----

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 31,2006

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [x]  No [  ].

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 RegulationS-K (Section 229.40) is not contained herein, and will not be contained, to the best of registrant's knowledge, indefinitive proxy or information statements incorporated by reference in Part IIIof this Form 10-K or any amendment to this Form 10-K. Yes [x]   No [ ]

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

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

**________________________**
The aggregate market value ofvoting and non-voting common stock held by non-affiliates of the registrant at June 30, 2006 was$81,031,358.

Of the registrant's only class ofcommon stock (no par value) there were 3,632,093 shares outstanding as ofDecember 31, 2006.

**________________________**

**DOCUMENTSINCORPORATED BYREFERENCE:**

Portions of the ProxyStatement dated March 15, 2007 (Part III)

 

PART I
FORWARD LOOKING STATEMENTS
Information contained hereinincludes forward-looking statements with respect to Bancshares' beliefs, plans,risks, goals and estimates.  Forward-looking statements are necessarily basedupon estimates and assumptions that are inherently subject to significantbanking, economic, and competitive uncertainties, many of which are beyondmanagement's control.  When used in this discussion, the words "anticipate,""project," "expect," "believe," "should," "intend," "is likely," "goingforward" and other expressions are intended to identify forward-lookingstatements.  These forward-looking statements are within the meaning of section27A of the Securities Exchange Act of 1934.  Such statements may include, butare not limited to, projections of income or loss, expenses, acquisitions,plans for the future, and others.

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

All dollar amounts set forth below, other than per-shareamounts, are in thousands unless otherwise noted.

GENERAL

First Citizens Bancshares, Inc.(Bancshares or the Company) is a Tennessee Corporation organized andincorporated in 1982 and commenced operations in September 1983.  Bancshares isregistered as a bank holding company under the Bank Holding Company Act of1956, as amended and elected, effective April 19, 2000 to become a financialholding company pursuant to the provisions of the Gramm-Leach Bliley Act.   Asa financial holding company, Bancshares may engage in activities that arefinancial in nature or incidental to a financial activity.  Permissibleactivities for a financial holding company are contained in Regulation Y ofFederal Reserve regulations.  Bancshares may continue to claim the benefits offinancial holding company status so long as each depository institution ownedby the company remains well capitalized and well managed.  In addition,Bancshares may not commence new activities under sections 4(k) or 4(n) of theBank Holding Company Act or acquire control of a company engaged in activitiesunder those sections if any of The Company's insured depository institutionsreceive a rating of less than satisfactory under any examination conducted todetermine compliance with the Community Reinvestment Act. Bancshares is aone-bank holding company. At December 31, 2006, the Corporation had totalassets of $831 million compared to $816 million at December 31, 2005. 

The Principal Executive Officesare at One First Citizens Place, Dyersburg, Tennessee 38024.   Our telephonenumber is 731-285-4410.  Our website is www.firstcitizens-bank.com.  Inaccordance with the Securities Exchange Act of 1934 and other related laws,Bancshares files reports with the United States Securities Exchange Commission(SEC) including annual and quarterly reports (Forms 10-K and 10-Q) as well ascurrent reports on Form 8-K and amendments to those reports, if any.  As of theend of the second fiscal quarter of 2005, the market value of outstandingvoting and non-voting common equity held by non-affiliates exceeded $75 millionand thus, Bancshares began filing required periodic reports with the SEC underaccelerated status beginning with the filing of Form 10-K for the year endedDecember 31, 2005.  

The public may read and copy anymaterials the Company files with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW Washington, DC 20549.  The public may obtain information on theoperation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site at www.sec.gov,which contains reports, proxy and information statements, and otherinformation.  We post our website links to our annual, quarterly and currentreports as soon as reasonably practicable after filing with the SEC.  Suchreports can be downloaded and/or viewed free of charge through access to thelinks on our website.  Shareholders may request a copy of the quarterly orannual reports without charge by contacting Judy Long, Secretary, FirstCitizens Bancshares, Inc., P. O. Box 370 Dyersburg, Tennessee 38025-0370. 

Shareholders desiring tocommunicate directly with the Board of Directors of the Corporation may do sothrough the Corporate Governance Committee by contacting the Chairman or anymember of the committee.  Committee membership is identified on First Citizenswebsite at www.firstcitizens-bank.comor may be obtained by calling the Audit Department of First Citizens at731-287-4275.  Letters sent via the US Postal Service may be mailed toChairman, Corporate Governance Committee, First Citizens National Bank, AuditDepartment, P.O. Box 890, Dyersburg, TN  38025-0890.

-1-

Bancshares, through its principalbanking subsidiary, First Citizens National Bank, provides a broad range offinancial services. The Company is engaged in both retail and commercial bankingbusiness.  First Citizens National Bank was chartered as a national bank in1900 and operates in West Tennessee.  First Citizens operates under thesupervision of the Comptroller of the Currency, and is a member of the FederalReserve System.  Deposits at First Citizens National Bank are insured up toapplicable limits by the Federal Deposit Insurance Corporation (FDIC).  Thesubsidiary bank is also subject to various requirements and restrictions underfederal and state law, including requirements to maintain reserves againstdeposits, restrictions on the types and amounts of loans that may be grantedand interest that may be charged thereon and limitations on the types ofinvestments that may be made, activities that may be engaged in, and types of servicesthat may be offered.  Various consumer laws and regulations also affectoperations of the subsidiary bank.  In addition to the impact of regulation,commercial banks are affected significantly by the actions of the FederalReserve as it attempts to control the money supply and credit availability inorder to influence the economy.  The subsidiary bank operates under theday-to-day management of its officers and directors; and formulates its ownpolicies with respect to lending practices, interest rates and service chargesand other banking matters. 

Bancshares' primary source ofincome is dividends received from First Citizens National Bank.  Dividendpayments are determined in relation to earnings, deposit growth and capitalposition of the subsidiaries in compliance with regulatory guidelines.Management anticipates that future increases in the capital of Bancshares willbe accomplished through earnings retention or capital injection.

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

** **

**December 31**

** **

** **

**(In  Thousands)**

** **

**2006    **

**2005**

**2004**

Total Assets

 $

831,420   

 $

815,749   

 $

773,204   

Total Deposits

666,063   

635,509   

592,382   

Total Net Loans

542,623   

540,387   

528,443   

Total Equity Capital

69,498   

63,646   

61,208   

Individual bank performance iscompared to industry standards through utilization of the Federal ReserveBoard's Division of Banking Supervision and Regulation.  First CitizensBancshares is grouped with peers with assets totaling $500 million to $1billion.  The group consisted of 414 bank holding companies per the September30, 2006 Bank Holding Company Performance Report, which is the most recentreport available as of the date of this report.

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

**12/31/2006****

**12/31/2005**

**12/31/2004**

** **

** **

** **

** **

** **

** **

**BANCSHARES**

**PEER GRP**

**BANCSHARES**

**PEER GRP**

**BANCSHARES**

**PEER GRP**

Net Interest Income/Average Assets

3.60 %

3.77 %

3.53 %

3.79 %

3.44 %

3.73 %

Net Operating Income/Average Assets

1.10 %

1.07 %

1.10 %

1.11 %

1.08 %

1.06 %

Net Loan Losses/ Average Total Loans

0.23 %

0.08 %

0.09 %

0.10 %

0.00 %

0.17 %

Primary Capital/Average Assets  

8.11 %

9.35 %

7.88 %

9.18 %

7.05 %

9.10 %

Cash Dividends/Net Income

46.04 %

25.76 %

47.03 %

23.22 %

50.83 %

26.35 %

**Peer information for December31, 2006 is compared to the September 30, 2006 Bank Holding Company PerformanceReport (most recent report available).

EXPANSION

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

Bancshares acquired Munford UnionBank in May 2002.  This acquisition originally added $115 million in assetshoused in Tipton and Shelby Counties in Tennessee to Bancshares' balancesheet.  Since this acquisition, the Bank has opened three additional branchesin this area which are Arlington in Shelby County that opened in 2003, Oakland in  Fayette County which opened in June 2004 and Collierville in Shelby County which opened in April 2005.  The assets of the Southwest Region (branches in Shelby, Tipton, and Fayette Counties) were approximately $232 million as of December 31,2006.  

In first quarter 2007,Bancshares' expansion will continue with the opening of loan production officesin Jackson, Tennessee and Franklin, Tennessee.

-2-

CAPITAL ADEQUACY

Bancshares is subject to capitaladequacy requirements imposed by the Federal Reserve.   The Federal Reserve hasadopted risk-based capital guidelines for bank holding companies.  The minimumguideline for the ratio of total capital to risk weighted assets (includingcertain off-balance-sheet items such as standby letters of credit) is 8%, andthe minimum ratio of Tier 1 Capital to risk-weighted assets is 4%.  At leasthalf of the Total Capital must be composed of common stock, minority interestsin the equity capital accounts of consolidated subsidiaries, non-cumulativeperpetual preferred stock and a limited amount of cumulative perpetualpreferred stock, less goodwill and certain other intangible assets (Tier 1Capital).  The remainder may consist of qualifying subordinated debt, certaintypes of mandatory convertible securities and perpetual debt, other preferredstock and a limited amount of loan loss reserves.  At December 31, 2006,Bancshares' total risked-based capital ratio was 12.49% significantly in excessof 8% mandated by regulation.  The risk based capital ratio was 12.11% for 2005and 10.86% for 2004.  Our strategic plan directs the company to leveragecapital by growing assets.  Risk based capital focuses primarily on broadcategories of credit risk and incorporates elements of transfer, interest rateand market risks.  The calculation of risk-based capital ratio is accomplishedby dividing qualifying capital by weighted risk assets.  Tier 1 leverage ratioat year-end 2006 was 8.22%, with total capital as a percentage of total assetsat 8.36%.

Failure to meet capital guidelinescould subject a financial holding company to a variety of enforcement remedies,including the termination of deposit insurance by the FDIC, and to certainrestrictions on its business and in certain circumstances to the appointment ofa conservator or receiver.

BANKING BUSINESS

The Company, headquartered in Dyersburg, Tennessee, is the bank holding company for First Citizens National Bank("Bank"), and First Citizens (TN) Statutory Trusts II and III.  First CitizensCapital Assets, Inc., a wholly owned subsidiary of Bancshares was liquidated inDecember 2006 with no material impact to the consolidated financialstatements.  First Citizens National Bank is a diversified financial serviceinstitution, which provides banking and other financial services to itscustomers. The bank operates two wholly owned subsidiaries: First CitizensFinancial Plus, Inc. and First Citizens Investments, Inc.  First CitizensInvestments, Inc. has a wholly owned subsidiary, First Citizens Holdings,Inc.   First Citizens Properties, Inc., is a 98% owned subsidiary of FirstCitizens Holdings, Inc.  The formation of these entities had no material impacton the consolidated financial statements of First Citizens Bancshares, Inc. The bank also owns 50% of White and Associates/First Citizens Insurance, LLCwhich provides various insurance products to its customers and FirstCitizens/White and Associates Insurance Company, Inc., which is a provider ofcredit insurance. The activities of the Bank's subsidiaries consist of: brokerage,investments, insurance related products, credit insurance and real estateparticipation interests.

First Citizens provides customarybanking services, such as checking and savings accounts, funds transfers,various types of time deposits and safe deposit facilities.  Other servicesalso include the financing of commercial transactions and making and servicingboth secured and unsecured loans to individuals, firms and corporations. FirstCitizens is a leader in agricultural lending in Tennessee.  Agriculturalservices include operating loans as well as financing for the purchase ofequipment and farmland.  The consumer-lending department makes direct loans toindividuals for personal, automobile, real estate, home improvement, businessand collateral needs.

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

The subsidiary bank has a totalof 32 banking locations (15 full service branch banks, four drive-thru onlybranches and 13 free standing ATMs) in seven Tennessee counties.  Subsidiariesof the Bank consist of the following:
-  First Citizens Financial Plus, Inc., a  bank service corporation wholly owned by First Citizens provides licensed  brokerage services that allow the bank to compete on a limited basis with  numerous non-bank entities that pose a continuing threat to our customer base.  The brokerage firm operates three locations in West Tennessee.
-  White and Associates/First Citizens  Insurance, LLC was chartered by the State of Tennessee and is a general  insurance agency offering a full line of insurance products including  casualty, life and health, and crop insurance. First Citizens holds a 50%  ownership in the company, which is accounted for using the equity method. The  insurance agency operates nine offices in Northwest Tennessee.
-  First Citizens/White and Associates  Insurance Company, is organized and existing under the laws of the state of  Arizona. Its principal activity is credit insurance. First Citizens holds a 50  percent ownership in the company and is accounted for using the equity method. 
-  First Citizens Investments, Inc. was  organized and existing under laws of the state of Nevada. The principal  activity of this entity is to acquire and sell investment securities as well  as collect the income from the portfolio. First Citizens Investments owns the  following:
-  First Citizens Holdings, a wholly owned  subsidiary of First Citizens Investments, acquires and sells certain  investment securities, collects income from its portfolio, and owns the  following subsidiary:
-  First Citizens Properties, Inc., a real  estate investment trust (REIT), whose principal activity is to invest in  participation interests of real estate loans made by First Citizens National  Bank and provides First Citizens with an alternative vehicle for raising  capital. First Citizens Holdings owns 98% and directors, executive officers  and certain employees own the remaining 2%. The minority interest is  immaterial to the consolidated financial statements of the Company. 

COMPETITIVE ENVIRONMENT

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

First Citizens builds andimplements strategic plans and commitments to address competitive factors inthe various markets it serves.  The primary strategic focus is on obtaining andmaintaining profitable customer relationships in all markets.  The marketsdemand competitive pricing, but First Citizens competes on high quality customerservice that will attract and enhance loyal, profitable customers to our bank. Industry surveys have consistently revealed that 65-70 percent of customersleave due to customer service issues.  First Citizens is committed to excellentcustomer service in all markets served as a means of branding anddistinguishing itself from other financial institutions.  Advertising andpromotional activities such as newspaper and radio ads are also utilized inaccordance with defined strategic plans.  For example, advertising andpromotions were increased in 2004 and 2005 in the Southwest Region after theannouncement of two mergers of large regional banks in efforts to attract newdeposits and promote brand awareness.  

-3-

In the markets it serves, FirstCitizens offers a typical mix of interest-bearing transaction, savings and timedeposit products as well as traditional non-interest bearing deposit accounts. First Citizens is the leader in deposit market share compared to competitors inthe Dyer, Fayette, Lauderdale, Obion, Tipton and Weakley County, Tennessee markets.  Source of the following information is the Deposit Market Share Reportas of June 30, 2006 prepared annually by the FDIC.  The following tabularanalysis presents the number of offices, deposits (in thousands), and marketshare percentage for deposits:

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

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

**Asof June 30, 2006**
 
**# of**

**Total**

**% of Market**

**Bank Name**

**Offices**

**Deposits**

**Share**

*(in  thousands) *

First Citizens National Bank

15

 $

545,463   

20.16 %

First State Bank

14

511,167   

18.89 %

Regions Bank

13

251,438   

9.29 %

BancorpSouth Bank

6

171,125   

6.33 %

Somerville Bank & Trust Co.

5

159,976   

5.91 %

Bank of Fayette County

5

124,659   

4.61 %

Bank of Ripley

5

119,403   

4.41 %

Commercial Bank & Trust

2

117,756   

4.35 %

Reelfoot Bank

5

87,074   

3.22 %

INSOUTH Bank

2

86,963   

3.21 %

Security Bank

6

84,559   

3.13 %

First South Bank

2

68,305   

2.52 %

Oakland Deposit Bank

3

65,241   

2.41 %

Bank of Gleason

1

53,963   

1.99 %

All others

14

258,395   

9.55 %

Total

98

 $

2,705,487   

100.00 %

First Citizens has consistentlybeen the leader in market share of deposits in its markets for several years. First Citizens' market share has been about 20% in these six counties combinedand in excess of 62 percent in Dyer County for the last three years. 

First Citizens National Bank alsocompetes in the Shelby County Market.  As the size and composition of theShelby County Market is much larger and more diverse, Shelby County is excluded from the tabular presentation above.  Market share in Shelby County has increased from 0.41% to 0.47% from 2005 to 2006.

EMPLOYEES

Bancshares and its subsidiaryemployed a total of 266 full-time equivalent employees (FTE) during each of theyears ended December 31, 2005 and 2006.  First Citizens is committed to hiringand retaining high quality employees to execute strategic plans of theCompany.  Relationship with employees is satisfactory and no collective bargainingissues exist.

SUPERVISION AND REGULATION

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

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

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

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

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

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

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

-4-

USURY, RECENT LEGISLATION ANDECONOMIC ENVIRONMENT

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

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

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

IMPACT OF GRAMM LEACH-BLILEY ACT

The Gramm Leach-Bliley FinancialModernization Act of 1999 permits bank holding companies meeting certainmanagement, capital, and community reinvestment act standards to engage in asubstantially broader range of non-banking activities than permittedpreviously, including insurance underwriting and merchant banking activities. The Act repeals sections 20 and 32 of the Glass Steagall Act, permittingaffiliations of banks with securities firms and registered investmentcompanies.  The Act authorizes financial holding companies, permitting banks tobe owned by security firms, insurance companies and merchant banking companiesand visa-versa. Some of these affiliations are also permissible for banksubsidiaries.  The Act gives the Federal Reserve Board authority to regulatefinancial holding companies, but provides for functional regulation ofsubsidiary activities.

The Gramm Leach-Bliley FinancialModernization Act also modifies financial privacy and community reinvestmentlaws. The new financial privacy provisions generally prohibit financialinstitutions such as the Bank from disclosing non-public personal financial informationto third parties unless customers have the opportunity to opt out of thedisclosure.  The Act also magnifies the consequences of a bank receiving lessthan a satisfactory community reinvestment act rating, by freezing newactivities until the institution achieves a better community reinvestment actrating.

BANK SECRECY ACT

Over the past thirty plus years,Congress has passed several laws impacting a financial institution'sresponsibilities relating to Bank Secrecy Act.  The most recent change was in2001 with the enactment of the USA Patriot Act (Uniting and StrengtheningAmerica by Providing Appropriate Tools Required to Intercept and ObstructTerrorism ACT).  This act significantly amended and expanded the application ofthe Bank Secrecy Act, including enhanced measures regarding customer identity,new suspicious activity reporting rules and enhanced anti-money launderingprograms.   In 2005, there was no new legislation enacted relating to BankSecrecy Act.  However, on June 30, 2005, the Federal Financial InstitutionsExamination Council (FFIEC) and the Federal bank examination agencies releasedthe new interagency "Bank Secrecy Act Anti-Money Laundering ExaminationManual".  The manual emphasizes a banking organization's responsibility to establishand implement risk-based policies, procedures, and processes to comply with theBank Secrecy Act and safeguard its operations from money laundering andterrorist financing.   It is a compilation of existing regulatory requirements,supervisory expectations, and sound practices for Bank Secrecy Act/Anti-MoneyLaundering (BSA/AML) compliance.  An effective BSA/AML compliance programrequires sound risk management; therefore, the manual also provides guidance onidentifying and controlling risk associated with money laundering and terroristfinancing.  The development of this manual was a collaborative effort of thefederal banking agencies and the Financial Crimes Enforcement Network (FinCEN),a bureau of the U. S. Department of the Treasury, to ensure consistency in theapplication of the BSA/AML requirements and consistent examinations of bankingorganizations.  

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

USA PATRIOT ACT OF 2001

On October 26, 2001, PresidentBush signed into law the USA Patriot Act of 2001.  The law enhances the powersof the federal government and law enforcement organizations to combatterrorism, organized crime and money laundering.   The Patriot Actsignificantly amends and expands the application of the Bank Secrecy Act,including enhanced measures regarding customer identity, new suspiciousactivity reporting rules and enhanced anti-money laundering programs.  Underthe Act, each financial institution is required to establish and maintainanti-money laundering programs, which include, at a minimum, the development ofinternal policies, procedures, and controls; the designation of a complianceofficer; an ongoing employee training program; and an independent auditfunction to test programs.  In addition, the Act requires the bank regulatoryagencies to consider the record of a bank or banking holding company incombating money laundering activities in their evaluation of bank and bankholding company merger or acquisition transactions.  Regulations proposed bythe U.S. Department of Treasury to effectuate certain provisions of the PatriotAct provide that all transaction or other correspondent accounts held by a U.S.financial institution on behalf of any foreign bank must be closed withinninety days after the final regulations are issued, unless the foreign bank hasprovided the U.S. financial institution with a means of verification that theinstitution is not a shell bank. First Citizens National Bank implementedpolicies and procedures in compliance with stated regulations of the PatriotAct.  

FEDERAL DEPOSIT INSURANCE REFORMACT OF 2005

After six years, the FederalDeposit Insurance Reform Act of 2005 (FDIRA) was passed on February 8, 2006, aspart of the Deficit Reduction Act of 2005.  The primary components of FDIRA areas follows:  merges the two major funds into a new Deposit Insurance Fund,raises coverage on retirement accounts to $250,000, establishes indexinginsurance levels for inflation, caps the fund, sets up a system of dividends,gives banks credit for past payments to the fund and provides for flexibilityif the fund should ever face financial difficulty.  The FDIC is required toimplement most of the provisions of FDIRA by November 5, 2006.  

-5-

CUSTOMER INFORMATION SECURITY ANDCUSTOMER FINANCIAL PRIVACY

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

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

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

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

Each institution may implement asecurity program appropriate to its size, complexity, nature and scope of itsoperations.  First Citizens National Bank has structured and implemented afinancial security program that complies with all principal requirements of theact.

The regulatory agencies alsopublished the *Interagency Guidance on Response Programs for UnauthorizedAccess to Customer Information and Customer Notice*.  Each financialinstitution is required to implement a response program to address unauthorizedaccess to sensitive customer information maintained by the institution or itsservice providers.  First Citizens has implemented an appropriate responseprogram, which includes: formation of an "Incident Response Team"; properlyassessing and investigating any incident; notifying the OCC of any securitybreach, if necessary; taking appropriate steps to contain and control anyincident; and notifying affected customers when required.  

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

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

INSURANCE ACTIVITIES 

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

-6-
ITEM 1A. RISK FACTORS
The asset value and earnings of First CitizensBancshares, Inc. (Company) and its subsidiaries as well as the value of itscommon stock is subject to various types of risks.  The ability of the Companyto continue its history of strong financial performance and return oninvestment is dependent on the ability to continue to effectively managemultiple areas of risk.  Significant risks can be broadly divided into threecategories:  credit risk, market risk and operational risks.  Such riskcategories are discussed as follows:

CREDIT RISK

Credit risks are risks toearnings and capital that a borrower may fail to meet the terms of any contractwith the Bank.  Many factors may impact the risk of credit losses on loans andinclude but are not limited to types and terms of loans within the portfolio,creditworthiness of borrowers, and the value and marketability of collateralsecuring various loans.  Changes in general economic conditions of marketsserved also impact the risk of credit losses.  Some credit losses are expectedand the levels of losses may vary over time.  Credit risks are managedthroughout the lending process beginning with strict underwriting guidelinesdesigned to control risks and limit exposure.  Then, management uses variousassumptions and judgments to evaluate on a quarterly basis the adequacy of theallowance for loan losses in accordance with generally accepted accountingprinciples as well as regulatory guidelines.  If management's estimate ofcredit losses proves to be incorrect resulting in an allowance for loan lossesinadequate to absorb losses or if regulatory authorities require an increase tothe allowance as a result of their examination process, earnings and capitalcould be significantly and adversely impacted.

MARKET RISK

Market risk consists primarily ofinterest rate and liquidity risk.  Interest income on loans and investments isthe largest source of income and interest expense on deposits and borrowings isthe largest expense of the Company.  The level and volatility of interest ratesdirectly impact the Company's earnings and capital.  Interest rates are largelydriven by monetary policies set by the Federal Open Market Committee (FOMC) andthe shape of the yield curve.  The FOMC sets interest rates to influence thecost and availability of money and credit to help promote national economicgoals.  The shape of the yield curve is the relationship of shorter-term ratesto longer-term rates.  The FOMC began a series of rate increases that resulted inthe Federal Reserve's discount rate increasing from 1.00% in June 2004 to 5.25%in June 2006.  Short-term rates increased steadily with increases in Federalfunds rates but longer term rates lagged behind resulting in a flattened andthen inverted yield curve by the end of 2005.  The yield curve remains invertedthrough December 2006.  The behavior of short-term rates compared to long-termrates over the last two years has compressed net interest margins forBancshares and other financial institutions.  The unrealized gains and losseson securities available-for-sale are also heavily influenced by thefluctuations in interest rates and the yield curve.  The changes in suchunrealized gains and losses have an effect on the accumulated othercomprehensive income component of equity.  

Competition is anothersignificant factor that directly affects the net interest margin and thereforeoverall earnings of the Company.  Historically, banks competed with otherbanks.  As discussed in Competitive Environment section of Item 1, the Companynow competes against a much broader range of entities that offer similarproducts and services.  Some of such entities include insurance companies,finance companies, credit unions, and industrial loan companies.  The Company mustbe able to compete in its markets in order to remain profitable.  Competitionis often intense in the pricing of both loans and deposits and can lead toreduced earnings if the Company earns less on loans or pays more for depositsin order to compete against such a diverse mix of competitors.  Changes intechnology and regulation, the trend of consolidations in the financialservices industry, and competition for experienced, qualified employees alsoaffect the Company's ability to compete.  

Liquidity risk relates toBancshares' ability to meet its short-term financial obligations.  Bancsharesis dependent upon dividends from its subsidiary bank as a primary source offunds.  Funding of the subsidiary bank is accomplished through diversifiedsources in order to manage liquidity risks.  The cost of such funding directlyimpacts financial results.  The quantity, quality and cost of funding sourcesavailable to Bancshares and its subsidiary bank could be significantly impactedby the following:  our financial results and organizational changes, changes inour loan portfolio or other assets, changes to our corporate and/or regulatorystructure, general economic conditions, current interest rate marketenvironment, changes in supervision and regulation of our industry.  See alsoItem 7A of this report for additional discussion of liquidity and interest ratesensitivity.

OPERATIONAL RISK

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

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

The Company is subject toextensive regulation including banking and financial services laws, taxlegislation, accounting standards and interpretations thereof.  Thus, certainactivities may be restricted such as the ability to pay dividends, ability toparticipate in mergers and acquisitions, and location of offices.  The scope,complexity and cost of corporate governance, reporting and disclosureprocedures required to comply with the Sarbanes-Oxley Act of 2002 as well asother regulations have significantly increased compliance costs over the pastthree years.  Compliance costs are expected to continue to escalate at asignificant level.  Legislation introduced or changed at the state or nationallevel has the potential to impact the banking industry and its operatingenvironment substantially.  The Company cannot determine whether suchlegislation will be enacted or the ultimate impact on the Company's financialposition or earnings.  

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

Reputation risk is the risk ofnegative public opinion.  The public perception of Bancshares' ability toconduct business and expand our customer base is affected by practices of ourboard, management and employees.  Significant relationships with vendors,customers and other external parties may also affect our reputation.  Adverseperceptions about our business practices or practices of those with whom wehave significant relationships, could adversely impact our financial results orcondition.  The board and executive management oversee the management ofreputation risks.   

-7-
ITEM 1B UNRESOLVED STAFF COMMENTS
** **None. 
ITEM 2. PROPERTIES
First Citizens owns and occupiesthe followings properties:
-  Main branch and executive     offices are in six-story building at One First Citizens Place (formerly     200 West Court), Dyersburg, Tennessee.  This property also includes the     Banking Annex, which has a municipal address of 215-219 Masonic Street.      The Annex was converted into a new operations center in 2006 which houses     the bank operations, information technology, call center, bank security     and mail departments.   
-  The Downtown Drive-Thru Branch     is located at 113 South Church Street, Dyersburg, Tennessee, and is a     remote motor bank with six drive-thru lanes and a drive-up ATM lane.   
-  The Green Village Office     located at 620 U.S. 51 Bypass adjacent to the Green Village Shopping Center in Dyersburg, Tennessee, is a full service banking facility.  This facility is     equipped with seven drive-up lanes, one of which is an ATM.
-  The Newbern Branch, a full     service facility is located on North Monroe Street, Newbern, Tennessee.   
-  The Industrial Park Branch     located at 2211 St. John Avenue, Dyersburg, Tennessee, is a full service     banking facility that offers drive-thru Teller and ATM services.   
-  The Ripley, Lauderdale County facility is located at 316 Cleveland Street in Ripley, Tennessee.  This full     service facility has four drive-up lanes and a twenty-four hour access     drive-up ATM.   
-  The Troy Branch is full service     banking facility located on Harper Street just west of Highway 51 in Troy, Tennessee.  This facility has three drive-up lanes and a twenty-four hour access     drive-up ATM.
-  The Union City branch operates     one full service facility, two motor branches and three ATM's in Obion County     .  The main office is located at 100 Washington Avenue in Union City,        Tennessee.  A motor branches are located at First and Harrison Streets     across from the main office and at 1509 East Reelfoot Avenue in Union City.  
-  The Martin office is located at     200 University Avenue, Martin, Tennessee, and is a full service banking     facility with four drive-thru service lanes with the fourth lane serving     as an ATM.  Two other ATMs offer banking services, one a drive-up on University Avenue and a second occupies space in the Student Center of The University of Tennessee at Martin.
-  The Munford, Tennessee branch     is located at 1426 Munford Avenue.  A remote building located at 1483 Munford Avenue serves as a drive-thru facility.  
-  Atoka full service branch is     located on the Atoka-Idaville Road at 123 Atoka-Munford Avenue, Atoka, Tennessee.  The Atoka Branch also has an ATM.
-  Millington Branch is a full     service branch facility located at 8170 Highway 51 N. Millington, Shelby     County, Tennessee.  The Millington Branch has a drive-thru ATM.
-  Full service Bartlett branch is     located at 7580 Highway 70, Bartlett, Shelby County, Tennessee.  A     drive-thru ATM is attached to the facility.
-  Arlington branch located at 5845 Airline Road, Arlington, Tennessee serves as a full service branch facility and houses a     drive thru ATM.  
-  Oakland branch was opened in     February 2005 at 7285 Highway 64, Oakland, Fayette County, Tennessee.  A drive-thru ATM is attached to the facility.   
-  The Collierville, Tennessee branch facility opened January 2006 and is located at 3668 South Houston Levee in     Collierville and includes a drive-thru ATM.

All properties except for theBanking Annex (Operations Center) are owned by First Citizens and there are noliens or encumbrances against any properties owned by First Citizens.  All ofthe properties described above are adequate and appropriate facilities to providebanking services as noted and are adequate to handle growth expected in theforeseeable future.  As growth continues or needs change, individual propertyenhancements or additional properties will be evaluated if considered necessary.

-8-
ITEM 3. LEGAL PROCEEDINGS
Various legal claims arise fromtime to time through the normal course of business of the Company and itssubsidiaries.  There is no material pending or threatened litigation as ofDecember 31, 2006.
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
During the fourth quarter of theyear ending December 31, 2006, there were no meetings, annual or special, ofthe shareholders of Bancshares. No matters were submitted to a vote of theshareholders nor were proxies solicited by management or any other person.
PART IIITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITYAND RELATED STOCKHOLDER MATTERS 
As of December 31, 2006, therewere 1,070 shareholders of Bancshares' common stock. Bancshares' common stockis not actively traded on any market.  The following graph reflects theCompany's cumulative return (including dividends) as compared to the S&P500 and Southeast Bank Stocks over a five-year period:

Per share prices reflected in thefollowing table are based on records of actual sales during stated time periodsof which management of Bancshares is aware. These records may not include allsales during these time periods if sale prices were not reported to FirstCitizens in connection with a transfer of shares.  Range of stock prices for 2006and 2005 by quarter is as follows:

Quarter Ended

Low

High

March 31, 2005

 $

31.00   

 $

32.75   

June 30, 2005

 $

31.00   

 $

32.00   

September 30, 2005

 $

32.00   

 $

32.00   

December 31, 2005

 $

32.00   

 $

33.00   

March 31, 2006

 $

33.00   

 $

33.00   

June 30, 2006

 $

33.00   

 $

33.00   

September 30, 2006

 $

33.00   

 $

34.00   

December 31, 2006

 $

34.00   

 $

34.00   

Dividends paid per share were$1.16 in 2006 and $1.12 in 2005.  Dividends were paid quarterly as follows for2006 and 2005:

2006

2005

Dividends

Dividends

Quarter Declared:

Per Share

Per Share

 First Quarter

 $

0.29   

 $

0.28   

 Second Quarter

 $

0.29   

 $

0.28   

 Third Quarter

 $

0.29   

 $

0.28   

 Fourth Quarter

 $

0.29   

 $

0.28   

     Total

 $

1.16   

 $

1.12   

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

-9-

The Company had no publiclyannounced plans or programs for purchase of stock during the periodspresented.  The Company purchased 4,578 shares at a weighted average cost of$33.66 per share for the year ended December 31, 2006.  The number of shares oftreasury stock repurchased in open-market transactions not pursuant to publiclyannounced plans or programs and the average price paid by month for the mostrecent fiscal quarter is as follows:

Weighted

No. of

Average

Shares

Price Paid

Purchased

Per Share

**2006**

October

190   

34.00   

November

840   

34.00   

December

1,048   

34.00   

   Total

2,078   

 $

34.00   

The Company sold 1,664 shares oftreasury stock in 2006 at a weighted average price of $34.00 per share. Proceeds from such sales were used to reacquire additional treasury shares. 
ITEM 6. SELECTED FINANCIAL DATA
The following table presentsselected financial data for Bancshares for the twelve months ended December 31,for the years indicated:

**2006**

**2005**

**2004**

**2003**

**2002**

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

Net Interest & Fee Income  

 $

27,970   

 $

26,922   

 $

25,668   

 $

25,354   

 $

24,262   

Gross Interest Income  

 $

52,112   

 $

44,614   

 $

39,017   

 $

39,506   

 $

38,970   

Income From Continuing Operations

 $

9,157   

 $

8,665   

 $

8,049   

 $

7,820   

 $

7,838   

Net Income Per Common Share

 $

2.52   

 $

2.38   

 $

2.20   

 $

2.14   

 $

2.14   

Cash Dividends Declared Per Common Share

 $

1.16   

 $

1.12   

 $

1.12   

 $

1.08   

 $

1.04   

Total Assets at Year End

 $

831,420   

 $

815,749   

 $

773,204   

 $

726,104   

 $

694,198   

Long Term Obligations (1)

 $

59,538   

 $

78,128   

 $

84,481   

 $

83,314   

 $

83,881   

Allowances For Loan Losses as a % Loans

1.13 %

1.25 %

1.16 %

1.25 %

1.24 %

Allowances For Loan Losses as a % of

 Non-Performing Loans

471.96 %

349.36 %

262.25 %

438.36 %

144.31 %

Loans 90 Days Past Due as a  % of Loans

0.24 %

0.36 %

0.44 %

0.04 %

0.37 %

(1)  Long-Term Obligationsconsist of FHLB advances and acquisition debts funded by a line of credit withFirst Tennessee Bank and trust-preferred securities.

**ITEM 7. MANAGEMENT'SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

See Banking Business under Item 1of this report regarding details of subsidiaries of the bank and holdingcompany and what types of activities each engage in.  
EXECUTIVE SUMMARY
Strong financial performance continues in 2006 asevidenced by a return on average equity in 2006 of 13.88% compared to 13.71%and 13.56% in 2005 and 2004, respectively.  Return on assets is 1.10%, 1.10%and 1.08% for 2006, 2005, and 2004, respectively.  Earnings per share increasedto $2.52 for the year ended December 31, 2006 from $2.38 per share in 2005. Growth in earnings is primarily a result of 4.8 percent growth in averageearning assets, higher interest rate environment in 2006 compared to 2005, andreduced provision for loan losses in 2006 compared to 2005.

The dividend payout ratio in 2006 was 47.06% and thedividend yield of 3.61% continues to exceed peer group banks in the Southeastregion.  Our goal continues to be providing shareholder returns that exceedpeer group banks and is achieved by focusing efforts on deploying capitalresources in a manner that supports long-term shareholder value.  Investmentsin more metropolitan Southwest Tennessee markets afforded the companyopportunities to expand the customer base and extend First Citizens' brandoutside Northwest Tennessee.  This prudent utilization of capital will supportfuture growth and development of both assets and earnings.  

Growth in net interest margins has become increasinglydifficult to achieve for many financial institutions including First Citizens. The trend of slowing growth in net interest margins has taken place overseveral years but is anticipated to be long term.  Margins have been compressedthe past few quarters by various factors including slower loan growth, invertedposition of the bond yield curve, and recent deposit trends.  Slow loan growthhas resulted in loans being priced more competitively which result in smallermargins.  Costs of funding have increased more rapidly than interest income onloans and investments as pricing on time deposits and certain interest bearingdeposit products have been increased to keep pace with competition in thecurrent market environment.  Interest rate risk position for the Company isnear neutral which also contributes to flat net interest margins.  Additionalinformation is noted in Liquidity and Interest Rate Sensitivity sectionincluded in Item 7A of this report.  

As evidenced in the cash flow statements, Bancshares continuesto deploy capital for purchases of premises and equipment totaling $2.7million, $5.9 million and $3.5 million in 2006, 2005 and 2004, respectively.  Opportunity cost on the 2006 purchases is approximately $193 thousand based on the averageyield on earning assets of 7.14 percent, as the funds likely would have beeninvested in loans or investments if fixed assets were not purchased.  Over thepast four years, four new branches have been constructed.  In 2006, three ofthe four, Martin, Arlington and Oakland, operated at a profit.  The fourth,Collierville, is expected to become profitable during first quarter 2007.  Alsoin 2006, the Company converted its annex building to the main headquarters intoa new Operations Center at a cost of approximately $2 million.  The Operations Center provides a means for an expedited workflow, improved operationalorganization as well as improved protection and uninterrupted power in case ofa natural disaster.  Increased capacity and efficiencies of the Operations C  enter will support First Citizens' expansion efforts into two new markets in2007.  

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

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

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

Fair value of the only derivativeheld by the company is determined using a combination of quoted market ratesfor similar instruments and quantitative models based on market 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 the cash flow hedge. 

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

**Goodwill**

The Company's policy is to reviewgoodwill for impairment at the reporting unit level on an annual basis unlessan event occurs that could potentially impair the goodwill amount.  Goodwillrepresents the excess of the cost of an acquired entity over fair valueassigned to assets and liabilities.  Management believes accounting estimatesassociated with determining fair value, as part of the goodwill test is acritical accounting estimate because estimates and assumptions are made basedon prevailing market factors, historical earnings and multiples and othercontingencies.  See also the Goodwill footnote in the Company's  ConsolidatedFinancial Statements included in Item 8 of this report for additional policyinformation.
RECENTLY ISSUED ACCOUNTING STANDARDSAccounting for Certain Hybrid Financial Instruments-an amendment of FASBStatements No. 133 and 140
In February 2006, FinancialAccount Standards Board (FASB) issued Statement of Financial AccountingStandard No. 155-Accounting for Certain Hybrid Financial Instruments-anamendment of FASB Statements No. 133 and 140 (SFAS 155). SFAS 155 amends FASBStatements No. 133, Accounting for Derivative Instruments and HedgingActivities, and No. 140, Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities. The purpose of this statement is toresolve issues addressed in Statement 133 Implementation Issue No. D1,"Application of Statement 133 to Beneficial Interests in Securitized FinancialAssets."  The statement becomes effective at the beginning of the first fiscalyear that begins after September 15, 2006.  Adoption of this statement has nomaterial impact on Bancshares' consolidated financial statements.

-11-
Accounting for Servicing of Financial Assets
In March 2006, FASB issued SFAS156 Accounting for Servicing of Financial Assets-an amendment of FASB StatementNo. 140.  SFAS 156 provides guidance for the accounting of separatelyrecognized servicing assets and servicing liabilities.  The statement becomeseffective at the beginning of the first fiscal year that begins after September15, 2006.  Adoption of this statement has no material impact on Bancshares'consolidated financial statements.

**Accounting for Uncertainty in Income Taxes **

In July 2006, Interpretation No.48, "Accounting for Uncertainty in Income Taxes-an interpretation of FASBStatement No. 109" (FIN 48) was issued.  This interpretation was issued toclarify accounting for uncertainty in tax positions recognized in financialstatements.  FIN 48 provides guidance for financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on the classification and disclosure of uncertaintax positions in financial statements.  Adoption of FIN 48 requires acumulative effect adjustment to the opening balance sheet of retained earningsfor any difference between the net amounts of assets and liabilities previouslyrecognized and those determined under the new guidance for all open taxpositions. FIN 48 also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosures andtransitions.  FIN 48 is effective for fiscal years beginning after December 15,2006.  Adoption of this statement has no material impact on Bancshares'consolidated financial statements.

 

**Fair Value Measurements**

In September 2006, FASB issuedStatement of Financial Accounting Standards No. 157, "Fair Value Measurements"(SFAS 157).  SFAS 157 defines fair value, establishes a framework for measuringfair value in generally accepted accounting principles and expands disclosuresabout fair value measurements.  This statement was issued to address the needfor increased consistency and comparability in fair value measurements and forexpanded disclosures about fair value measurements.  The statement emphasizesthat fair value measurement should be determined based on assumptions thatmarket participants would use in pricing the asset or liability.  Also, SFAS157 establishes a fair value hierarchy that prioritizes information used todevelop those assumptions.  SFAS is effective for fiscal years beginning afterNovember 15, 2007.  Adoption of this statement is not expected to materiallyimpact Bancshares' consolidated financial statements.

**Employers' Accountingfor Defined Benefit Pension and Other Postretirement Plans**

 

In September 2006, FASB issued Statementof Financial Accounting Standards No. 158, "Employers' Accounting for DefinedBenefit Pension and Other Postretirement Plans an amendment of FASB StatementsNo. 87, 88, 106 and 132(R)" (SFAS 158).  This standard requires employers torecognize the underfunded or overfunded status of a defined benefitpostretirement plan as an asset or liability in its statement of financialposition and to recognize changes in the funded status in the year in which thechanges occur through accumulated other comprehensive income. Additionally,SFAS No. 158 requires employers to measure the funded status of a plan as ofthe date of its year-end statement of financial position.  The new reportingand related disclosure requirement rules in SFAS 158 are effective for fiscalyears ending after December 15, 2006.  The new measurement date requirementsapply to fiscal years ending after December 15, 2008.  Adoption of thisstatement has no material impact on Bancshares' consolidated financialstatements.

 

**Considering the Effectsof Prior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements**

In September 2006, the U. S.Securities and Exchange Commission (SEC) staff issued Staff Accounting BulletinNo. 108, "Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements" (SAB 108).  This bulletinis issued to address diversity in practice in quantifying financial statementmisstatements and the potential under current practice for the build up ofimproper amounts on the balance sheet.  SAB 108 requires an analysis ofmisstatements using both an income statement (rollover) approach and a balancesheet (iron curtain) approach in assessing materiality and provides guidancefor correcting errors under this dual perspective.  SAB 108 must be applied toannual financial statements for the first fiscal year ending after November 15,2006.  Adoption of this statement has no material impact on Bancshares'consolidated financial statements.

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

In September 2006, FASB ratifiedEmerging Issues Task Force (EITF) Issue No. 06-4, "Accounting for DeferredCompensation and Postretirement Benefit Aspects of Endorsement Split-DollarLife Insurance Arrangements" (EITF 06-4).  EITF 06-4 addresses accounting forsplit-dollar life insurance arrangements after the employer purchases a lifeinsurance policy on the covered employee.  This EITF states that an obligationarises as a result of a substantive agreement with an employee to providefuture postretirement benefits.  Under this issue, the obligation is notsettled upon entering into an insurance arrangement. Since the obligation is notsettled, a liability should be recognized in accordance with applicableauthoritative guidance.  EITF 06-4 is effective for fiscal years beginningafter December 15, 2007.  The adoption of EITF 06-4 is not expected to have amaterial impact on Bancshares' consolidated financial statements.
Accounting for Purchases of Life Insurance
In September 2006, FASB ratifiedEITF 06-5, "Accounting for Purchases of Life Insurance-Determining the Amountthat Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, *Accountingfor Purchases of Life Insurance."*  This issue addresses determination ofthe amount that could be realized under the insurance contract at the balancesheet date in applying FTB 85-4 and if the determination should be on anindividual or group policy basis.  EITF 06-5 is effective for fiscal yearsbeginning after December 15, 2006.  The adoption of EITF 06-5 is not expectedto have a material impact on Bancshares' consolidated financial statements.
The Fair Value Option for Financial Assets and Financial Liabilities
In February 2007, FASB issuedSFAS No. 159 "The Fair Value Option for Financial Assets and FinancialLiabilities" to permit entities to choose to measure certain financialinstruments at fair value.  This statement is expected to expand the use offair value measurement with the intent to improve financial reporting byproviding entities with the opportunity to mitigate volatility in reportedearnings caused by measuring related assets and liabilities differently withouthaving to apply complex hedge accounting provisions. SFAS No. 159 is effectiveas of the beginning of an entity's first fiscal year that begins after November15, 2007. Early adoption is permitted as of the beginning of a fiscal year thatbegins on or before November 15, 2007, provided the entity also elects to applythe provisions of FASB Statement No. 157, Fair Value Measurements.  Bancsharesis currently evaluating the impact of SFAS 159 but does not anticipate amaterial effect on consolidated financial statements.

-12-
RESULTS OF OPERATIONS
Bancshares reports consolidatednet income of $9.16 million for the year ended December 31, 2006 compared to$8.67 million in 2005 and $8.0 million in 2004.  Earnings per share increasedto $2.52 per share for 2006 compared to $2.38 per share for 2005 and $2.20 pershare in 2004. Return on average assets was 1.10%, 1.10%, and 1.08% for theyears ending December 31, 2006, 2005 and 2004, respectively.  Return on averageequity is 13.88%, 13.71%, and 13.56% for 2006, 2005 and 2004, respectively. Increased earnings and return on average equity in 2006 are the result ofmodest balance sheet growth and reduced provision for loan losses.

Balance sheet growth of less than2 percent in 2006 was unusually slow compared to historical trends in the rangeof 6%-8% annually.  Also unusual compared to prior years, investments growth of$16 million or 10% outpaced loan growth at $2 million or less than onepercent.  Overall, balance sheet growth was diluted by slow loan growth in thesecond half of 2006 coupled with a reduction in borrowings from the FederalHome Loan Bank (FHLB).   Loan growth was moderate at approximately 5% fromDecember 31, 2005 to June 30, 2006 primarily as a result of advances onagricultural production lines as well as advances on construction loans.  Assuch lines were reduced in third and fourth quarters 2006, annual loan growthfor 2006 slowed to less than one percent.  As slow loan demand and the invertedyield curve exerted pressures on net interest margins, borrowings from FHLBwere reduced by $17.5 million.  

Asset quality is consideredstrong despite unfavorable trends in non-performing assets and net charge-offsin 2006 compared to 2005.  Non-performing loans and other real estate as apercent of total loans plus other real estate at December 31, 2006 were 0.57%compared to 0.38% at December 31, 2005 and peer at 0.71% as reported in theDecember 31, 2006 Uniform Bank Performance Report for Bancshares' subsidiarybank.  Net charge-offs in 2006 were $1.3 million compared to $468 thousand in2005.  The allowance for loan loss reserve as a percent of non-performingassets was 198.37%, 327.74%, 229.54%, 316.97%, and 99.21% for the years 2006,2005, 2004, 2003, and 2002, respectively.  Other Real Estate Owned increasedfrom $129 thousand to $1.8 million.  Increases in loan losses and other realestate owned are primarily driven by two problem credits which are consideredisolated incidents and not representative of trends inherent in the entireportfolio.  

Although an increase in otherreal estate and net charge-offs was experienced in 2006, provision for loanlosses was reduced in 2006 as the reserve balance was considered adequatewithout additional provision.  Additions made to the reserve account, as apercent of net charge offs for 2006 was 44.41% compared to 167.56% in 2005. The reserve for potential loan losses as a percent of total portfolio ended theyear at 1.13% which is slightly below the range of 1.15% to 1.25% maintainedthe last five years.  Allowance for loan losses as a percent of loans for peeris 1.20% per the most recent Uniform Bank Performance Report and is consistentwith the peer average range over the last five years of 1.20% to 1.30%.  Seeadditional information regarding the allowance for loan losses in LoanPortfolio Analysis below and in Note 1 to the Consolidated Financial Statementsincluded in Item 8 of this report.

The accompanying Summary AverageBalance Sheet and Net Interest Income Schedule indicate a slight decline in netyield on average earning assets at 3.89% for year 2006 compared to 3.92% for2005.  This is primarily due to the fairly neutral position of the balancesheet in terms of interest rate risk.  Thus, increases in yields oninterest-earning assets were outpaced by increases in the costs ofinterest-bearing liabilities during 2006 primarily due to growth in timedeposits.  First Citizens along with other financial institutions continued tobattle net interest margins compressed by an inverted yield curve in 2006.  Theinverted yield curve coupled with slower loan demand during the second half of2006 contributed to the decline in net interest margin.  Slow loan demand hasresults in more competitive pricing which also contributes to marginpressures.  See Item 7A of this report for additional information regardinginterest rate risk and market sensitivity.  

Although the inverted yield curvecompressed net interest margin, stability in low long-term mortgage ratespositively impacts loan fee income from secondary mortgage activity.  Althoughsome urban markets began seeing declines in 2006, markets served by FirstCitizens continued to deliver strong mortgage activity.  Gross income and feesrecorded from this activity totaled $1.2 million in 2006, $1.2 million in 2005 and$1.0 million in 2004.  As long-term mortgage rates remain reasonable andmarkets appear stable, mortgage income trends are expected to continue in 2007.

The effective tax rate is 24% in2006 compared to 26% and 28% in 2005 and 2004, respectively.  The effective taxrate and changes therein are impacted by fluctuations in certain factors,including but not limited to the level of tax-free investments within ourinvestment portfolio, tax-exempt earnings on bank owned life insurancepolicies, certain tax benefits which result from ESOP dividends and payouts,and other factors incidental to the financial services business.  Increaseddeduction related to the ESOP dividends and payouts and tax-exempt interestearned in the investment portfolio are the largest contributors to the decreasein effective rate for the current year.

-13-

Interest-earning assets in 2006averaged $742 million at an average rate of 7.14% compared to $709 million atan average rate of 6.42% in 2005, and $675 million at an average rate of 5.89%in 2004.  Interest bearing liabilities at year end averaged $670 million at acost of 3.60% compared to $645 million at a cost of 2.74% in 2005, and $610million at a rate of 2.19% in 2004.  The following presents the year-to-datedaily average balance sheet and net interest income analysis (in thousands):
SUMMARY - AVERAGE BALANCE SHEET AND NET INTEREST INCOME ANALYSIS
** **

**2006**

** **

 

2005

 

2004

**Average**

** **

**Average**

Average

Average 

Average

Average 

**Balance**

**Interest**

**Rate**

Balance

Interest

Rate

Balance

Interest

Rate

**ASSETS**

** **

** **

** **

Interest Earning

** **

** **

** **

 Assets:

** **

** **

** **

     Loans (1) (2) (3)

 $

557,088  

 $

43,557  

**7.82 %**

 $

538,789  

 $

37,991  

7.05 %

 $

513,678  

 $

33,302  

6.48 %

     Investment Securities:

** **

        Taxable

128,205  

6,078  

**4.74 %**

117,487  

4,704  

4.00 %

117,835  

4,169  

3.54 %

        Tax  Exempt (4)

43,135  

2,738  

**6.35 %**

40,567  

2,512  

6.19 %

38,064  

2,226  

5.85 %

     Interest Earning

** **

        Deposits

703  

37  

**5.26 %**

711  

20  

2.81 %

732  

3  

0.41 %

     Federal Funds Sold

13,586  

633  

**4.66 %**

11,134  

241  

2.16 %

5,041  

74  

1.47 %

**Total Interest**

** **

**  Earning Assets**

 $

742,717  

 $

53,043  

**7.14 %**

 $

708,688  

 $

45,468  

6.42 %

 $

675,350  

 $

39,774  

5.89 %

** **

** **

** **

Non-Interest Earning  

** **

** **

** **

   Assets:

** **

** **

** **

     Cash and Due From Banks

**16,043 **

** **

** **

18,619  

15,835  

     Property and Equipment

**28,554 **

** **

** **

25,817  

22,293  

     Other Assets

**44,119 **

** **

** **

36,281  

33,332  

**         Total Assets**

** $**

**831,433 **

** **

** **

 $

789,405  

 $

746,810  

-14-

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

** **

** **

** **

 

 

 

 

** **

**2006**

** **

 

2005

 

2004

**Average**

** **

**Average**

Average

Average 

Average

Average 

**Balance**

**Interest**

**Rate**

Balance

Interest

Rate

Balance

Interest

Rate

** **

** **

** **

**LIABILITIES AND**

** **

** **

** **

**  SHAREHOLDERS' EQUITY:**

** **

** **

** **

   Interest Bearing  Liabilities:

** **

** **

** **

      Savings Deposit

** $**

**197,115 **

** $**

**3,264 **

**1.66 %**

 $

190,106  

 $

2,242  

1.18 %

 $

181,164  

 $

1,288  

0.71%

      Time Deposits

**365,839 **

**15,568 **

**4.26 %**

331,973  

10,246  

3.09 %

311,671  

7,348  

2.36%

      Federal Funds  Purchased

** **

** **

** **

          And Other Interest

** **

** **

** **

          Bearing  Liabilities

**107,238 **

**5,310 **

**4.95 %**

122,754  

5,204  

4.24 %

117,316  

4,713  

4.02%

**              Total  Interest Bearing**

** **

** **

** **

**                   Liabilities**

** $**

**670,192 **

** $**

**24,142 **

**3.60 %**

 $

644,833  

 $

17,692  

2.74 %

 $

610,151  

 $

13,349  

2.19%

** **

** **

** **

** **

** **

** **

Non-Interest Bearing  Liabilities:

** **

** **

** **

     Demand Deposits

**90,360 **

** **

** **

78,586  

72,272  

     Other Liabilities

**4,911 **

** **

** **

2,788  

5,036  

         Total Liabilities

** $**

**765,463 **

** **

** **

 $

726,207  

 $

687,459  

**SHAREHOLDER'S EQUITY**

** $**

**65,970 **

** **

** **

 $

63,198  

 $

59,351  

** **

** **

** **

**TOTAL LIABILITIES AND**

** **

** **

** **

**  SHAREHOLDER'S EQUITY**

** $**

**831,433 **

** **

** **

 $

789,405  

 $

746,810  

** **

** **

** **

**NET INTEREST INCOME**

** **

** $**

**28,901 **

** **

 $

27,776  

 $

26,425  

 
** **

** **

** **

** **

**NET YIELD ON AVERAGE**

** **

** **

** **

**  EARNING ASSETS**

** **

** **

**3.89  %**

3.92  %

3.91 %

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

(2)           Fee Income isincluded in interest income and the computations of the yield on loans. 

(3)           Includes loans onnon-accrual status.

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

-15-

VOLUME/RATE ANALYSIS

The following table is ananalysis of the impact of the changes in balances and rates on interest incomeand interest expense changes from 2006 to 2005 as well as from 2005 to 2004:

**2006 to 2005**

** **

** **

**2005 to 2004**

**Due to Changes in:**

** **

** **

** **

**Due to Changes  in:**

** **

** **

** **

** **

**Total**

** **

** **

** **

** **

** **

**Total**

**Average**

** **

**Average**

** **

**Increase**

** **

**Average**

** **

**Average**

** **

**Increase**

**Volume**

** **

**Rate**

** **

**(Decrease)**

** **

**Volume**

** **

**Rate**

** **

**(Decrease)**

Interest Earned On:

** **

** **

** **

** **

** **

** **

** **

** **

** **

Loans

 $

1,431   

 $

4,135   

 $

5,566   

 $

1,771   

 $

2,918   

 $

4,689   

Taxable Investments

508   

866   

1,374   

(14)

549   

535   

Tax Exempt Investment

 Securities

163   

63   

226   

155   

131   

286   

Interest Bearing

 Deposits With Other

 Banks

-   

17   

17   

(1)

18   

17   

Federal Funds Sold and

 Securities Purchased

 Under Agreements to Resell

114   

278   

392   

132   

35   

167   

Lease Financing

TOTAL INTEREST EARNING

 ASSETS

 $

2,216   

 $

5,359   

 $

7,575   

 $

2,043   

 $

3,651   

 $

5,694   

Interest Expense On:

 Savings Deposits

116   

906   

1,022   

105   

849   

954   

 Time Deposits

1,441   

3,881   

5,322   

627   

2,271   

2,898   

 Federal Funds Purchased

     and Securities Sold Under

     Agreements to Repurchase

(768)

874   

106   

231   

260   

491   

TOTAL INTEREST EARNING

 LIABILITIES

789   

5,661   

6,450   

963   

3,380   

4,343   

NET INTEREST EARNINGS

 $

1,427   

 $

(302)

 $

1,125   

 $

1,080   

 $

271   

 $

1,351   

NON-INTEREST INCOME

The following table comparesnon-interest income for the years ended December 31, 2006, 2005 and 2004:

** **

**Increase**

** **

** **

**Increase**

** **

** **

**Total**

**(Decrease)**

** **

**Total**

**(Decrease)**

** **

**Total**

**2006**

**Amount**

**Percentage**

**2005**

**Amount**

**Percentage**

**2004**

Services Charges on

   Deposit Accounts

 $

6,059   

 $

107   

1.80 %

 $

5,952   

 $

393   

7.07 %

 $

5,559   

 Trust Fees

940   

(23)

-2.39 %

963   

17   

1.80 %

946   

 Brokerage

1,357   

50   

3.83 %

1,307   

147   

12.67 %

1,160   

Earnings on Bank Owned

   Life Insurance Policies

681   

(233)

-25.49 %

914   

471   

106.32 %

443   

 Other

1,611   

(97)

-5.68 %

1,708   

422   

32.81 %

1,286   

Total Non-Interest Income

 $

10,648   

 $

(196)

-1.81 %

 $

10,844   

 $

1,450   

15.44 %

 $

9,394   

-16-

Non-interest income decreased$196 thousand in 2006 primarily due to decreased earnings on bank owned lifeinsurance (BOLI).  The decrease in earnings on BOLI is due to non-recurringincome earned in 2005 of approximately $260 thousand from a death benefitreceived on a policy inherited through a prior bank acquisition.  In year 2006,non-interest income (fee income) contributed 17.0% of total revenue compared to19.5% and 19.4% for the same periods in 2005 and 2004, respectively.  Overdraftfees are the largest component of service charges on deposit accounts andincreased approximately 2% in 2006.  Brokerage fees increased as a result offurther development of brokerage services in our newer markets.

Income from First Citizens/Whiteand Associates Insurance Company, LLC is included in other non-interestincome.   In 2004, this subsidiary brought suit to protect certain rights andearnings in 2004 were down due to related legal fees incurred.  Settlementof the subsidiary's litigation occurred early in 2005 in favor of thesubsidiary and First Citizens' portion of the gain of approximately $150,000was recorded in first quarter of 2005.  The settlement of the suit along withan overall increase in revenue from the company contributed approximately $400thousand of the overall positive variance in non-interest income from 2004 to2005.  Income from this subsidiary decreased $56 thousand in 2006 compared to2005 primarily due to the non-recurring income from the litigation settlementin 2005.  Bancshares' portion of other non-interest income generated by FirstCitizens/White and Associates Insurance Company, LLC for the years ending 2006,2005, and 2004 totaled $653,000, $709,000, and $315,000, respectively.   

NON-INTEREST EXPENSE

The following table comparesnon-interest expense for the years ended December 31, 2006, 2005 and 2004 (inthousands):

** **

** **

**Increase**

** **

** **

** **

** **

** **

**Increase**

** **

** **

** **

** **

**Total**

** **

**(Decrease)**

** **

** **

** **

**Total**

** **

**(Decrease)**

** **

** **

** **

**Total**

**2006**

** **

**Amount**

** **

**Percentage**

** **

**2005**

** **

**Amount**

** **

**Percentage**

** **

**2004**

Salaries & Employee

   Benefits

 $

15,074   

 $

568   

3.92 %

 $

14,506   

 $

1,176   

8.82 %

 $

13,330   

Occupancy Expense

4,503   

216   

5.04 %

4,287   

384   

9.84 %

3,903   

Other Operating Expense

6,351   

189   

3.07 %

6,162   

560   

10.00 %

5,602   

Total Non-Interest Expense

 $

25,928   

 $

973   

3.90 %

 $

24,955   

 $

2,120   

9.28 %

 $

22,835   

The non-interest expense categoryis dominated by salaries and benefits expense and comprises 58 percent of thetotal in 2006, and 58 and 56 percent in years 2005 and 2004, respectively.  Employeesreceive performance-based incentives based on factors including achievement ofa certain Return on Equity level (calculated excluding incentives at theholding company level), accomplishing annual budget goals and attaining orexceeding business development goals.  Incentive pay totaled 10.95% of salariesand benefits compared to 11.89% in 2005 and 11.24% in 2004.  The significantexpense associated with salaries and benefits is consistent with Bancshares'strategic plan to hire and retain high quality employees to provide outstandingcustomer service and strive for exceptional shareholder returns.  

The efficiency ratio is ameasurement of non-interest expense as a percentage of total revenue.  Acomparison of the efficiency ratio for the years 2006, 2005 and 2004 reflectsratios of 65.44%, 64.62% and 65.46%, respectively.  

The following table comparesassets per employee (in thousands) for Bancshares compared to peer.  Peerinformation is obtained from Uniform Bank Performance Reports (UBPR) for theperiods noted.

** **

**Assets Per  Employee**

**Assets Per  Employee**

**December 31**

**FCNB**

** Peer Groups**

2006

 $

3,121 

 $

3,940 

2005

 $

2,967 

 $

3,860 

2004

 $

2,903 

 $

3,700 

2003

 $

2,916 

 $

3,540 

2002

 $

2,712 

 $

3,400 

Comparison of assets per employeefor the Company compared to its peers reveals that the Company is more heavilystaffed than its counterparts.  This is primarily a result of the growththrough acquisitions and new branches that has occurred over the past fiveyears.  New branches have an inefficient assets-per-employee ratio and thus,dilute the total assets per employee ratio as compared to peer.  As expected,this comparison improved during 2006, as no new branches or loan productionoffices were added during the year.  As the company expands into two newmarkets in 2007, assets per employee for our company will likely continue to beless than peer.  Our commitment to the highest level of customer service mayalso cause the Company to continue at a level below peer due to staff requiredto provide exceptional level of customer service supported by our strategicobjectives.  

-17-

Increased occupancy expense is aresult of increased depreciation and technology expenses compared to prioryears due to depreciation of fixed assets related to the newer branches as wellas the new operations center.  While efforts are made to ensure efficiencies inthese areas, the expansion, data integrity/security and customer servicestrategies adopted by the board will continue to exert pressure on occupancyand depreciation expense we continue to expand into new markets.  

Other operating expenses for 2006increased approximately 3% and 10% in 2006 and 2005, respectively, primarilydue to the digestion of newer branches and as a result of increasing regulatoryburdens associated with Sarbanes-Oxley and Bancshares becoming an acceleratedfiler with the SEC during 2005.  Implementation costs for this act wereapproximately $200,000 for the year ended December 31, 2005 and include increasedaudit fees, fees paid to directors serving on a newly appointed CorporateGovernance Committee, additional personnel costs, consulting and technologycosts.  Advertising costs increased $197 thousand in 2005 as a result ofefforts to improve brand recognition of First Citizens in newer markets. Advertising costs continued at a level comparable to 2005 with a modestincrease of $13 thousand as First Citizens continued efforts to increase brandawareness with a focus on promoting and providing exceptional customerexperiences.  

No impairment of goodwill hasbeen recognized since the adoption of SFAS 142 in 2002.  Goodwill is 1.45% oftotal assets and 18.58% of total capital as of December 31, 2006. 

INVESTMENT SECURITIES ANALYSIS

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

**December 31,**

**2006**

 

**2005**

** **

**2004**

** **

**2003**

** **

**2002**

U. S. Treasury & Government Agencies

 $

127,602   

 $

112,803   

 $

101,105   

 $

102,117   

 $

101,415   

State & Political Subdivisions

44,338   

41,776   

39,352   

38,719   

35,906   

All Others

5,436   

6,589   

6,680   

8,844   

5,551   

     Total Investment Securities

 $

177,376   

 $

161,168   

 $

147,137   

 $

149,680   

 $

142,872   

MATURITY AND YIELD ON SECURITIES- DECEMBER 31, 2006

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

Maturing 

Maturing 

Maturing 

After One 

After Five 

Maturing 

Within One

Year Within 

Years Within

After Ten

Year

Five Years

Ten Years

Years

Amount

 

Yield

 

Amount

 

Yield

 

Amount

 

Yield

 

Amount

 

Yield

 

Total

U. S. Treasury and

 Government Agencies

 $

9,312   

4.32 %

 $

40,892   

5.92 %

 $

22,016   

4.60 %

 $

55,382   

5.73 %

 $

127,602   

State and Political

 Subdivisions*

1,456   

5.79 %

8,439   

5.38 %

13,250   

7.22 %

21,483   

6.91 %

44,628   

All Others

-   

0.00 %

1,007   

6.67 %

-   

4,087   

8.10 %

5,094   

 Total Debt Securities

 $

10,768   

 $

50,338   

 $

35,266   

 $

80,952   

 $

177,324   

Equity Securities

 $

52   

     Total  

 $

177,376   

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

HELD TO MATURITY & AVAILABLEFOR SALE SECURITIES - DECEMBER 31, 2006

Held to Maturity

 

Available for Sale

Amortized 

Fair 

Amortized 

Fair 

Cost

 

Value

 

Cost 

 

Value

U. S. Treasury Securities

 $

-   

 $

-   

 $

1,803   

 $

1,793   

U. S. Government Agencies and Corporation Obligations

-   

-   

127,423   

125,809   

Securities Issued by States and Political Subdivisions in

   the United States :

     Taxable Securities

-   

-   

-   

-   

     Tax-exempt Securities

290   

291   

42,666   

44,338   

U. S. Securities:

 Other Debt Securities

-   

-   

4,906   

5,094   

 Equity Securities

-   

10   

52   

           Total

 $

290   

 $

291   

 $

176,808   

 $

177,086   

In addition to amounts presented above, the Bank also has$5.5 million in Federal Home Loan Bank and Federal Reserve Bank stock, recordedat cost.  FHLB and FRB stocks are listed as a separate line item on theConsolidated Balance Sheets included in Item 8 of this report.

-18-

Investments increasedapproximately $16 million or 10% in 2006 during a period of slow loan growth. Purchases in 2006 were accretive to overall yields on investments.  Objectivesof investment portfolio management are to provide safety of principal, adequateliquidity, insulate GAAP capital against excessive changes in market value,insulate earnings from excessive change, and optimize investment performance. Investments also serve as collateral for government, public funds, and largedeposit accounts that exceed Federal Deposit Insured limits.  Pledgedinvestments at year-end 2006 had a fair market value of $122 million.  Totalheld-to-maturity and available-for-sale investments at December 31, 2006, 2005,and 2004 were $177 million, $161 million, and $147 million, respectively.  Theaverage expected life is 4.4 years, 4.6 years, and 4.2 years, for 2006, 2005,and 2004, respectively.  Portfolio yields steadily improved over the past threeyears.  Tax equivalent yield on investment securities in 2006 improved to 5.21percent from 4.57 percent in 2005.

The company classifiesinvestments by intent into trading, available-for-sale and held-to-maturitycategories in accordance with generally accepted accounting principles.  Thecompany held no securities in the trading category for any period presented in thisreport and does not expect to in 2007.  Bancshares' investment strategy is toclassify most of the portfolio as available-for-sale, which are carried on thebalance sheet at fair market value.  Classification of available-for-saleinvestments allows flexibility to actively manage the portfolio under variousmarket conditions.  U. S. Treasuries and Agencies (including mortgage-backedsecurities) account for 72 percent and 70 percent of the investment portfolioas of year end 2006 and 2005, respectively.  Mortgage related investmentscomprise the largest percentage of U. S. Treasuries and Agencies category andaccount for approximately 45 percent and 40 percent of total portfolio as ofyear-end 2006 and 2005, respectively.  Statements of Cash Flows included inItem 8 of this report reflect reduced cash flows in 2006 as a result of thecurrent rate environment and the company's strategy over the past 12 months toextend portfolio duration.  Cash flows for 2007 are projected to beapproximately $25 million.  Bancshares continues to pursue strategies thatprovide a balance between steady cash flows and maintaining or improvingcurrent yields.  

Also purchased were certainderivative financial instruments as described in Note 3 of the ConsolidatedFinancial Statements, primarily to hedge interest rate fluctuations.

The following table indicates bycategory unrealized gains and losses within the available-for-sale portfolio asof December 31, 2006 (in thousands):

Unrealized 

Gains

 

Losses

 

Net

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

 Government Agencies and Corporations

 $

280   

 $

(1,903)

 $

(1,623)

Obligations of States and Political Subdivisions

1,792   

(121)

1,671   

All Others

230   

-   

230   

     Total

 $

2,302   

 $

(2,024)

 $

278   

LOAN PORTFOLIO ANALYSIS

The following compares the loanportfolio mix as of year-end for the last five years:

December 31,

2006

 

2005

 

2004

 

2003

 

2002

 

Real Estate Loans:

   Construction

 $

86,206   

 $

74,817   

 $

99,028   

 $

71,599   

 $

57,758   

   Mortgage*

 $

344,288   

 $

355,792   

 $

321,957   

 $

305,077   

 $

285,759   

Commercial, Financial and  

 Agricultural Loans

 $

80,033   

 $

78,086   

 $

72,330   

 $

70,658   

 $

67,732   

Installment Loans to  

 Individuals

 $

36,735   

 $

37,761   

 $

38,550   

 $

37,401   

 $

39,089   

Other Loans

 $

5,021   

 $

3,804   

 $

4,147   

 $

3,372   

 $

3,142   

 Total Loans

 $

552,283   

 $

550,260   

 $

536,012   

 $

488,107   

 $

453,480   

*Includes mortgage loans to besold in secondary market.  Secondary market mortgages total $3.4 million, $3.0million, $1.3 million, $2.4 million, and $5.9 million for 2006, 2005, 2004,2003, and 2002, respectively.

CHANGES IN LOAN CATEGORIES

Loan growth slowed to less than1% for the year ended December 31, 2006.  The following details the breakdownof that growth by category for 2006 (in thousands):

Increase

Percent

 

(Decrease)

 

Change

 

Real Estate Loans:

 Construction

 $

11,389   

15.22 %

 Mortgage

 $

(11,504)

-3.23 %

Commercial, Financial

 and Agricultural

 $

1,947   

2.49 %

Installment Loans to Individuals

 $

(1,026)

-2.72 %

Other Loans

 $

1,217   

31.99 %

     Total Loans

 $

2,023   

0.37 %

Total loans at December 31, 2006were $552 million compared to $550 million at December 31, 2005 and $536million at December 31, 2004.  Loans for this discussion include loans that aresold in the secondary mortgage market.  Loans to be sold in the secondary mortgagemarket are separately classified in the Consolidated Financial Statementsincluded in Item 8 of this report.  Secondary market mortgages total $3.4million, $3.0 million, $1.3 million, $2.4 million, and $5.9 million for 2006,2005, 2004, 2003, and 2002, respectively.  See also Notes 4, 5 and 6 of theConsolidated Financial Statements included in Item 8 of this report.  Interestand fees earned on secondary mortgage loans are included in interest and feeson loans as discussed in this report.  

Overall, loan growth in 2006flattened to less than 1%.  The slowdown is primarily due to flat overallcommercial real estate growth in mature markets served by First Citizens. Construction and permanent financing of one to four family residential loansand developments has been the focus of the bank's marketing program over thepast two years with residential loan rates at the lowest point in many years. Loan growth in 2005 and 2004 was 2.65% and 9.81%, respectively.  Weaker loangrowth in 2005 and 2006 can be attributed to the slowing economy and atightening in consumer credit underwriting standards.  

In spite of economic conditions,overall loan portfolio quality remains high with approximately $431 million or78 percent of total portfolio volume recorded in real estate loans; $80 millionor 14 percent in Commercial and Agricultural loans and $37 million or 7 percentof total portfolio in installment loans to consumers.  Agricultural lines haveperformed well over the last few years due to positive trends in crop yieldsand prices.  Volume of agricultural loans is (and is expected to be goingforward) negatively impacted, as agricultural producers have been able toreduce their debt levels.  

-19-

Portfolio quality remains strongwith the ratio of net charge offs to average net loans outstanding for theyears of 2006, 2005, and 2004 at 0.23%, 0.09%, and 0.16%, respectively.  Nonperforming assets as a percent of total loans plus foreclosed property atcurrent year end represent 0.57% compared to 0.38% and 0.51% at year end 2005and 2004, respectively.  A very small volume of significant balance loansaccount for the increase in net charge offs and increase in other real estateowned.  A negative trend in problem credits and charge offs was expected givenindustry historical trends during rising rate environment.  However, strongcredit risk management provides a means for timely identification andassessment of problem credits in order to minimize losses.  Negative trends inproblem credits are not expected to increase materially.  The loan loss reserveas a percent of loans is 1.13% slightly below the 1.15-1.25 percent rangemaintained over the past five years.  Overall, loan demand over the next twelvemonths is expected to grow approximately 5 percent based on expansion into newmarkets, expected economic conditions of markets served and growth of thecustomer base in existing markets.  

Unemployment rates serve as onemeasurement tool to evaluate the stability and condition of local economies ofour markets.  No significant negative trends were noted over the last 12 monthsor are expected in the near term.  Unemployment rates for year-end 2006, 2005and 2004 in Tennessee counties served during 2006 are as follows:

2006

2005

2004

Dyer 

4.9 %

5.6 %

5.8 %

Fayette

8.4 %

8.6 %

12.0 %

Lauderdale

6.5 %

7.8 %

10.0 %

Obion

5.2 %

5.3 %

5.9 %

Shelby

5.0 %

5.6 %

6.2 %

Tipton

4.9 %

5.3 %

6.5 %

Weakley

5.1 %

5.5 %

5.5 %

Unemployment rates for the stateof Tennessee as of the end of each quarter of 2006 were 5.4%, 5.6%, 4.6%, and4.7%, consecutively.

The following data details theinternally classified loans by category as of December 31, 2006 (in thousands):

Category

Total

Internally

Problem Loans %

Outstanding

Classified

of Category

Residential Real Estate

 $

191,832   

 $

4,665   

2.43 %

Home Equity Lines

21,615   

143   

0.66 %

Ag. Real Estate

29,728   

148   

0.50 %

Commercial Real Estate

167,200   

5,179   

3.10 %

Commercial Other

51,845   

423   

0.82 %

Installment Loans

35,463   

170   

0.48 %

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

Real estate loans account for approximately78% of the total loan portfolio.  Within real estate loans, residentialmortgage loans (including residential construction) are the largest categorycomprising 38% of total loans, which historically have low loan lossexperience.  Diversification of the real estate portfolio is a necessary anddesirable goal of the real estate loan policy.  In order to achieve andmaintain a prudent degree of diversity, given the composition of the marketarea and the general economic state of the market area, Bancshares will striveto maintain real estate loan portfolio diversification.  The following tablelists categories of real estate loans, volume and category type as a percentageof total loans and loan policy limits established for each category:

Actual

Policy

Category

Volume

Percentage

Percentage

Agricultural

 $

29,728   

5.48 %

20.00 %

Land Acquisition Development

   & Commercial Construction

 $

13,383   

2.47 %

10.00 %

Commercial Permanent

 $

145,044   

26.74 %

30.00 %

Residential Construction

 $

48,163   

8.88 %

10.00 %

Residential Mortgage

 $

162,508   

29.96 %

40.00 %

POLICY GUIDELINES

Loan Administration sets policyguidelines approved by the Board of Directors regarding portfoliodiversification 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 are as follows:

Collateral

Max.  Amortization

Max LTV

Real Estate

Various (see discussion)

Various (see discussion)

Equipment**

5 Years

75%

Inventory

5 Years

50%

Accounts Receivable

5 Years

75%

Livestock

5 Years

80%

Crops

1 Year

50%

Securities*

10 Years

75%

(Listed)

50%

(Unlisted)

*Maximum LTV on margin stocks(stocks not listed on a national exchange) when proceeds are used to purchaseor carry same shall be 50%.

**New farm equipment can beamortized over seven years.

-20-

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

Loan Category

 

LTV Limit

Raw Land

65%

Land Development or Farmland

75%

Construction:

 Commercial, Multi-Family, and Other Non-Residential

80%

 1-4 Family Residential

80%

Improved Property

80%

Owner-Occupied 1-4 Family and Home Equity

80%

Home Equity Lines

90%

Non-Owner Occupied 1-4 Family Residential

75%

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

On an approved exception basis,loans may be approved in excess of the LTV limits, provided that:
-  The request is fully documented     to support the fact that other credit factors justify the approval of that     particular loan as an exception to the LTV limit;  
-  The loan, if approved, is     designated in the Bank's records and reported as an aggregate number with     all other such loans approved by the full Board of Directors on at least a     quarterly basis;  
-  The aggregate total of all     loans so approved, including the extension of credit then under     consideration, shall not exceed 65% of the Bank's total capital; and  
-  Provided further that the     aggregate portion of these loans in excess of the LTV limits that are     classified as commercial, agricultural, multi-family or non-1-to-4 family     residential property shall not exceed 30% of the Bank's total capital.

AMORTIZATION SCHEDULES 

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

Loan Category

Amortized Period

Raw Land

10 years

Construction

1 year

Commercial, Multi-family, and Other Non-residential

20 years

1-4 Family Residential

20 years

Improved Property Farmland

20 years

Owner-occupied 1-4 Family and Home Equity

20 years

AVERAGE LOAN YIELDS

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

2006 - 7.82%

2005 - 7.05%

2004 - 6.48%

2003 - 7.17%

2002 - 7.93%

The aggregate amount of unusedguarantees, commitments to extend credit and standby letters of credit was approximately$111 million at year end.  Other information in reference to commitments andstandby letter of credits is included in Note 18 of the Consolidated FinancialStatements included in Item 8 of this report.

LOAN MATURITIES

Contractual maturities of loansas of December 31, 2006, are as follows:

** **

** **

** **

**Due After**

** **

** **

** **

**Due in One**

** **

**One Year but**

** **

**Due After**

** **

**Year or Less**

** **

**Within Five  Years**

** **

**Five Years**

Real Estate

 $

152,558   

 $

201,749   

 $

76,187   

Commercial, Financial

 and Agricultural

 $

41,548   

 $

38,433   

 $

5,073   

All Other Loans

 $

10,810   

 $

25,735   

 $

190   

TOTALS

 $

204,916   

 $

265,917   

 $

81,450   

Loans with Maturities After OneYear for which:

Interest Rates are Fixed or Predetermined:

 $

170,830   

Interest Rates are Floating or Adjustable:

 $

176,537 

-21-

The degree of interest rate risk to which a bank issubjected can be controlled through a well-defined funds management program. Bancshares controls interest rate risk by matching assets and liabilities,better explained by employing interest-sensitive funds in assets that are alsointerest sensitive.  Overall, Bancshares remains in a fairly neutral positionin terms of interest rate risk as evidenced by flat net interest margins duringa two-year period in which federal funds rates increased 425 basis points.  In2006, Bancshares became slightly liability sensitive which means thatliabilities reprice at a faster rate than assets.  Thus, in a rising rateenvironment (with a normal yield curve) net interest income would decline,while a flat rate or a lower rate environment would result in improved interestrate margins and net income.  Approximately $205 million or 37% of loans willmature immediately or over the next twelve months, while $266 million or 48% ofoutstanding loans will mature after one year, but within five years.  Only $81million or approximately 15% of outstanding loans bear maturities of greaterthan five years. 

NON-PERFORMING LOANS

Non-accrual, Restructured andPast Due Loans and Foreclosed Properties and related ratios as of December 31for each of the years presented are as follows:

**2006**

** **

**2005**

** **

**2004**

** **

**2003**

** **

**2002**

Non-accrual Loans

 $

371   

 $

1,524   

 $

1,581   

 $

1,174   

 $

2,216   

Restructured Loans

-   

-   

-   

-   

-   

Foreclosed Property Other Real Estate,  

1,815   

129   

337   

535   

1,730   

Other Repossessed Assets

-   

-   

2   

-   

-   

Loans and Leases 90 days past due and still

 Accruing interest

945   

431   

798   

223   

1,701   

Total Non-performing Loans and Other Assets

 $

3,131   

 $

2,084   

 $

2,718   

 $

1,932   

 $

5,647   

Non-Performing Assets as a Percent of Loans and

 Leases Plus Foreclosed Property at End of Year

0.57 %

0.38 %

0.51 %

0.39 %

1.25 %

Allowance as a Percent of:

 Non-Performing Assets

198.37 %

327.74 %

229.54 %

316.97 %

99.21 %

 Gross Loans

1.13 %

1.25 %

1.16 %

1.25 %

1.24 %

 Addition to Reserve as a Percent of Charge-Offs

44.41 %

167.56 %

90.44 %

237.80 %

179.00 %

  Loans and Leases 90 days past due as a Percent of

     Loans and Leases at Year-end

0.24 %

0.36 %

0.44 %

0.04 %

0.37 %

 Recoveries as a Percent of Gross Charge-offs

15.34 %

25.95 %

20.66 %

55.38 %

51.34 %

Non-performing assets consist ofnon-accrual loans, restructured loans, foreclosed properties, and loans andleases 90 days past due and still accruing interest.  Non-performing assets asa percent of total loan portfolio at December 31, 2006, 2005 and 2004 were $3.1million or 0.57%, $2.1 million or 0.38%, and $2.7 million or 0.51% of totalloans plus foreclosed property, respectively.  Loans and leases 90 days pastdue and still accruing interest total $945 thousand as of year-end 2006compared to  $431 thousand as of year-end 2005 and $798 thousand in 2004.  Theallowance for loan loss as a percent of non-performing assets was 198%, 328%,and 230%, as of December 31, 2006, 2005, and 2004, respectively.  The allowanceas a percent of gross loans for the same time periods was 1.13%, 1.25% and1.16%.  A very small number of problem credits have negatively impacted theratios related to non-performing assets as noted in the table above.  The mostsignificant increase is in other real estate and is the result of foreclosureon a residential property with a current estimated fair market value of $1.5million.   

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

Interest income on loans isrecorded on an accrual basis.  The accrual of interest is discontinued on allloans, except consumer loans, which become 90 days past due, unless the loan iswell secured and in the process of collection. Consumer loans which become pastdue 90 to 120 days are charged to the allowance for loan losses.  The grossinterest income that would have been recorded for the twelve months endingDecember 31, 2006 if all loans reported as non-accrual had been current inaccordance with their original terms and had been outstanding throughout theperiod is $25,000 compared to $96,000 for the same period in 2005.  Interestincome on loans reported as ninety days past due and on interest accrual statuswas $147,000 for 2006 and $86,000 for 2005.  Loans on which terms have beenmodified to provide for a reduction of either principal or interest as a resultof deterioration in the financial position of the borrower are considered to be"Restructured Loans".  Bancshares has no Restructured Loans for the periodbeing reported.  

Certain loans contained on theInternally Classified Problem Loan List are not included in the listing ofnon-accrual, past due or restructured loans. Management is confident that,although certain of these loans may pose credit problems, any potential forloss has been provided for by specific allocations to the Loan Loss ReserveAccount.  Loan officers are required to develop a "Plan of Action"for each problem loan within their portfolio. Adherence to each establishedplan is monitored by Loan Administration and re-evaluated at regular intervalsfor effectiveness.

LOAN LOSS EXPERIENCE &RESERVE FOR LOAN LOSSES

**2006**

** **

**2005**

** **

**2004**

** **

**2003**

** **

**2002**

Average net loans outstanding

 $

557,088   

 $

538,789   

 $

513,678   

 $

411,890   

 $

359,296   

Balance of reserve for loan losses

 at beginning of period

6,830   

6,239   

6,124   

5,653   

4,015   

Loans charged off

(1,538)

(632)

(1,036)

(919)

(1,743)

Recovery of loans previously charged off

236   

164   

214   

509   

895   

   Net loans charged off

(1,302)

(468)

(822)

(410)

(848)

Additions to reserve charged to expense

683   

1,059   

937   

975   

1,518   

Changes incident to mergers

-   

-   

-   

(94)

968   

Balance at end of period

 $

6,211   

 $

6,830   

 $

6,239   

 $

6,124   

 $

5,653   

Ratio of net charge-offs to average net

 loans outstanding

0.23 %

0.09 %

0.16 %

0.08 %

0.20 %

-22-

The preceding table summarizesactivity posted to the Loan Loss Reserve Account for the past five years.  Thesummary includes the average net loans outstanding; changes in the reserve forloan losses arising from loans charged off and recoveries on loans previouslycharged off; additions to the reserve which have been charged to operatingexpenses; and the ratio of net loans charged off to average loans outstanding. Changes to the Reserve Account for the year just ended consisted of (1) loanscharged off of $1.5 million, (2) recovery of loans previously charged off $236thousand, and (3) additions to reserves totaling $683 thousand.  As discussedabove, a small volume of loans accounts for the increase in net charge-offs. The charge-offs are considered isolated incidences and are spread among variousmarkets served by First Citizens.  The charge-offs and increase innon-performing assets do not appear to indicate material negative trends withina specific pool of loans or within a specific market.  Decreased provision forloan losses in 2006 compared to prior years is a result of slower loan growthin 2006 and adequacy of current level of reserves without requiring additionalprovision during fourth quarter 2006.  Provision for loan losses in excess ofnet charge-offs in years presented above prior to 2006 is primarily related toadditional provision considered necessary in relation to loan growth. 

The following table identifiescharge-offs and recoveries by category for the years presented:

**2006**

** **

**2005**

** **

**2004**

** **

**2003**

** **

**2002**

 
Charge-offs:

 
 Domestic:

 
    Commercial, financial & agricultural

 $

(447)

 $

(139)

 $

(459)

 $

(139)

 $

(188)

    Real estate-construction

-   

(242)

(115)

-   

-   

 
    Real estate-mortgage

(685)

(62)

(138)

(398)

(803)

 
    Installment loans to individuals & credit cards

(406)

(189)

(324)

(382)

(752)

 
        Total charge-offs

 $

(1,538)

 $

(632)

 $

(1,036)

 $

(919)

 $

(1,743)

 
 
Recoveries:

 
 Domestic:

 
    Commercial, financial & agricultural

 $

76   

 $

62   

 $

66   

 $

142   

 $

91   

 
    Real estate-construction

-   

10   

3   

-   

-   

 
    Real estate-mortgage

51   

4   

37   

237   

565   

 
    Installment loans to individuals & credit cards

109   

88   

108   

130   

239   

 
        Total recoveries

 $

236   

 $

164   

 $

214   

 $

509   

 $

895   

 
             Net charge-offs

 $

(1,302)

 $

(468)

 $

(822)

 $

(410)

 $

(848)

 
An analysis of the allocation ofthe Allowance for Loan Losses is made on a fiscal quarter at the end of themonth, (February, May, August, and November) and reported to the board at itsmeeting immediately preceding quarter-end.  The allowance for loan losses isestimated using methods consistent with generally accepted accountingprinciples as well as regulatory guidance on the allowance.  Such guidanceconsidered specifically includes but is not limited to SFAS 114 and 118 and theInteragency Policy Statement on the Allowance for Loan and Lease Losses issuedDecember 13, 2006.  

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

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

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

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

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

-23-

REPOSSESSED REAL PROPERTY

The book value of repossessedreal property was $1.8 million at December 31, 2006 compared to $129 thousandin 2005 and $337 thousand in 2004.  Marketing plans are currently in place forall properties held as of December 31, 2006.  The significant increase from2005 to 2006 consists primarily of one residential property valued at $1.5million.  Accounting for adjustments to the value of Other Real Estate whenrecorded subsequent to foreclosure is accomplished on the basis of anindependent appraisal.  The asset is recorded at the lesser of its appraisedvalue or the loan balance.  Any reduction in value is charged to the allowancefor possible loan losses.  All other real estate parcels are appraised annuallyand the carrying value adjusted to reflect the decline, if any, in itsrealizable value.  Such adjustments are charged directly to expense.

COMPOSITION OF DEPOSITS

The average amount of depositsand rates paid on such deposits are summarized for the three years endedDecember 31, 2006, 2005 and 2004:

** **

**2006**

** **

**2005**

** **

**2004**

** **

**Average**

** **

**Average**

** **

**Average**

** **

**Average**

** **

**Average**

** **

**Average**

** **

**Balance**

** **

**Rate**

** **

**Balance**

** **

**Rate**

** **

**Balance**

** **

**Rate**

Non-interest bearing demand deposits

 $

90,360   

0.00 %

 $

78,586   

0.00 %

 $

72,272   

0.00 %

Savings deposits

 $

197,115   

1.66 %

 $

190,106   

1.18 %

 $

181,164   

0.71 %

Time deposits

 $

365,839   

4.26 %

 $

331,973   

3.09 %

 $

311,671   

2.36 %

    Total deposits

 $

653,314   

2.88 %

 $

600,665   

2.08 %

 $

565,107   

1.53 %

Market share data for theTennessee Counties served by First Citizens is included in Item 1 BankingBusiness of this report.  As noted in Item 1, First Citizens is the marketshare leader in six of the seven counties it serves with approximately 20% ofthe market share.  Shelby County is the one market that First Citizensparticipates in but is not the leader due to the diversity and large number ofinstitutions in that market as well as the length of time that First Citizenshas been competing there.   First State Bank, a competitor in markets of FirstCitizens was second in market share accounting for approximately 18.9% of totaldeposits.  Bancshares' average deposits for 2006 were $653 million at anaverage rate of 2.88% compared to $601 million at an average rate of 2.08% in2005 and $565 million at an average rate of 1.56% in 2004.  The increase in theaverage cost of deposits is due to the impact of rising rate environment andcompetitive factors on time deposits.  The current market and competitiveenvironment has resulted in fierce competition in pricing of time deposits in2005 and 2006.  First Citizens does not compete solely on price as strategiesare focused more on customer relationships that attract and retain core depositcustomers rather than time deposits.

The success of overall depositstrategies over the past two years resulted in net growth from $592 million atyear-end 2004 to $635 million at year-end 2005 to $666 million at year-end2006.  Core deposits serve as a source of liquidity for Bancshares.  Consistentwith strategies to increase core deposits, average deposits balances in theprevious table illustrate growth of core deposits in both demand and savingscategories.  In the current rate environment, all markets have demanded acompetitively priced interest-bearing transaction account.  As a resultevidenced in our Statements of Cash Flows, transaction deposit accountsincreased approximately $9 million in 2006 and $19 million in 2005.  Over thepast three years, core deposits strategies have been focused primarily on twointerest-bearing transaction accounts, Wall Street and First Rate accounts. These two accounts accounted for approximately half of savings deposits for eachof the past three years.  First Citizens also continues to offer free checkingto attract and retain deposit relationships.  Demand deposits experiencedstrong growth in excess of 12 percent for each of the past two years. 

Time deposits grew in excess of$20 million for each of the past two years.  Time deposits over $100,000comprise 51.8% of total time deposits as of year-end 2006 compared to 51.5% atyear-end 2005.  Approximately 90% of over $100,000 time deposits will repriceover the next twelve months as a result of established strategies to deal withthe current competitive market and rate environment.  

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

Deposits over $100,000 increased$12 million or 7% from 2005 to 2006.  The following table sets forth thematurity distribution of Certificates of Deposit and other time deposits of$100,000 or more outstanding on the books of the bank on December 31, 2006 and2005 (in thousands).  

**2006**

** **

**2005**

**Amount**

** **

**Percent**

** **

**Amount**

** **

**Percent**

Maturing in:

   3 months or less

 $

48,963   

25.55 %

 $

56,725   

31.64 %

   Over 3 through 12 months

124,604   

65.02 %

86,509   

48.25 %

   Over 12 months

18,081   

9.43 %

36,062   

20.11 %

      Total

 $

191,648   

100.00 %

 $

179,296   

100.00 %

OTHER BORROWINGS

In addition to deposits,Bancshares used a combination of short-term and long-term borrowings tosupplement its funding needs.  Short-term borrowings consist of a Treasury, Tax& Loan demand note, federal funds purchased and short term advances fromthe Federal Home Loan Bank.  The short-term borrowings table below reflects themaximum amount of borrowings at any month end during the respective years. Short-term borrowings are used to manage fluctuations in liquidity based onseasonality of agricultural production loans and other factors.  The maximumamount of borrowings in any given month during 2006 was significantly less than2005 and 2004 due to the level of federal funds sold at the beginning of theyear as well as slower loan growth during 2006 as compared to the prior twoyears.  See also the Short Term Borrowings footnote included in theConsolidated Financial Statements in Item 8 of this report.  

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

**2006**

**2005**

**2004**

Amount outstanding-end of period

 $

1,000   

 $

1,000   

 $

1,000   

Maximum amount of borrowings at

 any month end during the year

 $

13,155   

 $

26,217   

 $

25,732   

Year-to-date daily average  

 $

4,501   

 $

6,527   

 $

9,656   

Weighted average cost

4.98 %

3.54 %

1.43 %

Long-term debt at the holdingcompany level consists of a revolving line of credit with First Tennessee Bankand trust-preferred debt.  The subsidiary bank's long-term debt consists ofadvances from the Federal Home Loan Bank.  In 2006, as a result of slow loangrowth, solid deposit growth and inverted yield curve, the Company reducedlong-term debt at the subsidiary bank by $17.5 million.  Average volume of FHLBadvances for 2006 was $58 million at an average rate of 5.67% compared to $73million at an average rate of 4.87% in 2005 and $69 million at an average rateof 5.12% in 2004. The average remaining maturity for FHLB long-term borrowingsis 5 years.  Federal Home Loan Bank borrowings are comprised of fixed ratepositions ranging from 3.99% to 6.55%.  Most of the FHLB borrowings havequarterly call features and maturities range from 2008 to 2011.  If an advanceis called, the Company has the option to pay off the advance without penalty orto have the advance reprice at a variable rate tied to the 90-day LIBOR.  Underthe current and forecasted rate environments, borrowings with call features inplace are not likely to be called and therefore are not included in currentliabilities on the Consolidated Balance Sheet included in Item 8 of thisreport.  Debt at Bancshares has variable rates and consists of Correspondentdebt and Trust Preferred debt affiliated with a prior acquisition.  Bancsharesstrategically reduced its debt by approximately $1 million during 2006.  Liquidity management and long term borrowings are discussed within theLiquidity section of this report.       

-24-

The following presents averagevolumes, rates, maturities, and re-pricing frequencies for long-term debt forthe year ended December 31, 2006 (in thousands):

**Average**

**Average**

**Average**

**Repricing**

**Volume**

**Rate**

**Maturity**

**Frequency**

FHLB borrowings

 $

58,182   

5.67 %

4 Years

Fixed

Revolving line of credit

2,236   

6.93 %

1 year

Variable

Trust preferred debt

10,310   

7.89 %

26 years

Variable

CAPITAL RESOURCES

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

2006

2005

2004

2003

2002

Percentage of Net Income to:

   Average Total Assets

1.10 %

1.10 %

1.08 %

1.09 %

1.27 %

   Average Shareholders Equity

13.88 %

13.71 %

13.56 %

13.88 %

15.05 %

Percentage of Dividends Declared

 to Net Income

46.04 %

47.03 %

50.83 %

50.49 %

48.66 %

Percentage of Average Equity

 to Average Assets

7.93 %

8.01 %

7.95 %

7.91 %

8.43 %

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

2006

2005

2004

2003

2002

8.36%

7.80%

7.92%

7.86%

9.25%

Total capital increased 9.19% to$69.5 million in 2006 from $63.6 million at year-end 2005.  Growth in capitalduring 2006 is from undistributed net income coupled with increases in othercomprehensive income from improved fair market values of available-for-saleinvestments securities.  Adjustments to capital resulting from changes inmarket value of available-for-sale securities and cash flow hedge, are madequarterly and contributed $1 million to the growth in 2006.  Bancshares has historicallymaintained capital in excess of minimum levels established by regulation andreflects continuous improvement when comparing previous years.  The risk basedcapital ratio of 12.5% percent at December 31, 2006 was significantly in excessof the 8 percent mandated by regulation.  This ratio has been maintained in the10-12 percent range over the past three years.  Total capital as a percentageof total assets was 8.36%, 7.80%, and 7.92% at December 31, 2006, 2005, and2004, respectively.  

Risk-based capital focusesprimarily on broad categories of credit risk and incorporates elements oftransfer, interest rate and market risks. The calculation of risk-based capitalratio is accomplished by dividing qualifying capital by weighted risk assets inaccordance with financial institution regulatory guidelines.  The minimumrisk-based capital ratio is 8.00%.  At least one-half or 4.00% must consist ofcore capital (Tier 1), and the remaining 4.00% may be in the form of core (Tier1) or supplemental capital (Tier 2).  Tier 1 capital/core capital consists ofcommon shareholders' equity, qualified perpetual preferred stock and minorityinterests in consolidated subsidiaries.  Tier 2 capital/supplementary capitalconsists of the allowance for loan and lease losses, perpetual preferred stock,term-subordinated debt, and other debt and stock instruments.

Dividends for 2006 were increased$0.04 to $1.16 per share from $1.12 per share in 2005 and 2004.  Bancsharescontinues its trend over the last several years with dividend payout ratio anddividend yield in excess of average reported for the Southeast Bank Group astracked by Mercer Capital.  The dividend payout ratio is 46.04% in 2006compared to 47.06% in 2005 and 50.83% in 2004.  The projected payout ratio for 2007is in the range of 45-50 percent.  Dividend payout for Southeast Bank Group for2006 was 33.33%.  The dividend yield in 2006 is 3.52 percent compared to 3.61percent in 2005.  The dividend yield for Southeast Bank Group is 2.00% for2006.  

As of year-end 2006, there areapproximately $11.8 million of retained earnings available for the payment offuture dividends from First Citizens National Bank to Bancshares.  Bankingregulations require certain capital levels to be maintained and may limitdividends paid by the bank to the holding company or by the holding company toshareholders.  These restrictions pose no practical limit on the ability of thebank or bank holding company to pay dividends at historical levels. 

Bancshares has repurchased 85,500shares of its common stock and the treasury stock has weighted average costbasis of $25.64 per share.  Approximately 4,600 treasury shares wererepurchased during 2006 at a weighted average cost of $33.66 per share.  Also,approximately 1,700 shares of treasury stock were sold in 2006 at a weightedaverage price of $34.00 per share.  There are no publicly announced plans orprograms to repurchase shares in place during the periods presented orsubsequently primarily due to Bancshares current strategy to reduce debt at theholding company level.  

AGGREGATE CONTRACTUAL OBLIGATIONSAND OFF BALANCE SHEET ARRANGEMENTS

Contractual Obligations are dueas follows:

Total

< 1 Year

1-3 Years

3-5 Years

> 5 Years

Unfunded Loan Commitments

 $

107,212   

 $

107,212   

 $

-   

 $

-   

 $

-   

Standby Letters of Credit

4,184   

4,184   

-   

-   

-   

Long Term Debt*

59,538   

2,173   

3,134   

42,939   

11,292   

Capital Lease Obligations

-   

-   

-   

-   

-   

Operating Leases

481   

201   

278   

2   

-   

Purchase Obligations

-   

-   

-   

-   

-   

Other Long Term Liabilities

-   

-   

-   

-   

-   

   Total

 $

171,415   

 $

113,770   

 $

3,412   

 $

42,941   

 $

11,292   

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

Except for unfunded loancommitments and standby letters of credit, First Citizens does not materiallyengage in off balance sheet activities and does not anticipate material changesin volume going forward.

Notes 13 and 18 of theConsolidated Financial Statements included in Item 8 of this report reflectlong term obligations and off balance sheet risk.
-25-ITEM 7A.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK
LIQUIDITY AND INTEREST RATESENSITIVITY

Liquidity is managed in a manner to ensure the availabilityof ample funding to satisfy loan demand, fund investment opportunities, andlarge deposit withdrawals.  Primary funding sources for Bancshares includescustomer core deposits, Federal Home Loan Bank borrowings, as well ascorrespondent bank and other borrowings.  Customer based sources accounted for87 percent of funding for the current year versus 84 percent for the prioryear.  Borrowed funds from the Federal Home Loan Bank amounted to 6.3 percent($48 million) of total funding at year-end 2006 compared to 8.7 percent ($65million) of total funding at year-end 2005.  The Bank had additional borrowingcapacity of approximately $16 million with Federal Home Loan Bank at year-end2006.  The Bank also has lines of credit for federal funds purchases totaling$52.5 million with four correspondent banks.  As of December 31, 2006, FirstCitizens held $23 million in short term Certificates of Deposit from the Stateof Tennessee and held $31 million in brokered Certificates of Deposit,representing 4.65% of total deposits.  Brokered time deposits wereapproximately $22 million and 3.5% of total deposits as of the prior year-end. 

Bancshares' liquidity position isfurther strengthened by ready access to a diversified base of wholesaleborrowings which include lines of credit with the Federal Home Loan Bank, FTNFinancial, federal funds purchased, securities sold under agreements torepurchase, Brokered certificates of deposit and others.  Bancshares has a lineof credit for $13 million earmarked for acquisitions and other financial needsof the holding company with approximately $11.5 million available at year-end2006.  Bancshares has a crisis contingency liquidity plan to defend against anymaterial downturn in the liquidity position.

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

Liquidity is an ongoing concernof the company's Funds Management Committee, which continues to seekalternative funding sources conducive to net interest margin strategies.  Thefollowing table reflects the liquidity position of First Citizens National Bankas of December 31, 2006 and 2005 in comparison to the OCC Liquidity Benchmarks.

OCC Liquidity  Benchmark

12/31/2006

 

12/31/2005

Short Term Liabilities/ Total Assets > 20%

20.12%

16.90%

On Hand Liquidity to Total Liabilities < 8%

8.56%

7.98%

Loan to Deposits < 80%

82.91%

86.55%

Wholesale Funds/Total Sources > 15%

14.71%

17.58%

Non Core Funding Dependence > 20%

50.73%

48.06%

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

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

-26-

Bancshares exposure to interestrate risk is well within established policy limits as noted in the tablebelow.  The interest rate risk position has shifted from slightly assetsensitive to slight liability sensitive during 2006.  Thus, Bancshares netinterest margin could benefit from a slight decrease in rates and could bediluted by further increases in rates over the next 12 months.  Bancshares'fairly neutral position in terms of interest rate risk over the two-year periodof interest rate hikes is evidenced by the following comparison of the federalfunds rate compared to net yield on average earning assets:

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

Interest Rate RiskDecember 2006*(In Thousands)*

Tier 1 Capital                              $67,418

Projected 12-MonthExposure

Rate

**POLICY**

Moves In

Current

Possible

% of Net Int

% of Net Int

Net Interest  Income Levels

Basis Pts

 

Position

 

Scenarios

 

Variance

 

Income

 

Income

Declining 2

(200)

 $

27,237   

 $

27,316   

 $

79 

0.3 %

-20.00 %

Declining 1

(100)

27,237   

27,432   

195 

0.7 %

-10.00 %

**Most Likely-Base**

**0 **

** **

**27,237 **

** **

**27,237 **

** **

**-   **

** **

**0.00 %**

** **

**0.00 %**

Rising 1

100   

27,237 

26,859   

(378) 

-1.4 %

-10.00 %

Rising 2

200   

27,237 

26,278   

(959) 

-3.5 %

-25.00 %

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

Bancshares monitors and employsmultiple strategies to continuously manage interest rate risk and liquidity atacceptable levels.  Such strategies include but are not limited to use ofFederal Home Loan Bank borrowings, adjustment of re-pricing date of loans, useof interest rate swaps, and investments in mortgage back investments thatenables the company to have constant cash inflows.  The following condensed gapreport provides an analysis of interest rate sensitivity of earning assets andcosting liabilities.

-27-

**CONDENSED GAPREPORTCURRENT BALANCESDECEMBER 31, 2006**

3-12

1-3

3-5

>5

Non

< 3 Mon

Months

Years

Years

Years

Sensitive

Bal

 

Bal

 

Bal

 

Bal

 

Bal

 

Bal

 

Total

Assets:

Total Cash and Due

   From

 $

-  

 $

-  

 $

-  

 $

-  

 $

-  

 $

19,597  

 $

19,597  

Total Investments

7,959  

22,519  

57,792  

42,036  

46,794  

276  

177,376  

Total Fed Funds Sold

12,948  

-  

-  

-  

-  

-  

12,948  

Total Net Loans

222,300  

113,234  

163,322  

53,427  

-  

(6,211)

546,072  

Total Other Assets

-  

-  

-  

-  

-  

75,427  

75,427  

Total Assets

 $

243,207  

 $

135,753  

 $

221,114  

 $

95,463  

 $

46,794  

 $

89,089  

 $

831,420  

Liabilities:

Total Demand

 $

-  

 $

-  

 $

-  

 $

-  

 $

-  

 $

95,048  

 $

95,048  

Total Savings

122,985  

-  

25,942  

27,681  

24,261  

-  

200,869  

Total Time

87,359  

234,332  

39,573  

8,264  

618  

-  

370,146  

Total Deposits

210,344  

234,332  

65,515  

35,945  

24,879  

95,048  

666,063  

Total Borrowings

35,423  

6,437  

10,159  

40,500  

-  

-  

92,519  

Other Liabilities

-  

-  

-  

-  

-  

3,340  

3,340  

Total Other Liabilities

35,423  

6,437  

10,159  

40,500  

-  

3,340  

95,859  

Total Liabilities

245,767  

240,769  

75,674  

76,445  

24,879  

98,388  

761,922  

Total Equity

-  

-  

-  

-  

-  

69,498  

69,498  

Total Liabilities/Equity

 $

245,767  

 $

240,769  

 $

75,674  

 $

76,445  

 $

24,879  

 $

167,886  

 $

831,420  

Period Gap

(2,560)

(105,016)

145,440  

19,018  

21,915  

(78,797)

-  

Cumulative Gap

(2,560)

(107,576)

37,864  

56,882  

78,797  

-  

-  

RSA/RSL

98.96 %

56.38 %

292.19 %

124.88 %

188.09 %

53.07 %

0.00 %

-28-

**CONDENSED GAPREPORTCURRENT BALANCESDECEMBER 31, 2005**

3-12

1-3

3-5

>5

Non

< 3 Mon

Months

Years

Years

Years

Sensitive

Bal

 

Bal

 

Bal

 

Bal

 

Bal

 

Bal

 

Total

Assets:

Total Cash and Due

   From

 $

-  

 $

-  

 $

-  

 $

-  

 $

-  

 $

15,808  

 $

15,808  

Total Investments

9,068  

17,842  

56,580  

38,523  

40,354  

(1,199)

161,168  

Total Fed Funds Sold

24,878  

-  

-  

-  

-  

-  

24,878  

Total Net Loans

228,134  

91,331  

171,713  

58,503  

-  

(6,251)

543,430  

Total Other Assets

-  

-  

-  

-  

-  

70,465  

70,465  

Total Assets

 $

262,080  

 $

109,173  

 $

228,293  

 $

97,026  

 $

40,354  

 $

78,823  

 $

815,749  

Liabilities:

Total Demand

 $

-  

 $

-  

 $

-  

 $

-  

 $

-  

 $

83,970  

 $

83,970  

Total Savings

57,483  

-  

24,834  

24,649  

51,225  

44,828  

203,019  

Total Time

93,365  

164,515  

77,251  

12,990  

399  

-  

348,520  

Total Deposits

150,848  

164,515  

102,085  

37,639  

51,624  

128,798  

635,509  

Total Borrowings

38,013  

6,873  

14,201  

36,294  

18,500  

-  

113,881  

Other Liabilities

-  

-  

-  

-  

-  

2,713  

2,713  

Total Other Liabilities

38,013  

6,873  

14,201  

36,294  

18,500  

2,713  

116,594  

Total Liabilities

188,861  

171,388  

116,286  

73,933  

70,124  

131,511  

752,103  

Total Equity

-  

-  

-  

-  

-  

63,646  

63,646  

Total Liabilities/Equity

 $

188,861  

 $

171,388  

 $

116,286  

 $

73,933  

 $

70,124  

 $

195,157  

 $

815,749  

Period Gap

73,219  

(62,215)

112,007  

23,093  

(29,770)

(116,334)

-  

Cumulative Gap

73,219  

11,004  

123,011  

146,104  

116,334  

-  

-  

RSA/RSL

138.77 %

63.70 %

196.32 %

131.24 %

57.55 %

40.39 %

0.00 %

NOTES TO THE GAP REPORTS

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

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

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

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

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

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

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

Management has assessed theeffectiveness of Bancshares' internal controls over financial reporting as ofDecember 31, 2006, based on criteria for effective internal control overfinancial reporting described in Internal Control-Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission.  Basedon this assessment, management believes that, as of December 31, 2006,Bancshares' internal control over financial reporting is effective.  

Bancshares' independent auditorshave issued an attestation opinion on management's assessment of Bancshares'internal control over financial reporting as stated in the report that appearson the following page.

 -30-
** 

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

 

Board of DirectorsFirst Citizens Bancshares, Inc.Dyersburg, Tennessee 38024

Wehave audited the accompanying consolidated balance sheets of First CitizensBancshares, Inc., and its subsidiaries as of December 31, 2006 and 2005, and therelated consolidated statements of income, comprehensive income, stockholders'equity, and cash flows for each of the years in the three-year period endedDecember 31, 2006. We also have audited management's assessment, included in theaccompanying Management's Assessment as to the Effectiveness of Internal Controlover Financial Reporting, that First Citizens Bancshares, Inc. and itssubsidiaries maintained effective internal control over financial reporting asof December 31, 2006, based on criteria established in *InternalControl-Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). First Citizens Bancshares, Inc.and its subsidiaries' management is responsible for these financial statements,for maintaining effective internal control over financial reporting, and for itsassessment of the effectiveness of internal control over financial reporting.Our responsibility is to express an opinion on these financial statements, anopinion on management's assessment, and an opinion on the effectiveness of thecompany's internal control over financial reporting based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we planand perform the audits to obtain reasonable assurance about whether thefinancial statements are free of material misstatement and whether effectiveinternal control over financial reporting was maintained in all materialrespects. Our audit of financial statements included examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made bymanagement, and evaluating the overall financial statement presentation. Ouraudit of internal control over financial reporting included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement's assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary 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 control overfinancial reporting includes those policies and procedures that (1) pertain tothe maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2)provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directors ofthe company; and (3) provide reasonable assurance regarding prevention of timelydetection of unauthorized acquisition, use, or disposition of the company'sassets that could have a material effect on the financial statements.

-31 -

 

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

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of First Citizens Bancshares, Inc.,and its subsidiaries as of December 31, 2006 and 2005, and the results of itsoperations and its cash flows for each of the years in the three-year periodended December 31, 2006, in conformity with accounting principles generallyaccepted in the United States of America. Also, in our opinion, management'sassessment that First Citizens Bancshares, Inc. and its subsidiaries, maintainedeffective internal control over financial reporting as of December 31, 2006, isfairly stated, in all material respects, based on criteria established in *InternalControl-Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Furthermore, in our opinion,First Citizens Bancshares, Inc. and its subsidiaries maintained, in all materialrespects, effective internal control over financial reporting as of December 31,2005, based on criteria established in *Internal Control-Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 
** 

/s/ ALEXANDER THOMPSON ARNOLD PLLC

Dyersburg, Tennessee

February23, 2007
**Alamo, TNDyersburg, TNFulton, KYHenderson, TNJackson, TNMartin, TNMilan, TNMcKenzie, TNParis, TNTrenton, TNUnion City, TN
 

 

 

 

 

-32-

**FIRST CITIZENSBANCSHARES, INC. AND SUBSIDIARIESCONSOLIDATEDBALANCE SHEETS**DECEMBER 31, 2006 AND 2005***(in thousands)***

**December 31,  2006**

** **

**December 31,  2005**

ASSETS

Cash and due from banks

 $

19,597   

 $

15,808   

Federal funds sold

12,948   

24,878   

Cash and cash equivalents

32,545   

40,686   

Investment securities:

Trading investments-stated at market

-   

-   

Held-to-Maturity, at amortized cost, fair

value of $291 at December 31, 2006

and $296 at December 31, 2005

290   

290   

Available-for-Sale, stated at market

177,086   

160,878   

Loans (excluding unearned income of $311 at December 31,  2006

and $462 at December 31, 2005)

548,834   

547,217   

Less:  allowance for loan losses

6,211   

6,830   

Net loans

542,623   

540,387   

Loans held-for-sale

3,449   

3,043   

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

5,505   

5,258   

Premises and equipment

28,234   

27,642   

Accrued interest receivable

6,760   

5,478   

Goodwill

11,825   

11,825   

Other intangible assets

458   

542   

Other real estate

1,815   

129   

Bank owned life insurance policies

17,224   

16,013   

Other assets

3,606   

3,578   

TOTAL ASSETS

 $

831,420   

 $

815,749   

LIABILITIES AND SHAREHOLDERS' EQUITY

Deposits

Demand

 $

95,048   

 $

83,970   

Time

370,146   

348,520   

Savings

200,869   

203,019   

Total deposits

666,063   

635,509   

Securities sold under agreements to  

repurchase

31,981   

34,753   

Federal funds purchased and other short

term borrowings

1,000   

1,000   

Long-term debt

59,538   

78,128   

Other liabilities

3,340   

2,713   

Total liabilities

761,922   

752,103   

Shareholders' equity:

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

authorized; 3,717,593 issued and  

outstanding at December 31, 2006 and 3,717,593

issued and outstanding at December 31, 2005

 $

3,718   

 $

3,718   

Surplus

15,331   

15,331   

Retained earnings

52,532   

47,591   

Accumulated other comprehensive income

108   

(900)

Total common stock and retained earnings

71,689   

65,740   

Less-85,500 treasury shares, at cost as of December 31,  2006

and 82,585 shares at cost at December 31, 2005

2,191   

2,094   

Total shareholders' equity

69,498   

63,646   

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

 $

831,420   

 $

815,749   

*Note:  Seeaccompanying notes to consolidated financial statements.*** **

-33-

**FIRST CITIZENSBANCSHARES, INC. AND SUBSIDIARIESCONSOLIDATEDSTATEMENTS OF INCOME**YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

** **

2006

 

2005

 

2004

*(In Thousands  Except Per Share Data)*

**Interest Income**

   Interest and fees on loans

 $

43,557   

 $

37,991   

 $

33,302   

   Interest and dividends on investment securities:

     Taxable

5,719   

4,342   

3,872   

     Tax-exempt

1,807   

1,658   

1,469   

     Dividends

359   

362   

297   

   Other interest income

670   

261   

77   

     Total interest income

52,112   

44,614   

39,017   

**Interest Expense**

   Interest on Deposits

18,832   

12,488   

8,636   

   Interest on borrowings

4,370   

4,404   

4,247   

   Other Interest Expense

940   

800   

466   

     Total Interest Expense

24,142   

17,692   

13,349   

         Net Interest Income

27,970   

26,922   

25,668   

**Provision for Loan Losses**

683   

1,059   

937   

 Net Interest Income After Provision for Loan Losses

27,287   

25,863   

24,731   

**Other Income**

   Income From Fiduciary Activities

940   

963   

946   

   Service Charges on Deposit Accounts

6,059   

5,952   

5,559   

   Brokerage Fees

1,357   

1,307   

1,160   

   Earnings on bank owned life insurance

681   

914   

443   

   Securities Gains (Losses) - Net

-     

(19)

210   

   Other Income

1,611   

1,727   

1,076   

     Total Other Income

10,648   

10,844   

9,394   

**Other Expenses**

   Salaries and Employee Benefits

15,074   

14,506   

13,330   

   Net Occupancy Expense

1,591   

1,701   

1,551   

   Depreciation

2,059   

1,882   

1,625   

   Data Processing Expense

853   

704   

727   

   Legal and Professional Fees

284   

250   

293   

   Stationary and Office Supplies

284   

303   

276   

   Amortization of Intangibles

85   

85   

85   

   Advertising and Promotions

654   

641   

444   

   Other Expenses

5,044   

4,883   

4,504   

     Total Other Expenses

25,928   

24,955   

22,835   

Net Income Before Income Taxes

12,007   

11,752   

11,290   

Provision for Income Tax Expense

2,850   

3,087   

3,241   

Net Income

 $

9,157   

 $

8,665   

 $

8,049   

Earnings Per Common Share:

 Net Income

 $

2.52   

 $

2.38   

 $

2.20   

Weighted Average Shares Outstanding

3,633   

3,639   

3,652   

*Note:  Seeaccompanying notes to consolidated financial statements.*

** **-34-

**FIRST CITIZENSBANCSHARES, INC. AND SUBSIDIARIESCONSOLIDATEDSTATEMENTS OF COMPREHENSIVE INCOMEYEARS ENDEDDECEMBER 31, 2006, 2005 AND 2004 **

**2006**

** **

**2005**

** **

**2004**

*(In Thousands)*

Net Income For Year

 $

9,157   

 $

8,665   

 $

8,049   

Other Comprehensive Income, Net of Tax:

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

        and Cash Flow Hedge:

    Unrealized Gains (Losses) on Arising During the Period

1,008   

(1,685)

(523)

**  Total Comprehensive Income**

** **

 $

10,165   

 $

6,980   

 $

7,526   

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

               in Net Income

19   

(8)

11   

                  Net Unrealized Gains (Losses)

 $

(2,808)

 $

1,123   

 $

(1,685)

**Year Ended December 31, 2004:**

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

     and Cash Flow Hedge:

           Unrealized Gains (Losses) Arising During the  Period

 $

(662)

 $

265   

 $

(397)

           Reclassification Adjustments For Gains Included

               in Net Income

(210)

84   

(126)

                  Net Unrealized Gains (Losses)

 $

(872)

 $

349   

 $

(523)

*Note:  Seeaccompanying notes to consolidated financial statements.*

** **-35-

**FIRST CITIZENSBANCSHARES, INC.CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS' EQUITYYEARS ENDEDDECEMBER 31, 2006, 2005 AND 2004(In Thousands,Except Per Share Data) **

** **

** **

** **

** **

** **

** **

** **

** **

**Accum.**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Other**

** **

** **

** **

** **

**Common Stock**

** **

** **

** **

**Retained**

** **

**Compre.**

** **

**Treasury**

** **

** **

**Shares**

** **

**Amount**

** **

**Surplus**

** **

**Earnings**

** **

**Income**

** **

**Stock**

** **

**Total**

**Balance, January 1, 2004**

3,718  

 $

3,718  

 $

15,331  

 $

39,043  

 $

1,308  

 $

(1,454)

 $

57,946  

Net Income, Year Ended  December 31, 2004

8,049  

8,049  

Adjustment of Unrealized  Gain (Loss) on

 Securities  Available-for-Sale and Cash

 Flow Hedge, Net of  Applicable Deferred

 Income Taxes $349 During  the Year

(523)

(523)

Cash Dividends Paid - $1.12  per Share

(4,091)

(4,091)

Treasury Stock Transitions -  Net

(173)

(173)

**Balance December 31, 2004**

3,718  

 $

3,718  

 $

15,331  

 $

43,001  

 $

785  

 $

(1,627)

 $

61,208  

Net Income, Year Ended  December 31, 2005

8,665  

8,665  

Adjustment of Unrealized  Gain (Loss) on

 Securities  Available-for-Sale and Cash

 Flow Hedge, Net of  Applicable Deferred

 Income Taxes $1,123 During  the Year

(1,685)

(1,685)

Cash Dividends Paid - $1.12  per Share

(4,075)

(4,075)

Treasury Stock Transitions -  Net

(467)

(467)

**Balance December 31, 2005**

3,718  

 $

3,718  

 $

15,331  

 $

47,591  

 $

(900)

 $

(2,094)

 $

63,646  

Net Income, Year Ended  December 31, 2006

9,157  

9,157  

Adjustment of Unrealized  Gain (Loss) on

 Securities  Available-for-Sale and Cash

 Flow Hedge, Net of  Applicable Deferred

 Income Taxes $1,123 During  the Year

1,008  

1,008  

Cash Dividends Paid - $1.16  per Share

(4,216)

(4,216)

Treasury Stock Transitions -  Net

(97)

(97)

**Balance December 31, 2006**

3,718  

 $

3,718  

 $

15,331  

 $

52,532  

 $

108  

 $

(2,191)

 $

69,498  

** **

*Note:  Seeaccompanying notes to consolidated financial statements.*

-36-

** FIRST CITIZENSBANCSHARES, INC. AND SUBSIDIARIESCONSOLIDATEDSTATEMENT OF CASH FLOWSYEARS ENDEDDECEMBER 31, 2006, 2005 AND 2004*(in thousands) ***

**2006**

2005

2004

**Operating Activities**

** **

Net Income

** $**

**9,157 **

 $

8,665   

 $

8,049   

Adjustments to Reconcile Net Income to Net

** **

 Cash Provided by Operating Activities:

** **

     Provision for Loan Losses

**683 **

1,059   

937   

     Provision for Depreciation

**2,059 **

1,882   

1,625   

     Provision for Amortization - Intangibles

**85 **

85   

85   

     Deferred Income Taxes

**336 **

(355)

145   

     Realized Investment Security (Gains) Losses

**0 **

19   

(210)

     Net (Increase) Decrease in Loans Held for Sale

**(406)**

(1,713)

1,064   

     (Increase) Decrease in Accrued Interest Receivable

**(1,282)**

(919)

(399)

     Increase (Decrease) in Accrued Interest Payable

**632 **

374   

(101)

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

**(676)**

(624)

(443)

     Net (Increase) Decrease in Other Assets

**(441)**

(735)

(21)

     Net Increase (Decrease) in Other Liabilities

**(630)**

342   

129   

NET CASH PROVIDED BY OPERATING ACTIVITIES

** $**

**9,517 **

 $

8,080   

 $

10,860   

** **

**Investing Activities**

** **

 Proceeds of Maturities of Held-to-Maturity Investment  Securities

** $**

**- **

 $

504   

 $

40   

 Proceeds of Sales and Maturities of Available-for-Sale

** **

     Investment Securities

**22,669 **

49,044   

49,450   

 Purchases of Available-for-Sale Investment Securities

**(36,637)**

(66,084)

(48,464)

 Increase in Loans - Net

**(5,383)**

(13,373)

(49,782)

 Premiums on Bank Owned Life Insurance-Net

**(535)**

(1,308)

(126)

 Purchase of Premises and Equipment

**(2,651)**

(5,937)

(3,474)

NET CASH USED BY INVESTING ACTIVITIES

** $**

**(22,537)**

 $

(37,154)

 $

(52,356)

** **

**Financing Activities**

** **

 Net Increase ( Decrease) in Demand Deposits,

** **

     NOW Accounts , and Savings Accounts

** $**

**8,928 **

 $

19,263   

 $

20,647   

 Increase in Time Deposits - Net

**21,626 **

23,864   

11,125   

 Increase in Long-Term Borrowings

**0 **

5,155   

2,000   

 Payment of Principal on Long-Term Debt

**(18,590)**

(11,508)

(833)

 Cash Dividends Paid

**(4,216)**

(4,075)

(4,091)

 Net Increase (Decrease) in Short-Term Borrowings

**(2,772)**

4,142   

11,930   

 Treasury Stock Transactions - Net

**(97)**

(467)

(173)

NET CASH PROVIDED BY FINANCING ACTIVITIES

**4,879 **

36,374   

40,605   

Increase (decrease) in cash and cash equivalents

**(8,141)**

7,300   

(891)

Cash and cash equivalents at beginning of year

**40,686 **

33,386   

34,277   

**Cash and cash equivalents at end of year**

** $**

**32,545 **

** **

 $

40,686   

** **

 $

33,386   

** **

Supplemental cash flow information:

** **

** **

 Interest paid

** $**

**24,142 **

 $

17,318   

 $

13,450   

 Income taxes paid

** $**

**2,870 **

 $

3,480   

 $

2,982   

** **

Supplemental noncash disclosures:

** **

 Transfers from loans to foreclosed assets

** $**

**2,613 **

 $

441   

 $

440   

** **

** **

*Note:  Seeaccompanying notes to consolidated financial statements.*

** **-37-

**FIRST CITIZENSBANCSHARES, INC. AND SUBSIDIARIESNOTES TOCONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2006AND 2005**

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

The accounting and reportingpolicies of First Citizens Bancshares, Inc., and subsidiaries conform togenerally accepted accounting principles.  The significant policies aredescribed as follows:

BASIS OF PRESENTATION

All dollar amounts set forthbelow, other than per-share amounts, are in thousands unless otherwise noted. The consolidated financial statements include all accounts of First CitizensBancshares, Inc., and its subsidiaries First Citizens National Bank, and FirstCitizens (TN) Statutory Trusts II and III.  First Citizens Capital Assets,Inc., subsidiary of Bancshares, was liquidated in December 2006 with nomaterial impact to consolidated financial statements.  First Citizens NationalBank also has two wholly owned subsidiaries, First Citizens Financial Plus andFirst Citizens Investments, Inc., which are consolidated into its financialstatements. First Citizens Bancshares, Inc.'s investment in these subsidiariesis reflected on the Parent Company's condensed balance sheet (Note 22). 

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

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

The Company also has two whollyowned subsidiaries, First Citizens (TN) Statutory Trust II and First Citizens(TN) Statutory Trust III.  The purpose and activities of these two subsidiariesare further discussed in Note 13 of Notes to the Consolidated FinancialStatements.  

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

NATURE OF OPERATIONS

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

BASIS OF ACCOUNTING

The consolidated financialstatements are presented using the accrual basis of accounting.

USE OF ESTIMATES

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

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

CASH EQUIVALENTS

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

-38-

SECURITIES

Investment securities areclassified as follows:

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

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

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

LOANS HELD FOR SALE

Mortgage loans originated andintended for sale in the secondary market are carried at the lower of aggregatecost or market, as determined by outstanding commitments from investors.  Netunrealized losses, if any, are recorded as a valuation allowance and charged toearnings.  Servicing rights are not retained when mortgage loans are sold. 

LOANS

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

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

ALLOWANCE FOR LOAN LOSSES

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

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

The allowance consists ofspecific, general and unallocated components.  The specific component relatesto loans that are classified as doubtful, substandard or special mention.  Forsuch loans that are also classified as impaired, an allowance is establishedwhen the discounted cash flows (or collateral value or observable market price)of the impaired loan is lower than the carrying value of that loan.  Thegeneral component covers non-classified loans and is based on historical lossexperience adjusted for qualitative factors.  An unallocated component ismaintained to cover uncertainties that could affect management's estimate ofprobable losses.  The unallocated component of the allowance reflects themargin of imprecision inherent in the underlying assumptions used in themethodologies for estimating specific and general losses in the portfolio.

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

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

PREMISES AND EQUIPMENT

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

REAL ESTATE ACQUIRED BYFORECLOSURE

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

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

-39-

INCOME TAXES

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

INTEREST INCOME ON LOANS

Interest income on commercial andreal estate loans is computed on the basis of daily principal balanceoutstanding using the accrual method.  Interest on installment loans iscredited to operations by the level-yield method.  Interest income on loans isdiscontinued at the time the loan is 90 days delinquent unless the loan is wellsecured and in process of collection.  Loans may be placed on non-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 currentand future payments are reasonably assured.  

NET INCOME PER SHARE OF COMMONSTOCK

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

INCOME FROM FIDUCIARY ACTIVITIES

Income from fiduciary activitiesis recorded on the accrual basis.

ADVERTISING AND PROMOTIONS

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

**NOTE 2 - CASH RESERVEREQUIREMENTS**

The Corporation's bank subsidiarymaintains cash reserve balances as required by the Federal Reserve Bank. Average required balances during 2006 and 2005 were $500,000 and $500,000,respectively.

**NOTE 3 - INVESTMENT SECURITIES**

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

Gross

Gross

Fair

Amortized

Unrealized

Unrealized

Market

Cost

 

Gains

 

Losses

 

Value

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

Securities Held-to-Maturity:

Obligations of states and political subdivisions

 $

290   

 $

1   

 $

-   

 $

291   

Securities Available-for-Sale:

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

 Government agencies and corporations

 $

129,226   

 $

280   

 $

(1,903)

 $

127,602   

Obligations of states and political subdivisions

42,666   

1,792   

(121)

44,338   

All others

4,916   

230   

5,146   

 $

176,808   

 $

2,302   

 $

(2,024)

 $

177,086   

 

**As of December 31, 2005 (in thousands):**

Securities Held-to-Maturity:

Obligations of states and political subdivisions

 $

290   

 $

6   

 $

-   

 $

296   

Securities Available-for-Sale:

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

 Government agencies and corporations

 $

115,631   

 $

20   

 $

(2,849)

 $

112,802   

Obligations of states and political subdivisions

40,171   

1,555   

(240)

41,486   

All others

6,350   

257   

(17)

6,590   

 $

162,152   

 $

1,832   

 $

(3,106)

 $

160,878   

-40-

The table below summarizesmaturities of debt securities held-to-maturity and available-for-sale as ofDecember 31, 2006:

Securities

Securities

Held to Maturity

Available for Sale

Amortized Cost

Fair Value

Amortized Cost

Fair Value

Amounts maturing in:

 One year or less

 $

10,903   

 $

10,763 

 After one year through five years

290   

291   

50,404   

50,054   

 After five years through ten years

35,266   

35,266   

 After ten years

-   

-   

80,951   

80,951   

 $

290   

 $

291   

 $

177,524   

 $

177,034   

Equity securities

10   

52   

       Total securities

 $

290   

 $

291   

 $

177,534   

 $

177,086   

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

**Gross Sales**

**Gains**

**Losses**

**Net**

**Year Ended December 31,**

2006 

 $

-   

 $

-   

 $

-   

 $

-   

2005 

 $

11,890   

 $

9   

 $

(28)

 $

(19)

2004 

14,240   

213   

(3)

210   

At December 31, 2006 and 2005, investmentsecurities were pledged to secure government, public and trust deposits asfollows:

**December 31**

**Amortized  Cost**

**Fair Value**

** **

**2006**

** **

** $**

**103,714 **

** **

** $**

**102,417 **

** **

**2005**

** **

** $**

**119,045 **

** **

** $**

**116,974 **

The following table presentsinformation on securities with gross unrealized losses at December 31, 2006,aggregated by investment category and the length of time that the individualsecurities have been in a continuous loss position:

** **

*Less Than  Twelve Months*

*Over Twelve  Months*

*Total*

** **

**Gross**

** **

** **

** **

**Gross**

** **

** **

** **

**Gross**

** **

** **

**Unrealized**

** **

**Fair**

** **

**Unrealized**

** **

**Fair**

** **

**Unrealized**

** **

**Fair**

**Losses**

** **

**Value**

** **

**Losses**

** **

**Value**

** **

**Losses**

** **

**Value**

Securities Available-for-Sale:

 U.S. Treasury securities and

 Obligations of U.S. Government

     corporations and agencies

 $

(10)

 $

8,097   

 $

(1,893)

 $

86,071   

 $

(1,903)

 $

94,168   

Obligations of states and political

 subdivisions

-   

-   

(121)

5,828   

(121)

5,828   

Other debt securities

-   

-   

-   

-   

-   

-   

**  Total**

** $**

**(10)**

** **

** $**

**8,097 **

** **

** $**

**(2,014)**

** **

** $**

**91,899 **

** $**

**(2,024)**

** **

** $**

**99,996 **

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

-41-

As of December 31, 2006, theCompany had 99 debt securities noted with unrealized losses with 91 of thosesecurities having been in an unrealized loss position for greater than 12months.  Most of the 91 securities are U. S. government agency ormortgage-backed securities which have declined in value or remained in anunrealized loss position due to the flattening and then inversion of the yieldcurve that occurred in 2005 subsequent to the increasing federal funds ratesover the past two years.  Such unrealized losses are considered to be drivenentirely by current market conditions and interest rates and not related to thecredit quality of the issuers.  In analyzing reasons for the unrealized lossesmanagement considers whether the securities are issued by the federalgovernment or its agencies, whether downgrades of bond ratings have occurred,and also reviews any applicable industry analysts' reports.  With respect tounrealized losses on securities noted and the analysis performed relating tothe securities, management currently believes that declines in market value aretemporary.  

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

During the year ended December31, 2006, the value of the derivative is a liability of approximately $37,000. Market interest rate fluctuations resulted in a reduction of the liability byapproximately $140,000, as well as a reduction in negative accumulated othercomprehensive income of approximately $48,000, net of tax, during the yearended December 31, 2006.  Accumulated other comprehensive income (net of tax)related to the swap totaled a negative $62,000 as of December 31, 2006.

**NOTE 4 - LOANS**

Loans outstanding at December 31,2006 and 2005, were comprised of the following:

**2006**

**2005**

Commercial, financial and agricultural

 $

80,033   

 $

78,086   

Real estate - construction

86,206   

74,817   

Real estate - mortgage

340,839   

352,749   

Installment

36,735   

37,761   

Other loans

5,021   

3,804   

548,834   

547,217   

Less: allowance for loan losses

6,211   

6,830   

 Net loans

 $

542,623   

 $

540,387   

In conformity with Statement No.114 of the Financial Accounting Standards Board, the Corporation has recognizedloans as impaired with carrying values of approximately $1,687,000 at December31, 2006 and $1,766,000 at December 31, 2005.  The balance maintained in theAllowance for Loan Losses related to these loans was $267,000 at December 31,2006, and $505,000 at December 31, 2005.  Average investment in impaired loansin 2006 and 2005 were $2.6 million and $1.9 million, respectively.  Interestincome on impaired loans was immaterial to the consolidated financialstatements for the three years ended December 31, 2006, 2005 and 2004 as themajority of impaired loans were on non-accrual status.  Loans and leases 90days past due and still accruing interest total $945 thousand as of year-end2006 compared to $431 thousand as of year-end 2005 and $798 thousand in 2004. 

**NOTE 5 - ALLOWANCE FOR LOANLOSSES**

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

**2006**

** **

**2005**

** **

**2004**

Balance  - beginning of period

 $

6,830   

 $

6,239   

 $

6,124   

Addition incident to merger

-   

-   

-   

Provision for loan losses

683   

1,059   

937   

Loans charged to allowance

(1,538)

(632)

(1,036)

Recovery of loan previously charged off

236   

164   

214   

 Net charge-offs

(1,302)

(468)

(822)

Balance - end of period

 $

6,211   

 $

6,830   

 $

6,239   

**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 three years ended December31, 2006, 2005 and 2004.  There has been no material difference between costand fair market values of loans held for sale for any of the periodspresented.  

Servicing rights are not retainedon any mortgage loans held for sale.  Secondary mortgage fees included ininterest and fees on loans were $1,185,000, $1,182,000, and $1,040,000 for theyears ended December 31, 2006, 2005, and 2004, respectively.  

-42-

**NOTE 7 - PREMISES AND EQUIPMENT**

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

Useful Lives

in Years

 

**2006**

 

2005

Land

 $

5,616   

 $

5,616   

Buildings

5 to 50

25,970   

25,000   

Furniture and equipment

3 to 20

17,614   

16,004   

49,200   

46,620   

Less: accumulated depreciation

20,966   

18,978   

 Net fixed assets

 $

28,234   

 $

27,642   

**NOTE 8 - GOODWILL AND OTHERINTANGIBLE ASSETS**

Upon adoption of SFAS 142 inJanuary 2002, the Company ceased to amortize goodwill ($25 thousand permonth).  Impairment testing is performed during the first quarter of eachyear.  Based on annual impairment testing since adoption of SFAS 142, there hasbeen no impairment of goodwill recorded.  Thus, there are no impairment chargesrecorded for any periods presented in these consolidated financial statementsand notes or subsequently.  There was no activity in goodwill during the yearsended December 31, 2006, 2005 and 2004, except for a reclassificationadjustment made in third quarter 2004.  During the third quarter 2004, goodwilltotaling $392,000 was reclassified as a deferred tax asset to correct an errormade on the accounting for the Munford Union Bank acquisition in 2002.  Theacquisition accounting did not include an amount for deferred taxes related toMunford Union Bank being an S Corporation prior to acquisition.  As this entrywas a reclassification on the balance sheet, there was no impact on totalassets, equity or net income for the periods presented.  Total goodwill as ofDecember 31, 2006 is $11.8 million or 1.45% of total assets or 18.58% of totalcapital.  

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

2006

2005

 Core deposit intangible

 $

845   

845   

 Accumulated amortization

(387)

(303)

      Net core deposit intangible

 $

458   

 $

542   

Amortization expense for the pastthree years has been $84,500 per year for 2006, 2005 and 2004.  Estimatedamortization expense for each of the next five years is $84,500 per year. 

**NOTE 9 - REPOSSESSED REALPROPERTY**

The carrying value of repossessedreal property on the balance sheets of the Corporation is $1.8 million atDecember 31, 2006, and $129,000 at December 31, 2005. The value of repossessedreal property is based on the lower of cost or fair market value.  Fair marketvalue is based on independent appraisals for significant properties. 

**NOTE 10 - BANK OWNED LIFEINSURANCE**

The Bank has a significantinvestment in bank owned life insurance policies (BOLI) due to providing thisfringe benefits to its employees in the position of Vice President and higherafter one year of service.  The cash surrender values of BOLI are $17 millionand $16 million as of December 31, 2006 and 2005, respectively.  BOLI areinitially recorded at the amount of premiums paid and are adjusted to currentcash surrender values.  Changes in cash surrender values are recorded in othernon-interest income and are based on premiums paid less expenses plus accretedinterest income.  Earnings on BOLI resulted in non-interest income of $681,000,$914,000 and $443,000 for the three years ended December 31, 2006, 2005 and2004, respectively.  Earnings in 2005 included non-recurring income ofapproximately $260,000 received from a death benefit associated with a policyinherited through a prior acquisition.  

**NOTE 11 - DEPOSITS**

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

**2006**

** **

**2005**

Time deposits

 $

185,523   

 $

179,296   

Savings deposits

137,403   

111,987   

NOW accounts, included in savingsdeposits on the balance sheets, totaled $63,745,000 at December 31, 2006 and$62,211,000 at December 31, 2005.  Demand deposit balances reclassified asloans consist of overdrafts totaling $492,000 and $434,000 as of December 31,2006 and 2005, respectively.  

Time deposits maturing in yearssubsequent to December 31, 2006, are as follows:

* *

On or before December 31, 2007

 $

322,163   

On or during year ended December 31, 2008

33,550   

On or during year ended December 31, 2009

6,152   

On or during year ended December 31, 2010

5,417   

During or after year ended December 31, 2011

2,864   

 $

370,146   

-43-

**NOTE 12 - SHORT-TERMBORROWINGS**

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

Cash management advances fromFHLB are secured 1-4 family first mortgages under the blanket collateral pledgeagreement that also collateralizes long-term advances from FHLB and have maturitiesof 90 days or less.  See the long-term debt footnote in regards to maximumborrowing capacity with FHLB as of December 31, 2006.  There were no short-termborrowings outstanding against this line as of December 31, 2006.

First Citizens National Bank isan Option B bank in regards to TT&L and up to $1 million in collectedTT&L payments collected can be retained as a short-term option note.  Thisoption note is callable upon demand by the TT&L.  The current balance ofthis line was $1,000,000 as of December 31, 2006.  

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

The following tabular analysispresents year-end balances of short-term borrowings, maximum month-end balance,year-to-date daily average, and weighted average cost for 2006, 2005 and 2004:

**2006**

**2005**

**2004**

Amount outstanding-end of period

 $

1,000   

 $

1,000   

 $

1,000   

Maximum amount of borrowings at

 any month end during the year

 $

13,155   

 $

26,217   

 $

25,732   

Year-to-date daily average  

 $

4,501   

 $

6,527   

 $

9,656   

Weighted average cost

4.98 %

3.54 %

1.43 %

**NOTE 13 - LONG TERM DEBT**

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

On March 26, 2002, the Company,through its Trust subsidiary, issued 5,000 floating rate Preferred Trust Securitiesin denominations of $1,000 for a total of $5,000,000, which mature thirty (30)years from the date of issuance. Interest is payable on March 26, June 26,September 26 and December 26 of each year during the term. The interest rate iscalculated quarterly equal to the three-month LIBOR interest rate plus 3.6%,provided that prior to March 26, 2007, the interest rate cannot exceed elevenpercent (11%).   Responsibilities of the Company concerning the debentures andrelated documents constitute a full and unconditional guarantee by the Companyof the Trust issuer's preferred securities.

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

First Citizens Bancshares, Inc.has a line of credit with First Tennessee Bank National Association in theamount of $13 million, secured by common stock of First Citizens National Bankwith a book value totaling 143% of the total outstanding advances on the line. The note was originally executed in 2002 with a two-year maturity with thepurpose for use in various financial strategies including the acquisition ofMunford Union Bank.  Interest on the outstanding balance is payable on aquarterly basis, calculated at 100 basis points below the base rate of FirstTennessee Bank.  Since its original maturity in 2004, the line has been renewedannually for a one-year term.  At December 31, 2006, the outstanding balance onthis line is $1.583 million.  This line was reduced by $1.1 million during2006.  

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

On March 17, 2005 the Companythrough its wholly owned subsidiary, First Citizens (TN) Statutory Trust III,sold 5,000 of its floating rate Preferred Trust Securities at a liquidationamount of $1,000 per security for an aggregate amount of $5,000,000.  For theperiod beginning on (and including) the date of original issuance and ending on(but excluding) June 17, 2005 the rate per annum is 4.84%.  For each successiveperiod beginning on (and including) June 17, 2005, and each succeeding interestpayment date at a rate per annum equal to the 3-month LIBOR plus 1.80%. Interest payment dates are: March 17, June 17, September 17, and December 17during the 30-year term.  The entire $5 million in proceeds was used to reduceBancshares' revolving line of credit with First Tennessee discussed above. This trust preferred debt is recorded as debt by the Company but included asTier I Capital for regulatory reporting in accordance with regulatoryguidelines as discussed above.  

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

First Citizens National Bank hassecured advances from the Federal Home Loan Bank in the amounts of $47,644,000at December 31, 2006 and $65,161,000 at December 31, 2005, which are consideredlong-term in nature. These advances bear interest at rates which vary from3.99% to 6.55%.  Most of the FHLB borrowings have quarterly call features andmaturities range from 2008 to 2011.  If an advance is called, the Company hasthe option to pay off the advance without penalty or to have the advancereprice at a variable rate tied to the 90-day LIBOR.  Obligations are securedby the Bank's entire portfolio of fully disbursed, one-to-four familyresidential mortgages and multi-family residential mortgages.  The Bank hadadditional borrowing capacity of approximately $16 million as of December 31,2006.

-44-

Annual average volume, rates andmaturities of long-term debt for the years 2006 and 2005 are as follows:

Average

Average

Average 

2006

Volume

Interest Rate

Maturity

First Citizens Bancshares, Inc.

** $**

**12,539 **

** **

**7.59 %**

** **

**19 years**

First Citizens National Bank

**58,689 **

** **

**5.32 %**

** **

**5 years**

2005

First Citizens Bancshares, Inc.

 $

13,399   

5.91 %

19 years

First Citizens National Bank

65,102   

5.41 %

4 years

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

Year Ending  December 31,

2007

 $

2,173 

2008

564   

2009

2,570   

2010

33,020   

2011

9,919   

Thereafter

 $

11,292   

 $

59,538   

**NOTE 14 - INCOME TAXES**

Provision for income taxes iscomprised of the following:

**2006**

**2005**

**2004**

Income tax expense (benefit):

 Current

 $

2,970   

 $

3,442   

 $

2,980   

 Deferred

(120)

(355)

261   

 State income tax benefit of operating loss carryforwards

(406)

(257)

-   

 Change in valuation allowance

406   

257   

-   

 $

2,850   

 $

3,087   

 $

3,241   

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

**2006**

**2005**

**2004**

Tax expenses at statutory rate

 $

4,082   

 $

3,996   

 $

3,839   

Increase (decrease) resulting from:

 State income taxes, net federal income tax benefit

** **

       and change in valuation allowance

-   

-   

300   

 Tax exempt interest income

(685)

(607)

(540)

 Earnings on bank owned life insurance

(232)

(276)

(150)

 ESOP dividend

(286)

(270)

(168)

 Other items

(29)

244   

(40)

 $

2,850   

 $

3,087   

 $

3,241   

-45-

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

**2006**

**2005**

Deferred tax assets:

   Allowance for loan losses

 $

2,168   

 $

2,099   

   Net unrealized loss on available-for-sale

      Securities

-   

491   

   Net unrealized loss on cash flow hedge

39   

68   

   Deferred loan fees

119   

111   

   State income tax benefit of operating loss  carryforwards

662   

256   

   Other

73   

82   

     Total deferred tax assets

3,061   

3,107   

Deferred tax liabilities:

** **

   Depreciation

(1,097)

(1,226)

   FHLB stock dividends

(773)

(679)

   Net unrealized gain on available-for-sale

      Securities

(106)

-   

   Prepaid expenses

(100)

(91)

   Other

-   

(55)

      Total deferred tax liabilities

(2,076)

(2,051)

Valuation allowance for state income tax benefit

(662)

(256)

          Net deferred tax assets (liabilities)

 $

323   

 $

800   

At year-end 2006, the Company hasa net operating loss carryforward for state tax purposes of approximately $3.8million expiring in 2020 and $6.2 million expiring in 2021.

**NOTE 15 - REGULATORY MATTERS**

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

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

As of December 31, 2006, the mostrecent notification from the Bank's primary regulatory authorities categorizedthe Bank and Bancshares as well capitalized under the regulatory framework forprompt corrective action. To be categorized as well capitalized, the Bank mustmaintain minimum total risk-based, Tier I risk-based, and Tier I leverageratios as set forth in the table.  There are no conditions or events sincenotification that management believes have changed the institution's category.

To Be Well

Capitalized Under

For Capital

Prompt Corrective

Actual

Adequacy  Purposes

Action  Provisions

**Amount**

**Ratio**

**Amount**

**Ratio**

**Amount**

**Ratio**

*(In Thousands)*

**December 31, 2006:**

Total Capital to Risk

Weighted Assets:

 First Citizens Bancshares

 $

73,629   

12.5 %

 $

47,160   

8.0 %

N/A

N/A

 First Citizens National Bank

74,807   

12.7 %

47,123   

8.0 %

 $

58,903   

10.0 %

Tier I Capital to Risk

Weighted Assets:

 First Citizens Bancshares

67,418   

11.4 %

23,573   

4.0 %

N/A

N/A

 First Citizens National Bank

68,596   

11.6 %

23,654   

4.0 %

35,481   

6.0 %

Tier I Capital to  

Average Assets:

 First Citizens Bancshares

67,418   

8.2 %

32,807   

4.0 %

N/A

N/A

 First Citizens National Bank

68,596   

8.4 %

32,665   

4.0 %

40,831   

5.0 %

**December 31, 2005:**

Total Capital to Risk

Weighted Assets:

 First Citizens Bancshares

69,043   

12.1 %

45,611   

8.0 %

N/A

N/A

 First Citizens National Bank

70,916   

12.5 %

45,569   

8.0 %

56,961   

10.0 %

Tier I Capital to Risk

Weighted Assets:

 First Citizens Bancshares

62,213   

10.9 %

22,810   

4.0 %

N/A

N/A

 First Citizens National Bank

64,091   

11.3 %

22,768   

4.0 %

34,152   

6.0 %

Tier I Capital to  

Average Assets:

 First Citizens Bancshares

62,213   

7.8 %

31,741   

4.0 %

N/A

N/A

 First Citizens National Bank

64,091   

8.1 %

31,728   

4.0 %

39,660   

5.0 %

-46-

**NOTE 16 -CAPITAL**

The Corporation is subject tocapital adequacy requirements imposed by the Federal Reserve Bank.  Inaddition, the Corporation's National Bank Subsidiary is restricted by theOffice of the Comptroller of the Currency from paying dividends in any yearsthat exceeded the net earnings of the current year plus retained profits of thepreceding two years.  As of December 31, 2006, approximately $11.8 million ofretained earnings were available for future dividends from the subsidiary bankto the parent corporation.

**NOTE 17 - RELATED PARTYTRANSACTIONS**

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

Activity in loans to executiveofficers, directors and their affiliates is as follows for the three yearsended December 31, 2006, 2005 and 2004:

**2006**

** **

**2005**

** **

**2004**

Balance at beginning of period

 $

14,396   

 $

14,682   

 $

14,419   

New loans

6,231   

11,209   

12,725   

Repayments

(7,177)

(11,495)

(12,462)

Balance at end of period

 $

13,450   

 $

14,396   

 $

14,682   

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

Indebtedness shown representsamounts owed by directors and executive officers of First Citizens Bancshares,Inc. and First Citizens National Bank and by business in which such persons aregeneral partners or have at least 10% or greater interest and trust and estatesin which they have a substantial beneficial interest.  All loans have been madeon substantially the same terms, including interest rates and collateral, asthose prevailing at the time for comparable transactions with others and do notinvolve other than normal risks of collectibility.  

First Citizens National Bankroutinely enters into deposit relationships with its directors, officers, andemployees in the normal course of business.  These deposits bear the same termsand conditions as those prevailing at the time for comparable transactions withunrelated parties.  Balances of executive officers and directors on deposit asof December 31, 2006 and 2005 were $13.1 million and $11.5 millionrespectively.

First Citizens has invested inthe construction of three new branches and the operations center over the pastthree years.  Contracts for construction of branch facilities and theoperations center were awarded on a competitive bid basis to a related party. Contract payments totaling approximately $1.1 million, $3.2 million, and $1.4million were paid in years ended December 31, 2006, 2005 and 2004,respectively.  

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

**NOTE 18 - FINANCIAL INSTRUMENTSWITH OFF-BALANCE SHEET RISK**

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

Commitments to extend credit areagreements to lend to a customer as long as there is no violation of anycondition established in the contract. Loan commitments generally have fixedexpiration dates or other termination clauses and may require payment of a fee.Since many commitments are expected to expire without being drawn upon, totalcommitment amounts do not necessarily represent future cash requirements. Eachcustomer's credit-worthiness is evaluated on a case-by-case basis, andcollateral required, if deemed necessary by the Bank upon extension of credit,and is based on management's credit evaluation of the counter party. AtDecember 31, 2006 and 2005, First Citizens National Bank had outstanding loancommitments of $107,212,000 and $104,249,000, respectively.  As of year-end2006, variable rate commitments were $84,672,000 and fixed rate commitmentswere $22,540,000.  As of year-end 2005, variable rate commitments were$84,223,000 and fixed rate commitments were $20,026,000.  Of these commitments,none had an original maturity in excess of one year.

Standby letters of credit andfinancial guarantees are conditional commitments issued by the Bank toguarantee performance of a customer to a third party. Those guarantees areissued primarily to support public and private borrowing arrangements, and thecredit risk involved is essentially the same as that involved in extendingloans to customers. The Bank requires collateral to secure these commitmentswhen deemed necessary. At December 31, 2006 and 2005, outstanding standbyletters of credit totaled $4,184,000 and $3,350,000, respectively.

In the normal course of business,First Citizens National 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, 2006 and 2005, however, theBank had no loans sold with recourse. 

**NOTE 19 - SIGNIFICANTCONCENTRATIONS OF CREDIT RISK**

First Citizens National Bankgrants agribusiness, 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 or West Tennessee.  Although the Bank has a diversified loan portfolio, asubstantial portion of its debtors' ability to honor their obligations isdependent upon the agribusiness and industrial economic sectors of thatgeographic area.

-47-

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

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

CASH AND CASH EQUIVALENTS

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

INVESTMENT SECURITIES

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

LOANS RECEIVABLE

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

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

DEPOSIT LIABILITIES

Demand Deposits

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

Variable-Rate Deposits

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

Fixed-Rate Deposits

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

2006

2005

Carrying 

Fair 

Carrying 

Fair 

Amount

Value

Amount

Value

 

*(In Thousands)*

**Financial Assets**

Cash and cash equivalents

 $

32,545   

 $

32,545   

 $

40,686   

 $

40,686   

Investment securities

177,376   

177,377   

161,168   

161,174   

Loans

548,834   

547,217   

Less: allowance for loan losses

(6,211)

(6,830)

        Loans, net of allowance

542,623   

534,758   

540,387   

529,450   

Loans held for sale

3,449   

3,449   

3,043   

3,043   

Accrued interest receivable

6,760   

6,760   

5,478   

5,478   

Federal Reserve Bank and Federal

    Home Loan Bank stock

5,505   

5,505   

5,258   

5,258   

Other assets

63,162   

63,162   

59,729   

59,729   

**Financial Liabilities**

** **

Deposits

 $

666,063   

 $

665,764   

 $

635,509   

 $

635,210   

Short-term borrowings

32,981   

33,541   

35,753   

36,387   

Long-term Ddebt

59,538   

66,928   

78,128   

78,891   

Other liabilities

3,340   

3,340   

2,713   

2,713   

**Unrecognized Financial Instruments**

** **

Commitments to extend credit

 $

107,212   

 $

107,212   

 $

104,249   

 $

104,249   

Standby letters of credit

4,184   

4,184   

3,350   

3,350   

-48-

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

First Citizens National Bankmaintains the First Citizens National Bank of Dyersburg Employee StockOwnership Plan and the First Citizens National Bank 401(k) Plan as employeebenefits. The 401(k) plan was adopted October 1, 2000.  The plans provide for acontribution annually not to exceed 25 percent of the total compensation of allparticipants and affords eligibility for participation to all full-timeemployees who have completed at least one year of service. During the year2006, the Company contributed amounts equal to three percent (3%) of totaleligible compensation to the 401(k) plan and seven percent (7%) of eligiblecompensation to the employee stock ownership plan. Contributions to the planstotaled approximately $1,121,000 in 2006, $1,095,000 in 2005, and $968,000 in2004.

**NOTE 22 - CONDENSED FINANCIAL INFORMATION**

**FIRST CITIZENSBANCSHARES, INC.(Parent CompanyOnly)Balance SheetsDecember 31, 2006and 2005***(In Thousands)*

2006

2005

**ASSETS**

 Cash

 $

132   

 $

147   

 Investment in subsidiaries

81,296   

76,236   

 Due from subsidiaries

0   

100   

 Other assets

49   

170   

TOTAL ASSETS

 $

81,477   

 $

76,653   

**LIABILITIES AND STOCKHOLDERS' EQUITY**

LIABILITIES

 Long term debt

 $

11,893   

 $

12,967   

 Accrued expenses

86   

40   

TOTAL LIABILITIES

11,979   

13,007   

STOCKHOLDERS' EQUITY

69,498   

63,646   

 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 $

81,477   

 $

76,653   

-49-

**FIRST CITIZENSBANCSHARES, INC.(Parent CompanyOnly)Condensed IncomeStatementsYears endedDecember 31, 2006 and 2005***(In Thousands)*

2006

2005

* *

**INCOME**

 Dividends from bank subsidiary

 $

5,677   

 $

5,551   

 Other income

102   

30   

TOTAL INCOME

5,779   

5,581   

**EXPENSES**

 Interest expense

969   

792   

 Other expenses

158   

168   

TOTAL EXPENSES

1,127   

960   

Income before income taxes and equity in undistributed

 Net income of bank subsidiary

4,652   

4,621   

Income tax expense (benefit)

(349)

(312)

5,001   

4,933   

Equity in undistributed net income of bank subsidiary

4,156   

3,732   

**  NET INCOME**

 $

9,157   

 $

8,665   

-50-

**FIRST CITIZENSBANCSHARES, INC.(Parent CompanyOnly)CondensedStatements of Cash FlowsYears endedDecember 31, 2006 and 2005***(In Thousands)*

2006

2005

**Operating Activities**

Net income

 $

9,157   

 $

8,665   

Adjustments to reconcile net income to net cash

 Provided by operating activities:

 Undistributed income of subsidiary

(4,156)

(3,732)

 (Increase) decrease in other assets

225   

25   

 Increase (decrease) in other liabilities

46   

43   

NET CASH PROVIDED BY OPERATING ACTIVITIES

 $

5,272   

 $

5,001   

**Investing Activities**

Investment in subsidiaries

100   

315   

**Financing Activities**

Payment of dividends and payments in lieu of fractional  shares

(4,216)

(4,075)

Long term borrowings issued

0   

5,155   

Payment of principal on long term debt

(1,074)

(6,019)

Treasury stock transactions - net

(97)

(467)

NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES

(5,387)

(5,406)

INCREASE (DECREASE) IN CASH

(15)

(90)

Cash at beginning of year

147   

237   

**CASH AT END OF YEAR**

 $

132   

 $

147   

 -51-

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

Interest 

Net Interest 

Net

E.P.S.

E.P.S.

Income

Income

Income

Basic

Diluted

**2006**

First Quarter

 $

12,344   

 $

6,877   

 $

2,169   

 $

0.60   

 $

0.60   

Second Quarter

13,041   

7,171   

2,245   

0.62   

0.62   

Third Quarter

13,475   

7,092   

2,424   

0.67   

0.67   

Fourth Quarter

13,252   

6,830   

2,319   

0.63   

0.63   

Total

 $

52,112   

 $

27,970   

 $

9,157   

 $

2.52   

 $

2.52   

**2005**

First Quarter

 $

8,713   

 $

6,362   

 $

2,070   

 $

0.57   

 $

0.57   

Second Quarter

9,270   

6,618   

2,306   

0.63   

0.63   

Third Quarter

9,884   

6,945   

2,205   

0.61   

0.61   

Fourth Quarter

10,124   

6,997   

2,084   

0.57   

0.57   

Total

 $

37,991   

 $

26,922   

 $

8,665   

 $

2.38   

 $

2.38   

-52-

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

Not applicable.

**ITEM 9A. CONTROLS AND PROCEDURES**

The Company, under supervision ofand with the participation of its management, including the Chief ExecutiveOfficer and Chief Financial Officer, evaluated the effectiveness of the designand operation of our disclosure controls and procedures as of the end of theperiod covered by this Annual Report.  Disclosure controls and procedures aredefined in accordance with Rule 13a-15(e) under the Securities Exchange Act. As of the end of the period covered by this Annual Report, disclosure controlsand procedures are considered to be effective.  There have been no changes ininternal control during the quarter ending December 31, 2006, that havematerially affected, or are reasonably likely to materially affect, theCompany's internal control over financial reporting.

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

-53-

**PART III**

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

Information appearing inBancshares' 2007 Proxy Statement regarding directors, officers and auditcommittee expert is incorporated herein by reference in response to this Item.

A description of The Code ofEthics (Conduct) for Bancshares included in the 2007 Proxy Statement isincorporated herein by reference in response to this item.

EXECUTIVE OFFICERS OF THEREGISTRANT

The following information relatesto the principal executive officers of Bancshares and its subsidiary, as ofDecember 31, 2006:

Name

Age

Position and Office

Katie S. Winchester

66

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

Ralph Henson

65

Vice President of Bancshares; Executive Vice President of  Loan Administration of First Citizens National Bank.  Employed by First  Citizens in 1964.  Mr. Henson served as Senior Vice President and Senior  Lending Officer until his appointment of Executive Vice President in February  1993.  Elected to Board of Directors in 1997. 

Jeffrey D. Agee

46

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

Barry T. Ladd

66

Appointed Executive Vice President and Chief  Administrative Officer of First Citizens and Bancshares in 1996.  Senior Vice  President and Senior Lending Officer of First Citizens from April 1994 to January  1996.  Employed by First Citizens in 1972.  Mr. Ladd served First Citizens as  Vice President and Lending Officer previous to his appointment as Senior Vice  President. Appointed to Board of Directors in 1996.  Retired as Executive  Officer effective December 31, 2006.

Judy Long

52

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

Christian Heckler

39

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

Laura Beth Butler

31

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

Sherrell Armstrong

44

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

-54-

**ITEM 11.  EXECUTIVECOMPENSATION**

The information required underthis Item is set forth in the 2007 Proxy Statement, and is incorporated byreference.  

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

Ownership of Bancshares' commonstock by certain beneficial owners and by management is set forth inBancshares' 2007 Proxy Statement for the Annual Meeting of Shareholders to beheld April 18, 2007, in the sections entitled Voting Securities and Election ofDirectors and is incorporated herein by reference. 

**ITEM 13.  CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

Officers, Directors and principalshareholders of Bancshares (and their associates) have deposit accounts andother transactions with First Citizens National Bank. These relationships arecovered in detail under the section titled "Certain Relationships andRelated Transactions" of the 2007 Proxy Statement under and incorporatedherein by reference.  

**ITEM 14. PRINCIPAL ACCOUNTINGFEES AND SERVICES **

The Audit Committee informationis incorporated by the reference to the 2007 Proxy Statement.

-55-

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, 2007                               /s/ KATIE WINCHESTER                                                                                                                                   CHAIRMAN,                                                                                       PRESIDENT AND CHIEF EXECUTIVE OFFICER                                                                                                    

                                   Date: March 15, 2007                              /s/    LAURA BETH BUTLER                                                                                                                 SENIORVICE PRESIDENT &PRINCIPAL                                                                                                            FINANCIAL OFFICER  

-56-
** 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following personson behalf of the Registrant and in the capacitiesindicated on March 15, 2006.**/s/        JEFFREY D. AGEE
/s/        RALPH E. HENSON**/s/        DWIGHT S. WILLIAMSDirectorDirectorDirector

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

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

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

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

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

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

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

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

/s/        P. H. WHITE, JR.Director
-57-
**ITEM 15. EXHIBITS,FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

Documents filed as a part of this report:        
Financial Statements:
Page NumberReports of Independent        Accountants31-32Consolidated Balance Sheets as        of December 31, 2006 & 200533Consolidated Statements of        Income for the years ended December 31, 2006, 2005            and 200434Consolidated Statements of        Changes in Shareholders' Equity and Other            Comprehensive Income for the years ended December 31,        2006, 2005 and 200435-36Consolidated Statements of Cash        Flows for the years ended December 31,           2006, 2005, and 200437Notes to Consolidated Financial        Statements38-52
       All other schedules have been omittedbecause of the absence of conditions under which they are required or becausethe required information is given in the above-listed financial statements or notes thereto.

Exhibits

        The following Exhibits are filedherewith or incorporated herein by reference:

Exhibit Number
Description3.1Charter of First Citizens Bancshares, Inc.*3.2Bylaws of First Citizens Bancshares, Inc.*21Subsidiaries of the Registrant31 (a)Certification Pursuant to Section 302 of        the Sarbanes-Oxley Act31 (b)Certification Pursuant to Section 302 of        the Sarbanes-Oxley Act32 (a)Certification Pursuant to Section 906 of        the Sarbanes-Oxley Act32 (b)Certification Pursuant to Section 906 of        the Sarbanes-Oxley Act
* Incorporated by reference toRegistrant's Annual Report on Form 10-K for the year ended December 31, 2001.

-58-******************************