raw Land 65%
Land Development or Farmland 75%
Construction:
Commercial, multi-family, and
other non-residential 80%
1-to-4 family residential 80%
Improved Property 80%
Owner-occupied 1-to-4 family
and home equity 80%
Multi-family construction loans include loans secured by cooperatives and
condominiums. Owner-occupied 1-to-4 family and home equity loans which
equal or exceed 90% LTV at origination must have either private mortgage
insurance or other readily marketable collateral pledged in support of
the credit.
On occasion, the Loan Committee may entertain and approve a request to
lend sums in excess of the LTV limits as established by policy, provided
that:
. The request is fully documented to support the fact that other credit
factors justify the approval of that particular loan as an exception
to the LTV limit;
. The loan, if approved, is designated in the Bank's records and
reported as an aggregate number with all other such loans approved by
the full Board of Directors on at least a quarterly basis;
. The aggregate total of all loans so approved,including the extension
of credit then under consideration, shall not exceed 50% of the
Bank's total capital; and
28
. 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:
1998 - 9.72%
1997 - 9.70%
1996 - 9.71%
1995 - 9.69%
1994 - 9.12%
The aggregate amount of unused guarantees, commitments to extend credit
and standby letters of credit was $46,855,000 at December 31, 1998.
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 $42,470 $103,885 $23,790
Commercial, Financial
and Agricultural $38,493 $27,455 $11,694
All Other Loans $ 7,850 $22,583 $ 0
TOTALS $88,813 $153,923 $35,484
Loans with Maturities After One Year for which:
(in thousands)
Interest Rates are Fixed or Predetermined $171,584
Interest Rates are Floating or Adjustable $ 17,823
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
variable rate loans. Loans totaling $106,636,000 or 38.32% 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 $153,923,000 at December 31, 1998 from $152,949,000 at
December 31, 1997 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 1999.
29
NON-PERFORMING LOANS
Nonaccrual, Restructured and Past Due Loans and Foreclosed Properties
(First Citizens National Bank)
December 31
(in thousands)
1998 1997 1996 1995 1994
Nonaccrual Loans $ 303 $ 440 $1,118 $ 836 $ 945
Restructured Loans 0 0 0 0 0
Foreclosed Property
Other Real Estate, 177 0 50 111 148
Other Repossessed
Assets 0 0 0 0 0
Loans and leases 90 days
Past due and still
accruing interest 425 164 177 313 1,044
Total Nonperforming
Assets $ 905 $ 604 $1,295 $1,260 $2,137
Nonperforming assets
as a percent of
loans and leases
plus foreclosed
property at end
of year .33% .27% .62% .66% 1.27%
Allowance as a percent of:
Nonperforming
assets 386.30% 461.76% 176.22% 175.88% 96.12%
Gross Loans 1.26% 1.22% 1.08% 1.16% 1.22%
Addition to Reserve as a
percent of Net
Charge-Offs 154.27% 364.07% 112.16% 180.20% 1,675.00%
Loans and leases 90 days
past due as a percent of
loans and leases at year
end .15% .08% .09% .17% .62%
Recoveries as a
percent of Gross
Charge-Offs 34.77% 41.11% 20.15% 44.66% 87.10%
Total Non Performing Assets were $905,000 as of December 31, 1998
compared to $604,000 at year end in 1997. Non performing Assets as a
percent of loans was .33% compared to .27% in 1997 and .62% in 1996.
Allowance for Loan Losses as a percent of Nonperforming assets and total
loans were 386.30%, 461.76% and 176.22% for each year ending December
31, 1998, 1997 and 1996. 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
30
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 discharge the debt (including accrued interest) in full,
considered to be proceeding in due course either through legal action,
including judgement enforcement procedures, or, in appropriate
circumstances, through collection efforts not involving legal action
which are reasonably expected to result in repayment of the debt or in
its restoration to a current status. Loans that represent a potential
loss to First Citizens are adequately reserved for in the provision for
loan losses.
Interest income on loans is recorded on an accrual basis. The accrual
of interest is discontinued on all loans, except consumer loans, which
become 90 days past due, unless the loan is well secured and in the
process of collection. Consumer loans which become past due 90 to 120
days are charged to the allowance for loan losses. The gross interest
income that would have been recorded for the twelve months ending
December 31, 1998 if all loans reported as non-accrual had been current
in accordance with their original terms and had been outstanding
throughout the period is $31,000. Interest income on loans reported as
ninety days past due and on interest accrual status was $41,000 for
1998. 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)
1998 1997 1996 1995 1994
Average Net Loans
Outstanding $259,416 $ 220,985 $203,663 $183,018 $160,254
Balance of Reserve
for Loan Losses
at Beginning of
Period $ 2,789 $ 2,282 $ 2,216 $ 2,054 $ 1,676
Loan Charge-Offs $ (952) $ (326) $ (680) $ (365) $ (186)
Recovery of Loans
Previously Charged
Off $ 331 $ 134 $ 137 $ 163 $ 162
Net Loans Charged
Off $ (621) $ (192) $ (543) $ (202) $ (24)
Additions to Reserve
Charged to Expense $ 958 $ 699 $ 609 $ 364 $ 402
31
Changes Incident
to Mergers $ 370 $ 0 $ 0 $ 0 $ 0
Balance at End of
Period $ 3,496 $ 2,789 $ 2,282 $ 2,216 $ 2,054
Ratio of Net Charge-
Offs to Average Net
Loans Outstanding .13% .09% .27% .11% .01%
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 $952,000 (2) Recovery of loans previously
charged off $331,000 and (3) Additions to reserves totaling $699,000.
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 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.
32
Examples of factors taken into consideration during the review are:
Industry or geographic economic problems, sale of business, change of or
disagreement among management, unusual growth or expansion of the
business, past due status of either principal or interest for 90 days,
placed on non-accrual or renegotiated status, declining financial
condition, adverse change in personal life, frequent overdrafts, lack of
cooperation by borrower, decline in marketability or market value of
collateral, insufficient cash flow, and inadequate collateral values.
Identification of impaired loans from non-performing assets as well as
bankrupt and doubtful loans is paramount to the reserve analysis.
Special allocations shall support loans found to be collateral or
interest cash flow deficient. In addition an allowance shall be
determined for pools of loans including all other criticized assets as
well as small homogeneous loans managed by delinquency. In no
circumstance shall the reserve fall below 1% of total loans less
government guarantees. The following is a sample of information
analyzed quarterly to determine the allowance for loan losses.
LOAN LOSS ALLOWANCE ANALYSIS
AVERAGE PERCENT CURRENT RESERVE
LOSS 1 YR. BALANCE 1 YR. BALANCE REQUIRED
I. CREDIT $ GROSS $ % $ $
CARDS
II. INSTALL. $ NET $ % $ $
LOANS
III. IMPAIRED WITH ALLOCATIONS $ $
IMPAIRED WITHOUT ALLOCATIONS $ $
ALLOWANCE
IV. DOUBTFUL 50.00% $ $
SUBSTANDARD 10.00%
ACCOUNTS RECEIVABLE FACTORING 1.00%
WATCH 5.00%
OTHER LOANS NOT LISTED PREVIOUSLY .75%
LESS SBA/FMHA GUARANTEED PORTIONS
TOTAL LOANS $
V. LETTERS OF CREDIT .75% $ $
VI. OTHER REAL ESTATE OWNED $
RESERVE REQUIRED $
RESERVE BALANCE $
EXCESS (DEFICIT) $
RESERVE AS % OF TOTAL LOANS %
PEER GROUP %
LOSS EXPERIENCE III & IV
(AVERAGE LAST 3 YEARS) % OR $
33
Accounting for adjustments to the value of Other Real Estate when
recorded subsequent to foreclosure is accomplished on the basis of an
independent appraisal. The asset is recorded at the lesser of its
appraised value or the loan balance. Any reduction in value is charged
to the allowance for possible loan losses. All other real estate
parcels are appraised annually and the carrying value is adjusted to
reflect the decline, if any, in its realizable value. Such adjustments
are charged directly to expense.
Management estimates the approximate amount of charge-offs for the 12
month period ending December 31, 1999 to be as follows:
Domestic Amount
Commercial, Financial & Agricultural $250,000
Real Estate-Construction 0
Real Estate-Mortgage 50,000
Installment Loans to individuals & credit cards 100,000
Lease financing 0
01/01/99 through 12/31/99 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)
1998 1997 1996 1995
Charge-offs:
Domestic:
Commercial, Financial &
Agricultural $228 $ 23 $ 432 $ 54
Real Estate-Construction 0 0 0 0
Real Estate-Mortgage 158 0 20 113
Installment Loans to
individuals & credit cards 566 303 228 198
Lease financing 0 0 0 0
Total $952 $ 326 $ 680 $ 365
Recoveries:
Domestic:
Commercial, Financial &
Agricultural $165 $ 43 $ 32 $ 38
Real Estate-Construction 0 0 0 0
Real Estate-Mortgage 9 2 3 19
Installment Loans to
individuals & credit cards 157 89 102 106
Lease financing 0 0 0 0
Total $331 $ 134 $ 137 $ 163
Net Charge-offs $(621) $(192) $(543) $(202)
34
COMPOSITION OF INVESTMENT SECURITIES
December 31
(in thousands)
1998 1997 1996 1995 1994
U. S. Treasury &
Government Agencies $85,221 $58,148 $62,194 $59,462 $47,042
State & Political
Subdivisions $14,806 $10,633 $10,569 $10,776 $10,883
All Others $ 2,837 $ 2,395 $ 2,984 $ 3,654 $ 4,801
TOTALS $102,765 $71,176 $75,747 $73,892 $62,726
MATURITY AND YIELD ON SECURITIES - DECEMBER 31, 1998
(in thousands)
Maturing Maturing
Maturing After One After Five Maturing
Within One Year Within Years Within After Ten
Year Five Years Ten Years Years
Amount Yield Amount Yield Amount Yield Amount Yield
U. S. Treasury
and Government
Agencies $35,942 6.38% $21,985 6.41% $17,955 6.62% $ 9,339 6.50%
State and
Political $ 2,571 6.95% $ 5,016 6.52% $ 2,980 6.90% $ 4,239 7.09%
Subdivisions*
All Others $ --- ---% $ --- --% $ 2,837 6.40% $ ---- --%
TOTALS $38,513 6.42% $27,001 6.43% $23,772 6.63% $13,578 6.68%
*Yields on tax free investments are stated herein on a taxable
equivalent basis.
HELD TO MATURITY & AVAILABLE FOR SALE SECURITIES - DECEMBER 31, 1998
Held to Maturity Available for Sale
(in thousands)
Amortized Fair Amortized Fair
Cost Value Cost Value
U.S. Treasury Securities 0 0 3,553 3,721
U.S. Government Agency and
corporation obligations 19,486 19,485 61,545 62,014
Securities issued by states & political
subdivisions in the U.S.:
Taxable Securities 0 0 N/A N/A
Tax-exempt Securities 6,225 6,313 8,438 8,581
U. S. Securities:
Debt Securities N/A N/A N/A N/A
Equity Securities
(Including Federal Reserve Stock) 2,814 2,837
Foreign Securities:
Debt Securities N/A N/A N/A N/A
Equity Securities N/A N/A
Total (sum of column A items 1 through
5.a must equal Schedule HC, item 2.a
and sum of column D, items 1 through
5.b must equal Schedule HC, item 2.b) 25,711 25,798 76,350 77,153
35
(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.
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 1998
was driven primarily by strong loan demand. The investment portfolio,
which currently totals $102,864,000, is comprised of U. S. Treasury and
U. S. Agency Obligations of $85,221,000, Municipal Obligations of
$14,506,000, and all other investments totaling $2,837,000. Fixed rate
holdings comprise 90% of the portfolio, while adjustable rate holding
comprise the remaining 10%.
The fixed rate holdings currently have an expected average life of 2.7
years. It is estimated that this average life would extend to 5.5 years
should rates go up by 100 basis points and 6.5 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 1.8 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 3.5%, while rates
up 200 basis points would impact the market value by a negative 7.8%.
This is equal to the price sensitivity of the 4.5 year Treasury bond,
which is consistent with the current average life profile of the
portfolio. If rates go down 100 basis points, we estimate that the
market value would increase by 1.8%.
The adjustable rate holdings reprice on an annual or more frequent basis
and currently have an average life of 4.6 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 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 December 31, 1998 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 $632,849
as reflected on the December 31, 1998 balance sheet. Mark to market
impact to capital on December 31, 1997 was a positive $512,293. All
purchase and sale transactions in 1998 were made in accordance with
specifications set forth in FASB 115. The trading account at December
31, 1998 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 38% within one year, and 26%
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
1998 $ 0.00 $ 0.00 $ 0.00
1997 $ 0.00 $ 0.00 $ 0.00
1996 $ 0.00 $ 0.00 $ 0.00
1995 $ 0.00 $ 0.00 $ 0.00
The following table allocates by category unrealized Gains/Losses within
the total portfolio as of December 31, 1998 (in thousands):
Unrealized Net
Gains Losses Gains/Losses
U.S. Treasury
Securities $ 168 $ 0 $ 168
Obligations of U.S.
Government Agencies
and Corporations $ 678 $ 210 $ 468
Obligations of States
and Political
Subdivisions $ 241 $ 10 $ 231
Federal Reserve and
Corporate Stock $ 23 $ 0 $ 23
TOTALS $ 1,110 $ 220 $ 890
LIQUIDITY AND INTEREST RATE SENSITIVITY
Liquidity is the ability to meet the needs of our customer base for
loans and deposit withdrawals by maintaining assets which are
convertible to cash equivalents with minimal exposure to interest rate
risk. Slower deposit growth in recent years has forced banks to seek
alternative funding sources in order to meet loan demand. First
Citizens has resolved this issue by becoming a member of the Federal
Home Loan Bank and establishing a credit line sufficient to meet all
liquidity needs.
Funds made available through Federal Home Loan Bank totaling $40,000,000
provides a fixed level of funds at a predetermined rate. Other lines of
credit established with Correspondent banks total $18,500,000.
Correspondent Bank lines provide additional liquidity required for
daily settlement of the banks books. It is anticipated that these
sources of funds will continue to be utilized as a tool in managing
liquidity.
As a result, the company has experienced no problem with liquidity
during any of the years under review and anticipates that all liquidity
requirements will be effectively met in the future. Adherence to a
strict Asset/Liability Management Policy will ensure our ability to
effectively manage future interest rate risk.
37
Liquidity ratio, which was 23.87% at December 31, 1998 indicates the
degree short-term and marketable assets are available to fund short term
liabilities and deposit outflows. The liquidity ratio is calculated by
comparing net liquid assets to net liabilities. The stability of our
deposit base, approved lines of credit, sound asset/liability
management, quality assets and a strong capital base assure adequate
liquidity. Other sources available to meet liquidity needs are loans
and investments totaling over $121 million maturing within one year and
approximately $77 million of the bank's investments placed in the held-for-
sale-account. Loan to deposit ratio at December 31, 1998 was 92.21%
compared to 85.68% at December 31, 1997. The dependency ratio was 5.31%
at year end, reflecting volatile liabilities relied upon to fund longer
term assets.
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.
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 net interest income
exposure to Tier I Capital shall not exceed 2.00%. Interest rate risk
is separated and analyzed according to the following categories of risk:
(1) repricing (2) yield curve (3) option risk (4) price risk and (5)
basis risk. Trading assets are utilized infrequently and are addressed
in the investment policy. Any unfavorable trends reflected in interest
rate margins will cause an immediate adjustment to the bank's gap
position or asset/liability management strategies. The following data
schedule reflects a summary of First Citizens' interest rate risk using
simulations. The projected 12 month exposure is based on 5 different
rate movements (flat, rising, or declining). Three different rate
scenarios were used for rising rates since First Citizens is liability
sensitive. Interest rate risk at December 31, 1998 when compared to the
same time period in 1997 was ($165,000) or .55% of Tier I Capital.
38
CONDENSED GAP REPORT
12/31/98 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 14,223 - - - - - -
TOTAL CASH & DUE FROM 14,223 - - - - - -
INVESTMENTS
US TREASURIES 3,721 - - - - 168 337
US AGENCIES