----

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 31,2010

[  ]       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) **One FirstCitizens PlaceDyersburg, Tennessee 38024(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:Title of each class    NoneName of Each Exchange on Which Registered****N/A
**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 [  ].

Indicate by check mark whether the registrant has submitted electronically andposted on its corporate Web site, if any, every Interactive Data File requiredto be submitted and posted pursuant to Rule 405 of Regulation S-T during thepreceding 12 months (or for such shorter period that the registrant was requiredto submit and post such files).  Yes [ ] No [ ] 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 RegulationS-K 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 or a smaller reporting company.  See definitions of "large accelerated filer,""acceleratedfiler" and "smaller reporting company" in Rule 12b-2 of the Exchange Act (Check One):                                        Large accelerated filer [ ]     Accelerated filer[x]                                           Non-accelerated filer [ ]      Smaller reporting company [ ]

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 on June 30, 2010 wasapproximately$77,247,680 based upon the last known sale price prior to such date.

As ofFebruary 15, 2011, the registrant had 3,625,826 outstanding shares of commonstock.

**________________________**

**DOCUMENTSINCORPORATED BYREFERENCE:**

Certain information called for by Part III of Form10-K is incorporated by reference to the Proxy Statement for our 2011 AnnualMeeting of Shareholders to be filed with the Commission within 120 days afterDecember 31, 2010.

 
ITEM 1.  BUSINESS.
**General**

First Citizens Bancshares, Inc. (the "Company") is a financial holdingcompany incorporated in Tennessee in 1982. Through its principal banksubsidiary, First Citizens National Bank (the "Bank"), the Company conductscommercial banking and financial services operations primarily in West Tennessee. At December 31, 2010, the Company and its subsidiaries had total assets of$974 million and total deposits of $792 million. The Company's principal executiveoffices are located at One First Citizens Place, Dyersburg, Tennessee 38024 andits telephone number is (731) 285-4410.

The Company,headquartered in Dyersburg, Tennessee, is the holding company for the Bank andFirst Citizens (TN) Statutory Trusts III and IV.  These trusts hold theCompany's trust preferred debt and are not consolidated but are accounted forunder the equity method in accordance with generally accepted accountingprinciples.

The Bank is adiversified financial services institution that provides banking and otherfinancial services to its customers. The Bank provides customary bankingservices, such as checking and savings accounts, fund transfers, various typesof time deposits, safe deposit facilities, financing of commercial transactionsand making and servicing both secured and unsecured loans to individuals, firmsand corporations. The Bank is the only community bank in Tennessee recognizedas a Preferred Lender for Farm Service Agency.  The Bank's agriculturalservices include operating loans as well as financing for the purchase ofequipment and farmland. The Bank's consumer lending department makes directloans to individuals for personal, automobile, real estate, home improvement,business and collateral needs. The Bank typically sells long-term residentialmortgages that it originates to the secondary market without retainingservicing rights. The Bank's commercial lending operations include varioustypes of credit services for customers.

The Bank has the followingsubsidiaries:
-  First Citizens Financial Plus, Inc., a bank service corporationwholly owned by the Bank, provides licensed brokerage services that allow theBank to compete on a limited basis with numerous non-bank entities that providesuch services to the Company's customer base.  The brokerage firm operatesthree 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 agency, 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% ownership in the    agency, which is accounted for using the equity method.
-  First Citizens Investments, Inc. was organized and exists underlaws of the state of Nevada.  The principal activity of this entity is toacquire and sell investment securities as well as collect income from theportfolio.  First Citizens Investments, Inc. owns the following subsidiary: 
-        First Citizens Holdings, Inc. is a Nevada corporation and is a wholly      owned subsidiary of First Citizens Investments, Inc., acquires and sells      certain investment securities, collects income from its portfolio, and      owns the following subsidiary:
-          First Citizens Properties, Inc. is a real estate investment trust        organized and existing under the laws of the state of Maryland, the        principal activity of which is to invest in participation interests in        real estate loans made by the Bank and provide the Bank with an        alternative vehicle for raising capital.  First Citizens Holdings,        Inc. owns 100% of the outstanding common stock and 60% of the        outstanding preferred stock of First Citizens Properties, Inc.        Directors, executive officers and certain employees and affiliates of the Bank own        approximately 40% of the preferred stock which is reported as        Noncontrolling Interest in Consolidated Subsidiaries in the Consolidated        Balance Sheets of the Company included elsewhere in this Annual Report        on 10-K. 

-1-

The following table sets forth acomparative analysis of key balance sheet metrics of the Company as of December31, for the years indicated (in thousands):

2010

 

2009

 

2008

 
Total assets

 $

974,378 

 $

956,555 

 $

927,502 

Total deposits

791,845 

752,146 

734,915 

Total net loans

539,675 

578,614 

589,458 

Total equity capital

89,279 

84,367 

77,063 

The table belowprovides a comparison of the Company's performance to industry standards basedon information provided by the Federal Reserve. The Company is grouped withpeers that have assets totaling $500 million to $1 billion in this analysis.According to the September 30, 2010 Bank Holding Company Performance Report,which is the most recent report available as of the date of this Annual Reporton Form 10-K, the Company's peer group consisted of 450 bank holding companies.The following table presents comparisons of the Company with its peers asindicated in Bank Holding Company Performance Reports for the years endedDecember 31 for each of the years indicated:

2010

2009

2008

Company

Peer(1)

Company

Peer

Company

Peer

Net interest income to average assets

3.77%

3.43%

3.74%

3.33%

3.28%

3.39%

Net operating income to average assets

0.92%

0.32%

0.89%

-0.13%

0.83%

0.29%

Net loan losses to average total loans

1.38%

1.03%

0.93%

1.18%

0.31%

0.52%

Tier I capital to average assets(2)

8.87%

8.86%

8.40%

8.51%

8.13%

8.69%

Cash dividends to net income

40.86%

28.75%

45.27%

38.66%

55.85%

42.70%

________________

(1) Peer information is provided for the nine months endedSeptember 30, 2010, which is the most recent information available.(2) Tier I Capital to average assets is the ratio of core equity capitalcomponents to average total assets.

The Company andthe Bank employed a total of 259 full-time equivalent employees as of December31, 2010.  The Company and the Bank are committed to hiring and retaining highquality employees to execute the Company's strategic plans.

The Company's Internet website address is www.firstcitizens-bank.com. TheCompany makes its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,Current Reports on Form 8-K and all amendments to those reports available freeof charge by link on its website on the "About Us - Investor Relations" webpageunder the caption "SEC Filings" as soon as reasonably practicable after suchmaterial is electronically filed with, or furnished to, the Securities andExchange Commission (the "SEC"). Shareholders may request a copy of the annual,quarterly or current reports without charge by contacting Judy Long, Secretary,First Citizens Bancshares, Inc., P. O. Box 370, Dyersburg, Tennessee 38025-0370.

**Expansion**

The Company, through its strategicplanning process, intends to seek profitable opportunities that utilize excesscapital and maximize income in Tennessee.  If the Company decides to acquireother banking institutions, its objective would be asset growth anddiversification into other market areas. Acquisitions and de novo branchesmight afford the Company increased economies of scale within operationfunctions and better utilization of human resources. The Company would onlypursue an acquisition or de novo branch if the Company's Board of Directorsdetermines it to be in the best interest of the Company and its shareholders. The Company does not currently have plans to acquire other bankinginstitutions.

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In 2008, the Company expanded byopening a full-service branch in Franklin, Tennessee.  The Company also ownstwo lots in Jackson, Tennessee which it purchased for construction offull-service facilities.  The lots were purchased in 2007 and 2008, butconstruction is temporarily on hold because of current economic conditions. Construction of these facilities is expected to commence in one to three years.

**Competition**

The business ofproviding financial services is highly competitive. In addition to competingwith other commercial banks in the service area, the Bank competes with savingsand loan associations, insurance companies, savings banks, small loancompanies, finance companies, mortgage companies, real estate investmenttrusts, certain governmental agencies, credit card organizations, credit unionsand other enterprises.  In 1998, federal legislation allowed credit unions toexpand their membership criteria. Expanded membership criteria coupled withexisting tax-exempt status give credit unions a competitive advantage comparedto banks.    

The Bank buildsand implements strategic plans and commitments to address competitive factorsin the various markets it serves.  The Bank's primary strategic focus is onobtaining and maintaining profitable customer relationships in all markets itserves.  The markets demand competitive pricing, but the Bank competes on highquality customer service that will attract and enhance loyal, profitablecustomers to the Bank.  Industry surveys have consistently revealed that 65-70%of customers leave banks because of customer service issues.  Accordingly, theBank is committed to excellent customer service in all markets that it serves asa means of branding and distinguishing itself from other financialinstitutions.  The Bank utilizes advertising, including both newspaper andradio, and promotional activities to support its strategic plans.  

The Bank offersa typical mix of interest-bearing transactions, savings and time depositproducts, as well as traditional non-interest bearing deposit accounts. TheBank is a leader in deposit market share compared to competitors in Dyer,Fayette, Lauderdale, Obion, Tipton and Weakley counties. The Bank hasconsistently been a leader in market share of deposits in its markets forseveral years. The Bank's market share has been 18% to 20% in Dyer, Fayette,Lauderdale, Obion, Tipton and Weakley counties combined and in excess of 62% in  Dyer County for the last three years.  The following market share informationfor these counties (banks only, deposits inside of market) is from the DepositMarket Share Report, as of June 30, 2010, prepared annually by the FDIC(dollars in thousands):

# of  

Total Deposits

% of Market Share

Bank Name

Offices

 

June 30, 2010

 

As of June 30,  2010

First State Bank

15

 $

747,025   

22.76%

First Citizens National Bank

13

612,590   

18.62%

Regions Bank

9

280,830   

8.56%

Bank of Fayette County

7

203,948   

6.21%

Somerville Bank & Trust Co.

5

159,399   

4.86%

Bank of Ripley

4

150,071   

4.57%

BancorpSouth Bank

6

149,646   

4.56%

Commercial Bank & Trust

2

114,499   

3.49%

Security Bank

6

98,865   

3.01%

INSOUTH Bank

2

95,449   

2.91%

Reelfoot Bank

6

93,617   

2.85%

First Farmers Bank of Lynchburg

3

74,233   

2.26%

First South Bank

2

71,151   

2.17%

Patriot Bank

2

58,743   

1.79%

Bank of Gleason

1

58,325   

1.78%

Bank of Halls

2

53,697   

1.64%

Brighton Bank

2

45,208   

1.38%

Greenfield Banking Co.

2

40,706   

1.24%

Clayton Bank and Trust

2

37,102   

1.13%

Lauderdale County Bank

2

36,924   

1.13%

Gates Banking & Trust Co.

1

34,828   

1.06%

All others

8

64,795   

2.02%

    Total

101

 $

3,281,651   

100.00%

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The Bank alsocompetes in the Shelby and Williamson County markets.  Because the size andcomposition of these two markets is much larger and more diverse than the othermarkets in which the Bank operates, Shelby and Williamson Counties are excludedfrom the above table.  The Bank's market share in Shelby County was 0.75% and0.62%****as of June 30, 2010 and 2009, respectively.  The Bank's marketshare in Williamson County was 0.18% and 0.11% as of June 30, 2010 and 2009,respectively.

**Regulation and Supervision**

The Company is aone-bank financial holding company under the Bank Holding Company Act of 1956,as amended, and is subject to supervision and examination by the Board ofGovernors of the Federal Reserve (the "Federal Reserve"). As a financialholding company, the Company is required to file with the Federal Reserveannual reports and other information regarding its business obligations andthose of its subsidiaries.  Federal Reserve approval must be obtained beforethe Company may:

•        Acquire ownership or control of any voting securities of a bankor bank holding company where the acquisition results in the bank holdingcompany owning or controlling more than 5% of a class of voting securities  of that bank or bank holding company; or

•        Acquire substantially all assets of a bank or bank holdingcompany or merge with another bank holding company.

Federal Reserveapproval is not required for a bank subsidiary of a bank holding company tomerge with or acquire substantially all assets of another bank if priorapproval of a federal supervisory agency, such as the Comptroller of theCurrency is required under the Bank Merger Act.

The Bank HoldingCompany Act provides that the Federal Reserve shall not approve anyacquisition, merger or consolidation that would result in a monopoly or wouldbe in furtherance of any combination or conspiracy to monopolize or attempt tomonopolize the business of banking in any part of the United States.  Further, the Federal Reserve may not approve any other proposed acquisition, merger,or consolidation, the effect of which might be to substantially lessencompetition or tend to create a monopoly in any section of the country, orwhich in any manner would be in restraint of trade, unless the anti-competitiveeffect of the proposed transaction is clearly outweighed in favor of publicinterest by the probable effect of the transaction in meeting convenience andneeds of the community to be served. Further, an application may be denied ifthe applicant has failed to provide the Federal Reserve with adequate assurancesthat it will make available such information on its operations and activities,and the operations and activities of any affiliate, deemed appropriate todetermine and enforce compliance with the Bank Holding Company Act and anyother applicable federal banking statutes and regulations.  In addition,consideration is given to the competence, experience and integrity of theofficers, directors and principal shareholders of the applicant and anysubsidiaries as well as the banks and bank holding companies concerned.  TheFederal Reserve also considers the record of the applicant and its affiliatesin fulfilling commitments to conditions imposed by the Federal Reserve inconnection with prior applications.

A bank holdingcompany is prohibited with limited exceptions from engaging directly orindirectly through its subsidiaries in activities unrelated to banking ormanaging or controlling banks. One exception to this limitation permitsownership of a company engaged solely in furnishing services to banks; anotherpermits ownership of shares of the company, all of the activities of which theFederal Reserve has determined after due notice and opportunity for hearing, tobe so closely related to banking or managing or controlling banks, as to be aproper incident thereto. 

*Usury, State Legislation andEconomic Environment*

Tennessee usury laws limit the rate of interest that may be charged by banks. Certainfederal laws provide for preemption of state usury laws. 

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Tennessee usury laws permit interest at an annual rate of four percentage points above theaverage prime loan rate for the most recent week for which such an average ratehas been published by the Federal Reserve, or 24%, whichever is less. The "MostFavored Lender Doctrine" permits national banks to charge the highest ratepermitted by any state lender.

Specific usurylaws may apply to certain categories of loans, such as the limitation placed oninterest rates on single pay loans of $1,000 or less with a term of one year orless.  Rates charged on installment loans, including credit cards as well asother types of loans, may be governed by the Industrial Loan and ThriftCompanies Act.

*Gramm-Leach-Bliley Act*

                Among otherthings, the Gramm-Leach-Bliley Financial Modernization Act of 1999 ("GLBA") modifiedfinancial privacy and community reinvestment laws. The new financial privacyprovisions generally prohibit financial institutions such as the Bank fromdisclosing non-public personal financial information to third parties unlesscustomers have the opportunity to opt out of the disclosure.  GLBA alsomagnifies the consequences of a bank receiving less than a satisfactoryCommunity Reinvestment Act ("CRA") rating, by freezing new activities until theinstitution achieves a better CRA rating.

*Bank Secrecy Act*

Over the past 30plus years, Congress has passed several laws impacting a financialinstitution's responsibilities relating to the Bank Secrecy Act.  In 2005, theFederal Financial Institutions Examination Council ("FFIEC") and federalbanking agencies released the interagency "Bank Secrecy Act Anti-MoneyLaundering Examination 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 specificexamination procedures performed will depend on the BSA/AML risk profile of thebanking organization, the quality and quantity of independent testing, thefinancial institution's history of BSA/AML compliance and other relevantfactors.   The Bank has implemented effective risk-based policies andprocedures that reinforce existing practices and encourage a vigilantdetermination to prevent the institution from becoming associated withcriminals or being used as a channel for money laundering or terroristfinancing activities.

*USA Patriot Act*

                The USA PatriotAct (the "Patriot Act") enhances the powers of the federal government and lawenforcement organizations to combat terrorism, organized crime and moneylaundering.  The Patriot Act significantly amended and expanded the applicationof the Bank Secrecy Act, including enhanced customer identity measures, newsuspicious activity reporting rules and enhanced anti-money launderingprograms. Under the Patriot Act, each financial institution is required toestablish and maintain anti-money laundering programs, which include, at aminimum, the development of internal policies, procedures, and controls; thedesignation of a compliance officer; an ongoing employee training program; andan independent audit function to test programs.  In addition, the Patriot Actrequires the federal banking agencies to consider the record of a bank orbanking holding company in combating money laundering activities in theirevaluation of bank and bank holding company merger or acquisition transactions.The Bank has implemented policies and procedures in compliance with statedregulations of the Patriot Act.

*FDIC Insurance Coverage*

Beginning withthe Emergency Economic Stabilization Act of 2008, several changes have beenmade to federal deposit insurance coverage with regard to the types of accountscovered and coverage limits.  Included in these changes, basic FDIC coverageper depositor temporarily increased to $250,000 effective through December 31,2013 and rules on revocable trusts were amended to remove qualificationrequirements and allow $250,000 coverage per beneficiary. Two separateinsurance components were created under the FDIC Temporary Liquidity GuaranteeProgram: (i) the Debt Guarantee Program; and (ii) the Transaction AccountGuarantee Program ("TAGP").  The Bank opted to participate only in the TAGPcomponent, under which certain non-interest-bearing transaction accountbalances are temporarily fully guaranteed through June 30, 2010.  The Bank'sFDIC insurance premium assessments will be affected based on participation inTAGP and also as a result of assessment increases required to replenish theFDIC insurance fund ("DIF") following the failure of numerous financialinstitutions in 2008 and 2009. Both the increase of deposit increase to$250,000 per depositor and the unlimited deposit insurance for certainnon-interest bearing transaction accounts (similar to those accounts covered byTAGP) were made permanent as part of the Dodd-Frank Wall Street Reform andProtection Act (the "Dodd-Frank Act") signed into law in July of 2010. 

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As a result ofincreased bank failures and a decrease in the DIF, on September 29, 2009, theFDIC required all insured financial institutions to prepay three years ofdeposit insurance premiums. The FDIC may require additional special assessmentpayments if the DIF balance continues to decline.

In October 2008,the FDIC proposed a rule to alter the way in which it differentiates for riskin the risk-based assessment system and to revise deposit insurance assessmentrates, including base assessment rates.  The FDIC also proposed to introducethree adjustments that could be made to an institution's initial baseassessment rate, including (i) a potential decrease of up to two basis pointsfor long-term unsecured debt, including senior and subordinated debt, (ii) apotential increase for secured liabilities in excess of 15% of domesticdeposits and (iii) for certain institutions, a potential increase for brokereddeposits in excess of 10% of domestic deposits. In addition, the FDIC proposedraising the current rates uniformly by 7 basis points for the assessment forthe first quarter of 2009. The proposal for first quarter 2009 assessment rateswas adopted as a final rule in December 2008.  On April 1, 2009, the FDIC madeadditional changes to assessment rates, increasing them to 10-14 basis pointsfor Risk Category I institutions and 45 basis points for Risk Category IVinstitutions.  In addition, on May 22, 2009, the FDIC adopted a final ruleimposing up to a 10-basis point emergency special assessment based on a bank'sReport of Condition as of June 30, 2009. This special assessment was collectedon September 30, 2009.  The Dodd-Frank Act also revised the assessment base fordeposit insurance premiums so that assessments will be based on a bank'saverage consolidated total assets less its average amount of tangible equity. As part of this change in the assessment base, there are proposed changes toassessment rates.

*Customer Information Securityand Customer Financial Privacy*

The Board ofGovernors of the Federal Reserve System published guidelines for CustomerInformation Security and Customer Financial Privacy with a mandatory effectivedate of July 1, 2001.  The Bank has established policies in adherence to thepublished guidelines.  

The threeprincipal requirements relating to the Privacy of Consumer FinancialInformation in GLBA are as follows:

•      Financial institutions must provide customers with noticesdescribing their privacy policies and practices, including policies withrespect to disclosure of nonpublic personal information to affiliates and tononaffiliated third parties. Notices must be provided at the time the customerrelationship is established and annually thereafter;

•     Subject to specified exceptions, financial institutions may notdisclose nonpublic personal information about consumers to any nonaffiliatedthird party unless consumers are given a reasonable opportunity to direct thatsuch information not be shared (to "opt out"); and

•     Financial institutions generally may not disclose customeraccount numbers to any nonaffiliated third party for marketing purposes.

The CustomerInformation Security guidelines implement section 501(b) of GLBA, whichrequires agencies to establish standards for financial institutions relating toadministrative, technical and physical safeguards for customer records andinformation. The guidelines require financial institutions to establish aninformation security program to: identify and assess risks that may threatencustomer information; develop a written plan containing policies and proceduresto manage and control these risks; implement and test the plan; and adjust theplan on a continuing basis to account for changes in technology, thesensitivity of customer information, and internal or external threats to informationsecurity.

Each institutionmay implement a security program appropriate to its size, complexity, natureand scope of its operations. The Bank has structured and implemented afinancial security program that complies with all principal requirements of theact.

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Regulatoryagencies also published the "Interagency Guidance on Response Programs forUnauthorized Access to Customer Information and Customer Notice."  Eachfinancial institution is required to implement a response program to addressunauthorized access to sensitive customer information maintained by theinstitution or its service providers.  The Bank has implemented an appropriateresponse program, which includes: formation of an "Incident Response Team";properly assessing and investigating any incident; notifying the Office of theComptroller of the Currency (the "OCC") of any security breach, if necessary;taking appropriate steps to contain and control any incident; and notifyingaffected customers when required.

*Identity TheftPrevention Program*

                The Fair andAccurate Credit Transactions Act ("FACT") requires banking institutions toimplement an Identity Theft Prevention Program to detect, prevent and mitigateidentity theft in connection with the opening of certain accounts or certain existingaccounts. Program requirements include incorporating federal guidelines oninvestigating customer address discrepancies and identifying other "red flags"that may indicate potential identity theft.  The Bank has implemented acomprehensive Identity Theft Prevention Program, which covers all customeraccounts and accomplishes the following standards as set forth in FACT: (1)identify relevant red flags for covered accounts; (2) detect red flags; (3)respond appropriately to any red flags detected; and (4) ensure the program isupdated periodically.

*FederalLegislation on Banking Products and Services*

                Following theeconomic crises of 2008, Congress and the regulatory agencies issuedlegislation, rules and regulations creating or amending numerous requirementson disclosures, documentation, and procedures in relation to several productsand services offered by financial institutions.  Many of these proposalsprovide customers with additional disclosure information and protections.  Theregulatory changes include, but are not limited to, the Real Estate SettlementProcedures Act, Federal Reserve Regulation E governing overdraft protection,the Truth in Lending Act and the Truth in Savings Act.  The Bank's policies andprocedures are being revised to incorporate recent regulatory requirements andensure full compliance.

*Federal MonetaryPolices*

Monetarypolicies of the Federal Reserve have a significant effect on operating resultsof bank holding companies and their subsidiary banks.  The Federal Reserve regulatesthe national supply of bank credit by open market operations in U.S. government securities, changes in the discount rate on bank borrowings and changes inreserve requirements against bank deposits.

Federal Reservemonetary policies have materially affected the operating results of commercialbanks in the past and are expected to do so in the future.  The nature offuture monetary policies and the effect of such policies on the business andearnings of the company and its subsidiaries cannot be accurately predicted.

*The Dodd-Frank Wall Street Reform and Consumer ProtectionAct*

The passage of the Dodd-Frank Act brought about a major overhaul of thecurrent financial institution regulatory system. Among other things, the Dodd-Frank Act establishes anew, independent Consumer Financial Protection Bureau tasked with protectingconsumers from unfair, deceptive and abusive financial products and practices.The Dodd-Frank Act also requires the implementation of the "Volcker Rule" forbanks and bank holding companies, which would prohibit, with certain limitedexceptions, proprietary trading, investment in and sponsorship of hedge fundsand private equity funds, and otherwise limit the relationships with suchfunds. The Dodd-Frank Act includes provisions that, among other things,reorganize bank supervision and strengthen the Federal Reserve. The Dodd-FrankAct also requires fees charged for debit card transactions, commonly referredto as interchange fees, to be both "reasonable and proportional" to the costincurred by the card issuer. 

Further, the Dodd-Frank Act provides that the appropriate federalregulators must establish standards prohibiting as an unsafe and unsoundpractice any compensation plan of a bank holding company or other "coveredfinancial institution" that provides an insider or other employee with"excessive compensation" or could lead to a material financial loss to suchfirm. In June 2010, prior to the implementation of the Dodd-Frank Act, the bankregulatory agencies promulgated the Interagency Guidance on Sound IncentiveCompensation Policies, which requires that financial institutions establishmetrics for measuring the impact of activities to achieve incentivecompensation with the related risk to the financial institution of such behavior.Together, the Dodd-Frank Act and the recent guidance on compensation may impactthe current compensation policies at the Bank.  The Dodd-Frank Act providesother restrictions including limiting the ability of financial institutions toutilize trust preferred securities as tier one capital going forward, andrequiring institutions to retain credit risk when selling loans to thirdparties. 

-7-

*Basel III*

On September 12, 2010, the oversight body of the Basel Committeeannounced a package of reforms which will increase existing capitalrequirements substantially over the next four years as well as add additionalliquidity requirements onto banks, commonly referred to as Basel III. Thesereforms were endorsed by the G20 at the summit held in Seoul, South Korea in November 2010. The short-term and long-term impact of the new Basel III capitalstandards and the forthcoming new capital rules to be proposed for non-BaselIII U.S. banks is uncertain. As a result of the recent deterioration in theglobal credit markets and the potential impact of increased liquidity risk andinterest rate risk, it is unclear what the short-term impact of theimplementation of Basel III may be or what impact a pending alternativestandardized approach to Basel III option for non-Basel III U.S. banks may haveon the cost and availability of different types of credit and the potentialcompliance costs of implementing the new capital standards.

*SmallBusiness Act of 2011*

As part of the Small Business Act of 2010, the Small Business LendingFund (the "SBLF") was created within the Treasury Department.  As announced onJanuary 14, 2010, the SBLF will buy preferred shares from banks, with the rateof return on these shares directly tied to the increase in small businesslending undertaken at the bank.  To date, the Bank has not chosen toparticipate in the SBLF.

*Revisionsto Regulation E*

*               *OnJuly 31, 2010, the Federal Reserve implemented revised Regulation E. The effectof this revision was to allow customers of the Bank to opt out of overdraftprotection programs, and thereby potentially reduce fee income generated by theBank.  The Bank has taken all steps necessary to be compliant with the revisedRegulation E.

*InsuranceActivities*

               Subsidiaries ofthe Company sell various types of insurance as agents in the State of Tennessee.  Insurance activities are subject to regulation by the states in which suchbusiness is transacted.  Although most of such regulation focuses on insurancecompanies and their insurance products, insurance agents and their activitiesare also subject to regulation by the states, including, among other things,licensing and marketing and sales practices.

-8-
ITEM 1A. RISK FACTORS.
Informationcontained herein includes forward-looking statements with respect to thebeliefs, plans, risks, goals and estimates of the Company.  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," "will," "intend," "is likely," "going forward," "may" and otherexpressions are intended to identify forward-looking statements.  Theseforward-looking statements are within the meaning of section 27A of theSecurities Act of 1933, as amended, and section 21E of the Securities ExchangeAct of 1934, as amended.  Such statements may include, but are not limited to,capital resources, strategic planning, acquisitions or de novo branching,ability to meet capital guidelines, legislation and governmental regulationsaffecting financial services companies, construction of new branch locations,dividends, critical accounting policies, allowance for loan losses, fair valueestimates, goodwill, occupancy and depreciation expense, held-to-maturitysecurities, available-for-sale securities, trading securities, cash flows, coredeposit intangibles, diversification in the real estate loan portfolio, interestincome, maturity of loans, loan impairment, loan ratings, charge-offs, otherreal estate owned, maturity and re-pricing of deposits, borrowings with callfeatures, dividend payout ratio, off-balance sheet arrangements, the impact ofrecently issued accounting standards, changes in funding sources, liquidity,interest rate sensitivity, net interest margins, debt securities, non-accrualstatus of loans, contractual maturities of mortgage-backed securities andcollateralized mortgage obligations, other-than-temporary impairment ofsecurities, amortization expense, deferred tax assets, independent appraisalsfor collateral, property enhancement or additions, efficiency ratio, ratio ofassets to employees, net income, changes in interest rates, loan policies,categorization of loans, maturity of FHLB borrowings and the effectiveness ofinternal control over financial reporting.

Forward-lookingstatements are based upon information currently available and representmanagement's expectations or predictions of the future. As a result of risksand uncertainties involved, actual results could differ materially from suchforward-looking statements. The potential factors that could affect theCompany's results include but are not limited to:

•        Changes in general economic and business conditions;

•        Changes in market rates and prices of securities, loans, depositsand other financial instruments;

•        Changes in legislative or regulatory developments affectingfinancial institutions in general, including changes in tax, banking,insurance, securities or other financial service related laws;

•        Changes in government fiscal and monetary policies;

•        The ability of the Company to provide and market competitiveproducts and services;

•        Concentrations within the loan portfolio;

•        Fluctuations in prevailing interest rates and the effectiveness of the Company'sinterest rate hedging strategies;

•        The Company's ability to maintain credit quality;

•        The effectiveness of the Company's risk monitoring systems;

•        The ability of the Company's borrowers to repay loans;

•        The availability of and costs associated with maintaining and/orobtaining adequate and timely sources of liquidity;

•        Geographic concentration of the Company's assets and susceptibility to economicdownturns in that area;

•        The ability of the Company to attract, train and retain qualifiedpersonnel;

•        Changes in consumer preferences; and

•        Other factors generally understood to affect the financialresults of financial services companies.

-9-

The Company undertakes no obligation to update itsforward-looking statements to reflect events or circumstances that occur afterthe date of this Annual Report on Form 10-K.

In addition to the factors listedabove, management believes that the risk factors set forth below should beconsidered in evaluating the Company's business. The relevant risk factorsoutlined below may be supplemented from time to time in the Company's pressreleases and filings with the Securities and Exchange Commission.

**We aresubject to credit quality risks and our credit policies may not be sufficientto avoid losses.**

                We are subjectto the risk of losses resulting from the failure of borrowers, guarantors andrelated parties to pay interest and principal amounts on loans.  Although wemaintain credit policies and credit underwriting, monitoring and collectionprocedures that management believes are sufficient to manage this risk, thesepolicies and procedures may not prevent losses, particularly during periods inwhich the local, regional or national economy suffers a general decline.  If alarge number of borrowers fail to repay their loans, our financial conditionand results of operations may be adversely affected.

**Earnings could be adverselyaffected if values of other real estate owned decline.**

**               **We aresubject to the risk of losses from the liquidation and/or valuation adjustmentson other real estate owned.  We owned over 100 properties totaling $14.7million in other real estate owned as of December 31, 2010.  Other real estateowned is valued at the lower of cost or fair market value less cost to sell. Fair market values are based on independent appraisals for properties valued at$50,000 or greater and appraisals are updated annually.  We may incur futurelosses on these properties if economic and real estate market conditions resultin further declines in the fair market value of these properties.  

**If our allowance for loanlosses becomes inadequate, our financial condition and results of operationscould be adversely affected.**

We maintain anallowance for loan losses that we believe is a reasonable estimate of known andinherent losses in our loan portfolio. Management uses various assumptions andjudgments to evaluate on a quarterly basis the adequacy of the allowance forloan losses in accordance with generally accepted accounting principles as wellas regulatory guidelines. The amount of future losses is susceptible to changesin economic, operating and other conditions, changes in interest rates whichmay be beyond our control, and these losses may exceed current estimates.Although we believe the allowance for loan losses is a reasonable estimate ofknown and inherent losses in our loan portfolio, we cannot fully predict suchlosses or that our loan loss allowance will be adequate in the future.Excessive loan losses could have an adverse effect on our financialperformance. 

Federal andstate regulators periodically review our allowance for loan losses and mayrequire us to increase our provision for loan losses or recognize further loancharge-offs, based on judgments different than those of our management. Anyincrease in the amount of our provision or loans charged-off as required bythese regulatory agencies could have an adverse effect on our results ofoperations.

**Changes in interest ratescould have an adverse effect on our earnings.**

Ourprofitability is in part a function of interest rate spread, or the differencebetween interest rates earned on investments, loans and other interest-earningassets and the interest rates paid on deposits and other interest-bearingliabilities. Interest rates are largely driven by monetary policies set by theFederal Open Market Committee, or FOMC, and trends in the prevailing marketrate of interest embodied by the yield curve.  The FOMC establishes targetrates of interest to influence the cost and availability of capital and promotenational economic goals.  In December 2008, the FOMC cut rates to a historicallow of a range of 0.00% to 0.25%.  Federal funds rates remained at that levelthrough December 2010.  The yield curve is a representation of the relationshipbetween short-term interest rates to longer-term debt maturity rates. Currently, the yield curve is fairly steep as short-term rates continue athistoric lows.  As of December 31, 2010, the Bank is liability sensitive interms of interest rate risk exposure, meaning that the Bank will likelyexperience margin compression when federal funds rates increase.  In otherwords, upward pressure on deposit interest rates will outpace increases in theinterest rates on interest-earning assets.  Deposits are currently priced athistorically low levels and are likely to reprice at a faster pace thaninterest-earning assets when the rate environment begins rising.  The majorityof variable-rate loans are priced at floors that will require significantincrease in federal fund and prime rates before loan yields increase.  FederalHome Loan Bank borrowings comprise the majority of wholesale borrowings, themajority of which will reprice steadily over the next 18 months.

-10-

Prepayment ofprincipal cash flows from the investment portfolio is expected to be steady in2011 as rates continue to be very low. Credit availability has improvedrecently because of the actions of the Federal Reserve and U. S. TreasuryDepartment as described above. Reinvestment rates on the investment portfoliohave dropped significantly (greater than 100 basis points) over the last 12months.

If the rate ofinterest paid on deposits and other borrowings increases more than the rate ofinterest earned on loans and other investments, our net interest income and,therefore, earnings could be adversely affected. Earnings could also beadversely affected if the rates on loans and other investments fall morequickly than those on deposits and other borrowings. While management takesmeasures to guard against interest rate risk, there can be no assurance thatsuch measures will be effective in minimizing the exposure to interest raterisk. A sudden and significant increase in the market rate of interest could havea material adverse effect on the Company's financial position and earnings.

**We are geographicallyconcentrated in West Tennessee, and changes in local economic conditions mayimpact our profitability.**

We operateprimarily in West Tennessee and the majority of all loan customers and mostdeposit and other customers live or has operations in this area. Accordingly,our success depends significantly upon growth in population, income levels,deposits, housing starts and continued attraction of business ventures to thisarea. Our profitability is impacted by changes in general economic conditionsin this market. One area of particular concern for 2011 is the residential realestate market in the Shelby County and surrounding markets. As inventoriesescalated and sales declined in 2008 and 2009, the loan portfolio wasnegatively impacted as the real estate market moved toward economic equilibriumin 2010.  Additionally, unfavorable local or national economic conditions couldreduce our growth rate, affect the ability of our customers to repay theirloans and generally affect our financial condition and results of operations.

We are less ablethan larger institutions to spread the risks of unfavorable local economicconditions across a large number of diversified economies. Moreover, we areunable to give assurance that we will benefit from any market growth orfavorable economic conditions in our primary market areas if they do occur.

**If financial market conditionsworsen or our loan demand increases significantly, our liquidity position couldbe adversely affected.**

We rely ondividends from the Bank as our primary source of funds. The Bank's primarysources of funds are client deposits and loan repayments. While scheduled loanrepayments have historically been a relatively stable source of funds, they aresusceptible to the inability of borrowers to repay the loans. The ability ofborrowers to repay loans can be adversely affected by a number of factors,including changes in economic conditions, adverse trends or events affectingbusiness industry groups, reductions in real estate values or markets, businessclosings or lay-offs, natural disasters and national or internationalinstability. Additionally, deposit levels may be affected by a number offactors, including rates paid by competitors, general interest rate levels,regulatory capital requirements, returns available to clients on alternativeinvestments and general economic conditions. Accordingly, we may be requiredfrom time to time to rely on secondary sources of liquidity to meet withdrawaldemands or otherwise fund operations. Such sources include Federal Home LoanBank advances, sales of securities and loans, and federal funds lines of creditfrom correspondent banks, as well as out-of-market time deposits. While webelieve that these sources are currently adequate, there can be no assurancethey will be sufficient to meet future liquidity demands, particularly if wecontinue to grow and experience increasing loan demand. We may be required toslow or discontinue loan growth, capital expenditures or other investments orliquidate assets should such sources not be adequate.

**Market conditions couldadversely affect our ability to obtain additional capital on favorable terms,should we need it.**

Our businessstrategy calls for continued growth. We anticipate that we will be able tosupport this growth through the generation of additional deposits at new branchlocations, as well as through returns realized as a result of investmentopportunities. However, we may need to raise additional capital in the futureto support continued growth and maintain capital levels. We may not be able toobtain additional capital in the amounts or on terms satisfactory to us. Growthmay be constrained if we are unable to raise additional capital as needed.

-11-

**Failure to remain competitivein an increasingly competitive industry may adversely affect results ofoperations and financial condition.**

We encounterstrong competition from other financial institutions in our market areas. Inaddition, established financial institutions not already operating in ourmarket areas may open branches in our market areas at future dates or maycompete in the market via the internet. Certain aspects of our banking businessalso compete with savings institutions, credit unions, mortgage bankingcompanies, consumer finance companies, insurance companies and otherinstitutions, some of which are not subject to the same degree of regulation orrestrictions imposed on us. Many of these competitors have substantiallygreater resources and lending limits and are able to offer services that we donot provide. While we believe that we compete effectively with these otherfinancial institutions in our market areas, we may face a competitivedisadvantage as a result of our smaller size, smaller asset base, lack ofgeographic diversification and inability to spread our marketing costs across abroader market. If we have to raise interest rates paid on deposits or lowerinterest rates charged on loans to compete effectively, our net interest marginand income could be negatively affected. Failure to compete effectively toattract new or to retain existing clients may reduce or limit our margins andour market share and may adversely affect our results of operations andfinancial condition.

**We expect the failure of otherbanks to increase our expenses.**

The failure ofnumerous banks from 2008 through 2010 may have a negative impact on ourearnings, as premiums required for FDIC insurance may continue to increase in2011 and beyond.**** In 2009, we paid FDIC deposit insurance assessmentstotaling $5.6 million, including a special assessment of $425,000 paid duringthird quarter 2009 and prepaid assessment of $4.5 million paid in fourthquarter 2009, as compared to aggregate payments of approximately $144,000 in2008.  In 2010, approximately $1.2 million of the prepaid assessment wasexpensed and included in non-interest expense.  We cannot give any assurancesthat the FDIC will not require additional special assessments or increasedeposit insurance assessments in the future.  

**Adverseperceptions about our business could adversely affect our results of operationsand financial condition.**

We believe thatour reputational risk increased significantly during the recent economicrecession as a result of the elevated number of bank failures and volume ofnegative media headlines related to the banking industry. As a result, the FDICimplemented various programs to help mitigate such risks, including increasingdeposit insurance limits to $250,000. As part of its strategic initiatives,management implemented various action plans including communications with andtraining sessions for our staff and communications to local customers and civicgroups regarding management's view on stability in the Company as well as mostlocal community banking institutions.  

The publicperception of our ability to conduct business and expand our customer base mayalso be affected by practices of the Company's board of directors, managementand employees. Significant relationships with vendors, customers and otherexternal parties may also affect our reputation. Adverse perceptions about ourbusiness practices or the business practices of those with whom we havesignificant relationships could adversely impact our results of operations andfinancial condition. 

**We are subject to extensivegovernment regulation and supervision.**

We are subjectto extensive federal and state regulation and supervision.  Banking regulationsare primarily intended to protect depositors' funds, federal deposit insurancefunds and the banking system as a whole, not our shareholders.  Theseregulations affect our lending practices, capital structure, investmentpractices and dividend policy and growth, among other things.  Future changesto statutes, regulations or regulatory policies, including changes ininterpretation or implementation of statutes, regulations or policies, couldaffect us in substantial and unpredictable ways.  Such changes could subject usto additional costs, limit the types of financial services and products we mayoffer and/or increase the ability of non-banks to offer competing financialservices and products, or decrease the flexibility in pricing certain productsand services by the Bank, among other things.  Failure to comply with laws,regulations or policies could result in sanctions by regulatory agencies, civilmoney penalties, civil liability and/or reputation damage, which could have amaterial adverse effect on our financial condition and results of operations.While our policies and procedures are designed to deter and detect any suchviolations, there can be no assurance that such violations will not occur.

-12-

**Our common stock is not listedor traded on any established securities market and is normally less liquid thansecurities traded in those markets.**

Our common stockis not listed or traded on any established securities market and we have noplans to seek to list our common stock on any recognized exchange. Accordingly,our common stock has substantially less daily trading volume than the averagesecurities listed on any national securities exchange. Most transactions in ourcommon stock are privately negotiated trades and the shares are very thinlytraded. There is no dealer for our stock and no "market maker." Our shares donot have a trading symbol. The lack of a liquid market can produce downwardpressure on our stock price and can reduce the marketability of our shares.

**Our ability to pay dividendsmay be limited.**

As a holdingcompany, the Company is a separate legal entity from the Bank and does notconduct significant income-generating operations of its own. It currentlydepends upon the Bank's cash and liquidity to pay dividends to itsshareholders. We cannot provide assurance that in the future the Bank will havethe capacity to pay dividends to the Company. Various statutes and regulationslimit the availability of dividends from the Bank. It is possible, dependingupon the Bank's financial condition and other factors, the Bank's regulatorscould assert that payment of dividends by the Bank to the Company is an unsafeor unsound practice. In the event that the Bank is unable to pay dividends tothe Company, we may not be able to pay dividends to our shareholders.
ITEM 1B UNRESOLVED STAFF COMMENTS
** **None. 
ITEM 2. PROPERTIES
The Bank has 16full-service bank financial centers, three drive-through only branches, oneloan production office and 30 ATMs spread over nine****Tennessee counties.A list of available banking locations and hours is maintained on the Bank'swebsite (www.firstcitizens-bank.com) under the "Locate Us" section.  The Bankowns and occupies the following properties:

•        The Bank's main branch and executive offices are located in asix-story building at One First Citizens Place (formerly 200 West Court),Dyersburg, Dyer County, Tennessee.  This property also includes the Banking  Annex, which hasan address of 215-219 Masonic Street.  The Banking Annex houses the Bank'soperations, information technology, call center, bank security and maildepartments;

•        The Bank's downtown drive-through branch is located at 117 SouthChurch Street, Dyersburg, Dyer County, Tennessee, and is a remote motor bankwith six drive-thru lanes and a drive-up ATM lane;

•        The Green Village Financial Center, located at 620 U.S. 51 Bypass adjacent to the Green Village Shopping Center in Dyersburg,Dyer County, Tennessee, is a full-service banking facility;

•        The Newbern Financial Center, a full-service facility, is locatedon North Monroe Street, Newbern, Dyer County, Tennessee;

•        The Industrial Park Financial Center located at 2211 St. John Avenue, Dyersburg,Dyer County, Tennessee is a full-service banking facility;

•        The Ripley Financial Center is a full-service facility located at  316 Cleveland Street in Ripley, Lauderdale County, Tennessee;

•        The Troy Financial Center is a full-service banking facilitylocated on Harper Street just west of Highway 51 in Troy, Obion County, Tennessee;

-13-

•        The Union City Financial Center operates one full-servicefacility, one motor branch and three ATMs in Obion County.  The main office islocated at 100 Washington Avenue in Union City, Tennessee, and the drive-through branchis located across from the main office at First and Harrison Streets. 

•        The Martin Financial Center is a full-service facility located at  200 University Avenue, Martin, Weakley County, Tennessee;

•        The Munford Financial Center is a full-service facility****locatedat 1426 Munford Avenue in Munford, Tipton County, Tennessee.  In addition, adrive-through facility is located at 1483 Munford Avenue, also in Munford;

•        The Atoka Financial Center is a full-service facility****locatedat 123 Atoka-Munford Avenue, Atoka, Tipton County, Tennessee;

•        The Millington Financial Center is a full-service branch facilitylocated at 8170 Highway 51 N. Millington, Shelby County, Tennessee;

•        The Bartlett Financial Center is a full-service facility****locatedat 7580 Highway 70, Bartlett, Shelby County, Tennessee;

•        The Arlington Financial Center is a full-service facility locatedat 5845 Airline Road, Arlington, Shelby County, Tennessee;

•        The Oakland Financial Center is a full-service facility locatedat 7285 Highway 64, Oakland, Fayette County, Tennessee;

•        The Collierville Financial Center is a full-service facilitylocated at 3668 South Houston Levee in Collierville, Shelby County, Tennessee;

•        The Franklin Financial Center is a full-service facility locatedat 1304 Murfreesboro Road in Franklin, Williamson County, Tennessee;

•        A lot located on Christmasville Cove in Jackson, Madison County,Tennessee, that was purchased in 2007 and on which the Company expects toconstruct a full-service branch location in the next one to three years;   and

•        A lot located on Union University Drive in Jackson, Madison County, Tennessee,that was purchased in February 2008 and on which the Company expects toconstruct a full-service branch in the next one to three   years.

The Bank ownsall properties and there are no liens or encumbrances against any propertiesowned by the Bank.  All properties described above are adequate and appropriatefacilities to provide banking services as noted and are adequate to handlegrowth expected in the foreseeable future.  As growth continues or needschange, individual property enhancements or additional properties will beevaluated as necessary.
ITEM 3. LEGAL PROCEEDINGS.
Various legal claimsarise from time to time through the normal course of business of the Companyand its subsidiaries.  There was no material pending or threatened litigationagainst the Company or its subsidiaries as of December 31, 2010.

-14-
PART IIITEM 5.        MARKETFOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES.
**Holders and Market Information**

As of February15, 2011, there were 1,062 shareholders of the Company's common stock. TheCompany's common stock is not listed or traded on any established publictrading market. The table below shows the quarterly range of high and low saleprices for the Company's common stock during the fiscal years 2010 and 2009.  Thesesale prices represent known transactions reported to the Company and do notnecessarily represent all trading transactions for the periods.

Year

High

Low

2010

First Quarter

 $

32.00   

 $

32.00   

Second Quarter

32.00 

32.00 

Third Quarter

32.00 

32.00 

Fourth Quarter

34.00 

32.00 

2009

First Quarter

 $

31.00   

 $

28.00   

Second Quarter

28.00   

26.00   

Third Quarter

26.00   

26.00   

Fourth Quarter

32.00   

29.80   

**Dividends**

The Company paidaggregate dividends per share of the Company's common stock of $1.00 in 2010and $1.04 in 2009.  The following quarterly dividends per share of common stockwere paid for 2010 and 2009:

Quarter

2010

2009

 First Quarter

 $

0.15 

 $

0.29 

 Second Quarter

0.15 

0.15 

 Third Quarter

0.15 

0.15 

 Fourth Quarter(1)

0.55 

0.45 

      Total

 $

1.00 

 $

1.04 

________________

(1)           OnDecember 15, 2010, the Company paid a special dividend of $0.40 per share,payable to holders of record as of November 15, 2010, in addition to the fourthquarter dividend of $0.15 per share.  On December 15, 2009, the Company paid aspecial dividend of $0.30 per share, payable to holders of record as ofNovember 15, 2009, in addition to the fourth quarter dividend of $0.15 pershare.

Future dividends will depend on theCompany's earnings, financial condition, regulatory capital levels and otherfactors, which the Company's Board of Directors considers relevant.  See thesection above entitled "Item 1. Business - Regulation and Supervision" and Note16 to the Company's Consolidated Financial Statements included elsewhere inthis Annual Report on 10-K for more information on restrictions and limitationson the Company's ability to pay dividends.

**Issuer Purchases of EquitySecurities**

The Company hadno publicly announced plans or programs for purchase of stock during 2010.There were no shares of Company common stock repurchased during the quarterended December 31, 2010.

-15-

**Unregistered Sale ofSecurities**

The Company sold808 shares of its common stock in 2010 at a price of $32.00 per share for anaggregate price of $25,856.  Sales of these shares occurred in 2010 as follows(in dollars, except number of shares):

No. of

Aggregate

Date

Shares

Price

January 29, 2010

800

 $

25,600   

July 8, 2010

8

256 

           808  

 $

25,856 

The Company alsosold 1,519 shares of its common stock in 2009 at a weighted average price of$27.69 per share for an aggregate price of $42,054 and sold 150 shares of itscommon stock in 2008 at a weighted average price of $34.74 per share for anaggregate price of $5,211.  The Company used proceeds from such sales to paygeneral expenses of the Company. All shares of common stock were issued inreliance upon the exemption from the registration requirements of theSecurities Act of 1933, as amended (the "Securities Act"), as set forth inSection 4(2) under the Securities Act and, in some cases, Rule 506 ofRegulation D promulgated thereunder relating to sales by an issuer not involvingany public offering, to the extent an exemption from such registration wasrequired.
ITEM 6. SELECTED FINANCIAL DATA.
The followingtable presents selected financial data of the Company for the 12 months endedDecember 31, for the years indicated (dollars in thousands, except per sharedata):

2010

2009

2008

2007

2006

Net interest income 

 $

34,377   

 $

33,199   

 $

29,833   

 $

27,429   

 $

26,785   

Gross interest income 

46,347   

49,011   

52,467   

54,279   

50,927   

Income from continuing operations

8,875   

8,327   

7,529   

9,160   

9,157   

Net income per common share

2.45   

2.30   

2.08   

2.53   

2.52   

Cash dividends declared per common share

1.00   

1.04   

1.16   

1.16   

1.16   

Total assets at year-end

974,378   

956,555   

927,502   

876,156   

831,420   

Long-term obligations (1)

42,296   

42,216   

73,843   

63,165   

59,538   

Allowances for loan losses as a % of total loans

1.47%

1.50%

1.22%

1.08%

1.13%

Allowances for loan losses as a % of

 non-performing loans

76.40%

96.87%

168.09%

336.24%

471.96%

Loans 90 days past due as a % of total loans

1.12%

1.54%

0.73%

0.32%

0.24%

________________

(1) Long-term obligations consistof Federal Home Loan Bank ("FHLB") advances that mature after December 31, 2011,and trust-preferred securities.

-16-
**ITEM 7. MANAGEMENT'SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**Executive Overview
For the year ended December 31,2010, the Company's stable core earnings streams resulted in a return on equity("ROE") of 9.8%.  Dividends were reduced slightly from $1.04 per share in 2009to $1.00 in 2010.  Strong net interest margins, gains on sale ofavailable-for-sale securities and management's commitment to efficiency andcost control served to more than offset challenges presented by the currenteconomic recession.  Net income for 2010 increased to $8.9 million compared to $8.3million in 2009 and $7.5 million in 2008.  Challenges in 2010 consisted of but werenot limited to stressed real estate conditions and job losses in local markets,provision for loans losses, expenses related to other real estate owned("OREO") and other-than-temporary impairment on a small volume ofavailable-for-sale securities.

The major drivers of increasedearnings were increased net interest income and gain on sale ofavailable-for-sale securities.  Provision for loan losses was $7.0 million in2010 compared to $7.1 million in 2009 and $2.9 million in 2008.  Gain on saleof available for sale securities totaled $1.9 million in 2010 compared to $1.2million in 2009 and net credit losses of other-than-temporary impairmentrealized in earnings totaled approximately $589,000 compared to approximately$651,000 in 2009.  Earnings per share were $2.45 for the year ended December31, 2010 compared to $2.30 for the year ended December 31, 2009 and $2.08 forthe year ended December 31, 2008.  

During 2010, capital growth of 5.8%outpaced asset growth of 1.9%.  Capital growth greater than asset growth wasattributable to a $5.2 million increase in retained earnings, partially offsetby a $2.4 million decrease in accumulated other comprehensive income.  Also,preferred shares totaling $2 million accounted for as a non-controllinginterest in a consolidated subsidiary were issued to an affiliate in 2010.  Increasedretained earnings of $5.2 million was a result of increased earnings and lowerdividends in 2010 compared to 2009.  Decreased accumulated other comprehensiveincome was a result of unrealized depreciation of the available-for-salesecurities portfolio compared to prior year.  Return on average equity was 9.80%for 2010 compared to 10.19% for 2009 and 10.07% for 2008.  Return on assets("ROA") was 0.92%, 0.89% and 0.83% for 2010, 2009 and 2008, respectively.  ROEof 9.80% and ROA of 0.92% for 2010 exceeded the same measures for the SoutheastPublic Bank Peer Report, as produced by Mercer Capital'sFinancial Institutions Group (the "Peer Report"), which reported an average ROE of negative 15.42% andaverage ROA of negative 0.37% for 2010.  

In 2010, the Company's dividendpayout ratio was 41% which was slightly lower than the Company's historicalrange of 45% to 55% over the past five years.  Dividend yield for 2010 was 3.13%,which was comparable to historical dividend yields in excess of 3%.  The PeerReport reported a peer dividend payout ratio of 50.6% and a dividend yield of1.52% for 2010.  

Maintaining and improving netinterest margins continues to be a top priority for many financialinstitutions, including the Bank.  The Company's net interest margin had been stablefrom 2005 to 2008 in the range of 3.75% to 4.00% and increased to 4.20% in 2009and 4.28% in 2010.  Interest rate risk position for the Company is liabilitysensitive, which also contributed to the improvement of net interest margins in2009 and 2010.  For more information, see Item 7A of this Annual Report on Form10-K.  

The efficiency ratio is ameasure of non-interest expense as a percentage of total revenue.  The Companycomputes the efficiency ratio by dividing non-interest expense by the sum ofnet interest income on a tax equivalent basis and non-interest income.  This isa non-GAAP financial measure, which management believes provides investors withimportant information regarding the Company's operational efficiency. Comparison of the Company's efficiency ratio with those of other companies maynot be possible because other companies may calculate the efficiency ratiodifferently.  The efficiency ratio for the years 2010, 2009 and 2008 was 59.03%,59.78%, and 66.14%, respectively.  

The tangible common equity ratiois a non-GAAP measure used by management to evaluate capital adequacy. Tangiblecommon equity is total equity less net accumulated other comprehensive income("OCI"), goodwill and deposit-based intangibles. Tangible assets aretotal assets less goodwill and deposit-based intangibles.  The tangible commonequity ratio was 7.84% as of year-end 2010 compared to 7.20% in 2009 and 6.92%in 2008.

-17-

A reconciliation of non-GAAPmeasures of efficiency ratio and tangible common equity is provided as follows(dollars in thousands):

2010

 

2009

 

2008

**Efficiency ratio:**

Net interest income(1)

 $

36,368   

 $

34,891   

 $

31,033   

Non-interest income(2)

12,270   

12,462   

11,395   

      Total revenue

48,638   

47,353   

42,428   

Non-interest expense

28,710   

28,309   

28,064   

Efficiency ratio

59.03 %

59.78 %

66.14 %

**Tangible common equity ratio:**

** **

** **

** **

** **

** **

Total equity capital

 $

89,279   

84,312   

 $

77,008   

Less:

Accumulated other comprehensive income

1,896   

4,256   

1,526   

Goodwill

11,825   

11,825   

11,825   

Other intangible assets

120   

204   

289   

Tangible common equity

 $

75,438   

 $

68,027   

 $

63,368   

Total assets

 $

974,378   

 $

956,555   

 $

927,502   

Less:

Goodwill

11,825   

11,825   

11,825   

Other intangible assets

120   

204   

289   

Tangible assets

 $

962,433   

 $

944,526   

 $

915,388   

Tangible common equity ratio

7.84%

7.20%

6.92%

___________________

(1)           Net interest income includes interest andrates on securities that are non-taxable for federal income tax purposes thatare presented on a taxable equivalent basis based on a federal statutory rateof 34%.

(2)           Non-interest income is presented net ofany credit losses from other-than-temporary impairment losses onavailable-for-sale securities recognized against earnings for the yearspresented.  
Critical Accounting Policies
The accountingand reporting of the Company and its subsidiaries conform to accountingprinciples generally accepted in the United States ("GAAP") and follow generalpractices within the industry.  Preparation of financial statements requiresmanagement to make estimates and assumptions that affect amounts reported inthe financial statements and accompanying notes. Management believes that theCompany's estimates are reasonable under the facts and circumstances based onpast experience and information supplied from professionals, regulators andothers.  Accounting estimates are considered critical if (i) management isrequired to make assumptions or judgments about items that are highly uncertainat the time estimates are made and (ii) different estimates reasonably couldhave been used during the current period, or changes in such estimates arereasonably likely to occur from period to period, that could have a materialimpact on presentation of the Company's Consolidated Financial Statements. 

The development,selection and disclosure of critical accounting policies are discussed andapproved by the Audit Committee of the Bank's Board of Directors.  Because ofthe potential impact on the financial condition or results of operations andthe required subjective or complex judgments involved, management believes itscritical accounting policies consist of the allowance for loan losses, fairvalue of financial instruments and goodwill.

-18-
*Allowance For Loan Losses*
The allowancefor losses on loans represents management's best estimate of inherent losses inthe existing loan portfolio.  Management's policy is to maintain the allowancefor loan losses at a level sufficient to absorb reasonably estimated andprobable losses within the portfolio.  Management believes the allowance forloan loss estimate is a critical accounting estimate because:  (i) changes canmaterially affect provision for loan loss expense on the income statement, (ii)changes in the borrower's cash flows can impact the reserve, and (iii) managementmakes estimates at the balance sheet date and also into the future in referenceto the reserve.  While management uses the best information available toestablish the allowance for loan losses, future adjustments may be necessary ifeconomic or other conditions change materially.  In addition,federal regulatory agencies as a part of their examination process periodicallyreview the Bank's loans and allowances for loan losses and may require the Bankto recognize adjustments based on their judgment about information available tothem at the time of their examination.  See Note 1 of the Company'sConsolidated Financial Statements included elsewhere in this Annual Report onForm 10-K for more information.
*Fair Value of Financial Instruments*
Certain assetsand liabilities are required to be carried on the balance sheet at fair value. Further, the fair value of financial instruments must be disclosed as a part ofthe notes to the consolidated financial statements for other assets andliabilities.  Fair values are volatile and may be influenced by a number offactors, including market interest rates, prepayment speeds, discount rates,the shape of yield curves and the credit worthiness of counter parties. 

Fair values forthe majority of the Bank's available-for-sale investment securities are basedon observable market prices obtained from independent asset pricing servicesthat are based on observable transactions but not quoted market prices.  

Fair value of derivatives(if any) held by the Company is determined using a combination of quoted marketrates for similar instruments and quantitative models based on market inputsincluding rate, price and index scenarios to generate continuous yield orpricing curves and volatility factors.  Third party vendors are used to obtainfair value of available-for-sale securities and derivatives (if any). For moreinformation, see Notes 1 and 20 in the Company's Consolidated FinancialStatements included elsewhere in this Annual Report on Form 10-K.  

*Goodwill*

The Company'spolicy is to review goodwill for impairment at the reporting unit level on anannual basis unless an event occurs that could potentially impair the goodwillamount.  Goodwill represents the excess of the cost of an acquired entity overfair value assigned to assets and liabilities.  Management believes accountingestimates associated with determining fair value as part of the goodwill testare critical because estimates and assumptions are made based on prevailingmarket factors, historical earnings and multiples and other contingencies. Formore information, see Notes 1 and 8 in the Consolidated Financial Statementsincluded elsewhere this Annual Report on Form 10-K.
Results of Operations
The Companyreported consolidated net income of $8.9 million for the year ended December31, 2010 compared to $8.3 million in 2009 and $7.5 million in 2008.  Theincrease from 2010 to 2009 was a result of increases in net interest income andgain on sale of available-for-sale securities, which served to more than offsetincreased expenses and losses related to OREO.  Earnings per share were $2.45for 2010 compared to $2.30 for 2009 and $2.08 for 2008. Return on averageassets was 0.92%, 0.89% and 0.83% for the years ended December 31, 2010, 2009and 2008, respectively.  Return on average equity was 9.80%, 10.19% and 10.07% for2010, 2009 and 2008, respectively.  

Asset growth wasmodest at less than 2% in 2010 compared to 3.1% in 2009 and 5.9% in 2008. Asset growth of $18 million was driven primarily by growth inavailable-for-sale investment securities of $45 million.  Federal funds sold increased$7 million, net loans decreased $39 million and OREO increased $4 million in 2010compared to 2009.  Deposit growth of 5.3% or $40 million in 2010 consisted ofincreased savings deposits of $28 million and increased time deposits of $12million.  Demand deposits were flat at $100 million at both year-end 2010 and2009.

-19-

Prevailingeconomic factors including, but not limited to, stressed real estate markets,job losses and the market interest rate environment put pressure on assetquality during 2009 and 2010.  The Bank has been challenged by deterioratingasset quality over the past three years primarily because of the downturn inreal estate markets in and around Shelby County, Tennessee.  Economicconditions have resulted in non-performing loans and OREO levels abovehistorical ranges experienced in recent years prior to 2008.  While economictrends were unfavorable over the past three years, such conditions wereconsidered manageable by the Company's management and core earnings streamswere generally able to absorb required increased provision for loan losses aswell as increased expense and losses related to OREO.  Non-performing loans asa percent of total loans showed more favorable trends at 1.12% as of year-end2010 compared to 1.54% as of year-end 2009.  Non-performing loans and OREO as apercent of total loans plus OREO at December 31, 2010 were 3.71% compared to3.28% and 1.63% at December 31, 2009 and 2008, respectively,****while theBank's peer group's average was 4.61% as reported in the Uniform Bank Performance Report for all insured commercialbanks having assets between $300 million and $1 billion ("UBPR") at December31, 2010.  Net charge-offs in 2010 were $7.8 million compared to $5.6 millionin 2009 and $1.9 million in 2008.  The allowance for loan losses as a percentof non-performing loans was 130.9%, 96.8% and 167.2% as of December 31, 2010,2009 and 2008, respectively.  Unfavorable trends in these key asset qualitymetrics over the last three years began to show some improvement by year-end2010.  OREO totaled $14.7 million, $10.5 million and $5.4 million as ofDecember 31, 2010, 2009 and 2008, respectively. 

Provision forloan losses was flat at $7 million in both 2009 and 2010.  The allowance forloan losses as a percent of total loans was 1.47% at year-end 2010 compared to 1.50%at year-end 2009 and 1.22% at year-end 2008.  Additions made to the reserveaccount, as a percent of gross charge-offs, for 2010 were 85.5% compared to 118.6%in 2009 and 125.7% for 2008.  The allowance for loan losses was evaluated inaccordance with GAAP and was weighted toward actual historical losses andincluded factor adjustments for changes in environmental conditions.  Themethodology used to evaluate the adequacy of the allowance was revised slightlyin fourth quarter 2010 pursuant to ASC Update 2010-20 Receivables (Topic 310),Disclosures about the Credit Quality of Financial Receivables and the Allowancefor Credit Losses but did not result in a significant change in the requiredreserve considered necessary to absorb probable losses.  For more information,see the section below entitled "Recently Issued Accounting Standards."

The allowancefor loan losses as of December 31, 2010 compared to December 31, 2009 trendeddownward in terms of amount allocated and as a percentage of total loansbecause of decreased loans in 2010 and improving trends of past due andimpaired loans.  The allowance for loan losses was considered adequate for eachof the periods presented to properly account for changes in the economies oflocal markets, changes in collateral values, variables in underwriting methods,levels of charged-off loans and volumes of non-performing loans.  See additionalinformation regarding the allowance for loan losses in Notes 1 and 4 to theConsolidated Financial Statements included elsewhere in this Annual Report onForm 10-K.

Consistent withprior years, the Company continues to show asset quality indicators below peerlevels in terms of loans 30-89 days past due and nonperforming loans. Comparison of key asset quality indicators between the Company and peers wereas follows for the last five years:

 2010

 

 2009  

 

 2008  

 

 2007  

 

 2006  

COMPANY

 

PEER*

 

COMPANY

 

PEER

 

COMPANY

 

PEER

 

COMPANY

 

PEER

 

COMPANY

 

PEER

Allowance as % of total  loans

1.47%

1.93%

1.50%

1.82%

1.22%

1.43%

1.08%

1.21%

1.13%

1.21%

Non-performing loans to  total loans

1.12%

3.21%

1.54%

3.14%

0.74%

2.07%

0.32%

1.03%

0.24%

0.55%

Loans 30-89 days past due to  total loans

0.44%

1.20%

0.93%

1.44%

1.15%

1.43%

0.74%

1.11%

0.62%

0.79%

Net charge-offs to average  total loans

1.38%

0.99%

0.93%

1.06%

0.31%

0.51%

0.13%

0.18%

0.23%

0.11%

___________________

*              Peer data is derived from the UBPR as ofDecember 31 of the year indicated.

The Company'sallowance as a percent of loans was less than peer as the Company'snon-performing loans (loans 90 days or more past due accruing interest andnon-accrual loans) were also below peer as of year-end 2010.  For moreinformation regarding loans and allowance for loan losses, see the sectionbelow entitled "Financial Condition -- Loan Portfolio Analysis" and Note 1 tothe Consolidated Financial Statements included elsewhere in this Annual Reporton Form 10-K.

Net yield onaverage earning assets improved to 4.28% for 2010 compared to 4.20% for 2009and 3.84% for 2008.  Net interest margin improvement was attributed to theCompany's ability to reprice interest bearing liabilities at lower rates,primarily time deposits and other borrowings, in a greater volume thandecreases in yields on interest earning assets.  The Bank remained in aliability sensitive position as of year-end 2010 and could face margincompression when the rate environment begins rising.  For more informationabout the Company's interest rate sensitivity, see Item 7A of this AnnualReport on Form 10-K.

-20-

Totalnon-interest income for 2010 decreased approximately $254,000 compared to 2009. The net decrease was primarily attributable to losses recognized on OREOtotaling $1.2 million in 2010 compared to approximately $470,000 in 2009. Other-than-temporary credit impairment losses on available-for-sale securitiesfor 2010 and 2009 totaled approximately $589,000 and $651,000, respectively,and related primarily to two different series of pooled trust preferredsecurities.  

Non-interestincome from mortgage banking and service charges on deposits were flat in 2010compared to 2009.  Despite the challenges of the national real estate market,the markets served by the Bank continued to deliver consistent mortgageactivity and overall stable non-interest income.  Gross income and feesrecorded from mortgage activity totaled $1.1 million per year in each of thepast three years.  Income from fiduciary activities totaled approximately$785,000 in 2010 compared to approximately $806,000 in 2009 and approximately$816,000 in 2008.  Bank-owned life insurance ("BOLI") earnings totaledapproximately $677,000 in 2010 compared to approximately $830,000 in both 2009and 2008.  Fee income from deposit accounts, which included interchange fees ondebit and ATM transactions, was $6.9 million per year in 2010 and 2009 and $7.2million in 2008.  Recent legislation that became effective in 2010 will likelyresult in dilution of overdraft fee income and interchange income with respectto the Bank's debit card program beginning in 2011.  Brokerage fees decreasedapproximately $237,000 in 2010 and $156,000 in 2009 because of continuedvolatility in stock and bond markets and weak consumer confidence during therecent economic recession.

The Company'seffective tax rate was 19% in 2010 and 2009 and 27% in 2008.  The effective taxrate was impacted by fluctuations in certain factors including, but not limitedto, the volume of and related earnings on tax-free investments within theBank's investment portfolio, tax-exempt earnings and expenses on BOLI, certaintax benefits that result from dividends and payouts under the Bank's EmployeeStock Ownership Plan ("ESOP"), and other factors incidental to the financialservices business.  Fluctuations in the deduction related to the ESOP dividendsand payouts and tax-exempt interest earned in the investment portfolio were thelargest contributors to the various effective rates for the past three years. 

Interest-earningassets in 2010 averaged $850 million at an average rate of 5.7% compared to$831 million at an average rate of 6.1% in 2009 and $808 million at an averagerate of 6.7% in 2008.  Interest bearing liabilities at year-end 2010 averaged$772 million at an average cost of 1.6% compared to $754 million at an averagecost of 2.1% at year-end 2009 and $737 million at an average cost of 3.1% atyear-end 2008.  The following table presents the annual average balance sheetand net interest income analysis for the years ended December 31, 2010, 2009and 2008 (dollars in thousands):

YEAR-TO-DATE AVERAGES AND RATES

2010

2009

2008

 Average  

Average

 Average  

Average

 Average  

Average

 Balance  

 Interest  

Rate

 

 Balance  

 Interest  

Rate

 

 Balance  

 Interest  

Rate

ASSETS

Interest earning assets:

Loans (1)(2)(3)

 $

561,964  

 $

36,085  

6.42%

 $

589,528  

 $

38,402  

6.51%

 $

606,015  

 $

42,356  

6.99%

Investment securities:

   Taxable

171,024  

6,262  

3.66%

148,140  

7,260  

4.90%

141,724  

7,643  

5.39%

   Tax exempt (4)

94,185  

5,970  

6.34%

75,752  

4,977  

6.57%

54,204  

3,529  

6.51%

Interest earning

   Deposits

1,056  

6  

0.57%

914  

16  

1.75%

867  

42  

4.84%

Federal funds sold

21,705  

55  

0.25%

16,392  

48  

0.29%

4,721  

97  

2.05%

Total interest earning  assets

849,934  

48,378  

5.69%

830,726  

50,703  

6.10%

807,531  

53,667  

6.65%

(Table continued on next page.)

-21-

YEAR-TO-DATE AVERAGES AND RATES

2010

2009

2008

 Average  

Average

 Average  

Average

 Average  

Average

 Balance  

 Interest  

Rate

 

 Balance  

 Interest  

Rate

 

 Balance  

 Interest  

Rate

Non-interest earning assets:

Cash and due from banks

 $

17,802  

 $

14,989  

 $

16,357  

Premises & equipment

30,498  

31,143  

34,771  

Other assets

67,067  

56,178  

 

51,325  

Total assets

 $

965,301  

 $

933,036  

 

 $

909,984  

LIABILITIES AND

   SHAREHOLDERS' EQUITY

 

Interest bearing liabilities

Savings deposits

 $

304,605  

 $

2,972  

0.98%

 $

265,055  

 $

3,007  

1.13%

 $

217,754  

 $

2,846  

1.31%

Time deposits

360,634  

5,738  

1.59%

374,469  

8,722  

2.33%

390,233  

14,671  

3.76%

Federal funds purchased and

   other interest bearing  liabilities

107,208  

3,300  

3.08%

114,624  

4,083  

3.56%

129,194  

5,117  

3.96%

Total interest bearing  liabilities

772,447  

12,010  

1.55%

754,148  

15,812  

2.10%

737,181  

22,634  

3.07%

Non-interest bearing  liabilities

Demand deposits

97,294  

89,819  

90,999  

Other liabilities

4,996  

7,367  

7,061  

Total liabilities

874,737 

851,334  

835,241  

Total shareholders' equity

90,564  

81,702  

74,743  

Total liabilities and  shareholders'

    equity

 $

965,301  

 $

933,036  

 $

909,984  

Net Interest Income

 $

36,368  

 $

34,891  

 $

31,033  

Net Yield on Average Earning

   Assets

4.28%

4.20%

3.84%

___________________

(1)           Loantotals are loans held for investments and net of unearned income and loan lossreserves.

(2)           Feeincome on loans held for investment is included in interest income andcomputations of the yield.  Loans held for sale and related mortgage bankingincome, however, are reported in other assets and other income and, therefore,are excluded. 

(3)           Includesloans on non-accrual status.

(4)           Interestand rates on securities that are non-taxable for federal income tax purposesare presented on a taxable equivalent basis based on the Company's statutoryfederal tax rate of 34%.

-22-

*Volume/RateAnalysis*

The following table provides an analysis of the impact of changes inbalances and rates on interest income and interest expense changes from 2010 to2009 and 2009 to 2008 (in thousands):
   **2010 Compared to 2009Due to Changes in:****2009 Compared to 2008Due to Changes in:**
** **

** **

** **

** **

**Total**

** **

** **

** **

** **

** **

**Total**

**Average**

** **

**Average**

** **

**Increase**

** **

**Average**

** **

**Average**

** **

**Increase**

**Volume**

** **

**Rate**

** **

**(Decrease)**

** **

**Volume**

** **

**Rate**

** **

**(Decrease)**
Interest earned on:
Loans

 $

(1,770)

 $

(547)

 $

(2,317)

 $

(1,073)   

 $

(2,881)

 $

(3,954)

Taxable securities

838   

(1,836)

(998)

  314
  (697)
  (383)
Tax exempt securities

1,169   

  (176)
  993
  1,416
  32
  1,448
Interest bearing

 deposits with other banks

1   

(11)

(10)

1
(27)

(26)

Federal funds sold and

 securities purchased

 under agreements to sell

13   

(6)

7 
34
(83)

(49)

Total interest earning assets

 $

251   

 $

(2,576)

 $

(2,325)

 $

  692
 $

(3,656)

 $

(2,964)

Interest expense on:

 Savings deposits

  388
(423)

  (35)
  535
(374)

161
 Time deposits

(220)

(2,764)

(2,984)

  (367)
(5,582)

(5,949)

 Federal funds purchased

     and securities sold under

     agreements to repurchase

(228)

(555)

(783)

  (519)
(515)

(1,034)

Total interest bearing liabilities

(60)

(3,742)

(3,802)

  (351)
(6,471)

(6,822)

Net interest earnings

 $

  311
 $

1,166   

 $

1,477   

 $

1,043   

 $

  2,815
 $

3,858   

*Non-Interest Income*

The followingtable compares non-interest income for the years ended December 31, 2010, 2009and 2008 (dollars in thousands):

** **

** **

**Increase**

** **

** **

** **

**Increase**

** **

** **

 
**Total**

** **

**(Decrease)**

** **

**Total**

** **

**(Decrease)**

** **

**Total**

 
**20****10**

 

**Amount**

** **

**%**

 

**200****9**

 

**Amount**

** **

**%**

** **

**2008**

 
** **

 

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

 
 Mortgage banking income

 $

1,116   

 $

5
0.45
 $

1,111   

 $

(28)

-2.46

 $

1,139   

 Income from fiduciary activities

785  

(21)

-2.61

806   

(10)

-1.23

816   

 
 Service charges on deposit accounts

6,923   

(18)

-0.26

6,941   

(331)

-4.55

7,272   

 
 Brokerage fees

1,080   

(237)

-18.00

1,317   

(156)

-10.59

1,473   

 
 Earnings on bank owned life insurance

677   

(155)

-18.63

832   

(1)

-0.12

833   

 
 Gain (loss) on sale of foreclosed property

(1,156)

(686)

145.96

(470)

(186)

65.49

(284)

 
 Gain on sale of available-for-sale securities

1,884   

688   

57.53

  1,196
760   

174.31

436   

 
 Income from insurance activities

  913
79

9.47

  834
  (106)
-11.28
  940
 
 Other non-interest income

  637
91
16.67

  546
(25)

-4.38

  571
 
 
Total non-interest income

 $

12,859   

 $

(254)

-1.94%

 $

13,113   

 $

(83)

-0.63%

 $

13,196   

 
-23-

Totalnon-interest income decreased less than two percent in 2010 compared to 2009. Although residential real estate values declined and it became more difficultfor borrowers to purchase or refinance in 2010, the Bank's mortgage activityremained stable because of the historically low interest rate environment.Mortgage banking income has been flat at $1.1 million per year in each of thepast three years.  Income from fiduciary activities decreased 2.6% or approximately$21,000 in 2010 compared to 2009.  Service charges on deposits decreased lessthan one percent in 2010 compared to 2009.  Brokerage fees decreasedapproximately $237,000 or 18.0% in 2010 compared to 2009 as consumer confidenceand willingness to invest in brokerage products remained weak.  Gain on sale offoreclosed property includes write down of OREO subsequent to foreclosure and hashad a negative trend over the past two years due to increased volume of OREO. For more information regarding OREO, see the section below entitled "-Financial Condition - Other Real Estate Owned" and Note 9  in the Company'sConsolidated Financial Statements included elsewhere this Annual Report on Form10-K.  Earnings on BOLI assets decreased approximately $155,000 or 18% in 2010compared to 2009 due to lower overall earnings and higher overall mortalitycharges on the policies.  Gain on sale of available-for-sale securitiesincreased approximately $688,000 in 2010 compared to 2009 as a result ofstrategies to realize appreciation in the investment portfolio.  See additionalinformation regarding sale of securities in Note 3 of the Company's ConsolidatedFinancial Statements included elsewhere in this Annual Report on Form 10-K.  In2010, total non-interest income (excluding impairment losses onavailable-for-sale securities) contributed 21.7% of total revenue compared to 19.6%and 20.1% for 2009 and 2008, respectively.  

Income from First Citizens/White and Associates Insurance Company, LLCwas included in Income from Insurance Activities in the Consolidated Statementsof Income and increased approximately $60,000 or 8% in 2010 compared to 2009. This increase was a result of increased income from various insurance productsincluding commercial lines, personal lines, title insurance and other products. Non-interest income generated by First Citizens/White and Associates InsuranceCompany, LLC, a full-service insurance agency, for 2010, 2009 and 2008 totaledapproximately $795,000, $735,000, and $773,000, respectively.   Other incomefrom insurance activities consists of commissions from sale of credit lifepolicies and the Company's proportionate share of income from FirstCitizens/White and Associates Insurance Company.

*Non-InterestExpense*

The followingtable compares non-interest expense for the years ended December 31, 2010, 2009and 2008 (dollars in thousands):

** **

** **

**Increase**

** **

** **

** **

**Increase**

** **

** **

**Total**

** **

**(Decrease)**

** **

**Total**

** **

**(Decrease)**

** **

**Total**

**20****10**

** **

**Amount**

** **

**%**

** **

**200****9**

** **

**Amount**

** **

**%**

** **

**2008**

   Salaries and employee benefits

 $

15,417   

 $

132  

0.86%

 $

15,285   

 $

(1,547)   

-9.19

 $

16,832

   Net occupancy expense

1,759   

  (45)
-2.49

1,804   

59   

3.38

1,745   

   Depreciation

1,792   

(60)

-3.24

1,852   

(16)

-0.86

1,868   

   Data processing expense

1,591   

399   

33.47

1,192   

208   

21.14

984   

   Legal and professional fees

441   

136

44.59
305   

(48)  

-13.60

353   

   Stationary and office supplies

221   

(33)

-12.99

254   

(5)

-1.93

259   

   Amortization of intangibles

85   

-   

-
85   

-   

-
85   

   Advertising and promotions

703   

81
13.02

622   

(89)

-12.52

711   

   Premiums for FDIC insurance

1,200   

  (471)
-28.19
1,671   

1,576   

1658.95

95   

   OREO expenses

888   

246   

38.32

642   

207   

47.59

435   

   ATM related fees and expenses

784   

301   

62.32

483   

61   

14.45
422  

   Other non-interest expenses

3,829   

(285)

-6.93

4,114   

(161)

-3.77

4,275   

Total non-interest expense

 $

28,710   

 $

401   

1.42%

 $

28,309   

 $

245   

0.87%

 $

28,064   

Totalnon-interest expense increased 1.4% in 2010 compared to 2009.  Non-interestexpense was dominated by salaries and benefits expense, which comprised 54% oftotal non-interest expense in 2010 compared to 53% in 2009 and 58% in 2008.  Salaryand benefits expense increased approximately $132,000 or less than 1% in 2010compared to 2009.  The majority of the Company's employees receiveperformance-based incentives based on factors designed to achieve strategicgoals and are balanced for risk and reward.  Such factors are aligned withstrategic objectives and include achievement of a certain ROE level,accomplishing annual budget goals, and attainment of business developmentgoals, asset quality goals, and other metrics applicable to the individual'sjob responsibilities.  Incentive pay totaled 8.9% of salaries and benefitsexpenses in 2010 compared to 8.3% in 2009 and 9.3% in 2008.  Significantexpense associated with salaries and benefits is consistent with the Company'sstrategic plan to hire and retain high quality employees to provide outstandingcustomer service and strive for exceptional shareholder returns.

-24-

The followingtable compares assets per employee for the Company compared to its peers, basedon information obtained from UBPR for the years ended December 31 (inthousands):

Company

 

Peer

2010

 $

3,760   

 $

4,540   

2009

3,680   

4,600   

2008

3,465   

4,310   

2007

3,210   

4,060   

2006

3,121   

3,940   

Comparison ofassets per employee for the Company and its peers revealed that the Companyimproved in each of the last five years but continued to be more heavilystaffed than its counterparts.  The trend of less assets per employee than peerswas consistent with historical trends and employees necessary to support theCompany's non-interest income streams including brokerage, mortgage and trustdivisions.  The Company's ratio steadily improved over the past few years asnewer branches become profitable and as a result improve the overall efficiencyof operations within the Company.  In an effort to provide a high level ofcustomer service and strategic efforts to continue growth of non-interestincome streams, management expects the trend of lower assets per employeescompared to peer to continue in future periods.

Net occupancyexpense decreased modestly by approximately $45,000 or 2.5% in 2010 compared to2009 as a result of strategic efforts to control expenditures in 2010. Depreciation trended slightly lower in 2009 and 2010 compared to 2008 as aresult of controlling purchases and expenses related primarily to computerequipment and software.  Certain shorter-lived assets, primarily computerequipment and software, were fully depreciated by early 2008 and were notimmediately replaced with new purchases.  Data processing expense increasedapproximately $400,000 in 2010 because of increased expenses associated withupgrading certain systems and outsourcing certain portions of the informationtechnology functions of the Bank.  While outsourcing of functions such as itemprocessing resulted in increased data processing expense, this initiative alsodecreased other categories of other non-interest expense such as postage,stationary and supplies and salaries and employee benefits expenses.  Also,upgrades of certain systems were required in order to achieve efficiencystrategies and/or in order to comply with changes in regulation.  The Companycontinues to strive for efficiencies in the areas of expansion, dataintegrity/security and customer service.  However, strategies adopted by theCompany's Board of Directors to provide superior customer service will continueto exert pressure on occupancy, depreciation and other non-interest expensesgoing forward.  

Expense relatedto FDIC insurance premiums decreased approximately $400,000 in 2010 compared to2009.  The decrease was primarily a result of the special assessment as of June30, 2009 (paid September 30, 2009) in the amount of approximately $425,000 bythe FDIC to help offset increased costs incurred by the fund caused by anincreased number of failed banks.  In December 2009, the FDIC required the Bankto pre-pay projected assessments for 2010 through 2012 totaling $4.2 million. The prepaid assessment is reflected in Other Assets in the Company'sConsolidated Financial Statements included elsewhere this Annual Report on Form10-K and totaled $2.9 million and $4.0 million as of December 31, 2010 and2009, respectively. 

Legal andprofessional fees increased in 2010 compared to 2009 as a result of legalexpenses incurred for collections and foreclosures as well as consultingprojects related to increased regulatory burdens and overall efficiencystrategies.  Stationary and office supplies decreased approximately 13% in 2010compared to 2009 as a result of outsourcing certain data processing functionsand increased use of electronic rather than paper documents.  Advertising andpromotions expense increased approximately $81,000 in 2010 compared to 2009because of the implementation and promotion of the Company's customer-centricstrategies.  Advertising and promotion costs are expensed as incurred andtotaled approximately $703,000 in 2010 compared to approximately $622,000 in2009.  Expenses related to OREO totaled approximately $888,000 in 2010 comparedto approximately $642,000 in 2009 and approximately $435,000 in 2008.  For moreinformation regarding OREO, see the section below entitled "Financial Condition- Other Real Estate Owned" and Note 9  in the Company's Consolidated FinancialStatements included elsewhere this Annual Report on Form 10-K.  Othernon-interest expense decreased approximately $285,000 in 2010 compared to 2009primarily because of efforts to control costs as part of the Company's overallefficiency strategies. 

-25-

No impairment ofgoodwill was recognized in any of the periods presented in this report. Goodwill was 1.21% and 1.24% of total assets and 13.56% and 14.03% of totalcapital as of December 31, 2010 and 2009, respectively. Amortization of coredeposit intangibles was flat at approximately $85,000 in each of the past threeyears.  Core deposit intangibles will be fully amortized in 2012.

**Financial Condition**

                Changes in the statement of financialcondition for the years ended December 31, 2010 and 2009 reflected theCompany's strategic efforts to focus on modest quality asset growth and capitalpreservation during the economic recession.  Asset growth in 2010 was primarilydriven by growth in available-for-sale investment securities.  The impact ofthe recession was evident in negative loan growth and increased OREO for theyear ended December 31, 2010.  Deposit growth overall for 2010 was moderate at 5.3%with increased savings and time deposits and flat overall demand deposits. 

As evidenced in the cash flowstatements, the Company slowed deployment of capital for purchases of premisesand equipment to approximately $1.5 million in 2010 compared to approximately $631,000in 2009 and $3.3 million in 2008.  Premises and equipment purchases in 2009 and2010 consisted primarily of upgrade and replacement of computer hardware andsoftware as well as renovations to various branches.

*Investment Securities Analysis*

 The followingtable presents the composition of total investment securities at December 31for the last five years (in thousands):

**December 31,**

** **

 
**20****10**

**200****9**

**200****8**

 

**200****7**

 

**2006**

** **

 
U. S. Treasury & government agencies

 $

191,443   

 $

158,458  

 $

148,269   

 $

134,460   

 $

127,602   

State & political subdivisions

102,450   

   89,211

59,588   

51,037   

44,338   

 
All others

930   

2,122   

  2,643
4,910   

5,436   

 
     Total investment securities

 $

294,823   

 $

249,791   

 $

210,500   

 $

190,407   

 $

177,376   

 
                In 2010, totalportfolio growth of $45.0 million consisted of $33.0 million increase in agencymortgage-backed securities and collateralized mortgage obligations and $13.2million increase in municipal securities.  Growth in the overall portfolio of $45.0million was primarily driven by purchases of new agency and municipal debt securities. The allocation to tax-exempt municipal securities as a percent of the totalportfolio was consistent at 35% of total securities as of year-end 2010 comparedto 36% as of year-end 2009.  Allocation to tax-exempt municipal securitiesincreased in 2009 and 2010 as this sector was considered to have exceptionalvalue based on ongoing dislocations in the public finance market and because ofopportunities presented by the spending of municipalities as a result ofgovernment stimulus programs.  The increase in tax-exempt municipal bonds alsoserves as protection from further downward movement in interest rates that isbalanced out by a more defensive posture in the Company's taxable sector of theportfolio.  

*Maturityand Yield on Securities*

Contractualmaturities on investment securities are generally ten years.  However, theexpected remaining lives of such bonds are expected to be much shorter due toanticipated payments from U. S. Treasury and government agency securities. These securities comprise 64% of the portfolio and are primarily amortizingpayments that provide stable monthly cash inflows of principal and interestpayments.  The following table presents contractual maturities and yields bycategory for debt securities as of December 31, 2010 (dollars in thousands):

-26-

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(1)

 $

-   

0.00%

 $

1,187   

4.04%

 $

21,661   

3.47%

 $

168,595   

3.66%

 $

191,443   

State and political

 subdivisions(2)

3,371   

6.98%

8,488   

6.99%

25,342   

6.32%

65,249   

6.54%

102,450   

All other

-   

           -%  

-   

         -%

-   

              - %

885   

5.56%

885   

 Total debt securities

 $

3,371  

 $

9,675   

 $

47,003   

 $

234,729   

 $

294,778   

Equity securities

-   

           -%  

-   

         -%

-   

              - %

 

45

1.18%

 

45   

     Total

 $

3,371   

 $

9,675   

 $

47,003

 $

      234,774

 $

294,823   

________________

(1)           The above table includes agencymortgage-backed securities (MBS) and collateralized mortgage obligations (CMO)based on contractual maturities (primarily in the After Ten Years category). However, the remaining lives of such securities are expected to be much shorterdue to anticipated payments.  

(2)            Yields are presented on a tax-equivalent basis using a federal statutoryrate of 34%. 

*Held-To-Maturity andAvailable-For-Sale Securities*

                The Company heldno securities in the held-to-maturity category as of December 31, 2010 and 2009.The following table presents amortized cost and fair value ofavailable-for-sale securities as of December 31, 2010 (in thousands):

Amortized  

Fair  

Cost  

 

Value

 

U. S. government agencies and corporate obligations

 $

189,280   

 $

191,443   

Obligations of states and political subdivisions:

     Taxable securities

1,415   

1,318 

     Tax-exempt securities

98,359   

101,132 

U. S. securities:

 Other debt securities

2,675   

885   

 Equity securities

23   

45 

           Total

 $

291,752   

 $

294,823   

In addition to amounts presentedabove, the Bank also had $5.7 million in FHLB and Federal Reserve Bank stock atDecember 31, 2010 recorded at cost.  Equity securities listed above consistedprimarily of shares of Fannie Mae and Freddie Mac perpetual preferred stock.

Total investmentsecurities at December 31, 2010, 2009 and 2008 were $295 million, $250 millionand $210 million, respectively.  Available-for-sale investments increased $45.0million or 18.0% from December 31, 2009 to December 31, 2010 as a result ofinterest cash flows reinvested into new securities and additional incrementalfunds allocated to the portfolio during the year.  Objectives of the Bank'sinvestment 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 FDIC-insured limits.  Pledged investments atyear-end 2010 had a fair market value of $181 million.  The average expectedlife of the investment securities portfolio was 5.1 years, 5.0 years and 3.7years as of December 31, 2010, 2009 and 2008, respectively.  Portfolio yields(on a tax equivalent basis) were 4.7% as of year-end 2010 compared to 5.2% asof year-end 2009 and 5.5% as of year-end 2008.

The Companyclassifies investments, based on intent, into trading, available-for-sale andheld-to-maturity categories in accordance with GAAP.  The Company held nosecurities in the trading category for any of the last five years and does notexpect to hold any such securities in 2011.  The Company's investment strategyis to classify most of the securities portfolio as available-for-sale, whichare carried on the balance sheet at fair market value.  Classification ofavailable-for-sale investments allows flexibility to actively manage theportfolio under various market conditions.  

-27-

U.S. Treasurysecurities and government agencies and corporate obligations consistedprimarily of mortgage-backed securities ("MBS") and collateralized mortgageobligations ("CMO") and accounted for 63% of the investment portfolio for yearsended December 31, 2010 and 2009.  Credit quality of the Company's MBS and CMOportfolio was considered strong and reflected a net unrealized gain of $2.2million as of December 31, 2010.  Credit quality factors on the bonds andrelated underlying mortgages are evaluated at the time of purchase and on aperiodic basis thereafter.  These factors typically include, but are notlimited to, average loan-to-value ratios, average FICO credit score, paymentseasoning (how many months of payment history), geographic dispersion, averagematurity and average duration.  Management believes that this level ofamortizing securities provides steady cash flows, as evidenced by the ConsolidatedStatement of Cash Flows included elsewhere in the Annual Report on Form 10-K. Principal cash flows for 2011 are projected to be $41 million.

Approximately36% of the portfolio was invested in municipal securities at both December 31, 2010and 2009.  Municipal securities totaled $102 million and were geographicallydiversified.  Approximately 71%, or $68 million, of municipal securities weregeneral obligation municipal bonds and the remaining 28% were revenue bonds. The revenue bonds are primarily essential services bonds such as for water andsewer, school systems and other public improvement projects.  Overall creditquality of the municipal portfolio was considered strong and reflected a netunrealized gain of $2.7 million as of year-end 2010.

Approximately 1%of the portfolio at December 31, 2010 consisted of one corporate bond and threecollateralized debt obligation securities that are backed by trust-preferredsecurities ("TRUP CDOs") issued by banks, thrifts and insurance companies. These four debt securities reflected a net unrealized loss of $1.8 million asof year-end 2010.  The market for TRUP CDOs became inactive in 2008 and as aresult, quoted market values trended significantly below amortized costbeginning in 2008.  These securities are evaluated for other-than-temporaryimpairment on a quarterly basis.  Charges for credit loss portion ofother-than-temporary impairment totaling approximately $589,000 and $651,000were recognized against earnings for the years ended December 31, 2010 and 2009,respectively.  For more information, see Note 3 in the Company's ConsolidatedFinancial Statements included elsewhere in this Annual Report on Form 10-K. 

The Company hadone interest rate swap classified as a cash flow hedge at December 31, 2009which matured in September 2010.  For more information, see Note 3 in theCompany's Consolidated Financial Statements included elsewhere in this AnnualReport on Form 10-K.

The followingtable indicates by category gross unrealized gains and losses within theavailable-for-sale portfolio as of December 31, 2010 (in thousands):

Unrealized  Gains

 

Unrealized  Losses

 

Net

U. S. Treasury securities and obligations of U. S.

 government agencies and corporations

 $

3,721 

 $

(1,558)

 $

2,163 

Obligations of states and political subdivisions

3,073   

(397)

2,676   

All other

22   

(1,790)

(1,768)

     Total

 $

6,816 

 $

(3,745)

 $

3,071 

Unrealized gains and losses noted above were included inAccumulated Other Comprehensive Income, net of tax.

-28-

*Loan Portfolio Analysis*

The followingtable compares the portfolio mix of loans held for investment as of December 31for each of the last five years (in thousands):

2010

2009

2008

2007

 

2006

 

Commercial, financial and agricultural  

 $

66,297   

 $

71,301   

 $

80,317   

 $

80,509   

 $

80,033   

Real estate-construction

49,148   

66,414   

97,340   

106,695   

86,206   

Real estate-mortgage

395,256   

407,058   

375,714   

353,655   

340,839   

Installment loans to individuals

31,593   

34,071   

36,220   

37,106   

36,735   

Other loans

5,409   

8,554   

7,167   

6,674   

5,021   

    Total loans

 $

547,703   

 $

587,398   

 $

596,758   

 $

584,639   

 $

548,834   

For purposes of thetable above, loans do not include loans that are sold in the secondary mortgagemarket.  The Company classifies loans to be sold in the secondary mortgagemarket separately in its consolidated financial statements. Secondary marketmortgages totaled $2.8 million, $2.7 million, and $2.6 million as of December31, 2010, 2009 and 2008, respectively.  For more information, see Notes 4, 5and 6 in the Company's Consolidated Financial Statements included elsewhere inthis Annual Report on Form 10-K.  Interest and fees earned on secondarymortgage loans were included in mortgage banking income as reported in othernon-interest income in the Company's Consolidated Financial Statements.

*Changes In Loan Categories*

Total loans atDecember 31, 2010 were $548 million compared to $587 million at December 31,2009 and $597 million at December 31, 2008.  Loans decreased 6.8% in 2010 and 1.6%in 2009 compared to loan growth of 2.1% in 2008.  The following table detailsthe breakdown of changes by category for 2010 (dollars in thousands):

Increase

Percent

 
 

(Decrease)

 

Change

 

 
Commercial, financial and agricultural

 $

(5,004)

-6.23%

Real estate-construction

(17,266)

-17.74%

 
Real estate-mortgage

(11,802)

-3.14%

 
Installment loans to individuals

(2,478)

-6.84%

 
Other loans

(3,145)

-43.88%

 
    Total change in loans

 $

(39,695)

-6.65%

 
At December 31,2010, the loan portfolio was heavily weighted in real estate loans, whichaccounted for $444 million or 81% of total portfolio.  Commercial andresidential construction loans accounted for $49 million of the $444 millioninvested in real estate loans.  Although the portfolio was heavily weighted inreal estate, the Bank does not invest in sub-prime or non-traditionalmortgages.  Within real estate loans, residential mortgage loans (includingresidential construction) were the largest category, comprising 36% of totalloans.  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, the Company 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 typesof commercial real estate and review of ratios of various concentrations ofcommercial real estate as a percentage of capital.   During 2010,  as loansdecreased 6.7% and capital increased 5.8%, real estate loans as a percent ofcapital decreased.  The following table presents real estate loans as a percentof total risk based capital for each of the last five years:

-29-

2010

2009

2008

 

2007

 

2006

As a percent of total risk based capital*:

 

 

 

 

 

 

Construction and development

53.05%

77.40%

120.68%

135.33%

115.24%

Residential (one-to-four family)

184.50%

206.82%

203.75%

193.71%

203.93%

Other real estate loans

245.15%

270.74%

265.31%

257.64%

255.93%

Total real estate loans

482.70%

554.96%

589.74%

586.68%

575.10%

________________

*              Totalrisk based capital is a non-GAAP measure used by regulatory authorities andreported on quarterly regulatory filings.  Total risk based capital for theBank was $92.6 million, $85.8 million, $80.7 million, $78.8 million and $74.8million for years ended December 31, 2010, 2009, 2008, 2007 and 2006,respectively.   

Negative loangrowth in 2010 occurred across all loan categories with weak overall loandemand as a result of distressed real estate markets, job losses and otherfactors resulting from the economic recession.  Also, the Bank strategicallyreduced its concentration of one-to-four family residential construction andnon-owner occupied commercial real estate loans since 2007 as focus shifted tolower-risk owner-occupied commercial real estate.  As a result, the ratio ofone-to-four family residential construction loans as a percent of total riskbased capital trended downward from 2007 to 2010 and was 19.75% as of December31, 2010 compared to 33.21% as of December 31, 2009, 55.88% as of December 31,2008 and 76.02% at December 31, 2007.  The ratio of non-owner occupiedcommercial real estate loans as a percent of total risk based capital alsotrended downward to 148.89% as of December 31, 2010 compared to 188.55% as ofDecember 31, 2009, 232.68% as of December 31, 2008 and 243.53% as of December31, 2007.  The ratio of owner occupied commercial real estate loans as apercent of total risk based capital was 105.57% as of December 31, 2010 comparedto 107.05% as of December 31, 2009 compared to 101.80% as of December 31, 2008and 102.99% as of December 31, 2007.

*Average Loan Yields*

The averageyield on loans of the Bank has trended downward as loans repriced during thehistorically low interest rate environment over the past three years.  Averageyield on loans for the years indicated were as follows:

2010 - 6.42%

2009 - 6.51%

2008 - 6.99%

2007 - 7.98%

2006 - 7.65%

The aggregateamount of unused guarantees, commitments to extend credit and standby lettersof credit was $80.9 million at year-end 2010.  For more information regardingcommitments and standby letters of credit, see Note 18 in the Company'sConsolidated Financial Statements included elsewhere in this Annual Report onForm 10-K.

*Loan Maturities*

Contractualmaturities of loans as of December 31, 2010 were as follows (in thousands):

** **

Due After

** **

Due in One  

One Year but

Due After

** **

Year or Less

 

Within Five  Years

 

Five Years

Real estate

 $

93,820   

 $

279,427   

 $

71,157   

Commercial, financial and agricultural

39,616   

28,337   

3,753   

All other loans

8,209   

21,773   

1,611   

Total

 $

141,645   

 $

329,537   

 $

76,521   

-30-

Loans with Maturities After One Year for which:

(In thousands)

Interest Rates are Fixed or Predetermined

 $

338,426   

Interest Rates are Floating or Adjustable

 $

67,632   

The degree of interest rate riskto which a bank is subjected can be controlled through a well-defined fundsmanagement program.  The Company controls interest rate risk by matchinginterest sensitive assets and liabilities.  Overall, the Company remains in afairly neutral position in terms of interest rate risk as evidenced by flat netinterest margins during a the three-year period from 2008 through 2010, in whichfederal funds rates have ranged from 0.25% to 5.25%.  At year-end 2010, theCompany was liability-sensitive, meaning that liabilities reprice at a fasterrate than assets.  Therefore, in a rising rate environment (with a normal yieldcurve) net interest income would decline, while a declining rate environmentwould result in increased interest rate margins and net interest income.  Themajority of the Bank's loan portfolio will reprice or mature in less than fiveyears.  Approximately $159 million or 29% of total loans will either reprice ormature over the next 12 months, while $185 million or 34% of total loans willmature or reprice after one year but less than three years.  Approximately $144million or 26% of total loans will mature or reprice after three years but inless than five years.  The remaining 11% or $60 million reprices or matures ingreater than five years.

*Loan Policy Guidelines*

Management hasestablished policies approved by the Company's Board of Directors regardingportfolio diversification and underwriting standards. Loan policy also includesBoard-approved guidelines for collateralization, loans in excess of loan tovalue ("LTV") limits, maximum loan amount and maximum maturity and amortizationperiod for each loan type.  Policy guidelines for loan to value ratios andmaturities related to various collateral  at December 31, 2010 were as follows:

Collateral

Maximum Amortization

Maximum LTV

Real estate

Various (see discussion  below)

Various (see discussion  below)

Equipment*

5 Years

75%

Inventory

5 Years

50%

Accounts receivable

5 Years

75%

Livestock

5 Years

75%

Crops

1 Year

50%

Securities**

10 Years

75%(Listed), 50%  (Unlisted)

___________________________

*              New farm equipmentcan be amortized over seven years with an FSA guaranty; farm irrigation systemsmay be amortized over seven years without an FSA guaranty.

**           Whenproceeds are used to purchase or carry stocks not listed on a nationalexchange, maximum LTV shall be 50%.

The Company'spolicy manages risk in the real estate portfolio by adherence to supervisorylimits in regards to LTV percentages, as designated by the followingcategories:

-31-
 
Loan Category

LTV Limit

Raw land

65%

Farmland

80%

Real estate-construction:

    Commercial acquisition  and development

70%

    Commercial,  multi-family* and other non-residential

80%

    One-to-four family  residential owner occupied

80%

    One-to-four family  residential non-owner occupied

75%

Commercial (existing  property):

    Owner occupied improved  property

85%

    Non-owner occupied  improved property

80%

Residential (existing  property):

    Home equity lines

80%

    Owner-occupied one-to-four  family residential

90%

    Non-owner occupied one-to-four family residential

75%

____________________

*              Multi-familyconstruction loans include loans secured by cooperatives and condominiums. 

On an approvedexception basis, loans may be approved in excess of the LTV limits, providedthat they are approved pursuant to the Bank's loan policy as follows:
- 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  
- The aggregate portion of these     loans in excess of the LTV limits that are classified as commercial,     agricultural, multi-family or non-one-to-four family residential property     shall not exceed 30% of the Bank's total capital.

The Bank's loanpolicy additionally requires every loan to have a documented repaymentarrangement.  While reasonable flexibility is necessary to meet credit needs ofcustomers, in general, real estate loans are to be repaid within the followingtime frames:

Loan Category

Amortized Period

Raw land

10 years

Real estate- construction

1.5 years

Commercial, multi-family,  and other non-residential

20 years

One-to-four family  residential

25-30 years

Home equity

10 years

Farmland

20 years

*Credit Risk Management and Allowancefor Loan Losses*

Loan portfolioquality faced challenges in 2009 and 2010 but remains manageable relative toprevailing market conditions.  The ratio of net charge offs to average netloans outstanding was 1.38%, 0.95% and 0.31% for 2010, 2009 and 2008,respectively.  The aggregate of non-performing loans and OREO as a percent oftotal loans plus OREO at year-end 2010 increased to 3.71% compared to 3.28% and1.63% at year-end 2009 and 2008, respectively, primarily as a result ofincreased volume of OREO.  Negative trends in OREO and charged off loans wereexpected given negative economic trends across the industry during the recenteconomic recession.  Management believes, however, that the Bank's strongcredit risk management provides a means for timely identification and assessmentof problem credits in order to minimize losses.  

-32-

Credit risk managementprocedures include assessment of loan quality through use of an internal loanrating system.  Each loan is assigned a rating upon origination and the ratingmay be revised over the life of the loan as circumstances warrant.  The ratingsystem utilizes eight major classification types based on risk of loss withGrade 1 being the lowest level of risk and Grade 8 being the highest level ofrisk.  Loans rated Grades 1 to 4 are the general "pass" grade loans with low toaverage levels of credit risk.  Loans rated Grade 5 are "special mention" loansthat may have one or more circumstances that warrant additional monitoring butdo not necessarily indicate probable credit losses or above average levels ofcredit risk.  Loans rated Grade 6 or higher are considered internallycriticized and have above average levels of credit risk.  

Credit risk management practicesalso include a loan review function that is independent of the lending processitself.  Results of loan review are reported to the Bank's Board of Directorsand serve to validate the Bank's internal loan rating process.  Results of loanreview, as well as current portfolio mix by rating, are incorporated into theprocess for quarterly evaluations of the allowance for loan losses and impairedloans.

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

•        Economic conditions; 

•        Management experience and depth; 

•        Credit history; 

•        Business conditions; 

•        Sources of repayment; 

•        Debt service coverage ratios; 

•        Financial condition of borrower(s) and/or guarantor(s); 

•        Deposit relationship; 

•        Payment history; 

•        Collateral values; and

•        Adherence to loan policy and adherence to loan documentationrequirements.

Loans internallyclassified at a Grade 6 or higher are those loans that have certaincharacteristics or circumstances that warrant additional credit qualitymonitoring and may meet the definition of an impaired loan described below.  Loansor borrowing relationships with an outstanding balance greater than $250,000 thatare also rated Grade 6 or higher are reviewed on an individual basis forimpairment as part of the quarterly evaluation of the adequacy of the allowancefor loan losses.  Loan impairment of internally criticized loans, if any, ismeasured using either the present value of expected future cash flowsdiscounted at the loan's effective interest rate or the fair value of thecollateral if the loan is collateral dependent. The majority of the Company'simpaired loans is secured by real estate and considered collateral-dependent.Therefore, impairment losses are primarily based on the fair value of theunderlying collateral (usually real estate).  Specific allocations to theallowance for loan losses are made for loans found to be collateral- or cashflow-deficient.  All loans less than $250,000 are evaluated on a pooled basisfor impairment.  

Specific allocations on impairedloans are typically the difference between the book value or cost of the loanand the estimated fair market value of the collateral, less cost to sell.  Anadditional provision for loan losses necessary for specific allocations onimpaired loans is typically made in the quarter that the loan becomesinternally criticized or rated Grade 6 or higher.  At the time a loan with abalance of $250,000 or greater becomes rated Grade 6 or higher, an updatedindependent third party appraisal is ordered.  If an appraisal for a propertysecuring a loan greater than $250,000 is not received prior to the evaluationdate, management estimates the specific allocation for that quarter in a mannersimilar to that used for loans with a balance of less than $250,000 and makesadjustments if necessary in the subsequent quarter when the independent thirdparty appraisal is received.  

An analysis ofthe allocation of the allowance for loan losses is made each fiscal quarter atthe end of the second month (i.e., February, May, August, and November) andreported to the Bank's Board of Directors at its meeting precedingquarter-end.  The allowance for loan losses is estimated using methodsconsistent with GAAP as well as regulatory guidance on allowance for loanlosses.  For additional information regarding the Company's accounting policyon the allowance for loan losses, see Note 1 in the Company's ConsolidatedFinancial Statements included elsewhere in this Annual Report on Form 10-K.

-33-

The evaluationof the adequacy of the allowance for loan losses includes identification ofimpaired loans and allocation of specific reserves if considered necessary on acase-by-case basis for loans meeting the Company's criteria for individualimpairment analysis.  A loan is deemed impaired when it is probable that acreditor will be unable to collect all amounts of principal and interest dueaccording to the original contractual terms of the loan. Impairment occurs when(i) the present value of expected future cash flows discounted at the loan'seffective interest rate impede full collection of the contract and (ii) fairvalue of the collateral, if the loan is collateral-dependent, indicatesunexpected collection of full contract value.  Specific reserve allocations aremade for loans found to be collateral- or interest cash flow-deficient.  Inaddition, an allowance is determined for loans evaluated on a pooled basis. Income recognition from impaired loans is determined in accordance with GAAP,as well as financial institution regulatory guidance.

Impaired loans wereprimarily collateral-dependent and totaled $9.3 million as of December 31, 2010compared to $10.0 million as of December 31, 2009 and $12.2 million as ofDecember 31, 2008.  For additional information on impaired loans, see Note 4 inthe Company's Consolidated Financial Statements included elsewhere in thisAnnual Report on Form 10-K.

The followingtable summarizes activity posted to the allowance for loan losses for the pastfive years (in thousands):

2010

2009

2008

2007

 

2006

 

Average net loans outstanding

 $

561,964   

 $

589,528   

 $

606,014   

 $

606,015   

 $

554,219   

Balance of allowance for loan losses

 at beginning of period

8,784   

7,300   

6,328   

6,211   

6,830   

Loans charged off

(8,187)

(5,951)

(2,274)

(1,096)

(1,538)

Recovery of loans previously charged off

431   

375   

388   

379   

236   

Net loans charged off

(7,756)

(5,576)

(1,886)

(717)

(1,302)

Additions to allowance charged to expense

7,000   

7,060   

2,858   

834   

683   

Balance at end of period

 $

8,028   

 $

8,784   

 $

7,300   

 $

6,328   

 $

6,211   

Ratio of net charged off loans to average

 net loans outstanding 

1.38%

0.95%

0.31%

0.12%

0.23%

Changes to the allowancefor loan losses for 2010 consisted of (i) loans charged off of $8.2 million,(ii) recovery of loans previously charged off of approximately $431,000, and(iii) provision for loan losses totaling $7.0 million.  Charge-offs in 2010occurred in all markets served.  However, approximately 55% of charge-offsrelated to loans made in Shelby County and the surrounding counties and 26% ofcharge-offs related to the Company's new market in and around Williamson County. 

The followingtable identifies charge-offs and recoveries by category for the years presented(in thousands):

2010

2009

2008

2007

2006

 
Charge-offs:

 
 Domestic:

 
    Commercial, financial and agricultural

 $

(953)

 $

(874)

 $

(638)

 $

(227)

 $

(447)

    Real estate-construction

(4,462)

(1,824)

(569)

(107)

-   

 
    Real estate-mortgage

(2,565)

(2,812)

(655)

(406)

(685)

 
    Installment loans to individuals and credit cards

(207)

(441)

(412)

(356)

(406)

 
        Total charge-offs

 $

(8,187)

 $

(5,951)

 $

(2,274)

 $

(1,096)

 $

(1,538)

 
 
Recoveries:

 
 Domestic:

 
    Commercial, financial and agricultural

 $

121   

 $

68   

 $

141   

 $

124   

 $

76   

 
    Real estate-construction

52   

130   

23   

22   

-   

 
    Real estate-mortgage

180   

64   

82   

148   

51   

 
    Installment loans to individuals and credit cards

78   

113   

142   

85   

109   

 
        Total recoveries

431   

375   

388   

379   

236   

 
             Net loans charged off

 $

(7,756)

 $

(5,576)

 $

(1,886)

 $

(717)

 $

(1,302)

 
-34-

For additionalinformation regarding the allowance for loan losses including allocation of theallowance by category, see Note 5 in the Company's Consolidated Financial Statementsincluded elsewhere in this Annual Report on Form 10-K.

Charge off of impaired loanswith specific allocations generally occurs at the time of foreclosure,typically when the loan is 60-120 days past due. On occasion, however, a loanis considered collateral-dependent and impaired but is not past due.  In thiscase, a partial charge-off is made at the time the updated appraisal isreceived to adjust the loan to fair value of the collateral, less cost to sell.Partially charged-off loans continue to be reported as impaired.  These loansare also reported in non-performing loan totals if such loans fit criteria fornon-performing assets as discussed below.  

*Non-Performing Assets*

Non-performing assets consist ofnon-performing loans, OREO and non-accrual debt securities.  Non-performingloans consist of non-accrual loans, loans 90 days or more past due and stillaccruing interest and restructured loans. Categorization of a loan asnon-performing is not in itself a reliable indicator of impairment.  A loan maybe deemed impaired prior to becoming 90 days past due, restructured or put onnon-accrual status.  The Bank's policy is to not accrue interest or discount on(i) any asset which is maintained on a cash basis because of deterioration inthe financial position of the borrower, (ii) any asset for which payment infull of interest or principal is not expected or (iii) any asset upon whichprincipal or interest has been in default for a period of 90 days or moreunless it is both well-secured and in the process of collection. For purposesof applying the 90 days past due test for non-accrual of interest discussedabove, the date on which an asset reaches non-accrual status is determined byits contractual term. A debt is well-secured if it is secured by collateral inthe form of liens or pledges of real or personal property, including securitiesthat have a realizable value sufficient to discharge the debt (includingaccrued interest) in full, considered to be proceeding in due course eitherthrough legal action, including judgment enforcement procedures or, inappropriate circumstances, through collection efforts not involving legalaction which are reasonably expected to result in repayment of the debt or inthe loan's restoration to a current status. Loans that represent probablelosses are recognized as impaired and adequately reserved for in the allowancefor loan losses. Valuation of non-performing loans are subject to the sameprocess described above for internally criticized loans in regards to obtainingnew appraisals and timing of specific allocations and subsequent charge-off.There have been no significant time lapses in the years ended December 31, 2010or 2009 between the identification and recognition of impairment and subsequentcharge-off of non-performing or impaired loans.  The following table summarizesnon-performing assets at December 31 of the past five years (in thousands):

2010

2009

2008

2007

2006

Non-accrual loans:

    Commercial, financial and agricultural

 $

500   

 $

639   

 $

425   

 $

133   

 $

19   

    Real estate-construction

854   

1,171   

662   

354   

-   

    Real estate-mortgage

2,545   

1,927   

2,496   

1,123   

291   

    Installment loans to individuals

249   

64   

90   

68   

61   

        Total non-accrual loans

 $

4,148   

 $

3,801   

 $

3,673   

 $

1,678   

 $

371   

Loans 90 days past due accruing interest:

    Commercial, financial and agricultural

 $

500   

 $

106   

 $

-   

 $

25   

 $

-   

    Real estate-construction

35   

1,472   

-   

53   

-   

    Real estate-mortgage

1,441   

3,660   

722   

126   

944   

    Installment loans to individuals

10   

34   

25   

-   

2   

        Total loans 90 days past due accruing interest

1,986   

5,272   

747   

204   

946   

Total non-current loans

 $

6,134   

 $

9,073   

 $

4,420   

 $

1,882   

 $

1,317   

Total non-current loans as % of total loans

1.12 %

1.54 %

0.74 %

0.32 %

0.24 %

-35-

Troubled debt restructuring

 

 

 

 

 

 

 

 

 

 Commercial, financial and agricultural

 $

15   

 $

11   

 $

14   

 $

-     

 $

-     

 Real estate-construction

-   

-   

-   

-   

-     

 Real estate-mortgage

2,770   

1,117   

1,138   

1,568   

-     

 Installment loans to individuals

68   

122   

92   

53   

-     

    Total troubled debt restructuring

 $

2,853   

 $

1,250   

 $

1,244   

 $

1,621   

 $

-     

Total troubled debt restructuring as a % of total loans*

0.52 %

0.21 %

0.21 %

0.28 %

0.00 %

OREO & other repossessed property

 $

14,734   

 $

10,527   

 $

5,446   

 $

2,302   

 $

1,815   

Non-accrual debt securities

241   

520   

-   

-   

-   

Total non-performing assets

 $

23,962   

 $

21,370   

 $

11,110   

 $

5,805   

 $

3,132   

Total non-performing assets as % of total assets

2.46 %

2.23 %

1.20 %

0.70 %

0.40 %

___________________________

*              Total troubleddebt restructurings that are on non-accrual status are not included in thistotal as they are reported in the non-accruals totals.

                Non-performing assets increased $2.6million from 2009 to 2010 primarily as a result of increased OREO, whichtrended higher over the last two years during the economic recession.  For moreinformation about OREO, see the section below entitled "- Other Real EstateOwned."  

Interest incomeon loans is recorded on an accrual basis.  The accrual of interest isdiscontinued on all loans, except consumer loans, which become 90 days pastdue, unless the loan is well secured and in the process of collection. Consumerloans which become past due 90 to 120 days are charged to the allowance forloan losses.  The gross interest income that would have been recorded for the12 months ended December 31, 2010 if all loans reported as non-accrual had beencurrent in accordance with their original terms and had been outstandingthroughout the period was approximately $209,000 compared to approximately $216,000,$178,000, $103,000, and $25,000 for the same periods in 2009, 2008, 2007, and 2006,respectively.  Loans on which terms have been modified to provide for areduction of either principal or interest as a result of deterioration in thefinancial position of the borrower are considered to be restructured loans. The Company had restructured loans totaling $3.2 million, of which approximately$393,000 was on non-accrual status as of December 31, 2010.  The Company hadrestructured loans totaling $2.8 million, of which $1.4 million was onnon-accrual status as of December 31, 2009.  

Certain loans internallyrated Grade 5 or higher may not meet the criteria and therefore are not includedin the non-accrual, past due or restructured loan totals. Management isconfident that, although certain of these loans may pose credit issues, anyprobable loss has been provided for by specific allocations to the loan lossreserve account.  Loan officers are required to develop a "plan of action" foreach problem loan within their portfolio. Adherence to each established plan ismonitored by the Bank's loan administration and re-evaluated at regularintervals for effectiveness.

*Other Real Estate Owned*

The book valueof OREO was $14.7 million as of December 31, 2010 compared to $10.5 million asof December 31, 2009 and $5.4 million as of December 31, 2008.  As of December31, 2010, there were over 100 properties accounted for as OREO consistingprimarily of newly constructed single-family homes and residential lots. Approximately 82% of the $14.7 million accounted for as OREO was located in Shelby County and surrounding counties.  Approximately 14% of the $14.7 million in OREO waslocated in and around Williamson County and surrounding counties in MiddleTennessee.  While management continues efforts to liquidate OREO, Shelby,Williamson and their surrounding counties have been under stress with declininghome sales and declining market values.  According to MarketGraphics ResearchGroup, Inc. and the Memphis Area Association of Realtors for the 12 monthsended November 30, 2010 (the most recent data available), new home inventorywas down 32% and new home permits were up 26%.  Also, new home sales volumeswere up 9.3% and new home average price was down 13% for the 12 months endedNovember 30, 2010.  All home sales volumes were almost flat with decrease of lessthan 2% and average price of all home sales was also near flat with a decrease ofless than 3% for the same period.

-36-

                Activity in OREOfor the most recent three years is as follows (in thousands):

2010

2009

2008

Beginning balance

 $

10,527   

 $

5,424   

 $

2,302   

Acquisitions

11,691   

9,983   

5,440   

Capitalized costs

500   

424   

29   

Dispositions

(6,828)

(4,834)

(2,063)

Valuation adjustments through earnings

(1,156)

(470)

(284)

Ending balance

 $

14,734   

 $

10,527   

 $

5,424   

Capitalizedcosts consist of costs to complete construction of homes partially complete atthe time of foreclosure or to complete certain phases of a development projectfor raw land.  Capitalized costs were incurred in order to improvemarketability of certain properties.  Valuation adjustments through earningsreflected above includes write down of properties subsequent to foreclosure andrealized gains and losses on sale of OREO.

OREO is recordedat the time of foreclosure at the lesser of its appraised value or the loanbalance.  Any reduction in value at the time of foreclosure is charged to theallowance for loan losses.  All other real estate parcels are appraised at leastannually and carrying values adjusted to reflect the decline, if any, in theirrealizable value.  Such adjustments made subsequent to foreclosure are chargedagainst earnings.  Net losses on sale and write down of OREO values subsequentto foreclosure totaled $1.2 million in 2010 compared to approximately $470,000and $284,000 for years ended December 31, 2009 and 2008.  

Othernon-interest expenses for property taxes, maintenance and other costs relatedto OREO totaled approximately $888,000, $642,000, and $435,000 in the yearsended December 31, 2010, 2009 and 2008, respectively.  The negative trend inother non-interest expense related to OREO was attributable to the largervolume of OREO over the past three years.  

*Composition of Deposits*

The average balanceof deposits and average interest rates paid on such deposits are summarized inthe following table for the years ended December 31, 2010, 2009 and 2008(dollars in thousands):

** **

2010

 

2009

 

2008

** **

Balance

 

Rate

 

Balance

 

Rate

 

Balance

 

Rate

Non-interest bearing demand deposits

 $

97,294 

0.00%

 $

89,819 

0.00%

 $

90,999 

0.00%

Savings deposits

304,605 

0.98%

265,055 

1.13%

217,754 

1.31%

Time deposits

360,634 

1.59%

374,469 

2.33%

390,233 

3.76%

    Total deposits

 $

762,533 

1.14%

 $

729,343 

1.61%

 $

698,986 

2.51%

The decrease inaverage cost of deposits at December 31, 2010 compared to December 31, 2009 wasa result of the continued historically low interest rate environment.  Theprevailing market and competitive environment continued to yield strongcompetition in pricing of interest-bearing deposit products.  The Bank does notcompete solely on price, as strategies are focused more on customerrelationships that attract and retain core deposit customers rather than timedeposits.

Total depositsgrew $40 million or 5.3% during the year ended December 31, 2010.  Savingsdeposit growth was $28 million or 9.4% and time deposit growth was $12 millionor 3.4% in 2010 compared to 2009 while demand deposit balances were flat.   During2010, demand deposit balances fluctuated in the range of $90 million to $110million consistent with historical ranges while overall average demand depositbalances trended higher than averages for the past two years.  Savings depositgrowth was primarily attributable to growth in the Bank's competitively pricedinterest bearing transaction accounts, including the Wall Street, e-Solutionsand First Rate accounts.  

-37-

In June 2008,the Bank began participating in the Certificate of Deposit Account RegistryService ("CDARS").  CDARS is a deposit placement service that allows the Bankto accept very large-denomination certificates of deposit ("CDs") (up to$50,000,000) from customers and ensures that 100% of those CDs areFDIC-insured.  Participating in this network enhances the Bank's ability toattract and retain large-denomination depositors without having to place fundsin a Sweep or Repurchase Agreement.  The CDARS network provides a means toplace reciprocal deposits for the Bank's customers, purchase time deposits(referred to as "One-Way Buy" deposits) or to sell excess deposits (referred toas "One-Way Sell" deposits).  One-Way Buy deposits are structured similar totraditional brokered deposits.  The Bank held reciprocal deposits and "One-WayBuy" deposits in the CDARS program totaling $24 million at year-end 2010compared to $25 million at year end 2009 and $45 million at year end 2008. CDARS accounts are classified as brokered time deposits for regulatoryreporting purposes.  Brokered deposits including CDARS totaled $25 million or 3%as of December 31, 2010 compared to $36 million or 4% of total deposits as ofDecember 31, 2009 and $76 million or 10% of total deposits as of December 31,2008.  Core deposit growth allowed the Company to reduce its reliance onbrokered deposits in 2009 and 2010. Customer demand for CDARS decreased in 2009and 2010 compared to 2008.

Time depositsover $100,000 plus brokered time deposits comprised 56.1% of total timedeposits as of year-end 2010 compared to 55.1% as of year-end 2009 and 40.5% asof year-end 2008.  Approximately 86% of time deposits including brokered timedeposits will mature or reprice over the next 12 months as the currentcompetitive market and rate environment continues to exhibit strong demand forshorter terms at historically low rates.  

*Maturity Distribution of TimeDeposits in Amounts of $100,000 and Over*

Deposits over$100,000 increased $24.1 million or 12.7% from December 31, 2009 to December31, 2010.  This was a result of the increase in FDIC insurance limits from$100,000 to $250,000 beginning in October 2008.  Of the $213.7 million in timedeposits as of December 31, 2010, $110.2 million were for deposits in an amountgreater than $250,000.  Of the $189.6 million in time deposits over $100,000 asof December 31, 2009, $107.2 million were for deposits in an amount greaterthan $250,000.   Public fund time deposits decreased $2.6 million from $85.5million at year-end 2009 to $82.9 million at year-end 2010.  

The followingtable sets forth the maturity distribution of CDs and other time deposits of$100,000 or more outstanding on December 31, 2010 and 2009 (dollars inthousands): 

2010

 

2009

Amount

 

Percent

 

Amount

 

Percent

Maturing in:

   3 Months or less

 $

75,610 

35.39%

 $

92,883 

48.98%

   Over three months less than six months

43,045 

20.14%

32,625 

17.21%

   Over Six Months less than 12 months

66,526 

31.13%

53,392 

28.16%

   Over 12 months

28,496 

13.34%

10,719 

5.65%

      Total

 $

213,677 

100.00%

 $

189,619 

100.00%

*Other Borrowings*

In addition todeposits, the Company uses a combination of short-term and long-term borrowingsto supplement its funding needs.  Short-term borrowings consist of a treasury,tax and loan demand note, federal funds purchased and short-term advances fromthe FHLB.  The short-term borrowings table below provides the maximum amount ofborrowings at any month end during the years presented.  Short-term borrowingsare used to manage fluctuations in liquidity based on seasonality ofagricultural production loans and other factors.  Short-term borrowings wereused on a very limited basis during 2009 and 2010 because of the Company'sstrategic efforts to maintain a strong liquidity position, slow loan demand,and steady growth in core deposits over the past two years.  The followingtable presents short-term borrowing balances at year end, maximum borrowings atmonth end during the year and average cost for the years presented (dollars inthousands):

2010

2009

2008

Amount outstanding at end of year

 $

1,000 

 $

748   

 $

1,000   

Weighted average interest rate at end of year

0.00 %

0.00 %

0.00 %

Maximum outstanding at any month end

 $

1,000   

 $

1,000   

 $

48,500   

Average outstanding during year

 $

667   

 $

1,029   

 $

20,679   

Weighted average interest rate during year

0.00 %

0.00 %

2.70 %

-38-

For moreinformation about short-term borrowings, see Note 12 in the Company'sConsolidated Financial Statements included elsewhere in this Annual Report onForm 10-K.

Other borrowingsat the holding company level carried a variable rate and consisted of trust-preferreddebt in 2010 and 2009.  Totals for 2008 also included a line of credit withFirst Tennessee Bank, which was paid in full in December 2008.  

The Bank's otherborrowings consists of advances from the FHLB.  Average volume of FHLB advancesfor 2010 was $60.9 million at an average rate of 4.26% compared to $65.1million at an average rate of 4.84% in 2009 and $61.1 million at an averagerate of 5.03% in 2008.  The average remaining maturity for FHLB long-termborrowings was approximately three years at December 31, 2010.  FHLB borrowingsare comprised primarily of fixed rate positions ranging from 1.15% to 7.05%. The Bank also had one LIBOR based advance totaling $2.5 million which had arate of 0.31% as of year-end 2010.  Most of the FHLB borrowings have quarterlycall features and maturities ranging from 2011 to 2019.  Approximately 35% or $14.5million will mature on or before December 31, 2011.  Advances totaling $9.5million at December 31, 2010 had call features that offer the option to pay offthe advance without penalty or to have the advance reprice at a variable ratetied to the 90-day LIBOR, when called.  As of December 31, 2010, advancestotaling $16 million require repayment if the call feature was exercised. Under the existing and forecasted rate environments, borrowings with callfeatures in place are not likely to be called in the next 12 months and,therefore, were not included in current liabilities.  For more informationabout liquidity, see the section below entitled "- Liquidity."  

The followingtable presents average volumes, rates, maturities and re-pricing frequenciesfor other borrowings for the year ended December 31, 2010 (dollars inthousands):

Average  

Average  

Average  

Repricing

Volume

Rate

Maturity

Frequency

FHLB Borrowings

 $

60,902   

4.26%

3

Fixed

Trust Preferred Debt

10,310   

2.14%

26

Variable

*Aggregate ContractualObligations and Off-Balance Sheet Arrangements*

At December 31, 2010,contractual obligations were due as follows (in thousands):

Total

Less than  One  Year

One-Three  Years

Three-Five  Years

Greater than  Five  Years

Unfunded loan commitments

 $

78,107   

 $

78,107   

 $

-   

 $

-   

 $

-   

Standby letters of credit

2,752   

2,752 

-   

-   

-   

Other borrowings*

52,259   

9,963   

13,481 

4,188   

24,627   

Capital lease obligations

-   

-   

-   

-   

-   

Operating lease obligations

313   

87   

226 

-   

-   

Purchase obligations

-   

-   

-   

-   

-   

Other long-term liabilities

-   

-   

-   

-   

-   

   Total

 $

133,431   

 $

90,909   

 $

13,707   

 $

4,188   

 $

24,627   

 ________________________

*              Other borrowingspresented as principal only, excluding interest.

Except for unfunded loancommitments and standby letters of credit, the Bank does not materially engagein off-balance sheet activities and does not anticipate material changes involume going forward.

For moreinformation about long-term obligations and off-balance sheet risk, see Notes 13and 18 in the Company's Consolidated Financial Statements included elsewhere inthis Annual Report on Form 10-K.

-39-

**Capital Resources**

The followingtable presents return on equity and assets for the years presented:

          2010

          2009

          2008

           2007

          2006

Percentage of net income to:

   Average total assets

0.92%

0.89%

0.83%

1.08%

1.10%

   Average shareholders equity

9.80%

10.19%

10.07%

12.79%

13.88%

Percentage of dividends declared

 to net income

40.86%

45.27%

55.85%

45.93%

47.04%

Percentage of average equity

 to average assets

9.38%

8.76%

8.21%

8.45%

7.93%

Total capital(excluding reserve for loan losses) as a percentage of total assets ispresented in the following table for years indicated: 

2010

2009

2008

2007

2006

9.16%

8.81%

8.30%

8.56%

8.36%

Total capitalincreased 5.8% to $89.3 million at year-end 2010 compared to $84.4 million atyear-end 2009 and $77.0 million at year-end 2008.  Growth in capital during 2010was from undistributed net income from the Bank of $5.2 million and $2.0million from increased non-controlling minority interest in consolidatedsubsidiary.  Accumulated Other Comprehensive Income decreased $2.4 million atDecember 31, 2010 compared to December 31, 2009 as market values ofavailable-for-sale securities trended lower in December 2010 compared toDecember 2009.  

The Company hashistorically maintained capital in excess of minimum levels established byregulation.  The risk-based capital ratios of 15.3% as of December 31, 2010 and13.55% at December 31, 2009 were significantly in excess of the 8% mandated byregulation.  This ratio has steadily increased during the past three years. Total capital as a percentage of total assets was 9.16%, 8.81%, and 8.30% atDecember 31, 2010, 2009 and 2008, respectively.  

Risk-basedcapital focuses primarily on broad categories of credit risk and incorporateselements of transfer, interest rate and market risks. The calculation ofrisk-based capital ratio is accomplished by dividing qualifying capital byweighted risk assets in accordance with financial institution regulatoryguidelines.  The minimum risk-based capital ratio is 8.00%.  At least one-halfof this ratio or 4.00% must consist of core capital (Tier 1), and the remaining4.00% may be in the form of core (Tier 1) or supplemental capital (Tier 2). Tier 1 capital or core capital consists of common shareholders' equity,qualified perpetual preferred stock and minority interests in consolidatedsubsidiaries.  Tier 2 capital or supplementary capital may consist of theallowance for loan and lease losses, perpetual preferred stock, term-subordinateddebt and other debt and stock instruments.

Dividendpayments totaled $1.00 per share in 2010 compared to $1.04 per share in 2009 and$1.16 per share 2008.  The Company's strategy continues to be to pay dividendsat a level that provides dividend payout ratio and dividend yield in excess ofaverage for peers as reported in the Peer Report.  The dividend payout ratiowas 40.86% in 2010 compared to 45.27% in 2009 and 55.85% in 2008.  Theprojected payout ratio for 2011 is in the range of 40% to 50%.  Dividend payoutin the Peer Report for 2010 was 50.66%.  The Company's dividend yield in 2010was 3.13% compared to 3.35% in 2009 and 3.41% in 2008.  The dividend yield inthe Peer Report was 1.52% for 2010.  

As of year-end2010, there were approximately $11 million of retained earnings available forthe payment of future dividends from the Bank to the Company.  Bankingregulations require certain capital levels to be maintained and may limitdividends paid by the Bank to the Company or by the Company to itsshareholders.  Historically, these restrictions have posed no practical limiton the ability of the Bank or the Company to pay dividends. 

Over the past 15years, the Company has repurchased approximately 91,767 shares of its commonstock; treasury stock has weighted average cost basis of $26.32 per share. During 2010, the Company did not repurchase any of its shares of common stock. During 2010, the Company sold 808 shares of its common stock at a price of$32.00 per share for an aggregate price of $25,856.  During 2009, the Companyrepurchased 1,000 shares at a weighted average cost of $26.00 per share. During 2009, the Company sold 1,519 shares of its common stock at a weightedaverage price of $27.69 per share.  There are currently no publicly announcedplans or programs to repurchase shares in place.

-40-

**Liquidity**

The Company manages liquidity ina manner to ensure the availability of ample funding to satisfy loan demand,fund investment opportunities and fund large deposit withdrawals.  Primary fundingsources for the Company include customer core deposits, and FHLB borrowings aswell as correspondent bank and other borrowings.  The Company's liquidityposition is further strengthened by ready access to a diversified base ofwholesale borrowings, which includes lines of credit with the FHLB, federalfunds purchased, securities sold under agreements to repurchase, brokered CDsand others.  

The turmoil and events infinancial markets and across the banking industry during the recent economicrecession serve as a reminder that adequate liquidity is critical to theCompany's success and survival, especially during times of turbulent marketconditions.  Therefore, management has reviewed, tested and updated strategicaction plans related to liquidity, including crisis and contingency liquidityplans to defend against any material downturn in the Bank's liquidityposition.  

Deposits accounted for 89% offunding at December 31, 2010 compared to 86% of funding for each of the priortwo years.  Borrowed funds from the FHLB amounted to 4.7% ($42 million) oftotal funding as of December 31, 2010 compared to 7.5% ($65 million) of totalfunding at December 31, 2009 and 7.5% ($63 million) of total funding at December31, 2008.  The Bank had additional borrowing capacity of $60.6 million with the FHLB as of December 31, 2010.  The Bank also has federal fund lines of creditwith four correspondent banks with lines totaling $54.5 million as of December31, 2010.  In each of the years ended December 31, 2010 and 2009, the Bank held$23 million in short-term CDs with the State of Tennessee.  Brokered timedeposits were $26 million and $36 million as of year-end 2010 and 2009,respectively.  Decreased loan demand in 2010 allowed the Bank to reduce itsreliance on wholesale funding sources such as brokered deposits and FHLBadvances.  Brokered deposits include reciprocal and one-way buy deposits in theCDARS program.  For more information about CDARS, see the section aboveentitled "Financial Condition - Composition of Deposits." 

When evaluatingliquidity, funding needs are compared against 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 the Company does notmaintain liquidity by paying above market prices for funds or by relying undulyon wholesale or credit-sensitive funding sources.  The Office of theComptroller of Currency ("OCC") has established benchmarks to be used asguidelines in managing liquidity.  The following areas are considered liquidityred flags:
-            Significant increases in reliance on wholesale funding;
-          Significant increases in large CDs, brokered deposits or depositswith interest rates higher than the market;
-          Mismatched funding - funding long-term assets with short-termliabilities or short-term assets with long-term liabilities;
-          Significant increases in borrowings;
-          Significant increases in dependence on funding sources other thancore deposits;
-          Reduction in borrowing lines by correspondent banks;
-          Increases in cost of funds;
-          Declines in levels of core deposits; and
-          Significant decreases in short-term investments.

-41-

Liquidity ishigh priority for the Bank's Funds Management Committee, which continues toseek alternative funding sources conducive to net interest margin strategies. The following table reflects the liquidity position of the Bank as of December31, 2010, 2009 and 2008 in comparison to the OCC Liquidity Benchmarks:

OCC Liquidity  Benchmark

December 31, 2010

 

December 31, 2009

 

December 31, 2008

Short Term Liabilities/ Total Assets > 20%

17.00%

20.13%

16.63%

On Hand Liquidity to Total Liabilities < 8%

10.76%

5.93%

10.77%

Loan to Deposits < 80%

68.14%

76.94%

80.21%

Wholesale Funds/Total Sources > 15%

9.13%

13.22%

15.28%

Non Core Funding Dependence > 20%

30.13%

30.82%

30.96%

The abovecomparison is one quantitative means of monitoring liquidity levels.  However,other quantitative and qualitative factors are considered in the overall riskmanagement process for liquidity.  Such other factors evaluated by managementinclude, but are not limited to, forecasting and stress testing capital levels,diversification of funding sources, degree of reliance on short-term volatilefunding sources, deposit volume trends and stability of deposits.  There are noknown trends or uncertainties that are likely to have a material effect on theCompany's liquidity or capital resources.  There currently exist no recommendationsby regulatory authorities, which, if implemented, would have such an effect. 

**Recently Issued Accounting Standards**

*Business Combinations*

In December2010, the Financial Accounting Standards Board ("FASB") issued AccountingStandards Codification ("ASC") Update No. 2010-29 Business Combinations (Topic805).  This update clarifies the acquisition date that should be used forreporting the pro forma financial information disclosures in Topic 805 whencomparative financial statements are presented.  It addresses diversity inpractice about the interpretation of the pro forma revenue and earningsdisclosure requirements for business combinations.  The amendments in this updatespecify that if a public entity presents comparative financial statements, the entityshould disclose revenue and earnings of the combined entity as though thebusiness combination(s) that occurred during the current year had occurred asof the beginning of the comparable prior annual reporting period only.  Theamendments in this update are effective prospectively for business combinationsfor which the acquisition date is on or after the beginning of the first annualreporting period beginning on or after December 15, 2010.  This update did nothave a material effect on the Company's financial statements.

*Goodwill and OtherIntangibles*

In December2010, the FASB issued ASC Update No. 2010-28 Intangibles-Goodwill and Other(Topic 350).  This amendment addresses questions about entities with reportingunits with zero or negative carrying amounts because some entities concluded thatStep 1 of the test is passed in those circumstances because the fair value oftheir reporting unit will generally be greater than zero.  The amendmentinstructs these entities to perform Step 2 of the goodwill impairment test ifit is more likely than not that a goodwill impairment exists.  For publicentities, the amendments in this update are effective for fiscal years, andinterim periods within those years, beginning after December 15, 2010.  This updatedid not have a material effect on the Company's financial statements.

*Technical Amendments*

In August 2010,FASB issued ASC Update No. 2010-21 Accounting for Technical Amendments toVarious SEC Rules and Schedules Amendments to SEC Paragraphs Pursuant toRelease No. 33-9026: Technical Amendments to Rules, Forms, Schedules andCodification of Financial Reporting Policies (SEC Update) and 2010-22Accounting for Various Topics-Technical Corrections to SEC Paragraphs (SECUpdate).  These two updates amend paragraphs in the ASC on various topicsincluding, but not limited to, noncontrolling interests, equity, condensedfinancial statements, business combinations and others.  This update did nothave a material effect on the Company's financial statements.

-42-

*Allowance for Credit Losses*

In July 2010,the FASB issued ASC Update 2010-20Receivables (Topic 310) Disclosures about the Credit Quality of FinancingReceivables and the Allowance for Credit Losses.  This amendment requiresan entity to provide disclosures regarding the nature of credit risk inherentin the portfolio, how risks are analyzed and assessed in arriving at theallowance for credit losses, and changes and reasons for changes in theallowance for credit losses.  Such disclosures are to be provided on two levelsof disaggregation, namely portfolio segment and class of financingreceivables.  Existing disclosures are also amended to require presentation ona disaggregated basis.  Additional disclosures are required regarding creditquality indicators at the end of the reporting period by class, aging of pastdues by class, nature and extent of troubled debt restructurings that occurredduring the period by class and the effect on the allowance for credit losses,troubled debt restructurings that defaulted by class and the effect on theallowance for credit losses, significant purchases and sales of financialreceivables during the period by portfolio segment.  For public entities, thedisclosures as of the end of the reporting period are effective for interim andannual reporting periods ending on or after December 15, 2010.  The disclosuresabout activity that occurs during a reporting period are effective for interimand annual reporting periods beginning on or after December 31, 2010.  Theamendments encourage but do not require comparative disclosures for earlierreporting periods that ended before initial adoption and require comparativedisclosures for periods ending after initial adoption.  Management believesthat adoption of this update is likely to significantly change the disclosuresrelated to the allowance for loan losses.

In January 2011,the FASB issued ASC Update 2011-1 Receivables (Topic 310): Deferral of theEffective Date of Disclosures about Troubled Debt Restructurings in Update No.2010-20.  This update postponed the effective date to periods ending after June15, 2011 for certain required disclosures related to troubled debtrestructurings that were included in ASC Update 2010-20.

*Subsequent Events*

In February,FASB issued ASC Update 2010-09 Subsequent Events (Topic 855) Amendments toCertain Recognition and Disclosure Requirements.  This amendment to Subtopic855-10 requires reporting entities to evaluate subsequent events through thedate that the financial statements are issued.  In addition, a reporting entityis not required to disclose the date through which subsequent events have beenevaluated.  These amendments are effective for interim or annual periods endingafter June 15, 2010.  This update did not have a material effect on theCompany's financial statements.

*FairValue Measurements*

In January 2010,FASB issued ASC Update 2010-06 Fair Value Measurements and Disclosures (Topic820) Improving Disclosures about Fair Value Measurements.  This amendment toSubtopic 820-10 requires separate disclosures of the amounts of significanttransfers in and out of Level 1 and Level 2 fair value measurements anddescriptions of the reasons for the transfers.  In addition, the reportingentity should present separately information about purchases, sales, issuances,and settlements on activity in Level 3 fair value measurements. This updatealso clarifies existing disclosures regarding level of disaggregation andinputs and valuation techniques as well as includes conforming amendments to theguidance on employers' disclosures about post-retirement benefit plan assets. The new disclosures and clarification of existing disclosures are effective forinterim and annual reporting periods beginning after December 15, 2009, exceptfor the disclosures about purchases, sales, issuance, and settlements in theroll forward of activity in Level 3 fair value measurements.  These disclosuresare effective for fiscal years beginning after December 15, 2010, and forinterim periods within those fiscal years.  Management does not expect thatadoption of this update will materially affect its financial statements.

*Technical Corrections*

* *                In January 2010,FASB issued ASC Update No. 2010-04 Accounting for Various Topics TechnicalCorrections to SEC Paragraphs.  This update provided technical correction onvarious accounting topics including, but not limited to, subsequent events,push down accounting, goodwill, and others.  In February 2010, FASB issued ASCUpdate No. 2010-08, which was another technical correction to variousaccounting topics.  Topics addressed in this update included, but are not limitedto, amendments to master glossary, statement of cash flows, debt and equitysecurities, equity method investments, goodwill, income taxes, derivatives andothers.  These two updates did not have a material impact on the Company'sfinancial statements.

-43-
ITEM 7A.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK
**Interest Rate Sensitivity**

Interest ratesensitivity varies with different types of interest earning assets andinterest-bearing liabilities.  Overnight federal funds, on which rates changedaily, and loans which are tied to the prime rate are much more sensitive thanlong-term investment securities and fixed rate loans. The shorter-term interestsensitive assets and liabilities are key to measurement of the interestsensitivity gap.  Minimizing this gap is a continual challenge and a primaryobjective of the asset/liability management program.

The Companymonitors and employs multiple strategies to continuously manage interest raterisk and liquidity at acceptable levels.  Such strategies include but are notlimited to use of FHLB borrowings, floors on variable rate loans, use ofinterest rate swaps and investments in mortgage-backed investments that enablethe Company to have steady cash inflows.  

Overall, theCompany improved net interest margins to above 4% in 2009 and 2010 after maintainingsteady net interest margins in the range of 3.7% to 4.0% from December 2005 toDecember 2008.  Margins steadily improved in 2009 to 4.2% for the first time inover five years and held at 4.28% for the year ended December 31, 2010.  Marginimprovement is a result of the Company's ability to keep interest earning assetyields declining at a pace slower than the decline of interest bearingliabilities.  The Company's overall fairly neutral interest rate risk positionis evidenced by comparison of the range of federal funds rate compared to rangeof the Company's net yield on average earning assets.  From 2005 to 2010, theaverage quarterly federal funds rate fluctuated between 0.00% and 5.25% whilethe Company's average quarterly net yield range for the same period is 3.59% to4.41%.  The Company's quarterly net interest margin was 4.34%, 4.30%, 4.18% and4.26% for the four calendar quarters of 2010.

Interest raterisk is separated and analyzed according to the following categories of risk:(1) re-pricing; (2) yield curve; (3) option risk; (4) price risk; and (5) basisrisk. Trading assets are utilized infrequently and are addressed in theinvestment policy.  Unfavorable trends reflected in interest rate margins willcause an immediate adjustment to the Bank's gap position or asset/liabilitymanagement strategies.  The data schedule below reflects a summary of theCompany's interest rate risk using simulations.  The projected 12-monthexposure is based on different rate movements (flat, rising or declining). 

-44-

The followingcondensed gap report provides an analysis of interest rate sensitivity ofearning assets and costing liabilities in a flat rate environment:

**CONDENSEDGAP REPORT****CURRENT BALANCESDECEMBER 31, 2010**

One

Three

Six

12

Two

Three

Five

More than Five

Non-

Month

Months

Months

Months

Years

Years

Years

Years

Sensitive

Balance

Balance

Balance

Balance

Balance

Balance

Balance

Balance

Balance

Total

Assets:

Total Cash and Due

   From Banks

 $

-    

 $

-    

 $

-    

 $

-    

 $

-    

 $

-    

 $

-    

 $

-    

 $

21,899  

 $

21,899  

Total Investments

5,136  

8,847  

8,806  

19,292  

33,714  

30,437  

48,272  

137,332  

2,987  

294,823  

Total Fed Funds Sold

18,063  

-    

-    

-    

-    

-    

-    

-    

-    

18,063  

Total Net Loans

120,208  

39,821  

45,949  

71,745  

130,285  

87,591  

52,051  

-    

(7,975)

539,675  

Total Other Assets

99,918  

Total Assets

 $

143,407  

 $

48,668  

 $

54,755  

 $

91,037  

 $

163,999  

 $

118,028  

 $

100,323  

 $

137,332  

 $

16,911  

 $

974,378  

Liabilities:

Total Demand

 $

-    

 $

-    

 $

-    

 $

10,040  

 $

5,020  

 $

5,020  

 $

-    

 $

80,050  

 $

-    

 $

100,130  

Total Savings

67,698  

-  

-  

-  

26,169  

26,169  

69,242  

133,801  

-  

323,079  

Total Time

37,423  

89,940  

79,020  

112,696  

39,840  

5,514  

4,131  

72  

-  

368,636  

Total Deposits

105,121  

89,940  

79,020  

122,736  

71,029  

36,703  

73,373  

213,923  

-  

791,845  

Total Borrowings

33,204  

14,226  

489  

5,653  

8,834  

6,669  

2,493  

16,000  

-  

87,568  

Other Liabilities

5,686  

5,686  

Total Other Liabilities

33,204  

14,226  

489  

5,653  

8,834  

6,669  

2,493  

16,000  

5,686  

93,254  

Total Liabilities

138,325  

104,166  

79,509  

128,389  

79,863  

43,372  

75,866  

229,923  

5,686  

885,099  

Total Equity

-  

-  

-  

-  

-  

-  

-  

-  

89,279  

89,279  

Total Liabilities/Equity

 $

138,325  

 $

104,166  

 $

79,509  

 $

128,389  

 $

79,863  

 $

43,372  

 $

75,866  

 $

229,923  

 $

94,965  

 $

974,378  

Period Gap

(85,980)

(55,498)

(24,754)

(37,352)

84,136  

74,656  

24,457  

(92,591)

11,225  

-  

Cumulative Gap

5,089  

(50,409)

(75,163)

(112,515)

(28,379)

46,277  

70,734  

(21,857)

(10,632)

(10,632)

RSA/RSL

37.84 %

46.72 %

68.87 %

70.91 %

205.35 %

272.13 %

132.24 %

23.00 %

17.81 %

0.00 %

-45-

The followingcondensed gap report provides an analysis of interest rate sensitivity ofearning assets and costing liabilities in a flat rate environment:

**CONDENSEDGAP REPORT****CURRENT BALANCESDECEMBER 31, 2009**

** **

One

Three

Six

12

Two

Three

Five

More than Five

Non

Month

Months

Months

Months

Years

Years

Years

Years

Sensitive

Balance

Balance

Balance

Balance

Balance

Balance

Balance

Balance

Balance

Total

Assets:

Total Cash and Due

   From

 $

-    

 $

-    

 $

-    

 $

-    

 $

-    

 $

-    

 $

-    

 $

-    

 $

21,177  

 $

21,177  

Total Investments

4,767  

9,734  

10,390  

19,649  

31,705  

25,162  

38,442  

102,931  

7,011  

249,791  

Total Fed Funds Sold

11,170  

-    

-    

-    

-    

-    

-    

-    

-    

11,170  

Total Net Loans

150,869  

43,716  

44,568  

73,936  

100,028  

118,876  

55,552  

-    

(8,931)

578,614  

Total Other Assets

-  

-  

-  

-  

-  

-  

-  

-  

-  

95,803  

Total Assets

 $

166,806  

 $

53,450  

 $

54,958  

 $

93,585  

 $

131,733  

 $

144,038  

 $

93,994  

 $

102,931  

 $

19,257  

 $

956,555  

Liabilities:

Total Demand

 $

-    

 $

-    

 $

-    

 $

10,068  

 $

5,034  

 $

5,034  

 $

-    

 $

80,368  

 $

-    

 $

100,504  

Total Savings

62,852  

-  

-  

-  

24,453  

24,453  

63,594  

119,848  

-  

295,200  

Total Time

49,689  

106,404  

73,948  

98,354  

16,806  

7,208  

3,954  

79  

-  

356,442  

Total Deposits

112,541  

106,404  

73,948  

108,422  

46,293  

36,695  

67,548  

200,295  

-  

752,146  

Total Borrowings

32,376  

7,157  

6,888  

22,606  

11,536  

5,858  

2,180  

24,310  

-  

112,911  

Other Liabilities

7,186  

7,186  

Total Other Liabilities

32,376  

7,157  

6,888  

22,606  

11,536  

5,858  

2,180  

24,310  

7,186  

120,097  

Total Liabilities

144,917  

113,561  

80,836  

131,028  

57,829  

42,553  

69,728  

224,605  

7,186  

872,243  

Total Equity

-  

-  

-  

-  

-  

-  

-  

-  

84,312  

84,312  

Total Liabilities/Equity

 $

144,917  

 $

113,561  

 $

80,836  

 $

131,028  

 $

57,829  

 $

42,553  

 $

69,728  

 $

224,605  

 $

91,498  

 $

956,555  

Period Gap

(66,068)

(60,111)

(25,878)

(37,443)

73,904  

101,485  

24,266  

(121,674)

12,071  

-  

Cumulative Gap

21,889  

(38,222)

(64,100)

(101,543)

(27,639)

73,846  

98,112  

(23,562)

(11,491)

- 

RSA/RSL

54.41 %

47.07 %

67.99 %

71.42 %

227.80 %

338.49 %

134.80 %

23.00 %

21.05 %

0.00 %

** **

_______________

*              RSA/RSL means the ratio of rate-sensitiveassets to rate-sensitive liabilities.

*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. 

-46-

3.             Demand depositsare considered to be core and are spread among the one-year, two-year,three-year and greater than five-year categories for gap analysis.

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 six-month CD rate.  First Rate and WallStreet deposit products are more rate sensitive and, therefore, are placed in thevariable category of less than one month.  

5.             Simulationsare utilized to reflect the impact of multiple rate scenarios on net interestincome at risk, net income at risk and economic value of equity at risk. Strategies are implemented to increase net interest income, while alwaysconsidering the impact on interest rate risk.  Overall, the Bank managesthe gap between rate sensitive liabilities to expand and contract with the ratecycle phase.  The Bank's Funds Management Committee is responsible forimplementing and monitoring procedures to improve net interest income throughvolume increases and better pricing techniques.  

The Company'sinterest rate risk position was liability sensitive at year-end 2010. Therefore, net interest margins would be diluted slightly by increases in ratesover the next 12 months under a normal interest rate environment.  As ofDecember 2010, federal funds rates continue at the historical low range of0.00% - 0.25%.  Federal funds rates at this level do not have the capacity todecrease even 100 basis points.  Therefore, in the interest rate risk models,the rates on federal funds and prime hit a floor of zero and 3.0%,respectively.  The prime rate floor of 3% assumes that the normal spreadbetween federal funds rates and prime is maintained and remains fixed at 300basis points.   While prime rate in the model reaches a floor of 3%, the Bank'svariable rate loan pricing carries an average floor of 5.5%.  As rates in themodel are shocked, loans will decrease only until the floor position is reachedwhile some liabilities continue to reprice downward.  However, the variancebetween the flat rate scenario and the down rate shocks are negative as thecurrent pricing of liabilities is historically low and has little room to trenddownward beyond its current position.  With federal funds rates currently at0.00% to 0.25%, the down 100 basis points and down 200 basis point scenariosare the most unlikely scenarios.  Scenarios for exposure in the up 100 basispoints and up 200 basis points are considered more realistic.  These scenariosalso indicate a negative variance because the upward scenarios indicate thatdeposits will reprice faster than loans and investments, especially given thatmost of the loans are currently at a floor and will require a more than 200-basispoint increase in federal funds rates and prime rate before loan floors willincrease.  

The Company'sexposure to interest rate risk is well within established policy limits aspresented in the following table (dollars in thousands):  

NetInterest Income at Risk*December31, 2010

Tier 1 Capital                             $85,695

Projected 12  Month Exposure

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)

 $

33,110   

 $

30,635   

 $

(2,475)

-7.5%

-20.0%

Declining 1

(100)

33,110   

32,922   

(188)

-0.6%

-10.0%

**Most Likely-Base**

**-**

** **

**33,110 **

** **

**33,110 **

** **

**-   **

** **

**-%**

** **

**-%**

Rising 1

100  

33,110   

32,227   

(883)

-2.7%

-10.0%

Rising 2

200  

33,110   

31,336   

(1,774)

-5.4%

-25.0%

____________________________

*              Net interest income assumes thatinterest rates would change immediately within the total portfolio, a scenariowhich would reflect a worst case position and is unlikely to happen. 

-47-
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.Management's Annual Report on Internal Control Over Financial Reporting
Management of the Company isresponsible for establishing and maintaining adequate internal control overfinancial reporting.  The Company's internal control system is designed toprovide reasonable assurance to management and the Company's Board of Directorsregarding the preparation and fair presentation of the Company's annualfinancial statements in accordance with GAAP.  

Inherentlimitations exist in the effectiveness of any internal control structure,including the possibility of human error and circumvention of controls. Accordingly, even effective internal control can only provide reasonableassurance with respect to financial statement preparation.  

Managementassessed the effectiveness of the Company's internal control over financialreporting as of December 31, 2010, based on criteria for effective internalcontrol over financial reporting described in Internal Control-IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission.  Based on this assessment, management believes that, as of December31, 2010, the Company's internal control over financial reporting waseffective.  

AlexanderThompson Arnold, PLLC, the Company's independent registered public accountingfirm, has audited the Company's consolidated financial statements and issued anattestation report on the Company's internal control over financial reporting.This report appears on page 49 of thisAnnual Report on Form 10-K.

 -48-
**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  AICPA Center for Public Company Audit Firms  AICPA Governmental Audit Quality Center  AICPA Employee Benefit Plan Audit Quality Center  Tennessee Society of Certified Public  Accountants  Kentucky Society of Certified Public  Accountants

* 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, 2010 and 2009, and therelated consolidated statements of income, shareholders' equity and comprehensive income, and cash flows for each of the years in the three year period ended December31, 2010.  We also have audited First Citizens Bancshares, Inc. andsubsidiaries' internal control over financial reporting as of December 31, 2010,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 subsidiaries' management isresponsible for these financial statements, for maintaining effective internalcontrol over financial reporting, and for its assessment of the effectivenessof internal control over financial reporting.  Our responsibility is to expressan opinion on these financial statements and an opinion on the company'sinternal 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 weplan and 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 the financial statements included examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation.  Our audit of internal control over financial reporting includedobtaining an understanding of internal control over financial reporting, assessingthe risk that a material weakness exists, and testing and evaluating the designand operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considerednecessary in 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 controlover financial reporting includes those policies and procedures that (1)pertain to the maintenance of records that, in reasonable detail, accuratelyand fairly reflect the transactions and dispositions of the assets of thecompany; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations of managementand directors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company's assets that could have a material effect on the financialstatements.

-49 -

First Citizens Bancshares, Inc.Page 2

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 maybecome inadequate because of changes in conditions, or that the degree ofcompliance with 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, 2010 and 2009, and the results of itsoperations and its cash flows for each of the years in the three-year periodended December 31, 2010, in conformity with accounting principles generallyaccepted in the United States of America.  Also, in our opinion, First CitizensBancshares, Inc. and subsidiaries maintained, in all material respects,effective internal control over financial reporting as of December 31, 2010, basedon criteria established in *Internal Control-Integrated Framework* issuedby the Committee of Sponsoring Organizations of the Treadway Commission(COSO).  
** 

/s/ ALEXANDER THOMPSON ARNOLD PLLC

Dyersburg, Tennessee

March 1, 2011
**   
 

 

 

 

Dyersburg, TN

McKenzie, TN

Union City, TN

Milan, TN

Henderson, TN

Murray, KY

Jackson, TN

Paris, TN

Martin, TN

Trenton, TN

 

 

 

 

-50-
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES**CONSOLIDATEDBALANCE SHEETS**DECEMBER 31, 2010 AND 2009***(dollars in thousands)***
**December 31,  2010**

** **

**December 31,  2009**

ASSETS

** **

Cash and due from banks

 $

15,628 

 $

17,402 

Federal funds sold

18,063 

11,170 

Cash and cash equivalents

33,691 

28,572 

Interest-bearing deposits in other banks

6,271 

3,775 

Investment securities:

Available-for-sale, stated at market

294,823 

249,791 

Loans (excluding unearned income of $352 at December 31,  2010

and $434 at December 31, 2009)

547,703 

587,398 

Less:  allowance for loan losses

8,028 

8,784 

Net loans

539,675 

578,614 

Loans held-for-sale

2,777 

2,741 

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

5,684 

5,684 

Premises and equipment

30,268 

30,525 

Accrued interest receivable

5,215 

5,405 

Goodwill

11,825 

11,825 

Other intangible assets

120 

204 

Other real estate owned

14,734 

10,527 

Bank owned life insurance policies

21,656 

21,116 

Other assets

7,639 

7,776 

TOTAL ASSETS

 $

974,378 

 $

956,555 

LIABILITIES AND SHAREHOLDERS' EQUITY

Non-interest bearing demand deposits

 $

100,130 

 $

100,504 

Interest bearing time deposits

368,636 

356,442 

Interest bearing savings deposits

323,079 

295,200 

Total deposits

791,845 

752,146 

Securities sold under agreements to 

Repurchase

34,309 

36,881 

Federal funds purchased and other short

term borrowings

1,000 

748 

Other borrowings

52,259 

75,282 

Other liabilities

5,686 

7,131 

Total liabilities

885,099 

872,188 

-51-

**FIRST CITIZENSBANCSHARES, INC. AND SUBSIDIARIESCONSOLIDATEDBALANCE SHEETS (cont'd)****DECEMBER 31, 2010 AND 2009*****(Dollars inthousands)***

** December 31,  2010**

** December 31,  2009**

** **

Equity

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

authorized; 3,717,593 issued and outstanding

at December 31, 2010 and December 31, 2009

 $

3,718   

 $

3,718   

Surplus

15,331   

15,331   

Retained earnings

68,696   

63,448   

Accumulated other comprehensive income

1,896   

4,256   

Total common stock and retained earnings

89,641   

86,753   

Less-91,767 treasury shares, at cost as of December 31,  2010

 and 92,575 treasury shares, at cost as of December 31,  2009

2,417   

2,441   

Total shareholders' equity

87,224   

84,312   

Noncontrolling (minority) interest in consolidated  subsidiary

2,055   

55   

Total equity

89,279   

84,367   

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

 $

974,378   

 $

956,555   

*Note:  Seeaccompanying notes to consolidated financial statements.*

-52-

**FIRST CITIZENSBANCSHARES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME****YEARS ENDED DECEMBER 31, 2010, 2009 AND 200****8*****(In thousands,except per share data)***

** **

**             2010**

** **

**             2009**

** **

**              2008**

** **

 
Interest income

 
   Interest and fees on loans

 $

36,085   

 $

38,402   

 $

42,357   

   Interest and dividends on investment securities:

 
     Taxable

6,038   

7,029   

7,334   

 
     Tax-exempt

3,940   

3,285   

2,329   

 
     Dividends

224   

231   

309   

 
   Other interest income

60   

64   

138   

 
     Total interest income

46,347   

49,011   

52,467   

 
 
Interest expense

 
   Interest on deposits

8,710   

11,729   

17,517   

 
   Interest on borrowings

2,815   

3,428   

4,166   

 
   Other interest expense

485   

655   

951   

 
     Total interest expense

12,010   

15,812   

22,634   

 
         Net interest income

34,337   

33,199   

29,833   

 
 
Provision for loan losses

7,000   

7,060   

2,858   

 
 Net interest income after provision for loan losses

27,337   

26,139   

26,975   

 
 
Non-interest income

 
 Mortgage banking income

1,116   

1,111   

1,139   

 
   Income from fiduciary activities

785   

806   

816   

 
   Service charges on deposit accounts

6,923   

6,941   

7,272   

 
   Brokerage fees

1,080   

1,317   

1,473   

 
   Earnings on bank owned life insurance

677   

832   

833   

 
   Loss on sale of foreclosed property

(1,156)

(470)

(284)

 
   Gain on sale of available-for-sale securities

1,884   

1,196   

436   

 
   Income from insurance activities

913   

834   

940   

 
   Other non-interest income

637   

546   

571   

 
          Total non-interest income

12,859   

13,113   

13,196   

 
 
Total other-than temporary impairment losses

1,567   

1,357   

1,810   

 
Portion of loss recognized in other

 
   comprehensive income (before taxes)

(978)

(706)

-     

 
Net impairment losses recognized in earnings

589   

651   

1,810   

 
** **-53-

**FIRST CITIZENSBANCSHARES, INC. AND SUBSIDIARIESCONSOLIDATEDSTATEMENTS OF INCOME (cont'd)****YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008*****(In thousands,except per share data)***

**              2010**

** **

**             2009**

** **

**             2008**

** **

Non-interest expense

   Salaries and employee benefits

15,417   

15,285   

16,832   

   Net occupancy expense

1,759   

1,804   

1,745   

   Depreciation

1,792   

1,852   

1,868   

   Data processing expense

1,591   

1,192   

984   

   Legal and professional fees

441   

305   

353   

   Stationary and office supplies

221   

254   

259   

   Amortization of intangibles

85   

85   

85   

   Advertising and promotions

703   

622   

711   

   Premiums for FDIC insurance

1,200   

1,671   

95   

   Expenses related to other real estate owned

888   

642   

435   

   ATM related fees and expenses

784   

483   

422   

   Other non-interest expense

3,829   

4,114   

4,275   

     Total non-interest expense

28,710   

28,309   

28,064   

Net income before income taxes

10,897   

10,292   

10,297   

Provision for income tax expense

2,022   

1,965   

2,768   

   Net income

 $

8,875   

 $

8,327   

 $

7,529   

Earnings per common share:

 Net income

 $

2.45   

 $

2.30   

 $

2.08   

Weighted average shares outstanding

3,626   

3,625   

3,625   

*Note:  Seeaccompanying notes to consolidated financial statements.*

 -54-

**FIRST CITIZENSBANCSHARES, INC. AND SUBSIDIARIESCONSOLIDATEDSTATEMENTS OF COMPREHENSIVE INCOMEYEARS ENDEDDECEMBER 31, 2010, 2009 AND 2008(In thousands)**

**         2010**

** **

**          2009**

** **

**        2008**

Net income 

 $

8,875   

 $

8,327   

 $

7,529   

Other comprehensive income, net of tax:

    Net change in unrealized gains (losses) on cash flow  hedge

69   

44   

(14)

    Net change in unrealized gains (losses) on available-

       for-sale securities

(2,429)

2,687   

596   

         Total other comprehensive income, net of tax

(2,360)

2,731   

582   

**  Total comprehensive income**

** **

 $

6,515   

 $

11,058   

 $

8,111   

** **Related tax effects allocated to each component of othercomprehensive income are as follows:

Before-tax

Tax (Expense)

Net-of-tax

Amount

or Benefit

Amount

**Year ended December 31, 2010:**

 Unrealized gains (losses) on cash flow hedge

 $

111   

 $

(42)

 $

69   

 Unrealized gains (losses) on available-for-sale securities:

           Unrealized gains (losses) arising during the  period

4,901   

(1,878)

(1,630)

           Reclassification adjustments for net gains  included in net income

(1,295)

496   

(799)

 Unrealized gains (losses) on available-for-sale  securities, net

3,606   

(1,382)

(2,429)

                  Net unrealized gains (losses)

 $

3,717   

 $

(1,424)

 $

(2,360)

**Year ended December 31, 2009:**

 Unrealized gains (losses) on cash flow hedge

 $

71   

 $

(27)

 $

44   

 Unrealized gains (losses) on available-for-sale  securities:

           Unrealized gains (losses) arising during the  period

4,901   

(1,878)

3,023   

           Reclassification adjustments for net gains  included in net income

(545)

209   

(336)

 Unrealized gains (losses) on available-for-sale  securities, net

4,356   

(1,669)

2,687   

                  Net unrealized gains (losses)

 $

4,427   

 $

(1,696)

 $

2,731   

**Year ended December 31, 2008:**

 Unrealized gains (losses) on cash flow hedge

 $

(23)

 $

9   

 $

(14)

 Unrealized gains (losses) on available-for-sale  securities:

           Unrealized gains (losses) arising during the  period

(408)

156   

(252)

           Reclassification adjustments for net losses  included in net income

1,374   

(526)

848   

 Unrealized gains (losses) on available-for-sale  securities, net

966   

(370)

596   

                  Net unrealized gains (losses)

 $

943   

 $

(361)

 $

582   

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

** **-55-

**FIRST CITIZENSBANCSHARES, INC.CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS' EQUITYYEARS ENDEDDECEMBER 31, 2010, 2009 AND 2008*(In thousands,except per share data)***

 

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Accum.**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Other**

** **

** **

** **

**Non- **

** **

** **

**Common Stock**

** **

** **

** **

**Retained**

** **

**Compre.**

** **

**Treasury**

** **

** Controlling**

** **

** **

**Shares**

** **

**Amount**

** **

**Surplus**

** **

**Earnings**

** **

**Income**

** **

**Stock**

** **

**Interests**

** **

**Total**

**(#)**

** **

**($)**

** **

**($)**

** **

**($)**

** **

**($)**

** **

**($)**

** **

**($)**

** **

**($)**

**Balance January 1, 200****8**

3,718  

 $

3,718  

 $

15,331  

 $

57,485  

 $

944  

 $

(2,447)

 $

55  

 $

75,086  

Net income, year ended December 31, 2008

7,529  

 

7,529  

Cumulative effect for change in  accounting

   principle (adoption of EITF  06-04)

(1,919)
   
(1,919)

Adjustment of unrealized gain on

 securities available-for-sale, net of tax

596  
   
596  

Adjustment of unrealized loss on

 cash flow hedge, net of tax

(14)
   
(14)

Cash dividends paid - $1.16 per share

(4,205)
   
(4,205)

Treasury stock transitions-net

(10)
   
(10)

**Balance December 31, 2008**

3,718  

 $

3,718  

 $

15,331  

 $

58,890  

 $

1,526  

 $

(2,457)

 $

55  

 $

77,063  

Net income, year ended December 31, 2009

8,327  

   

8,327  

Adjustment of unrealized gain (loss) on

 securities available-for-sale, net of tax

2,686  

  

2,686  

Adjustment of unrealized gain (loss) on

 cash flow hedge, net of tax

44  

  

44  

Cash dividends paid - $1.04 per share

(3,769)

 

(3,769)

Treasury stock transitions, net

16  

   

16  

**Balance December 31, 2009**

3,718  

 $

3,718  

 $

15,331  

 $

63,448 

 $

4,256  

 $

(2,441)

 $

55  

 $

84,367  

Net income, year ended December 31, 2010

8,875  

  

8,875  

Adjustment of unrealized loss on

 securities available-for-sale, net of tax

(2,429) 

  

(2,429)  

Adjustment of unrealized gain on

 cash flow hedge, net of tax

69  

 

69  

Cash dividends paid - $1.00 per share

(3,627)

 

(3,627)

Treasury stock transitions, net
   
24
 

24

Sale of subsidiary preferred shares to  noncontrolling interest

  

2,000

2,000 

**Balance December 31, 20****10**

3,718  

 $

3,718  

 $

15,331  

 $

68,696 

 $

1,896  

 $

(2,417)

 $

2,055  

 $

89,279  

** **

*Note:  Seeaccompanying notes to consolidated financial statements.*

-56-

** FIRST CITIZENSBANCSHARES, INC. AND SUBSIDIARIESCONSOLIDATEDSTATEMENT OF CASH FLOWSYEARS ENDEDDECEMBER 31, 2010, 2009 AND 2008*(In thousands)***

*** ***

**            2010**

** **

**              2009**

** **

**             2008**

 
**Operating activities**

 
Net income

 $

8,875   

 $

8,327   

 $

7,529   

 
Adjustments to reconcile net income to net

 
 cash provided by operating activities:

 
     Provision for loan losses

7,000   

7,060   

2,858   

 
     Provision for depreciation

1,792   

1,852   

1,868   

 
     Provision for amortization of intangibles

85   

85   

85   

 
     Deferred income taxes

65   

(789)

(870)

 
     Gains on sale or call of investment securities

(1,884)

(1,196)

(436)

 
     Impairment losses on securities recorded in earnings

589   

651   

1,810   

     Net losses on sale or write down of other real estate  owned

1,156   

470   

284   

 
     Net increase in loans held-for-sale

(36)

(109)

(445)

 
     Decrease in accrued interest receivable

190   

176   

983   

 
     Increase (decrease) in accrued interest payable

(244)

(980)

148   

 
     Increase in cash surrender value of bank-owned life  insurance policies

(540)

(489)

(694)

 
     Net (increase) decrease in other assets

375   

(5,174)

(296)

 
     Net increase (decrease) in other liabilities

71   

(1,500)

2,821   

 
NET CASH PROVIDED BY OPERATING ACTIVITIES

17,494   

8,384   

15,645   

 
 
**Investing activities**

 
 Increase in interest-bearing deposits in other banks

(2,496)

(793)

(2,081)

 
 Proceeds of maturities of held-to-maturity investment  securities

-   

115   

175   

 
 Proceeds of paydowns and maturities of  available-for-sale

 
     investment securities

69,296   

36,943   

50,402   

 
 Purchases of available-for-sale investment securities

(178,964)

(111,550)

(101,226)

 
 Decrease (increase) in loans - net

23,224   

(4,040)

(18,807)

 
 Proceeds from sale of other real estate owned

5,043   

2,600   

1,396   

 
 Purchase of premises and equipment

(1,535)

(631)

(3,306)

 
NET CASH USED BY INVESTING ACTIVITIES

(23,128)

(36,315)

(42,683)

 
 
**Financing activities**

 
 Net increase in demand deposits and savings accounts

27,505   

53,629   

32,142   

 
 Net increase (decrease) in time deposits

12,194   

(36,398)

12,178   

 
 Net increase (decrease) in short-term borrowings

(2,320)

3,864   

(10,100)

 
 Issuance of other borrowings

10,000   

2,000   

12,000   

 
 Payment of principal on other borrowings

(33,023)

(561)

(1,319)

 
 Cash dividends paid

(3,627)

(3,769)

(4,205)

 
 Treasury stock transactions - net

24   

16   

(10)

 
NET CASH PROVIDED BY FINANCING ACTIVITIES

10,753   

18,781   

40,686   

 
 

*Note:  Seeaccompanying notes to consolidated financial statements.*

** **-57-

**FIRST CITIZENSBANCSHARES, INC. AND SUBSIDIARIESCONSOLIDATEDSTATEMENT OF CASH FLOWS (cont'd)****YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008*****(In thousands)***

**2010**

** **

**2009**

** **

**2008**

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 $

5,119   

 $

(9,150)

 $

13,381   

Cash and cash equivalents at beginning of year

28,572   

37,722   

24,341   

CASH AND CASH EQUIVALENTS AT END OF YEAR

 $

33,691   

 $

28,572   

 $

37,722   

Supplemental cash flow information:

 Interest paid

 $

12,234   

 $

16,792   

 $

22,782   

 Income taxes paid

 $

2,816   

 $

3,788   

 $

2,425   

Supplemental noncash disclosures:

 Transfers from loans to other real estate owned

 $

11,691   

 $

9,493   

 $

5,440   

 Transfers from foreclosed other real estate owned to  loans

 $

1,785   

 $

1,940   

 $

400   

** **

** **

** **

** **

*Note:  Seeaccompanying notes to consolidated financial statements.*

 -58-

**FIRST CITIZENSBANCSHARES, INC. AND SUBSIDIARIESNOTES TOCONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2010AND 2009**

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

The accountingand reporting policies of First Citizens Bancshares, Inc., and subsidiaries(the "Company") conform to generally accepted accounting principles ("GAAP"). The significant policies are described as follows:

**Basis of Presentation**

The ConsolidatedFinancial Statements include all accounts of the Company and its subsidiary,First Citizens National Bank (the "Bank").  First Citizens (TN) StatutoryTrusts III and IV are reported under the equity method in accordance with GAAPfor 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.  The Bank also has two wholly-ownedsubsidiaries, First Citizens Financial Plus, Inc. and First CitizensInvestments, Inc., which are consolidated into its financial statements.  TheCompany's investment in these subsidiaries is reflected on the Company'scondensed balance sheet.  See Note 22 for more information.  

The Bank has a50% ownership in two insurance subsidiaries, both of which are accounted forusing the equity method.  White and Associates/First Citizens Insurance, LLC isa general insurance agency offering a full line of insurance products. FirstCitizens/White and Associates Insurance Company's principal activity is creditinsurance.  The investment in these subsidiaries is included in Other Assets onthe Consolidated Balance Sheets presented in this report and earnings fromthese subsidiaries are recorded in Other Income on the Consolidated Statementsof Income.

The principalactivity of First Citizens Investments, Inc. is to acquire and sell investmentsecurities and collect income from the securities portfolio.  First CitizensHoldings, Inc., a wholly owned subsidiary of First Citizens Investments, Inc.,acquires and sells certain investment securities, collects income from itsportfolio, and owns First Citizens Properties, Inc., a real estate investmenttrust.  First Citizens Properties, Inc. is a real estate investment trustorganized and existing under the laws of the state of Maryland, the principalactivity of which is to invest in participation interests in real estate loansmade by the Bank and provide the Bank with an alternative vehicle for raisingcapital.  First Citizens Holdings, Inc. owns 100% of the outstanding commonstock and 60% of the outstanding preferred stock of First Citizens Properties,Inc.  Directors, executive officers and certain employees and affiliates of theBank own approximately 40% of the preferred stock which is reported as NoncontrollingInterest in Consolidated Subsidiary in the Consolidated Financial Statements ofthe Company.  Net income (loss) attributable to the noncontrolling interest is includedin Other Non-Iterest Expense on the Consolidated Statements of Income and isnot material for any of the periods presented.

The Company hastwo additional wholly owned subsidiaries, First Citizens (TN) Statutory TrustIII and First Citizens (TN) Statutory Trust IV.  The purpose and activities ofthese trusts are further discussed in Note 13.  

All significantinter-company balances and transactions are eliminated in consolidation. Certain balances have been reclassified to conform to current yearpresentation.  

**Nature of Operations**

The Company andits subsidiaries provide a wide variety of commercial banking services toindividuals and corporate customers in the mid-southern United States with a concentration in West Tennessee.  The Company's primary products are checkingand savings deposits and residential, commercial and consumer lending.

**Basis of Accounting**

The ConsolidatedFinancial Statements are presented using the accrual method of accounting.

-59-

**Use of Estimates**

The preparationof financial statements in conformity with GAAP requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting periods.  Actual results could differ from thoseestimates.

Materialestimates that are particularly susceptible to significant change relate to thefair value of investment securities, determination of the allowance for losseson loans, the valuation of real estate acquired in connection with foreclosuresor in satisfaction of loans, and determination of fair values associated withimpairment testing of goodwill.  In connection with the determination of theallowances for losses on loans and foreclosed real estate, management obtainsindependent appraisals for significant properties.  Estimates and assumptionsused in goodwill impairment testing are made based on prevailing marketfactors, historical earnings and multiples and other factors.

**Cash Equivalents**

Cash equivalentsinclude amounts due from banks which do not bear interest and federal fundssold. Generally, federal funds are purchased or sold for one-day periods. 

**Interest-Bearing Deposits in OtherBanks**

**               **Interest-bearingdeposits in other banks consist of excess balances above the minimum requiredbalance at the Federal Reserve Bank and short-term certificates of depositsheld at other banks.  The certificates of deposits at other banks are held inincrements of less than $250,000 and, therefore, are covered by FDICinsurance.  Interest income on deposits in banks is reported as Other InterestIncome on the Consolidated Statements of Income.  

** Securities**

Investmentsecurities are classified as follows:

•        Held-to-maturity, which includes those investment securitieswhich the Company has the intent and the ability to hold until maturity; 

•        Trading securities, which include those investments that are heldfor short-term resale; and

•        Available-for-sale, which includes all other investmentsecurities.

Held-to-maturitysecurities are reflected at cost, adjusted for amortization of premiums andaccretion of discounts using methods which approximate the interest method. Available-for-sale securities are carried at fair value, and unrealized gainsand losses are recognized as direct increases or decreases to accumulated othercomprehensive income except for other-than-temporary impairment losses that arerequired to be charged against earnings.  The credit portion ofother-than-temporary impairment losses is recorded against earnings and isseparately stated on the Consolidated Statements of Income.  Tradingsecurities, where applicable, are carried at fair value, and unrealized gainsand losses on these securities are included in net income.

Realized gainsand losses on sale or call of investment securities transactions are determinedbased on the specific identification method and are included in net income.

**Loans Held for Sale**

Mortgage loansoriginated and intended for sale in the secondary market are carried at thelower of aggregate cost or market, as determined by outstanding commitmentsfrom investors.  Net unrealized losses, if any, are recorded as a valuationallowance and charged to earnings.  Servicing rights are not retained whenmortgage loans are sold.  Income from loans held for sale is reported inMortgage Banking Income, which is included in Non-Interest Income in theConsolidated Financial Statements.

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**Loans**

Loans that management has the intent and ability to hold for the foreseeablefuture or until maturity or payoff are reflected on the Consolidated BalanceSheets at the unpaid principal amount less the allowance for loan losses andunearned interest and fees.  Interest on loans is recorded on an accrualbasis unless it meets criteria to be placed on non-accrual status.  TheBank's policy is to not accrue interest or discount on (i) any asset which ismaintained on a cash basis because of deterioration in the financial position ofthe borrower, (ii) any asset for which payment in full of interest or principalis not expected or (iii) any asset upon which principal or interest has been indefault for a period of 90 days or more unless it is both well-secured and inthe process of collection. For purposes of applying the 90 days past due testfor non-accrual of interest, the date on which an asset reaches non-accrualstatus is determined by its contractual term.  A debt is deemed well-secured ifit is secured by collateral in the form of liens or pledges of real or personalproperty, including securities that have a realizable value sufficient todischarge the debt (including accrued interest) in full, considered to beproceeding in due course either through legal action, including judgmentenforcement procedures or, in appropriate circumstances, through collectionefforts not involving legal action which are reasonably expected to result inrepayment of the debt or in its restoration to a current status.  Unpaidinterest on loans placed on non-accrual status is reversed from income andfurther accruals of income are not usually recognized.  Subsequentcollections related to impaired loans are usually credited first to principaland then to previously uncollected interest.

**Allowance for Loan Losses**

               The allowance for loan losses is established as losses are estimated to haveoccurred through a provision for loan losses charged to earnings.  Loanlosses are charged against the allowance when management believes theuncollectability of a loan balance is confirmed.  Subsequent recoveries, ifany, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management andis based upon management's periodic review of the collectability of the loans inlight of historical experience, the nature and volume of the loan portfolio,adverse situations that may affect the borrower's ability to repay, estimatedvalue of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that aresusceptible to significant revision as more information becomes available.

The allowance consists of specific and general components. The specific component relates to loans evaluated on an individual basis forimpairment.  For each loan evaluated individually that is determined to beimpaired, a specific allocation to the allowance is established when thediscounted cash flows (or collateral value or observable market price) of theloan is lower than the carrying value of that loan.  The general componentof the allowance is determined based on loans evaluated on a pooled basis whichconsist of non-impaired loans and pools of loans with similar characteristicsthat are not evaluated individually for impairment.  

For the year ended December 31, 2010, loans that meet thecriteria for individual impairment analysis are those loans or borrowingrelationships with current outstanding principal balance greater than or equalto $250,000 at the measurement date and have an internal rating of "Grade 6" orhigher (generally characterized as "Substandard" or worse).  Onceidentified for individual analysis, then a loan is considered impaired when,based on current information and events, it is probable that the Bank will beunable to collect scheduled payments of principal or interest when due accordingto contractual terms of the loan agreement.  Factors considered bymanagement in determining impairment include payment status, collateral value,and the probability of collecting scheduled principal and interest payments whendue.  Loans that experience insignificant payment delays and paymentshortfalls generally are not classified as impaired.  Management determinesthe significance of payment delays and payment shortfalls on a case-by-casebasis, taking into consideration all circumstances surrounding the loan and theborrower, including the length of delay, reasons for the delay, the borrower'sprior payment record, and the amount of the shortfall in relation to principaland interest owed.  Impairment is measured on a loan by loan basis forcommercial and construction loans by either the present value of expected futurecash flows discounted at the loan's effective interest rate, the loan'sobtainable market price, or fair value of the collateral if the loan iscollateral dependent.  The majority of the Company's impaired loans issecured by real estate and considered collateral-dependent. Therefore,impairment losses are primarily based on the fair value of the underlyingcollateral (usually real estate).  

In the year ended December 31, 2009, the criteria forindividual impairment analysis was the same as discussed above except that thethreshold was loans or borrowing relationships over $50,000 rather than$250,000.  In 2010, the threshold was raised to $250,000 primarily due tostrategic efforts to align credit risk management practices common among bankswith $1 billion or more in total assets as the Bank's asset level approaches $1billion.  Management believes that loans or borrowing relationships in therange of $50,000 to $250,000 can be adequately evaluated on a pooled basis basedon loan type and internal risk rating.  The change in methodology did notresult in a significant change in the overall allowance for loan losses requiredto cover probable losses in the portfolio.  

-61-

The general component of the allowance for loan losses is based onhistorical loss experience adjusted for qualitative factors.  Loans are pooledtogether based on the type of loans and internal risk ratings.  Risk factorsfor each pool are developed using historical charge-offs for the past threeyears.  The risk factors are then adjusted based on current conditions of theloan portfolio and lending environment that may result in future lossesdiffering from historical patterns.  Such factors include, but are not limitedto:

•        Changes in underlying collateral securing the loans;

•        Changes in lending policies and procedures including changes inunderwriting, collection, charge-off and recovery practices;

•        Changes in economic and business conditions that affect thecollectability of the portfolio;

•        Changes in the nature and volume of the portfolio;

•        Changes in the experience, ability and depth of lendingmanagement and other related staff;

•        Changes in the volume and severity of past due loans, volume ofnon-accruals, and/or problem loans;

•        Changes in the quality of the Company's loan review system;

•        Existence and effect of any concentration of credit and changesin the level of concentrations; and

•        The effect of other external factors such as competition, legalor regulatory requirements.

The risk factorsfor loans evaluated collectively are also adjusted based on the level of riskassociated with the internal risk ratings of the loans.  Loans rated Grade 1are considered low risk and have the lowest risk factors applied.  Loans ratedGrades 2 and 3 have an average level of risk.  Loans rated Grade 4 and 5 have amarginal level of risk slightly higher than Grades 2 and 3.  Loans rated Grade6 or higher have above average risk and therefore have higher risk factorsapplied to that portion of the portfolio.  

**Premises and Equipment**

Bank premisesand equipment are stated at cost less accumulated depreciation. The provisionfor depreciation is computed using straight-line and accelerated methods forboth financial reporting and income tax purposes.  Expenditures for maintenanceand repairs are charged against income as incurred. Cost of major additions andimprovements are capitalized and depreciated over the estimated useful life ofthe addition or improvement.

**Other Real Estate Owned**

Real estateacquired through foreclosure is separately stated on the Consolidated BalanceSheets as Other Real Estate Owned ("OREO") and recorded at the lower of cost orfair value less cost to sell.  Adjustments made at the date of foreclosure arecharged to the allowance for loan losses.  Expenses incurred in connection withownership, subsequent adjustments to book value, and gains and losses upondisposition are included in other non-interest expenses.  Adjustments to netrealizable value subsequent to acquisition are made at least annually ifnecessary based on appraisal.

**Securities Sold underAgreements to Repurchase**

Securities soldunder agreements to repurchase are accounted for as collateralized financingtransactions, represent the purchase of interests in securities by bankingcustomers and are recorded at the amount of cash received in connection withthe transaction. Daily repurchase agreements are settled on the followingbusiness day and fixed repurchase agreements have various fixed terms. All securitiessold under agreements to repurchase are collateralized by certain pledgedsecurities, generally U.S. government and federal agency securities, and areheld in safekeeping by the purchasing financial institution. These transactionsare not deposits and, therefore, are not covered by FDIC insurance. Securitiessold under agreements to repurchase are reported separately on the Company's ConsolidatedBalance Sheets and interest expense related to these transactions is reportedon the Company's Consolidated Statements of Income as Other Interest Expense.

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**Income Taxes**

The Company usesthe accrual method of accounting for federal and state income tax reporting.  Deferred tax assets or liabilities are computed for significant differences infinancial statement and tax bases of assets and liabilities, which result fromtemporary differences in financial statement and tax accounting. A valuationallowance, if needed, reduces deferred tax assets to the amount expected to berealized.  Provision for income taxes is made on a separate income tax returnbasis for each entity included in the Consolidated Financial Statements. 

**InterestIncome and Fees on Loans**

Interest incomeon commercial and real estate loans is computed on the basis of daily principalbalance outstanding 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-accrualstatus at 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 current andfuture payments are reasonably assured.  

Fees on loansare generally recognized in earnings at the time of origination as they aregenerally offset by related expenses also incurred at origination.  Certainfees such as commitment fees are deferred and amortized over the life of theloan using the interest method.  

**Net Income per Share of CommonStock**

Net income pershare of common stock is computed by dividing net income by the weightedaverage number of shares of common stock outstanding during the period, aftergiving retroactive effect to stock dividends and stock splits.

**Income from FiduciaryActivities**

Income fromfiduciary activities is recorded on an accrual basis.

**Advertising and Promotions**

The Company'spolicy is to charge advertising and promotions to expenses as incurred.

**Fair Value**

Fair valuemeasurements are used to record fair value adjustments to certain assets andliabilities and to determine fair value disclosures.  The Company measures fairvalue under guidance provided by the Financial Accounting Standards Board("FASB") Accounting Standards Codification ("ASC") Topic 820, "Fair ValueMeasurements and Disclosures" ("ASC 820"), and was effective January 1, 2008for all applicable financial and non-financial assets and liabilities.  ASC 820defines fair value, establishes a framework for measuring fair value andexpands disclosure requirements regarding fair value measurements.  ASC 820does not expand the use of fair value in any new circumstances but clarifiesthe principle that fair value should be based on assumptions that marketparticipants would use when pricing the asset or liability. ASC 820 outlinesthe following three acceptable valuation techniques may be used to measure fairvalue:  

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- Market approach-The market     approach uses prices and other relevant information generated by market     transactions involving identical or similar assets or liabilities.  This     technique includes matrix pricing that is a mathematical technique used     principally to value debt securities without relying solely on quoted     prices for specific securities but rather by relying on securities'     relationship to other benchmark quoted securities.   
- Income approach-The income     approach uses valuation techniques to convert future amounts such as     earnings or cash flows to a single present discounted amount.  The     measurement is based on the value indicated by current market expectations     about those future amounts.  Such valuation techniques include present     value techniques, option-pricing models (such as the Black-Scholes formula     or a binomial model), and multi-period excess earnings method (used to     measure fair value of certain intangible assets).
- Cost approach-The cost approach     is based on current replacement cost which is the amount that would     currently be required to replace the service capacity of an asset.   

Valuationtechniques are selected as appropriate for the circumstances and for whichsufficient data is available.  Valuation techniques are to be consistentlyapplied, but a change in valuation technique or its application may be made ifthe change results in a measurement that is equally or more representative offair value under the circumstances.  Revisions resulting from a change invaluation technique or its application are accounted for as a change inaccounting estimate which does not require the change in accounting estimate tobe accounted for by restating or retrospectively adjusting amounts reported infinancial statements of prior periods or by reporting pro forma amounts forprior periods.  

ASC 820 alsoestablishes a hierarchy that prioritizes information used to develop thoseassumptions.  The level in the hierarchy within which the fair valuemeasurement in its entirety falls is determined based on the lowest level inputthat is significant to the fair value measurement in its entirety.  The Companyconsiders an input to be significant if it drives more than 10% of the totalfair value of a particular asset or liability.  The hierarchy is as follows:

**Level 1Inputs**(Highest ranking):    Unadjusted quoted prices in active markets foridentical assets or liabilities that the entity has the ability to access atthe measurement date.

**Level 2Inputs**:    Inputs other than quoted prices included in Level 1 that areobservable for the asset or liability, either directly or indirectly.  Suchinputs may include quoted prices for similar assets or liabilities in activemarkets, and inputs other than quoted market prices that are observable for theassets and liabilities such as interest rates and yield curves that areobservable at commonly quoted intervals.

**Level 3Inputs**(Lowest ranking):     Unobservable inputs for determining fairvalues of assets and liabilities that reflect an entity's own assumptions aboutthe assumptions that market participants would use in pricing the assets andliabilities.

Assets andliabilities may be measured for fair value on a recurring basis (daily, weekly,monthly or quarterly) or on a non-recurring basis in periods subsequent toinitial recognition.  Recurring valuations are measured regularly forinvestment securities and derivatives (if any).  Loans held for sale, OREO andimpaired loans are measured at fair value on a non-recurring basis and do notnecessarily result in a change in the amount recorded on the ConsolidatedBalance Sheets.  Generally, these assets have non-recurring valuations that arethe result of application of other accounting pronouncements that require theassets be assessed for impairment or at the lower of cost or fair value.  Fairvalues of loans held for sale are considered Level 2.  Fair values for OREO andimpaired loans are considered Level 3.  See Note 20 for more information.

The Company obtains fair valuemeasurements for securities and derivatives (if any) from a third partyvendor.  The Company's cash flow hedge and the majority of theavailable-for-sale securities are valued using Level 2 inputs.  Collateralizeddebt obligation securities that are backed by trust preferred securities andaccount for less than 1% of the available-for-sale securities portfolio arevalued using Level 3 inputs.  The fair value measurements reported in Level 2are primarily matrix pricing that considers observable data (such as dealerquotes, market spreads, cash flows, the U.S. Treasury yield curve, live tradinglevels, trade execution data, market consensus prepayment speeds, creditinformation and terms and conditions of bonds, and other factors).  Fair valuemeasurements for pooled trust-preferred securities are obtained through the useof valuation models that include unobservable inputs which are considered Level3.  See additional discussion of valuation techniques and inputs in Note 20.

-64-

Certain non-financial assets andnon-financial liabilities measured at fair value on a recurring basis includereporting units measured at fair value in the first step of a goodwillimpairment test. Certain non-financial assets measured at fair value on anon-recurring basis include non-financial assets and non-financial liabilitiesmeasured at fair value in the second step of a goodwill impairment test, aswell as intangible assets and other non-financial long-lived assets measured atfair value for impairment assessment.  

Effective January 1, 2008, theCompany adopted ASC 820, which permits the Company to choose to measureeligible items at fair value at specified election dates. Unrealized gains andlosses on items for which the fair value measurement option has been electedare reported in earnings at each subsequent reporting date. The fair valueoption (i) may be applied instrument by instrument, with certain exceptionsenabling the Company to record identical financial assets and liabilities atfair value or by another measurement basis permitted under generally acceptedaccounting principles, (ii) is irrevocable (unless a new election date occurs)and (iii) is applied only to entire instruments and not to portions ofinstruments. Adoption of ASC 820 on January 1, 2008 did not have a materialimpact on the Company's financial condition or results of operation.

**Subsequent Events**

                The Company has reviewed subsequentevents through March 1, 2011.  

**NOTE 2 - CASH RESERVES ANDINTEREST-BEARING DEPOSITS IN OTHER BANKS**

The Bankmaintains cash reserve balances as required by the Federal Reserve Bank. Average required balances during both 2010 and 2009 were approximately$500,000.  Amounts above the required minimum balance are reported as Interest-BearingDeposits in Other Banks on the Consolidated Balance Sheets.  Balances in excessof required reserves held at the Federal Reserve Bank as of December 31, 2010and 2009 were $5.3 million and $2.8 million, respectively.  Interest-bearingdeposits in other banks also include short-term certificates of deposit held inincrements that are within FDIC insurance limits and totaled approximately$975,000 and $1 million as of December 31, 2010 and 2009, respectively.

**NOTE 3 - INVESTMENT SECURITIES**

The followingtables reflect amortized cost, unrealized gains, unrealized losses and fairvalue of available-for-sale investment securities for the dates presented (inthousands):

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

Cost

 

Gains

 

Losses

 

Value

As of December 31, 2010:

U. S. Treasury securities and obligations of U. S.

 government agencies and corporations

 $

189,280   

 $

3,721   

 $

(1,558)

 $

191,443   

Obligations of states and political subdivisions

99,774   

3,073   

(397)

102,450   

All others

2,698   

22   

(1,790)

930   

     Total investment securities

 $

291,752   

 $

6,816   

 $

(3,745)

 $

294,823   

As of December 31, 2009:

U. S. Treasury securities and obligations of U. S.

 government agencies and corporations

 $

153,924   

 $

4,774   

 $

(240)

 $

158,458   

Obligations of states and political subdivisions

85,574   

3,735   

(98)

89,211   

All others

3,289   

4   

(1,171)

2,122   

     Total investment securities

 $

242,787   

 $

8,513   

 $

(1,509)

 $

249,791   

There were nosecurities categorized as trading or held-to-maturity as of December 31, 2010or 2009.  At December 31, 2010 and 2009, investment securities were pledged tosecure government, public and trust deposits as follows (in thousands):

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Amortized Cost

 

Fair Value

2010

 $

177,598   

 $

180,943   

2009

 $

143,089   

 $

148,369   

The following table summarizescontractual maturities of debt securities available-for-sale as of December 31,2010 (in thousands):

Amortized Cost

Fair Value

Amounts maturing in:

 One year or less

 $

3,308   

 $

3,371   

 After one year through five years

9,204   

9,675   

 After five years through ten years

45,366   

47,003   

 After ten years*

233,851   

234,729   

 $

291,729   

 $

294,778   

Equity securities

23   

45   

       Total securities

 $

291,752   

 $

294,823   

 _______________

*              This table includesagency mortgage-backed securities ("MBS") and collateralized mortgageobligations ("CMO") based on contractual maturities (primarily in the After tenyears category).  However, the remaining lives of such securities are expectedto be much shorter because of anticipated payments.  

Sales and gains(losses) on sales of available-for-sale securities are presented as follows (inthousands):

Gross Sales

Gains

Losses

Net

Year Ended December 31,

2010

 $

62,304   

 $

1,884   

 $

-   

 $

1,884 

2009

41,041   

1,196   

-   

1,196   

2008

30,497   

396   

(40)

356 

*

_______________

*              For the year endedDecember 31, 2008, the Company also had realized gain of approximately $80,000on call of available-for-sale securities totaling $6.1 million. 

The followingtable presents information on securities with gross unrealized losses atDecember 31, 2010, aggregated by investment category and the length of timethat the individual securities have been in a continuous loss position (inthousands):

** **

*Less Than 12  Months*

*12 Months and  Over*

*Total*

 
Gross

Gross

Gross

 
Unrealized

Fair

Unrealized

Fair  

Unrealized

Fair  

 
Losses

 

Value

 

Losses

 

Value

 

Losses

 

Value

 
Securities available-for-sale:

 
 U.S. Treasury securities and

 
     obligations of U.S. government

 
     corporations and agencies

 $

(1,558)

 $

54,486   

 $

-   

 $

-   

 $

(1,558)

 $

54,486   

 
Obligations of states and political

 
 Subdivisions

(397)

17,517   

-   

-   

(397)

17,517   

 
 
Other debt securities

-   

-   

(1,790)

885   

(1,790)

885   

 
 
 Total securities available-for -sale

 $

(1,955)

 $

72,003   

 $

(1,790)

 $

885   

 $

(3,745)

 $

72,888   

 
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In reviewing theinvestment portfolio for other-than-temporary impairment of individualsecurities, consideration is given but not limited to (1) the length of time inwhich fair value has been less than cost and the extent of the unrealized loss,(2) the financial condition of the issuer, and (3) the positive intent andability of the Company to maintain its investment in the issuer for a time thatwould provide for any anticipated recovery in the fair value.

As of December31, 2010, the Company had 69 debt securities with unrealized losses.  TheCompany did not intend to sell any such securities in an unrealized lossposition and it was more likely than not that the Company would not be requiredto sell the debt securities prior to recovery of costs.   Of the 69 debtsecurities, four were corporate debt securities that had been in an unrealizedloss position for greater than 12 months and accounted for approximately halfof the unrealized gross losses as of December 31, 2010.  The remaining 65 bondshad been in an unrealized loss position for less than 12 months and consistedof 47 municipal bonds and 18 agency MBSs or CMOs.  The securities in anunrealized loss position as of December 31, 2010 were evaluated forother-than-temporary impairment.  In analyzing reasons for the unrealizedlosses, management considers various factors including, but not limited to,whether the securities are issued by the federal government or its agencies,whether downgrades of bond ratings have occurred, and reviews any applicableindustry analysts' reports.  With respect to unrealized losses on municipal andagency securities and the analysis performed relating to the securities,management believes that declines in market value were not other-than-temporaryat December 31, 2010. The unrealized losses on the agency and municipalsecurities have not been recognized for other-than-temporary impairment. 

The Company's fourcorporate bonds accounted for $1.8 million of the $3.7 million gross unrealizedloss as of December 31, 2010.  Three of the four corporate debt securities arepooled collateralized debt obligation securities that are backed bytrust-preferred securities ("TRUP CDOs") issued by banks, thrifts and insurancecompanies.  These three bonds were rated below investment grade (BBB) byMoody's and/or S&P at December 31, 2010.  The fourth bond is asingle-issuer corporate debt security.  

At December 31,2010, the one single-issuer corporate debt security carried a gross unrealizedloss of approximately $10,000 and had been in an unrealized loss position formore than 12 months.  However the value of the bond has improved in recentmonths and was called and paid in full in January 2011.  Thus, this bond wasnot recognized for other-than-temporary impairment.  

At December 31,2010, the three TRUP CDOs had an aggregate book value of $2.3 million and fairmarket value of approximately $885,000 and each of the three are the mezzanineor "B" class tranches.  One of the three bonds referred to as I-Pretsl IV  hasa book value of $1 million and a fair value of approximately $198,000 with theunrealized loss reflected in accumulated other comprehensive income as ofDecember 31, 2010.  This bond had experienced deferrals totaling 11.6% ofperforming collateral and no defaults as of December 31, 2010.  This bond hasnot experienced an adverse change in projected cash flows as quarterly testing todate for this bond yielded present value of projected cash flows above bookvalue.  Therefore, no other-than-temporary impairment has been recognized todate on this bond.  

The other twoTRUP CDOs referred to as Pretsl I and Pretsl X had an aggregate book value of$1.3 million and aggregate fair value of approximately $240,000 as of year end2010.  These two bonds have been recognized for other-than-temporary impairmentbecause of adverse changes in present value of projected cash flows resultingfrom multiple deferrals and defaults during 2009 and 2010.  The creditcomponent of other-than-temporary impairment on these two securities reflectedin earnings totaled approximately $583,000 and $651,000 for the years endedDecember 31, 2010 and 2009, respectively.  The gross unrealized loss related tofactors other than credit totaled approximately $978,000 and $706,000 that was reflectedin accumulated other comprehensive income net of applicable taxes as ofDecember 31, 2010 and 2009, respectively.  The credit component of theunrealized loss was based on the difference between the book value of thesecurity and the present value of projected cash flows at December 31, 2010 and2009.  As of December 31, 2010, Pretsl I had deferrals and defaults totaling36.2% of performing collateral and Pretsl X had deferrals and defaults totaling45.5% of performing collateral.  In addition, these two securities were onnon-accrual status as of December 31, 2010.  

The followingtable provides additional information regarding the Company's three investmentsin TRUP CDOs as of December 31, 2010:

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Description

Class

Actual Over Collateral Ratio(1)

Required Over Collateral Ratio(2)

Actual Over (Under)

Pretsl I

Mezzanine

77.1%

N/A(3)

N/A

Pretsl X

B-2

60.0%

N/A(3)

N/A

I-Pretsl IV

B-1

102.9%

106.0%

-3.1%

_________________

(1)     The OverCollateral ("OC") Ratio reflects the ratio of performing collateral to a givenclass of notes and is calculated by dividing the performing collateral by thesum of the current balance of a given class of notes plus all senior classes.

(2)     TheRequired OC Ratio for a particular class of bonds reflects the requiredovercollateralization ratio such that cash distributions may be made to lowerclasses of bonds.  If the OC Ratio is less than the Required OC ratio, cash isdiverted from the lower classes of bonds to the senior bond classes.  Forexample, if the OC Ratio for Class B is lower than the Class B RequiredOC Ratio in the transaction, all cash payments will be diverted to the Class Band Class A bonds until such time that he OC Ratio exceeds the Required OCRatio.  The lower class bonds will capitalize interest or pay-in-kind ("PIK").

(3)     TheRequired OC Ratio is not applicable in this case, as interest on these bondsfor the applicable tranche is capitalized to the bond or PIK. The Company doesnot recognize PIK interest for book purposes and has these bonds on non-accrualstatus.  

Security-specificcollateral is used in the assumptions to project cash flows each quarter. Issuers in default are assumed at zero recovery.  Issuers in deferral areassumed at a 15% recovery beginning two years from deferral date.  Forwardinterest rates are used to project future principal and interest paymentsallowing the model to indicate impact of over- or under-collateralization foreach transaction.  Higher interest rates generally increase credit stress onundercollateralized transactions by reducing excess interest (calculated as thedifference between interest received from underlying collateral and interestpaid on the bonds).  The discount rate is based on the original discount margincalculated at the time of purchase based on the purchase price.  The originaldiscount margin is then added to the three-month LIBOR to determine thediscount rate.  The discount rate is then used to calculate the present valuefor the then-current quarter's projected cash flows.  If the present value of thethen-current quarter's projected cash flows is less than the prior quarter orless than the then-current book value of the security, that difference isrecorded against earnings as the credit component of other-than-temporaryimpairment.

The Company's equitysecurities consist primarily of Fannie Mae and Freddie Mac perpetual preferredstock. These equity securities incurred $1.8 million in impairment losses forthe year ended December 31, 2008 that was caused when the Federal HousingFinance Agency placed both Fannie Mae and Freddie Mac under conservatorship inthe third quarter of 2008.  No impairment charges were recognized on thesesecurities in 2009 and approximately $6,000 in other-than-temporary impairmentlosses were recognized in 2010.

The following isa tabular rollforward of the amount related to the pre-tax credit losscomponent recognized in earnings on debt securities (in thousands):

 Year ended  

 Year ended  

December 31, 2010

December 31, 2009

Balance of credit losses on available-for-sale securities

 $

-   

 $

-   

Additions for credit losses for which an OTTI loss was not  previously recognized

- 

651   

Additions for credit losses for which an OTTI loss was  previously recognized

589   

-   

Balance of credit losses on available-for-sale securities

 $

589   

 $

651   

See alsodiscussion of valuation techniques and hierarchy for determining fair value ofthese securities at Note 20.

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GAAP hasestablished accounting and reporting standards for derivative financialinstruments, including certain derivative instruments embedded in othercontracts and for hedging activities. These standards require that derivativesbe reported either as assets or liabilities on the Consolidated 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 had one derivative transaction, which wasa $1.5 million interest rate swap that was purchased in June 2000 and maturedin September 2010.  Because a Federal Home Loan Bank ("FHLB") Variable LIBORBorrowing was designated as the hedged item, the Company effectively fixed thecost of this liability.  As a floating rate liability was hedged, there were nosignificant fluctuations in its market value but there were fluctuations in thecash flows.  Therefore, the swap was designated as a cash flow hedge, hedgingthe "benchmark interest rate."   The market value gain or loss of the swap wasadjusted through other comprehensive income.  The purpose of the transactionwas to reduce exposure to interest rate risk.  

The value of thederivative was a liability of approximately $111,000 as of December 31, 2009and it matured in September 2010.  Accumulated other comprehensive incomerelated to the cash flow hedge totaled approximately negative $69,000 as of December31, 2009.  The Company had no derivative transactions as of December 31, 2010. There were no reclassification adjustments to other comprehensive income forgains or losses related to the cash flow hedge for any of the periods presentedin the Consolidated Financial Statements.

**NOTE 4 - LOANS**

**               **Performingand non-performing loans by category were as follows as of December 31, 2010and 2009 (in thousands):

Non-

Performing

Performing

Total

**December 31, 2010:**

Commercial,  financial and agricultural

 $

65,428  

 $

869  

 $

66,297  

Real estate -  construction

48,259  

889  

49,148  

Real estate -  mortgage

391,270  

3,986  

395,256  

Installment  loans to individuals

31,334  

259  

31,593  

All other loans

5,278  

131  

5,409  

Total

 $

541,569  

 $

6,134  

 $

547,703  

**December 31, 2009:**

Commercial,  financial and agricultural

 $

70,934  

 $

367  

 $

71,301  

Real estate -  construction

63,771  

2,643  

66,414  

Real estate -  mortgage

401,471  

5,587  

407,058  

Installment  loans to individuals

33,978  

93  

34,071  

All other loans

8,176  

378  

8,554  

Total

 $

578,330  

 $

9,068  

 $

587,398  

_________________

*Non-Performingloans consist of loans that are on non-accrual status and loans 90 days pastdue and still accruing interest.

-69-

                An aging analysisof loans outstanding by category as of December 31, 2010 and 2009 was as follows(in thousands):

**30-59 Days Past Due**

**60-89 Days Past Due**

**Greater Than 90 Days**

**Total Past Due**

**Current**

**Total Loans**

**Recorded Investment > 90 Days and Accruing**

**As of December 31, 2010:**

Commercial,  financial and agricultural

 $

405  

 $

167  

 $

716  

 $

1,288  

 $

65,009  

 $

66,297  

 $

500  

 
Real estate -  construction

368  

117  

35  

520  

48,628  

49,148  

35  

 
Real estate -  mortgage

1,093  

349  

2,238  

3,680  

391,576  

395,256  

1,441  

 
Installment  loans to individuals

210  

81  

13  

304  

31,289  

31,593  

10  

 
All other loans

-  

-  

-  

-  

5,409  

5,409  

-  

 
Total

 $

2,076  

 $

714  

 $

3,002  

 $

5,792  

 $

541,911  

 $

547,703  

 $

1,986  

 
**As of December 31, 2009:**

Commercial,  financial and agricultural

 $

416  

 $

87  

 $

207  

 $

710  

 $

70,591  

 $

71,301  

 $

106  

Real estate -  construction

1,076  

375  

1,472  

2,923  

63,491  

66,414  

1,472  

Real estate -  mortgage

3,018  

1,023  

4,599  

8,640  

398,418  

407,058  

3,660  

Installment  loans to individuals

256  

117  

78  

451  

33,620  

34,071  

29  

All other loans

-  

282  

282  

8,272  

8,554  

-  

Total

 $

4,766  

 $

1,602  

 $

6,638  

 $

13,006  

 $

574,392  

 $

587,398  

 $

5,267  

                Loans onnon-accrual status as of December 31, 2010 and 2009 by category were as follows(in thousands):

**2010**

**2009**

Commercial,  financial and agricultural

 $

369  

 $

261  

Real estate -  construction

854  

1,171  

Real estate -  mortgage

2,545  

1,927  

Installment  loans to individuals

249  

64  

All other loans

131  

378  

Total

 $

4,148  

 $

3,801  

                Credit riskmanagement procedures include assessment of loan quality through use of an internalloan rating system.  Each loan is assigned a rating upon origination and therating may be revised over the life of the loan as circumstances warrant.  Therating system utilizes eight major classification types based on risk of losswith Grade 1 being the lowest level of risk and Grade 8 being the highest levelof risk.  Loans internally rated Grade 1 to Grade 4 are considered "Pass" gradeloans with low to average level of risk of credit losses.  Loans rated Grade 5are considered "Special Mention" and generally have one or more circumstancesthat require additional monitoring but do not necessarily indicate a higherlevel of probable credit losses.  Loans rated Grade 6 or higher are loans withcircumstances that generally indicate an above average level of risk for creditlosses.  Loans by internal risk rating by category as of December 31, 2010 and2009 were as follows (in thousands):  

Grades 1-4

Grade 5

Grades 6-8

Total

**December 31, 2010:**

Commercial,  financial and agricultural

 $

64,297  

 $

71  

 $

1,929  

 $

66,297  

Real estate -  construction

45,931  

820  

2,397  

49,148  

Real estate -  mortgage

373,025  

4,912  

17,319  

395,256  

Installment  loans to individuals

31,136  

14  

443  

31,593  

All other loans

5,278  

-    

131  

5,409  

Total

 $

519,667  

 $

5,817  

 $

22,219  

 $

547,703  

**December 31, 2009:**

Commercial,  financial and agricultural

 $

69,500  

 $

288  

 $

1,513  

 $

71,301  

Real estate -  construction

61,166  

1,445  

3,803  

66,414  

Real estate -  mortgage

386,604  

6,949  

13,505  

407,058  

Installment  loans to individuals

33,790  

12  

269  

34,071  

All other loans

7,578  

506  

470  

8,554  

Total

 $

558,638  

 $

9,200  

 $

19,560  

 $

587,398  

-70-

Information regarding theCompany's impaired loans for the years ended December 31, 2010 and 2009 is asfollows (in thousands):

Recorded  Investment

Unpaid Principal  Balance

Specific  Allowance

Average Recorded  Investment

Interest Income  Recognized

**December 31, 2010:**

**With no specific allocation  recorded:**

Commercial,  financial and agricultural

 $

-  

 $

-  

 N/A  

 $

234  

 $

-  

Real estate -  construction

841  

841  

 N/A  

1,799  

34  

Real estate -  mortgage

2,846  

2,846  

 N/A  

3,642  

206  

Installment  loans to individuals

-    

-    

 N/A  

-    

-    

All other loans

-    

-    

 N/A  

-    

-    

**With allocation recorded:**

Commercial,  financial and agricultural

 $

500  

 $

500  

 $

50  

 $

436  

 $

20  

Real estate -  construction

742  

742  

375  

4,743  

-  

Real estate -  mortgage

4,210  

4,210  

853  

7,058  

96  

Installment  loans to individuals

200  

200  

37  

185  

-    

All other loans

-    

-    

-    

265  

-    

**Total:**

Commercial,  financial and agricultural

 $

500  

 $

500  

 $

50  

 $

670  

 $

20  

Real estate -  construction

1,583  

1,583  

375  

6,542  

34  

Real estate -  mortgage

7,056  

7,056  

853  

10,700  

302  

Installment  loans to individuals

200  

200  

37  

185  

-  

All other loans

-  

-  

-    

265  

-  

**December 31, 2009:**

Commercial,  financial and agricultural

 $

158  

 $

158  

 N/A  

 $

239  

 $

-  

Real estate -  construction

647  

647  

 N/A  

634  

-  

Real estate -  mortgage

776  

776  

 N/A  

1,201  

-  

Installment  loans to individuals

-  

-  

 N/A  

-  

-  

All other loans

-  

-  

 N/A  

-  

-  

**With allocation recorded:**

Commercial,  financial and agricultural

 $

342  

 $

342  

 $

150  

 $

399  

 $

18  

Real estate -  construction

1,543  

1,543  

300  

3,452  

59  

Real estate -  mortgage

7,284  

7,284  

983  

8,900  

364  

Installment  loans to individuals

232  

232  

163  

120  

5  

All other loans

472  

472  

100  

153  

5  

**Total:**

Commercial,  financial and agricultural

 $

500  

 $

500  

 $

150  

 $

638  

 $

18  

Real estate -  construction

2,190  

2,190  

300  

4,086  

59  

Real estate -  mortgage

8,060  

8,060  

983  

10,101  

364  

Installment  loans to individuals

232  

232  

163  

120  

5  

All other loans

472  

472  

100  

153  

5  

-71-

**NOTE 5 - ALLOWANCE FOR LOANLOSSES**

The followingtable presents the breakdown of the allowance for loan losses by category andthe percentage of each category in the loan portfolio to total loans atDecember 31 for the years indicated (dollars in thousands): 

2010

2009

2008

2007

2006

Amount

% to Total Loans

Amount

% to Total Loans

Amount

% to Total Loans

Amount

% to Total Loans

Amount

% to Total Loans

Commercial, financial and agricultural

 $

944  

12.10%

 $

959  

12.14%

 $

864 

13.46%

 $

750 

13.77%

 $

736 

14.58%

Real estate - construction

1,295  

8.97%

1,148  

11.31%

1,399 

16.31%

1,340 

18.25%

1,316 

15.71%

Real estate - mortgage

5,299  

72.17%

5,811  

69.30%

4,537 

62.96%

3,747 

60.49%

3,676 

62.10%

Installment loans to individuals

462  

5.77%

694  

5.80%

431 

6.07%

459 

6.35%

451 

6.70%

All other  loans

           28
0.99%

     172

1.46%

          69

1.20%

       32 
1.14%

       32 
0.91%

                Total

 $

8,028  

100.0%

 $

8,784  

100.0%

 $

7,300 

100.0%

 $

6,328 

100.0%

 $

6,211 

100.0%

An analysis ofthe allowance for loan losses during the years ended December 31 is as follows(in thousands):

2010

 

2009

 

2008

Balance  - beginning of year

 $

8,784   

 $

7,300   

 $

6,328   

Provision for loan losses

7,000   

7,060   

2,858   

Loans charged to allowance

(8,187)

(5,951)

(2,274)

Recovery of loans previously charged off

431   

375   

388   

 Net charge-offs

(7,756)

(5,576)

(1,886)

Balance - end of year

 $

8,028   

 $

8,784   

 $

7,300   

                The allowance forloan losses is comprised of allocations for loans evaluated individually andloans evaluated collectively for impairment.  The allocations of the allowancefor loan losses for outstanding loans by category evaluated individually andcollectively were as follows as of December 31, 2010 (in thousands):

Evaluated  

Evaluated  

Individually

Collectively

Total

**Allowance for loan losses**

Commercial,  financial and agricultural

 $

50  

 $

894  

 $

944  

Real estate -  construction

375  

920  

1,295  

Real estate -  mortgage

853  

4,446  

5,299  

Installment  loans to individuals

37  

425  

462  

All other loans

-    

28  

28  

Total

 $

1,315  

 $

6,713  

 $

8,028  

**Loans**

Commercial,  financial and agricultural

 $

500  

 $

65,797  

 $

66,297  

Real estate -  construction

1,583  

47,565  

49,148  

Real estate -  mortgage

7,056  

388,200  

395,256  

Installment  loans to individuals

200  

31,393  

31,593  

All other loans

-    

5,409  

5,409  

Total

 $

9,339  

 $

538,364  

 $

547,703  

-72-

**NOTE 6 - SECONDARY MORTGAGEMARKET ACTIVITIES**

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.  There were no such losses for any of the years ended December 31, 2010,2009 or 2008.  There has been no material difference between cost and fairmarket values of loans held for sale for any of the periods presented. 

Servicing rightsare not retained on any mortgage loans held for sale.  Mortgage banking incomeincluded in non-interest income was $1.1 million for each of the years endedDecember 31, 2010, 2009 and 2008.  

**NOTE 7 - PREMISES AND EQUIPMENT**

The fixed assetsused in the ordinary course of business are summarized as follows (inthousands):

Useful Lives

in Years

 

2010

 

2009

Land

 $

8,479   

 $

8,479   

Buildings

5 to 50

28,444   

28,040   

Furniture and equipment

3 to 20

14,264   

13,134   

51,187   

49,653   

Less: Accumulated depreciation

20,919   

19,128   

 Net fixed assets

 $

30,268   

 $

30,525   

**NOTE 8 - GOODWILL AND OTHERINTANGIBLE ASSETS**

Goodwill is not amortized buttested at least annually for impairment.  No impairment charges were recordedfor any periods presented in the Consolidated Financial Statements and Notesand no impairment charges have been recorded since December 31, 2010.  Therewas no activity in goodwill during the years ended December 31, 2010, 2009 and2008.  Total goodwill as of December 31, 2010 was $11.8 million or 1.21% oftotal assets and 13.56% of total capital.  

Otheridentifiable intangibles consisted of core deposit intangibles being amortizedover a ten-year period as follows (in thousands):

2010

** **

2009

 Core deposit intangible

 $

845 

 $

845 

 Accumulated amortization

(725)

(641)

      Net core deposit intangible

 $

120 

 $

204 

Amortizationexpense was approximately $84,500 per year for 2010, 2009 and 2008. Amortization expense is estimated to be approximately $85,000 in 2011 andapproximately $35,000 in 2012.

-73-
NOTE 9 - OTHER REAL ESTATE OWNED
              The carryingvalue of foreclosed real estate on the Consolidated Balance Sheets was $14.7million as of December 31, 2010 and $10.5 million as of December 31, 2009.  Thevalue of OREO is based on the lower of cost or fair value less cost to sell.  Fair value is based on independent appraisals for significant properties andmay be adjusted by management as discussed in Note 20.
NOTE 10 - BANK-OWNED LIFE INSURANCEAND IMPUTED INCOME TAX REIMBURSEMENT AGREEMENTS
The Bank has asignificant investment in bank-owned life insurance policies ("BOLI") andprovides the associated fringe benefit to certain employees in the position ofVice President and higher after one year of service.  The cash surrender valuesof BOLI were $21.7 million and $21.1 million as of December 31, 2010 and 2009,respectively.  BOLI are initially recorded at the amount of premiums paid andare adjusted to current cash surrender values.  Changes in cash surrendervalues are recorded in other non-interest income and are based on premiums paidless expenses plus accreted interest income.  Earnings on BOLI resulted innon-interest income of approximately $677,000, $832,000 and $833,000 for theyears ended December 31, 2010, 2009 and 2008, respectively.  

The Companyadopted guidance in ASC 715-60 effective January 1, 2008.  The cumulativeeffective adjustment to retained earnings for change in accounting principlewas recorded January 1, 2008 in the amount of $1.9 million to accrue thepost-retirement death benefits for endorsement split dollar life insuranceplans.  Expense related to these accruals is reflected in Salaries and EmployeeBenefits on the Consolidated Statements of Income and was approximately $175,000,$164,000 and $265,000 for the years ended December 31, 2010, 2009 and 2008,respectively.   The accrual for the post-retirement death benefits is includedin Other Liabilities on the Consolidated Balance Sheet and totaled $2.4 millionand $2.3 million as of December 31, 2010 and 2009, respectively.   

ExecutiveManagement Life Insurance Death Benefit Only Salary Continuation Plans providedfor in the employment agreements for certain officers of the Bank were replacedin December 2007 with Endorsement Split Dollar Life Insurance Plans and Amendedand Restated Split Dollar Agreements.  The new agreements combine the deathbenefits from the Bank's larger group plan with the death benefits establishedin the Executive Management Life Insurance Death Benefit Only SalaryContinuation Plans.  The new agreements did not change the total after-taxdeath benefit provided to each participant.  Imputed Income Tax ReimbursementAgreements for each participant became effective January 1, 2008 and wereentered into in order to keep the participants at the same after-tax benefitunder the Amended and Restated Split Dollar Agreements.  These Imputed IncomeTax Reimbursement Agreements provide for annual cash payments to theparticipants until death beginning in March 2009 for the 2008 tax year inamounts equal to the portion of the amount of federal and state income taxesattributable to the income imputed to the participant on the benefit under theAmended and Restated Split Dollar Agreement.  

Because thenew Endorsement Split Dollar Life Insurance Plans created imputed income toeach participant without generating cash to pay the tax expense associated withthe imputed income, and in order to provide participants the same after-taxbenefit provided under the previous plans, effective January 1, 2008 the Bankentered into Imputed Income Tax Reimbursement Agreements with the applicableofficers under the Amended and Restated Split Dollar Agreements. The ImputedIncome Tax Reimbursement Agreements provide for annual cash payments to theparticipants until death beginning in March 2009 for the previous tax year inamounts equal to a portion of federal income taxes attributable to (i) theincome imputed to the participant on the benefit under the Amended and RestatedSplit Dollar Agreement and (ii) the additional cash payments under the ImputedIncome Tax Reimbursement Agreement. 

Eachparticipant was 100% vested in benefits provided under Imputed Income TaxReimbursement Agreements as of January 1, 2008. Therefore, 100% of theprincipal (or service) cost of the plan was accrued for as of January 1, 2008and expensed through earnings in the year ended December 31, 2008. Servicecosts are based on the net present value of the sum of payments in accordancewith each participant's agreement.   Interest accrues monthly at a rate of7.0%.  

Net otherpost-retirement benefits expense for Imputed Income Tax ReimbursementAgreements is included in Salaries and Employee Benefits on the ConsolidatedStatements of Income as follows (in thousands):  

2010

 

2009

** **

Service cost

 $      -    

$    -    

Interest cost

      25  

     25  

   Net other post-retirement benefits expense

 $   25  

 $  25  

-74-

The accumulatedpost-retirement defined benefit obligation for Imputed Income Tax ReimbursementAgreements is included in Other Liabilities on the Consolidated Balance Sheetas follows (in thousands):  

Accumulated other post-retirement benefit obligation:

2010

 

2009

   Beginning balance

 $

382   

 $

371   

   Service cost

-   

-   

   Interest cost

25   

25   

   Benefit payments

(15)

(14)

   Ending balance

 $

392   

 $

382   

Theaccumulated post-retirement benefit obligation was included in Other Liabilitiesas of December 31, 2010 and 2009 and was equal to the funded status of the planas of each applicable year-end as there were no related assets recognized onthe Consolidated Balance Sheet for the Imputed Income Tax ReimbursementAgreements.

**NOTE 11 - DEPOSITS**

Included indeposits shown on the Consolidated Balance Sheets are the following time andsavings deposits in denominations of $100,000 to $250,000 and greater than$250,000 (in thousands):

2010

 

2009

Time Deposits

 

 

 

   Greater than $100,000 but less than $250,000

 $

103,518   

 $

93,308   

   Greater than $250,000

110,159   

96,310   

Savings Deposits

   Greater than $100,000 but less than $250,000

 $

69,064   

 $

57,210   

   Greater than $250,000

141,600   

124,990   

NOW accounts, included insavings deposits on the Consolidated Balance Sheets, totaled $59.8 million asof December 31, 2010 and $62.1 million at December 31, 2009.  Demand depositbalances reclassified as loans consisted of overdrafts totaling approximately $423,000and $296,000 as of December 31, 2010 and 2009, respectively.  

Time depositsmaturing in years subsequent to December 31, 2010, were as follows (inthousands):

* *

* *

On or before December 31, 2011

 $

318,867   

On or during year ended December 31, 2012

40,235   

On or during year ended December 31, 2013

5,484   

On or during year ended December 31, 2014

1,492   

During or after year ended December 31, 2015

2,558   

 $

368,636   

** **

**NOTE 12 - FEDERAL FUNDSPURCHASED AND OTHER SHORT-TERM BORROWINGS**

The Bank hasthree sources of short-term borrowings, which consist of cash managementadvances from the FHLB, Treasury, Tax and Loan ("TT&L") option note, andfederal funds purchased from correspondent banks.  Short-term borrowings areused to manage seasonal fluctuations in liquidity.  

Cash managementadvances from FHLB are secured by one-to-four family first mortgages under theblanket collateral pledge agreement that also collateralizes long-term advancesfrom FHLB and have maturities of 90 days or less.  See Note 13 for moreinformation about maximum borrowing capacity with FHLB.  There were noshort-term borrowings outstanding against this line as of December 31, 2010 or2009.

-75-

The Bank is anOption B bank in regards to TT&L and up to $1 million in TT&L paymentscollected can be retained as a short-term option note.  This option note iscallable upon demand by the TT&L.  The balance of this line was $1 millionand approximately $748,000 as of December 31, 2010 and 2009, respectively. 

The Bank hasfederal fund lines of credit available with four correspondent banks totaling $54.5million.  There were no federal funds purchased as of December 31, 2010 or 2009. 

The following tabular analysispresents short-term borrowing year-end balance, maximum month-end balance, annualaverage and weighted average interest rates for 2010, 2009 and 2008:

2010

2009

2008

Amount outstanding at end of year

 $

1,000   

 $

748   

 $

1,000   

Weighted average interest rate at end of year

0.00 %

0.00 %

0.00 %

Maximum outstanding at any month end

 $

666   

 $

1,000   

 $

48,500   

Average outstanding during year

 $

1,029   

 $

1,029   

 $

20,679   

Weighted average interest rate during year

0.00 %

0.00 %

2.70 %

**NOTE 13 - OTHER BORROWINGS**

In March 2005,the Company formed a wholly owned subsidiary -- First Citizens (TN) StatutoryTrust III.  The trust was created as a Delaware statutory trust for the solepurpose of issuing and selling trust preferred securities and using proceedsfrom the sale to acquire long-term subordinated debentures issued by theCompany.  The debentures are the sole assets of the trust.  The Company owns100% of the common stock of the trust.

On March 17,2005, the Company, through First Citizens (TN) Statutory Trust III, sold 5,000of its floating rate trust preferred securities at a liquidation amount of$1,000 per security for an aggregate amount of $5.0 million.  For the periodbeginning on (and including) the date of original issuance and ending on (butexcluding) June 17, 2005, the rate per annum was 4.84%.  For each successiveperiod beginning on (and including) June 17, 2005, and each succeeding interestpayment date, interest accrues at a rate per annum equal to the three-monthLIBOR plus 1.80%.  Interest payment dates are March 17, June 17, September 17,and December 17 during the 30-year term.  The entire $5.0 million in proceedswas used to reduce other debt at the Company.  The Company's obligation underthe debentures and related documents constitute a full and unconditional guaranteeby the Company of the trust issuer's obligations under the trust preferredsecurities.  

In March 2007,the Company formed a wholly owned subsidiary -- First Citizens (TN) StatutoryTrust IV.  The trust was created as a Delaware statutory trust for the solepurpose of issuing and selling trust preferred securities and using proceedsfrom the sale to acquire long-term subordinated debentures issued by theCompany.  The debentures are the sole assets of the trust.  The Company owns100% of the common stock of the trust.  

In March 2007,the Company, through First Citizens (TN) Statutory Trust IV, sold 5,000 of itsfloating rate trust preferred securities at a liquidation amount of $1,000 persecurity for an aggregate amount of $5.0 million.  For the period beginning on(and including) the date of original issuance and ending on (but excluding)June 15, 2007, the rate per annum was 7.10%.  For each successive periodbeginning on (and including) June 15, 2007, and each succeeding interestpayment date, interest accrues at a rate per annum equal to the three-monthLIBOR plus 1.75%.  Interest payment dates are March 15, June 15, September 15,and December 15 during the 30-year term.  The purpose of proceeds was torefinance the debt issued through First Citizens (TN) Statutory Trust II at alower spread to LIBOR and results in savings of approximately $92,500annually.  First Citizens (TN) Statutory Trust II was dissolved as a result ofthis transaction.  The Company's obligation under the debentures and relateddocuments constitute a full and unconditional guarantee by the Company of thetrust issuer's obligations under the trust preferred securities.  

Although foraccounting presentation the trust preferred securities are presented as debt,the outstanding balance qualifies as Tier I capital subject to the limitationthat the amount of the securities included in Tier I Capital cannot exceed 25%of total Tier I capital.

-76-

The Company isdependent on the profitability of its subsidiaries and their ability to paydividends in order to service its long-term debt.

The Bank hadsecured advances from the FHLB totaling $41.9 million as of December 31, 2010and $65.0 million as of December 31, 2009.  FHLB borrowings are comprisedprimarily of advances with principal due at call date or maturity date withfixed interest rates ranging from 1.15% to 5.33%.  Most of these FHLBborrowings have quarterly call features and maturities range from 2011 to 2019. Most of the advances with call features when called offer the option to pay offthe advance without penalty or to have the advance reprice at a variable ratetied to the 90-day LIBOR.  Advances totaling $16 million require repayment ifthe call feature is exercised.  Under the existing and forecasted rateenvironments, borrowings with call features in place are not likely to becalled in the next 12 months.  The Bank has one LIBOR based variable rateadvance totaling $2.5 million with a rate of 0.31% as of December 31, 2010.  Alsoincluded in the FHLB borrowings total reported above is a pool of smallerbalance amortizing advances that total $1.4 million as of year end 2010 and $2.0million as of year end 2009.  These smaller balance advances have rates rangingfrom 3.34% to 7.05% and maturities range from 2011 to 2019.  Obligations aresecured by loans totaling $372 million consisting of the Bank's entireportfolio of fully disbursed, one-to-four family residential mortgages,commercial mortgages, farm mortgages, second mortgages and multi-familyresidential mortgages.  The Bank had additional borrowing capacity of $60.6million as of December 31, 2010.

Annual averagevolume, rates and maturities of other borrowings for 2010 and 2009 were asfollows (dollars in thousands):

Average

Average

Average  

Volume

Interest Rate

Maturity

2010

 

 

 

First Citizens Bancshares, Inc.

 $

10,310   

2.14%

26 years

First Citizens National Bank

60,902   

4.26%

3 years

2009

 

 

 

First Citizens Bancshares, Inc.

 $

10,310   

279%

27 years

First Citizens National Bank

65,072   

4.82%

2 years

Maturities ofprincipal of other borrowings for the following five years are as shown (inthousands):

2011

 $

9,963   

2012

3,316   

2013

10,165   

2014

2,105   

2015

2,083   

Thereafter

24,627   

 $

52,259   

** NOTE 14 - INCOME TAXES**

** **Provision for income taxes wascomprised of the following for the years shown (in thousands):

2010

2009

2008

Income tax expense (benefit):

 Current

 $

1,957   

 $

2,754   

 $

3,638   

 Deferred

65 

(789)

(870)

 State income tax expense (benefit of operating loss  carryforwards)

(164)  

41 

(260)

 Change in valuation allowance

164 

(41)

260   

 $

2,022   

 $

1,965   

 $

2,768   

-77-

Effective taxrates differed from federal statutory rate of 34% applied to income beforeincome taxes as a result of the following (in thousands):

2010

2009

2008

Tax expenses at statutory rate

 $

3,705   

 $

3,499   

 $

3,501   

(Decrease) increase resulting from:

 Tax exempt interest income

(1,340)

(1,207)

(858)

 Net earnings on bank-owned life insurance

(171)

(193)

(162)

 ESOP dividend

(261)

(265)

(295)

 Impairment loss on equity securities

-   

-   

615   

 Other items

89   

131   

(33)

 $

2,022   

 $

1,965   

 $

2,768   

In assessing the realizability of deferred taxassets, management considers whether it is more likely than not that someportion or all of the deferred tax assets will not be realized.  The ultimaterealization of the deferred tax assets is dependent upon the generation offuture taxable income during the periods in which those temporary differencesbecome deductible.  Management considers the scheduled reversal of deferred taxliabilities, projected future taxable income and tax planning strategies inmaking this assessment.  Based upon the level of historical taxable income andprojections for future taxable income over the periods in which the deferredtax assets are deductible, management believes it is more likely than not thatthe Company will realize the benefit of these deductible differences.  However,the amount of deferred tax assets considered realizable could be reduced in thenear term if estimates of future taxable income during the carryforward periodare reduced.   Deferred tax assets and liabilities were comprised of thefollowing as of December 31 for the years indicated (in thousands):

2010

2009

2008

Deferred tax assets:

   Allowance for loan losses

 $

2,714   

 $

2,987   

 $

2,482   

   Impairment loss on equity securities

618   

615   

615   

   Impairment loss on debt securities

419   

221   

-   

   Net unrealized loss on cash flow hedge

-   

43   

70   

   Deferred loan fees

94 

111   

108   

   State income tax benefit for net operating loss  carryforwards

1,559   

1,395   

1,436   

   Imputed income tax reimbursement plan

133   

130   

43   

   Unrealized loss on other real estate owned

498 

119   

-   

   Other

41   

73   

-   

     Total deferred tax assets

6,076   

5,694   

4,754   

Deferred tax liabilities:

** **

** **

** **

   Depreciation

(2,240)

(2,046)

(1,757)

   FHLB stock dividends

(742)

(748)

(748)

   Net unrealized gain on available-for-sale

      debt securities

(1,177)

(2,684)

(1,016)

   Prepaid expenses

(121)

(113)

(111)

   Other

-   

-   

(72)

      Total deferred tax liabilities

(4,280)

(5,591)

(3,704)

Valuation allowance for state income tax benefit

(1,559)

(1,395)

(1,436)

          Net deferred tax assets (liabilities)

 $

237 

 $

(1,292)

 $

(386)

-78-

Atyear-end 2010, the Company had a net operating loss carryforward for state taxpurposes of $3.2 million expiring in 2020, $6.2 million expiring in 2021, $7.9million expiring in 2022, $4.0 million expiring in 2023 and an estimated $2.5million expiring in 2025.  As of December 31, 2010 and 2009, the Companyhad no unrecognized tax benefits.  The Company's policy is to recognizepenalties and interest on unrecognized tax benefits in Provision for Income TaxExpense in the Consolidated Statements of Income.  There were no amountsrelated to interest and penalties recognized for each of the years endedDecember 31, 2010, 2009 and 2008.  The tax years subject to examination byfederal and state taxing authorities are the years ended December 31, 2010,2009, 2008 and 2007.

**NOTE 15 -REGULATORY MATTERS**

The Company is subject to various regulatory capital requirements administeredby federal banking agencies.  Failure to meet minimum capital requirementscan initiate certain mandatory, and possibly additional discretionary, actionsby regulators that, if undertaken, could have a direct material effect on theCompany and the Consolidated Financial Statements.  The regulations requirethe Bank to meet specific capital adequacy guidelines that involve quantitativemeasures of the Bank's assets, liabilities and certain off-balance sheet itemsas calculated under regulatory accounting practices.  The Bank's capitalclassification is also subject to qualitative judgments by the regulators aboutcomponents, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacyrequire the Bank to maintain minimum amounts and ratios (set forth in the tablebelow) of Tier I capital (as defined in the regulations) to total average assets(as defined), and minimum ratios of Tier I and total risk-based capital (asdefined) to risk-weighted assets (as defined).  To be considered adequatelycapitalized (as defined) under the regulatory framework for prompt correctiveaction, the Bank must maintain minimum Tier I leverage, Tier I risk-based andtotal risk-based ratios as set forth in the table.  The Bank's actualcapital amounts and ratios are presented in the table below.

Asof December 31, 2010, the most recent notification from the Bank's primaryregulatory authorities categorized the Bank and the Company as well capitalizedunder the regulatory framework for prompt corrective action. To be categorizedas well capitalized, the Bank must maintain minimum total risk-based, Tier Irisk-based and Tier I leverage ratios as set forth in the table below. There are no conditions or events since notification that management believeshave changed the institution's category.

The Company's and the Bank's actual and minimum capital amounts and ratios arepresented in the following table (dollars in thousands):

To Be  Well

  Capitalized Under

For  Capital

  Prompt Corrective

  Actual

  Adequacy Purposes

  Action Provisions

  Amount

  Ratio

  Amount

  Ratio

  Amount

  Ratio

December 31, 2010:

Total capital to risk

 weighted assets:

     First Citizens  Bancshares, Inc.

 $

93,301   

15.4%

 $

48,563   

8.0%

N/A

10.0%

     First Citizens National Bank

92,643   

15.3%

48,568   

8.0%

 $

60,710   

10.0%

Tier I capital to risk

 weighted assets:

    First Citizens Bancshares, Inc.

85,695   

14.1%

24,293   

4.0%

N/A

6.0%

    First Citizens National Bank

85,080   

14.0%

24,291   

4.0%

36,437   

6.0%

Tier I capital to 

 average assets:

   First Citizens Bancshares, Inc.

85,695   

8.9%

38,385   

4.0%

N/A

5.0%

   First Citizens National Bank

85,080   

8.9%

38,368   

4.0%

47,959   

5.0%

December 31, 2009:

Total capital to risk

 weighted assets:

    First Citizens Bancshares, Inc.

 $

86,307   

13.6%

 $

50,956   

8.0%

    N/A

10.0%

    First Citizens National Bank

85,811   

13.5%

50,926   

8.0%

 $

63,658   

10.0%

Tier I capital to risk

 weighted assets:

   First Citizens Bancshares, Inc.

78,336   

12.3%

25,475   

4.0%

N/A

6.0%

   First Citizens National Bank

77,897   

12.2%

25,457   

4.0%

38,185   

6.0%

Tier I capital to 

 average assets:

   First Citizens Bancshares, Inc.

78,336   

8.3%

37,662   

4.0%

N/A

5.0%

   First Citizens National Bank

77,897   

8.3%

37,677   

4.0%

47,096   

5.0%

-79-

**NOTE 16 - CAPITAL**

The Company issubject to capital adequacy requirements imposed by the Federal Reserve.  Inaddition, the Bank is restricted by the Office of the Comptroller of theCurrency from paying dividends in an amount in excess of the net earnings ofthe current year plus retained profits of the preceding two years.  As ofDecember 31, 2010, $11.2 million of retained earnings were available for futuredividends from the Bank to the Company.

AccumulatedOther Comprehensive Income as of December 31, 2010 and 2009 was as follows (inthousands):

December 31, 2010

December 31, 2009

 Unrealized loss on cash flow hedge, net of tax

 $

- 

 $

(69)

 Unrealized gains on available-for-sale securities

            without other-than-temporary impairment, net  of tax

2,501 

4,791   

 Unrealized losses on available-for-sale securities with

            other-than-temporary impairment, net of tax

(605)

(466)  

           Total accumulated other comprehensive income

 $

1,896   

 $

4,256   

**NOTE 17 - RELATED PARTYTRANSACTIONS**

The Company hasloans and deposits with certain executive officers, directors and theiraffiliates.  The Company also enters into contracts with certain relatedparties from time to time such as for construction of a branch.  All relatedparty transactions are entered into under substantially the same terms asunrelated third-party transactions.  All material contracts are awarded basedon competitive bids.  

Activity inloans to executive officers, directors and their affiliates was as follows forthe years ended December 31, 2010, 2009 and 2008 (in thousands):

2010

 

2009

 

2008

Balance at beginning of period

 $

10,575   

 $

16,076   

 $

17,247   

New loans

4,569   

6,369   

10,665   

Repayments

(3,499)

(11,870)

(11,836)

Balance at end of period

 $

11,645   

 $

10,575   

 $

16,076   

 There were nocharged-off, restructured or non-current loans to related parties for any ofthe periods presented.  Loans to related parties are made on substantially thesame terms as third-party transactions.  

-80-

Indebtednessshown represents amounts owed by directors and executive officers of theCompany and the Bank and by entities in which such persons are general partnersor have at least 10% or greater interest and trust and estates in which theyhave a substantial beneficial interest.  All loans have been made onsubstantially the same terms, including interest rates and collateral, as thoseprevailing at the time for comparable transactions with others and do notinvolve other than normal risks of 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, 2010and 2009 were $14.8 million and $17.5 million, respectively.

The Bank hasinvested in the construction of new branches and the operations center over thepast three years.  Contracts for construction and/or renovation of branchfacilities, operations center and leasehold improvements for the loanproduction offices were awarded on a competitive bid basis to a related party. Contract payments were paid to the related party and totaled approximately$155,000 and less than $60,000 in 2010 and 2009, respectively compared to $1.2million in 2008.

**NOTE 18- FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK**

The Bank is aparty to financial instruments with off-balance sheet risk in the normal courseof business to meet the financing needs of its customers. These financialinstruments include commitments to extend credit and standby letters of credit.These instruments involve, to varying degrees, elements of credit risk notrecognized in the statement of financial position. 

The Bank'sexposure to credit loss in the event of non-performance by the other party tothe financial instrument for commitments to extend credit and standby lettersof credit is represented by the contractual amount of those instruments. Thesame policies are utilized in making commitments and conditional obligations asare used for creating on-balance sheet instruments. Ordinarily, collateral orother security is not required to support financial instruments withoff-balance sheet risk. 

Commitments toextend credit are agreements to lend to a customer as long as there is noviolation of any condition established in the contract. Loan commitmentsgenerally have fixed expiration dates or other termination clauses and mayrequire payment of a fee. Since many commitments are expected to expire withoutbeing drawn upon, total commitment amounts do not necessarily represent futurecash requirements. Each customer's credit-worthiness is evaluated on acase-by-case basis, including the collateral required, if deemed necessary bythe Bank upon extension of credit, and is based on management's creditevaluation of the counter party. At December 31, 2010 and 2009, the Bank hadoutstanding loan commitments of $78.1 million and $79.8 million, respectively. As of year-end 2010, variable rate commitments were $52.0 million and fixedrate commitments were $26.1 million. As of year-end 2009, variable rate commitmentswere $59.4 million and fixed rate commitments were $20.5 million. Of thesecommitments, none had an original maturity in excess of one year.

Standby lettersof credit and financial guarantees are conditional commitments issued by theBank to guarantee performance of a customer to a third party. Those guaranteesare issued primarily to support public and private borrowing arrangements, andthe credit 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, 2010 and 2009, outstanding standbyletters of credit totaled $2.8 million and $4.5 million, respectively.

In the normalcourse of business, the Bank extends loans, which are subsequently sold toother lenders, including agencies of the U.S. government.  Certain of theseloans are conveyed with recourse creating off-balance sheet risk with regard tothe collectibility of the loan.  At December 31, 2010 and 2009, the Bank had noloans sold with recourse. 

The Bank alsohad an off-balance sheet liability at December 31, 2009 in the form of a $25million standby letter of credit issued by FHLB on the Bank's behalf.  Thisletter of credit was used to collateralize public fund deposits in 2009. 

-81-

**NOTE 19 - SIGNIFICANTCONCENTRATIONS OF CREDIT RISK**

The Bank grantsagribusiness, commercial, residential and personal loans to customersthroughout a wide area of the mid-southern United States.  A large majority ofthe Bank's loans, however, are concentrated in the immediate vicinity of theBank, primarily in West Tennessee.  Although the Bank has a diversified loanportfolio, a substantial portion of its debtors' ability to honor theirobligations is dependent upon the agribusiness and industrial economic sectorsof that geographic area.

**NOTE 20 - FAIR VALUEMEASUREMENTS**

** Recurring Basis**

The followingare descriptions of valuation methodologies used for assets and liabilitiesmeasured at fair value on a recurring basis.

*Available-for-SaleSecurities*

Fair values for available-for-salesecurities are obtained from a third party vendor and are valued using Level 2inputs, except for TRUP CDOs which are accounted for using Level 3 inputs. TRUP CDOs accounted for less than 2% of the portfolio at December 31, 2010 and2009.  

The markets forTRUP CDOs and other similar securities were not active at December 31, 2010 or2009.  The inactivity was evidenced first by a significant widening of thebid-ask spread in the brokered markets in which these securities trade and thenby a significant decrease in the volume of trades relative to historicallevels.  The new issue market has also been relatively inactive. 

               The marketvalues for TRUP CDOs and other securities except for those issued or guaranteedby the U.S. Treasury have been very depressed relative to historical levels. For example, the yield spreads for the broad market of investment grade andhigh yield corporate bonds reached all-time levels versus Treasuries at the endof November 2008 and remained close to those levels at December 31, 2010. Therefore, during 2010 and 2009, a low market price for a particular bond mayonly have provided evidence of stress in credit markets in general rather thanbeing an indicator of credit problems with a particular issuer. 

Given marketconditions for TRUP CDOs at December 31, 2009 and 2010 and the relativeinactivity in the secondary and new issue markets, the Company determined:

•        Few observable transactions existed and market quotations thatwere available were not reliable for purposes of determining fair value as ofDecember 31, 2010 and 2009;

•        An income valuation approach technique (present value technique)that maximized the use of relevant observable inputs and minimized the use ofunobservable inputs were equally or more representative of fair value  than themarket approach valuation technique used at prior measurement dates; and

•        The Company's TRUP CDOs should be classified within Level 3 ofthe fair value hierarchy because significant adjustments were required todetermine fair value at the measurement date.

The Company'sTRUP CDO valuations were prepared by an independent third party. The thirdparty's approach to determining fair value involved these steps as of December31, 2009:
-          The credit quality of the collateral was calibrated by assigningdefault probabilities to each issuer;
-          Asset defaults were generated taking into account both theprobability of default of the asset and an assumed level of correlation amongthe assets;
-          A 50% level of correlation was assumed among assets from the sameindustry (e.g., banks with other banks) while a lower (30%) correlation levelis assumed among those from different industries;
-          The loss given default was assumed to be 100% (i.e., norecovery);
-          The cash flows were forecast for the underlying collateral andapplied to each TRUP CDO tranche to determine the resulting distribution amongthe securities;
-          The calculations were modeled in 10,000 scenarios using a Monte Carlo engine; 
-          The expected cash flows for each scenario were discounted at therisk-free rate (three-month LIBOR) plus 300 basis points (for illiquidity) tocalculate the present value of the security; and
-          The prices were aggregated and the average price was used forvaluation purposes.

-82-

The thirdparty's methodology was adjusted slightly in fourth quarter 2010 and theapproach to determining fair value as of December 31, 2010 involved thesesteps:
-  The credit quality of the collateral was calibrated by assigningdefault probabilities to each issuer;
-  Asset defaults were generated taking into account both theprobability of default of the asset and an assumed level of correlation amongthe assets;
-  A 50% level of correlation was assumed among assets from the sameindustry (e.g., banks with other banks) while a lower (30%) correlation levelis assumed among those from different industries;
-  The loss given default was assumed to be 100% (i.e., norecovery);
-  The cash flows were forecast for the underlying collateral andapplied to each TRUP CDO tranche to determine the resulting distribution amongthe securities;
-  The calculations were modeled in 10,000 scenarios using a Monte Carlo engine; 
-  The expected cash flows for each scenario were discounted using adiscount rate that the third party calculates for each bond that represents anestimate of the yield that would be required in today's market for a bond witha similar credit profile as the bond in question; and
-  The prices were aggregated and the average price was used forvaluation purposes.

The primarydifference in the steps used to determine fair value as of December 31, 2009compared to December 31, 2010 was on how expected cash flows were discounted todetermine the present value of the bond.  This change resulted in significantlylower overall fair values as of December 31, 2010 compared to December 31, 2009. 

The Companyrecalculated the overall effective discount rates for these valuations.  Theoverall discount rates ranged from 1.3% to 19.8% and were highly dependent uponthe credit quality of the collateral, the relative position of the tranche inthe capital structure of the TRUP CDO and the prepayment assumptions.

*Cash Flow Hedge*

The Company'scash flow hedge is valued by a third party vendor and based on matrix pricingusing Level 2 inputs as specified in Note 1.  The cash flow hedge matured inSeptember 2010 and the Company held no derivative transactions as of December31, 2010.

A summary ofassets and liabilities as of December 31, 2010 and 2009 measured at estimatedfair value on a recurring basis is as follows (in thousands):

Level 1

Level 2

Level 3

Total Fair

Inputs

Inputs

Inputs

Value

December 31, 2010:

 

 

 

 

Financial assets:

     Securities available-for-sale

 $

-   

 $

294,384   

 $

439   

 $

294,823   

December 31, 2009:

 

 

 

 

Financial assets:

     Securities available-for-sale

 $

-   

 $

248,064   

 $

1,727   

 $

249,791   

Financial liabilities:

     Cash flow hedge

 $

-   

 $

111   

 $

-   

 $

111   

The followingtable presents a reconciliation and income statement classification of gainsand losses for all assets measured at fair value on a recurring basis usingsignificant unobservable inputs (Level 3) for the years ended December 31, 2010and 2009 (in thousands):

-83-

2010

2009

Available-for-sale securities

 

 

Beginning balance

 $

1,727   

 $

2,342   

   Total unrealized gains (losses) included in:

         Net income

(583)

(651)

         Other comprehensive income

(705)  

36   

   Purchases, sales, issuances and settlements, net

-   

-   

   Transfers in and (out) of Level 3

-   

-   

Ending balance

 $

439   

 $

1,727   

**Non-Recurring Basis**

Certain assetsare measured at fair value on a non-recurring basis as described below.

*Impaired Loans*

Impaired loansare evaluated and valued at the time the loan is identified as impaired at thelower of cost or fair value.  Fair value is measured based on the value of thecollateral securing these loans.  Collateral may be real estate and/or businessassets including equipment, inventory and/or accounts receivable.  Independentappraisals for collateral are obtained and may be discounted by managementbased on historical experience, changes in market conditions from time ofvaluation and/or management's knowledge of the borrower and the borrower'sbusiness.  As such discounts may be significant, these inputs are consideredLevel 3 in the hierarchy for determining fair value.  Values of impaired loansare reviewed on at least a quarterly basis to determine if specific allocationsin the reserve for loan losses are adequate.  

*Loans Held for Sale*

Loans held forsale are recorded at the lower of cost or fair value.  Fair value of loans heldfor sale are based upon binding contracts and quotes from third party investorsthat qualify as Level 2 inputs for determining fair value.  Loans held for saledid not have an impairment charge in 2010 or 2009.

*Other Real Estate Owned*

OREO is recordedat the lower of cost or fair value.  Fair value is measured based on independentappraisals and may be discounted by management based on historical experienceand knowledge and changes in market conditions from time of valuation.  As suchdiscounts may be significant, these inputs are considered Level 3 in thehierarchy for determining fair value.  Values of OREO are reviewed at leastannually or more often if circumstances require more frequent evaluations. 

A summary ofassets as of December 31, 2010 and 2009 measured at estimated fair value on anon-recurring basis were as follows:

Level 1

Level 2

Level 3

Total Fair

Inputs

Inputs

Inputs

Value

December 31, 2010:

Assets:

     Impaired loans

 $

-   

 $

-   

 $

3,687   

 $

3,687   

     Loans held for sale

-   

2,777   

-   

2,777   

     Other real estate owned

- 

- 

14,734   

14,734   

December 31, 2009:

Assets:

     Impaired loans

 $

-   

 $

-   

 $

10,059   

 $

10,059   

     Loans held for sale

-   

2,741   

-   

2,741   

     Other real estate owned

- 

- 

10,527   

10,527   

-84-

**FairValue Estimates**

ASC 820 requiresdisclosure of the estimated fair value of financial instruments for interim andannual periods.  The following assumptions were made and methods applied toestimate the fair value of each class of financial instruments not measured atfair value on the Consolidated Balance Sheets:

*Cash and Cash Equivalents*

For instrumentsthat qualify as cash equivalents, as described in Note 1, the carrying amountis assumed to be fair value.

*Interest-Bearing Deposits in OtherBanks*

* ****               ***Interestbearing deposits in other banks consist of excess balances held at the FederalReserve Bank and short term certificates of deposits and the carrying amount isassumed to be fair value.

* Loans*

Fair value ofvariable-rate loans with no significant change in credit risk subsequent toloan origination is based on carrying amounts.  For other loans, such as fixedrate loans, fair values are estimated utilizing discounted cash flow analyses,applying interest rates currently offered for new loans with similar terms toborrowers of similar credit quality.  Fair values of loans that haveexperienced significant changes in credit risk have been adjusted to reflectsuch changes.

*Accrued Interest Receivable*

The fair valuesof accrued interest receivable and other assets are assumed to be the carryingvalue.

*Federal Home Loan Bank andFederal Reserve Bank Stock*

Carrying amountsof capital stock of the FHLB of Cincinnati and Federal Reserve Bank of St. Louis approximate fair value.

*Bank-Owned Life Insurance*

Carrying amountof bank-owned life insurance is the cash surrender value as of the end of theperiods presented and approximates fair value.

*Deposit Liabilities*

Demand Deposits

The fair valuesof deposits which are payable on demand, such as interest-bearing andnon-interest-bearing checking accounts, passbook savings, and certain moneymarket accounts are equal to the carrying amount of the deposits.

Variable-Rate Deposits

The fair valueof variable-rate money market accounts and certificates of deposit approximatetheir carrying value at the balance sheet date.

Fixed-Rate Deposits

               For fixed-ratecertificates of deposit, fair values are estimated utilizing discounted cashflow analyses, which apply interest rates currently being offered oncertificates of deposits to a schedule of aggregated monthly maturities on timedeposits.

-85-
*Other Borrowings*
For securitiessold under repurchase agreements payable upon demand, the carrying amount is areasonable estimate of fair value.  For securities sold under repurchaseagreements for a fixed term, fair values are estimated using the samemethodology as fixed rate time deposits discussed above.  The fair value of theadvances from the FHLB and other long-term borrowings are estimated bydiscounting the future cash outflows using the current market rates. 
*Other Liabilities*
Fair value of other liabilities isassumed to be the carrying values.

The carryingamount and fair value of assets and liabilities as of December 31, 2010 and 2009were as follows (in thousands):

2010

2009

Carrying  

Fair  

Carrying  

Fair  

Amount

Value

Amount

Value

Financial assets

Cash and cash equivalents

 $

33,691   

 $

33,691   

 $

28,572   

 $

28,572   

Interest-bearing deposits in other banks

6,271   

6,271   

3,775   

3,775   

Investment securities

294,823   

294,823   

249,791   

249,791   

Loans

547,703 

587,398 

Less: allowance for loan losses

(8,028)

(8,784)

        Loans, net of allowance

539,675   

540,479   

578,614   

579,465   

Loans held for sale

2,777   

2,777   

2,741   

2,741   

Accrued interest receivable

5,215   

5,215   

5,405   

5,405   

Federal Reserve Bank and Federal

    Home Loan Bank Stock

5,684   

5,684   

5,684   

5,684   

Other real estate owned

14,734   

14,734   

10,527   

10,527   

Bank-owned life insurance

21,656   

21,656   

21,116   

21,116   

Financial liabilities

Deposits

 $

791,845   

 $

793,978   

 $

752,146   

 $

754,452   

Short-term borrowings

35,309   

35,402   

37,629   

37,679   

Other borrowings

52,259   

52,359   

75,282   

76,307   

Other liabilities

5,686   

5,686   

7,131   

7,131 

Off-balance sheet arrangements

Commitments to extend credit

 $

78,107   

 $

78,107   

 $

79,776   

 $

79,776   

Standby letters of credit

2,752   

2,752   

4,534   

4,534   

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

The Bank maintains the FirstCitizens National Bank of Dyersburg Employee Stock Ownership Plan (the "ESOP")and the First Citizens National Bank 401(k) Plan (the "401(k) Plan") asemployee benefits. The plans provide for a contribution annually not to exceed25% of the total compensation of all participants and afford eligibility forparticipation to all full-time employees who have completed at least one yearof service and are age 21 or older. 

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The Company annually contributesamounts equal to 3% of total eligible compensation to the 401(k) Plan and adiscretionary percentage of total eligible compensation to the ESOP.  The discretionarypercentage of total eligible compensation for 2010 and 2009 was 2%.  Totaleligible compensation for both plans consists of total compensation subject toincome tax.  Total eligible compensation includes any salary deferrals madethrough the 401(k) Plan and Section 125 Cafeteria Plan and is subject tomaximum limits set annually by the IRS.  Each participant may also elect todefer up to 75% of his or her pay into the 401(k) Plan, subject to dollarlimitations imposed by law. 

Employer cash contributions tothe 401(k) Plan totaled approximately $364,000 in 2010, $362,000 in 2009, and$339,000 in 2008.  Cash contributions to the ESOP totaled approximately $239,000in 2010, $243,000 in 2009, and $785,000 in 2008.  Cash contributions to the401(k) Plan and ESOP are reported in Salaries and Employee Benefits in Non-InterestExpenses on the Consolidated Statements of Income. 

The ESOP is a non-leveraged planand all shares owned by the ESOP were allocated to participants as of December31, 2009.  As of December 31, 2010, all shares owned by the ESOP were allocatedto participants except for 8,691 shares which remained unallocated.  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 ESOPparticipant desires to sell his or her shares of Company common stock, or ifcertain employees elect to diversify their account balances, the Company may berequired to purchase the shares from the participant at their fair marketvalue.  The ESOP owned 779,984 shares of Company common stock with an estimatedfair value of $26.5 million as of December 31, 2010 and 754,985 shares ofCompany common stock with an estimated fair value of $24.2 million as ofDecember 31, 2009.  

**NOTE 22 - CONDENSED FINANCIAL INFORMATION**

**FIRST CITIZENSBANCSHARES, INC.(Parent CompanyOnly)Balance Sheets****December 31, 2010 and 2009***(In thousands)*

2010

2009

ASSETS

 Cash

 $

304   

 $

206   

 Investment in Subsidiaries

97,231   

94,493   

 Other assets

26   

0   

TOTAL ASSETS

 $

97,561   

 $

94,699   

LIABILITIES AND SHAREHOLDERS' EQUITY

 LIABILITIES

     Long Term Debt

 $

10,310   

 $

10,310   

    Accrued Expenses

25   

77   

   TOTAL LIABILITIES

10,335   

10,387   

 SHAREHOLDERS' EQUITY

87,226   

84,312   

   TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

 $

97,561   

 $

94,699   

  

-87-

**FIRST CITIZENSBANCSHARES, INC.(Parent CompanyOnly)Condensed IncomeStatementsYears endedDecember 31, 2010 and 200****9***(In Thousands)*

2010

2009

INCOME

 Dividends from Bank Subsidiary

 $

4,050   

 $

4,195   

 Other Income

7   

9   

TOTAL INCOME

4,057   

4,204   

EXPENSES

 Interest Expense

221   

288   

 Other Expenses

204   

204   

TOTAL EXPENSES

425   

492   

Income Before Income Taxes and Equity in Undistributed

 Net Income of Bank Subsidiary

3,632   

3,712   

Income Tax Benefit

(144)

(164)

3,776   

3,876   

Equity in Undistributed Net Income of Bank Subsidiary

5,099   

4,451   

 NET INCOME

 $

8,875   

 $

8,327   

-88-

**FIRST CITIZENSBANCSHARES, INC.(Parent CompanyOnly)CondensedStatements of Cash FlowsYears ended December 31, 2010and 200****9***(In Thousands)*

2010

2009

Operating activities

Net income

 $

8,875   

 $

8,327   

Adjustments to reconcile net income to net cash

 provided by operating activities:

     Undistributed income of subsidiary

(5,099)

(4,451)

    Increase in other assets

(26)

-   

     Increase (decrease) in other liabilities

(49)

15   

Net cash provided by operating activities

 $

3,698   

 $

3,891   

Financing activities

Payment of dividends and payments in lieu of fractional shares

(3,627)

(3,770)

Treasury stock transactions - net

24 

16   

Net cash used by financing activities

(3,600)

(3,754)

Increase  in cash

98 

137   

Cash at beginning of year

206   

69   

CASH AT END OF YEAR

 $

304   

 $

206   

-89-

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

Interest  

Net Interest  

Net

EPS

EPS

Income

Income

Income

Basic

Diluted

(*In thousands, except per share data*)

**2010**

First Quarter

 $

11,872   

 $

8,681   

 $

2,169   

 $

0.60   

 $

0.60   

Second Quarter

11,675   

8,584   

2,021   

0.56   

0.56   

Third Quarter

11,439   

8,452   

2,234   

0.61   

0.61   

Fourth Quarter

11,361   

8,620   

2,451   

0.68   

0.68   

    Total

 $

46,347   

 $

34,337   

 $

8,875   

 $

2.45   

 $

2.45   

**2009**

First Quarter

 $

12,207   

 $

7,609   

 $

1,779   

 $

0.49   

 $

0.49   

Second Quarter

12,124   

8,069   

2,285   

0.63   

0.63   

Third Quarter

12,376   

8,631   

2,418   

0.67   

0.67   

Fourth Quarter

12,304   

8,889   

1,845   

0.51   

0.51   

    Total

 $

49,011   

 $

33,198   

 $

8,327   

 $

2.30   

 $

2.30   

 -90-

**ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING AND FINANCIAL DISCLOSURE.**

There have beenno changes in the Company's independent registered public accounting firm forthe two most recent fiscal years. 

**ITEM 9A.  CONTROLS AND PROCEDURES.**

The Company,under supervision of and with the participation of its management, includingthe Chief Executive Officer and Chief Financial Officer, evaluated theeffectiveness of the design and operation of the Company's disclosure controlsand procedures as of the end of the period covered by this Annual Report onForm 10-K.  Disclosure controls and procedures are defined in accordance with Rule13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, asamended (the "Exchange Act").  Based upon that evaluation as of the end of theperiod covered by this Annual Report on Form 10-K, management concluded thatthe Company's disclosure controls and procedures were effective in ensuringthat information required to be disclosed in the reports that the Company fileswith or submits to the SEC under the Exchange Act is recorded, processed,summarized and reported on a timely basis.  

There have beenno changes in internal control over financial reporting during the quarterended December 31, 2010 that have materially affected, or are reasonably likelyto materially affect, the Company's internal control over financial reporting. Management'sreport and the attestation report of the Company's independent registeredpublic accounting firm regarding internal control over financial reporting areincluded in Item 8 of this Annual Report on Form 10-K.****

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**PART III**

**ITEM 10.  DIRECTORS, EXECUTIVEOFFICERS AND CORPORATE GOVERNANCE.**

Information appearing in thesections entitled "Proposal 1: Election of Directors," "General Information -Section 16(a) Beneficial Ownership Reporting Compliance," "Corporate Governance- Code of Ethics," "General Information - Proposals by Shareholders/DirectorSelection," "Audit Committee Report" and "Corporate Governance - Committees ofthe Board of Directors" of the Company's 2011 Proxy Statement is incorporatedherein by reference.

**Executive Officers**

The followinginformation relates to the executive officers of the Company, as of December31, 2010:

Name

Age

Position, Office and Background

Jeffrey D. Agee

50

Mr. Agee serves as President  and CEO of the Bank and the Company. He previously served as Executive Vice  President and CFO of the Bank and Vice President and CFO of the Company from  August 1999 to June 2004.  Mr. Agee holds a bachelor's degree in accounting  from the University of Tennessee and is a graduate of ABA Stonier Graduate  School of Banking at Georgetown University and of BAI School of Bank  Administration at University of Wisconsin. He is also a Certified Public  Accountant and certified through FINRA as holder of a Series 27 Broker's  license. He serves as Financial and Operations Principal of First Citizens  Financial Plus, Inc. (wholly-owned subsidiary of the Bank) and demonstrates  an understanding of SEC rules and regulations, internal controls and  financial reporting. He also currently serves on boards of directors of 16  community and professional organizations.

Sherrell Armstrong

48

Mr. Armstrong has served as  Executive Vice President of the Company and Executive Vice President and  Chief Credit Officer for the Bank since January 1, 2007. Mr. Armstrong  previously served as Executive Vice President and Loan Administrator of the  Bank from 2003 to 2007. He also served as Senior Vice President of the Bank  from 2002 to 2003 as well as a Vice President and Commercial Lender of the  Bank from 1997 to 2002. Mr. Armstrong has been employed by the Bank since  June 1997.  

Laura Beth Butler

35

Ms. Butler has served as  Executive Vice President and Chief Financial Officer for the Company and the  Bank since April 2009. Ms. Butler previously served as Senior Vice President  and Chief Financial Officer from June 2004 to April 2009. Ms. Butler is a  Certified Public Accountant and previously served as Senior Audit Manager of  the banking practice of a local accounting firm from 2000 to 2004.

Christian Heckler

43

Mr. Heckler was appointed  Regional President of the Southwest Region for the Bank in April 2006. He  previously served as Community Bank President and Commercial Lender from 2002  to April 2006. Mr. Heckler earned a bachelor's degree in business  administration from the University of Tennessee.  He also served as Vice  President/Commercial Lending for Renasant Bank from 2000 to 2003 and Vice  President/Commercial Lending of Trustmark National Bank from 1998 to 2000.   He has also served on the board of directors for Millington YMCA, advisory  board for Covington Heart to Heart and as past Chairman of Covington Heart to  Heart Annual Fund Campaign.  

Judy Long

55

Ms. Long has served as  Executive Vice President and Secretary for the Company and Executive Vice  President, Chief Operations Officer and Secretary of the Bank since August  1999. Ms. Long previously served as Senior Vice President, Chief Operations  Officer and Secretary from 1997 to 1999, Senior Vice President and  Administrative Officer from 1996 to 1997 and Vice President and Loan  Operations Manager from 1992 to 1996. Ms. Long has been employed by the  Company since July 1974.

-92-

Bennett Ragan, Jr.

62

Appointed Regional President-Dyer County of the Company in March 2007 and named Executive Officer of the Company  in April 2008.  Mr. Ragan served as Senior Vice President, Green Village  Branch Manager and Commercial Lender of the Company from July 2003 to March  2007. 

Katie S. Winchester

70

Ms. Winchester serves as  Chairman of the Company and the Bank.  She previously served as President of  the Company and the Bank from 1992 to 2006 and CEO and Vice Chairman of the  Company and the Bank from 1996 to April 2007.  She serves as Chairman of the  Tennessee Higher Education Commission and Chairman of Baptist Memorial Health  Care Corporation in Memphis, Tennessee. She also serves as Chairman of  Dunagan Chair of Banking for the University of Tennessee at Martin.  She  served as a Member of Federal Advisory Council for the Federal Reserve Board  in Washington, D.C. in 2000, 2001 and 2002.  She is also a member of the  boards of directors for Dyersburg State Community College Foundation Board, United Way of Dyer County, Dyer County Adult Education and Tennessee Vocational  Rehabilitation (Dyersburg).

**ITEM 11.  EXECUTIVECOMPENSATION.**

Information appearing in the sectionsentitled "Compensation Discussion and Analysis," "Corporate Governance -Compensation Committee Interlocks and Insider Participation" and "CompensationCommittee Report" of the Company's 2011 Proxy Statement is incorporated hereinby reference.  

**ITEM 12.  SECURITY OWNERSHIPOF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.**

Information in the section entitled"Security Ownership of Certain Beneficial Owners and Management" of theCompany's 2011 Proxy Statement is incorporated herein by reference. 

**ITEM 13.  CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.**

Information appearing in thesections entitled "Certain Relationships and Related Transactions" and"Corporate Governance - Director Independence" of the Company's 2011 ProxyStatement is incorporated herein by reference.  

**ITEM 14.  PRINCIPAL ACCOUNTANTFEES AND SERVICES.**

Information appearing in thesection entitled "Proposal 2: Ratification of Independent Registered PublicAccounting Firm" of the Company's 2011 Proxy Statement is incorporated hereinby reference.  

-93-

**PARTIV**

**ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, ANDREPORTS ON FORM 8-K**

1.  *Financial Statements*.  Thefollowing financial statements of the Company are set forth in Item 8 above:
- Reports of Independent Registered Public Accounting Firm;
- Consolidated Balance Sheets as of December 31, 2010 and 2009;
- Consolidated Statements of Income for the years ended     December 31, 2010, 2009 and 2008;
- Consolidated Statements of Changes in Shareholders' Equity     and Other Comprehensive Income for the years ended December 31, 2010, 2009     and 2008;
- Consolidated Statements of Cash Flows for the years ended     December 31, 2010, 2009 and 2008; and
- Notes to Consolidated Financial Statements.

2.  *Financial Statement Schedules.* All schedules are omitted because they are not applicable or are not required,or because the information is included in the consolidated financial statementsand notes thereto included herein.

3. *Exhibits.*  The followingExhibits are filed herewith or incorporated herein by reference:

ExhibitNumber                Description

3.1                          Charterof First Citizens Bancshares, Inc., as amended (1)

3.2                          Bylawsof First Citizens Bancshares, Inc., as amended (1)

10.1                     Form of Amendment to Executive Employment Agreement for Jeffrey D. Agee andJudy D. Long (1)*

10.2                     Form of First Citizens National Bank Amended and Restated Split DollarAgreement (1)*

10.3                     Executive Employment Agreement by and between First Citizens Bancshares, Inc.and Jeffrey D. Agee, dated April 21, 1994 (1)*

10.4                     Executive Employment Agreement by and between First Citizens Bancshares, Inc.and Katie S. Winchester, dated December 28, 2007 (1)*

10.5                     Executive Employment Agreement by and between First Citizens Bancshares, Inc.and Judy D. Long, dated April 15, 1998 (1)*

10.6                     Executive Employment Agreement by and between First Citizens Bancshares, Inc.and Ralph E. Henson, dated July 1, 2006 (1)*

10.7                     Executive Employment Agreement by and between First Citizens Bancshares, Inc.and Stallings Lipford, dated December 28, 2007 (1)*

10.8                     Form of First Citizens National Bank Imputed Income Tax Reimbursement Agreement(1)*

10.9                        Descriptionof the First Citizens Bancshares, Inc. and subsidiaries Incentive CompensationPlan for the year ended December 31, 2010*

21                           Subsidiaries of the Registrant

31.1                        CertificationPursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2                        CertificationPursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1                        CertificationPursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2                        CertificationPursuant to Section 906 of the Sarbanes-Oxley Act of 2002

_____________________________

(1)           Previouslyfiled as an exhibit to First Citizens Bancshares, Inc.'s Annual Report on Form10-K, as filed with the Securities and Exchange Commission on March 13, 2009and incorporated herein by reference.

*             Management contract or compensatory plan or arrangement.

-94-

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 15, 2011                               /s/ JEFFREY D. AGEE                                                                                                      PRESIDENT AND CHIEF EXECUTIVE OFFICER                                                                                                    

 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 15, 2011.
/s/ Jeffrey D. Agee

/s/ Larry W. Gibson

/s/ Green Smitheal III

Jeffrey D. Agee

Larry W. Gibson

Green Smitheal III

President and Chief   Executive Officer; Director

Director

Director

 

 

 

/s/ Eddie E. Anderson

/s/ Christian E. Heckler

/s/ David R. Taylor

Eddie E. Anderson  Director

Christian E. Heckler  Director

David R. Taylor  Director

 

 

 

/s/ J. Walter Bradshaw

/s/ Ralph E. Henson

/s/ Larry S. White

J. Walter Bradshaw  Director

Ralph E. Henson  Director

Larry S. White  Director

 

 

 

/s/ Laura Beth Butler

/s/ Barry T. Ladd

/s/ Dwight S. Williams

Laura Beth Butler  Chief Financial Officer

Barry T. Ladd  Director

Dwight S. Williams  Director

 

 

 

/s/ J. Daniel Carpenter

/s/ John M. Lannom

/s/ Katie S. Winchester

J. Daniel Carpenter  Director

John M. Lannom  Director

Katie S. Winchester  Director

 

 

 

/s/ William C. Cloar

/s/ Stallings Lipford

/s/ Joseph S. Yates

William C. Cloar  Director

Stallings Lipford  Director

Joseph S. Yates  Director

 

 

 

/s/ Richard W. Donner

/s/ Milton E. Magee

 

Richard W. Donner  Director

Milton E. Magee  Director

 

 

/s/ Bentley F. Edwards

/s/ Allen Searcy

Bentley F. Edwards  Director

Allen Searcy  Director

 

 

 

-95-
****EXHIBIT INDEX**

ExhibitNumber                Description

3.1                          Charterof First Citizens Bancshares, Inc., as amended (1)

3.2                          Bylawsof First Citizens Bancshares, Inc., as amended (1)

10.1                     Form of Amendment to Executive Employment Agreement for Jeffrey D. Agee andJudy D. Long (1)*

10.2                     Form of First Citizens National Bank Amended and Restated Split DollarAgreement (1)*

10.3                     Executive Employment Agreement by and between First Citizens Bancshares, Inc.and Jeffrey D. Agee, dated April 21, 1994 (1)*

10.4                     Executive Employment Agreement by and between First Citizens Bancshares, Inc.and Katie S. Winchester, dated December 28, 2007 (1)*

10.5                      ExecutiveEmployment Agreement by and between First Citizens Bancshares, Inc. and Judy D.Long, dated April 15, 1998 (1)*

10.6                     Executive Employment Agreement by and between First Citizens Bancshares, Inc.and Ralph E. Henson, dated July 1, 2006 (1)*

10.7                     Executive Employment Agreement by and between First Citizens Bancshares, Inc.and Stallings Lipford, dated December 28, 2007 (1)*

10.8                     Form of First Citizens National Bank Imputed Income Tax Reimbursement Agreement(1)*

10.9                        Descriptionof the First Citizens Bancshares, Inc. and subsidiaries Incentive CompensationPlan for the Year Ended December 31, 2010*

21                           Subsidiariesof the Registrant

31.1                        CertificationPursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2                        CertificationPursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1                        CertificationPursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2                        CertificationPursuant to Section 906 of the Sarbanes-Oxley Act of 2002

_____________________________

(1)           Previouslyfiled as an exhibit to First Citizens Bancshares, Inc.'s Annual Report on Form10-K, as filed with the Securities and Exchange Commission on March 13, 2009and incorporated herein by reference.

*             Management contract or compensatory plan or arrangement.

-96-**********************