----

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549________________________
FORM10-K

(Mark One)

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 or 15(D) OF THE SECURITIESEXCHANGE              ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31,2007

[  ]       Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number 0-11709________________________
First CitizensBancshares, Inc.(Exact name of registrant as specified in its charter)
**Tennessee**62-1180360
(State or other jurisdiction of
(IRS Employer Identification No.)
incorporation or organization) **P.O. Box 370, FirstCitizens PlaceDyersburg, Tennessee 38025-0370(Address of principal executive offices including zip code) **(731) 285-4410(Registrant's telephone number, including area code)**________________________
Securities registered pursuant to Section 12(b) of the Act:Name of each exchangeTitle of each class on which registered****None
**Securities registered pursuant to Section 12(g) of the Act:Common Stock(Title of class)**________________________**
Indicate by check mark if theregistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act. Yes [ ]   No [ x ]

Indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or Section15(d) of the Act.  Yes [ ]  No [x]

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 [  ].

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 RegulationS-K (Section 229.40) is not contained herein, and will not be contained, to the best of registrant's knowledge, indefinitive proxy or information statements incorporated by reference in Part IIIof this Form 10-K or any amendment to this Form 10-K.  [ ]

Indicateby check mark whether the registrant is a large accelerated filer, an acceleratedfiler or a non-accelerated filer.  See definition of "accelerated filer and large acceleratedfiler" in Rule 12b-2 of the Exchange Act (Check One):                                        Large accelerated filer [ ]     Accelerated filer[x]    Non-accelerated filer [ ]

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Act).  Yes [ ]  No [x]

**________________________**
The aggregate market value ofvoting and non-voting common stock held by non-affiliates of the registrant at June 30, 2007 was$90,071,704.

Of the registrant's only class ofcommon stock (no par value) there were 3,624,806 shares outstanding as ofDecember 31, 2007.

**________________________**

**DOCUMENTSINCORPORATED BYREFERENCE:**

Certain information called for by Part III of Form10-K is incorporated by reference to the Proxy Statement for our 2008 AnnualMeeting of Stockholders to be filed with the Commission within 120 days afterDecember 31, 2007.

 

PART I
FORWARD LOOKING STATEMENTS
Information contained hereinincludes forward-looking statements with respect to the beliefs, plans, risks,goals and estimates of First Citizens Bancshares, Inc..  Forward-lookingstatements are necessarily based upon estimates and assumptions that areinherently subject to significant banking, economic, and competitiveuncertainties, many of which are beyond management's control.  When used inthis discussion, the words "anticipate," "project," "expect," "believe,""should," "intend," "is likely," "going forward" and other expressions areintended to identify forward-looking statements.  These forward-lookingstatements are within the meaning of section 27A of the Securities Exchange Actof 1934, as amended (the "Exchange Act").  Such statements may include, but arenot limited to, projections of income or loss, expenses, acquisitions, plansfor the future, and others.

Forward-looking statements arebased upon information currently available and represent management'sexpectations or predictions of the future.  Due to risks and uncertaintiesinvolved, actual results could differ materially from such forward-lookingstatements.  Some of the potential factors that could affect our results aredescribed in Item 1A, "Risk Factors."  Examples of such risks and uncertaintiesinclude but are not limited to:
- Changes in general economic and     business conditions that are not anticipated and result in changes in loan     and deposit demands and/or increases in loan delinquencies and defaults;
- Changes in market rates and     prices may adversely impact the value of securities, loans, deposits and     other financial instruments;
- Effect of changes in legislative or regulatory developments     including changes in tax, banking, insurance, securities, or other     financial service related laws.
ITEM 1.  BUSINESS
PRESENTATION OF AMOUNTS

All dollar amounts set forth below, other than per-shareamounts, are in thousands unless otherwise noted.  Certain balances have beenreclassified to conform to current year presentation.

GENERAL

First Citizens Bancshares, Inc.("Bancshares" or the "Company") is a Tennessee corporation organized andincorporated in 1982 and commenced operations in September 1983.  Bancshares isregistered as a bank holding company under the Bank Holding Company Act of1956, as amended and elected, effective April 19, 2000 to become a financialholding company pursuant to the provisions of the Gramm-Leach Bliley Act.   Asa financial holding company, Bancshares may engage in activities that arefinancial in nature or incidental to a financial activity.  Permissibleactivities for a financial holding company are contained in Regulation Y ofFederal Reserve regulations.  Bancshares may continue to claim the benefits offinancial holding company status so long as each depository institution ownedby the company remains well capitalized and well managed.  In addition,Bancshares may not commence new activities under sections 4(k) or 4(n) of theBank Holding Company Act or acquire control of a company engaged in activitiesunder those sections if any of the Company's insured depository institutionsreceive a rating of less than satisfactory under any examination conducted todetermine compliance with the Community Reinvestment Act. Bancshares is aone-bank holding company. At December 31, 2007, the Corporation had totalassets of $876 million compared to $831 million at December 31, 2006. 

The Company's principal executiveoffices are located at One First Citizens Place, Dyersburg, Tennessee 38024.  Our telephone number is 731-285-4410.  Our website is www.firstcitizens-bank.com. In accordance with the Exchange Act and other related laws, Bancshares filesreports with the United States Securities Exchange Commission ("SEC") includingannual and quarterly reports (Forms 10-K and 10-Q) as well as current reportson Form 8-K and amendments to those reports, if any.  As of the end of thesecond fiscal quarter of 2005, the market value of outstanding voting andnon-voting common equity held by non-affiliates exceeded $75 million and thus,Bancshares began filing required periodic reports with the SEC underaccelerated status beginning with the filing of Form 10-K for the year ended December31, 2005.  

We post to our website links toour annual, quarterly and current reports as soon as reasonably practicableafter those reports are filed with or furnished to the SEC.  Such reports canbe downloaded and/or viewed free of charge through access to the links on ourwebsite.  Shareholders may request a copy of the current, quarterly or annualreports without charge by contacting Judy Long, Secretary, First CitizensBancshares, Inc., P. O. Box 370 Dyersburg, Tennessee 38025-0370.  

Shareholders desiring tocommunicate directly with the Board of Directors of the Corporation may do sothrough the Corporate Governance Committee by contacting the Chairman or anymember of the committee.  Committee membership is identified on the Bank'swebsite at www.firstcitizens-bank.com or may be obtained by calling the AuditDepartment of the Bank at 731-287-4275.  Letters sent via the US Postal Servicemay be mailed to Chairman, Corporate Governance Committee, First CitizensNational Bank, Audit Department, P.O. Box 890, Dyersburg, TN  38025-0890.

-1-

Bancshares, through its principalbanking subsidiary, First Citizens National Bank (the "Bank"), provides a broadrange of financial services. The Company is engaged in both retail andcommercial banking business.  The Bank was chartered as a national bank in 1900and operates in West Tennessee.  The Bank operates under the supervision of theComptroller of the Currency, and is a member of the Federal Reserve System. Deposits at the Bank are insured up to applicable limits by the Federal DepositInsurance Corporation (FDIC).  The Bank is also subject to various requirementsand restrictions under federal and state law, including requirements tomaintain reserves against deposits, restrictions on the types and amounts ofloans that may be granted and interest that may be charged thereon andlimitations on the types of investments that may be made, activities that maybe engaged in, and types of services that may be offered.  Various consumerlaws and regulations also affect operations of the Bank.  In addition to theimpact of regulation, commercial banks are affected significantly by theactions of the Federal Reserve as it attempts to control the money supply andcredit availability in order to influence the economy.  The Bank operates underthe day-to-day management of its officers and directors; and formulates its ownpolicies with respect to lending practices, interest rates and service chargesand other banking matters. 

Bancshares' primary source ofincome is dividends received from the Bank.  Dividend payments are determinedin relation to earnings, deposit growth and capital position of thesubsidiaries in compliance with regulatory guidelines. Management anticipatesthat future increases in the capital of Bancshares will be accomplished throughearnings retention or capital injection.

The following table sets fortha comparative analysis of Assets, Deposits, Net Loans, and Equity Capital ofBancshares as of December 31, for the years indicated:

** **

** **

**December 31**

** **

** **

** **

** **

**(In  Thousands)**

** **

** **

**2007**

** **

**2006**

** **

**2005**

Total Assets

 $

876,156   

 $

831,420   

 $

815,749   

Total Deposits

690,595   

666,063   

635,509   

Total Net Loans

578,311   

542,623   

540,387   

Total Equity Capital

75,031   

69,498   

63,646   

Individual bank performance iscompared to industry standards through utilization of the Federal ReserveBoard's Division of Banking Supervision and Regulation.  Bancshares is groupedwith peers with assets totaling $500 million to $1 billion.  The group consistedof 410 bank holding companies per the September 30, 2007 Bank Holding CompanyPerformance Report, which is the most recent report available as of the date ofthis report.

The following presentscomparisons of Bancshares with its peers as indicated on Bank Holding CompanyPerformance Reports for the periods indicated:

**12-31-2007**

** **

**12-31-2006**

** **

**12-31-2005**

** **

**Bancshares**

**Peer****

**Bancshares**

**Peer**

**Bancshares**

**Peer**

Net Interest Income/Average Assets

3.36 %

3.61 %

3.60 %

3.74 %

3.53 %

3.81 %

Net Operating Income/Average Assets

1.08 %

0.96 %

1.10 %

1.01 %

1.10 %

1.10 %

Net Loan Losses/ Average Total Loans

0.13 %

0.13 %

0.23 %

0.11 %

0.09 %

0.12 %

Primary Capital/Average Assets 

8.55 %

9.32 %

8.11 %

9.27 %

7.88 %

9.28 %

Cash Dividends/Net Income

45.93 %

30.82 %

46.04 %

29.09 %

47.03 %

25.17 %

**Peer information for December31, 2007 is compared to the September 30, 2007 Bank Holding Company PerformanceReport (most recent report available).

EXPANSION

Bancshares through its strategicplanning process has stated its intention to seek profitable opportunities thatwould utilize excess capital and maximize income in Tennessee.  Bancshares'objective in acquiring other banking institutions would be for asset growth anddiversification into other market areas.  Acquisitions and de-novo branchesafford Bancshares increased economies of scale within the operation functionsand better utilization of human resources.  Any acquisition or de-novobranching approved by Bancshares would be deemed to be in the best interest ofBancshares and its shareholders.  

Bancshares acquired Munford UnionBank in May 2002.  This acquisition originally added $115 million in assetshoused in Tipton and Shelby Counties in Tennessee to Bancshares' balancesheet.  Since this acquisition, the Bank has opened three additional branchesin this area: Arlington in Shelby County that opened in 2003, Oakland in Fayette County which opened in June 2004 and Collierville in Shelby County which opened inApril 2005.  The assets of the Southwest Region (branches in Shelby, Tipton,and Fayette Counties) were approximately $250 million as of December 31, 2007. 

In 2007, Bancshares expanded byopening loan production offices into Jackson, Tennessee and Franklin, Tennessee.  Bancshares plans to open a full service branch in Franklin by the end of 2008and in Jackson by the end of 2009.

 

-2-

CAPITAL ADEQUACY

Bancshares is subject to capitaladequacy requirements imposed by the Federal Reserve.   The Federal Reserve hasadopted risk-based capital guidelines for bank holding companies.  The minimumguideline for the ratio of total capital to risk weighted assets (includingcertain off-balance-sheet items such as standby letters of credit) is 8%, andthe minimum ratio of Tier 1 Capital to risk-weighted assets is 4%.  At leasthalf of the Total Capital must be composed of common stock, minority interestsin the equity capital accounts of consolidated subsidiaries, non-cumulativeperpetual preferred stock and a limited amount of cumulative perpetualpreferred stock, less goodwill and certain other intangible assets (Tier 1Capital).  The remainder may consist of qualifying subordinated debt, certaintypes of mandatory convertible securities and perpetual debt, other preferredstock and a limited amount of loan loss reserves.  At December 31, 2007,Bancshares' total risked-based capital ratio was 12.45%, significantly inexcess of 8% mandated by regulation.  The risk based capital ratio was 12.49%for 2006 and 12.11% for 2005.  Our strategic plan directs the company to leveragecapital by growing assets.  Risk based capital focuses primarily on broadcategories of credit risk and incorporates elements of transfer, interest rateand market risks.  The calculation of risk-based capital ratio is accomplishedby dividing qualifying capital by risk weighted assets.  Tier 1 leverage ratioat year-end 2007 was 8.47%, with total capital as a percentage of total assetsat 8.56%.

Failure to meet capitalguidelines could subject a financial holding company to a variety ofenforcement remedies, including the termination of deposit insurance by theFDIC, and to certain restrictions on its business and in certain circumstancesto the appointment of a conservator or receiver.

BANKING BUSINESS

The Company, headquartered in Dyersburg, Tennessee, is the bank holding company for the Bank and First Citizens (TN)Statutory Trusts III and IV.  First Citizens (TN) Statutory Trusts III and IVrelate to the Company's trust preferred debt and are not consolidated.Therefore, the trusts are accounted for under the equity method in accordancewith generally accepted accounting principles.  First Citizens Capital Assets,Inc., a wholly owned subsidiary of Bancshares, was liquidated in December 2006with no material impact to the consolidated financial statements.  The Bank isa diversified financial service institution, which provides banking and otherfinancial services to its customers. 

The Bank provides customarybanking services, such as checking and savings accounts, funds transfers,various types of time deposits and safe deposit facilities.  Other servicesalso include the financing of commercial transactions and making and servicingboth secured and unsecured loans to individuals, firms and corporations. TheBank is a leader in agricultural lending in Tennessee.  Agricultural servicesinclude operating loans as well as financing for the purchase of equipment andfarmland.  The consumer-lending department makes direct loans to individualsfor personal, automobile, real estate, home improvement, business andcollateral needs.

Mortgage lending makes availablelong term fixed and variable rate loans to finance the purchase of residentialreal estate.  These loans are sold in the secondary market without retainingservicing rights.  Commercial lending operations include various types ofcredit services for customers.

The Bank has the followingbanking locations in nine Tennessee counties: 15 full service branch banks,four drive-thru only branches, two loan production offices and 33 ATMs.  A listof available banking locations and hours are noted on the Bank's website (www.firstcitizens-bank.com)under the "About Us" section.  Subsidiaries of the Bank consist of thefollowing:
-  First Citizens Financial Plus, Inc., a  bank service corporation wholly owned by the Bank, provides licensed brokerage  services that allow the Bank to compete on a limited basis with numerous  non-bank entities that pose a continuing threat to our customer base. The  brokerage firm operates three locations in West Tennessee. 
-  White and Associates/First Citizens  Insurance, LLC was chartered by the State of Tennessee and is a general  insurance agency offering a full line of insurance products including  casualty, life and health, and crop insurance. The Bank holds a 50% ownership  in the company, which is accounted for using the equity method. The insurance  agency operates nine offices in Northwest Tennessee. 
-  First Citizens/White and Associates  Insurance Company, is organized and existing under the laws of the state of  Arizona. Its principal activity is credit insurance. The Bank holds a 50  percent ownership in the company and is accounted for using the equity method.  
-  First Citizens Investments, Inc. was  organized and exists under laws of the state of Nevada. The principal activity  of this entity is to acquire and sell investment securities as well as collect  the income from the portfolio. First Citizens Investments owns the following: 
-  First Citizens Holdings, a wholly owned  subsidiary of First Citizens Investments, acquires and sells certain  investment securities, collects income from its portfolio, and owns the  following subsidiary: 
-  First Citizens Properties, Inc., a real  estate investment trust (REIT), whose principal activity is to invest in  participation interests of real estate loans made by the Bank and provides the  Bank with an alternative vehicle for raising capital. First Citizens Holdings  owns 98% and directors, executive officers and certain employees own the  remaining 2%. The minority interest is immaterial to the consolidated  financial statements of the Company. 

COMPETITIVE ENVIRONMENT

The business of providingfinancial services is highly competitive. Competition involves not only otherbanks but non-financial enterprises as well.  In addition to competing withother commercial banks in the service area, the Bank competes with savings andloan associations, insurance companies, savings banks, small loan companies,finance companies, mortgage companies, real estate investment trusts, certaingovernmental agencies, credit card organizations, credit unions and otherenterprises.  In 1998, federal legislation allowed credit unions to expandtheir membership criterion.  Expanded membership criterion coupled with anexisting tax free status give credit unions a competitive advantage compared tobanks.    

The Bank builds and implementsstrategic plans and commitments to address competitive factors in the variousmarkets it serves.  The primary strategic focus is on obtaining and maintainingprofitable customer relationships in all markets.  The markets demandcompetitive pricing, but the Bank competes on high quality customer servicethat will attract and enhance loyal, profitable customers to the Bank. Industry surveys have consistently revealed that 65-70 percent of customersleave due to customer service issues.  The Bank is committed to excellentcustomer service in all markets served as a means of branding anddistinguishing itself from other financial institutions.  Advertising andpromotional activities such as newspaper and radio ads are also utilized tosupport defined strategic plans.  

-3-

In the markets it serves, theBank offers a typical mix of interest-bearing transaction, savings and timedeposit products as well as traditional non-interest bearing deposit accounts. The Bank is a leader in deposit market share compared to competitors in theDyer, Fayette, Lauderdale, Obion, Tipton and Weakley County, Tennesseemarkets.  Source of the following information is the Deposit Market ShareReport as of June 30, 2007 prepared annually by the FDIC.  

The Bank has consistently been aleader in market share of deposits in its markets for several years.  The Bank'smarket share has been 19% to 20% in these six counties combined and in excessof 62 percent in Dyer County for the last three years.  

The Bank also competes in the Shelby County market.  As the size and composition of the Shelby County market is muchlarger and more diverse, Shelby County is excluded from the tabularpresentation above.  Market share in Shelby County is 0.46% and 0.47% in 2007and 2006, respectively.

The following tabular analysispresents the number of offices, deposits (in thousands), and market sharepercentage for deposits:

**Dyer, Fayette,Lauderdale, Obion, Tipton, and Weakley County Markets**

**(Banksonly, Deposits Inside of Market)**

**Asof June 30, 2007**

** **

**# of**

** **

**Total Deposits**

** **

**% of Market**

**Bank Name**

**Offices**

** **

**6/30/2007**

** **

**Share 06/30/07**

*(in thousands)*

First Citizens National Bank

15

$

563,815   

19.32 %

First State Bank

14

578,305   

19.82 %

Regions Bank

13

268,813   

9.21 %

BancorpSouth Bank

6

162,230   

5.56 %

Somerville Bank & Trust Co.

5

174,763   

5.99 %

Bank of Fayette County

5

158,319   

5.43 %

Bank of Ripley

5

138,660   

4.75 %

Commercial Bank & Trust

2

119,583   

4.10 %

Reelfoot Bank

6

90,849   

3.11 %

INSOUTH Bank

2

90,849   

3.11 %

Security Bank

6

82,916   

2.84 %

First South Bank

2

63,995   

2.19 %

Oakland Deposit Bank

3

79,108   

2.71 %

Bank of Gleason

1

51,457   

1.76 %

Brighton Bank

2

47,785   

1.64 %

All others

15

246,624   

8.46 %

Total

102

$

2,918,071   

100.00 %

EMPLOYEES

Bancshares and the Bank employeda total of 264 full-time equivalent employees as of December 31, 2007. Bancshares and the Bank are committed to hiring and retaining high qualityemployees to execute strategic plans of the Company.  Relationship withemployees is satisfactory and no collective bargaining issues exist.

SUPERVISION AND REGULATION

Bancshares is a one-bankfinancial holding company under the Bank Holding Company Act of 1956, asamended, and is subject to supervision and examination by the Board ofGovernors of the Federal Reserve. As a financial holding company, Bancshares isrequired to file with the Federal Reserve annual reports and other informationregarding its business obligations and those of its subsidiaries.  FederalReserve approval must be obtained before Bancshares may:

1)     Acquireownership or control of any voting securities of a bank or bank holding companywhere the acquisition results in the bank holding company owning or controllingmore than 5 percent of a class of voting securities of that bank or bankholding company; or

2)     Acquiresubstantially all assets of a bank or bank holding company or merge withanother bank holding company.

Federal Reserve approval is notrequired for a bank subsidiary of a bank holding company to merge with oracquire substantially all assets of another bank if prior approval of a federalsupervisory agency, such as the Comptroller of the Currency is required underthe Bank Merger Act.  Relocation of a subsidiary bank of a bank holding companyfrom one state to another requires prior approval of the Federal Reserve and issubject to the prohibitions of the Douglas Amendment.

The Bank Holding Company Actprovides that the Federal Reserve shall not approve any acquisition, merger orconsolidation which would result in a monopoly or which would be in furtheranceof any combination or conspiracy to monopolize or attempt to monopolize thebusiness of banking in any part of the United States.  Further, the FederalReserve may not approve any other proposed acquisition, merger, orconsolidation, the effect of which might be to substantially lessen competitionor tend to create a monopoly in any section of the country, or which in anymanner would be in restraint of trade, unless the anti-competitive effect ofthe proposed transaction is clearly outweighed in favor of public interest bythe probable effect of the transaction in meeting convenience and needs of thecommunity to be served. An amendment effective February 4, 1993 furtherprovides that an application may be denied if the applicant has failed toprovide the Federal Reserve with adequate assurances that it will makeavailable such information on its operations and activities, and the operationsand activities of any affiliate, deemed appropriate to determine and enforcecompliance with the Bank Holding Company Act and any other applicable federalbanking statutes and regulations.  In addition, consideration is given to thecompetence, experience and integrity of the officers, directors and principalshareholders of the applicant and any subsidiaries as well as the banks andbank holding companies concerned.  The Federal Reserve also considers therecord of the applicant and its affiliates in fulfilling commitments toconditions imposed by the Federal Reserve in connection with priorapplications.

A bank holding company isprohibited with limited exceptions from engaging directly or indirectly throughits subsidiaries in activities unrelated to banking or managing or controllingbanks. One exception to this limitation permits ownership of a company engagedsolely in furnishing services to banks; another permits ownership of shares ofthe company, all of the activities of which the Federal Reserve has determinedafter due notice and opportunity for hearing, to be so closely related tobanking or managing or controlling banks, as to be a proper incident thereto.Moreover, under the 1970 amendments to the Act and to the Federal Reserveregulations, a financial holding company and its subsidiaries are prohibitedfrom engaging in certain "tie-in" arrangements in connection with anyextension of credit or provision of any property or service. Subsidiary banksof a financial holding company are subject to certain restrictions imposed bythe Federal Reserve Act on any extension of credit to the financial holdingcompany or to any of its other subsidiaries, or investments in the stock orother securities thereof, and on the taking of such stock for securities ascollateral for loans to any borrower.

Financial holding companies arerequired to file an annual report of their operations with the Federal Reserve,and they and their subsidiaries are subject to examination by the FederalReserve. 

-4-

USURY, RECENT LEGISLATION ANDECONOMIC ENVIRONMENT

Tennessee usury laws limit therate of interest that may be charged by banks. Certain federal laws provide forpreemption of state usury laws. 

Legislation enacted in 1983amends Tennessee usury laws to permit interest at an annual rate of four (4)percentage points above the average prime loan rate for the most recent weekfor which such an average rate has been published by the Board of Governors ofthe Federal Reserve, or twenty-four percent (24%), whichever is less (TCA47-14-102(3)). The "Most Favored Lender Doctrine" permits nationalbanks to charge the highest rate permitted by any state lender.

Specific usury laws may apply tocertain categories of loans, such as the limitation placed on interest rates onsingle pay loans of $1,000.00 or less for one year or less.  Rates charged oninstallment loans, including credit cards, as well as other types of loans maybe governed by the Industrial Loan and Thrift Companies Act.

IMPACT OF GRAMM LEACH-BLILEY ACT

The Gramm Leach-Bliley FinancialModernization Act of 1999 ("GLBA") permits bank holding companies meetingcertain management, capital, and community reinvestment act standards to engagein a substantially broader range of non-banking activities than permittedpreviously, including insurance underwriting and merchant banking activities. GLBA repeals sections 20 and 32 of the Glass Steagall Act, permittingaffiliations of banks with securities firms and registered investmentcompanies.  GLBA authorizes financial holding companies, permitting banks to beowned by security firms, insurance companies and merchant banking companies andvice-versa. Some of these affiliations are also permissible for banksubsidiaries.  GLBA gives the Federal Reserve Board authority to regulatefinancial holding companies, but provides for functional regulation ofsubsidiary activities.

GLBA also modifies financialprivacy and community reinvestment laws. The new financial privacy provisionsgenerally prohibit financial institutions such as the Bank from disclosingnon-public personal financial information to third parties unless customers havethe opportunity to opt out of the disclosure.  GLBA also magnifies theconsequences of a bank receiving less than a satisfactory communityreinvestment act rating, by freezing new activities until the institutionachieves a better community reinvestment act rating.

BANK SECRECY ACT

Over the past thirty plus years,Congress has passed several laws impacting a financial institution'sresponsibilities relating to Bank Secrecy Act.  The most recent change was in2001 with the enactment of the Uniting and Strengthening America by ProvidingAppropriate Tools Required to Intercept and Obstruct Terrorism ACT (the"Patriot Act").  The Patriot Act significantly amended and expanded theapplication of the Bank Secrecy Act, including enhanced measures regarding customeridentity, new suspicious activity reporting rules and enhanced anti-moneylaundering programs.   In 2005, there was no new legislation enacted relatingto Bank Secrecy Act.  However, on June 30, 2005, the Federal FinancialInstitutions Examination Council ("FFIEC") and the federal bank examinationagencies released the new interagency "Bank Secrecy Act Anti-Money LaunderingExamination Manual".  The manual emphasizes a banking organization'sresponsibility to establish and implement risk-based policies, procedures, andprocesses to comply with the Bank Secrecy Act and safeguard its operations frommoney laundering and terrorist financing.   It is a compilation of existingregulatory requirements, supervisory expectations, and sound practices for BankSecrecy Act/Anti-Money Laundering ("BSA/AML") compliance.  An effective BSA/AMLcompliance program requires sound risk management; therefore, the manual alsoprovides guidance on identifying and controlling risk associated with moneylaundering and terrorist financing.  The development of this manual was acollaborative effort of the federal banking agencies and the Financial CrimesEnforcement Network ("FinCEN"), a bureau of the U. S. Department of theTreasury, to ensure consistency in the application of the BSA/AML requirementsand consistent examinations of banking organizations.  

The specific examinationprocedures performed will depend on the BSA/AML risk profile of the bankingorganization, the quality and quantity of independent testing, the financialinstitutions history of BSA/AML compliance and other relevant factors.   TheBank has implemented effective risk-based policies and procedures thatreinforce existing practices and encourages a vigilant determination to preventthe institution from becoming associated with criminals or being used as achannel for money laundering or terrorist financing activities.

PATRIOT ACT

On October 26, 2001, PresidentBush signed the Patriot Act into law.  The Patriot Act enhances the powers ofthe federal government and law enforcement organizations to combat terrorism,organized crime and money laundering.   The Patriot Act significantly amendsand expands the application of the Bank Secrecy Act, including enhancedmeasures regarding customer identity, new suspicious activity reporting rulesand enhanced anti-money laundering programs.  Under the Act, each financialinstitution is required to establish and maintain anti-money launderingprograms, which include, at a minimum, the development of internal policies, procedures,and controls; the designation of a compliance officer; an ongoing employeetraining program; and an independent audit function to test programs.  Inaddition, the Patriot Act requires the bank regulatory agencies to consider therecord of a bank or banking holding company in combating money launderingactivities in their evaluation of bank and bank holding company merger oracquisition transactions.  Regulations proposed by the U.S. Department ofTreasury to effectuate certain provisions of the Patriot Act provide that alltransaction or other correspondent accounts held by a U.S. financialinstitution on behalf of any foreign bank must be closed within ninety daysafter the final regulations are issued, unless the foreign bank has providedthe U.S. financial institution with a means of verification that theinstitution is not a shell bank. The Bank has implemented policies andprocedures in compliance with stated regulations of the Patriot Act. 

FEDERAL DEPOSIT INSURANCE REFORMACT OF 2005

The Federal Deposit InsuranceReform Act of 2005 ("FDIRA") was passed on February 8, 2006, as part of theDeficit Reduction Act of 2005.  The primary components of FDIRA are asfollows:  merges the two major funds into a new Deposit Insurance Fund, raisescoverage on retirement accounts to $250,000, establishes indexing insurancelevels for inflation, caps the fund, sets up a system of dividends, gives bankscredit for past payments to the fund and provides for flexibility if the fundshould ever face financial difficulty.  The FDIC was required to implement mostof the provisions of FDIRA by November 5, 2006.  

-5-

CUSTOMER INFORMATION SECURITY ANDCUSTOMER FINANCIAL PRIVACY

The Board of Governors of theFederal Reserve System published guidelines for Customer Information Securityand Customer Financial Privacy with a mandatory effective date of July 1,2001.  The Bank has established policies in adherence to the publishedguidelines.  

The three principal requirementsrelating to the Privacy of Consumer Financial Information in GLBA are asfollows:
- Financial institutions must     provide customers with notices describing their privacy policies and     practices, including policies with respect to disclosure of nonpublic     personal information to affiliates and to nonaffiliated third parties.     Notices must be provided at the time the customer relationship is     established and annually thereafter.  
- Subject to specified     exceptions, financial institutions may not disclose nonpublic personal     information about consumers to any nonaffiliated third party unless     consumers are given a reasonable opportunity to direct that such     information not be shared (to "opt out").   
- Financial institutions     generally may not disclose customer account numbers to any nonaffiliated     third party for marketing purposes.

The Customer Information Securityguidelines implement section 501(b) of GLBA.  GLBA requires the agencies toestablish standards for financial institutions relating to administrative,technical and physical safeguards for customer records and information.

The guidelines require financialinstitutions to establish an information security program to:
- Identify and assess the risks     that may threaten customer information;
- Develop a written plan     containing policies and procedures to manage and control these risks;
- Implement and test the plan;     and
- Adjust the plan on a continuing     basis to account for changes in technology, the sensitivity of customer     information, and internal or external threats to information security.

Each institution may implement asecurity program appropriate to its size, complexity, nature and scope of itsoperations.  The Bank has structured and implemented a financial securityprogram that complies with all principal requirements of the act.

The regulatory agencies alsopublished the *Interagency Guidance on Response Programs for UnauthorizedAccess to Customer Information and Customer Notice*.  Each financialinstitution is required to implement a response program to address unauthorizedaccess to sensitive customer information maintained by the institution or itsservice providers.  The Bank has implemented an appropriate response program,which includes: formation of an "Incident Response Team"; properly assessingand investigating any incident; notifying the Office of the Comptroller of theCurrency (the "OOC") of any security breach, if necessary; taking appropriatesteps to contain and control any incident; and notifying affected customerswhen required.  

Monetary policies of regulatoryauthorities, including the Federal Reserve have a significant effect onoperating results of bank holding companies and their subsidiary banks.  TheFederal Reserve regulates the national supply of bank credit by open marketoperations in United States Government securities, changes in the discount rateon bank borrowings, and changes in reserve requirements against bank deposits.A tool once extensively used by the Federal Reserve to control growth anddistribution of bank loans, investments and deposits has been eliminatedthrough deregulation.  Competition, not regulation, dictates rates, which mustbe paid and/or charged in order to attract and retain customers.

Federal Reserve monetary policieshave materially affected the operating results of commercial banks in the pastand are expected to do so in the future.  The nature of future monetarypolicies and the effect of such policies on the business and earnings of thecompany and its subsidiaries cannot be accurately predicted.

INSURANCE ACTIVITIES

Subsidiaries of Bancshares sellvarious types of insurance as agents in the State of Tennessee.  Insuranceactivities are subject to regulation by the states in which such business istransacted.  Although most of such regulation focuses on insurance companiesand their insurance products, insurance agents and their activities are alsosubject to regulation by the states, including, among other things, licensingand marketing and sales practices.

-6-
ITEM 1A. RISK FACTORS
Our asset value and earnings as well as the value of ourcommon stock is subject to various types of risks.  Our ability to continue ourhistory of strong financial performance and return on investment is dependenton the ability to continue to effectively manage multiple areas of risk. Significant risks can be broadly divided into three categories:  credit risk,market risk and operational risks.  Such risk categories are discussed asfollows:

CREDIT RISK

Credit risks are risks toearnings and capital that a borrower may fail to meet the terms of any contractwith the Bank.  Many factors may impact the risk of credit losses on loans andinclude but are not limited to types and terms of loans within the portfolio,creditworthiness of borrowers, and the value and marketability of collateralsecuring various loans.  Changes in general economic conditions of marketsserved also impact the risk of credit losses.  Some credit losses are expectedand the levels of losses may vary over time.  Credit risks are managedthroughout the lending process beginning with strict underwriting guidelinesdesigned to control risks and limit exposure.  Then, our management usesvarious assumptions and judgments to evaluate on a quarterly basis the adequacyof the allowance for loan losses in accordance with generally acceptedaccounting principles as well as regulatory guidelines.  If management'sestimate of credit losses proves to be incorrect resulting in an allowance forloan losses inadequate to absorb losses or if regulatory authorities require anincrease to the allowance as a result of their examination process, earningsand capital could be significantly and adversely impacted.

Current economic conditions haveincreased credit risks across the industry in 2007 and such trends are expectedto continue in 2008.  The Bank does not participate in sub-prime lending ornon-traditional mortgages, thus, our increased credit risk exposure has beenlimited compared to that of institutions that did participate in suchactivities.  

MARKET RISK

Market risk consists primarily ofinterest rate and liquidity risk.  Interest income on loans and investments isour largest source of income and interest expense on deposits and borrowings isour largest expense.  The level and volatility of interest rates directlyimpact our earnings and capital.  

Interest rates are largely drivenby monetary policies set by the Federal Open Market Committee ("FOMC") and theshape of the yield curve.  The FOMC sets interest rates to influence the costand availability of money and credit to help promote national economic goals. The shape of the yield curve is the relationship of shorter-term rates tolonger-term rates.  The FOMC cut rates 175 basis points from September 2007 toJanuary 2008, which increases the Bank's interest rate risk for 2008.  Althoughthe Bank maintains a fairly neutral position for interest rate risk, steep ratecuts in a short period of time coupled with competitive factors pressuringpricing of loans and deposits in our current economic environment will continueto exert pressure on net interest margins.

Competition is anothersignificant factor that directly affects the net interest margin and thereforeour overall earnings.  Historically, banks competed with other banks.  Asdiscussed in the Competitive Environment section of Item 1, we now competeagainst a much broader range of entities that offer similar products andservices.  Some of those entities include insurance companies, financecompanies, credit unions, and industrial loan companies.  We must be able tocompete in our markets in order to remain profitable.  Competition is oftenintense in the pricing of both loans and deposits and can lead to reducedearnings if we earn less on loans or pay more for deposits in order to competeagainst such a diverse mix of competitors.  Changes in technology andregulation, the trend of consolidations in the financial services industry, andcompetition for experienced, qualified employees also affect our ability tocompete.  

Liquidity risk relates to ourability to meet our short-term financial obligations.  We are dependent upondividends from the Bank as a primary source of funds.  Funding of the Bank isaccomplished through diversified sources in order to manage liquidity risks. The cost of such funding directly impacts financial results.  The quantity,quality and cost of funding sources available to us and the Bank could besignificantly impacted by the following:  our financial results andorganizational changes, changes in our loan portfolio or other assets, changesto our corporate and/or regulatory structure, general economic conditions,current interest rate market environment, changes in supervision and regulationof our industry.  The current trend of decreasing federal funds rates and LIBORrates in January 2008 have lowered costs of wholesale funding.  Pricing ofretail deposits is also trending downward but remains very competitive. 

See also Item 7A of this reportfor additional discussion of liquidity and interest rate sensitivity.

OPERATIONAL RISK

Transaction risk, compliance risk, strategic risk, andreputation risk are our primary operational risks.  Transaction risk is therisk to earnings and capital which could result from an inability to deliverproducts or services.  Transaction risk can arise from ineffective orinefficient processes, fraud, theft, breaches in data security, and exposure ofother external threats or events.  Losses related to transaction risk can occurfrom within our organization or as a result of errors or disruption from avendor or other outside party for which we have limited control, if any.  Twospecific types of transaction risk include fraud risk and systemic risk.  Therisk that a payment transaction will be initiated or altered in an attempt tomisdirect or misappropriate funds.  Examples of fraud risk are embezzlement bya financial institution employee or by an interloper who gains unauthorizedaccess to a system.  Another type of transaction risk, systemic risk is therisk of inability of one funds transfer system participant to settle its commitments,which causes other participants to be unable to settle their commitments.  Riskmanagement procedures to identify, measure, monitor and control these types ofrisk are critical to successful management of operational risks.

Compliance risk is the risk tocapital and earnings as a result of violations of applicable laws, regulationsand ethical standards.  Our board of directors and executive management lead byexample with a commitment to honesty and integrity which provide the foundationfor the Company's core values.  The board of directors and management alsoimplemented and enforce a Code of Conduct which is posted on our website (www.firstcitizens-bank.com). 

We are subject to extensiveregulation including banking and financial services laws, tax legislation,accounting standards and interpretations thereof.  Thus, certain activities maybe restricted such as the ability to pay dividends, ability to participate inmergers and acquisitions, and location of offices.  The scope, complexity and costof corporate governance, reporting and disclosure procedures required to complywith the Sarbanes-Oxley Act of 2002 as well as other regulations havesignificantly increased compliance costs over the past three years.  Compliancecosts are expected to continue to escalate at a significant level.  Legislationintroduced or changed at the state or national level has the potential toimpact the banking industry and its operating environment substantially.  Wecannot determine whether such legislation will be enacted or the ultimateimpact on our financial position or earnings.  

Strategic risk arises fromadverse business decisions or improper implementation of strategic actionplans.  Current strategies include growth and development of current markets aswell as expansion into new markets.  In addition to market expansiongeographically, the range of products and services offered is also beingexpanded to include a more diverse range of products and services, includingbut not limited to new electronic banking products and services for commercialcustomers.  If implementation of market and product strategies is ineffective,our financial results could be adversely impacted.  

Reputation risk is the risk ofnegative public opinion.  The public perception of our ability to conductbusiness and expand our customer base is affected by practices of our board,management and employees.  Significant relationships with vendors, customersand other external parties may also affect our reputation.  Adverse perceptionsabout our business practices or practices of those with whom we havesignificant relationships, could adversely impact our financial results orcondition.  The board and executive management oversee the management ofreputation risks.   

-7-
ITEM 1B UNRESOLVED STAFF COMMENTS
** **None. 
ITEM 2. PROPERTIES
The Bank owns and occupies thefollowing properties:
- Main branch and executive     offices are in a six-story building at One First Citizens Place (formerly     200 West Court), Dyersburg, Tennessee.  This property also includes the     Banking Annex, which has a municipal address of 215-219 Masonic Street.      The Annex was converted into a new operations center in 2006 which houses     the Bank's operations, information technology, call center, bank security     and mail departments.   
- The Downtown Drive-Thru Branch     is located at 113 South Church Street, Dyersburg, Tennessee, and is a     remote motor bank with six drive-thru lanes and a drive-up ATM lane.   
- The Green Village Office     located at 620 U.S. 51 Bypass adjacent to the Green Village Shopping Center in Dyersburg, Tennessee, is a full service banking facility.
- The Newbern Branch, a full     service facility is located on North Monroe Street, Newbern, Tennessee.   
- The Industrial Park Branch     located at 2211 St. John Avenue, Dyersburg, Tennessee, is a full service     banking facility.   
- The Ripley, Lauderdale County full service facility is located at 316 Cleveland Street in Ripley, Tennessee.   
- The Troy Branch is full service     banking facility located on Harper Street just west of Highway 51 in Troy, Tennessee.   
- The Union City branch operates     one full service facility, two motor branches and three ATM's in Obion County     .  The main office is located at 100 Washington Avenue in Union City,        Tennessee.  Motor branches are located at First and Harrison Streets     across from the main office and at 1509 East Reelfoot Avenue in Union City.  
- The Martin office is located at     200 University Avenue, Martin, Tennessee, and is a full service banking     facility.   
- The Munford, Tennessee branch     is located at 1426 Munford Avenue.  A remote building located at 1483 Munford Avenue serves as a drive-thru facility.  
- Atoka full service branch is     located on the Atoka-Idaville Road at 123 Atoka-Munford Avenue, Atoka, Tennessee.   
- Millington Branch is a full service     branch facility located at 8170 Highway 51 N. Millington, Shelby County,     Tennessee.  
- Full service Bartlett branch is     located at 7580 Highway 70, Bartlett, Shelby County, Tennessee.   
- Arlington branch located at 5845 Airline Road, Arlington, Tennessee serves as a full service branch facility.
- Oakland branch was opened in     February 2005 at 7285 Highway 64, Oakland, Fayette County, Tennessee.   
- The Collierville, Tennessee branch facility opened January 2006 and is located at 3668 South Houston Levee in     Collierville.
- A building and lot at 1304 Murfreesboro Road in Franklin, Williamson County, Tennessee was purchased in 2007.  The     building is currently being renovated and is expected to open as a full     service branch by the end of second quarter 2008.
- A lot located on Christmasville     Cove in Jackson was purchased in 2007 and will be used to construct a full     service branch location in two to five years.
- In February 2008, a lot located     on Union University Drive in Jackson, Tennessee was purchased.  Construction     of a full service branch at this location is expected to begin in late     2008 or early 2009.

The Bank owns all properties andthere are no liens or encumbrances against any properties owned by the Bank. All of the properties described above are adequate and appropriate facilitiesto provide banking services as noted and are adequate to handle growth expectedin the foreseeable future.  As growth continues or needs change, individualproperty enhancements or additional properties will be evaluated if considerednecessary.

-8-
ITEM 3. LEGAL PROCEEDINGS
Various legal claims arise fromtime to time through the normal course of business of the Company and itssubsidiaries.  There is no material pending or threatened litigation as ofDecember 31, 2007.
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
During the fourth quarter of the yearending December 31, 2007 there were no meetings, annual or special, ofthe shareholders of Bancshares. No matters were submitted to a vote of theshareholders nor were proxies solicited by management or any other person.
PART IIITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITYAND RELATED STOCKHOLDER MATTERS 
As of December 31, 2007, therewere 1,073 shareholders of Bancshares' common stock. Bancshares' common stockis not actively traded on any market.  The following graph reflects theCompany's cumulative return (including dividends) as compared to the S&P500 and Southeast Bank Stocks over a five-year period:

Per share prices reflected in thefollowing table are based on records of actual sales during stated time periodsof which management of Bancshares is aware. These records may not include allsales during these time periods if sale prices were not reported to Bancsharesin connection with a transfer of shares.  The range of stock prices for 2006and 2007 by quarter is as follows:

Quarter Ended

Low

High

March 31, 2006

 $

33.00   

 $

33.00   

June 30, 2006

 $

33.00   

 $

33.00   

September 30, 2006

 $

33.00   

 $

34.00   

December 31, 2006

 $

34.00   

 $

34.00   

March 31, 2007

 $

35.00   

 $

35.00   

June 30, 2007

 $

35.00   

 $

36.45   

September 30, 2007

 $

36.45   

 $

36.45   

December 31, 2007

 $

34.00   

 $

36.45   

Aggregate dividends paid pershare were $1.16 in each of 2007 and 2006.  Dividends were paid quarterly asfollows for 2007 and 2006:

2007

2006

Dividends

Dividends

Quarter Declared:

Per Share

Per Share

 First Quarter

 $

0.29   

 $

0.29   

 Second Quarter

 $

0.29   

 $

0.29   

 Third Quarter

 $

0.29   

 $

0.29   

 Fourth Quarter

 $

0.29   

 $

0.29   

      Total

 $

1.16   

 $

1.16   

Future dividends will depend onBancshares' earnings, financial condition, regulatory capital levels and otherfactors, which the Board of Directors of Bancshares considers relevant. 

-9-

The Company had no publiclyannounced plans or programs for purchase of stock during the periodspresented.  The Company purchased 7,705 shares at a weighted average cost of$35.07 per share for the year ended December 31, 2007.  The number of shares oftreasury stock repurchased in open-market transactions not pursuant to publiclyannounced plans or programs and the average price paid by month for the mostrecent fiscal quarter is as follows:

Shares

Price Paid

Purchased

Per Share

**2007**

October

-   

-     

November

450   

 $

36.45   

December

-   

-     

   Total

450   

 $

36.45 

The Company sold 413 shares oftreasury stock in 2007 at a weighted average price of $36.10 per share. Proceeds from such sales were used to reacquire additional treasury shares. 
ITEM 6. SELECTED FINANCIAL DATA
The following table presentsselected financial data for Bancshares for the twelve months ended December 31,for the years indicated:

**2007**

**2006**

**2005**

**2004**

**2003**

**(Dollars in  thousands, except per share data)**

Net Interest & Fee Income 

 $

27,429   

 $

26,785   

 $

25,740   

 $

24,628   

 $

23,670   

Gross Interest Income 

 $

54,279   

 $

50,927   

 $

43,432   

 $

37,977   

 $

37,822   

Income From Continuing Operations

 $

9,160   

 $

9,157   

 $

8,665   

 $

8,049   

 $

7,820   

Net Income Per Common Share

 $

2.53   

 $

2.52   

 $

2.38   

 $

2.20   

 $

2.14   

Cash Dividends Declared Per Common Share

 $

1.16   

 $

1.16   

 $

1.12   

 $

1.12   

 $

1.08   

Total Assets at Year End

 $

876,156   

 $

831,420   

 $

815,749   

 $

773,204   

 $

726,104   

Long Term Obligations (1)

 $

63,165   

 $

59,538   

 $

78,128   

 $

84,481   

 $

83,314   

Allowances For Loan Losses as a % Loans

1.08 %

1.13 %

1.25 %

1.16 %

1.25 %

Allowances For Loan Losses as a % of

 Non-Performing Loans

336.24 %

471.96 %

349.36 %

262.25 %

438.36 %

Loans 90 Days Past Due as a  % of Loans

0.32 %

0.24 %

0.36 %

0.44 %

0.04 %

 (1)  Long-Term Obligationsconsist of FHLB advances and acquisition debts funded by a line of credit withFirst Tennessee Bank and trust-preferred securities.
****ITEM 7. MANAGEMENT'SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
See Banking Business under Item 1of this report regarding details of Bancshares, the Bank and other subsidiariesand what types of activities each engage in.  
EXECUTIVE SUMMARY
Financial performance for year ended December 31, 2007consists of stable earnings and moderate balance sheet growth.  Net income of$9.16 million for 2007 is flat compared to 2006.  Asset growth of 5.38% wasoutpaced by capital growth of approximately 8%.  Flat earnings combined withmoderate capital growth decreased 2007 return on average equity to 12.79%compared to 13.88% and 13.71% in 2006 and 2005, respectively.  Return on assetsis 1.08%, 1.10%, and 1.10% for 2007, 2006 and 2005, respectively.  The returnon equity ("ROE") of 12.79% and return on assets ("ROA") of 1.08% for 2007exceeds the Southeast Bank Group Index tracked by Mercer Capital which reportedan average ROE of 10.62% and average ROA of 0.98% for 2007.  Earnings per sharewere $2.53 for the year ended December 31, 2007 compared to $2.52 and $2.38 pershare in 2006 and 2005, respectively.  Flat earnings are the result of growthin net interest income and other income being offset by increases in provisionfor loan losses, expenses related to other real estate and other non-interestexpenses.

In 2007, the dividend payout ratio of 45.9% and thedividend yield of 3.31% continue to meet or exceed peer group banks in theSoutheast region.  Our goal continues to be providing shareholder returns thatexceed peer group banks and is achieved by focusing efforts on deployingcapital resources in a manner that supports long-term shareholder value. Investments in more metropolitan Southwest Tennessee markets and new Jackson and Franklin Tennessee loan production offices afford the Company opportunities toexpand the customer base and extend the Bank's brand outside Northwest Tennessee.  This prudent utilization of capital will support future growth anddevelopment of both assets and earnings.  

Challenges to maintain and improve net interest marginscontinue for many financial institutions including the Bank.  Industry trendsof smaller net interest margins are expected to continue given current economicand market rate conditions.  Margins have been compressed in past years byvarious factors including slower loan growth in core markets, trends in thebond yield curve, and recent deposit trends.  In addition, competition in allmarkets has forced pricing to more aggressive levels, which results in smallermargins.  Interest rate risk position for the Company is near neutral whichalso contributes to flat net interest margins.  Additional information is notedin Liquidity and Interest Rate Sensitivity section included in Item 7A of thisreport.  

As evidenced in the cash flow statements, Bancsharescontinues to deploy capital for purchases of premises and equipment totaling$4.2 million, $2.7 million and $5.9 million in 2007, 2006 and 2005,respectively.  Opportunity cost on the 2007 purchases is approximately $300,000based on the average yield on earning assets of 7.34%, as the funds likelywould have been invested in loans or investments if fixed assets were notpurchased.  In 2007, investments were made in two properties that are to becomefull service de novo branch locations in Jackson and Franklin, Tennessee over the next 12 to 24 months. 

-10-
CRITICAL ACCOUNTING POLICIES
The accounting and reporting ofBancshares and its subsidiaries conform to accounting principles generallyaccepted in the United States ("GAAP") and follow general practices within theindustry.  Preparation of financial statements requires management to makeestimates and assumptions that affect amounts reported in the financialstatements and accompanying notes. The Company's estimates are based onhistorical experience, information supplied from professionals, regulators andothers believed to be reasonable under the facts and circumstances.  Accountingestimates are considered critical if (1) management is required to makeassumptions or judgments about items that are highly uncertain at the timeestimates are made, and (2) different estimates reasonably could have been usedduring the current period or changes in such estimates are reasonably likely tooccur from period to period, that could have a material impact on presentationof the Consolidated Financial Statements.  

The development, selection anddisclosure of critical accounting policies are discussed with the AuditCommittee of the Board of Directors.  Due to the potential impact on thefinancial condition or results of operations and the required subjective orcomplex judgments involved, management believes its critical accountingpolicies to consist of the allowance for loan losses, fair value of financialinstruments, and goodwill and assessment of impairment.
Allowance For Loan Losses
The allowance for loan lossesrepresents management's best estimate of inherent losses in the existing loanportfolio.  Management's policy is to maintain the allowance for loan losses ata level sufficient to absorb reasonably estimated and probable losses withinthe portfolio.  The Company believes the loan loss reserve estimate is acritical accounting estimate because:  changes can materially affect bad debtexpense on the income statement, changes in the borrower's cash flows canimpact the reserve, and estimates must be made at the balance sheet date andalso into the future in reference to the reserve.  While management uses thebest information available to establish the allowance for loan losses, futureadjustments may be necessary if economic or other conditions changematerially.  The Loan Portfolio Analysis included in this Management'sDiscussion and Analysis provides further detail regarding how loans aremonitored and evaluated in relation to the determination of the allowance forloan losses.  Also, refer to Note 1 of the Consolidated Financial Statementsincluded in Item 8 of this report.
Fair Value Of Financial Instruments
GAAP requires that certain assetsand liabilities be carried on the balance sheet at fair value.  Furthermore,fair value of financial instruments is required to be disclosed as a part ofthe notes to the Consolidated Financial Statements for other assets and liabilities. Fair values are volatile and may be influenced by a number of factors,including market interest rates, prepayment speeds, discount rates, the shapeof yield curves and the credit worthiness of counter parties.  

Fair values for the majority ofthe Bank's available-for-sale investment securities are based on quoted marketprices from actively traded markets.  In instances where quoted market pricesare not available, fair values are based on quoted prices of similarinstruments with adjustment for relevant distinctions (e.g., size of issue,interest rate, etc.).  

Fair value of the only derivativeheld by the company is determined using a combination of quoted market ratesfor similar instruments and quantitative models based on market inputs includingrate, price and index scenarios to generate continuous yield or pricing curvesand volatility factors.  Third party vendors are used to obtain fair value ofavailable-for-sale securities and the cash flow hedge.  

See also the Fair Value ofFinancial Instruments footnote in the Consolidated Financial Statementsincluded in Item 8 of this report.  

**Goodwill**

The Company's policy is to reviewgoodwill for impairment at the reporting unit level on an annual basis unlessan event occurs that could potentially impair the goodwill amount.  Goodwillrepresents the excess of the cost of an acquired entity over fair valueassigned to assets and liabilities.  Management believes accounting estimatesassociated with determining fair value, as part of the goodwill test is acritical accounting estimate because estimates and assumptions are made basedon prevailing market factors, historical earnings and multiples and othercontingencies.  See also the Goodwill footnote in the Company's  ConsolidatedFinancial Statements included in Item 8 of this report for additional policyinformation.

-11-
RESULTS OF OPERATIONS
Bancshares reports consolidatednet income of $9.16 million for the year ended December 31, 2007 compared to$9.16 million in 2006 and $8.67 million in 2005.  Earnings per share increasedto $2.53 per share for 2007 compared to $2.52 per share in 2006 and $2.38 pershare for 2005. Return on average assets was 1.08%, 1.10%, and 1.10% for theyears ending December 31, 2007, 2006 and 2005, respectively.  Return on averageequity is 12.79%, 13.88% and 13.71% for 2007, 2006 and 2005, respectively. Flat earnings and decreased return on average equity in 2007 are the result ofmoderate balance sheet growth outpacing earnings growth.  Increases in netinterest income and other non-interest income were offset by increases inprovision for loan losses and other non-interest expenses.

Balance sheet growth improved to5.38% in 2007 compared to less than 2 percent in 2006.  Growth in 2006 wasunusually slow as a result of slow loan growth coupled with a reduction inborrowings from the Federal Home Loan Bank ("FHLB").  Growth in 2007 iscomparable to historical trends in the range of 6%-8% annually.  Asset growthwas primarily driven by 7.4% growth in investments and 6.6% growth in loans. Loan growth was partially funded through a decrease in federal funds sold ofapproximately $11.5 million, which reduced the overall impact of loan growth ontotal asset growth.

Current economic factorsincluding but not limited to the real estate market, high fuel and energycosts, and the market interest rate environment have put pressure on assetquality across the industry.  The Bank has not been immune to these challenges,but asset quality is considered satisfactory despite unfavorable trends innon-performing assets in 2006 and 2007.  While trends have been unfavorable,such trends are not significant compared to peers and larger financialinstitutions who have had significant losses as a result of investments insub-prime and non-traditional mortgages.  The Bank did not participate insub-prime or non-traditional mortgage products and thus our losses have beenlimited compared to peers and larger financial institutions.  Non-performingloans and other real estate as a percent of total loans plus other real estateat December 31, 2007 were 0.71% compared to 0.57% at December 31, 2006 and peerat 1.26% as reported in the December 31, 2007 Uniform Bank Performance Reportfor the Bank.  Net charge-offs in 2007 were $717,000 compared to $1.3 millionin 2006 and $468,000 in 2005.  The allowance for loan loss reserve as a percentof non-performing assets was 151.24%, 198.37%, 327.74%, 229.54% and 316.97% forthe years 2007, 2006, 2005, 2004, and 2003, respectively.  The decrease in thisratio over the last three years is primarily driven by increases in other realestate owned.  Other real estate totaled $2.3 million and $1.8 million as ofDecember 31, 2007 and 2006, respectively.   

Provision for loan losses wasincreased in 2007 as unfavorable trends in non-performing assets continued. Additions made to the reserve account, as a percent of gross charge-offs for2007 was 76.09% compared to 44.41% in 2006.  The reserve for potential loanlosses as a percent of total portfolio ended 2007 at 1.08% compared to 1.13% atyear-end 2006.  The allowance for loan losses is evaluated in accordance withGAAP and is heavily weighted toward actual historical losses.  As losseshistorically have been small and current accounting rules no longer provide fora unallocated allowance, the allowance as a percentage of loans has slowlydecreased over the last five years.  Allowance for loan losses as a percent ofloans for peer is 1.20% per the most recent Uniform Bank Performance Report. See additional information regarding the allowance for loan losses in LoanPortfolio Analysis below and in Note 1 to the Consolidated Financial Statementsincluded in Item 8 of this report.

The accompanying Summary AverageBalance Sheet and Net Interest Income Schedule indicate a slight improvement innet yield on average earning assets at 3.78% for year 2007 compared to 3.75%and 3.77% for 2006 and 2005, respectively.  This is primarily due to the fairlyneutral position of the balance sheet in terms of interest rate risk.  Thus, increasesin yields on interest-earning assets were primarily offset by increases in thecosts of interest-bearing liabilities during 2007.  The Bank, along with otherfinancial institutions, continued to battle net interest margins compressed bycurrent market and competitive factors in 2007.  The slight improvement inyield is primarily from interest income growth generated by the two new loanproduction offices.  See Item 7A of this report for additional informationregarding interest rate risk and market sensitivity.  

Trends of strong non-interestincome continued in 2007 with stable income from mortgage banking activities,increased service charges on deposits as well as increases in trust andbrokerage fees.  Despite the challenges of the current real estate market, themarkets served by the Bank continued to deliver strong mortgage activity. Gross income and fees recorded from this activity totaled $1.2 million each ofthe past three years.  As long-term mortgage rates remain reasonable and marketsappear stable, stable mortgage income trends are expected to continue in 2008. Fee income from deposit accounts increased to $6.9 million in 2007 compared to$6.1 million in 2006 as a result of changes implemented to the Bank's feestructures and overdraft protection program in 2007.  Although grossnon-interest income increased significantly, offsetting increases innon-interest expense partially offset this additional income.  See non-interestexpense discussion below for additional details.

The effective tax rate is 25% in2007 compared to 24% in 2006 and 26% in 2005.  The effective tax rate andchanges therein are impacted by fluctuations in certain factors, including butnot limited to the level of tax-free investments within our investment portfolio,tax-exempt earnings on Bank owned life insurance policies, certain tax benefitswhich result from ESOP dividends and payouts, temporary differences resultingfrom use of accelerated deprecation for tax purposes and other factorsincidental to the financial services business.  Fluctuations in the deductionrelated to the ESOP dividends and payouts and tax-exempt interest earned in theinvestment portfolio are the largest contributors to the various effectiverates for the past three years.

-12-

Interest-earningassets in 2007 averaged $753 million at an average rate of 7.34% compared to$740 million at an average rate of 7.01% in 2006 and $706 million at an averagerate of 6.27% in 2005.  Interest bearing liabilities at year end averaged$679 million at a cost of 3.96% compared to $670 million at a cost of 3.60% in2006 and $645 million at a cost of 2.74% in 2005.  The following presentsthe year-to-date daily average balance sheet and net interest income analysis(in thousands):

  YEAR-TO-DATE AVERAGES AND RATES

2007

2006

2005

   Average 

  Average

   Average 

  Average

   Average 

  Average

   Balance 

   Interest 

Rate

   Balance 

   Interest 

Rate

   Balance 

   Interest 

Rate

ASSETS

INTEREST EARNING

   ASSETS:

Loans (1)(2)(3)

 $

560,229  

 $

44,700  

7.98 %

 $

554,219  

 $

42,372  

7.65 %

 $

536,315  

 $

36,809  

6.86 %

Investment Securities:

   Taxable

137,571  

7,087  

5.15 %

128,205  

6,078  

4.74 %

117,487  

4,704  

4.00 %

   Tax Exempt (4)

46,481  

3,020  

6.50 %

43,135  

2,738  

6.35 %

40,567  

2,512  

6.19 %

Interest Earning

   Deposits

773  

47  

6.08 %

703  

37  

5.26 %

711  

20  

2.81 %

Federal Funds Sold

7,968  

452  

5.67 %

13,586  

633  

4.66 %

11,134  

241  

2.16 %

Lease Financing

Total Interest Earning

   Assets

753,022  

55,306  

7.34 %

739,848  

51,858  

7.01 %

706,214  

44,286  

6.27 %

NON-INTEREST

   EARNING ASSETS:

Cash and due from

   Banks

 $

16,586  

 $

16,043  

 $

18,619  

Bank Premises and Equipment

28,743  

28,554  

25,817  

Other Assets

49,705  

46,988  

38,755  

Total Assets

 $

848,056  

 $

831,433  

 $

789,405  

LIABILITIES AND

   SHAREHOLDERS' EQUITY

INTEREST BEARING 

   LIABILITIES:

Savings Deposits

 $

201,506  

 $

3,794  

1.88 %

 $

197,115  

 $

3,264  

1.66 %

 $

190,106  

 $

2,242  

1.18 %

Time Deposits

372,109  

17,822  

4.79 %

365,839  

15,568  

4.26 %

331,973  

10,246  

3.09 %

Federal funds 

   Purchased and

   Other Interest

   Bearing Liabilities

105,218  

5,234  

4.97 %

107,238  

5,310  

4.95 %

122,754  

5,204  

4.24 %

Total Interest

   Bearing Liabilities

678,833  

26,850  

3.96 %

670,192  

24,142  

3.60 %

644,833  

17,692  

2.74 %

 

-13-

**SUMMARY - AVERAGEBALANCE SHEET AND NET INTEREST INCOME ANALYSIS (cont'd)**

YEAR-TO-DATE AVERAGES AND RATES

2007

2006

2005

 Average  

Average

 Average  

Average

 Average  

Average

 Balance  

 Interest  

Rate

 Balance  

 Interest  

Rate

 Balance  

 Interest  

Rate

NON-INTEREST BEARING

   LIABILITIES:

Demand deposits

93,413  

90,360  

78,586  

Other liabilities

4,189  

4,911  

2,788  

Total liabilities

778,442  

767,469  

728,212  

SHAREHOLDERS' EQUITY

71,621  

65,970  

63,198  

TOTAL LIABILITIES AND

   SHAREHOLDERS' EQUITY

 $

850,063  

 $

833,439  

 $

791,410  

NET INTEREST INCOME

 $

28,456  

 $

27,716  

 $

26,594  

NET YIELD ON AVERAGE

   EARNING ASSETS

3.78 %

3.75 %

3.77 %

(1)           Loan totals are shownnet of unearned income and loan loss reserves.

(2)          Fee Income on loans held for investment is included ininterest income and the computations of the yield.  However, loans held forsale and related mortgage banking income are reported in other assets and other              income and therefore, are excluded. 

(3)           Includes loans onnon-accrual status.

(4)           Interestand rates on securities, which are non-taxable for federal income tax purposes,are presented on a taxable equivalent basis.

-14-

VOLUME/RATE ANALYSIS

The following table is an analysis of theimpact of the changes in balances and rates on interest income and interestexpense changes from 2007 to 2006 as well as from 2006 to 2005:

**2007 to 2006**

** **

** **

**2006 to 2005**

**Due to Changes in:**

** **

** **

** **

**Due to Changes in:**

** **

** **

** **

** **

**Total**

** **

** **

** **

** **

** **

**Total**

**Average**

** **

**Average**

** **

**Increase**

** **

**Average**

** **

**Average**

** **

**Increase**

**Volume**

** **

**Rate**

** **

**(Decrease)**

** **

**Volume**

** **

**Rate**

** **

**(Decrease)**

Interest Earned On:

** **

** **

** **

** **

**(In Thousands)**

** **

** **

** **

** **

Loans

 $

480    

 $

  1,848   
 $

2,328  

 $

1,431  

 $

4,135  

 $

5,566  

Taxable Investments

482  

527  

1,009  

508  

866  

1,374  

Tax Exempt Investment

 Securities

4  

278  

282  

163  

63  

226  

Interest Bearing

 Deposits With Other

 Banks

4  

6  

10  

0  

17  

17  

Federal Funds Sold and

 Securities Purchased

 Under Agreements to Resell

(319)

138  

(181)

114  

278  

392  

Lease Financing

TOTAL INTEREST EARNING

 ASSETS

 $

651    

 $

2,797    

 $

3,448  

 $

2,216  

 $

5,359  

 $

7,575  

Interest Expense On:

 Savings Deposits

83  

447  

530  

116  

906  

1,022  

 Time Deposits

300  

1,954  

2,254  

1,441  

3,881  

5,322  

 Federal Funds Purchased

     and Securities Sold  Under

     Agreements to  Repurchase

(100)

24  

(76)

(768)

874  

106  

TOTAL INTEREST EARNING

 LIABILITIES

283  

2,425  

2,708  

789  

5,661  

6,450  

NET INTEREST EARNINGS

 $

  368   
 $

  372   
 $

740  

 $

1,427  

 $

(302)

 $

1,125  

NON-INTEREST INCOME

The following table compares non-interestincome for the years ended December 31, 2007, 2006 and 2005:

** **

** **

**Increase**

** **

** **

** **

** **

** **

**Increase**

** **

** **

** **

** **

**Total**

** **

**(Decrease)**

** **

** **

** **

**Total**

** **

**(Decrease)**

** **

** **

** **

**Total**

**2007**

** **

**Amount**

** **

**Percentage**

** **

**2006**

** **

**Amount**

** **

**Percentage**

** **

**2005**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

Mortgage banking income

 $

1,178  

(7)

-0.59 %

 $

1,185  

3  

0.25 %

 $

1,182  

Services Charges on

   Deposit Accounts

6,962  

903  

14.90 %

6,059  

107  

1.80 %

5,952  

 Trust Fees

1,007  

67  

7.13 %

940  

(23)

-2.39 %

963  

 Brokerage Fees

1,565  

208  

15.33 %

1,357  

50  

3.83 %

1,307  

Earnings on Bank Owned

   Life Insurance Policies

695  

14  

2.06 %

681  

(233)

-25.49 %

914  

 Other

1,507  

(104)

-6.46 %

1,611  

(97)

-5.68 %

1,708  

Total Non-Interest Income

 $

12,914  

 $

1,081  

9.14 %

 $

11,833  

 $

(193)

-1.60 %

 $

12,026  

-15-

Non-interest income increased 9%driven primarily by increases in service charges on deposits. Of the $903,000increase in service charges, approximately $700,000 is a result of expansionand changes to the overdraft protection program.  Such changes to the programalso resulted in additional expense in 2007 of approximately $215,000 which isincluded in non-interest expense totals.   The other $200,000 increase indeposit fees are primarily related to interchange and surcharge fees earned onthe use of ATM and debit cards.   Trust and brokerage fees increased about$275,000 combined as a result of increased sales of such services.  Earnings onBOLI assets were flat in 2007 compared to 2006.  The decrease in earnings onBOLI in 2007 and 2006 compared to 2005 is due to non-recurring income earned in2005 of approximately $260,000 from a death benefit received on a policyinherited through a prior bank acquisition.  In year 2007, total non-interestincome (fee income) contributed 19.2% of total revenue compared to 19.6% and21.2% for the same periods in 2006 and 2005, respectively.  

Income from First Citizens/Whiteand Associates Insurance Company, LLC is included in other non-interestincome.   Income from this subsidiary decreased $19,000 in 2007 compared to2006.  Income decreased primarily due to lower contingency gains earned in 2007due to higher claim losses in 2006 as a result of tornados in local markets.  Bancshares'portion of other non-interest income generated by First Citizens/White andAssociates Insurance Company, LLC for the years ending 2007, 2006, and 2005totaled $634,000, $653,000 and $709,000, respectively.   

NON-INTEREST EXPENSE

The following table comparesnon-interest expense for the years ended December 31, 2007, 2006 and 2005 (inthousands):

** **

** **

**Increase**

** **

** **

** **

** **

** **

**Increase**

** **

** **

** **

** **

**Total**

** **

**(Decrease)**

** **

** **

** **

**Total**

** **

**(Decrease)**

** **

** **

** **

**Total**

**2007**

** **

**Amount**

** **

**Percentage**

** **

**2006**

** **

**Amount**

** **

**Percentage**

** **

**2005**

Salaries & Employees

   Benefits

 $

15,687   

 $

613   

4.07 %

 $

15,074   

 $

568   

3.92 %

 $

14,506   

Occupancy Expense

4,623   

120   

2.66 %

4,503   

216   

5.04 %

4,287   

Other Operating Expense

7,034   

683   

10.75 %

6,351   

189   

3.07 %

6,162   

Total Non-Interest Expense

 $

27,344   

 $

1,416   

5.46 %

 $

25,928   

 $

973   

3.90 %

 $

24,955   

The non-interest expense categoryis dominated by salaries and benefits expense and comprises 57% of the total in2007, and 58% in each of years 2006 and 2005.  Employees receiveperformance-based incentives based on factors including achievement of acertain Return on Equity level (calculated excluding incentives at the holding companylevel), accomplishing annual budget goals and attaining or exceeding businessdevelopment goals.  Incentive pay totaled 10.43% of salaries and benefitscompared to 10.95% in 2006 and 11.89% in 2005.  The significant expenseassociated with salaries and benefits is consistent with Bancshares' strategicplan to hire and retain high quality employees to provide outstanding customerservice and strive for exceptional shareholder returns.  

The efficiency ratio is ameasurement of non-interest expense as a percentage of total revenue.  Acomparison of the efficiency ratio for the years 2007, 2006 and 2005 reflectsratios of 65.98%, 65.44%, and 64.62%, respectively.  

The following table comparesassets per employee (in thousands) for Bancshares compared to a peer group. Peer information is obtained from Uniform Bank Performance Reports (UBPR) forthe periods noted.

** **

**Assets Per  Employee**

**Assets Per  Employee**

**December 31**

**FCNB**

** Peer Groups**

2007

 $

3,210 

 $

4,060 

2006

 $

3,121 

 $

3,940 

2005

 $

2,967 

 $

3,860 

2004

 $

2,903 

 $

3,700 

2003

 $

2,916 

 $

3,540 

Comparison of assets per employeefor the Company compared to its peers reveals that the Company is more heavilystaffed than its counterparts.  This is primarily a result of the growththrough acquisitions and new branches that has occurred over the past fiveyears.  New branches have an inefficient assets-per-employee ratio and thus,dilute the total assets per employee ratio as compared to peer.  As expected, ourratio improved during 2007 due to our growth.  As the company continues itsexpansion into Jackson and Franklin, Tennessee, assets per employee for theCompany will likely continue to be less than peer.  Our commitment to thehighest level of customer service may also cause the Company to continue at alevel below peer due to staff required to provide exceptional level of customerservice supported by our strategic objectives.  

-16-

Increased occupancy expense isprimarily due to the addition of the loan production offices in Jackson and Franklin, Tennessee, in 2007.  While efforts are made to ensure efficiencies in theseareas, the expansion, data integrity/security and customer service strategiesadopted by the board will continue to exert pressure on occupancy anddepreciation expense as we continue to expand into new markets.  

Total non-interest expenseincreased approximately 5% and 3% in 2007 and 2006, respectively.  Thedigestion of newer branches and increasing regulatory burdens continue to putpressure on non-interest expenses.  Successful implementation of strategies toincrease non-interest income streams also yields higher non-interest expenses. As discussed in the other non-interest income section above, approximately$200,000 additional expense was incurred related to changes in the overdraftprotection program.  Advertising costs increased $111,000 in 2007 as a resultof promotion efforts to establish brand awareness of the Bank in the newJackson and Franklin, Tennessee markets.  Expenses incurred related to otherreal estate owned increased approximately $280,000 in 2007.  See additionaldiscussion in Other Real Estate Section noted below.

No impairment of goodwill hasbeen recognized since the adoption of SFAS 142 in 2002.  Goodwill is 1.35% oftotal assets and 15.76% of total capital as of December 31, 2007. 

INVESTMENT SECURITIES ANALYSIS

The following presents thecomposition of securities for the last five years:

**December 31,**

** **

**2007**

 

**2006**

 

**2005**

** **

**2004**

** **

**2003**

** **

U. S. Treasury & Government Agencies

 $

134,171   

 $

127,602   

 $

112,803   

 $

101,105   

 $

102,117   

State & Political Subdivisions

51,326   

44,338   

41,776   

39,352   

38,719   

All Others

4,910   

5,436   

6,589   

6,680   

8,844   

     Total investment securities

 $

190,407   

 $

177,376   

 $

161,168   

 $

147,137   

 $

149,680   

MATURITY AND YIELD ON SECURITIES- DECEMBER 31, 2007

The following presentscontractual maturities and yields by category for debt securities:

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

 

Total

U. S. Treasury and

 Government agencies

 $   15,030 

4.32%

 $   15,310 

5.92%

 $   16,823 

4.60%

 $          87,008  

5.73%

 $ 134,171 

State and political

 subdivisions*

           515  

7.47%

      11,119 

5.79%

      15,478 

7.05%

             24,214  

6.59%

      51,326 

All others

           940  

6.67%

                -  

0.00%

                -  

               3,918  

8.15%

        4,858  

 Total debt securities

 $   16,485 

 $   26,429 

 $   32,301 

 $        115,140  

 $ 190,355 

Equity securities

 $          52  

     Total 

 $ 190,407 

*Yields on tax-exempt investmentsare stated on a tax-equivalent basis calculated using a federal statutory rateof 34 percent.

HELD TO MATURITY & AVAILABLEFOR SALE SECURITIES - DECEMBER 31, 2007

Held to Maturity

 

Available for Sale

(In Thousands)

Amortized  

Fair  

Amortized  

Fair  

Cost

 

Value

 

Cost  

 

Value

U. S. Treasury securities

 $

-   

 $

-   

 $

-   

 $

-   

U. S. Government agencies and corporation obligations

-   

-   

134,139   

134,171   

Securities issued by states and political subdivisions in

   the United States:

     Taxable securities

-   

-   

-   

-   

     Tax-exempt securities

290   

291   

49,374   

51,036   

U. S. securities:

 Other debt securities

-   

-   

4,903   

4,858   

 Equity securities

-   

-   

10   

52   

           Total

 $

290   

 $

291   

 $

188,426   

 $

190,117   

In addition to amounts presented above, the Bank also has$5.5 million in FHLB and Federal Reserve Bank ("FRB") stock, recorded at cost. FHLB and FRB stocks are listed as a separate line item on the ConsolidatedBalance Sheets included in Item 8 of this report.

-17-

Investments increasedapproximately $13 million or 7.4% in 2007 during a period of slow loan growth. Purchases in 2007 were accretive to overall yields on investments.  Objectivesof investment portfolio management are to provide safety of principal, adequateliquidity, insulate GAAP capital against excessive changes in market value,insulate earnings from excessive change, and optimize investment performance. Investments also serve as collateral for government, public funds, and largedeposit accounts that exceed Federal Deposit Insurance limits.  Pledgedinvestments at year-end 2007 had a fair market value of $130 million.  Totalheld-to-maturity and available-for-sale investments at December 31, 2007, 2006and 2005 were $190 million, $177 million and $161 million, respectively.  Theaverage expected life is 4.2 years, 4.4 years, and 4.6 years, for 2007, 2006and 2005, respectively.  Portfolio yields steadily improved over the past threeyears.  Tax equivalent yield on investment securities in 2007 improved to 5.49%compared to 5.21% in 2006 and 4.57% in 2005.

The company classifiesinvestments by intent into trading, available-for-sale and held-to-maturitycategories in accordance with GAAP.  The Company held no securities in thetrading category for any period presented in this report and does not expect toin 2008.  Bancshares' investment strategy is to classify most of the portfolioas available-for-sale, which are carried on the balance sheet at fair marketvalue.  Classification of available-for-sale investments allows flexibility toactively manage the portfolio under various market conditions.  U. S.Treasuries and Agencies (including mortgage-backed securities) account for 70%and 72% of the investment portfolio as of year-end 2007 and 2006,respectively.  Mortgage related investments comprise the largest percentage ofU. S. Treasuries and Agencies category and account for approximately half oftotal portfolio as of each of the years ended December 31, 2007 and 2006. Statements of Cash Flows included in Item 8 of this report reflect increased cashflows in 2007 as a result of the current rate environment and portfoliostrategies.  Cash flows for 2008 are projected to be in excess of $40 million. Bancshares continues to pursue strategies that provide a balance between steadycash flows and maintaining or improving current yields.  

The Company has one interest rateswap classified as a cash flow hedge, which is described in Note 3 of theConsolidated Financial Statements.

The following table indicates bycategory unrealized gains and losses within the available-for-sale portfolio asof December 31, 2007 (in thousands):

Unrealized  

Gains

 

Losses

 

Net

U. S. Treasury Securities and Obligations of U. S.

 Government Agencies and Corporations

 $

1,003   

 $

(971)

 $

32   

Obligations of States and Political Subdivisions

 $

1,772   

 $

(110)

1,662   

All Others

 $

131   

 $

(134)

(3)

     Total

 $

2,906   

 $

(1,215)

 $

1,691   

LOAN PORTFOLIO ANALYSIS

The following compares theportfolio mix of loans held for investment as of year-end for the last fiveyears:

December 31

2007

 

2006

 

2005

 

2004

 

2003

 

Real Estate Loans:

   Construction

 $

106,695   

 $

86,206   

 $

74,817   

 $

99,028   

 $

71,599   

   Mortgage

 $

353,655   

 $

340,839   

 $

352,749   

 $

320,630   

 $

302,683   

Commercial, Financial and 

 Agricultural Loans

 $

80,509   

 $

80,033   

 $

78,086   

 $

72,330   

 $

70,658   

Installment Loans to 

 Individuals

 $

37,106   

 $

36,735   

 $

37,761   

 $

38,550   

 $

37,401   

Other Loans

 $

6,674   

 $

5,021   

 $

3,804   

 $

4,147   

 $

3,372   

 TOTAL LOANS

 $

584,639   

 $

548,834   

 $

550,260   

 $

536,012   

 $

488,107   

CHANGES IN LOAN CATEGORIES

Loan growth was 6.5% in 2007compared to less than 1% in 2006.  The following details the breakdown of thatgrowth by category for 2007 (in thousands):

Increase

Percent

 

(Decrease)

 

Change

 

Real Estate Loans:

 Construction

 $

20,489   

23.77 %

 Mortgage

 $

12,816   

3.76 %

Commercial, Financial

 and Agricultural

 $

476   

0.59 %

Installment Loans to  Individuals

 $

371   

1.01 %

Other Loans

 $

1,653   

32.92 %

     TOTAL LOANS

 $

35,805   

6.52 %

Total loans at December 31, 2007were $585 million compared to $549 million at December 31, 2006 and $550million at December 31, 2005.  Loans for this discussion do not include loansthat are sold in the secondary mortgage market.  Loans to be sold in thesecondary mortgage market are separately classified in the Consolidated FinancialStatements included in Item 8 of this report.  Secondary market mortgages total$2.2 million, $3.4 million, $3.0 million, $1.3 million, and $2.4 million for2007, 2006, 2005, 2004, and 2003, respectively.  See also Notes 4, 5 and 6 ofthe Consolidated Financial Statements included in Item 8 of this report. Interest and fees earned on secondary mortgage loans are included in mortgagebanking income as reported in other non-interest income in the ConsolidatedFinancial Statements included in this report.  

Overall, loan growth improved to6.5% in 2007 compared to less than 1% growth in 2006 and 2.7% in 2005.  Growthin 2007 was primarily generated from commercial and residential constructionloans originated in the loan production offices in Franklin and Jackson, Tennessee as well as branches in Shelby, Tipton and Fayette Counties.  Weakerloan growth in 2005 and 2006 can be attributed to the slowing economy and atightening in consumer credit underwriting standards.  

The loan portfolio is heavilyweighted in real estate loans, which account for approximately $460 million or79 percent of total portfolio.  Commercial and residential construction loansaccount for $107 million of the $460 million invested in real estate loans. Although the portfolio is heavily weighted in real estate, the Bank does notinvest in sub-prime or non-traditional mortgages.  The Bank monitors itsconcentrations in commercial real estate in accordance with regulatoryguidelines.

-18-

Portfolio quality remains strongwith the ratio of net charge offs to average net loans outstanding for theyears of 2007, 2006, and 2005 at 0.13%, 0.23%, and 0.09%, respectively.  Nonperforming assets as a percent of total loans plus foreclosed property atcurrent year end represent 0.71% compared to 0.57% and 0.38% at year end 2006and 2005, respectively.  A very small volume of significant balance loansaccount for the increase in net charge offs and increase in other real estateowned in 2006 and 2007.  A negative trend in problem credits and charge offswas expected given industry historical trends during rising rate environmentexperienced in 2006 and 2007.  However, strong credit risk management providesa means for timely identification and assessment of problem credits in order tominimize losses.  Negative trends in problem credits are not expected toincrease materially.  

Unemployment rates serve as onemeasurement tool to evaluate the stability and condition of local economies ofour markets.  Unemployment rates increased in all markets served over the last12 months.  Unemployment rates for year-end 2007, 2006 and 2005 in Tennessee counties served during 2007 are as follows:

County

2007

2006

2005

 

County

2007

2006

2005

Dyer 

5.9%

4.9%

5.6%

Shelby

5.3%

5.0%

5.6%

Fayette

7.9%

8.4%

8.6%

Tipton

5.7%

4.9%

5.3%

Lauderdale

8.0%

6.5%

7.8%

Weakley

5.9%

5.1%

5.5%

Madison

5.4%

4.9%

5.2%

Williamson

3.6%

3.0%

3.4%

Obion

5.5%

5.2%

5.3%

Unemployment rates for the stateof Tennessee as of the end of each quarter of 2007 were 4.7%, 4.1%, 4.7%, and5.3%, consecutively.

The following data details theinternally classified loans by category as of December 31, 2007 (in thousands):

Total

Internally

Problem Loans %

Category

Outstanding

Classified

of Category

Residential Real Estate

 $

199,500   

 $

5,084   

2.55 %

Home Equity Lines

24,760   

150   

0.61 %

Ag. Real Estate

30,113   

45   

0.15 %

Agriculture Other

18,394   

84   

0.46 %

Commercial Real Estate

181,650   

3,511   

1.93 %

Commercial Other

52,634   

821   

1.56 %

Internally classified loans arethose loans that have certain characteristics or circumstances that warrantadditional credit quality monitoring and may require specific reserveallocations as determined in accordance with SFAS No. 114.

Real estate loans account forapproximately 79% of the total loan portfolio.  Within real estate loans,residential mortgage loans (including residential construction) are the largestcategory comprising 36% of total loans, which historically have low loan lossexperience.  Diversification of the real estate portfolio is a necessary anddesirable goal of the real estate loan policy.  In order to achieve andmaintain a prudent degree of diversity, given the composition of the marketarea and the general economic state of the market area, Bancshares will striveto maintain real estate loan portfolio diversification.  Risk monitoring ofcommercial real estate concentrations is performed in accordance withregulatory guidelines and includes assessment of risk levels of various types ofcommercial real estate and review of ratios of various concentrations ofcommercial real estate as a percentage of capital.  

POLICY GUIDELINES

Loan Administration sets policyguidelines approved by the Board of Directors regarding portfolio diversificationand underwriting standards. Loan policy also includes board-approved guidelinesfor collateralization, loans in excess of loan to value ("LTV") limits, maximumloan amount, and maximum maturity and amortization period for each loan type. Policy guidelines for loan to value ratios and maturities related to variouscollateral are as follows:

Collateral

Max.  Amortization

Max LTV

Real Estate

Various (see discussion)

Various (see discussion)

Equipment**

5 Years

75%

Inventory

5 Years

50%

Accounts Receivable

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 purchaseor carry same shall be 50%.

**New farm equipment can beamortized over seven years.

-19-

Bancshares' policy furthermanages risk in the real estate portfolio by adherence to supervisory limits inregards to loan to value percentages, as designated by the followingcategories:

Loan Category

 

LTV Limit

Raw Land

65%

Land Development or Farmland

75%

Construction:

 Commercial, Multi-Family, and Other Non-Residential

80%

 1-4 Family Residential

80%

Improved Property

80%

Owner-Occupied 1-4 Family and Home Equity

80%

Home Equity Lines

90%

Non-Owner Occupied 1-4 Family Residential

75%

Multi-family construction loansinclude loans secured by cooperatives and condominiums.  

On an approved exception basis,loans may be approved in excess of the LTV limits, 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 65% of the Bank's total capital; and  
- Provided further that the     aggregate portion of these loans in excess of the LTV limits that are     classified as commercial, agricultural, multi-family or non-1-to-4 family     residential property shall not exceed 30% of the Bank's total capital.

AMORTIZATION SCHEDULES

Loan policy requires every loanto have a documented repayment arrangement.  While reasonable flexibility isnecessary to meet credit needs of customers, in general all loans should berepaid within the following time frames:

Loan Category

Amortized Period

Raw Land

10 years

Construction

1 year

Commercial, Multi-family, and Other Non-residential

20 years

1-4 Family Residential

20 years

Improved Property Farmland

20 years

Owner-occupied 1-4 Family and Home Equity

20 years

AVERAGE LOAN YIELDS

The average yield on loans of theBank for the years indicated are as follows:

2007 - 7.98%

2006 - 7.65%

2005 - 6.86%

2004 - 6.30%

2003 - 6.87%

The aggregate amount of unusedguarantees, commitments to extend credit and standby letters of credit wasapproximately $128 million at year end.  Other information in reference tocommitments and standby letter of credits is included in Note 18 of theConsolidated Financial Statements included in Item 8 of this report.

LOAN MATURITIES

Contractual maturities of loansas of December 31, 2007, are as follows:

** **

** **

** **

**Due After**

** **

** **

** **

**Due in One**

** **

**One Year but**

** **

**Due After**

** **

**Year or Less**

** **

**Within Five  Years**

** **

**Five Years**

** **

** **

** **

**(in thousands)**

** **

** **

Real Estate

 $

161,939   

 $

216,440   

 $

81,971   

Commercial, Financial

 and Agricultural

 $

46,120   

 $

35,987   

 $

5,076   

All Other Loans

 $

11,098   

 $

24,024   

 $

1,984   

TOTALS

 $

219,157   

 $

276,451   

 $

89,031   

The degree of interest rate risk to which a bank issubjected can be controlled through a well-defined funds management program. Bancshares controls interest rate risk by matching assets and liabilities,better explained by employing interest-sensitive funds in assets that are alsointerest sensitive.  Overall, Bancshares remains in a fairly neutral positionin terms of interest rate risk as evidenced by flat net interest margins duringa three-year period in which federal funds rates increased 425 basis points andthen rates began decreasing in fourth quarter 2007.  At year-end 2007, Bancsharesis slightly asset-sensitive which means that assets re-price at a faster ratethan liabilities.  Thus, in a rising rate environment (with a normal yieldcurve) net interest income would improve, while a declining rate environmentwould result in decreased interest rate margins and net interest income. Approximately $302 million or 52% of total loans will either re-price or matureover the next twelve months, while $117 million or 20% of total loans willre-price or mature after one year, but less than three years.  Approximately$134 million or 23% of total loans will re-price or mature after three years,but less than five years.  Only $32 million or approximately 5% of outstandingloans have maturities or re-pricing dates of greater than five years. 

-20-

NON-PERFORMING LOANS

Non-accrual and Past Due Loansand Foreclosed Properties and related ratios as of December 31 for each of theyears presented are as follows: 

**2007**

** **

**2006**

** **

**2005**

** **

**2004**

** **

**2003**

Non-Accrual Loans

 $

1,678   

 $

371   

 $

1,524   

 $

1,581   

 $

1,174   

Foreclosed Property Other Real Estate,  

2,302   

1,815   

129   

337   

535   

Other Repossessed Assets

-   

-   

-   

2   

-   

Loans and Leases 90 Days Past Due and Still

 Accruing Interest

204   

945   

431   

798   

223   

Total Non-Performing Loans and Other Assets

 $

4,184   

 $

3,131   

 $

2,084   

 $

2,718   

 $

1,932   

Non-Performing Assets as a Percent of Loans and

 Leases Plus Foreclosed Property at End of Year

0.71 %

0.57 %

0.38 %

0.51 %

0.39 %

Allowance as a Percent of:

 Non-Performing Assets

151.24 %

198.37 %

327.74 %

229.54 %

316.97 %

 Gross Loans

1.08 %

1.13 %

1.25 %

1.16 %

1.25 %

 Addition to Reserve as a Percent of Charge-Offs

76.09 %

44.41 %

167.56 %

90.44 %

237.80 %

 Loans and Leases 90 days Past Due as a Percent of

     Loans and Leases at Year-End

0.32 %

0.24 %

0.36 %

0.44 %

0.04 %

 Recoveries as a Percent of Gross Charge-Offs

34.58 %

15.34 %

25.95 %

20.66 %

55.38 %

Non-performing assets consist ofnon-accrual loans, restructured loans, foreclosed properties, and loans andleases 90 days past due and still accruing interest.  Non-performing assets asa percent of total loan portfolio at December 31, 2007, 2006 and 2005 were $4.1million or 0.71%, $3.1 million or 0.57%, and $2.1 million or 0.38% of totalloans plus foreclosed property, respectively.  Loans and leases 90 days pastdue and still accruing interest total $204,000 as of year end 2007 compared to$945,000 as of year-end 2006 and $431,000 as of year-end 2005.  The allowancefor loan loss as a percent of non-performing assets was 151%, 198%, and 328% asof December 31, 2007, 2006, and 2005, respectively.  The allowance as a percentof gross loans for the same time periods was 1.08%, 1.13% and 1.25%.  A verysmall number of problem credits have negatively impacted the ratios related tonon-performing assets as noted in the table above.  The most significantincrease is in other real estate and is the result of foreclosure in December2006 on a residential property with a current estimated fair market value of$1.45 million which has not been sold as of year end 2007.    

Categorization of a loan asnon-performing is not in itself a reliable indicator of probable loan losses. Policy states that the Bank shall not accrue interest or discount on (1) anyasset which is maintained on a cash basis because of deterioration in thefinancial position of the borrower, (2) any asset for which payment-in-full ofinterest or principal is not expected, or (3) any asset upon which principal orinterest has been in default for a period of 90 days or more unless it is bothwell secured and in the process of collection. For purposes of applying the 90days past due test for the non-accrual of interest discussed above, the date onwhich an asset reaches non-accrual status is determined by its contractualterm.  A debt is well secured if it is secured (1) by collateral in the form ofliens or pledges of real or personal property, including securities that have arealizable value sufficient to discharge the debt (including accrued interest)in full, considered to be proceeding in due course either through legal action,including judgment enforcement procedures, or, in appropriate circumstances, throughcollection efforts not involving legal action which are reasonably expected toresult in repayment of the debt or in its restoration to a current status. Loans that represent probable losses are adequately reserved for in theallowance for loan losses.

Interest income on loans isrecorded on an accrual basis.  The accrual of interest is discontinued on allloans, except consumer loans, which become 90 days past due, unless the loan iswell secured and in the process of collection. Consumer loans which become pastdue 90 to 120 days are charged to the allowance for loan losses.  The grossinterest income that would have been recorded for the twelve months endingDecember 31, 2007 if all loans reported as non-accrual had been current inaccordance with their original terms and had been outstanding throughout theperiod is $103,000 compared to $25,000 for the same period in 2006.  Loans onwhich terms have been modified to provide for a reduction of either principalor interest as a result of deterioration in the financial position of theborrower are considered to be "Restructured Loans".  Bancshares hasrestructured loans totaling approximately $1.6 million, of which $609,000 is onnon-accrual status as of December 31, 2007.  

Certain loans contained on theInternally Classified Problem Loan List are not included in the listing ofnon-accrual, past due or restructured loans. Management is confident that,although certain of these loans may pose credit problems, any probable loss hasbeen provided for by specific allocations to the Loan Loss Reserve Account. Loan officers are required to develop a "Plan of Action" for eachproblem loan within their portfolio. Adherence to each established plan ismonitored by Loan Administration and re-evaluated at regular intervals foreffectiveness.

LOAN LOSS EXPERIENCE &RESERVE FOR LOAN LOSSES

**December 31,**

**2007**

** **

**2006**

** **

**2005**

** **

**2004**

** **

**2003**

Average Net Loans Outstanding

 $

560,229   

 $

554,219   

 $

536,315   

 $

511,946   

 $

470,868   

Balance of Reserve for Loan Losses

 at Beginning of Period

6,211   

6,830   

6,239   

6,124   

5,653   

Loan Charge-Offs

(1,096)

(1,538)

(632)

(1,036)

(919)

Recovery of Loans Previously Charged Off

379   

236   

164   

214   

509   

Net Loans Charged Off

(717)

(1,302)

(468)

(822)

(410)

Additions to Reserve Charged to Expense

834   

683   

1,059   

937   

975   

Changes Incident to Mergers

-   

-   

-   

-   

(94)

Balance at End of Period

 $

6,328   

 $

6,211   

 $

6,830   

 $

6,239   

 $

6,124   

Ratio of Net Charge-Offs to Average Net

 Loans Outstanding

0.13 %

0.23 %

0.09 %

0.16 %

0.09 %

-21-

The preceding table summarizesactivity posted to the Loan Loss Reserve Account for the past five years.  Thesummary includes the average net loans outstanding; changes in the reserve forloan losses arising from loans charged off and recoveries on loans previouslycharged off; additions to the reserve which have been charged to operatingexpenses; and the ratio of net loans charged off to average loans outstanding. Changes to the Reserve Account for the year just ended consisted of (1) loanscharged off of $1.1 million, (2) recovery of loans previously charged off$379,000, and (3) additions to reserves totaling $834,000.  Current yearcharge-offs are spread among various markets served by the Bank.  Thecharge-offs and increase in non-performing assets do not appear to indicatematerial negative trends within a specific pool of loans or within a specificmarket.  Increased provision for loan losses in 2007 compared to 2006 is aresult of loan growth in 2007 and adequacy of current level of reserves. Provision for loan losses in excess of net charge-offs in 2007 is primarilyrelated to additional provision considered necessary in relation to loan growth. 

The following table identifiescharge-offs and recoveries by category for the years presented (in thousands):

**2007**

** **

**2006**

** **

**2005**

** **

**2004**

** **

**2003**

 
Charge-offs:

 
 Domestic:

 
    Commercial, Financial & Agricultural

 $

(227)

 $

(447)

 $

(139)

 $

(459)

 $

(139)

    Real Estate-Construction

(107)

-   

(242)

(115)

-   

 
    Real Estate-Mortgage

(406)

(685)

(62)

(138)

(398)

 
    Installment Loans to Individuals & Credit Cards

(356)

(406)

(189)

(324)

(382)

 
        Total Charge-offs

 $

(1,096)

 $

(1,538)

 $

(632)

 $

(1,036)

 $

(919)

 
 
Recoveries:

 
 Domestic:

 
    Commercial, Financial & Agricultural

 $

124   

 $

76   

 $

62   

 $

66   

 $

142   

 
    Real Estate-Construction

22   

-   

10   

3   

-   

 
    Real Estate-Mortgage

148   

51   

4   

37   

237   

 
    Installment Loans to Individuals & Credit Cards

85   

109   

88   

108   

130   

 
        Total Recoveries

 $

379   

 $

236   

 $

164   

 $

214   

 $

509   

 
             Net Charge-offs

 $

(717)

 $

(1,302)

 $

(468)

 $

(822)

 $

(410)

 
An analysis of the allocation ofthe Allowance for Loan Losses is made on a fiscal quarter at the end of themonth, (February, May, August, and November) and reported to the board at itsmeeting immediately preceding quarter-end.  The allowance for loan losses isestimated using methods consistent with GAAP as well as regulatory guidance onthe allowance.  Such guidance considered specifically includes but is notlimited to SFAS 114 and 118 and the Interagency Policy Statement on theAllowance for Loan and Lease Losses issued December 13, 2006.  

The evaluation of the adequacy ofthe allowance includes the identification of impaired loans and allocation ofspecific reserves if considered necessary on a case-by-case basis forsignificant loans.  A loan is impaired when it is probable that a creditor willbe unable to collect all amounts due of principal and interest according to theoriginal contractual terms of the loan. Impairment occurs under the followingcircumstances:  (1) Impairment of a loan shall exist when the present value ofexpected future cash flows discounted at the loans effective interest rateimpede full collection of the contract; and (2) Fair value of the collateral,if the loan is collateral dependent, indicates unexpected collection of fullcontract value.  Specific reserve allocations shall be made to for loans foundto be collateral or interest cash flow deficient.  In addition, an allowanceshall be determined for pools of loans including all other criticized assets aswell as small homogeneous loans managed by delinquency. Impairment decisionsare reported to the Board of Directors and in external reports as required byregulations.  Income recognition from impaired loans is determined in accordancewith GAAP, as well as financial institution regulatory guidance.

Credit risk management proceduresinclude assessment of loan quality through use of an internal loan ratingsystem.  Each loan is assigned a rating upon origination and the rating may berevised over the life of the loan as circumstances warrant.  The rating systemutilizes eight major classification types based on risk of loss.  

Credit risk management processalso includes an annual review of a minimum of 70% of the gross portfolio lessinstallment loans.  The loan review function is independent of the lendingprocess itself and results of loan review are reported to the Board.  Inaddition, any single note or series of notes directly or indirectly related toone borrower which equals 25% of the Bank's legal lending limit are included inthe review.  The results of loan review as well as current portfolio mix byrating are incorporated into the quarterly evaluation of the allowance for loanlosses.

Examples of factors taken intoconsideration during assessment of loan quality for rating purposes, forindependent loan review, and for evaluation of the adequacy of the allowancefor loan losses include but are not limited to the following: 

Economic conditions, managementexperience and depth, credit history, business conditions, sources ofrepayment, debt service coverage ratios, financial condition of borrower(s)and/or guarantor(s), deposit relationship, payment history, collateral values,adherence to loan policy and adherence to loan documentation requirements.

OTHER REAL ESTATE OWNED

The book value of other realestate ("ORE") owned was $2.3 million at December 31, 2007 compared to $1.8million at December 31, 2006 compared to $129,000 in 2005.  ORE issignificantly higher in 2006 and 2007 as a result of foreclosures on a smallvolume of significant balance loans.  Management continues efforts to liquidateORE.  

In December 2006, the Bankforeclosed on one residential property in Shelby County valued at approximately$1.5 million. This residence requires modifications and additional constructionto reach a point of marketability to be sold at or near its market value.  Suchmodifications began in 2007 and are expected to be completed in 2008.  

Accounting for adjustments to thevalue of ORE when recorded subsequent to foreclosure is accomplished on thebasis of an independent appraisal.  The asset is recorded at the time offoreclosure at the lesser of its appraised value or the loan balance.  Anyreduction in value is charged to the allowance for loan losses.  All other realestate parcels are appraised annually and the carrying value adjusted toreflect the decline, if any, in its realizable value.  Such adjustments arecharged directly to expense.

-22-

COMPOSITION OF DEPOSITS

The average amount of depositsand rates paid on such deposits are summarized for the three years endedDecember 31, 2007, 2006 and 2005:

** **

**2007**

** **

**2006**

** **

**2005**

** **

**Average**

** **

**Average**

** **

**Average**

** **

**Average**

** **

**Average**

** **

**Average**

** **

**Balance**

** **

**Rate**

** **

**Balance**

** **

**Rate**

** **

**Balance**

** **

**Rate**

Non-Interest Bearing Demand Deposits

 $

93,413   

0.00 %

 $

90,360   

0.00 %

 $

78,586   

0.00 %

Savings Deposits

 $

201,506   

1.88 %

 $

197,115   

1.66 %

 $

190,106   

1.18 %

Time Deposits

 $

372,109   

4.79 %

 $

365,839   

4.26 %

 $

331,973   

3.09 %

    Total Deposits

 $

667,028   

3.24 %

 $

653,314   

2.88 %

 $

600,665   

2.08 %

Market share data for theTennessee Counties served by the Bank is included in Item 1 Banking Business ofthis report.  As noted in Item 1, the Bank is a market share leader in six ofthe seven counties it serves with 19.32% of the market share.  Shelby County is the one market that the Bank participates in but is not the leader due tothe diversity and large number of institutions in that market as well as thelength of time that the Bank has been competing there.   Bancshares' averagedeposits for 2007 were $667 million at an average rate of 3.24% compared to$653 million at an average rate of 2.88% in 2006 and $601 million at an averagerate of 2.08% in 2005.  The increase in the average cost of deposits is due tothe impact of current rate environment and competitive factors on time andsavings deposits.  The current market and competitive environment has resultedin fierce competition in pricing of interest-bearing deposit products over thelast three years.  The Bank does not compete solely on price as strategies arefocused more on customer relationships that attract and retain core depositcustomers rather than time deposits.

Growth in deposits slowed to 3.7%in 2007 compared to 4.8% growth in 2006. Core deposits serve as a source ofliquidity for Bancshares.  Consistent with strategies to increase coredeposits, average deposits balances in the previous table illustrate growth ofcore deposits in both demand and savings categories.  In the current rateenvironment, all markets have demanded a competitively priced interest-bearingtransaction account.  As a result evidenced in our Statements of Cash Flows,transaction deposit accounts increased approximately $14 million in 2007, $9million in 2006 and $19 million in 2005.  Over the past three years, coredeposits strategies have been focused primarily on two interest-bearingtransaction accounts, Wall Street and First Rate accounts.  These two accountsaccounted for approximately half of savings deposits for each of the past threeyears.  In fourth quarter of 2007, the Bank introduced a new electronic basedinterest-bearing transaction account called E-Solutions Plus account which haddeposits totaling approximately $5 million as of year end 2007.  The Bank alsocontinues to offer free checking to attract and retain deposit relationships.

Time deposits grew in excess of$20 million in 2005 and 2006 but slowed to approximately $10.5 million in 2007. Time deposits over $100,000 and brokered time deposits comprise 52.2% of totaltime deposits as of year end 2007 compared to 51.8% as of year-end 2006 and51.5% at year-end 2005.  Approximately 90% of over $100,000 time deposits willreprice over the next twelve months as a result of established strategies todeal with the current competitive market and rate environment.  

MATURITY DISTRIBUTION OF TIMEDEPOSITS IN AMOUNTS OF $100,000 AND OVER

Deposits over $100,000 decreased$21.5 million or 11% from 2006 to 2007.  The following table sets forth thematurity distribution of Certificates of Deposit and other time deposits of$100,000 or more outstanding on December 31, 2007 and 2006 (in thousands): 

**2007**

** **

**2006**

**Amount**

** **

**Percent**

** **

**Amount**

** **

**Percent**

Maturing in:

   3 Months or Less

 $

46,427   

27.29 %

 $

48,963   

25.55 %

   Over 3 Through 12 Months

112,743   

66.26 %

124,604   

65.02 %

   Over 12 Months

10,972   

6.45 %

18,081   

9.43 %

      Total

 $

170,142   

100.00 %

 $

191,648   

100.00 %

OTHER BORROWINGS

In addition to deposits,Bancshares used a combination of short-term and long-term borrowings tosupplement its funding needs.  Short-term borrowings consist of a Treasury, Tax& Loan demand note, federal funds purchased and short term advances fromthe FHLB.  The short-term borrowings table below reflects the maximum amount ofborrowings at any month end during the respective years.  Short-term borrowingsare used to manage fluctuations in liquidity based on seasonality of agriculturalproduction loans and other factors.  The maximum amount of borrowings in anygiven month increased in 2007 compared to 2006 and 2005 due to increased loangrowth in 2007 as compared to the prior two years.  See also the Short TermBorrowings footnote included in the Consolidated Financial Statements in Item 8of this report.  

The following presents short-termborrowing balances at year end, maximum borrowings at month end during the yearand average cost for the periods presented (in thousands):

**2007**

**2006**

**2005**

Amount Outstanding-End of Period

 $

11,100   

 $

1,000   

 $

1,000   

Maximum Amount of Borrowings at

 Any Month End During the Year

 $

22,400   

 $

13,155   

 $

26,217   

Year-to-Date Daily Average 

 $

8,804   

 $

4,501   

 $

6,527   

Weighted Average Cost

5.30 %

4.98 %

3.54 %

Long-term debt at the holdingcompany level consists of a revolving line of credit with First Tennessee Bankand trust-preferred debt.  Debt at Bancshares has variable rates and consistsof Correspondent debt and Trust Preferred debt affiliated with a prioracquisition.  Bancshares strategically reduced its debt by approximately$828,000 during 2007.      

-23-

The Bank's long-term debtconsists of advances from the FHLB.  In 2006, as a result of slow loan growth,solid deposit growth and inverted yield curve, the Company reduced long-termdebt at the Bank by $17.5 million.  As loan growth increased in 2007, oneadditional advance of $5 million was issued increasing the volume to $52.1million as of year end 2007.  Average volume of FHLB advances for 2007 was$48.8 million at an average rate of 5.58% compared to average volume of $58million at an average rate of 5.67% in 2006 and  $73 million at an average rateof 4.87% in 2005. The average remaining maturity for FHLB long-term borrowingsis 2 years.  FHLB borrowings are comprised of fixed rate positions ranging from3.99% to 6.55%.  Most of the FHLB borrowings have quarterly call features andmaturities range from 2008 to 2011.  Approximately 70% or $36 million willmature or is expected to be called in 2010.  Most of the advances with callfeatures when called offer the option to pay off the advance without penalty orto have the advance reprice at a variable rate tied to the 90-day LIBOR.  One$5 million advance requires repayment if the call feature is exercised.  Underthe current and forecasted rate environments, borrowings with call features inplace are not likely to be called in the next 12 months and therefore are notincluded in current liabilities on the Consolidated Balance Sheet included inItem 8 of this report.  Liquidity management and long term borrowings arediscussed within the Liquidity section of this report.       

The following presents averagevolumes, rates, maturities, and re-pricing frequencies for long-term debt forthe year ended December 31, 2007 (in thousands):

**Average**

**Average**

**Average**

**Repricing**

**Volume**

**Rate**

**Maturity**

**Frequency**

FHLB Borrowings

 $

48,763   

5.58%

3 Years

Fixed

Revolving Line of Credit

1,250   

7.04%

1 year

Variable

Trust Preferred Debt

10,310   

7.64%

25 years

Variable

CAPITAL RESOURCES

The following presents return onequity and assets for the years presented:

2007

2006

2005

2004

2003

Percentage of Net Income to:

   Average Total Assets

1.08%

1.10%

1.10%

1.08%

1.09%

   Average Shareholders Equity

12.79%

13.88%

13.71%

13.56%

13.88%

Percentage of Dividends Declared

 to Net Income

45.93%

46.04%

47.03%

50.83%

50.49%

Percentage of Average Equity

 to Average Assets

8.45%

7.93%

8.01%

7.95%

7.91%

Total Capital (excluding Reservefor Loan Losses) as a percentage of total assets is presented in the followingtable for years indicated: 

2007

2006

2005

2004

2003

8.56%

8.36%

7.80%

7.92%

7.86%

Total capital increased 7.96% to$75.0 million in 2007 from $69.5 million at year-end 2006.  Growth in capitalduring 2007 is from undistributed net income from the Bank coupled withincreases in other comprehensive income from improved fair market values ofavailable-for-sale investments securities.  Adjustments to capital resultingfrom changes in market value of available-for-sale securities and cash flowhedge are made quarterly and contributed $836,000 to the growth in 2007. Bancshares has historically maintained capital in excess of minimum levelsestablished by regulation and reflects continuous improvement when comparingprevious years.  The risk based capital ratio of 12.5% percent at December 31,2007 was significantly in excess of the 8 percent mandated by regulation.  Thisratio has been maintained in the 10-12 percent range over the past threeyears.  Total capital as a percentage of total assets was 8.56%, 8.36%, and7.80% at December 31, 2007, 2006 and 2005, respectively.  

Risk-based capital focusesprimarily on broad categories of credit risk and incorporates elements oftransfer, interest rate and market risks. The calculation of risk-based capitalratio is accomplished by dividing qualifying capital by weighted risk assets inaccordance with financial institution regulatory guidelines.  The minimum risk-basedcapital ratio is 8.00%.  At least one-half or 4.00% must consist of corecapital (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 ofcommon shareholders' equity, qualified perpetual preferred stock and minorityinterests in consolidated subsidiaries.  Tier 2-capital/supplementary capitalmay consist of the allowance for loan and lease losses, perpetual preferredstock, term-subordinated debt, and other debt and stock instruments.

Dividends for 2006 and 2007 were$1.16 per share compared to $1.12 per share in 2005.  Bancshares continues itstrend over the last several years with dividend payout ratio and dividend yieldin excess of average reported for the Southeast Bank Group as tracked by MercerCapital.  The dividend payout ratio is 45.93% in 2007, 46.04% in 2006 and47.06% in 2005.  The projected payout ratio for 2008 is in the range of 45-50percent.  Dividend payout for Southeast Bank Group for 2007 was 43.14%.  Thedividend yield in 2007 is 3.31% compared to 3.52% in 2006.  The dividend yieldfor Southeast Bank Group is 3.30% for 2007.  

As of year-end 2007, there areapproximately $12 million of retained earnings available for the payment offuture dividends from the Bank to Bancshares.  Banking regulations requirecertain capital levels to be maintained and may limit dividends paid by theBank to Bancshares or by Bancshares to its shareholders.  These restrictionspose no practical limit on the ability of the Bank or Bancshares to paydividends at historical levels. 

Bancshares has repurchasedapproximately 92,800 shares of its common stock and the treasury stock hasweighted average cost basis of $26.36 per share.  Approximately 7,700 treasuryshares were repurchased during 2007 at a weighted average cost of $35.07 pershare.  Also, approximately 400 shares of treasury stock were sold in 2006 at aweighted average price of $36.10 per share.  There are no publicly announcedplans or programs to repurchase shares in place during the periods presented orsubsequently primarily due to Bancshares current strategy to reduce debt at theholding company level.  

AGGREGATE CONTRACTUAL OBLIGATIONSAND OFF BALANCE SHEET ARRANGEMENTS

Contractual Obligations are due as follows:

Total

< 1 Year

1-3 Years

3-5 Years

> 5 Years

Unfunded Loan Commitments

 $

122,573   

 $

122,573   

 $

-   

 $

-   

 $

-   

Standby Letters of Credit

5,925   

5,925   

-   

-   

-   

Long Term Debt*

63,165   

1,366   

35,588   

10,235   

15,976   

Capital Lease Obligations

-   

-   

-   

-   

-   

Operating Leases

480   

211   

240   

29   

-   

Purchase Obligations

-   

-   

-   

-   

-   

Other Long Term Liabilities

-   

-   

-   

-   

-   

   Total

 $

192,143   

 $

130,075   

 $

35,828   

 $

10,264   

 $

15,976   

                *Long-term debtis presented as principal only excluding interest.

Except for unfunded loan commitments and standby lettersof credit, the Bank does not materially engage in off balance sheet activitiesand does not anticipate material changes in volume going forward.

Notes 13 and 18 of theConsolidated Financial Statements included in Item 8 of this report reflectlong term obligations and off balance sheet risk.
-24-RECENTLY ISSUED ACCOUNTING STANDARDS
**Fair Value Measurements**

In September 2006, FASB issuedStatement of Financial Accounting Standards No. 157, "Fair Value Measurements" (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuringfair value in GAAP and expands disclosures about fair value measurements. Thisstatement was issued to address the need for increased consistency andcomparability in fair value measurements and for expanded disclosures aboutfair value measurements. The statement emphasizes that fair value measurementshould be determined based on assumptions that market participants would use inpricing the asset or liability. Also, SFAS 157 establishes a fair valuehierarchy that prioritizes information used to develop those assumptions. OnFebruary 12, 2008, FASB issued a Staff Position which delays the effective dateof SFAS No. 157 until fiscal years beginning after November 15, 2008 fornonfinancial assets and nonfinancial liabilities, except for items that arerecognized or disclosed at fair value in the financial statements on arecurring basis (at least annually). Adoption of this statement is notexpected to materially impact Bancshares' Consolidated Financial Statements.

**Accounting for Deferred Compensation and PostretirementBenefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements**

In September 2006, FASB ratifiedEmerging Issues Task Force (EITF) Issue No. 06-4, "Accounting for DeferredCompensation and Postretirement Benefit Aspects of Endorsement Split-DollarLife Insurance Arrangements" (EITF 06-4). EITF 06-4 addresses accounting forsplit-dollar life insurance arrangements after the employer purchases a lifeinsurance policy on the covered employee. This EITF states that an obligationarises as a result of a substantive agreement with an employee to providefuture postretirement benefits. Under this issue, the obligation is notsettled upon entering into an insurance arrangement. Since the obligation isnot settled, a liability should be recognized in accordance with applicableauthoritative guidance. EITF 06-4 is effective for fiscal years beginningafter December 15, 2007. The adoption of EITF 06-4 will have a material impacton Bancshares' Consolidated Financial Statements. See Subsequent Event footnoteto Consolidated Financial Statements for additional information regardingimpact of adoption of this pronouncement.
The Fair Value Option for Financial Assets and Financial Liabilities
In February 2007, FASB issuedSFAS No. 159 "The Fair Value Option for Financial Assets and Financial Liabilities"to permit entities to choose to measure certain financial instruments at fairvalue. This statement is expected to expand the use of fair value measurementwith the intent to improve financial reporting by providing entities with theopportunity to mitigate volatility in reported earnings caused by measuringrelated assets and liabilities differently without having to apply complexhedge accounting provisions. SFAS No. 159 is effective as of the beginning ofan entity's first fiscal year that begins after November 15, 2007. Earlyadoption is permitted as of the beginning of a fiscal year that begins on orbefore November 15, 2007, provided the entity also elects to apply theprovisions of FASB Statement No. 157, Fair Value Measurements. Bancshares doesnot anticipate adoption of this pronouncement to result in a material effect onthe Company's Consolidated Financial Statements.
Noncontrolling Interests in Consolidated Financial Statements - an amendmentof ARB No. 51
In December 2007, FASB issuedStatement of Financial Accounting Standards No. 160, "Noncontrolling Interestsin Consolidated Financial Statements - an amendment of ARB No. 51" to improve therelevance, comparability, and transparency of financial information that areporting entity provides in its consolidated financial statements. Thestandard establishes reporting requirements for ownership interests insubsidiaries held by parties other than the parent, net income attributable tothe parent and to the noncontrolling interest, changes in parent's ownershipinterest, initially recording any retained noncontrolling equity investment atfair value rather than carrying amount of retained investment, and sufficientdisclosures that clearly identify and distinguish between the interests of theparent and the interests of noncontrolling owners. This Statement is effectivefor fiscal years, and interim periods within those fiscal years, beginning onor after December 15, 2008 (that is, January 1, 2009, for entities withcalendar year-ends).
Business Combinations-Revised
In December 2007, FASB revised Statementof Financial Accounting Standards No. 141, "Business Combinations." ThisStatement establishes principles and requirements for how the acquirer: (a)recognizes and measures in its financial statements the identifiable assetsacquired, the liabilities assumed, and any noncontrolling interest in theacquiree (b) recognizes and measures the goodwill acquired in the businesscombination or a gain from a bargain purchase and, (c) determines whatinformation to disclose to enable users of the financial statements to evaluatethe nature and financial effects of the business combination. The effectivedates of this statement are the same as SFAS No. 160 described above.

-25-
ITEM 7A.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK
LIQUIDITY AND INTEREST RATESENSITIVITY

Liquidity is managed in a manner to ensure theavailability of ample funding to satisfy loan demand, fund investmentopportunities, and large deposit withdrawals.  Primary funding sources forBancshares includes customer core deposits, FHLB borrowings, as well ascorrespondent bank and other borrowings.  Customer based sources accounted for86% of funding for the current year versus 87% for the prior year.  Borrowed fundsfrom the FHLB amounted to 6.5% ($52 million) of total funding at year-end 2007compared to 6.3 percent ($48 million) of total funding at year-end 2006.  TheBank had additional borrowing capacity of approximately $28 million with FHLBat year-end 2007.  The Bank also has lines of credit for federal fundspurchases totaling $52.5 million with four correspondent banks.  As of December31, 2007, the Bank held $23 million in short term Certificates of Deposit fromthe State of Tennessee and held $34 million in brokered Certificates ofDeposit, representing 4.93% of total deposits.  Brokered time deposits wereapproximately $31 million and 4.65% of total deposits as of year-end 2006. 

Bancshares' liquidity position isfurther strengthened by ready access to a diversified base of wholesaleborrowings which include lines of credit with the FHLB, FTN Financial, federalfunds purchased, securities sold under agreements to repurchase, Brokeredcertificates of deposit and others.  Bancshares has a line of credit with FirstTennessee Bank for $13 million earmarked for acquisitions and other financialneeds of the holding company with approximately $12 million available atyear-end 2007.  Bancshares has a crisis contingency liquidity plan to defendagainst any material downturn in the liquidity position.

When evaluating liquidity,comparison is made between funding needs and the current level of liquidity,plus liquidity that would likely be available from other sources. Thiscomparison provides a means for determining whether funds management practicesare adequate. Management should be able to manage unplanned changes in fundingsources, as well as react to changes in market conditions that could hinder theBank's ability to quickly liquidate assets with minimal loss.  Funds managementpractices are designed and implemented to ensure that Bancshares does notmaintain liquidity by paying up for funds or by relying unduly on wholesale orcredit-sensitive funding sources.  Office of the Comptroller of the Currencyhas established benchmarks to be used for guidelines in managing liquidity. Thefollowing areas are considered liquidity red flags:
- Significant increases in     reliance on wholesale funding.
- Significant increases in large     certificates of deposit, brokered deposits, or deposits with interest     rates higher than the market.
- Mismatched funding - funding     long-term assets with short-term liabilities or short-term assets with     long-term liabilities.
- Significant increases in     borrowings.
- Significant increases in     dependence on funding sources other than core deposits.
- Reduction in borrowing lines by     correspondent banks.
- Increases in cost of funds.
- Declines in levels of core     deposits.
- Significant decreases in     short-term investments.

Liquidity is an ongoing concernof the Company's Funds Management Committee, which continues to seekalternative funding sources conducive to net interest margin strategies.  Thefollowing table reflects the liquidity position of the Bank as of December 31,2007 and 2006 in comparison to the OCC Liquidity Benchmarks.

OCC Liquidity  Benchmark

12/31/2007

 

12/31/2006

 

Short Term Liabilities/ Total Assets > 20%

21.93%

20.12%

On Hand Liquidity to Total Liabilities < 8%

6.72%

8.56%

Loan to Deposits < 80%

84.05%

82.91%

Wholesale Funds/Total Sources > 15%

16.39%

14.71%

Non Core Funding Dependence > 20%

67.09%

50.73%

The above comparison is onequantitative means of monitoring liquidity levels.  However, other quantitativeand qualitative factors are considered in the overall risk management processfor liquidity.  Such other factors evaluated by management include but are notlimited to diversification of funding sources, degree of reliance on short-termvolatile funding sources, deposit volume trends and stability of deposits.  Thereare no known trends or uncertainties that are likely to have a material effecton Bancshares' liquidity or capital resources. There currently exist norecommendations by regulatory authorities, which, if implemented, would havesuch an effect.  There are no matters of which management is aware that havenot been disclosed.

Interest rate sensitivity varieswith different types of interest earning assets and interest-bearingliabilities.  Overnight federal funds, on which rates change daily, and loanswhich are tied to the prime rate are much more sensitive than long-terminvestment securities and fixed rate loans. The shorter-term interest sensitiveassets and liabilities are key to measurement of the interest sensitivity gap. Minimizing this gap is a continual challenge and a primary objective of theasset/liability management program.

Bancshares monitors and employsmultiple strategies to continuously manage interest rate risk and liquidity atacceptable levels.  Such strategies include but are not limited to use of FHLBborrowings, adjustment of re-pricing date of loans, use of interest rate swaps,and investments in mortgage back investments that enables the company to haveconstant cash inflows.  

The Company's interest rate riskposition is slightly asset sensitive at year-end 2007.  Thus, net interestmargins could benefit from a slight increase in rates and could be diluted bydecreases in rates over the next 12 months.  Bancshares' fairly neutralposition in terms of interest rate risk from December 2004 to December 2007 isevidenced by the following comparison of the federal funds rate compared to netyield on average earning assets:

Interest rate risk is separatedand analyzed according to the following categories of risk: (1) re-pricing (2)yield curve (3) option risk (4) price risk and (5) basis risk. Trading assetsare utilized infrequently and are addressed in the investment policy.  Anyunfavorable trends reflected in interest rate margins will cause an immediateadjustment to the Bank's gap position or asset/liability managementstrategies.  The following data schedule reflects a summary of Bancshares'interest rate risk using simulations. The projected 12-month exposure is basedon different rate movements (flat, rising, or declining).  In a rising ratecycle, non-maturity deposits will not re-price until a 100 basis point risetakes place.  In a declining rate cycle, non-maturity deposits will re-pricewith market conditions when deposits hit a floor position.  

-26-

The following condensed gapreport provides an analysis of interest rate sensitivity of earning assets andcosting liabilities.

**CONDENSED GAPREPORTCURRENT BALANCES****DECEMBER 31, 2007**

3-12

1-3

3-5

>5

Non

< 3 Months

Months

Years

Years

Years

Sensitive

Bal

 

Bal

 

Bal

 

Bal

 

Bal

 

Bal

 

Total

Assets:

Total Cash and Due

   From

 $

-  

 $

-  

 $

-  

 $

-  

 $

-  

 $

23,740  

 $

23,740  

Total Investments

7,180  

38,721  

51,973  

35,885  

54,957  

1,691  

190,407  

Total Fed Funds Sold

1,502  

-  

-  

-  

-  

-  

1,502  

Total Net Loans

190,124  

183,798  

162,821  

47,896  

-  

(6,328)

578,311  

Total Other Assets

-  

-  

-  

-  

-  

82,196  

82,196  

Total Assets

 $

198,806  

 $

222,519  

 $

214,794  

 $

83,781  

 $

54,957  

 $

101,299  

 $

876,156  

Liabilities:

Total Demand

 $

-  

 $

9,715  

 $

4,857  

 $

4,857  

 $

77,661  

 $

-  

 $

97,090  

Total Savings

129,623  

-  

13,626  

13,626  

55,968  

-  

212,843  

Total Time

42,152  

310,993  

18,375  

8,964  

178  

-  

380,662  

Total Deposits

171,775  

320,708  

36,858  

27,447  

133,807  

-  

690,595  

Total Borrowings

45,949  

15,346  

36,113  

9,500  

-  

-  

106,908  

Other Liabilities

-  

-  

-  

-  

-  

3,622  

3,622  

Total Other Liabilities

45,949  

15,346  

36,113  

9,500  

-  

3,622  

110,530  

Total Liabilities

217,724  

336,054  

72,971  

36,947  

133,807  

3,622  

801,125  

Total Equity

-  

-  

-  

-  

-  

75,031  

75,031  

Total Liabilities/Equity

 $

217,724  

 $

336,054  

 $

72,971  

 $

36,947  

 $

133,807  

 $

78,653  

 $

876,156  

Period Gap

(18,918)

(113,535)

141,823  

46,834  

(78,850)

22,646  

-  

Cumulative Gap

(18,918)

(132,453)

9,370  

56,204  

(22,646)

-  

-  

RSA/RSL

91.31 %

66.22 %

294.36 %

226.76 %

41.07 %

128.79 %

0.00 %

-27-

**CONDENSED GAPREPORTCURRENT BALANCESDECEMBER 31, 200****6**

3-12

1-3

3-5

>5

Non

< 3  Mon

  Months

Years

Years

Years

  Sensitive

  Bal

 

  Bal

 

  Bal

 

  Bal

 

  Bal

 

  Bal

 

  Total

Assets:

Total Cash and Due

   From

 $

-  

 $

-  

 $

-  

 $

-  

 $

-  

 $

19,597  

 $

19,597  

Total Investments

7,959  

22,519  

57,792  

42,036  

46,794  

276  

177,376  

Total Fed Funds Sold

12,948  

-  

-  

-  

-  

-  

12,948  

Total Net Loans

222,300  

113,234  

163,322  

53,427  

-  

(6,211)

546,072  

Total Other Assets

-  

-  

-  

-  

-  

75,427  

75,427  

Total Assets

 $

243,207  

 $

135,753  

 $

221,114  

 $

95,463  

 $

46,794  

 $

89,089  

 $

831,420  

Liabilities:

Total Demand

 $

-  

 $

-  

 $

-  

 $

-  

 $

-  

 $

95,048  

 $

95,048  

Total Savings

122,985  

-  

25,942  

27,681  

24,261  

-  

200,869  

Total Time

87,359  

234,332  

39,573  

8,264  

618  

-  

370,146  

Total Deposits

210,344  

234,332  

65,515  

35,945  

24,879  

95,048  

666,063  

Total Borrowings

35,423  

6,437  

10,159  

40,500  

-  

-  

92,519  

Other Liabilities

-  

-  

-  

-  

-  

3,340  

3,340  

Total Other Liabilities

35,423  

6,437  

10,159  

40,500  

-  

3,340  

95,859  

Total Liabilities

245,767  

240,769  

75,674  

76,445  

24,879  

98,388  

761,922  

Total Equity

-  

-  

-  

-  

-  

69,498  

69,498  

Total Liabilities/Equity

 $

245,767  

 $

240,769  

 $

75,674  

 $

76,445  

 $

24,879  

 $

167,886  

 $

831,420  

Period Gap

(2,560)

  (105,016)

145,440  

19,018  

21,915  

  (78,797)

-  

Cumulative Gap

(2,560)

  (107,576)

37,864  

56,882  

78,797  

-  

-  

RSA/RSL

98.96 %

56.38 %

292.19 %

124.88 %

188.09 %

53.07 %

0.00 %

NOTES TO THE GAP REPORTS

1.             The gap report reflects the interest sensitivity positions during a flatrate environment.  Time frames could change depending on whether rates rise orfall. 

2.             Re-pricing overrides maturities in various time frames. 

3.             Demand deposits, considered to be core, are placed in the last timeframe due to lack of interest sensitivity. 

4.             Savings accounts, also considered core, are split into various timeframes based on characteristics of the various accounts and pricing strategiesrelated to those accounts.  In a flat rate environment, regular savingsaccounts tend not to re-price or liquidate and become price sensitive onlyafter a major increase in the 6-month CD rate.  However, First Rate and WallStreet deposit products are more rate sensitive and therefore placed in thevariable category of less than three months.  

5.             Simulations are utilized to reflect the impact of multiple ratescenarios on net interest income at risk, net income at risk and economic valueof equity at risk.  Strategies are implemented to increase net interest income, while always considering the impact on interest rate risk.  Overall, theBankmanages the gap between rate sensitive liabilities to expand and contract withthe rate cycle phase.  The Bank's Funds Management Committee ("FMC") isresponsible for implementing and monitoring procedures to improve net interestincome through volume increases and better pricing techniques. Long term fixedrate positions will be held to less than 25% of assets, unless they are fundedwith matched deposits or borrowings.  

-28-

Bancshares exposure to interestrate risk is well within established policy limits as noted in the tablebelow.  

Interest Rate RiskDecember 2007(*In Thousands)*

Tier 1 Capital                              $72,198

Projected 12-MonthExposure

Rate

**POLICY**

Moves In

Current

Possible

% of Net Int

% of Net Int

Net Interest  Income Levels

Basis Pts

 

Position

 

Scenarios

 

Variance

 

Income

 

Income

Declining 2

(200)

 $

28,202   

 $

25,999   

 $

(2,203)

-7.81%

-20.00%

Declining 1

(100)

28,202   

27,314   

(888)

-3.15%

-10.00%

**Flat**

**0**

** **

**28,202 **

** **

**28,202 **

** **

**-   **

** **

**0.00%**

** **

**0.00%**

Rising 1

100  

28,202   

28,518   

316   

1.12%

-10.00%

Rising 2

200  

28,202   

28,699   

497   

1.76%

-25.00%

**Notes:**Net interest income as presented in the preceding table assumes that interestrates would change immediately within the total portfolio, a scenario whichwould reflect a worst case position and is unlikely to happen.  

Subsequent to year-end 2007, theFederal Open Market Committee ("FOMC") decreased rates 125 basis points inJanuary 2008.  As the Bank is slightly asset sensitive at year-end 2007, suchrate cuts are likely to result in a small negative trend in net interestmargins in 2008.  However, the Company's Funds Management Committee continuesto monitor and implement strategies as necessary to minimize any negativeimpact to margins due to changes in the current rate environment.  

-29-
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA** **MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING** **
The management of First Citizens Bancshares, Inc.(Bancshares) is responsible for establishing and maintaining an adequateinternal control structure, which governs financial reporting.  Bancshares'internal control system is designed to provide reasonable assurance tomanagement and the Board of Directors regarding the preparation and fairpresentation of the Bancshares' annual financial statements in accordance withgenerally accepted accounting principles of the United States.  

Inherent limitations exist in theeffectiveness of any internal control structure, including the possibility ofhuman error and circumvention of controls.  Accordingly, even effectiveinternal control can only provide reasonable assurance with respect tofinancial statement preparation.  

Management has assessed theeffectiveness of Bancshares' internal controls over financial reporting as ofDecember 31, 2007, based on criteria for effective internal control overfinancial reporting described in Internal Control-Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission.  Basedon this assessment, management believes that, as of December 31, 2007,Bancshares' internal control over financial reporting is effective.  

Alexander Thompson Arnold, PLLC,a registered public accounting firm, has audited the consolidated financialstatements included in the annual report and the effectiveness of the Company'sinternal control over financial reporting.

 -30-
** 

                                                                           
185 N. Church      Street                                                      Telephone: (731) 285-7900      Dyersburg, TN       38024                                                      (800) 608-5612                                                                                               Fax: (731) 285-6221
                                                                                                                                                                                                                 Members      of:                                                                                                                                                                                                                                                                              American Institute of Certified Public Accountants                                                                                                                                                                                                                   Governmental Audit Quality Center - AICPA                                                                                                                                                                                                                              Tennessee Society of Certified Public Accountants                                                                                                                                                                                                                 Center for Public Company Audit      Firms                                                                                                                                                                                                                                     Employee Benefit Plan Audit Quality Center - AICPA                                                                                                                                                                                                                 www.atacpa.net                                                       **REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors andStockholders of First Citizens Bancshares, Inc. and SubsidiariesDyersburg, Tennessee 38024

Wehave audited the accompanying consolidated balance sheets of First CitizensBancshares, Inc., and subsidiaries as of December 31, 2007 and 2006, and therelated consolidated statements of income, comprehensive income, stockholders'equity, and cash flows for each of the years in the three-year period endedDecember 31, 2007. We also have audited First Citizens Bancshares, Inc. andsubsidiaries' internal control over financial reporting as of December 31, 2007,based on criteria established in *Internal Control - Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). First Citizens Bancshares, Inc.and its subsidiaries' management is responsible for these financial statements,for maintaining effective internal control over financial reporting, and for itsassessment of the effectiveness of internal control over financial reporting.Our responsibility is to express an opinion on these financial statements and anopinion on the company's internal control over financial reporting based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we planand perform the audits to obtain reasonable assurance about whether thefinancial statements are free of material misstatement and whether effectiveinternal control over financial reporting was maintained in all materialrespects. Our audits of financial statements included examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made bymanagement, and evaluating the overall financial statement presentation. Ouraudit of internal control over financial reporting included obtaining anunderstanding of internal control over financial reporting, assessing the riskthat a material weakness exists, and testing and evaluating the design andoperating effectiveness of internal control based on the assessed risk. Ouraudits also included performing such other procedures as we considered necessaryin the circumstances. We believe that our audits provide areasonable basis for our opinions.

 

Acompany's internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company's internal control overfinancial reporting includes those policies and procedures that (1) pertain tothe maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2)provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directors ofthe company; and (3) provide reasonable assurance regarding prevention of timelydetection of unauthorized acquisition, use, or disposition of the company'sassets that could have a material effect on the financial statements.

-31 -

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may becomeinadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate. 

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of First Citizens Bancshares, Inc.,and subsidiaries as of December 31, 2007 and 2006, and the results of itsoperations and its cash flows for each of the years in the three-year periodended December 31, 2007, in conformity with accounting principles generallyaccepted in the United States of America. Also, in our opinion, First Citizens Bancshares, Inc. and subsidiaries, maintained,in all material respects,effective internal control over financial reporting as of December 31, 2007, based on criteria established in *InternalControl-Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). 

 
** 

/s/ ALEXANDER THOMPSON ARNOLD PLLC

Dyersburg, Tennessee

March 4, 2008
**Alamo, TNDyersburg, TNFulton, KYHenderson, TNJackson, TNMartin, TNMilan, TNMcKenzie, TNParis, TNTrenton, TNUnion City, TN
 

 

 

 

 

-32-
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES**CONSOLIDATEDBALANCE SHEETS**DECEMBER 31, 2007 AND 2006***(in thousands)***
**December 31,  2007**

** **

**December 31,  2006**

ASSETS

Cash and due from banks

 $

23,740   

 $

19,597   

Federal funds sold

1,502   

12,948   

Cash and cash equivalents

25,242   

32,545   

Investment securities:

Trading investments-stated at market

-   

-   

Held-to-Maturity, at amortized cost, fair

value of $291 at December 31, 2007

and $291 at December 31, 2006

290   

290   

Available-for-Sale, stated at market

190,117   

177,086   

Loans (excluding unearned income of $506 at December 31,  2007

and $385 at December 31, 2006)

584,639   

548,834   

Less:  allowance for loan losses

6,328   

6,211   

Net loans

578,311   

542,623   

Loans held-for-sale

2,187   

3,449   

Federal Home Loan Bank and Federal Reserve Bank stocks, at  cost

5,505   

5,505   

Premises and equipment

30,308   

28,234   

Accrued interest receivable

6,564   

6,760   

Goodwill

11,825   

11,825   

Other intangible assets

373   

458   

Other real estate

2,302   

1,815   

Bank owned life insurance policies

19,933   

17,224   

Other assets

3,199   

3,606   

TOTAL ASSETS

 $

876,156   

 $

831,420   

LIABILITIES AND SHAREHOLDERS' EQUITY

Deposits

Demand

 $

97,090   

 $

95,048   

Time

380,662   

370,146   

Savings

212,843   

200,869   

Total deposits

690,595   

666,063   

Securities sold under agreements to 

repurchase

32,643   

31,981   

Federal funds purchased and other short

term borrowings

11,100   

1,000   

Long-term debt

63,165   

59,538   

Other liabilities

3,622   

3,340   

Total liabilities

801,125   

761,922   

Shareholders' equity:

Common stock, no par value - 10,000,000

authorized; 3,717,593 issued and 

outstanding at December 31, 2007 and 3,717,593

issued and outstanding at December 31, 2006

 $

3,718   

 $

3,718   

Surplus

15,331   

15,331   

Retained earnings

57,485   

52,532   

Accumulated other comprehensive income

944   

108   

Total common stock and retained earnings

77,478   

71,689   

Less-92,787 treasury shares, at cost as of December 31,  2007

and 85,500 shares at cost at December 31, 2006

2,447   

2,191   

Total shareholders' equity

75,031   

69,498   

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

 $

876,156   

 $

831,420   

*Note:  Seeaccompanying notes to consolidated financial statements.*

-33-

**FIRST CITIZENSBANCSHARES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME****YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005**

**  **

2007

 

2006

 

2005

*(In Thousands  Except Per Share Data)*

**Interest Income**

   Interest and fees on loans

 $

44,700   

 $

42,372   

 $

36,809   

   Interest and dividends on investment securities:

     Taxable

6,679   

5,719   

4,342   

     Tax-exempt

1,993   

1,807   

1,658   

     Dividends

408   

359   

362   

   Other interest income

499   

670   

261   

     Total interest income

54,279   

50,927   

44,614   

**Interest Expense**

   Interest on Deposits

21,616   

18,832   

12,488   

   Interest on borrowings

4,057   

4,370   

4,404   

   Other Interest Expense

1,177   

940   

800   

     Total Interest Expense

26,850   

24,142   

17,692   

         Net Interest Income

27,429   

26,785   

26,922   

**Provision for Loan Losses**

834   

683   

1,059   

 Net Interest Income After Provision for Loan Losses

26,595   

26,102   

25,863   

**Other Income**

 Mortgage banking income

1,178   

1,185   

1,182   

   Income From Fiduciary Activities

1,007   

940   

963   

   Service Charges on Deposit Accounts

6,962   

6,059   

5,952   

   Brokerage Fees

1,565   

1,357   

1,307   

   Earnings on bank owned life insurance

695   

681   

914   

   Securities Gains (Losses) - Net

(29)

-     

(19)

   Other Income

1,536   

1,611   

1,727   

     Total Other Income

12,914   

11,833   

12,026   

**Other Expenses**

   Salaries and Employee Benefits

15,687   

15,074   

14,506   

   Net Occupancy Expense

1,685   

1,591   

1,701   

   Depreciation

2,095   

2,059   

1,882   

   Data Processing Expense

843   

853   

704   

   Legal and Professional Fees

327   

284   

250   

   Stationary and Office Supplies

286   

284   

303   

   Amortization of Intangibles

85   

85   

85   

   Advertising and Promotions

765   

654   

641   

   Other Expenses

5,571   

5,044   

4,883   

     Total Other Expenses

27,344   

25,928   

24,955   
                     
Net Income Before Income Taxes

12,165   

12,007   

11,752   

Provision for Income Tax Expense

3,005   

2,850   

3,087   

Net Income

 $

9,160   

 $

9,157   

 $

8,665   

Earnings Per Common Share:

 Net Income

 $

2.53   

 $

2.52   

 $

2.38   

Weighted Average Shares Outstanding

3,626   

3,633   

3,639   

*Note:  Seeaccompanying notes to consolidated financial statements.*

** **-34-

**FIRST CITIZENSBANCSHARES, INC. AND SUBSIDIARIESCONSOLIDATEDSTATEMENTS OF COMPREHENSIVE INCOMEYEARS ENDEDDECEMBER 31, 2007, 2006 AND 2005**

** **

**2007**

** **

**2006**

** **

**2005**

*(In Thousands)*

* *

Net Income For Year

 $

9,160   

 $

9,157   

 $

8,665   

Other Comprehensive Income, Net of Tax:

    Net Change in Unrealized Gains (Losses) on Cash Flow  Hedge

(37)

40   

49   

    Net Change in Unrealized Gains (Losses) on Available-

       for-Sale Securities

873   

968   

(1,734)

         Total Other Comprehensive Income, Net of Tax

836   

1,008   

(1,685)

**  Total Comprehensive Income**

** **

 $

9,996   

 $

10,165   

 $

6,980   

**  **

Related tax effects allocated to eachcomponent of other comprehensive income are as follows:

  Before-tax

Tax  (Expense)

  Net-of-tax

 
  Amount

or  Benefit

  Amount

 
 
**Year Ended December 31, 2007:**

 
 Unrealized Gains (Losses) on Cash Flow  Hedge

 $

(60)

 $

23  

 $

(37)

 Unrealized Gains (Losses) on  Available-for-Sale Securities:

 
            Unrealized Gains (Losses) Arising During the Period

1,385  

(530)

855  

 
            Reclassification Adjustments For Losses Included in Net Income

29  

(11)

18  

 
 Unrealized Gains (Losses) on  Available-for-Sale Securities, net

1,414  

(541)

873  

 
                   Net Unrealized Gains (Losses)

 $

1,354  

 $

(518)

 $

836  

 
 
**Year Ended December 31, 2006:**

 
 Unrealized Gains (Losses) on Cash Flow  Hedge

 $

61  

 $

(21)

 $

40  

 
 Unrealized Gains (Losses) on  Available-for-Sale Securities:

 
            Unrealized Gains (Losses) Arising During the Period

1,465  

(497)

968  

 
            Reclassification Adjustments For Gains (Losses) Included

 
                in Net Income

-    

-    

-    

 
 Unrealized Gains (Losses) on  Available-for-Sale Securities, net

1,465  

(497)

968  

 
                   Net Unrealized Gains (Losses)

 $

1,526  

 $

(518)

 $

1,008  

 
 
**Year Ended December 31, 2005:**

 
 Unrealized Gains (Losses) on Cash Flow  Hedge

 $

82  

 $

(33)

 $

49  

 
 Unrealized Gains (Losses) on  Available-for-Sale Securities:

 
            Unrealized Gains (Losses) Arising During the Period

(2,909)

1,164  

(1,745)

 
            Reclassification Adjustments For Losses Included in Net Income

19  

(8)

11  

 
 Unrealized Gains (Losses) on  Available-for-Sale Securities, net

(2,890)

1,156  

(1,734)

 
                   Net Unrealized Gains (Losses)

 $

(2,808)

 $

1,123  

 $

(1,685)

 
*Note:  See accompanying notes to consolidated financial statements.*

** **-35-

**FIRST CITIZENSBANCSHARES, INC.CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS' EQUITYYEARS ENDEDDECEMBER 31, 2007, 2006 AND 2005(In Thousands,Except Per Share Data)**

**  **

** **

** **

** **

** **

** **

** **

** **

** **

**Accum.**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Other**

** **

** **

** **

** **

**Common Stock**

** **

** **

** **

**Retained**

** **

**Compre.**

** **

**Treasury**

** **

** **

**Shares**

** **

**Amount**

** **

**Surplus**

** **

**Earnings**

** **

**Income**

** **

**Stock**

** **

**Total**

**Balance January 1, 2005**

3,718  

 $

3,718  

 $

15,331  

 $

43,001  

 $

785  

 $

(1,627)

 $

61,208  

Net Income, Year Ended  December 31, 2005

8,665  

8,665  

Adjustment of Unrealized  Gain (Loss) on

 Securities  Available-for-Sale, net of tax

(1,734)

(1,734)

Adjustment of Unrealized  Gain (Loss) on

 Cash Flow Hedge, net of  tax

49  

49  

Cash Dividends Paid - $1.12  per Share

(4,075)

(4,075)

Treasury Stock Transitions -  Net

(467)

(467)

**Balance December 31, 2005**

3,718  

 $

3,718  

 $

15,331  

 $

47,591  

 $

(900)

 $

(2,094)

 $

63,646  

Net Income, Year Ended  December 31, 2006

9,157  

9,157  

Adjustment of Unrealized  Gain (Loss) on

 Securities  Available-for-Sale, net of tax

968  

968  

Adjustment of Unrealized  Gain (Loss) on

 Cash Flow Hedge, net of  tax

40  

40  

Cash Dividends Paid - $1.16  per Share

(4,216)

(4,216)

Treasury Stock Transitions -  Net

(97)

(97)

**Balance December 31, 2006**

3,718  

 $

3,718  

 $

15,331  

 $

52,532  

 $

108  

 $

(2,191)

 $

69,498  

Net Income, Year Ended  December 31, 2007

9,160  

9,160  

Adjustment of Unrealized  Gain (Loss) on

 Securities  Available-for-Sale, net of tax

873  

873  

Adjustment of Unrealized  Gain (Loss) on

 Cash Flow Hedge, net of  tax

(37)

(37)

Cash Dividends Paid - $1.16  per Share

(4,207)

(4,207)

Treasury Stock Transitions -  Net

(256)

(256)

**Balance December 31, 2007**

3,718  

 $

3,718  

 $

15,331  

 $

57,485  

 $

944  

 $

(2,447)

 $

75,031  

** **

*Note:  Seeaccompanying notes to consolidated financial statements.*

-36-

** **

**FIRST CITIZENSBANCSHARES, INC. AND SUBSIDIARIESCONSOLIDATEDSTATEMENT OF CASH FLOWSYEARS ENDEDDECEMBER 31, 2007, 2006 AND 2005*(in thousands)***

*** ***

**2007**

**2006**

**2005**

**Operating Activities**

** **

** **

Net Income

 $

9,160   

 $

9,157   

 $

8,665   

Adjustments to Reconcile Net Income to Net

 Cash Provided by Operating Activities:

     Provision for Loan Losses

834   

683   

1,059   

     Provision for Depreciation

2,095   

2,059   

1,882   

     Provision for Amortization - Intangibles

85   

85   

85   

     Deferred Income Taxes

669   

336   

(355)

     Realized Investment Security (Gains) Losses

29   

0   

19   

     Net (Increase) Decrease in Loans Held for Sale

1,262   

(406)

(1,713)

     (Increase) Decrease in Accrued Interest Receivable

196   

(1,282)

(919)

     Increase (Decrease) in Accrued Interest Payable

245   

632   

374   

     (Increase) in Cash Surrender Value of Bank Owned Life  Insurance

(564)

(676)

(624)

     Net (Increase) Decrease in Other Assets

(403)

(441)

(735)

     Net Increase (Decrease) in Other Liabilities

(362)

(630)

342   

NET CASH PROVIDED BY OPERATING ACTIVITIES

 $

13,246   

 $

9,517   

 $

8,080   

**Investing Activities**

 Proceeds of Maturities of Held-to-Maturity Investment  Securities

 $

-   

 $

-   

 $

504   

 Proceeds of Sales and Maturities of Available-for-Sale

     Investment Securities

41,985   

22,669   

49,044   

 Purchases of Available-for-Sale Investment Securities

(53,361)

(36,637)

(66,084)

 Increase in Loans - Net

(37,317)

(5,383)

(13,373)

 Premiums on Bank Owned Life Insurance-Net

(2,145)

(535)

(1,308)

 Purchase of Premises and Equipment

(4,169)

(2,651)

(5,937)

NET CASH USED BY INVESTING ACTIVITIES

 $

(55,007)

 $

(22,537)

 $

(37,154)

**Financing Activities**

 Net Increase ( Decrease) in Demand Deposits,

     NOW Accounts , and Savings Accounts

 $

14,016   

 $

8,928   

 $

19,263   

 Increase in Time Deposits - Net

10,516   

21,626   

23,864   

 Increase in Long-Term Borrowings

10,155   

0   

5,155   

 Payment of Principal on Long-Term Debt

(6,528)

(18,590)

(11,508)

 Cash Dividends Paid

(4,207)

(4,216)

(4,075)

 Net Increase (Decrease) in Short-Term Borrowings

10,762   

(2,772)

4,142   

 Treasury Stock Transactions - Net

(256)

(97)

(467)

NET CASH PROVIDED BY FINANCING ACTIVITIES

34,458   

4,879   

36,374   

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

(7,303)

(8,141)

7,300   

Cash and Cash Equivalents at Beginning of Year

32,545   

40,686   

33,386   

**CASH AND CASH EQUIVALENTS AT END OF YEAR**

 $

25,242   

 $

32,545   

 $

40,686   

Supplemental cash flow information:

 Interest paid

 $

27,095   

 $

24,142   

 $

17,318   

 Income Taxes paid

 $

2,950   

 $

2,870   

 $

3,480   

Supplemental noncash disclosures:

 Transfers from loans to foreclosed assets

 $

488   

 $

2,613   

 $

441   

*Note:  Seeaccompanying notes to consolidated financial statements.*

** **-37-

**FIRST CITIZENSBANCSHARES, INC. AND SUBSIDIARIESNOTES TOCONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2007AND 2006**

**NOTE 1 - SUMMARY OFSIGNIFICANT ACCOUNTING AND REPORTING POLICIES**

The accounting and reporting policiesof First Citizens Bancshares, Inc., and subsidiaries (the "Company") conform togenerally accepted accounting principles.  The significant policies aredescribed as follows:

BASIS OF PRESENTATION

All dollar amounts set forthbelow, other than per-share amounts, are in thousands unless otherwise noted. The Consolidated Financial Statements include all accounts of First CitizensBancshares, Inc., and its subsidiary, First Citizens National Bank (the"Bank").  First Citizens Capital Assets, Inc., subsidiary of Bancshares, wasliquidated in December 2006 with no material impact to Consolidated FinancialStatements.  First Citizens (TN) Statutory Trusts II, III and IV are reportedunder the equity method in accordance with generally accepted accounting principlesfor Variable Interest Entities for all periods presented.  These investmentsare included in Other Assets and the proportionate share of income (loss) isincluded in other non-interest income.  First Citizens National Bank also hastwo wholly owned subsidiaries, First Citizens Financial Plus and First CitizensInvestments, Inc., which are consolidated into its financial statements.  FirstCitizens Bancshares, Inc.'s investment in these subsidiaries is reflected onthe Parent Company's condensed balance sheet (Note 22).  

First Citizens National Bank hasa 50% ownership in two insurance subsidiaries both of which are accounted forusing the equity method.  One is White and Associates/First Citizens Insurance,LLC which is a general insurance agency offering a full line of insuranceproducts.  The other is First Citizens/White and Associates Insurance Companywhose principal activity is credit insurance.  The investment in thesesubsidiaries is included in Other Assets on the Balance Sheets presented inthis report and earnings from these subsidiaries are recorded in Other Incomeon the Income Statements presented in this report.  

The principal activity of FirstCitizens Investments, Inc. is to acquire and sell investment securities as wellas collect the income from the portfolio.  First Citizens Holdings, a whollyowned subsidiary of First Citizens Investments, acquires and sells certaininvestment securities, collects income from its portfolio, and owns FirstCitizens Properties, Inc., a real estate investment trust (REIT).  FirstCitizens Properties, Inc. invests in participation interests of real estateloans made by First Citizens National Bank and provides First Citizens with analternative vehicle for raising capital.  First Citizens Holdings owns 98% anddirectors, executive officers and certain employees own the remaining 2%. 

The Company also has two whollyowned subsidiaries, First Citizens (TN) Statutory Trust III and First Citizens(TN) Statutory Trust IV.  First Citizens (TN) Statutory Trust II was terminatedin March 2007.  The purpose and activities of trusts are further discussed inNote 13 of Notes to the Consolidated Financial Statements.  

All significant inter-companybalances and transactions are eliminated in consolidation.  Certain balanceshave been reclassified to conform to current year presentation.  

NATURE OF OPERATIONS

The Company and its subsidiariesprovide commercial banking services of a wide variety to individuals andcorporate customers in the mid-southern United States with a concentration in West Tennessee.  The Company's primary products are checking and savings deposits andresidential, commercial, and consumer lending.

BASIS OF ACCOUNTING

The Consolidated FinancialStatements are presented using the accrual basis of accounting.

USE OF ESTIMATES

The preparation of financialstatements in conformity with generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period.  Actual results could differ fromthose estimates.

Material estimates that areparticularly susceptible to significant change relate to the determination ofthe allowance for losses on loans and the valuation of real estate acquired inconnection with foreclosures or in satisfaction of loans.  In connection withthe determination of the allowances for losses on loans and foreclosed realestate, management obtains independent appraisals for significant properties.

CASH EQUIVALENTS

Cash equivalents include amountsdue from banks, which do not bear interest and federal funds sold. Generally,federal funds are purchased or sold for one-day periods.  

-38-

SECURITIES

Investment securities areclassified as follows:

Held-to-maturity, which includesthose investment securities which the Company has the intent and the ability tohold until maturity; Trading securities, which include those investments thatare held for short-term resale; and available-for-sale, which includes allother investment securities.

Securities, which areheld-to-maturity, are reflected at cost, adjusted for amortization of premiumsand accretion of discounts using methods, which approximate the interestmethod.  Securities, which are available-for-sale, are carried at fair value,and unrealized gains and losses are recognized as direct increases or decreasesin stockholders' equity.  Trading securities, where applicable, are carried atfair value, and unrealized gains and losses on these securities are included innet income.

Realized gains and losses oninvestment securities transactions are determined based on the specific identificationmethod and are included in net income.

LOANS HELD FOR SALE

Mortgage loans originated andintended for sale in the secondary market are carried at the lower of aggregatecost or market, as determined by outstanding commitments from investors.  Netunrealized losses, if any, are recorded as a valuation allowance and charged toearnings.  Servicing rights are not retained when mortgage loans are sold. Income from loans held for sale is reported in Mortgage Banking Income which isincluded in Other Non-Interest Income in the Consolidated Financial Statements.

LOANS

Loans that management has theintent and ability to hold for the foreseeable future or until maturity orpayoff are reflected on the balance sheets at the unpaid principal amount lessthe allowance for loan losses and unearned interest and fees.

Loans are generally placed onnon-accrual status when, in the judgment of management, the loans have becomeimpaired.  Unpaid interest on loans placed on non-accrual status is reversedfrom income and further accruals of income are not usually recognized. Subsequent collections related to impaired loans are usually credited first toprincipal and then to previously uncollected interest.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses isestablished as losses are estimated to have occurred through a provision forloan losses charged to earnings.  Loan losses are charged against the allowancewhen management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses isevaluated on a regular basis by management and is based upon management'speriodic review of the collectability of the loans in light of historicalexperience, the nature and volume of the loan portfolio, adverse situationsthat may affect the borrower's ability to repay, estimated value of anyunderlying collateral and prevailing economic conditions.  This evaluation isinherently subjective, as it requires estimates that are susceptible tosignificant revision as more information becomes available.

The allowance consists ofspecific and general components.  The specific component relates to loans thatare classified as doubtful, substandard or special mention.  For such loansthat are also classified as impaired, an allowance is established when thediscounted cash flows (or collateral value or observable market price) of theimpaired loan is lower than the carrying value of that loan.  The generalcomponent covers non-classified loans and is based on historical lossexperience adjusted for qualitative factors.  

A loan is considered impairedwhen, based on current information and events, it is probable that theCorporation will be unable to collect scheduled payments of principal orinterest when due according to contractual terms of the loan agreement. Factors considered by management in determining impairment include paymentstatus, collateral value, and the probability of collecting scheduled principaland interest payments when due.  Loans that experience insignificant paymentdelays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfallson a case-by-case basis, taking into consideration all circumstancessurrounding the loan and the borrower, including the length of delay, reasonsfor the delay, borrower's prior payment record, and amount of the shortfall inrelation to principal and interest owed.  Impairment is measured on a loan byloan basis for commercial and construction loans by either the present value ofexpected future cash flows discounted at the loan's effective interest rate,the loan's obtainable market price, or fair value of the collateral if the loanis collateral dependent.

Large groups of smaller balancehomogeneous loans are collectively evaluated for impairment.  Accordingly, theCompany does not separately identify individual consumer and residential loansfor impairment disclosures, unless such loans are the subject of arestructuring agreement.

PREMISES AND EQUIPMENT

Bank premises and equipment arestated at cost less accumulated depreciation. The provision for depreciation iscomputed using straight-line and accelerated methods for both financialreporting and income tax purposes.  Expenditures for maintenance and repairsare charged against income as incurred. Cost of major additions andimprovements are capitalized and depreciated over estimated useful lives.

REAL ESTATE ACQUIRED BYFORECLOSURE

Real estate acquired throughforeclosure is reflected in other assets and recorded at the lower of fairvalue less estimated costs to sell or cost.  Adjustments made at the date offoreclosure are charged to the allowance for loan losses.  Expenses incurred inconnection with ownership, subsequent adjustments to book value, and gains andlosses upon disposition are included in other non-interest expenses.

Adjustments to net realizablevalue are made annually subsequent to acquisition based on appraisal.

-39-

INCOME TAXES

First Citizens Bancshares, Inc.uses the accrual method of accounting for federal and state income taxreporting.   Deferred tax assets or liabilities are computed for significantdifferences in financial statement and tax bases of assets and liabilities,which result from temporary differences in financial statement and taxaccounting. A valuation allowance, if needed, reduces deferred tax assets tothe amount expected to be realized.  Provision for income taxes is made on aseparate income tax return basis for each entity included in the ConsolidatedFinancial Statements.  

INTEREST INCOME ON LOANS

Interest income on commercial andreal estate loans is computed on the basis of daily principal balanceoutstanding using the accrual method.  Interest on installment loans iscredited to operations by the level-yield method.  Interest income on loans isdiscontinued at the time the loan is 90 days delinquent unless the loan is wellsecured and in process of collection.  Loans may be placed on non-accrual statusat an earlier date if collection of principal or interest is considereddoubtful.  All interest accrued but not received for loans placed onnon-accrual status is reversed against interest income.  Interest received onsuch loans is accounted for on the cash-basis or cost-recovery method untilqualifying to return to accrual status.  Loans are returned to accrual statuswhen all principal and interest amounts contractually due are brought currentand future payments are reasonably assured.  

NET INCOME PER SHARE OF COMMONSTOCK

Net income per share of commonstock is computed by dividing net income by the weighted average number ofshares of common stock outstanding during the period, after giving retroactiveeffect to stock dividends and stock splits.

INCOME FROM FIDUCIARY ACTIVITIES

Income from fiduciary activitiesis recorded on the accrual basis.

ADVERTISING AND PROMOTIONS

The Company's policy is to chargeadvertising and promotions to expense as incurred.

**NOTE 2 - CASH RESERVEREQUIREMENTS**

The Bank maintains cash reservebalances as required by the Federal Reserve Bank.  Average required balancesduring 2007 and 2006 were $500,000 and $500,000, respectively.

**NOTE 3 - INVESTMENT SECURITIES**

The following tables reflectamortized cost, unrealized gains, unrealized losses, and fair value ofinvestment securities for the balance sheet dates presented, segregated intoheld-to-maturity and available-for-sale categories:

Gross

Gross

Fair

Amortized

Unrealized

Unrealized

Market

Cost

 

Gains

 

Losses

 

Value

**As of December 31, 2007 (in thousands):**

Securities Held-to-Maturity:

Obligations of States  and Political Subdivisions

 $

290   

 $

1   

 $

-   

 $

291   

Securities Available-for-Sale:

U. S. Treasury Securities and Obligations of U. S.

 Government Agencies and Corporations

 $

134,139   

 $

1,003   

 $

(971)

 $

134,170   

Obligations of States  and Political Subdivisions

49,374   

1,772   

(110)

51,037   

All Others

4,913   

131   

(134)

4,910   

 $

188,426   

 $

2,906   

 $

(1,215)

 $

190,117   

**As of December 31, 2006 (in thousands):**

Securities Held-to-Maturity:

Obligations of States  and Political Subdivisions

 $

290   

 $

1   

 $

-   

 $

291   

Securities Available-for-Sale:

U. S. Treasury Securities and Obligations of U. S.

 Government Agencies and Corporations

 $

129,226   

 $

280   

 $

(1,903)

 $

127,602   

Obligations of States  and Political Subdivisions

42,666   

1,792   

(121)

44,338   

All Others

4,916   

230   

-   

5,146   

 $

176,808   

 $

2,302   

 $

(2,024)

 $

177,086   

-40-

The table below summarizesmaturities of debt securities held-to-maturity and available-for-sale as ofDecember 31, 2007:

Securities

Securities

Held to Maturity

Available for Sale

Amortized Cost

Fair Value

Amortized Cost

Fair Value

*(In Thousands)*

Amounts Maturing In:

 One Year or Less

 $

17,283   

 $

17,292   

 After One Year Through Five Years

290   

291   

26,748   

26,860   

 After Five Years Through Ten Years

31,437   

32,113   

 After Ten Years

-   

-   

113,238   

113,800   

 $

290   

 $

291   

 $

188,706   

 $

190,065   

Equity securities

10   

52   

       Total securities

 $

290   

 $

291   

 $

188,716   

 $

190,117   

Securities gains (losses) on saleof available-for-sale securities presented in the consolidated statements ofincome consist of the following:

**Gross Sales**

**Gains**

**Losses**

**Net**

**Year Ended December 31,**

2007 - Securities Available-for-Sale

 $

23,341   

 $

77   

(106) 

 $

(29)

2006 - Securities Available-for-Sale

 $

-   

 $

-   

 $

-   

 $

-   

2005 - Securities Available-for-Sale

 $

11,890   

 $

9   

 $

(28)

 $

(19)

At December 31, 2007 and 2006,investment securities were pledged to secure government, public and trustdeposits as follows:

**December 31**

**Amortized  Cost**

**Fair Value**

** **

2007

$    129,328

$     130,107

** **

2006

 $    103,714  

 $     102,417  

The following table presentsinformation on securities with gross unrealized losses at December 31, 2007,aggregated by investment category and the length of time that the individualsecurities have been in a continuous loss position:

** **

*Less Than  Twelve Months*

*Over Twelve  Months*

*Total*

** **

**Gross**

** **

** **

** **

**Gross**

** **

** **

** **

**Gross**

** **

** **

**Unrealized**

** **

**Fair**

** **

**Unrealized**

** **

**Fair**

** **

**Unrealized**

** **

**Fair**

**Losses**

** **

**Value**

** **

**Losses**

** **

**Value**

** **

**Losses**

** **

**Value**

*(In Thousands)*

Securities Available-for-Sale:

 U.S. Treasury Securities and

 Obligations of U.S. Government

 $

-   

0 

 $

-   

 $

-   

 Corporations and Agencies

 $

(214)

 $

9,911   

 $

(756)

 $

38,945   

 $

(970)

 $

48,856   

Obligations of States and Political

 Subdivisions

(68)

5,902   

(42)

3,765   

(110)

9,667   

Other Debt Securities

(135)

1,865   

-   

-   

(135)

1,865   

 Total Securities Available-for -Sale

 $

(417)

 $

17,678   

 $

(798)

 $

42,710   

 $

(1,215)

 $

60,388   

In reviewing the investmentportfolio for other-than-temporary impairment of individual securities,consideration is given to (1) the length of time in which fair value has beenless than cost and the extent of the unrealized loss, (2) the financialcondition of the issuer, and (3) the positive intent and ability of the Companyto maintain its investment in the issuer for a time that would provide for anyanticipated recovery in the fair value.

As of December 31, 2007, theCompany had 70 debt securities noted with unrealized losses with 57 of thosesecurities having been in an unrealized loss position for greater than 12months.  Most of the 57 securities are U. S. government agency ormortgage-backed securities which have declined in value or remained in anunrealized loss position due to yield curve trends over the past two years. Such unrealized losses are considered to be driven entirely by current marketconditions and interest rates and not directly related to the credit quality ofthe issuers.  In analyzing reasons for the unrealized losses, management considerswhether the securities are issued by the federal government or its agencies,whether downgrades of bond ratings have occurred, and also reviews anyapplicable industry analysts' reports.  With respect to unrealized losses onsecurities noted and the analysis performed relating to the securities,management currently believes that declines in market value are temporary andasserts positive intent and ability to hold such investments until anticipatedrecovery.  

-41-

Generally accepted accountingprinciples have established accounting and reporting standards for derivativefinancial instruments, including certain derivative instruments embedded inother contracts and for hedging activities. These standards require thatderivatives be reported either as assets or liabilities on the balance sheetsand be reflected at fair value. The accounting for changes in the fair value ofa derivative instrument depends on the intended use of the derivative and theresulting designation.   The Company has one derivative transaction, which isan interest rate swap that was purchased in June 2000.  Since a Federal HomeLoan Bank Variable LIBOR Borrowing has been designated as the hedged item andin doing so, the Company has effectively fixed the cost of this liability.  Asa floating rate liability was hedged, there are no significant fluctuations inits market value but there are fluctuations in the cash flows.  Thus, the swapis designated as a cash flow hedge, hedging the "benchmark interest rate."  The market value gain or loss of the swap is adjusted through othercomprehensive income.  The purpose of the transaction was to reduce exposure tointerest rate risk.  Volume of the transaction is $1.5 million and the term is10 years.  

As of December 31, 2007, thevalue of the derivative is a liability of approximately $99,000.  Marketinterest rate fluctuations resulted in an increase of the liability byapproximately $60,000, as well as an increase in negative accumulated othercomprehensive income of approximately $37,000, net of tax, during the yearended December 31, 2007.  There were no reclassification adjustments to othercomprehensive income for gains or losses related to the cash flow hedge for anyof the periods presented in the Consolidated Financial Statements.

**NOTE 4 - LOANS**

Loans outstanding at December 31,2007 and 2006, were comprised of the following:

**2007**

**2006**

Commercial, Financial and Agricultural

 $

80,509   

 $

80,033   

Real Estate - Construction

106,695   

86,206   

Real Estate - Mortgage

353,655   

340,839   

Installment

37,106   

36,735   

Other Loans

6,674   

5,021   

584,639   

548,834   

Less: Allowance for Loan Losses

6,328   

6,211   

 Net Loans

 $

578,311   

 $

542,623   

In conformity with Statement No. 114 of the FinancialAccounting Standards Board, the Company has recognized loans as impaired withcarrying values of approximately $6.2 million as of December 31, 2007 and $1.7million at December 31, 2006.  The balance maintained in the Allowance for LoanLosses related to these loans was $1.1 million at December 31, 2007 and$267,000 at December 31, 2006.  Average investment in impaired loans in 2007and 2006 were $3.1 million and $2.6 million, respectively.  Interest incomerecognized under the accrual method on impaired loans was $356,000, $93,000 and$30,000 for the three years ended December 31, 2007, 2006 and 2005,respectively.  Loans 90 days past due and still accruing interest total$204,000 as of year-end 2007, $945 thousand as of year-end 2006 and $431thousand as of year-end 2005.  

**NOTE 5 - ALLOWANCE FOR LOANLOSSES**

An analysis of the allowance forloan losses during the three years ended December 31 is as follows:

**2007**

** **

**2006**

** **

**2005**

*(In Thousands)*

Balance  - Beginning of Period

 $

6,211   

 $

6,830   

 $

6,239   

Addition Incident to Merger

-   

-   

-   

Provision for Loan Losses

834   

683   

1,059   

Loans Charged to Allowance

(1,096)

(1,538)

(632)

Recovery of Loan Previously Charged Off

379   

236   

164   

 Net charge-offs

(717)

(1,302)

(468)

Balance - End of Period

 $

6,328   

 $

6,211   

 $

6,830   

**NOTE 6 - SECONDARY MORTGAGEMARKET ACTIVITIES**

Mortgage loans originated and intended for sale in thesecondary market are carried at the lower of aggregate cost or market, asdetermined by outstanding commitments from investors.  Net unrealized losses,if any, are recorded as a valuation allowance and charged to earnings.  Therewere no such losses for any of the three years ended December 31, 2007, 2006and 2005.  There has been no material difference between cost and fair marketvalues of loans held for sale for any of the periods presented.  

Servicing rights are not retainedon any mortgage loans held for sale.  Mortgage banking income included in othernon-interest income was $1,178,000, $1,185,000, and $1,182,000 for the yearsended December 31, 2007, 2006, and 2005, respectively.  

**NOTE 7 - PREMISES ANDEQUIPMENT**

The fixed assets used in theordinary course of business are summarized as follows:

Useful Lives

in Years

 

2007

 

2006

*(In Thousands)*

Land

 $

7,441   

 $

5,616   

Buildings

5 to 50

27,344   

25,970   

Furniture and Equipment

3 to 20

16,892   

17,614   

51,677   

49,200   

Less: Accumulated Depreciation

21,369   

20,966   

 Net Fixed Assets

 $

30,308   

 $

28,234   

-42-

**NOTE 8 - GOODWILL AND OTHERINTANGIBLE ASSETS**

Upon adoption of SFAS 142 in January 2002, the Companyceased to amortize goodwill ($25 thousand per month).  Impairment testing isperformed during the first quarter of each year.  Based on annual impairmenttesting since adoption of SFAS 142, there has been no impairment of goodwillrecorded.  Thus, there are no impairment charges recorded for any periodspresented in these Consolidated Financial Statements and notes orsubsequently.  There was no activity in goodwill during the years endedDecember 31, 2007, 2006 and 2005.  Total goodwill as of December 31, 2007 is$11.8 million or 1.35% of total assets or 15.76% of total capital.  

Other identifiable intangiblesconsist of core deposit intangibles being amortized over a 10-year period asfollows:

2007

2006

 Core Deposit Intangible

 $

845   

 $

845   

 Accumulated Amortization

(472)

(387)

      Net Core Deposit Intangible

 $

373   

 $

458   

Amortization expense is $84,500 peryear for 2007, 2006 and 2005.  Estimated amortization expense is estimated tobe $84,500 per year in years 2008 to 2011 and $35,000 in 2012.

**NOTE 9 - REPOSSESSED REALPROPERTY**

               

The carrying value of repossessedreal property on the balance sheets of the Company is $2.3 million at December31, 2007 and $1.8 million at December 31, 2006.  The value of repossessed realproperty is based on the lower of cost or fair market value.  Fair market valueis based on independent appraisals for significant properties.  

**NOTE 10 - BANK OWNED LIFEINSURANCE**

The Bank has a significantinvestment in bank owned life insurance policies (BOLI) due to providing thisfringe benefits to its employees in the position of Vice President and higherafter one year of service.  The cash surrender values of BOLI are $20 millionand $17 million as of December 31, 2007 and 2006, respectively.  BOLI areinitially recorded at the amount of premiums paid and are adjusted to currentcash surrender values.  Changes in cash surrender values are recorded in othernon-interest income and are based on premiums paid less expenses plus accretedinterest income.  Earnings on BOLI resulted in non-interest income of $395,000,$681,000, and $914,000 for the years ended December 31, 2007, 2006 and 2005,respectively.  Earnings in 2005 included non-recurring income of approximately$260,000 received from a death benefit associated with a policy inheritedthrough a prior acquisition.  

**NOTE 11 - DEPOSITS**

Included in deposits shown on thebalance sheets are the following time and savings deposits in denominations of$100,000 or more:

**2007**

** **

**2006**

Time Deposits

 $

204,194   

 $

191,648   

Savings Deposits

145,619   

137,403   

NOW accounts, included in savings deposits on the balancesheets, totaled $67,334,000 at December 31, 2007 and $63,745,000 at December31, 2006.  Demand deposit balances reclassified as loans consist of overdraftstotaling $507,000 and $492,000 as of December 31, 2007 and 2006, respectively. 

Time deposits maturing in yearssubsequent to December 31, 2007, are as follows:

On or before December 31, 2008

 $

353,151   

On or during year ended December 31, 2009

11,173   

On or during year ended December 31, 2010

7,421   

On or during year ended December 31, 2011

3,051   

During or after year ended December 31, 2012

5,866   

 $

380,662   

** NOTE 12 - SHORT-TERMBORROWINGS**

The Bank has three sources ofshort-term borrowings, which consist of cash management advances from theFederal Home Loan Bank ("FHLB"), Treasury, Tax and Loan ("TT&L") optionnote, and federal funds purchased from correspondent banks.  Short-termborrowings are used to manage seasonal fluctuations in liquidity.  

Cash management advances fromFHLB are secured 1-4 family first mortgages under the blanket collateral pledgeagreement that also collateralizes long-term advances from FHLB and havematurities of 90 days or less.  See the long-term debt footnote in regards tomaximum borrowing capacity with FHLB as of December 31, 2007.  There were noshort-term borrowings outstanding against this line as of December 31, 2007.

The Bank is an Option B bank inregards to TT&L and up to $1 million in collected TT&L paymentscollected can be retained as a short-term option note.  This option note iscallable upon demand by the TT&L.  The current balance of this line was$1,000,000 as of December 31, 2007 and December 31, 2006.  

The Bank has federal fund linesof credit available with four correspondent banks totaling $52,500,000. Federal funds purchased totaled $10.1 million as of December 31, 2007.  Therewere no federal funds purchased as of December 31, 2006.

The following tabular analysis presents year-end balancesof short-term borrowings, maximum month-end balance, year-to-date dailyaverage, and weighted average cost for 2007, 2006 and 2005:

**2007**

**2006**

**2005**

Amount Outstanding-End of Period

 $

11,100   

 $

1,000   

 $

1,000   

Maximum Amount of Borrowings at

 Any Month End During the Year

 $

22,400   

 $

13,155   

 $

26,217   

Year-to-Date Daily Average 

 $

8,804   

 $

4,501   

 $

6,527   

Weighted Average Cost

5.30 %

4.98 %

3.54 %

-43-

**NOTE 13 - LONG TERM DEBT**

In March 2002, First CitizensBancshares, Inc. formed a wholly owned subsidiary, First Citizens (TN)Statutory Trust under the provisions of the Business Act of Delaware. Thesubsidiary was formed for the purpose of issuing preferred securities andconveying the proceeds to First Citizens Bancshares, Inc. in exchange forlong-term, subordinated debentures issued by First Citizens Bancshares, Inc.  Thedebentures are the sole assets of the trust.  First Citizens Bancshares, Inc.owns 100% of the common stock of the Trust.

On March 26, 2002, the Company,through its Trust subsidiary, issued 5,000 floating rate Preferred TrustSecurities in denominations of $1,000 for a total of $5,000,000, which maturethirty (30) years from the date of issuance. Interest is payable on March 26,June 26, September 26 and December 26 of each year during the term. Theinterest rate is calculated quarterly equal to the three-month LIBOR interestrate plus 3.6%, provided that prior to March 26, 2007, the interest rate cannotexceed eleven percent (11%).   Responsibilities of the Company concerning thedebentures and related documents constitute a full and unconditional guaranteeby the Company of the Trust issuer's preferred securities.  In March 2007,First Citizens (TN) Statutory Trust II was terminated and the related debt wasrefinanced through First Citizens (TN) Statutory Trust IV, which is discussedbelow.

In March 2005, the Company formeda wholly owned subsidiary First Citizens (TN) Statutory Trust III.  The Trustwas created under the Business Act of Delaware for the sole purpose of issuingand selling preferred securities and using proceeds from the sale to acquire longterm subordinated debentures issued by Bancshares.  The debentures are the soleassets of the Trust.  First Citizens Bancshares owns 100% of the common stockof the Trust.

On March 17, 2005 the Companythrough its wholly owned subsidiary, First Citizens (TN) Statutory Trust III,sold 5,000 of its floating rate Preferred Trust Securities at a liquidationamount of $1,000 per security for an aggregate amount of $5,000,000.  For theperiod beginning on (and including) the date of original issuance and ending on(but excluding) June 17, 2005 the rate per annum is 4.84%.  For each successiveperiod beginning on (and including) June 17, 2005, and each succeeding interestpayment date at a rate per annum equal to the 3-month LIBOR plus 1.80%. Interest payment dates are: March 17, June 17, September 17, and December 17during the 30-year term.  The entire $5 million in proceeds was used to reduceBancshares' revolving line of credit with First Tennessee.  Bancshares'obligation under the debentures and related documents constitute a full andunconditional guarantee by the Company of the Trust issuer's obligations underthe Preferred Securities.  

In March 2007, the Company formeda wholly owned subsidiary First Citizens (TN) Statutory Trust IV.  The Trustwas created under the Business Act of Delaware for the sole purpose of issuingand selling preferred securities and using proceeds from the sale to acquirelong term subordinated debentures issued by Bancshares.  The debentures are thesole assets of the Trust.  First Citizens Bancshares owns 100% of the commonstock of the Trust.  

In March 2007, the Companythrough its wholly owned subsidiary, First Citizens (TN) Statutory Trust IV,sold 5,000 of its floating rate Preferred Trust Securities at a liquidation amountof $1000 per security for an aggregate amount of $5,000,000.  For the periodbeginning on (and including) the date of original issuance and ending on (butexcluding) June 15, 2007 the rate per annum of 7.10%.  For each successiveperiod beginning on (and including) June 15, 2007, and each succeeding interestpayment date at a rate per annum equal to the 3-month LIBOR plus 1.75%. Interest payment dates are: March 15, June 15, September 15, and December 15during the 30-year term.  The purpose of proceeds was to refinance the debtissued through First Citizens (TN) Statutory Trust II (discussed above) at alower spread to LIBOR and results in savings of $92,500 annually.  Bancshares'obligation under the debentures and related documents constitute a full andunconditional guarantee by the Company of the Trust issuer's obligations underthe Preferred Securities.  

Although for accountingpresentation, the Preferred Trust Securities are treated as debt, theoutstanding balance qualifies as Tier I capital subject to the provision thatthe amount of the securities included in Tier I Capital cannot exceedtwenty-five percent (25%) of total Tier I capital.

First Citizens Bancshares, Inc.also has a line of credit with First Tennessee Bank National Association in theamount of $13 million, secured by common stock of First Citizens National Bankwith a book value totaling 143% of the total outstanding advances on the line. The note was originally executed in 2002 with a two-year maturity with thepurpose for use in various financial strategies including the acquisition ofMunford Union Bank.  Interest on the outstanding balance is payable on aquarterly basis, calculated at 100 basis points below the base rate of FirstTennessee Bank.  Since its original maturity in 2004, the line has been renewedannually for a one-year term.  At December 31, 2007, the outstanding balance onthis line is $755,000.  This line was reduced by $828,000 during 2007. 

First Citizens Bancshares, Inc.will be dependent on the profitability of its subsidiaries and their ability topay dividends in order to service its long-term debt.

The Bank has secured advancesfrom the FHLB in the amounts of $52,099,000 at December 31, 2007 and$47,644,000 at December 31, 2006, which are considered long-term in nature.These advances bear interest at rates which vary from 3.99% to 6.55%.  Most ofthe FHLB borrowings have quarterly call features and maturities range from 2008to 2011.  If an advance is called, the Company has the option to pay off theadvance without penalty or to have the advance reprice at a variable rate tiedto the 90-day LIBOR.  Obligations are secured by the Bank's entire portfolio offully disbursed, one-to-four family residential mortgages and multi-familyresidential mortgages.  The Bank had additional borrowing capacity ofapproximately $27 million as of December 31, 2007.

Annual average volume, rates andmaturities of long-term debt for the years 2007 and 2006 are as follows:

Average

Average

Average  

2007

Volume

Interest Rate

Maturity

*(in Thousands)*

* *

* *

* *

* *

First Citizens Bancshares, Inc.

 $

11,560   

7.58%

25 years

First Citizens National Bank

48,763   

5.58%

3 years

2006

First Citizens Bancshares, Inc.

 $

12,576   

5.91%

19 years

First Citizens National Bank

65,102   

5.32%

5 years

Maturities of principal on theabove referenced long-term debt for the following five years are as shown:

Year Ending  December 31,

2008

 $

1,366   

2009

2,556   

2010

33,020   

2011

9,919   

2012

316   

Thereafter

15,988   

 $

63,165   

-44-

**NOTE 14 - INCOME TAXES**

Provision for income taxes is comprised of the following:

**2007**

**2006**

**2005**

Income tax expense (benefit):

 Current

 $

2,336   

 $

2,970   

 $

3,442   

 Deferred

669   

(120)

(355)

 State income tax benefit of operating loss carryforwards

(514)

(406)

(257)

 Change in valuation allowance

514   

406   

257   

 $

3,005   

 $

2,850   

 $

3,087   

Effective tax rates differ fromfederal statutory rate of 34% applied to income before income taxes due to thefollowing:

**2007**

**2006**

**2005**

Tax expenses at statutory rate

 $

4,136   

 $

4,082   

 $

3,996   

Increase (decrease) resulting from:

 state income taxes, net federal income tax benefit

** **

** **

       and change in valuation allowance

-   

-   

-   

 Tax exempt interest income

(728)

(685)

(607)

 Earnings on bank owned life insurance

(236)

(232)

(276)

 ESOP dividend

(157)

(286)

(270)

 Other items

(10)

(29)

244   

 $

3,005   

 $

2,850   

 $

3,087   

Inassessing the realizability of deferred tax assets, management considerswhether it is more likely than not that some portion or all of the deferred taxassets will not be realized.  The ultimate realization of the deferred taxassets is dependent upon the generation of future taxable income during theperiods in which those temporary differences become deductible.  Managementconsiders the scheduled reversal of deferred tax liabilities, projected futuretaxable income, and tax planning strategies in making this assessment.  Basedupon the level of historical taxable income and projections for future taxableincome over the periods in which the deferred tax assets are deductible,management believes it is more likely than not that the Company will realizethe benefit of these deductible differences.  However, the amount of deferredtax assets considered realizable could be reduced in the near term if estimatesof future taxable income during the carryforward period are reduced.  Year-enddeferred tax assets and liabilities were due to the following:

**Deferred Taxes**

**2007**

**2006**

Deferred tax assets:

   Allowance for loan losses

 $

2,423   

 $

2,168   

 Net unrealized loss on available-for-sale

      securities

-   

-   

   Net unrealized loss on cash flow hedge

61   

39   

   Deferred loan fees

135   

119   

   State income tax benefit for net operating loss  carryforwards

1,176   

662   

   Other

98   

73   

     Total deferred tax assets

3,893   

3,061   

Deferred tax liabilities:

** **

** **

   Depreciation

(1,781)

(1,097)

   FHLB stock dividends

(773)

(773)

   Net unrealized gain on available-for-sale

      securities

(649)

(106)

   Prepaid expenses

(115)

(100)

   Other

(288)

-   

      Total deferred tax liabilities

(3,606)

(2,076)

Valuation allowance for state income tax benefit

(1,176)

(662)

          Net deferred tax assets (liabilities)

 $

(889)

 $

323   

At year-end 2007, the Company has a net operating loss carryforwardfor state tax purposes of approximately $3.8 million expiring in 2020, $6.2million expiring in 2021 and estimated $7.9 million expiring in 2022. TheCompany adopted FASB Interpretation No. 48, "Accounting for Uncertainties inIncome Taxes, an Interpretation of FASB Statement No. 109" (FIN48) effectiveJanuary 1, 2007.  FIN 48 provides guidance for how an entity shouldrecognize, measure, present and disclose uncertain tax positions that it hastaken or expects to take on a tax return. As of January 1, 2007 and December 31,2007, the Company had no unrecognized tax benefits.  Our policy is torecognize penalties and interest on unrecognized tax benefits in "Provision forIncome Tax Expense" in the Consolidated Statements of Income. There were noamounts related to interest and penalties recognized for the year ended December31, 2007. The tax years subject to examination by federal and state taxingauthorities are the years ending December 31, 2007, 2006, 2005, and 2004.

-45-

**NOTE 15 - REGULATORY MATTERS**

First Citizens Bancshares, Inc.is subject to various regulatory capital requirements administered by federalbanking agencies.  Failure to meet minimum capital requirements can initiatecertain mandatory, and possibly additional discretionary, actions by regulatorsthat, if undertaken, could have a direct material effect on the Company and theConsolidated Financial Statements.  The regulations require the Bank to meetspecific capital adequacy guidelines that involve quantitative measures of theBank's assets, liabilities, and certain off-balance sheet items as calculatedunder regulatory accounting practices.  The Bank's capital classification isalso subject to qualitative judgments by the regulators about components, riskweightings, and other factors.

Quantitative measures establishedby regulation to ensure capital adequacy require the Bank to maintain minimumamounts and ratios (set forth in the table below) of Tier I capital (as definedin the regulations) to total average assets (as defined), and minimum ratios ofTier I and total risk-based capital (as defined) to risk-weighted assets (asdefined).  To be considered adequately capitalized (as defined) under theregulatory framework for prompt corrective action, the Bank must maintainminimum Tier I leverage, Tier I risk-based, and total risk-based ratios as set forthin the table.  The Bank's actual capital amounts and ratios are also presentedin the table.

As of December 31, 2007, the mostrecent notification from the Bank's primary regulatory authorities categorizedthe Bank and Bancshares as well capitalized under the regulatory framework forprompt corrective action. To be categorized as well capitalized, the Bank mustmaintain minimum total risk-based, Tier I risk-based, and Tier I leverageratios as set forth in the table.  There are no conditions or events sincenotification that management believes have changed the institution's category.

For Capital

Prompt Corrective

Actual

Adequacy  Purposes

Action  Provisions

**Amount**

**Ratio**

**Amount**

**Ratio**

**Amount**

**Ratio**

*(In Thousands)*

**December 31, 2007:**

Total Capital to Risk

Weighted Assets:

 First Citizens Bancshares

 $

78,526   

12.5 %

 $

50,418   

8.0 %

N/A

N/A

 First Citizens National Bank

78,839   

12.5 %

50,457   

8.0 %

 

$ 63,071   

10.0 %

Tier I Capital to Risk

Weighted Assets:

 First Citizens Bancshares

72,198   

11.5 %

25,200   

4.0 %

N/A

N/A

 First Citizens National Bank

72,511   

11.5 %

25,221   

4.0 %

37,832   

6.0 %

Tier I Capital to 

Average Assets:

 First Citizens Bancshares

72,198   

8.5 %

33,936   

4.0 %

N/A

N/A

 First Citizens National Bank

72,511   

8.5 %

34,083   

4.0 %

42,603   

5.0 %

**December 31, 2006:**

Total Capital to Risk

Weighted Assets:

 First Citizens Bancshares

 $

73,629   

12.5 %

 $

47,160   

8.0 %

N/A

N/A

 First Citizens National Bank

74,807   

12.7 %

47,123   

8.0 %

 

$ 58,903   

10.0 %

Tier I Capital to Risk

Weighted Assets:

 First Citizens Bancshares

67,418   

11.4 %

23,573   

4.0 %

N/A

N/A

 First Citizens National Bank

68,596   

11.6 %

23,654   

4.0 %

35,481   

6.0 %

Tier I Capital to 

Average Assets:

 First Citizens Bancshares

67,418   

8.2 %

32,807   

4.0 %

N/A

N/A

 First Citizens National Bank

68,596   

8.4 %

32,665   

4.0 %

40,831   

5.0 %

-46-

**NOTE 16 -CAPITAL**

The Company is subject to capitaladequacy requirements imposed by the Federal Reserve Bank.  In addition, theBank is restricted by the Office of the Comptroller of the Currency from payingdividends in any years that exceeded the net earnings of the current year plusretained profits of the preceding two years.  As of December 31, 2007,approximately $12.0 million of retained earnings were available for futuredividends from the Bank to the Company.

Accumulated Other ComprehensiveIncome, a component of capital, consists of unrealized gains (losses) onavailable-for-sale securities, net of tax and unrealized gain (loss) on cashflow hedge, net of tax.  Accumulated Other Comprehensive Income as of December31, 2007 and 2006 is as follows:

**2007**

** **

**2006**

 Unrealized Gain (Loss) on Cash Flow Hedge, net of tax

 $

(99)

 $

(62)

 Unrealized Gains (Losses) on Available-for-Sale  Securities, net of tax

1,043   

170   

           Accumulated Other Comprehensive Income

 $

944   

 $

108   

**NOTE 17 - RELATED PARTYTRANSACTIONS**

The Company has loans anddeposits with executive officers, directors and their affiliates.  The Companyalso enters into contracts with certain related parties from time to time suchas for construction of a branch.  All related party transactions are enteredinto under substantially the same terms as unrelated third party transactions. All material contracts are awarded based on competitive bids.  

Activity in loans to executiveofficers, directors and their affiliates is as follows for the three yearsended December 31, 2007, 2006 and 2005:

**2007**

** **

**2006**

** **

**2005**

Balance at Beginning of Period

 $

13,450   

 $

14,396   

 $

14,682   

New Loans

5,887   

6,231   

11,209   

Repayments

(2,090)

(7,177)

(11,495)

Balance at End of Period

 $

17,247   

 $

13,450   

 $

14,396   

There were no charged-off,restructured or non-current loans to related parties for any of the periodspresented.  Loans to related parties are made on substantially the same termsas third party transactions.  

Indebtedness shown representsamounts owed by directors and executive officers of the Company and the Bankand by entities in which such persons are general partners or have at least 10%or greater interest and trust and estates in which they have a substantialbeneficial interest.  All loans have been made on substantially the same terms,including interest rates and collateral, as those prevailing at the time forcomparable transactions with others and do not involve other than normal risksof collectibility.  

The Bank routinely enters intodeposit relationships with its directors, officers, and employees in the normalcourse of business.  These deposits bear the same terms and conditions as thoseprevailing at the time for comparable transactions with unrelated parties. Balances of executive officers and directors on deposit as of December 31, 2007and 2006 were $11.5 million and $13.1 million, respectively.

The Bank has invested in theconstruction of three new branches and the operations center over the pastthree years.  Contracts for construction of branch facilities, operationscenter and leasehold improvements for the two new loan production offices wereawarded on a competitive bid basis to a related party.  Contract paymentstotaling approximately $117,000, $1.1 million, and $3.2 million were paid tothe related party in years ended December 31, 2007, 2006 and 2005,respectively.  

In July 2005, the main office ofthe brokerage subsidiary was moved from the Banking Annex to a leased facilityin Dyersburg.  The new facility is leased from a related party.  In 2005, thebrokerage subsidiary invested approximately $100,000 in leasehold improvementsto this facility and paid approximately $11,000 in lease payments during 2005and $22,200 in 2006.  The lease is set up for a five-year term with monthlypayments of $1,850.  The lease includes an option of an additional five-yearterm at the original monthly payment of $1,850 and then another five-yearoption at a monthly rate of $2,460.  Future minimum lease payments for thisrelated party lease are $22,200 per year for each of the next five years.

**NOTE 18 - FINANCIALINSTRUMENTS WITH OFF-BALANCE SHEET RISK**

The Bank is a party to financialinstruments with off-balance sheet risk in the normal course of business tomeet the financing needs of its customers. These financial instruments includecommitments to extend credit and standby letters of credit. These instrumentsinvolve, to varying degrees, elements of credit risk, not recognized in thestatement of financial position. 

The Bank's exposure to creditloss in the event of non-performance by the other party to the financialinstrument for commitments to extend credit and standby letters of credit isrepresented by the contractual amount of those instruments. The same policiesare utilized in making commitments and conditional obligations as are used forcreating on-balance sheet instruments. Ordinarily, collateral or other securityis not required to support financial instruments with off-balance sheet risk.

Commitments to extend credit areagreements to lend to a customer as long as there is no violation of anycondition established in the contract. Loan commitments generally have fixedexpiration dates or other termination clauses and may require payment of a fee.Since many commitments are expected to expire without being drawn upon, totalcommitment amounts do not necessarily represent future cash requirements. Eachcustomer's credit-worthiness is evaluated on a case-by-case basis, andcollateral required, if deemed necessary by the Bank upon extension of credit,and is based on management's credit evaluation of the counter party. AtDecember 31, 2007 and 2006, the Bank had outstanding loan commitments of$122,574,000 and $107,212,000, respectively.  As of year-end 2007, variablerate commitments were $90,326,000 and fixed rate commitments were $32,248,000. As of year-end 2006, variable rate commitments were $84,672,000 and fixed ratecommitments were $22,540,000.  Of these commitments, none had an originalmaturity in excess of one year.

Standby letters of credit andfinancial guarantees are conditional commitments issued by the Bank toguarantee performance of a customer to a third party. Those guarantees areissued primarily to support public and private borrowing arrangements, and thecredit risk involved is essentially the same as that involved in extendingloans to customers. The Bank requires collateral to secure these commitmentswhen deemed necessary. At December 31, 2007 and 2006, outstanding standbyletters of credit totaled $5,925,000 and $4,184,000, respectively.

In the normal course of business,the Bank extends loans, which are subsequently sold to other lenders, includingagencies of the U. S. government.  Certain of these loans are conveyed withrecourse creating off-balance sheet risk with regard to the collectibility ofthe loan.  At December 31, 2007 and 2006, however, the Bank had no loans soldwith recourse. 

**NOTE 19 - SIGNIFICANTCONCENTRATIONS OF CREDIT RISK**

The Bank grants agribusiness,commercial, residential, and personal loans to customers throughout a wide areaof the mid-southern United States.  A large majority of the Bank's loans,however, are concentrated in the immediate vicinity of the Bank or West Tennessee.  Although the Bank has a diversified loan portfolio, a substantial portionof its debtors' ability to honor their obligations is dependent upon theagribusiness and industrial economic sectors of that geographic area.

-47-

**NOTE 20 - DISCLOSURE OF FAIRVALUE OF FINANCIAL INSTRUMENTS**

The following assumptions weremade and methods applied to estimate the fair value of each class of financialinstruments reflected on the balance sheets of the Company:

CASH AND CASH EQUIVALENTS

For instruments, which qualify ascash equivalents, as described in Note 1 of Notes to Consolidated FinancialStatements, the carrying amount is assumed to be fair value.

INVESTMENT SECURITIES

Fair value for investmentsecurities is based on quoted market price, if available.  If quoted marketprice is not available, fair value is estimated using quoted market prices forsimilar securities.  The carrying values of Federal Reserve Bank and FHLB stockapproximate fair value based on the redemption provisions of each bank.

LOANS RECEIVABLE

Fair value of variable-rate loanswith no significant change in credit risk subsequent to loan origination isbased on carrying amounts.  For other loans, such as fixed rate loans, fairvalues are estimated utilizing discounted cash flow analyses, applying interestrates currently offered for new loans with similar terms to borrowers ofsimilar credit quality.  Fair values of loans which have experiencedsignificant changes in credit risk have been adjusted to reflect such changes.

The fair values of accruedinterest receivable and other assets are assumed to be its carrying value.

DEPOSIT LIABILITIES

Demand Deposits

The fair values of deposits whichare payable on demand, such as interest-bearing and non-interest-bearingchecking accounts, passbook savings, and certain money market accounts areequal to the carrying amount of the deposits.

Variable-Rate Deposits

The fair value of variable-ratemoney market accounts and certificates of deposit approximate their carryingvalue at the balance sheet date.

Fixed-Rate Deposits

For fixed-rate certificates ofdeposit, fair values are estimated discounted cash flow analyses, which applyinterest rates currently being offered on certificates to a schedule ofaggregated monthly maturities on time deposits.

2007

2006

Carrying  

Fair  

Carrying  

Fair  

Amount

Value

Amount

Value

 

*(In Thousands)*

**Financial Assets**

Cash and Cash Equivalents

 $

25,242   

 $

25,242   

 $

32,545   

 $

32,545   

Investment Securities

190,407   

190,408   

177,376   

177,377   

Loans

584,639   

548,834   

Less: Allowance for Loan Losses

(6,328)

(6,211)

        Loans, Net of Allowance

578,311   

582,430   

542,623   

534,758   

Loans Held for Sale

2,187   

2,187   

3,449   

3,449   

Accrued Interest Receivable

6,564   

6,564   

6,760   

6,760   

Federal Reserve Bank and Federal

    Home Loan Bank Stock

5,505   

5,505   

5,505   

5,505   

Other Assets

69,442   

69,442   

63,162   

63,162   

**Financial Liabilities**

** **

Deposits

 $

690,595   

 $

691,677   

 $

666,063   

 $

665,764   

Short-term Borrowings

43,743   

43,658   

32,981   

33,541   

Long-term Debt

63,165   

71,717   

59,538   

66,928   

Other Liabilities

3,622   

3,622   

3,340   

3,340   

**Unrecognized Financial Instruments**

** **

Commitments to Extend Credit

 $

122,574   

 $

122,574   

 $

107,212   

 $

107,212   

Standby Letters of Credit

5,925   

5,925   

4,184   

4,184   

**NOTE 21 - EMPLOYEE STOCKOWNERSHIP AND 401(K) PLANS**

The Bank maintains the First Citizens National Bank ofDyersburg Employee Stock Ownership Plan and the First Citizens National Bank401(k) Plan as employee benefits. The 401(k) plan was adopted October 1, 2000. The plans provide for a contribution annually not to exceed 25 percent of thetotal compensation of all participants and affords eligibility forparticipation to all full-time employees who have completed at least one yearof service and are age 21 or older. 

The Company contributes annually amounts equal to threepercent (3%) of total eligible compensation to the 401(k) plan and sevenpercent (7%) of total eligible compensation to the employee stock ownershipplan (ESOP). Total eligible compensation for both plans consists of totalcompensation subject to income tax.  Total eligible compensation includes anysalary deferrals made through the 401(k) Plan and Section 125 Cafeteria Planand is subject to maximum limits set annually by the IRS.   Participants mayalso elect to defer up to 75% of his or her pay into the 401(k) Plan, subjectto dollar limitations imposed by law. 

Cash contributions to the 401(k) plan totaledapproximately $346,000 in 2007, $341,000 in 2006, and $321,000 in 2005.  Cashcontributions to the ESOP totaled approximately $851,000 in 2007, $780,000 in2006, and $774,000 in 2005.  Cash contributions to the 401(k) and ESOP plan arereported in Salaries and Employee Benefits in Other Expenses on theConsolidated Statements of Income. 

The ESOP is a non-leveraged plan and all shares owned bythe ESOP were allocated to participants as of December 31, 2007 and 2006.  Cashdividends paid by the Company on common stock held by the ESOP are charged toretained earnings.  All shares owned by the ESOP are considered outstanding forearnings per share computations.  In the event a terminated or retired Planparticipant desires to sell his or her shares of the Company's stock, or forcertain employees who elect to diversify their account balances, the Companymay be required to purchase the shares from the participant at their fairmarket value.  The ESOP owned 746,572 shares of common stock of the Companywith an estimated fair value of $25.4 million as of December 31, 2007 and730,405 shares of common stock of the Company with an estimated fair value of$24.8 million as of December 31, 2006.  

-48-

**NOTE 22 - CONDENSED FINANCIAL INFORMATION**

**FIRST CITIZENSBANCSHARES, INC.(Parent CompanyOnly)Balance Sheets****December 31, 2007 and 2006*******(In Thousands)*

2007

2006

**ASSETS**

 Cash

 $

233   

 $

132   

 Investment in Subsidiaries

85,964   

81,296   

 Other Assets

0   

49   

TOTAL ASSETS

 $

86,197   

 $

81,477   

**LIABILITIES AND STOCKHOLDERS' EQUITY**

LIABILITIES

 Long Term Debt

 $

11,065   

 $

11,893   

 Accrued Expenses

101   

86   

TOTAL LIABILITIES

11,166   

11,979   

STOCKHOLDERS' EQUITY

75,031   

69,498   

 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 $

86,197   

 $

81,477   

**FIRST CITIZENSBANCSHARES, INC.(Parent CompanyOnly)Condensed IncomeStatementsYears endedDecember 31, 2007 and 2006***(In Thousands)*

2007

2006

*(In Thousands)*

**INCOME**

 Dividends from Bank Subsidiary

 $

6,023   

 $

5,677   

 Other Income

31   

102   

TOTAL INCOME

6,054   

5,779   

**EXPENSES**

 Interest Expense

876   

969   

 Other Expenses

199   

158   

TOTAL EXPENSES

1,075   

1,127   

Income Before Income Taxes and Equity in Undistributed

 Net Income of Bank Subsidiary

4,979   

4,652   

Income Tax Expense (Benefit)

(349)

(349)

5,328   

5,001   

Equity in Undistributed Net Income of Bank Subsidiary

3,832   

4,156   

**  NET INCOME**

 $

9,160   

 $

9,157   

**FIRST CITIZENSBANCSHARES, INC.(Parent CompanyOnly)CondensedStatements of Cash FlowsYears endedDecember 31, 2007 and 2006***(In Thousands)*

2007

2006

**Operating Activities**

Net Income

 $

9,160   

 $

9,157   

Adjustments to Reconcile Net Income to Net Cash

 Provided by Operating Activities:

 Undistributed Income of Subsidiary

(3,832)

(4,156)

 (Increase) Decrease in Other Assets

49   

225   

 Increase (Decrease) in Other Liabilities

15   

46   

NET CASH PROVIDED BY OPERATING ACTIVITIES

 $

5,392   

 $

5,272   

**Investing Activities**

Investment in Subsidiaries

0   

100   

**Financing Activities**

Payment of Dividends and Payments in Lieu of  Fractional Shares

(4,207)

(4,216)

Long Term Borrowings Issued

5,155   

0   

Payment of Principal on Long Term Debt

(5,983)

(1,074)

Treasury Stock Transactions - Net

(256)

(97)

NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES

(5,291)

(5,387)

INCREASE (DECREASE) IN CASH

101   

(15)

Cash at Beginning of Year

132   

147   

**CASH AT END OF YEAR**

 $

233   

 $

132   
 
 -49-

**NOTE 23 - QUARTERLY SELECTED FINANCIAL DATA (UNAUDITED)**

Interest  

Net Interest  

Net

E.P.S.

E.P.S.

Income

Income

Income

Basic

Diluted

**2007**

First Quarter

 $

13,159   

 $

6,687   

 $

2,021   

 $

0.56   

 $

0.56   

Second Quarter

13,451   

6,868   

2,245   

0.62   

0.62   

Third Quarter

13,880   

6,913   

2,504   

0.69   

0.69   

Fourth Quarter

13,789   

6,961   

2,390   

0.66   

0.66   

Total

 $

54,279   

 $

27,429   

 $

9,160   

 $

2.53   

 $

2.53   

**2006**

First Quarter

 $

12,071   

 $

6,604   

 $

2,169   

 $

0.60   

 $

0.60   

Second Quarter

12,722   

6,852   

2,245   

0.62   

0.62   

Third Quarter

13,175   

6,792   

2,424   

0.67   

0.67   

Fourth Quarter

12,959   

6,537   

2,319   

0.63   

0.63   

Total

 $

50,927   

 $

26,785   

 $

9,157   

 $

2.52   

 $

2.52   

** **
NOTE 24-SUBSEQUENT EVENT
The Company adopted EITF 06-4effective January 1, 2008.  The cumulative effect adjustment to retainedearnings for change in accounting principle is $1.9 million to accrue thepostretirement death benefits for endorsement split dollar life insuranceplans.  Expense related to these accruals is estimated at $240,000 for the yearended December 31, 2008.

Imputed Income Tax ReimbursementAgreements for Chairman Katie S. Winchester, CEO & President Jeffrey D.Agee, Chief Operations Officer Judy Long, Director Barry Ladd, and DirectorRalph Henson became effective January 1, 2008 and were entered into in order tokeep the participants at the same after-tax benefit under the Amended andRestated Split Dollar Agreements.  These Imputed Income Tax ReimbursementAgreements provide for annual cash payments to the participants until deathbeginning in March 2009 for the 2008 tax year in amounts equal to the a portionof the amount of the federal and state income taxes attributable to the incomeimputed to the participant on the benefit under the Amended and Restated SplitDollar Agreement.  The accrual for these agreements was recorded January 1,2008 against earnings in the amount of $230,000, net of tax.  Total expense forthe year ended December 31, 2008 is projected to be $245,000.

-50-

**ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTSON ACCOUNTING AND FINANCIAL DISCLOSURE**

Not applicable.

**ITEM 9A. CONTROLS AND PROCEDURES**

The Company, under supervision ofand with the participation of its management, including the Chief ExecutiveOfficer and Chief Financial Officer, evaluated the effectiveness of the designand operation of our disclosure controls and procedures as of the end of theperiod covered by this Annual Report.  Disclosure controls and procedures aredefined in accordance with Rule 13a-15(e) under the Securities Exchange Act. As of the end of the period covered by this Annual Report, disclosure controlsand procedures are considered to be effective.  There have been no changes ininternal control during the quarter ending December 31, 2007, that havematerially affected, or are reasonably likely to materially affect, theCompany's internal control over financial reporting.

See Item 8 for Management'sAnnual Report on Internal Control over Financial Reporting and the relatedIndependent Auditor's attestation opinion.

-51-

**PART III**

**ITEM 10.  DIRECTORS ANDEXECUTIVE OFFICERS OF THE REGISTRANT**

Information appearing inBancshares' 2008 Proxy Statement regarding directors, officers and auditcommittee expert is incorporated herein by reference in response to this Item.

A description of The Code ofEthics (Conduct) for Bancshares included in the 2008 Proxy Statement isincorporated herein by reference in response to this item.

EXECUTIVE OFFICERS OF THEREGISTRANT

The following information relatesto the principal executive officers of Bancshares and its subsidiary, as ofDecember 31, 2007:

Name

Age

Position and Office

Jeffrey D. Agee

47

Appointed CEO of Bancshares and First Citizens National  Bank in April 2007.  Appointed President of Bancshares and First Citizens  National Bank in April 2006.  Mr. Agee is a Certified Public Accountant and  served as Executive Vice President from August 1999 to April 2006 and Chief  Financial Officer of First Citizens from August 1999 to June 2004.  Employed  by First Citizens since 1982.  Appointed to the Board in July 2005.

Sherrell Armstrong

45

Appointed Executive Vice President and Chief Credit  Officer of First Citizens National Bank January 1, 2007. Mr. Armstrong served  as Executive Vice President and Loan Administrator (2003-2007). He also  previously served as Senior Vice President (2002-2003) as well as a Vice  President and Commercial Lender (1997-2002). Employed by First Citizens since  June 1997.

Laura Beth Butler

32

Appointed Senior Vice President and Chief Financial  Officer of First Citizens National Bank and Bancshares June 2004.  Ms. Butler  is a Certified Public Accountant and served as Senior Audit Manager of the  Banking practice of a local accounting firm from 2000 to 2004.

Christian Heckler

40

April 2006 appointed Regional President of the Southwest  Region for First Citizens National Bank. ** **Previously served as  Community Bank President and Commercial Lender.  Appointed to the Board June  2006.

Judy Long

53

Vice President and Secretary to the Board of First  Citizens Bancshares.  Appointed Executive Vice President and Chief Operations  Officer and Secretary of the Board of both First Citizens National Bank and  Bancshares in August 1999.  Ms. Long served as Senior Vice President and  Chief Operations Officer and Secretary to First Citizens prior to this  appointment.  She served as Senior Vice President and Administrative Officer  previous to November 1997, Vice President and Loan Operations Manager  (1992-1996).  Employed by First Citizens on July 19, 1974.

Katie S. Winchester

67

Chairman of the Board of Bancshares and First Citizens  National Bank since April 2005.  Vice Chairman of Board from 2000 to 2005.   Employed by First Citizens in 1961.  Served as Executive Vice President and  Secretary of Board from 1986 to 1992.  She served as CEO of Bancshares and  Bank from 1996 to 2007 and served as President from 1992 to 2006.  Ms.  Winchester was elected to the Bank and Bancshares Boards in 1990. 

-52-

**ITEM 11.  EXECUTIVECOMPENSATION**

The information required underthis Item is set forth in the 2008 Proxy Statement, and is incorporated byreference.  

**ITEM 12.  SECURITY OWNERSHIPOF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

Ownership of Bancshares' commonstock by certain beneficial owners and by management is set forth inBancshares' 2008 Proxy Statement for the Annual Meeting of Shareholders to beheld April 16, 2008, in the sections entitled Voting Securities and Election ofDirectors and is incorporated herein by reference. 

**ITEM 13.  CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

Officers, Directors and principalshareholders of Bancshares (and their associates) have deposit accounts andother transactions with First Citizens National Bank. These relationships arecovered in detail under the section titled "Certain Relationships andRelated Transactions" of the 2008 Proxy Statement under and incorporatedherein by reference.  

**ITEM 14. PRINCIPAL ACCOUNTINGFEES AND SERVICES **

The information required underthis Item is set forth in the 2008 Proxy Statement, and is incorporated byreference.  

**ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, ANDREPORTS ON FORM 8-K**
Financial Statements
The following financial statements of First Citizens Bancshares,Inc., set forth in Item 8 above, are filed as a part of this Form 10-K.
- Reports of Independent Accountants
- Consolidated Balance Sheets as of December 31, 2007 &     2006
- Consolidated Statements of Income for the years ended     December 31, 2007, 2006 & 2005
- Consolidated Statements of Changes in Shareholders' Equity     and Other Comprehensive Income for the years ended December 31, 2007, 2006     & 2005
- Consolidated Statements of Cash Flows for the years ended     December 31, 2007, 2006 & 2005
- Notes to Consolidated Financial Statements
Exhibits
The following Exhibits are filed herewith or incorporatedherein by reference:

ExhibitNumber                Description

3.1                          Charter of First CitizensBancshares, Inc.*

3.2                          Bylaws of First CitizensBancshares, Inc.*

21                           Subsidiaries of the Registrant

31 (a)                     Certification Pursuant to Section302 of the Sarbanes-Oxley Act 

31 (b)                     Certification Pursuant to Section302 of the Sarbanes-Oxley Act

32 (a)                     Certification Pursuant to Section906 of the Sarbanes-Oxley Act

32 (b)                     Certification Pursuant to Section906 of the Sarbanes-Oxley Act

*Incorporated by reference toRegistrant's Annual Report on Form 10-K for the year ended December 31, 2001.

-53-

SIGNATURES

Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be  signed on its behalf by the undersigned,hereunto duly authorized.

First Citizens Bancshares, Inc.(Registrant)
** 

                                   Date: March 14, 2008                               /s/ JEFFREY D. AGEE                                                                                                      PRESIDENT AND CHIEF EXECUTIVE OFFICER                                                                                                    

                                   Date: March 14, 2008                              /s/    LAURA BETH BUTLER                                                                                                                 SENIORVICE PRESIDENT &PRINCIPAL                                                                                                            FINANCIAL OFFICER  

-56-
** 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following personson behalf of the Registrant and in the capacitiesindicated on March 14, 2008.**/s/        JEFFREY D. AGEE
/s/        RALPH E. HENSON**/s/        DWIGHT S. WILLIAMSDirectorDirectorDirector

/s/        EDDIE E. ANDERSON
/s/        BARRY T. LADD
/s/        KATIE S. WINCHESTERDirectorDirectorDirector

/s/        J. WALTER BRADSHAW
/s/        JOHN M. LANNOM
/s/        JOSEPH S. YATESDirectorDirectorDirector

/s/        J. DANIEL CARPENTER
/s/        STALLINGS LIPFORDDirectorDirector

/s/        WILLIAM C. CLOAR
/s/        MILTON E. MAGEEDirectorDirector

/s/        RICHARD W. DONNER
/s/        ALLEN SEARCYDirectorDirector

/s/        BENTLEY F. EDWARDS
/s/        GREEN SMITHEAL, IIIDirectorDirector

/s/        LARRY W. GIBSON
/s/        DAVID R. TAYLORDirectorDirector

/s/        CHRISTIAN E. HECKLER
/s/        LARRY S. WHITEDirectorDirector

/s/        P. H. WHITE, JR.Director
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