----

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 31,2009

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

Commission file number 0-11709________________________
First CitizensBancshares, Inc.(Exact name of registrant as specified in its charter)
**Tennessee**62-1180360
(State or other jurisdiction of
(IRS Employer Identification No.)
incorporation or organization) **One FirstCitizens PlaceDyersburg, Tennessee 38024(Address of principal executive offices including zip code) **(731) 285-4410(Registrant's telephone number, including area code)**________________________
Securities registered pursuant to Section 12(b) of the Act:Title of each class    NoneName of Each Exchange on Which Registered****N/A
**Securities registered pursuant to Section 12(g) of the Act:Common Stock(Title of class)**________________________**
Indicate by check mark if theregistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act. Yes [ ]   No [ x ]

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

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

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

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 RegulationS-K (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.  [x]

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 on June 30, 2009 wasapproximately$63,175,034 based upon the last known sale price prior to such date.

As ofFebruary 26, 2010, the registrant had 3,625,818 outstanding shares of commonstock.

**________________________**

**DOCUMENTSINCORPORATED BYREFERENCE:**

Certain information called for by Part III of Form10-K is incorporated by reference to the Proxy Statement for our 2010 AnnualMeeting of Shareholders to be filed with the Commission within 120 days afterDecember 31, 2009.

 
ITEM 1.  BUSINESS.
**General**

First Citizens Bancshares, Inc. (the "Company") is a financial holdingcompany incorporated in Tennessee in 1982. Through its principal banksubsidiary, First Citizens National Bank (the "Bank"), the Company conductscommercial banking and financial services operations primarily in West Tennessee. At December 31, 2009, the Company and its subsidiaries had total assets of $957 million and total deposits of $752 million. The Company's principal executiveoffices are located at One First Citizens Place, Dyersburg, Tennessee 38024 andits telephone number is (731) 285-4410.

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

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

The Bank has the followingsubsidiaries:
-  First Citizens Financial Plus, Inc., a bank service corporationwholly owned by the Bank, provides licensed brokerage services that allow theBank to compete on a limited basis with numerous non-bank entities that providesuch services to the Company's customer base.  The brokerage firm operatesthree locations in West Tennessee. 
-  White and Associates/First Citizens    Insurance, LLC was chartered by the State of Tennessee and is a general    insurance agency offering a full line of insurance products including    casualty, life and health, and crop insurance.  The Bank holds a 50%    ownership in the agency, which is accounted for using the equity method.     The insurance agency operates nine offices in Northwest Tennessee.    
-      First Citizens/White and Associates Insurance Company is organized and    existing under the laws of the state of Arizona.  Its principal    activity is credit insurance.  The Bank holds a 50% ownership in the    agency, which is accounted for using the equity method.
-  First Citizens Investments, Inc. was organized and exists underlaws of the state of Nevada.  The principal activity of this entity is toacquire and sell investment securities as well as collect income from theportfolio.  First Citizens Investments, Inc. owns the following subsidiary: 
-        First Citizens Holdings, Inc. is a Nevada corporation and is a wholly      owned subsidiary of First Citizens Investments, Inc., acquires and sells      certain investment securities, collects income from its portfolio, and      owns the following subsidiary:
-          First Citizens Properties, Inc. is a real estate investment trust        organized and existing under the laws of the state of Maryland, the        principal activity of which is to invest in participation interests in        real estate loans made by the Bank and provide the Bank with an        alternative vehicle for raising capital.  First Citizens Holdings,        Inc. owns 100% of the outstanding common stock and 98% of the        outstanding preferred stock of First Citizens Properties, Inc.        Directors, executive officers and certain employees of the Bank own the        remaining 2% of the preferred stock.  The minority interest is not        material to the consolidated financial statements of the Company. 

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

**2009**

** **

**2008**

** **

**2007**

Total assets

 $

956,555   

 $

927,502   

 $

876,156   

Total deposits

752,146   

734,915   

690,595   

Total net loans

578,614   

589,458   

578,311   

Total equity capital

84,312   

77,008   

75,031   

The table belowprovides a comparison of the Company's performance to industry standards basedon information provided by the Federal Reserve. The Company is grouped withpeers that have assets totaling $500 million to $1 billion in this analysis.According to the September 30, 2009 Bank Holding Company Performance Report,which is the most recent report available as of the date of this Annual Reporton Form 10-K, the Company's peer group consisted of 443 bank holding companies.The following table presents comparisons of the Company with its peers asindicated in Bank Holding Company Performance Reports for the years endedDecember 31 for each of the years indicated:

**2009**

**2008**

**2007**

**Company**

**Peer***

**Company**

**Peer**

**Company**

**Peer**

Net interest income to average assets

3.74%

3.30%

3.28%

3.39%

3.36%

3.61%

Net operating income to average assets

0.89%

0.10%

0.83%

0.29%

1.08%

0.90%

Net loan losses to average total loans

0.93%

0.89%

0.31%

0.52%

0.13%

0.18%

Primary capital to average assets 

8.40%

8.72%

8.13%

8.69%

8.47%

9.19%

Cash dividends to net income

45.27%

38.66%

55.85%

42.70%

45.93%

34.92%

________________

* Peer information is provided for the nine months endedSeptember 30, 2009, which is the most recent information available.

The Company andthe Bank employed a total of 250 full-time equivalent employees as of December31, 2009.  The Company and the Bank are committed to hiring and retaining highquality employees to execute the Company's strategic plans.

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

-1-

**Expansion**

The Company, through its strategic planning process, intends to seek profitableopportunities that utilize excess capital and maximize income in Tennessee. If the Company decides to acquire other banking institutions, its objectivewould be for asset growth and diversification into other market areas.Acquisitions and de novo branches might afford the Company increased economiesof scale within the operation functions and better utilization of humanresources. The Company would only pursue an acquisition or de novo branch if theboard of directors determines it to be in the best interest of the Company andits shareholders.  The Company does not currently have plans to acquireother banking institutions.

In 2007, theCompany expanded by opening loan production offices in Jackson, Tennessee and Franklin, Tennessee.  In July 2008, the Franklin office was relocated andopened as a full service branch.  The Company also owns two lots in Jackson, Tennessee which it purchased for construction of full service facilities.  Thelots were purchased in 2007 and 2008, but construction is temporarily on holdbecause of current economic conditions.  Construction of these facilities isexpected to commence in the next two to five years.

**Competition**

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

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

The Bank offersa typical mix of interest-bearing transaction, savings and time depositproducts as well as traditional non-interest bearing deposit accounts. The Bankis a leader in deposit market share compared to competitors in the Dyer,Fayette, Lauderdale, Obion, Tipton and Weakley counties. The Bank hasconsistently been a leader in market share of deposits in its markets forseveral years. The Bank's market share has been 18% to 20% in Dyer, Fayette,Lauderdale, Obion, Tipton and Weakley counties combined and in excess of 62% in  Dyer County for the last three years.  The following market share informationfor these counties (banks only, deposits inside of market) is from the DepositMarket Share Report, as of June 30, 2009, prepared annually by the FDIC(dollars in thousands):

** **

**# of**

** **

**Total Deposits**

** **

**% of Market**

 
**Bank Name**

**Offices**

** **

**6/30/2009**

** **

**Share  06/30/09**

 
First Citizens National Bank

14

 $

602,895   

18.62%

First State Bank

15

744,294   

22.99%

 
Regions Bank

9

285,289   

8.81%

 
Bank of Fayette County

6

195,218   

6.03%

 
Somerville Bank & Trust Co.

5

164,970   

5.10%

 
BancorpSouth Bank

7

145,988   

4.51%

 
Bank of Ripley

4

146,345   

4.52%

 
Commercial Bank & Trust

2

112,026   

3.46%

 
INSOUTH Bank

2

102,456   

3.16%

 
Reelfoot Bank

6

93,366   

2.88%

 
Oakland Deposit Bank

3

87,788   

2.71%

 
Security Bank

6

90,153   

2.78%

 
First South Bank

2

70,612   

2.18%

 
Bank of Gleason

1

54,308   

1.68%

 
Patriot Bank

2

49,893   

1.54%

 
Bank of Halls

2

47,056   

1.45%

 
Brighton Bank

2

42,210   

1.30%

 
Greenfield Banking Co.

2

41,512   

1.28%

 
Lauderdale County Bank

2

35,594   

1.10%

 
Gates Banking & Trust Co.

1

33,048   

1.02%

 
Clayton Bank and Trust

2

32,276   

1.00%

 
All others

8

60,261   

1.88%

 
Total

103

 $

3,237,558   

100.00%

 
The Bank beganoffering full service branch operations in Williamson County, Tennessee in July2008.  Therefore, market share data discussed above excludes the Williamson County market.  Market share as of June 2009 in Williamson County was 0.11%.

The Bank alsocompetes in the Shelby County market.  Because the size and composition of the Shelby County market is much larger and more diverse than the other markets in which the Bankoperates, Shelby County is excluded from the above table.  The Bank's marketshare in Shelby County was 0.62% and 0.72%****in 2009 and 2008,respectively.

-2-

**Regulation and Supervision**

The Company is aone-bank financial holding company under the Bank Holding Company Act of 1956,as amended, and is subject to supervision and examination by the Board ofGovernors of the Federal Reserve. As a financial holding company, the Companyis required to file with the Federal Reserve annual reports and otherinformation regarding its business obligations and those of its subsidiaries. Federal Reserve approval must be obtained before the Company may:

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

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

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

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

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

*Usury, State Legislation andEconomic Environment*

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

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

Specific usurylaws may apply to certain categories of loans, such as the limitation placed oninterest rates on single pay loans of $1,000.00 or less with a term of one yearor less.  Rates charged on installment loans, including credit cards as well asother types of loans, may be governed by the Industrial Loan and ThriftCompanies Act.

*Gramm-Leach-Bliley Act*

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

*Bank Secrecy Act*

Over the past 30plus years, Congress has passed several laws impacting a financialinstitution's responsibilities relating to the Bank Secrecy Act.  In 2005, theFederal Financial Institutions Examination Council ("FFIEC") and federalbanking agencies released the interagency "Bank Secrecy Act Anti-MoneyLaundering Examination Manual." The manual emphasizes a banking organization'sresponsibility to establish and implement risk-based policies, procedures andprocesses to comply with the Bank Secrecy Act and safeguard its operations frommoney laundering and terrorist financing. It is a compilation of existingregulatory requirements, supervisory expectations and sound practices for BankSecrecy Act/Anti-Money Laundering ("BSA/AML") compliance. An effective BSA/AMLcompliance program requires sound risk management; therefore, the manual alsoprovides guidance on identifying and controlling risk associated with moneylaundering and terrorist financing.  

The specificexamination procedures performed will depend on the BSA/AML risk profile of thebanking organization, the quality and quantity of independent testing, thefinancial institution's history of BSA/AML compliance and other relevantfactors.   The Bank has implemented effective risk-based policies andprocedures that reinforce existing practices and encourage a vigilantdetermination to prevent the institution from becoming associated withcriminals or being used as a channel for money laundering or terroristfinancing activities.

*USA Patriot Act*

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

-3-

*FDIC Insurance Coverage*

Beginning withthe Emergency Economic Stabilization Act of 2008, several changes have beenmade to federal deposit insurance coverage with regard to the types of accountscovered and coverage limits.  Included in these changes, basic FDIC coverageper depositor temporarily increased to $250,000 effective through December 31,2013 and rules on revocable trusts were amended to remove qualificationrequirements and allow $250,000 coverage per beneficiary. Two separateinsurance components were created under the FDIC Temporary Liquidity GuaranteeProgram: (i) the Debt Guarantee Program; and (ii) the Transaction AccountGuarantee Program ("TAGP").  The Bank opted to participate only in the TAGPcomponent, under which certain non-interest-bearing transaction accountbalances are temporarily fully guaranteed through June 30, 2010.  The Bank'sFDIC insurance premium assessments will be affected based on participation inTAGP and also as a result of assessment increases required to replenish theFDIC insurance fund ("DIF") following the failure of numerous financialinstitutions in 2008 and 2009. As a result of increased bank failures and adecrease in the DIF, on September 29, 2009, the FDIC required all insuredfinancial institutions to prepay three years of deposit insurance premiums. TheFDIC may require additional special assessment payments if the DIF balancecontinues to decline.

In October 2008,the FDIC proposed a rule to alter the way in which it differentiates for riskin the risk-based assessment system and to revise deposit insurance assessmentrates, including base assessment rates.  The FDIC also proposed to introducethree adjustments that could be made to an institution's initial baseassessment rate, including (i) a potential decrease of up to two basis pointsfor long-term unsecured debt, including senior and subordinated debt, (ii) apotential increase for secured liabilities in excess of 15% of domesticdeposits and (iii) for certain institutions, a potential increase for brokereddeposits in excess of 10% of domestic deposits. In addition, the FDIC proposedraising the current rates uniformly by 7 basis points for the assessment for thefirst quarter of 2009. The proposal for first quarter 2009 assessment rates wasadopted as a final rule in December 2008.  On April 1, 2009, the FDIC madeadditional changes to assessment rates, increasing them to 10-14 basis points for Risk Category I institutions and45 basis points for Risk Category IV institutions.  In addition, on May22, 2009, the FDIC adopted a final rule imposing up to a 10-basis pointemergency special assessment based on a bank's Report of Condition as of June30, 2009. This special assessment was collected on September 30, 2009. 

*Customer Information Securityand Customer Financial Privacy*

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

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

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

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

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

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

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

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

*Identity TheftPrevention Program*

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

*FederalLegislation on Banking Products and Services*

                During 2008,Congress issued federal legislation creating or amending numerous requirementson disclosures, documentation, and procedures in relation to several productsand services offered by financial institutions.  Much of the legislation isbeing issued in response to current adverse economic conditions and providescustomers with additional disclosure information and protections.  Theregulatory changes include, but are not limited to, the Real Estate SettlementProcedures Act, the Truth in Lending Act and the Truth in Savings Act.  TheBank's policies and procedures are being revised to incorporate recentregulatory requirements and ensure full compliance.

*Federal MonetaryPolices*

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

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

*EmergencyEconomic Stabilization Act of 2008*

                As referencedabove, in response to recent unprecedented market turmoil, Congress enacted theEmergency Economic Stabilization Act ("EESA") on October 3, 2008. EESAauthorizes the Secretary of the Treasury (the "Secretary") to purchase up to$700 billion in troubled assets from financial institutions under the TroubledAsset Relief Program ("TARP"). Troubled assets include residential orcommercial mortgages and related instruments originated prior to March 14, 2008and any other financial instrument the purchase of which the Secretarydetermines, after consultation with the Chairman of the Board of Governors ofthe Federal Reserve System, is necessary to promote financial stability.  TheSecretary was authorized to purchase up to $250 billion in troubled assetsimmediately and up to $350 billion upon certification by the President thatsuch authority is needed.  Pursuant to his authority under EESA, the Secretaryof the Treasury created the TARP Capital Purchase Program under which theTreasury Department is investing up to $250 billion in senior preferred stockof U.S. banks and savings associations or their holding companies. The Companyelected not to participate in the TARP Capital Purchase Program.

*InsuranceActivities*

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

-4-
ITEM 1A. RISK FACTORS.
Informationcontained herein includes forward-looking statements with respect to thebeliefs, plans, risks, goals and estimates of the Company.  Forward-lookingstatements are necessarily based upon estimates and assumptions that areinherently subject to significant banking, economic, and competitiveuncertainties, many of which are beyond management's control.  When used inthis discussion, the words "anticipate," "project," "expect," "believe,""should," "will," "intend," "is likely," "going forward," "may" and otherexpressions are intended to identify forward-looking statements.  Theseforward-looking statements are within the meaning of section 27A of theSecurities Act of 1933, as amended, and section 21E of the Securities ExchangeAct of 1934, as amended.  Such statements may include, but are not limited to,capital resources, strategic planning, acquisitions or de novo branching,ability to meet capital guidelines, governmental regulations, construction ofnew branch locations, dividends, critical accounting policies, allowance forloan losses, fair value estimates, goodwill, occupancy and depreciationexpense, held-to-maturity securities, available-for-sale securities, tradingsecurities, cash flows, diversification in the real estate loan portfolio,interest income, maturity of loans, loan impairment, loan ratings, maturity andre-pricing of deposits, borrowings with call features, dividend payout ratio,off-balance sheet arrangements, the impact of recently issued accountingstandards, changes in funding sources, liquidity, interest rate sensitivity,net interest margins, payment status of corporate debt securities, non-accrualstatus of loans, contractual maturities of mortgage-backed securities andcollateralized mortgage obligations, other-than-temporary impairment ofsecurities, amortization expense, deferred tax assets, independent appraisalsfor collateral, property enhancement or additions, efficiency ratio, ratio ofassets to employees, net income, changes in interest rates, loan policies,categorization of loans, maturity of FHLB borrowings and the effectiveness ofinternal control over financial reporting.

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

•        Changes in general economic and business conditions;

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

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

•        Changes in government fiscal and monetary policies;

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

•        Concentrations within our loan portfolio;

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

•        The Company's ability to maintain credit quality;

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

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

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

•        Geographic concentration of the Company's assets;

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

•        Changes in consumer preferences; and

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

The Company undertakes no obligationto update its forward-looking statements to reflect events or circumstancesthat occur after the date of this Annual Report on Form 10-K. 

                In addition tothe factors listed above, management believes that the risk factors set forthbelow should be considered in evaluating the Company's business. The relevantrisk factors outlined below may be supplemented from time to time in theCompany's press releases and filings with the Securities and ExchangeCommission.

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

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

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

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

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

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

Ourprofitability is in part a function of interest rate spread, or the differencebetween interest rates earned on investments, loans and other interest-earningassets and the interest rates paid on deposits and other interest-bearingliabilities. Interest rates are largely driven by monetary policies set by theFederal Open Market Committee (the "FOMC"), and trends in the prevailing marketrate of interest embodied by the yield curve.  The FOMC establishes targetrates of interest to influence the cost and availability of capital and promotenational economic goals.  In December 2008, the FOMC cut rates to a historicallow of a range of 0.00% to 0.25%.  Federal funds rates remained at that levelthrough December 2009.  The yield curve is a representation of the relationshipbetween short-term interest rates to longer-term debt maturity rates. Currently, the yield curve is fairly steep because of short-term rates restingat historic lows, which represents market expectations that interests rateswill rise over current levels.  As of December 31, 2009, The Bank is liabilitysensitive in terms of interest rate risk exposure, meaning that the bank willlikely experience margin compression when federal funds rates increase; Inother words, upward pressure on deposit interest rates will outpace increasesin the interest rates on interest-earning assets.  Deposits are currentlypriced at historically low levels and are likely to re-price at a faster pacethan interest earning assets when the rate environment begins rising.  Themajority of variable rate loans are at priced at floors that will requiresignificant increase in federal fund and prime rates before loan yieldsincrease.  Federal Home Loan Bank borrowings comprise the majority of wholesaleborrowings, the majority of which will re-price steadily over the next 18months.

                Prepayment ofprincipal cash flows from the investment portfolio is expected to be steady in2010 as rates continue to be very low. Credit availability has improvedrecently because of the actions of the Federal Reserve and U. S. TreasuryDepartment described above. Reinvestment rates on the investment portfolio havedropped significantly (greater than 100 basis points) over the last 12 months.

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

-5-

**We are geographically concentratedin West Tennessee, and changes in local economic conditions impact ourprofitability.**

We operateprimarily in western Tennessee and substantially all loan customers and mostdeposit and other customers live or have operations in this area. Accordingly,our success depends significantly upon growth in population, income levels,deposits, housing starts and continued attraction of business ventures to thisarea. Our profitability is impacted by changes in general economic conditionsin this market. One area of particular concern for 2010 is the residential realestate market in the Shelby County and surrounding markets as inventoriesescalated and values declined in 2008 and 2009. Additionally, unfavorable localor national economic conditions could reduce our growth rate, affect theability of our customers to repay their loans and generally affect ourfinancial condition and results of operations. 

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

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

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

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

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

**Failure to remain competitive in anincreasingly competitive industry may adversely affect results of operations andfinancial condition.**

                We encounterstrong competition from other financial institutions in our market areas. Inaddition, established financial institutions not already operating in ourmarket areas may open branches in our market areas at future dates or maycompete in the market via the internet. Certain aspects of our banking businessalso compete with savings institutions, credit unions, mortgage bankingcompanies, consumer finance companies, insurance companies and other institutions,some of which are not subject to the same degree of regulation or restrictionsimposed on us. Many of these competitors have substantially greater resourcesand lending limits and are able to offer services that we do not provide. Whilewe believe that we compete effectively with these other financial institutionsin our market areas, we may face a competitive disadvantage as a result of oursmaller size, smaller asset base, lack of geographic diversification andinability to spread our marketing costs across a broader market. If we have toraise interest rates paid on deposits or lower interest rates charged on loansto compete effectively, our net interest margin and income could be negativelyaffected. Failure to compete effectively to attract new or to retain existingclients may reduce or limit our margins and our market share and may adverselyaffect our results of operations and financial condition.

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

                The failure ofnumerous banks in 2008 and 2009 may have a negative impact on our earnings, aspremiums required for FDIC insurance may continue to increase in 2010 andbeyond.**** In 2009, we paid FDIC deposit insurance assessments totaling$5.6 million, including a special assessment of $425,000 paid during thirdquarter 2009 and prepaid assessment of $4.5 million paid in fourth quarter2009, as compared to aggregate payments of approximately $144,000 in 2008.  Wecannot give any assurances that the FDIC will not require additional specialassessments or increase deposit insurance assessments in the future. 

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

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

The publicperception of our ability to conduct business and expand our customer base mayalso be affected by practices of the Company's board, management and employees.Significant relationships with vendors, customers and other external partiesmay also affect our reputation. Adverse perceptions about our businesspractices or the business practices of those with whom we have significantrelationships could adversely impact our results of operations and financialcondition. 

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

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

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

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

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

                As a holdingcompany, the Company is a separate legal entity from the Bank and does notconduct significant income-generating operations of its own. It currentlydepends upon the Bank's cash and liquidity to pay dividends to itsshareholders. We cannot provide assurance that in the future the Bank will havethe capacity to pay dividends to the Company. Various statutes and regulationslimit the availability of dividends from the Bank. It is possible, dependingupon the Bank's financial condition and other factors, the Bank's regulatorscould assert that payment of dividends by the Bank to the Company is an unsafeor unsound practice. In the event that the Bank is unable to pay dividends tothe Company, we may not be able to pay dividends to our shareholders.

-6-
ITEM 1B UNRESOLVED STAFF COMMENTS
** **None. 
ITEM 2. PROPERTIES
The Bank has 17full-service bank financial centers, three drive-through only branches, oneloan production office and 30 ATMs spread over nine****Tennessee counties.A list of available banking locations and hours is maintained on the Bank'swebsite (www.firstcitizens-bank.com) under the "Locate Us" section.  The Bankowns and occupies the following properties:

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

•        The Bank's downtown drive-through branch is located at 113 SouthChurch Street, Dyersburg, Dyer County, Tennessee and is a remote motor bankwith six drive-thru lanes and a drive-up ATM lane;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

•        A lot located on Union University Drive in Jackson, Tennesseethat was purchased in February 2008 and on which the Company expects toconstruct a full service branch in the next two to five years.

The Bank ownsall properties and there are no liens or encumbrances against any propertiesowned by the Bank.  All properties described above are adequate and appropriatefacilities to provide banking services as noted and are adequate to handlegrowth expected in the foreseeable future.  As growth continues or needschange, individual property enhancements or additional properties will beevaluated as necessary.
ITEM 3. LEGAL PROCEEDINGS.
Various legal claimsarise from time to time through the normal course of business of the Companyand its subsidiaries.  There was no material pending or threatened litigationagainst the Company or its subsidiaries as of December 31, 2009.
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS.
During thefourth quarter of the year ending December 31, 2009, there were no annual orspecial meetings of the Company's shareholders. No matters were submitted to avote of the shareholders nor were proxies solicited by management or any otherperson.

-7-
PART IIITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITYAND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
**Holders and Market Information**

As of February26, 2010, there were 1,069 shareholders of the Company's common stock. TheCompany's common stock is not listed or traded on any established publictrading market. The table below shows the quarterly range of high and low saleprices for the Company's common stock during the fiscal years 2009 and 2008.These sale prices represent known transactions reported to the Company and donot necessarily represent all trading transactions for the periods.

Year

High

Low

2009

First Quarter

 $

31.00   

 $

28.00   

Second Quarter

28.00   

26.00   

Third Quarter

26.00   

26.00   

Fourth Quarter

32.00   

29.80   

2008

First Quarter

 $

34.00   

 $

34.00   

Second Quarter

34.00   

34.00   

Third Quarter

34.00   

31.00   

Fourth Quarter

31.00   

31.00   

**Dividends**

The Company paidaggregate dividends per share of the Company's common stock of $1.04 in 2009and $1.16 in 2008.  The following quarterly dividends per share of common stockwere paid for 2009 and 2008:

Quarter

2009

2008

First Quarter

 $

0.29 

 $

0.29 

Second Quarter

0.15 

0.29 

Third Quarter

0.15 

0.29 
Fourth Quarter
             0.45 
            0.29 

      Total

 $

1.04 

 $

1.16 

Future dividendswill depend on the Company's earnings, financial condition, regulatory capitallevels and other factors, which the board of directors considers relevant.  SeeNote 16 to the Company's Consolidated Financial Statements included elsewherein this Annual Report on 10-K for more information on restrictions andlimitations on the Company's ability to pay dividends.

**Issuer Purchases of EquitySecurities**

The Company hadno publicly announced plans or programs for purchase of stock during 2009. TheCompany purchased 1,000 shares of its common stock at a weighted average costof $26.00 per share for the year ended December 31, 2009. There were no sharesof Company common stock repurchased in open-market transactions not pursuant topublicly announced plans or programs during the quarter ended December 31,2009.

**Unregistered Sale ofSecurities**

The Company sold1,519 shares of its common stock in 2009 at a weighted average price of $27.69per share for an aggregate price of $42,054.  Sales of these shares occurred in2009 as follows (in dollars, except number of shares):

No. of

Aggregate

Date

Shares

Price

February 3, 2009

500

 $

15,500   

May 18, 2009

2

52   

May 27, 2009

2

52   

June 10, 2009

2

52   

June 18, 2009

1,000

26,000   

June 24, 2009

1

26   

July 28, 2009

2

52   

December 21, 2009

10

320   

           1,519  

 $

42,054   

The Company alsosold 150 shares of its common stock in 2008 at a weighted average price of$34.74 per share for an aggregate price of $5,211 and sold 413 shares of itscommon stock in 2007 at a weighted average price of $36.10 per share for anaggregate price of $14,909.  The Company used proceeds from such sales toacquire additional shares of Company common stock and to pay general expensesof the Company. All shares of common stock were issued in reliance upon theexemption from the registration requirements of the Securities Act of 1933, asamended (the "Securities Act"), as set forth in Section 4(2) under theSecurities Act and, in some cases, Rule 506 of Regulation D promulgatedthereunder relating to sales by an issuer not involving any public offering, tothe extent an exemption from such registration was required.
ITEM 6. SELECTED FINANCIAL DATA.
The followingtable presents selected financial data of the Company for the 12 months endedDecember 31, for the years indicated (dollars in thousands, except per sharedata):

**2009**

**2008**

**2007**

**2006**

**2005**

Net interest and fee income 

 $

33,199   

 $

29,833   

 $

27,429   

 $

26,785   

 $

25,740   

Gross interest income 

49,011   

52,467   

54,279   

50,927   

43,432   

Income from continuing operations

8,327   

7,529   

9,160   

9,157   

8,665   

Net income per common share

2.30   

2.08   

2.53   

2.52   

2.38   

Cash dividends declared per common share

1.04   

1.16   

1.16   

1.16   

1.12   

Total assets at year-end

956,555   

927,502   

876,156   

831,420   

815,749   

Long-term obligations (1)

42,216   

73,843   

63,165   

59,538   

78,128   

Allowances for loan losses as a % of total loans

1.50 %

1.22 %

1.08 %

1.13 %

1.25 %

Allowances for loan losses as a % of

 non-performing loans

96.87 %

168.09 %

336.24 %

471.96 %

349.36 %

Loans 90 days past due as a % of total loans

1.54 %

0.73 %

0.32 %

0.24 %

0.36 %

________________

(1) Long-term obligations consistof Federal Home Loan Bank ("FHLB") advances that mature after December 31, 2010and trust-preferred securities.

 

-8-
**ITEM 7. MANAGEMENT'SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**Executive Overview
For the year ended December 31,2009, the Company's stable core earnings streams resulted in a return on equityin excess of 10%.  Dividends were reduced slightly, however, from $1.16 pershare in 2008 to $1.04 in 2009.  Improving net interest margins, gains on saleof available-for-sale securities and management's commitment to improvedefficiencies and cost control served to more than offset challenges presentedby the current economic recession, resulting in increased net income for 2009compared to 2008.  Such challenges consisted primarily of stressed real estateconditions and job losses in local markets, increased provision for loanslosses and other-than-temporary impairment on a small volume ofavailable-for-sale securities.

The year ended December 31, 2009resulted in increased earnings of $8.3 million compared to $7.5 million in 2008and****$9.2 million in 2007.  The major drivers of increased earnings wereimprovement in net interest margins and gain on sale of available-for-salesecurities.  Provision for loan losses was $7.1 million in 2009 compared to$2.9 million in 2008 and approximately $834,000 in 2007.  Gain on sale ofavailable for sale securities totaled $1.2 million and net credit losses ofother-than-temporary impairment realized in earnings totaled approximately$651,000 compared to realized impairment loss on shares of Fannie Mae andFreddie Mac preferred stock of $1.8 million in 2008.  Earnings per share were$2.30 for the year ended December 31, 2009, compared to $2.08 for the yearended December 31, 2008 and $2.53 for the year ended December 31, 2007. 

During 2009, capital growth of9.5% outpaced asset growth of 3.1%.  Capital growth greater than asset growthwas attributable to $4.6 million increase in retained earnings and $2.7 millionimprovement in accumulated other comprehensive income.  Increase in retainedearnings of $4.6 million was a result of increased earnings and lower dividendsin 2009 compared to 2008.  Increased accumulated other comprehensive income isa result of unrealized appreciation of the available-for-sale securitiesportfolio compared to prior year.  Improved earnings combined with 9.5% capitalgrowth yielded return on average equity of 10.19% for 2009 compared to 10.07%for 2008 and 12.79% 2007.  Return on assets ("ROA") was 0.89%, 0.83%, and 1.08%for 2009, 2008 and 2007, respectively.  Return on equity ("ROE") of 10.19% andROA of 0.89% for 2009 exceeded the same measures for the Southeast Public BankPeer Report, as produced by Mercer Capital'sFinancial Institutions Group (the "Peer Report"), which reported an average ROE of negative 9.95% andaverage ROA of negative 0.73% for 2009.  

In 2009, the Company's dividendpayout ratio was 45% which was on the lower end of the Company's historicalrange of 45% to 55% over the past five years.  Dividend yield was 3.35%, whichwas comparable to historical dividend yields in excess of 3%.  The Peer Reportreported peer dividend payout ratio in excess of 71% and dividend yield of1.76% for 2009.  

Maintaining and improving netinterest margins continue to be a top priority for many financial institutions,including the Bank.  The Company's net interest margin had been stable from2005 to 2008 in the range of 3.75% to 4.00% and increased to 4.20% in 2009during the prolonged historically low rate environment.  Net interest margin of4.20% for 2009 was a 36 basis point improvement compared to 3.84% for 2008. Interest rate risk position for the Company is liability sensitive, which alsocontributed to the improvement of net interest margins in 2009.  For moreinformation, see Item 7A of this Annual Report on Form 10-K.  

The efficiency ratio is ameasure of non-interest expense as a percentage of total revenue.  The Companycomputes the efficiency ratio by dividing non-interest expense by the sum ofnet interest income on a tax equivalent basis and non-interest income.  This isa non-GAAP financial measure, which we believe provides investors withimportant information regarding our operational efficiency.  Comparison of ourefficiency ratio with those of other companies may not be possible becauseother companies may calculate the efficiency ratio differently.  The efficiencyratio for the years 2009, 2008 and 2007 was 59.78%, 66.14%, and 66.02%,respectively.  

The tangible common equity ratiois a non-GAAP measure used by management to evaluate capital adequacy. Tangiblecommon equity is total equity less net accumulated other comprehensive income("OCI"), goodwill and deposit-based intangibles. Tangible assets aretotal assets less goodwill and deposit-based intangibles.  The tangible commonequity ratio is 7.20% as of year end 2009 compared to 6.92% in 2008 and 7.16%in 2007.

A reconciliation of non-GAAPmeasures of efficiency ratio and tangible common equity is provided as follows:

**2009**

** **

**2008**

** **

**2007**

**Efficiency ratio:**

Net interest income(1)

 $

34,891   

 $

31,033   

 $

28,456   

Non-interest income(2)

12,462   

11,395   

12,817   

      Total revenue

47,353   

42,428   

41,273   

Non-interest expense

28,309 

28,064 

27,247 

Efficiency ratio

59.78 %

66.14 %

66.02 %

**Tangible common equity ratio:**

** **

** **

** **

** **

** **

Total equity capital

 $

84,312   

 $

77,008   

 $

75,031   

Less:

Accumulated other comprehensive income

4,256   

1,526   

944   

Goodwill

11,825   

11,825   

11,825   

Other intangible assets

204   

289   

373   

Tangible common equity

 $

68,027   

 $

63,368   

 $

61,889   

Total assets

 $

956,555   

 $

927,502   

 $

876,156   

Less:

Goodwill

11,825   

11,825   

11,825   

Other intangible assets

204   

289   

373   

Tangible assets

 $

944,526   

 $

915,388   

 $

863,958   

Tangible common equity ratio

7.20 %

6.92 %

7.16 %

___________________

(1)           Net interest income includes interest andrates on securities that are non-taxable for federal income tax purposes thatare presented on a taxable equivalent basis based on federal statutory rate of34%.

(2)           Non-interest income is presented net ofany credit impairment recognized against earnings for the years presented. 
Critical Accounting Policies
The accountingand reporting of the Company and its subsidiaries conform to accountingprinciples generally accepted in the United States ("GAAP") and follow generalpractices within the industry.  Preparation of financial statements requires managementto make estimates and assumptions that affect amounts reported in the financialstatements and accompanying notes. Management believes that the Company'sestimates are reasonable under the facts and circumstances based on pastexperience and information supplied from professionals, regulators and others. Accounting estimates are considered critical if (i) management is required tomake assumptions or judgments about items that are highly uncertain at the timeestimates are made and (ii) different estimates reasonably could have been usedduring the current period, or changes in such estimates are reasonably likelyto occur from period to period, that could have a material impact onpresentation of the Company's Consolidated Financial Statements.  

The development,selection and disclosure of critical accounting policies are discussed andapproved by the Audit Committee of the Board of Directors.  Because of thepotential impact on the financial condition or results of operations and therequired subjective or complex judgments involved, management believes itscritical accounting policies consist of the allowance for loan losses, fairvalue of financial instruments and goodwill.
*Allowance For Loan Losses*
                The allowancefor losses on loans represents management's best estimate of inherent losses inthe existing loan portfolio.  Management's policy is to maintain the allowancefor loan losses at a level sufficient to absorb reasonably estimated andprobable losses within the portfolio.  Management believes the allowance forloan loss estimate is a critical accounting estimate because:  changes canmaterially affect provision for loan loss expense on the income statement,changes in the borrower's cash flows can impact the reserve, and management makesestimates at the balance sheet date and also into the future in reference tothe reserve.  While management uses the best information available to establishthe allowance for loan losses, future adjustments may be necessary if economicor other conditions change materially.  In addition, federalregulatory agencies as a part of their examination process periodically reviewthe Bank's loans and allowances for loan losses and may require the Bank torecognize adjustments based on their judgment about information available tothem at the time of their examination.  See Note 1 of the Company'sConsolidated Financial Statements included elsewhere in this Annual Report onForm 10-K for more information.
*Fair Value of Financial Instruments*
GAAP requiresthat certain assets and liabilities be carried on the balance sheet at fairvalue.  Further, the fair value of financial instruments must be disclosed as apart of the notes to the consolidated financial statements for other assets andliabilities.  Fair values are volatile and may be influenced by a number offactors, including market interest rates, prepayment speeds, discount rates,the shape of yield curves and the credit worthiness of counter parties. 

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

Fair value ofthe only derivative held by the Company is determined using a combination ofquoted market rates for similar instruments and quantitative models based onmarket inputs including rate, price and index scenarios to generate continuousyield or pricing curves and volatility factors.  Third party vendors are usedto obtain fair value of available-for-sale securities and the cash flow hedge.For more information, see Notes 1 and 20 in the Company's ConsolidatedFinancial Statements included elsewhere in this Annual Report on Form 10-K. 

*Goodwill*

                The Company'spolicy is to review goodwill for impairment at the reporting unit level on anannual basis unless an event occurs that could potentially impair the goodwillamount.  Goodwill represents the excess of the cost of an acquired entity overfair value assigned to assets and liabilities.  Management believes accountingestimates associated with determining fair value as part of the goodwill testare critical because estimates and assumptions are made based on prevailingmarket factors, historical earnings and multiples and other contingencies. Formore information, see Notes 1 and 8 in the Consolidated Financial Statementsincluded elsewhere this Annual Report on Form 10-K.

-9-
RESULTS OF OPERATIONS
The Companyreported consolidated net income of $8.3 million for the year ended December31, 2009 compared to $7.5 million in 2008 and $9.2 million in 2007.  Theincrease from 2009 to 2008 was a result of increases in net interest income andother non-interest income, which served to more than offset increases in provisionfor loan losses, other-than-temporary impairment credit losses onavailable-for-sale securities, increased premiums for FDIC insurance andincreased expenses related to other real estate. Earnings per share were $2.30for 2009 compared to $2.08 for 2008 and $2.53 for 2007. Return on averageassets was 0.89%, 0.83%, and 1.08%, for the years ending December 31, 2009,2008 and 2007, respectively.  Return on average equity was 10.19%, 10.07%, and12.79% for 2009, 2008 and 2007, respectively.  

Asset growth wasmodest at 3.1% in 2009 compared to 5.9% in 2008.  Asset growth of $29 millionwas driven primarily by growth in available-for-sale investment securities of$39 million as a result of management's strategy to realize appreciation in theinvestment portfolio.  Federal funds sold decreased $12 million, loansdecreased $9 million and other real estate increased $5 million in 2009compared to 2008.  Deposit growth of 2.34% or $17.2 million in 2009 compared to2008 consisted of increased savings deposits of $62 million offset by decreaseddemand deposits of $8 million and decreased time deposits of $36 million. 

Prevailingeconomic factors including, but not limited to, stressed real estate markets,job losses and the market interest rate environment put pressure on assetquality across the industry during 2009.  The Bank has been challenged bydeteriorating asset quality over the past three years primarily because of thedownturn in real estate markets in and around Shelby County in Tennessee.  Economic conditions have resulted in non-performing loans and other real estatelevels above historical ranges experienced in recent years prior to 2008. While economic trends were unfavorable in 2008 and 2009, such conditions wereconsidered manageable by the Company's management and core earnings streamswere generally able to absorb required increased provision for loan losses aswell as increased expense and losses related to other real estate owned. Non-performing loans and other real estate as a percent of total loans plusother real estate at December 31, 2009 were 3.28% compared to 1.63% at December31, 2008 and 0.71% at December 31, 2007,****while the Bank's peer group'saverage was 4.23% as reported in the UniformBank Performance Report at December 31, 2009 for all insured commercialbanks having assets between $300 million and $1 billion.  Net charge-offs in2009 were $5.6 million compared to $1.9 million and approximately $717,000 in2008 and 2007, respectively. The allowance for loan losses as a percent of non-performingloans was 96.8%, 167.2%, and 336% for 2009, 2008 and 2007, respectively.  Thenegative trends in these key asset quality metrics over the last three yearswere consistent with impact of distressed real estate markets and othernegative economic conditions in the Bank's local markets as well as theindustry as a whole.  Other real estate owned ("OREO") totaled $10.5 million,$5.4 million, and $2.3 million as of December 31, 2009, 2008 and 2007,respectively.   

Provision forloan losses increased in 2009 compared to 2008 in response to upward trends innon-performing assets. The allowance for loan losses as a percent of totalloans was 1.50% at year-end 2009 compared to 1.22% at year-end 2008 and 1.08%at year-end 2007.  Additions made to the reserve account, as a percent of grosscharge-offs, for 2009 were 118.6% compared to 125.7% and 76.1% for 2008 and2007, respectively.  The allowance for loan losses was evaluated in accordancewith GAAP and was weighted toward actual historical losses and included factoradjustments for changes in environmental conditions.  The methodology used toevaluate the adequacy of the allowance was consistent with prior years. Application of such methodology in the prevailing environment resulted in ahigher allowance for loan losses as a percent of total loans when compared toprior years.  Based on the then current analysis of the portfolio, theincreased allowance for loan losses as a percent of total loans to 1.50% as ofyear end 2009 was considered adequate to properly account for changes in theeconomies of local markets, changes in collateral values, variables inunderwriting methods, increased levels of charged-off loans and increasednon-performing loans.  The Company's analysis in 2009 increased the generalallocation to unimpaired loans from 0.95% of loans in 2008 to 1.12% of loans in2009 while specific allocations on impaired loans increased from 1.90% of totalimpaired loans with specific allocations in 2008 to 2.04% in 2009.  

Consistent withprior years, the Company continues to show asset quality indicators in terms of30-89 days past due, nonperforming loans and charge-offs below peer levels. Comparison of key asset quality indicators for the Company and peer were asfollows for the last five years:

** 2009**

** **

** 2008**

** **

** 2007**

** **

** 2006**

** **

** 2005**

**COMPANY**

** **

**PEER***

** **

**COMPANY**

** **

**PEER**

** **

**COMPANY**

** **

**PEER**

** **

**COMPANY**

** **

**PEER**

** **

**COMPANY**

** **

**PEER**

Allowance as % of total  loans

1.50%

1.82%

1.22%

1.43%

1.08%

1.21%

1.13%

1.21%

1.24%

1.23%

Non-performing loans to  total loans

1.54%

3.14%

0.74%

2.07%

0.32%

1.03%

0.24%

0.55%

0.33%

0.49%

Loans 30-89 days past due to  total loans

0.93%

1.44%

1.15%

1.43%

0.74%

1.11%

0.62%

0.79%

0.91%

0.64%

Net charge-offs to average  total loans

0.93%

1.06%

0.31%

0.51%

0.13%

0.18%

0.23%

0.11%

0.07%

0.13%

___________________

*              Peer data is derived from the UniformBank Performance Report as of December 31 of the year indicated  for allinsured commercial banks having assets between $300 million and $1 billion.

The Company'sallowance as a percent of loans was less than peer as the Company'snon-performing loans (loans 90 days or more past due accruing interest andnon-accrual loans) were also below peer as of year-end 2009.  In addition, theCompany's loan portfolio demonstrated greater diversification than peer inregards to concentration levels of commercial real estate loans (constructionand development loans and non-owner occupied commercial loans).  For moreinformation regarding loans and allowance for loan losses, see the sectionbelow entitled "Financial Condition -- Loan Portfolio Analysis" and Note 1 tothe Consolidated Financial Statements included elsewhere in this Annual Reporton Form 10-K.

Net yield onaverage earning assets improved to 4.20% for 2009 compared to 3.84% for 2008and 3.78% for 2007.  Net interest margin improvement was attributed to theCompany's ability to re-price at lower rates interest bearing liabilities,primarily time deposits, in a greater volume than decreases in yields oninterest earning assets.  The Bank remained in a liability sensitive positionas of year end 2009 and could face margin compression when the rate environmentbegins rising.  For more information about the Company's interest ratesensitivity, see Item 7A of this Annual Report on Form 10-K.

Totalnon-interest income for 2009 decreased approximately $83,000 compared to 2008. The net decrease was mostly offset by increased gains on sale of securities of$1.2 million in 2009 compared to approximately $436,000 in 2008.  Other-than-temporarycredit impairment losses on available-for-sale securities for 2009 totaledapproximately $651,000 and related to two different series of pooled trustpreferred securities.  The 2008 impairment charge of a $1.81 million wasprimarily a result of impairment of Fannie Mae and Freddie Mac perpetualpreferred stock caused when the Federal Housing Finance Agency placed bothFannie Mae and Freddie Mac under conservatorship in the third quarter of 2008.

Non-interestincome from mortgage banking, fiduciary activities and bank-owned lifeinsurance were flat in 2009.  Despite the challenges of the national realestate market, the markets served by the Bank continued to deliver consistentmortgage activity and stable, non-interest income.  Gross income and feesrecorded from mortgage activity totaled $1.1 million in 2009 and 2008 and $1.2million in 2007.  Income from fiduciary activities totaled approximately$800,000 in 2009 and 2008 and $1 million in 2007.  Bank-owned life insuranceearnings totaled approximately $830,000 per year in 2009 and 2008 andapproximately $700,000 in 2007.  Fee income from deposit accounts, whichincluded interchange fees on debit and ATM transactions, was $6.9 million in2009, $7.2 million in 2008 and $6.9 million in 2007.  Decreased service chargeson deposits were primarily a result of decreased income from overdraft fees. Recent legislation that becomes effective in 2010 will likely result indilution of overdraft fee income in 2010 and going forward.  Brokerage fees decreasedapproximately $156,000 in 2009 because of continued volatility in stock andbond markets and weak consumer confidence during 2009.

The Company'seffective tax rate was 20% in 2009 compared to 27% in 2008 and 25% in 2007. The effective tax rate was impacted by fluctuations in certain factorsincluding, but not limited to, the level of tax-free investments within theBank's investment portfolio, tax-exempt earnings and expenses on Bank-ownedlife insurance policies, certain tax benefits that result from dividends andpayouts under the Company's Employee Stock Ownership Plan ("ESOP"), temporarydifferences resulting from use of accelerated deprecation for tax purposes andother factors incidental to the financial services business.  Fluctuations inthe deduction related to the ESOP dividends and payouts, tax-exempt interestearned in the investment portfolio and increased earnings and expenses onBank-owned life insurance were the largest contributors to the variouseffective rates for the past three years.  

Interest-earningassets in 2009 averaged $831 million at an average rate of 6.1% compared to$808 million at an average rate of 6.7% in 2008 and $753 million at an averagerate of 7.3% in 2007.  Interest bearing liabilities at year-end 2009 averaged$754 million at a cost of 2.1% compared to $737 million at a cost of 3.1% atyear-end 2008 and $679 million at a cost of 4.0% at year-end 2007.  Thefollowing table presents the year-to-date daily average balance sheet and netinterest income analysis for the years ended December 31, 2009, 2008 and 2007(dollars in thousands):

YEAR-TO-DATE AVERAGES AND RATES

2009

2008

2007

 Average  

Average

 Average  

Average

 Average  

Average

 Balance  

 Interest  

Rate

 Balance  

 Interest  

Rate

 Balance  

 Interest  

Rate

ASSETS

**Interest Earning  Assets:**

Loans (1)(2)(3)

 $

589,528  

$    38,402  

6.51%

 $

606,015  

 $

42,356  

6.99%

 $

560,229  

 $

44,700  

7.98%

Investment securities:

   Taxable

148,140  

7,260  

4.90%

141,724  

7,643  

5.39%

137,571  

7,087  

5.15%

   Tax-exempt (4)

75,752  

4,977  

6.57%

54,204  

3,529  

6.51%

46,481  

3,020  

6.50%

Interest earning

   Deposits

914  

16  

1.75%

867  

42  

4.84%

773  

47  

6.08%

Federal funds sold

       16,392  

       48  

0.29%

     4,721  

         97  

2.05%

      7,968  

     452  

5.67%

**Total interest earning  assets**

**830,726 **

**50,703 **

**6.10%**

**807,531 **

**53,667 **

**6.65%**

**753,022 **

**55,306 **

**7.34%**

**Non-interest  earning assets**

Cash and due from banks

14,989  
      
 

16,357  
      
 

16,586  
      
Premises & equipment

31,143  
      
34,771  
      
28,743  
      
Other assets

     56,178  
      
      51,325  
      
     49,705  
      
Total assets

 $

933,036  
      
 $

909,984   
      
 $

848,056   
      
======
======

======
**LIABILITIES AND**

**   SHAREHOLDERS' EQUITY**

 

**Interest bearing  liabilities**

Savings deposits

$     265,055  

$     3,007  

1.31%

 $

217,754  

 $

2,846  

1.31%

 $

201,506  

 $

3,794  

1.88%

Time deposits

374,469  

8,722  

2.33%

390,233  

14,671  

3.76%

372,109  

17,822  

4.79%

Federal funds purchased and

   other interest  bearing

   liabilities

     114,624  

      4,083  

3.56%

     129,194  

     5,117  

3.96%

      105,218  

      5,234  

4.97%

Total interest bearing  liabilities

754,148  

15,812  

2.10%

737,181  

22,634  

3.07%

678,833  

26,850  

3.96%

(Table continued on next page.)

-11-

YEAR-TO-DATE AVERAGES AND RATES

2009

2008

2007

 Average 

Average

 Average 

Average

 Average 

Average

 Balance 

 Interest 

Rate

 Balance 

 Interest 

Rate

 Balance 

 Interest 

Rate

**Non-interest bearing liabilities**

Demand deposits

 $

89,819  
      
 $

90,999  
      
 $

93,413  
      
Other liabilities

          7,367  
      
         7,061  
      
         4,189  
      
Total liabilities

851,334  
      
835,241  
      
834,783   
      
Total shareholders' equity

         81,702  
      
       74,743  
      
       71,621  
                     
Total liabilities and
            
   shareholders' equity

 $

933,036  
      
 $

909,984  
      
 $

906,404  
         
**Net Interest Income**
   
** $**

**34,891 **
      
** $**

**31,033 **
      
** $**

**31,033 **
   
**Net Yield on Average**
   
**   Earning Assets**
      
**4.20 %**
      
**3.84%**
      
**   3.84%**

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

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

(3)           Includesloans on non-accrual status.

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

*Volume Rate Analysis*

The following table provides an analysis of the impact of changes inbalances and rates on interest income and interest expense changes from 2009 to2008 and 2008 to 2007 (in thousands):
   **2009 Compared to 2008Due to Changes in:****2008 Compared to 2007Due to Changes in:**
** **

** **

** **

** **

**Total**

** **

** **

** **

** **

** **

**Total**

**Average**

** **

**Average**

** **

**Increase**

** **

**Average**

** **

**Average**

** **

**Increase**

**Volume**

** **

**Rate**

** **

**(Decrease)**

** **

**Volume**

** **

**Rate**

** **

**(Decrease)**

Interest earned on:

** **

** **

** **

** **

** **

** **

** **

** **

** **

Loans

 $

(1,073)

 $

(2,881)

 $

(3,954)

 $

3,200   

 $

(5,544)

 $

(2,344)

Taxable securities

314   

(697)

(383)

224   

332   

556   

Tax exempt securities

1,416   

32   

1448 

503   

6   

509   

Interest bearing

 deposits with other banks

1   

(27)

(26)

5   

(10)

(5)

Federal funds sold and

 securities purchased

 under agreements to sell

34   

(83)

(49)

(67)

(288)

(355)

Total interest earning assets

 $

692   

 $

(3,656)

 $

(2,964)

 $

3,865   

 $

(5,504)

 $

(1,639)

Interest expense on:

 Savings deposits

535   

(374)

161   

213   

(1,161)

(948)

 Time deposits

(367)

(5,582)

(5,949)

681   

(3,832)

(3,151)

 Federal funds purchased

     and securities sold under

     agreements to repurchase

(519)

(515)

(1,034)

949   

(1,066)

(117)

Total interest bearing liabilities

(351)

(6,471)

(6,822)

1,843   

(6,059)

(4,216)

Net interest earnings

 $

1,043   

 $

2,815   

 $

3,858   

 $

2,022   

 $

555   

 $

2,577   

*Non-Interest Income*

The followingtable compares non-interest income for the years ended December 31, 2009, 2008and 2007 (dollars in thousands):

** **

** **

**Increase**

** **

** **

** **

**Increase**

** **

** **

 
**Total**

** **

**(Decrease)**

** **

**Total**

** **

**(Decrease)**

** **

**Total**

 
**2009**

 

**Amount**

** **

**%**

 

**2008**

 

**Amount**

** **

**%**

** **

**2007**

 
** **

 

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

 
 Mortgage banking income

 $

1,111   

 $

(28)

-2.46%

 $

1,139   

 $

(39)

-3.31%

 $

1,178   

 Income from fiduciary activities

806   

(10)

-1.23

816   

(191)

-18.97

1,007   

 
 Service charges on deposit accounts

6,941   

(331)

-4.55

7,272   

310   

4.45

6,962   

 
 Brokerage fees

1,317   

(156)

-10.59

1,473   

(92)

-5.88

1,565   

 
 Earnings on bank owned life insurance

832   

(1)

-0.12

833   

138   

19.86

695   

 
 Gain (loss) on sale of foreclosed property

(470)

(186)

65.49

(284)

(187)

192.78

(97)

 
 Gain on sale of available-for-sale securities

1,196   

760   

174.31

436   

465   

-

(29)

 
 Other non-interest income

1,380   

(131)

-8.67

1,511   

(25)

-1.63

1,536   

 
 
Total non-interest income

 $

13,113   

 $

(83)

-0.63%

 $

13,196   

 $

379   

2.96%

 $

12,817   

 
Totalnon-interest income decreased less than one percent in 2009 compared to 2008. Several categories of non-interest income were flat or decreased slightly for2009 compared to 2008.  Although residential real estate values declined andthe ability for borrowers to purchase or refinance became more difficult in2009, the Bank's mortgage activity remained stable because of the historicallylow interest rate environment. Mortgage banking income decreased modestly at2.5% or approximately $28,000 for 2009 compared to 2008.  Income from fiduciaryactivities was flat in 2009 compared to 2008.  Service charges on depositsdecreased approximately 4.6% as a result of lower income from overdraft fees. Brokerage fees decreased approximately $156,000 or 10.6% for 2009 compared to2008 as consumer confidence and willingness to invest in brokerage products wasweaker in 2009.  Gain (loss) on sale of foreclosed property includes write downof other real estate owned (OREO) subsequent to foreclosure and trended upwardover the past two years due to increased volume of other real estate.  For moreinformation regarding OREO, see the section below entitled "- FinancialCondition - Other Real Estate Owned" and Note 9  in the Company's ConsolidatedFinancial Statements included elsewhere this Annual Report on Form 10-K. Earnings on bank-owned life insurance ("BOLI") assets were flat in 2009compared to 2008 as there was little change in the rate environment in 2009. Gain on sale of available-for-sale securities increased as a result ofstrategies to realize appreciation in the investment portfolio.  See additionalinformation regarding sale of securities in Note 3 of the Company'sConsolidated Financial Statements included elsewhere in this Annual Report onForm 10-K.  In 2009, total non-interest income (excluding impairment losses onavailable-for-sale securities) contributed 21.7% of total revenue compared to20.4% and 19.2% for 2008 and 2007, respectively.  

Income from First Citizens/White and Associates Insurance Company, LLC wasincluded in other non-interest income and decreased approximately $38,000 or 5%in 2009 compared to 2008.  This decrease was a result of lower income fromvarious insurance products including personal lines, title insurance and otherproducts.  The Company's portion of other non-interest income generated by FirstCitizens/White and Associates Insurance Company, LLC for the years ending 2009,2008 and 2007 totaled approximately $735,000, $773,000 and $634,000,respectively. 

-12-

*Non-InterestExpense*

The followingtable compares non-interest expense for the years ended December 31, 2009, 2008and 2007 (dollars in thousands):

** **

** **

**Increase**

** **

** **

** **

**Increase**

** **

** **

**Total**

** **

**(Decrease)**

** **

**Total**

** **

**(Decrease)**

** **

**Total**

**2009**

** **

**Amount**

** **

**%**

** **

**2008**

** **

**Amount**

** **

**%**

** **

**2007**

   Salaries and Employee Benefits

 $

15,285   

 $

(1,547)

-9.19%

 $

16,832   

 $

1,145   

7.30%

 $

15,687   

   Net Occupancy Expense

1,804   

59   

3.38

1,745   

60   

3.56

1,685   

   Depreciation

1,852   

(16)

-0.86

1,868   

(227)

-10.84

2,095   

   Data Processing Expense

1,192   

208   

21.14

984   

141   

16.73

843   

   Legal and Professional Fees

305   

(48)

-13.60

353   

26   

7.95

327   

   Stationary and Office Supplies

254   

(5)

-1.93

259   

(27)

-9.44

286   

   Amortization of Intangibles

85   

-   

0.00

85   

-   

0.00

85   

   Advertising and Promotions

622   

(89)

-12.52

711   

(54)

-7.06

765   

   Premiums for FDIC insurance

1,671   

1,576   

1658.95

95   

17   

21.79

78   

   Expenses related to other real estate owned

642   

207   

47.59

435   

200   

85.11

235   

   Other Expenses

4,597   

(100)

-2.13

4,697   

(464)

-8.99

5,161   

Total non-interest expense

 $

28,309   

 $

245   

0.87%

 $

28,064   

 $

817   

3.00%

 $

27,247   

Totalnon-interest expense increased less than one percent in 2009 compared to 2008as a result of strategic efforts to offset increased costs associated with FDICinsurance premiums and OREO.  Non-interest expense was dominated by salariesand benefits expense, which comprised 53% of the total in 2009 compared to 58%in 2008 and 57% in 2007.  Strategic efforts to reduce costs and improveefficiencies in 2009 resulted in reduction of $1.5 million in salary and benefitexpense.  The $1.5 million reduction was a result of reduction in full-timeequivalent employees, reduced employer contribution to retirement plans, andreduced expense related to incentive plans.  The majority of the Company'semployees receive performance-based incentives based on factors designed toachieve strategic goals and are balanced for risk and reward.  Such factors arealigned with strategic objectives and include achievement of a certain ROElevel, accomplishing annual budget goals, and attainment of businessdevelopment goals, asset quality goals, and other metrics applicable to theindividual's job responsibilities.  Incentive pay totaled 8.3% of salaries andbenefits expenses in 2009 compared to 9.3% in 2008 and 10.4% in 2007. 

Of the $1.1million increase in salaries and employee benefits expense for 2008 compared to2007, approximately $268,000 was as a result of adoption of EITF 06-04effective January 1, 2008 for accounting for post-retirement death benefitspursuant to endorsement split dollar life insurance plans.  In addition,approximately $371,000 of the $1.1 million increase was attributable to accrualof the imputed income tax reimbursement plan, a non-qualified defined benefitplan associated with certain executives.  For more information regarding theseplans, see Note 10 in the Company's Consolidated Financial Statements includedelsewhere in this Annual Report on Form 10-K.  Significant expense associatedwith salaries and benefits is consistent with the Company's strategic plan tohire and retain high quality employees to provide outstanding customer serviceand strive for exceptional shareholder returns.

The followingtable compares assets per employee for the Company compared to its peers, basedon information obtained from Uniform Bank Performance Reports for all insuredcommercial banks having assets between $300 million and $1 billion for theyears ended December 31 (in thousands):

**Company**

** **

**Peer**

2009

 $

3,680   

 $

4,600   

2008

3,465   

4,310

2007

3,210   

4,060

2006

3,121   

3,940

2005

2,967   

3,860

Comparison ofassets per employee for the Company and its peers revealed that the Companyimproved in each of the last five years but continued to be more heavilystaffed than its counterparts.  The trend of assets per employee less than peerwas because of growth through the addition of new branches in prior years andemployees necessary to support the Company's non-interest income streamsincluding brokerage and trust divisions.  New branches typically have aninefficient assets-per-employee ratio and dilute the total assets per employeeratio as compared to peers.  The Company's ratio improved during 2009 as assetsgrew modestly while average full-time equivalent employees decreased.  In aneffort to provide a high level of customer service and strategic efforts tocontinue growth of non-interest income streams, the Company expects the trendof lower assets per employees compared to peer to continue in future periods.

Net occupancyexpense increased modestly at $59,000 or 3.4% in 2009 compared to 2008 as aresult of strategic efforts to control expenditures in 2009.  Depreciationtrended lower in 2008 and 2009 compared to 2007 as a result of controllingpurchases and expenses related primarily to computer equipment and software. Certain shorter-lived assets, primarily computer equipment and software, werefully depreciated by early 2008 and were not immediately replaced with newpurchases.  Data processing expense increased $208,000 in 2009 compared to 2008because of increased expenses associated with outsourcing certain portions ofthe information technology functions of the Bank.  While outsourcing offunctions such as item processing resulted in increased data processingexpense, this initiative also decreased other categories of other non-interestexpense such as postage, stationary and supplies and salaries and employeebenefits expenses.  The Company continues to strive for efficiencies in theareas of expansion, data integrity/security and customer service.  However,strategies adopted by the Board to provide superior customer service willcontinue to exert pressure on occupancy, depreciation and other non-interestexpenses going forward.  

Expense relatedto FDIC insurance premiums increased $1.5 million in 2009 as the result of anincrease in assessment rates and depletion of a one-time assessment credit thatserved to reduce premiums due in 2007 and 2008.  Expense for 2009 also includesapproximately $425,000 for a special assessment as of June 30, 2009 (paidSeptember 30, 2009) against all banks by the FDIC to help offset increasedcosts incurred by the fund caused by an increased number of failed banks.  InDecember 2009, the FDIC required the Bank to pre-pay projected assessments for2010 through 2012 totaling $4.2 million.  The $4.2 million prepaid assessmentis reflected in Other Assets in the Company's Consolidated Financial Statementsincluded elsewhere this Annual Report on Form 10-K and will be expensed overthe next three years. 

Othernon-interest expense decreased 2.1% and 9.0% in 2009 and 2008, respectively. Decreases in other non-interest expense in each of the last two years is aresult of strategic efforts to reduce controllable non-interest expenses inorder to offset increases in certain other non-interest expense categories suchas other real estate expenses and FDIC insurance premium expense.  For example,advertising costs decreased approximately $89,000 in 2009 as a result ofstricter cost allocations for advertising in the current economic environment. Expenses incurred related to OREO increased approximately $212,000 in 2009 ascompared to 2008.  For more information regarding OREO, see the section belowentitled "Financial Condition - Other Real Estate Owned" and Note 9  in theCompany's Consolidated Financial Statements included elsewhere this AnnualReport on Form 10-K.

No impairment ofgoodwill was recognized in any of the periods presented in this report. Goodwill was 1.24% and 1.27% of total assets and 14.03% and 15.36% of totalcapital as of December 31, 2009 and 2008, respectively. 

**Financial Condition**

                Changes in the statement of financial condition for the years ended December 31,2009 and 2008 reflected the Company's strategic efforts to focus on modestquality asset growth and capital preservation during the economic recession. Asset growth at December 31, 2009 compared to December 31, 2008 was primarilydriven by growth in available-for-sale investment securities.  The impactof the recession was evident in negative loan growth, increased allowance forloan losses and increased other real estate owned at December 31, 2009 comparedto December 31, 2008.  Deposit growth overall at December 31, 2009 comparedto December 31, 2008 was modest at 2.3% with increased savings deposits offsetby reduced reliance on brokered deposits and lower overall demand deposits. 

As evidenced in the cash flowstatements, the Company slowed deployment of capital for purchases of premisesand equipment to approximately $621,000 in 2009 compared to $3.3 million, and$4.2 million in 2008 and 2007, respectively.  Premises and equipment purchasesin 2009 consisted primarily of renovations to the Bank's Atoka branch andupgrade and replacement of computer hardware and software.

*Investment Securities Analysis*

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

**December 31,**

** **

 
**2009**

**2008**

**2007**

 

**2006**

 

**2005**

** **

 
U. S. Treasury & government agencies

 $

158,458   

 $

148,269   

 $

134,460   

 $

127,602   

 $

112,803   

State & political subdivisions

89,211   

59,588   

51,037   

44,338   

41,776   

 
All others

2,122   

2,643   

4,910   

5,436   

6,589   

 
     Total investment securities

 $

249,791   

 $

210,500   

 $

190,407   

 $

177,376   

 $

161,168   

 
                In 2009, totalportfolio growth of $39.3 million consisted of $10.2 million increase in agencymortgage-backed securities and collateralized mortgage obligations and $29.6million increase in municipal securities.  Growth in the overall portfolio of$39.3 million was primarily driven by purchase of new securities but alsoincluded a $4.3 million increase in net unrealized gain (pre-tax).  Of the $4.3million increase in unrealized gain, $3.4 million of the increase relates totax-exempt municipal securities.  The allocation to tax-exempt municipalsecurities as a percent of the total portfolio increased from 28% as of 2008 to36% as of 2009.  Allocation to tax-exempt municipal securities increased in2009 as this sector was considered to have exceptional value based on ongoingdislocations in the public finance market and because of opportunitiespresented by the spending of municipalities as a result of government stimulusprograms.  The increase in tax-exempt municipal bonds also serves as protectionfrom further downward movement in interest rates that is balanced out by a moredefensive posture in our taxable sector of the portfolio.  

-13-

*Maturityand Yield on Securities*

Contractualmaturities are primarily over 10 years.  However, the expected remaining livesof such bonds are expected to be much shorter due to anticipated payments fromU. S. Treasury and government agency securities.  These securities comprise 63%of the portfolio and are primarily amortizing payments that provide stablemonthly cash inflows of principal and interest payments.  The following tablepresents contractual maturities and yields by category for debt securities asof December 31, 2009 (dollars in thousands):

Maturing  

Maturing  

Maturing  

After One  

After Five  

Maturing  

Within One

Year Within  

Years Within

After Ten

Year

Five Years

Ten Years

Years

Amount

 

Yield

 

Amount

 

Yield

 

Amount

 

Yield

 

Amount

 

Yield

 

Total

U. S. Treasury and

 government agencies(1)

 $

-   

0.00%

 $

5,394   

4.16%

 $

17,641   

3.92%

 $

135,423   

4.63%

 $

158,458   

State and political

 subdivisions(2)

776   

4.29%

11,367   

6.95%

19,943   

7.12%

57,125   

6.67%

89,211   

All other

-   

           -    

-   

        -    

-   

               -    

2,088   

5.49%

2,088   

 Total debt securities

 $

776   

 $

16,761   

 $

37,584   

 $

194,636   

 $

249,757   

Equity securities

 $

34   

1.18%

 $

34   

     Total 

 $

249,791   

________________

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

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

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

The Company held nosecurities in the held-to-maturity category as of December 31, 2009. Thefollowing table presents amortized cost and fair value of available-for-salesecurities as of December 31, 2009 (in thousands):

Amortized  

Fair  

Cost  

 

Value

 

U. S. government agencies and corporation obligations

 $

153,924   

 $

158,458   

Tax exempt securities issued by states and political

 subdivisions:

     Tax-exempt securities

85,574   

89,211   

U. S. securities:

 Other debt securities

3,259   

2,088   

 Equity securities

30   

34   

           Total

 $

242,787   

 $

249,791   

In addition to amounts presentedabove, the Bank also had $5.7 million in FHLB and Federal Reserve Bank ("FRB")stock at December 31, 2009 recorded at cost.  Equity securities listed aboveconsisted primarily of shares of Fannie Mae and Freddie Mac perpetual preferredstock.

Available-for-saleinvestments increased $39.4 million or 18.7% at December 31, 2009 compared toDecember 31, 2008 as a result of interest cash flows reinvested into newsecurities, additional incremental funds allocated to the portfolio andunrealized appreciation in fair market value of available-for-sale securities. Objectives of the Bank's investment portfolio management are to provide safetyof principal, adequate liquidity, insulate GAAP capital against excessivechanges in market value, insulate earnings from excessive change and optimizeinvestment performance.  Investments also serve as collateral for government,public funds and large deposit accounts that exceed FDIC-insured limits. Pledged investments at year-end 2009 had a fair market value of $148 million. Total investment securities at December 31, 2009, 2008 and 2007 were $250million, $210 million and $190 million, respectively.  The average expectedlife of the investment securities portfolio was 5.0 years, 3.7 years and 4.2years for 2009, 2008 and 2007, respectively.  Portfolio yields (on a taxequivalent basis) were 5.2% as of year-end 2009 compared to 5.5% as of year-end2008 and 2007.

The Companyclassifies investments, based on intent, into trading, available-for-sale andheld-to-maturity categories in accordance with GAAP.  The Company held nosecurities in the trading category for any of the last five years and does notexpect to hold any such securities in 2010.  The Company's investment strategyis to classify most of the securities portfolio as available-for-sale, whichare carried on the balance sheet at fair market value.  Classification ofavailable-for-sale investments allows flexibility to actively manage theportfolio under various market conditions.  

U.S. Treasurysecurities and government agencies and corporations obligations consistedprimarily of mortgage-backed securities ("MBS") and collateralized mortgageobligations ("CMO") and accounted for 63% and 70% of the investment portfolioat December 31, 2009 and 2008, respectively.  Credit quality of the Company'sMBS and CMO portfolio was considered strong and reflected a net unrealized gainof $4.5 million as of December 31, 2009.  Credit quality factors on the bondsand related underlying mortgages are evaluated at the time of purchase and on aperiodic basis thereafter.  These factors typically include, but are notlimited to, average loan-to-value ratios, average FICO credit score, paymentseasoning (how many months of payment history), geographic dispersion, averagematurity and average duration.  Management believes that this level ofamortizing securities provides steady cash flows, as evidenced by the Statementof Cash Flows.  Principal cash flows for 2010 are projected to be $40 million.

Approximately36% of the portfolio was invested in municipal securities at December 31,2009.  Municipal securities totaled $89 million and were geographically diversified. Approximately 80%, or $71 million, of municipal securities were generalobligation municipal bonds and the remaining 20% were revenue bonds.  Overallcredit quality of the municipal portfolio was considered strong and reflected anet unrealized gain of $3.6 million as of year-end 2009.

Approximately 1%of the portfolio at December 31, 2009 consisted of one corporate bond and threecollateralized debt obligation securities that are backed by trust-preferredsecurities ("TRUP CDOs") issued by banks, thrifts and insurance companies. These four debt securities reflected a net unrealized loss of $1.2 million asof year-end 2009.  The market for TRUP CDOs became inactive in 2008 and as aresult, quoted market values trended significantly below amortized costbeginning in 2008.  These securities are evaluated for other-than-temporaryimpairment on a quarterly basis.  Charges for credit loss portion ofother-than-temporary impairment totaling approximately $651,000 were recognizedagainst earnings for the year ended December 31, 2009.  For more information,see Note 3 in the Company's Consolidated Financial Statements includedelsewhere in this Annual Report on Form 10-K.  

The Company hadone interest rate swap classified as a cash flow hedge at December 31, 2009. For more information, see Note 3 in the Company's Consolidated FinancialStatements included elsewhere in this Annual Report on Form 10-K.

The followingtable indicates by category gross unrealized gains and losses within theavailable-for-sale portfolio as of December 31, 2009 (in thousands):

Unrealized  

 
Gains

 

Losses

 

Net

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

 
 government agencies and corporations

 $

4,774   

 $

(240)

 $

4,534   

Obligations of states and political subdivisions

3,735   

(98)

3,637   

 
All other

4   

(1,171)

(1,167)

 
     Total

 $

8,513   

 $

(1,509)

 $

7,004   

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

-14-

*Loan Portfolio Analysis*

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

2009

2008

2007

 

2006

 

2005

 

Real estate loans:

   Construction

 $

66,414   

 $

97,340   

 $

106,695   

 $

86,206   

 $

74,817   

   Mortgage

407,058   

375,714   

353,655   

340,839   

352,749   

Commercial, financial and 

 agricultural loans

71,301   

80,317   

80,509   

80,033   

78,086   

Installment loans to individuals

34,071   

36,220   

37,106   

36,735   

37,761   

Other loans

8,554   

7,167   

6,674   

5,021   

3,804   

    Total loans

 $

587,398   

 $

596,758   

 $

584,639   

 $

548,834   

 $

550,260   

For purposes ofthis discussion, loans do not include loans that are sold in the secondarymortgage market.  The Company classifies loans to be sold in the secondarymortgage market separately in its consolidated financial statements. Secondarymarket mortgages totaled $2.7 million, $2.6 million, and $2.2 million for 2009,2008 and 2007, respectively.  For more information, see Notes 4, 5 and 6 in theCompany's Consolidated Financial Statements included elsewhere in this AnnualReport on Form 10-K.  Interest and fees earned on secondary mortgage loans wereincluded in mortgage banking income as reported in other non-interest income inthe Company's Consolidated Financial Statements.

*Changes In Loan Categories*

Total loans atDecember 31, 2009 were $587 million compared to $597 million at December 31,2008 and $585 million at December 31, 2007.  Loans decreased 1.6% in 2009compared to loan growth of 2.1% and 6.5% in 2008 and 2007, respectively.  Thefollowing table details the breakdown of that growth by category for 2009(dollars in thousands):

Increase

Percent

 
 

(Decrease)

 

Change

 

 
Real estate loans:

 
 Construction

 $

(30,926)

-28.99%

 Mortgage

31,344   

8.86%

 
Commercial, financial and agricultural

(9,016)

-11.20%

 
Installment loans to individuals

(2,149)

-5.79%

 
Other loans

1,387   

20.78%

 
    Total loans

 $

(9,360)

-1.60%

 
At December 31,2009, the loan portfolio was heavily weighted in real estate loans, whichaccounted for $473 million or 81% of total portfolio.  Commercial andresidential construction loans accounted for $66 million of the $473 millioninvested in real estate loans.  Although the portfolio was heavily weighted inreal estate, the Bank does not invest in sub-prime or non-traditionalmortgages.  Within real estate loans, residential mortgage loans (including residentialconstruction) were the largest category comprising 36% of total loans. Diversification of the real estate portfolio is a necessary and desirable goalof the real estate loan policy.  In order to achieve and maintain a prudentdegree of diversity, given the composition of the market area and the generaleconomic state of the market area, the Company will strive to maintain realestate loan portfolio diversification.  Risk monitoring of commercial realestate concentrations is performed in accordance with regulatory guidelines andincludes assessment of risk levels of various types of commercial real estateand review of ratios of various concentrations of commercial real estate as apercentage of capital.   The following table presents real estate loans as apercent of total risk based capital for each of the last five years:

2009

2008

2007

 

2006

 

2005

**As a percent of total risk based capital*:**

 

 

 

 

 

 

Construction and development

77.40%

120.68%

135.33%

115.24%

105.50%

Residential (1-4 family)

206.82%

203.75%

193.71%

203.93%

238.48%

Other real estate loans

270.74%

265.31%

257.64%

255.93%

262.77%

Total real estate loans

554.96%

589.74%

586.68%

575.10%

606.75%

________________

*              Totalrisk based capital is a non-GAAP measure used by regulatory authorities andreported on quarterly regulatory filings.  Total risk based capital for theBank was $85.8 million, $80.7 million, $78.8 million, $74.8 million and $70.9million for years ended December 31, 2009, 2008, 2007, 2006 and 2005,respectively.   

Negative loangrowth in 2009 occurred primarily in construction, commercial, and installmentloans.  Growth in real estate mortgage loans was partially a result of loansformerly classified as construction being reclassified into the mortgagecategory as the loans progress through their normal life cycle.  Overall loangrowth was weak in 2009 because of distressed real estate markets, job lossesand other factors resulting from the economic recession.  The Bankstrategically reduced its concentration of one-to-four family residentialconstruction and non-owner occupied commercial real estate loans from 2007 to2009 as focus shifted to lower-risk owner-occupied commercial real estate.  Asa result, the ratio of one-to-four family residential construction loans as apercent of total risk based capital trended downward from 2007 to 2009 and was33.21% as of December 31, 2009 compared to 55.88% as of December 31, 2008 and76.02% at December 31, 2007.  The ratio of non-owner occupied commercial realestate loans as a percent of total risk based capital also trended downward to188.55% as of December 31, 2009 compared to 232.68% as of December 31, 2008 and243.53% as of December 31, 2007.  The ratio of owner occupied commercial realestate loans as a percent of total risk based capital trended upward in 2009 to107.05% as of December 31, 2009 compared to 101.80% as of December 31, 2008 and102.99% as of December 31, 2007.

-15-

Portfolioquality continued to faces challenges in 2009 but remains satisfactory relativeto prevailing market conditions.  The ratio of net charge offs to average netloans outstanding was 0.95%, 0.31% and 0.13% for 2009, 2008 and 2007,respectively.  The aggregate of non-performing loans and other real estateowned as a percent of total loans plus other real estate owned at 2009 year-endincreased to 3.28% compared to 1.63% and 0.71% at year-end 2008 and 2007,respectively, primarily as a result of increased volume of other real estate. Negative trends in levels of problem credits, other real estate owned andcharged off loans were expected given negative economic trends across theindustry from 2007 to 2009.  However, strong credit risk management provides ameans for timely identification and assessment of problem credits in order tominimize losses.  

The following data details theinternally classified loans by category as of December 31, 2009 (dollars inthousands):

Total

Internally

Problem Loans %

 
Product Type

Outstanding

Classified

of Category

 
Residential real estate

 $

193,346   

 $

10,863   

5.62%

Home equity lines

27,211   

330   

1.21%

 
Commercial real estate

191,354   

2,950   

1.54%

 
Commercial other

45,944   

1,512   

3.29%

 
Commercial-SBA guaranteed

1,766   

-    

                  -

 
Agriculture real estate

38,128   

348   

0.91%

 
Agriculture-other

20,334   

394   

1.94%

 
Agriculture FSA guaranteed

8,878   

41   

0.46%

 
USDA guaranteed

3,335   

481   

14.42%

 
Consumer installment

33,252   

440   

1.32%

 
Personal

1,355   

107   

7.90%

 
Other loans

22,495   

-    

                  -  

 
 $

587,398   

 $

17,466   

2.97%

 
Internallyclassified loans are those loans that have certain characteristics orcircumstances that warrant additional credit quality monitoring and may requirespecific reserve allocations as determined in accordance with generallyaccepted accounting standards related to impaired loans.  The above tablereflects that the majority of exposure continues to reside in the residentialreal estate category.  This trend is consistent with similar trends in netcharge-offs, non-performing loans and other real estate properties experiencedduring 2009.

*Policy Guidelines*

Management setsguidelines 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  at December 31, 2009 were as follows:

Collateral

Maximum Amortization

Maximum LTV

Real estate

Various (see discussion  below)

Various (see discussion  below)

Equipment*

5 Years

75%

Inventory

5 Years

50%

Accounts receivable

5 Years

75%

Livestock

5 Years

80%

Crops

1 Year

50%

Securities**

10 Years

75%(Listed), 50%  (Unlisted)

___________________________

*              New farm equipmentcan be amortized over seven years.

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

-16-

The Company'spolicy manages risk in the real estate portfolio by adherence to supervisorylimits in regards to LTV 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%

Owner-occupied improved  property

80%

Non-owner occupied improved  property

75%

Owner-occupied 1-4 family  and home equity

85%

Home equity lines

90%

Non-owner occupied 1-4 family residential

75%

____________________

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

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

The Bank's loanpolicy requires every loan to have a documented repayment arrangement.  Whilereasonable flexibility is necessary to meet credit needs of customers, ingeneral, real estate loans are to be repaid within the following time frames:

Loan Category

Amortized Period

Raw Land

10 years

Construction

1.5 years

Commercial, Multi-family,  and Other Non-residential

20-25 years

1-4 Family Residential

25-30 years

Home Equity

10 years

*Average LoanYields*

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

2009 - 6.51%

2008 - 6.99%

2007 - 7.98%

2006 - 7.65%

2005 - 6.86%

2004 - 6.30%

The aggregateamount of unused guarantees, commitments to extend credit and standby lettersof credit was $84 million at year-end 2009.  For more information regardingcommitments and standby letters of credit, see Note 18 in the Company'sConsolidated Financial Statements included elsewhere in this Annual Report onForm 10-K.

-17-

*LoanMaturities*

Contractualmaturities of loans as of December 31, 2009 were as follows (in thousands):

** **

** **

** **

**Due After**

** **

** **

** **

**Due in One**

** **

**One Year but**

** **

**Due After**

** **

**Year or Less**

** **

**Within Five  Years**

** **

**Five Years**

** **

** **

** **

**(in thousands)**

** **

** **

Real Estate

 $

109,144   

 $

289,235   

 $

75,093

Commercial, Financial

 and Agricultural

 $

43,757   

 $

34,826   

 $

1,272   

All Other Loans

 $

8,982

 $

23,144   

 $

1,945   

TOTALS

 $

161,883   

 $

347,205  

 $

78,310   

Loans with Maturities After One Year for which:

(In Thousands)

Interest Rates are Fixed or Predetermined

 $

344,657   

Interest Rates are Floating or Adjustable

 $

80,858   

The degree of interest rate riskto which a bank is subjected can be controlled through a well-defined fundsmanagement program.  The Company controls interest rate risk by matchinginterest sensitive assets and liabilities.  Overall, the Company remains in a fairlyneutral position in terms of interest rate risk as evidenced by flat netinterest margins during a three-year period in which federal funds rates haveranged from 0.25% to 5.25%.  At year-end 2009, the Company wasliability-sensitive, which means that liabilities re-price at a faster ratethan assets.  Therefore, in a rising rate environment (with a normal yieldcurve) net interest income would decline, while a declining rate environmentwould result in increased interest rate margins and net interest income.  Themajority of the Bank's loan portfolio will re-price or matures in less thanfive years.  Approximately $188 million or 32% of total loans will eitherre-price or mature over the next 12 months, while $167 million or 28% of totalloans will mature or re-price after one year but less than three years. Approximately $170 million or 29% of total loans will mature or re-price afterthree years but in less than five years.  The remaining 10% or $60 millionre-prices or matures in greater than five years.

*Loan Loss Experience andReserve for Loan Losses*

The followingtable summarizes activity posted to the loan loss reserve account for the pastfive years (in thousands):

**2009**

**2008**

**2007**

** **

**2006**

** **

**2005**

 

Average net loans outstanding

 $

589,528   

 $

606,014   

 $

606,015   

 $

554,219   

 $

536,315   

Balance of reserve for loan losses

 at beginning of period

7,300   

6,328   

6,211   

6,830   

6,239   

Loans charged off

(5,951)

(2,274)

(1,096)

(1,538)

(632)

Recovery of loans previously charged off

375   

388   

379   

236   

164   

Net loans charged off

(5,576)

(1,886)

(717)

(1,302)

(468)

Additions to reserve charged to expense

7,060   

2,858   

834   

683   

1,059   

Balance at end of period

 $

8,784   

 $

7,300   

 $

6,328   

 $

6,211   

 $

6,830   

Ratio of net charged off loans to average

 net loans outstanding 

0.95%

0.31%

0.12%

0.23%

0.09%

Changes to thereserve account for 2009 consisted of (i) loans charged off of $6.0 million,(ii) recovery of loans previously charged off of approximately $375,000, and(iii) additions to reserves totaling $7.1 million.  Charge-offs for 2009occurred in all markets served but were concentrated to one region.  More than70% of charge-offs related to loans made in Shelby County and the surroundingcounties.  Increased provision for loan losses in 2009 was attributable to theneed to provide additional reserves given the negative trends in charge-offsand non-performing loans in 2009.

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

**2009**

**2008**

** **

**2007**

** **

**2006**

** **

**2005**

 
Charge-offs:

 
 Domestic:

 
    Commercial, financial & agricultural

 $

(874)

 $

(638)

 $

(227)

 $

(447)

 $

(139)

    Real estate-construction

(1,824)

(569)

(107)

-   

(242)

 
    Real estate-mortgage

(2,812)

(655)

(406)

(685)

(62)

 
    Installment loans to individuals & credit cards

(441)

(412)

(356)

(406)

(189)

 
        Total charge-offs

 $

(5,951)

 $

(2,274)

 $

(1,096)

 $

(1,538)

 $

(632)

 
 
Recoveries:

 
 Domestic:

 
    Commercial, financial & agricultural

 $

68   

 $

141   

 $

124   

 $

76   

 $

62   

 
    Real estate-construction

130   

23   

22   

-   

10   

 
    Real estate-mortgage

64   

82   

148   

51   

4   

 
    Installment loans to individuals & credit cards

113   

142   

85   

109   

88   

 
        Total recoveries

375   

388   

379   

236   

164   

 
             Net loans charged off

 $

(5,576)

 $

(1,886)

 $

(717)

 $

(1,302)

 $

(468)

 
An analysis ofthe allocation of the allowance for loan losses is made each fiscal quarter atthe end of the second month (i.e., February, May, August, and November) andreported to the Bank Board at its meeting immediately preceding quarter-end. The allowance for loan losses is estimated using methods consistent with GAAPas well as regulatory guidance on the allowance.  

The evaluationof the adequacy of the allowance includes identification of impaired loans andallocation of specific reserves if considered necessary on a case-by-case basisfor significant loans.  A loan is impaired when it is probable that a creditorwill be unable to collect all amounts of principal and interest due accordingto the original contractual terms of the loan. Impairment occurs when (i) thepresent value of expected future cash flows discounted at the loans effectiveinterest rate impede full collection of the contract and (ii) fair value of thecollateral, if the loan is collateral dependent, indicates unexpectedcollection of full contract value.  Specific reserve allocations are made forloans found to be collateral or interest cash flow deficient.  In addition, anallowance is determined for pools of loans including all other criticizedassets as well as small homogeneous loans managed by delinquency. Impairmentdecisions are reported to the Bank Board of Directors and in external reportsas required by regulations.  Income recognition from impaired loans isdetermined in accordance with GAAP, as well as financial institution regulatoryguidance.

Credit riskmanagement procedures include assessment of loan quality through use of aninternal loan rating system.  Each loan is assigned a rating upon originationand the rating may be revised over the life of the loan as circumstanceswarrant.  The rating system utilizes eight major classification types based onrisk of loss.  

Credit riskmanagement process also includes an annual review of a minimum of 70% of thegross portfolio less installment loans.  The loan review function isindependent of the lending process itself and results of loan review arereported to the Bank's Board of Directors.  In addition, any single note orseries of notes directly or indirectly related to one borrower that equals 25%of the Bank's legal lending limit are included in the review.  Results of loanreview as well as current portfolio mix by rating are incorporated into thequarterly evaluation of the allowance for loan losses.

Examples offactors taken into consideration during assessment of loan quality for ratingpurposes, for independent loan review and for evaluation of the adequacy of theallowance for loan losses include, but are not limited to, the following: 

•        Economic conditions; 

•        Management experience and depth; 

•        Credit history; 

•        Business conditions; 

•        Sources of repayment; 

•        Debt service coverage ratios; 

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

•        Deposit relationship; 

•        Payment history; 

•        Collateral values; and

•        Adherence to loan policy and adherence to loan documentationrequirements.

-18-

*Non-Performing Assets*

Non-performingassets consist of non-accrual loans, restructured loans and loans and leases 90days past due and still accruing interest, other real estate and non-accrualdebt securities.  The following table summarizes non-performing assets atDecember 31 of the past five years (in thousands):

**2009**

**2008**

**2007**

**2006**

**2005**

**Non-accrual loans:**

    Commercial, financial & agricultural

 $

639   

 $

425   

 $

133   

 $

19   

 $

134   

    Real estate-construction

1,171   

662   

354   

-   

-   

    Real estate-mortgage

1,927   

2,496   

1,123   

291   

1,234   

    Installment loans to individuals

64   

90   

68   

61   

9   

**        Total non-accrual loans**

** $**

**3,801 **

** **

** $**

**3,673 **

** **

** $**

**1,678 **

** **

** $**

**371 **

** **

** $**

**1,377 **

**Loans 90 days past due accruing interest:**

    Commercial, financial & agricultural

 $

106   

 $

-   

 $

25   

 $

-   

 $

16   

    Real estate-construction

1,472   

-   

53   

-   

-   

    Real estate-mortgage

3,660   

722   

126   

944   

410   

    Installment loans to individuals

34   

25   

-   

2   

3   

**        Total loans 90 days past due accruing interest**

**5,272 **

** **

**747 **

** **

**204 **

** **

**946 **

** **

**429 **

**Total non-current loans**

** $**

**9,073 **

** **

** $**

**4,420 **

** **

** $**

**1,882 **

** **

** $**

**1,317 **

** **

** $**

**1,806 **

**Total non-current loans as % of total loans**

**1.54 %**

**0.74 %**

**0.32 %**

**0.24 %**

**0.33 %**

**Troubled debt restructuring**

** **

** **

** **

** **

** **

** **

** **

** **

** **

 Commercial, financial and agricultural

 $

11   

 $

14   

 $

- 

 $

-     

 $

-     

 Real estate-construction

-   

-   

-   

-     

-     

 Real estate-mortgage

1,117   

1,138   

1,568   

-     

-     

 Installment loans to individuals

122   

92   

53   

-     

-     

**    Total troubled debt restructuring**

** $**

**1,250 **

** **

** $**

**1,244 **

** **

** $**

**1,621 **

** **

** $**

**-   **

** **

** $**

**-   **

**Total troubled debt restructuring as a % of total loans**

**0.21 %**

** **

**0.21 %**

** **

**0.28 %**

** **

**0.00 %**

** **

**0.00 %**

**Other real estate & other repossessed property**

** $**

**10,527 **

** **

** $**

**5,446 **

** **

** $**

**2,302 **

** **

** $**

**1,815 **

** **

** $**

**129 **

**Non-accrual debt securities**

**520 **

** **

**- **

** **

**- **

** **

**- **

** **

**- **

**Total non-performing assets**

** $**

**21,370 **

** **

** $**

**11,110 **

** **

** $**

**5,805 **

** **

** $**

**3,132 **

** **

** $**

**1,935 **

**Total non-performing assets as % of total assets**

**2.23 %**

** **

**1.20 %**

** **

**0.70 %**

** **

**0.40 %**

** **

**0.20 %**

                Non-performing assets increased $13million from 2008 to 2009 primarily as a result of increased other real estateconsisting primarily of residential real estate lots and properties located in Shelby County and surrounding counties.  Other real estate owned trended higher over thelast two years during the economic recession.  For more information about OREO,see the section below entitled "- Other Real Estate Owned."  Also, loans 90days past due accruing interest increased $4.5 million from 2008 to 2009because of a small volume of higher balance loans that were 90 to 120 days pastdue as of December 31, 2009.  These loans were considered well secured and inprocess of collection and were subject to evaluation for impairment inaccordance with policy.  

Categorizationof a loan as non-performing is not in itself a reliable indicator of probableloan losses.  The Bank's policy is to not accrue interest or discount on (i)any asset which is maintained on a cash basis because of deterioration in thefinancial position of the borrower, (ii) any asset for which payment in full ofinterest or principal is not expected or (iii) any asset upon which principalor interest has been in default for a period of 90 days or more unless it isboth well secured and in the process of collection. For purposes of applyingthe 90 days past due test for non-accrual of interest discussed above, the dateon which an asset reaches non-accrual status is determined by its contractualterm.  A debt is well secured if it is secured 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 reasonablyexpected to result in repayment of the debt or in its restoration to a currentstatus.  Loans that represent probable losses are adequately reserved for inthe allowance for loan losses.  As part of this process, the Bank's policyrequires a current appraisal at the point that a loan over $250,000 becomesinternally classified.  

Interest incomeon loans is recorded on an accrual basis.  The accrual of interest isdiscontinued on all loans, except consumer loans, which become 90 days pastdue, unless the loan is well secured and in the process of collection. Consumerloans which become past due 90 to 120 days are charged to the allowance forloan losses.  The gross interest income that would have been recorded for the12 months ending December 31, 2009 if all loans reported as non-accrual hadbeen current in accordance with their original terms and had been outstandingthroughout the period was approximately $216,000 compared to approximately$178,000, $103,000, $25,000 and $33,000 for the same periods in 2008, 2007,2006 and 2005, respectively.  Loans on which terms have been modified toprovide for a reduction of either principal or interest as a result ofdeterioration in the financial position of the borrower are considered to berestructured loans.  The Company had restructured loans totaling $2.8 million,of which $1.4 million was on non-accrual status as of December 31, 2009.  TheCompany had restructured loans totaling $1.15 million, of which approximately$635,000 was on non-accrual status as of December 31, 2008.  

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

-19-

*Other Real Estate Owned*

The book valueof OREO was $10.5 million as of December 31, 2009 compared to $5.4 million asof December 31, 2008 and $2.3 million at December 31, 2007.  As of December 31,2009, there were approximately 90 properties in OREO consisting primarily ofnewly constructed single-family homes and residential lots.  Approximately 90%of the $10.5 million in OREO was located in Shelby County and surroundingcounties.  While management continues efforts to liquidate OREO, Shelby andsurrounding counties have been under stress with declining home sales anddeclining market values.  According to MarketGraphics Research Group, Inc. andthe Memphis Area Association of Realtors for the 12 months ended November 30,2009 (most recent data available), new home inventory was down 39% and new homepermits were down 54%.  Also, new home sales volumes were down 44% and new homeaverage price was down 5.2% for the 12 months ended November 30, 2009.  Allhome sales volumes were down 16% and average price of all home sales was down7% for the same period.

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

**2009**

**2008**

**2007**

Beginning balance

 $

5,424   

 $

2,302   

 $

1,815   

Acquisitions

9,983   

5,440   

1,951   

Capitalized costs

424   

29   

11   

Dispositions

(4,834)

(2,063)

(1,378)

Valuation adjustments through earnings

(470)

(284)

(97)

Ending balance

 $

10,527   

 $

5,424   

 $

2,302   

Capitalizedcosts consist of costs to complete construction of homes partially complete atthe time of foreclosure and were made in order to improve marketability ofthese properties.  Valuation adjustments through earnings reflected aboveincludes write down of properties subsequent to foreclosure and net losses onsale of OREO.

OREO is recordedat the time of foreclosure at the lesser of its appraised value or the loanbalance.  Any reduction in value at the time of foreclosure is charged to theallowance for loan losses.  All other real estate parcels are appraised atleast annually and carrying values  adjusted to reflect the decline, if any, inits realizable value.  Such adjustments made subsequent to foreclosure arecharged against earnings.  Losses on sale and write down of OREO valuessubsequent to foreclosure totaled approximately $470,000, $284,000 and $97,000for years ended December 31, 2009, 2008 and 2007.  In 2009, losses on sale orwrite-down of properties equated to approximately 10% of the property values. The average 10% decline in value from the time of foreclosure to time of sale orat which time an updated appraisal is warranted because of the length of timethe property has been OREO indicates that the valuation process at the time offoreclosure is fairly accurate.  

Othernon-interest expenses for property taxes, maintenance and other costs relatedto OREO totaled approximately $647,000, $435,000 and $235,000 in the yearsended December 31, 2009, 2008 and 2007, respectively.  The negative trend inother non-interest expense related to OREO was attributable to the largervolume of OREO over the past three years.  

*Composition of Deposits*

The averageamount of deposits and rates paid on such deposits are summarized in thefollowing table for the three years ended December 31, 2009, 2008 and 2007(dollars in thousands):

** **

**2009**

** **

**2008**

** **

**2007**

** **

**Average**

** **

**Average**

** **

**Average**

** **

**Average**

** **

**Average**

** **

**Average**

** **

**Balance**

** **

**Rate**

** **

**Balance**

** **

**Rate**

** **

**Balance**

** **

**Rate**

Non-interest bearing demand deposits

 $

89,819   

0.00%

 $

90,999   

0.00%

 $

93,413   

0.00%

Savings deposits

 $

265,055   

1.13%

 $

217,754   

1.31%

 $

201,506   

1.88%

Time deposits

 $

374,469   

2.33%

 $

390,233   

3.76%

 $

372,109   

4.79%

    Total deposits

 $

729,343   

1.61%

 $

698,986   

2.51%

 $

667,028   

3.24%

The decrease inaverage cost of deposits at December 31, 2009 compared to December 31, 2008 wasa result of a declining rate environment offset by competitive factors on timeand savings deposits.  The prevailing market and competitive environmentcontinued to yield fierce competition in pricing of interest-bearing depositproducts.  The Bank does not compete solely on price, as strategies are focusedmore on customer relationships that attract and retain core deposit customersrather than time deposits.

Total depositsgrew $17.2 million or 2.3% during the year ended December 31, 2009.  Growth of$61.9 million or 26.5% in savings deposits was offset by decline of $8.3million or 7.6% in demand deposit balances and decline of $36.4 million or 9.3%in time deposits.  During 2009, demand deposit balances fluctuated in the rangeof $85 million to $110 million consistent with historical trends.  Savingsdeposit growth was primarily attributable to growth in the Bank's competitivelypriced interest bearing transaction accounts, including the Wall Street, e-Solutionsand First Rate accounts.  

Time depositsincreased in excess of $12 million in 2008.  In June 2008, the Bank beganparticipating in Certificate of Deposit Account Registry Service ("CDARS"). CDARS is a deposit placement service that allows the Bank to accept verylarge-denomination certificates of deposit ("CDs") (up to $50,000,000) fromcustomers and ensures that 100% of those CDs are FDIC-insured.  Participatingin this network enhances the Bank's ability to attract and retainlarge-denomination depositors without having to place funds in a Sweep orRepurchase Agreement.  The CDARS network provides a means to place reciprocaldeposits for the Bank's customers, purchase time deposits (referred to as"One-Way Buy" deposits) or to sell excess deposits (referred to as "One-WaySell" deposits).  One-Way Buy deposits are structured similar to traditionalbrokered deposits.  The Bank held reciprocal deposits and "One-Way Buy"deposits in the CDARS program totaling $25 million at year end 2009 and $45 millionat year end 2008.  CDARS accounts are classified as brokered time deposits forregulatory reporting purposes.  Brokered deposits including CDARS accounted for$36 million or less than five percent of total deposits as of December 31, 2009compared to $76 million or 10% of total deposits as of December 31, 2008 and$34 million or 4% of total deposits as of December 31, 2007.  Strategicallyslow asset growth allowed the Company to reduce its reliance on brokereddeposits in 2009. Customer demand for CDARS decreased in 2009 compared to 2008.

Time depositsover $100,000 plus brokered time deposits comprised 55.1% of total timedeposits as of year-end 2009 compared to 40.5% of total time deposits as ofyear-end 2008 and 52.2% as of year-end 2007.  Over 90% of time depositsincluding brokered time deposits will mature or re-price over the next 12months as the current competitive market and rate environment continues toexhibit stronger demand for shorter terms at historically low rates. 

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

                Deposits over$100,000 increased $30.5 million or 19.2% from December 31, 2008 to December31, 2009.  This was a result of the increase in FDIC insurance limits from$100,000 to $250,000 that began in October 2008.  Also, public fund timedeposits increased $18 million from $68 million at year-end 2008 to $86 millionat year-end 2009.  

-20-

The followingtable sets forth the maturity distribution of CDs and other time deposits of$100,000 or more outstanding on December 31, 2009 and 2008 (dollars inthousands): 

**2009**

** **

**2008**

**Amount**

** **

**Percent**

** **

**Amount**

** **

**Percent**

Maturing in:

   Three months or less

 $

92,883   

48.98%

 $

51,394   

32.30%

   Over three months less than six months

32,625   

17.21%

56,899   

35.76%

   Over six months less than 12 months

53,392   

28.16%

38,378   

24.12%

   Over 12 months

10,719   

5.65%

12,443   

7.82%

      Total

 $

189,619   

100.00%

 $

159,114   

100.00%

*Other Borrowings*

In addition todeposits, the Company uses a combination of short-term and long-term borrowingsto supplement its funding needs.  Short-term borrowings consist of a treasury,tax and loan demand note, federal funds purchased and short-term advances fromthe FHLB.  The short-term borrowings table below provides the maximum amount ofborrowings at any month end during the years presented.  Short-term borrowingsare used to manage fluctuations in liquidity based on seasonality ofagricultural production loans and other factors.  Short-term borrowings wereused on a very limited basis during 2009 because of the Company's strategicefforts to maintain a strong liquidity position coupled with slower loan demandin 2009.  The maximum amount of borrowings in any given month decreased in 2009compared to 2008 and 2007 because of slower loan growth and strategic effortsto improve and strengthen the Company's liquidity position since mid-2008through year-end 2009.  Loan growth accelerated in the first half of 2008 at anannualized rate in excess of 10% and then slowed to a modest rate of 2.1% for2008 and then decreased less than 2% during 2009.  For more information aboutshort-term borrowings, see Note 12 in the Company's Consolidated FinancialStatements included elsewhere in this Annual Report on Form 10-K. 

The followingtable presents short-term borrowing balances at year end, maximum borrowings atmonth end during the year and average cost for the years presented (dollars inthousands):

**2009**

**2008**

**2007**

Amount outstanding at end of year

 $

748   

 $

1,000   

 $

11,100   

Weighted average interest rate at end of year

0.00 %

0.00 %

4.35 %

Maximum outstanding at any month end

 $

1,000   

 $

48,500   

 $

22,400   

Average outstanding during year

 $

1,029   

 $

20,679   

 $

8,804   

Weighted average interest rate during year

0.00 %

2.70 %

5.30 %

Other borrowingsat the holding company level carried a variable rate and consisted of atrust-preferred debt in 2009.  Prior year totals also included a line of creditwith First Tennessee Bank, which was paid in full in December 2008.  

The Bank's otherborrowings consists of advances from the FHLB.  Average volume of FHLB advancefor 2009 was $65.1 million at an average rate of 4.84% compared to $61.1million at an average rate of 5.03% in 2008 and $48.8 million at an averagerate of 5.58% in 2007.  The average remaining maturity for FHLB long-termborrowings was approximately two years at December 31, 2009.  FHLB borrowingsare comprised of fixed rate positions ranging from 1.89% to 6.55%.  Most of theFHLB borrowings have quarterly call features and maturities ranging from 2010to 2017.  Approximately 50% or $33.1 million will mature on or before December31, 2010.  Advances totaling $40.5 million at December 31, 2009 had callfeatures that offer the option to pay off the advance without penalty or tohave the advance reprice at a variable rate tied to the 90-day LIBOR, whencalled.  As of December 31, 2009, advances totaling $16 million requirerepayment if the call feature were exercised.  Under the existing and forecastedrate environments, borrowings with call features in place are not likely to becalled in the next 12 months and, therefore, were not included in currentliabilities.  For more information about liquidity, see the section belowentitled "-  Liquidity."   

The followingtable presents average volumes, rates, maturities and re-pricing frequenciesfor other borrowings for the year ended December 31, 2009 (dollars inthousands):

**Average**

**Average**

**Average**

**Repricing**

**Volume**

**Rate**

**Maturity**

**Frequency**

FHLB Borrowings

 $

65,072   

4.84%

2

Fixed

Trust Preferred Debt

10,310   

2.79%

27

Variable

*Aggregate ContractualObligations and Off-Balance Sheet Arrangements*

At December 31, 2009,contractual obligations were due as follows (in thousands):

Total

< 1 Year

1-3 Years

3-5 Years

> 5 Years

Unfunded Loan Commitments

 $

79,776   

 $

79,776   

 $

-   

 $

-   

 $

-   

Standby Letters of Credit

4,534   

4,534   

-   

-   

-   

Other Borrowings*

75,282   

33,065   

13,235   

2,270   

26,712   

Capital Lease Obligations

-   

-   

-   

-   

-   

Operating Leases

317   

161   

156   

-   

-   

Purchase Obligations

-   

-   

-   

-   

-   

Other Long Term Liabilities

-   

-   

-   

-   

-   

   Total

 $

159,909   

 $

117,536   

 $

13,391   

 $

2,270   

 $

26,712   

 ________________________

*              Other borrowingspresented as principal only, excluding interest.

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

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

-21-

**Capital Resources**

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

2009

2008

2007

2006

2005

Percentage of net income to:

   Average total assets

0.89%

0.83%

1.08%

1.10%

1.10%

   Average shareholders equity

10.19%

10.07%

12.79%

13.88%

13.71%

Percentage of dividends declared

 to net income

45.27%

55.85%

45.93%

47.04%

47.03%

Percentage of average equity

 to average assets

8.76%

8.21%

8.45%

7.93%

8.01%

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

2009

2008

2007

2006

2005

8.81%

8.30%

8.56%

8.36%

7.80%

Total capitalincreased 9.5% to $84.3 million at year-end 2009 compared to $77.0 million atyear-end 2008 and $75.0 million at year-end 2007.  Growth in capital during2009 was from undistributed net income from the Bank of $4.6 million and $2.7million from increased accumulated other comprehensive income attributable toimproved fair market values of available-for-sale investments securities.

The Company hashistorically maintained capital in excess of minimum levels established byregulation.  The risk-based capital ratio of 13.55% at December 31, 2009 wassignificantly in excess of the 8% mandated by regulation.  This ratio has beenmaintained at a level in excess of 12% over the past three years.  Totalcapital as a percentage of total assets was 8.81%, 8.30%, and 8.56%, atDecember 31, 2009, 2008, and 2007, respectively.  

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

Dividendspayments totaled $1.04 in 2009 compared to $1.16 per share per year in each ofthe prior three years.  The Company's strategy continues to be to pay dividendsat a level that provides dividend payout ratio and dividend yield in excess ofaverage for peers as reported in the Peer Report.  The dividend payout ratiowas 45.27% in 2009, 55.85% in 2008 and 45.93% in 2007.  The projected payoutratio for 2010 is in the range of 45% to 55%.  Dividend payout in the PeerReport for 2009 was 71.18%.  The Company's dividend yield in 2009 was 3.35%compared to 3.41% in 2008 and 3.31% in 2007.  The dividend yield in the PeerReport was 1.76% for 2009.  

As of year-end2009, there were approximately $10 million of retained earnings available forthe payment of future dividends from the Bank to the Company.  Bankingregulations require certain capital levels to be maintained and may limitdividends paid by the Bank to the Company or by the Company to itsshareholders.  Historically, these restrictions have posed no practical limiton the ability of the Bank or the Company to pay dividends. 

Over the past 15years, the Company has repurchased approximately 92,575 shares of its commonstock and the treasury stock has weighted average cost basis of $26.37 pershare.  During 2009, the Company repurchased 1,000 shares at a weighted averagecost of $26.00 per share.  During 2009, the Company sold 1,519 shares of itscommon stock at a weighted average price of $27.69 per share.  The Company alsosold 150 shares of its common stock in 2008 at a weighted average price of$34.74 per share.  There are currently no publicly announced plans or programsto repurchase shares in place.

**Liquidity**

The Company manages liquidity ina manner to ensure the availability of ample funding to satisfy loan demand,fund investment opportunities and fund large deposit withdrawals.  Primaryfunding sources for the Company include customer core deposits, FHLBborrowings, as well as correspondent bank and other borrowings.  The Company'sliquidity position is further strengthened by ready access to a diversifiedbase of wholesale borrowings, which includes lines of credit with the FHLB,federal funds purchased, securities sold under agreements to repurchase,brokered CDs and others.  

The turmoil and events infinancial markets and across the banking industry serve as a reminder thatadequate liquidity is critical to the Company's success and survival,especially during times of turbulent market conditions.  Therefore, managementhas reviewed, tested and updated strategic action plans related to liquidity,including crisis and contingency liquidity plans to defend against any materialdownturn in the liquidity position.  

Deposits accounted for 86% offunding for each of the last two years.  Borrowed funds from the FHLB amountedto 7.5% ($65 million) of total funding at year-end 2009 compared to 7.5% ($63million) of total funding at year-end 2008.  The Bank had additional borrowingcapacity of approximately $37 million with FHLB at year-end 2009.  The Bank also has federal fund lines of credit with seven correspondent banks with linestotaling $90.5 million as of year-end 2009.  In each of the years endedDecember 31, 2009 and 2008, the Bank held $23 million in short-term CDs withthe State of Tennessee.  Brokered time deposits were $36 million and $76million as of year-end 2009 and 2008, respectively.  Decreased loan demand in2009 allowed the Bank to reduce its reliance on wholesale funding sources suchas brokered deposits as well as other higher priced time deposits.  Brokereddeposits include reciprocal and one-way buy deposits in the CDARS program.  Formore information about CDARS, see the section above entitled "FinancialCondition - Composition of Deposits." 

When evaluatingliquidity, comparison is made between funding needs and the current level ofliquidity, plus liquidity that would likely be available from other sources.This comparison provides a means for determining whether funds managementpractices are adequate. Management should be able to manage unplanned changesin funding sources, as well as react to changes in market conditions that couldhinder the Bank's ability to quickly liquidate assets with minimal loss.  Fundsmanagement practices are designed and implemented to ensure that the Companydoes not maintain liquidity by paying above market prices for funds or byrelying unduly on wholesale or credit-sensitive funding sources.  The OCC hasestablished benchmarks to be used as guidelines in managing liquidity. Thefollowing areas are considered liquidity red flags:
-          Significant increases in reliance on wholesale funding;
-          Significant increases in large CDs, brokered deposits or depositswith interest rates higher than the market;.
-          Mismatched funding - funding long-term assets with short-termliabilities or short-term assets with long-term liabilities;
-          Significant increases in borrowings;
-          Significant increases in dependence on funding sources other thancore deposits;
-          Reduction in borrowing lines by correspondent banks;
-          Increases in cost of funds;
-          Declines in levels of core deposits; and
-          Significant decreases in short-term investments.

Liquidity ishigh priority for the Company's Funds Management Committee, which continues toseek alternative funding sources conducive to net interest margin strategies. The following table reflects the liquidity position of the Bank as of December31, 2009, 2008 and 2007 in comparison to the OCC Liquidity Benchmarks:

OCC Liquidity  Benchmark

December 31,  2009

 

December 31,  2008

 

December 31,  2007

Short Term Liabilities/ Total Assets > 20%

20.13%

16.63%

21.93%

On Hand Liquidity to Total Liabilities < 8%

5.93%

10.77%

6.72%

Loan to Deposits < 80%

76.94%

80.21%

84.05%

Wholesale Funds/Total Sources > 15%

13.22%

15.28%

16.39%

Non Core Funding Dependence > 20%

30.82%

30.96%

36.30%

The abovecomparison is one quantitative means of monitoring liquidity levels.  However,other quantitative and qualitative factors are considered in the overall riskmanagement process for liquidity.  Such other factors evaluated by managementinclude, but are not limited to, forecasting and stress testing capital levels,diversification of funding sources, degree of reliance on short-term volatilefunding sources, deposit volume trends and stability of deposits.  There are noknown trends or uncertainties that are likely to have a material effect on theCompany's liquidity or capital resources.  There currently exist norecommendations by regulatory authorities, which, if implemented, would havesuch an effect.  

-22-
Recently Issued Accounting Standards
*Accounting StandardsCodification*

*             *In June 2009,the Financial Accounting Standards Board ("FASB") issued Accounting StandardsCodification ("ASC") Topic 105, "Generally Accepted Accounting Principles -FASB Accounting Standards CodificationTM and the Hierarchy of Generally AcceptedAccounting Principles." The ASC is the single source of authoritativenongovernmental GAAP.  The ASC does not change current GAAP, but is intended tosimplify user access to all authoritative GAAP by providing all theauthoritative literature related to a particular topic in one place.  Allexisting accounting standard documents are superseded and all other accountingliterature not included in the ASC is considered nonauthoritative.  The ASC iseffective for interim or annual reporting periods ending after September 15,2009.  GAAP references in the Company's financial statements have been updatedto reflect this change.

*Fair Value Measurements andDisclosures*

In August 2009,the FASB issued ASC Topic 820, "Fair Value Measurements and Disclosures -Measuring Liabilities at Fair Value" ("ASC 820").  ASC 820 provides amendmentsfor fair value measurements of liabilities.  Accounting guidance under ASC 820affirms that fair value when the market for an asset is not active is the pricethat would be received in a sale of the asset in an orderly transaction, andincludes additional factors for determining whether there has been asignificant decrease in market activity for an asset. Guidance to ASC 820requires an entity to base its conclusion about whether a transaction was notorderly on the weight of the evidence.  It provides clarification that incircumstances in which a quoted price in an active market for the identicalliability is not available, a reporting entity is required to measure fairvalue using one or more techniques.  ASC 820 also clarifies that whenestimating a fair value of a liability, a reporting entity is not required toinclude a separate input or adjustment to other inputs relating to theexistence of a restriction that prevents the transfer of the liability.  ASC820 is effective for the first reporting period (including interim periods)beginning after issuance or fourth quarter 2009.  The Company is currentlyevaluating the impact of ASC 820 on its financial condition, results ofoperations and disclosures.

In April 2009,the FASB issued guidance (formerly FASB Staff Position ("FSP") 107-1 and APB28-1), "Interim Disclosures about Fair Value of Financial Instruments."  Thisguidance requires a public entity to provide disclosures about fair value offinancial instruments in interim financial information and is effective forinterim and annual financial periods ending after June 15, 2009.  Adoption ofthis guidance did not have a material impact on the Company's financialcondition or results of operations.  See Note 9 of the Company's ConsolidatedFinancial Statements included elsewhere in this Annual Report on Form 10-K formore information.

In April 2009,the FASB issued guidance (formerly FSP FAS 157-4), "Determining Fair Value Whenthe Volume and Level of Activity for the Asset or Liability Have SignificantlyDecreased and Identifying Transactions That Are Not Orderly."  This guidanceaffirms the objective of fair value when a market is not active, clarifies andincludes additional factors for determining whether there has been asignificant decrease in market activity, eliminates the presumption that alltransactions are distressed unless proven otherwise, and requires an entity todisclose a change in valuation technique.  This guidance is effective forinterim and annual periods ending after June 15, 2009.  Adoption of thisguidance did not have a material impact on the Company's financial condition orresults of operations.

*Variable Interest Entities*

In June 2009,the FASB issued new guidance to improve financial reporting by enterprisesinvolved with variable interest entities and to address (i) the effects ofcertain provisions of previous guidance issued as FASB Interpretation No. 46(revised December 2003), "Consolidation of Variable Interest Entities," as aresult of the elimination of the qualifying special-purpose entities concept inFASB Statement No. 166, "Accounting for Transfers of Financial Assets," and(ii) constituent concerns about the application of certain key provisions inthe former guidance, including those in which the accounting and disclosures underthe Interpretation do not always provide timely and useful information about anenterprise's involvement in a variable interest entity.  Determination ofwhether a company is required to consolidate an entity is based on, among otherthings, an entity's purpose and design and a company's ability to direct theactivities of the entity that most significantly impact the entity's economicperformance. SFAS No. 167 requires additional disclosures about the reportingentity's involvement with variable-interest entities and any significantchanges in risk exposure due to that involvement as well as its effect on theentity's financial statements. This statement is effective as of the beginningof each reporting entity's first annual reporting period that begins afterNovember 15, 2009, for interim periods within that first annual reportingperiod, and for interim and annual reporting periods thereafter.  Managementhas not completed its evaluation of this issue; however, the Company does notexpect this guidance to have a material impact on its financial condition orresults of operations. 

*Transfer of Financial Assets*

                In June 2009, the FASB issued guidance regarding SFAS No.166, "Accounting for Transfers of Financial Assets."  SFAS No. 166 amends ASCTopic 860, "Transfers and Servicing," to enhance reporting transfers offinancial assets, including securitizations, and disclosure where companieshave continuing exposure to the risks related to transferred financial assets.SFAS No. 166 eliminates the concept of a "qualifying special-purpose entity"and changes requirements for derecognizing financial assets. SFAS No. 166 alsorequires additional disclosures about all continuing involvement withtransferred financial assets, including information about gains and lossesresulting from transfers during the period. SFAS No. 166 has also modified thecriteria that must be met in order for a transfer of a portion of a financialasset, such as a loan participation, to qualify for sale accounting.  ThisStatement must be applied as of the beginning of each reporting entity's firstannual reporting period that begins after November 15, 2009 for interim periodswithin that first annual reporting period and for interim and annual reportingperiods thereafter.  Management has not completed its evaluation of this issue;however, the Company does not expect this guidance to have a material impact onits financial condition or results of operations. 

*Subsequent Events*

In June 2009, the FASBissued ASC Topic 855, "Subsequent Events" ("ASC 855").  ASC 855 was issued toestablish general standards of accounting for and disclosure of events thatoccur after the balance sheet date but before financial statements are issuedor are available to be issued.  In particular, ASC 855 sets forth: (i) theperiod after the balance sheet date during which management of a reportingentity should evaluate events or transactions that may occur for potentialrecognition or disclosure in the financial statements; (ii) the circumstances underwhich an entity should recognize events or transactions occurring after thebalance sheet date in its financial statements; and (iii) the disclosures thatan entity should make about events or transactions that occurred after thebalance sheet date.  In accordance with ASC 855, an entity should apply therequirements to interim or annual financial periods ending after June 15, 2009. There was nomaterial impact to the Company's financial condition or results of operationsupon adoption of ASC 855.

*Other Than Temporary Impairment*

In April 2009,the FASB issued guidance (formerly FSP FAS 115-2, FAS124-2 and EITF 99-20-2),"Recognition and Presentation of Other-Than-Temporary-Impairment."  Thisguidance (i) changes existing guidance for determining whether an impairment isother than temporary to debt securities and (ii) replaces the existingrequirement that the entity's management assert it has both the intent andability to hold an impaired security until recovery with a requirement thatmanagement assert: (a) it does not have the intent to sell the security; and(b) it is more likely than not it will not have to sell the security beforerecovery of its cost basis.  Under the new guidance, declines in the fair valueof held-to-maturity and available-for-sale securities below their cost that aredeemed to be other than temporary are reflected in earnings as realized lossesto the extent the impairment is related to credit losses.  The amount ofimpairment related to other factors is recognized in other comprehensiveincome.  This guidance is effective for interim and annual periods ending afterJune 15, 2009.  These provisions did not have a material impact on theCompany's financial condition or results of operations.

*Financial Instruments*

Accountingguidance under FASB ASC Topic 825, "Financial Instruments," requires an entityto provide disclosures about the fair value of financial instruments in interimfinancial statements and amends prior guidance to require those disclosures insummarized financial statements at interim reporting periods.  This guidancedid not have a material impact on the Company's financial condition or resultsof operations.

*Consolidation*

* *Accountingguidance under FASB ASC Topic 810, "Consolidation," amended prior guidance toestablish accounting and reporting standards for noncontrolling interests in asubsidiary and for the deconsolidation of that subsidiary.  Under FASB ASCTopic 810, a noncontrolling interest in a subsidiary, which is sometimesreferred to as minority interest, is an ownership interest in the consolidatedentity that should be reported as a component of equity in the consolidatedfinancial statements. Among other requirements, FASB ASC Topic 810 requiresconsolidated net income to be reported at amounts that include the amountsattributable to both the parent and the noncontrolling interest. It alsorequires disclosure, on the face of the consolidated income statement, of theamounts of consolidated net income attributable to the parent and to thenoncontrolling interest. The new authoritative accounting guidance under FASBASC Topic 810 became effective on January 1, 2009 and did not impact theCompany's financial condition or results of operations.

*Compensation-RetirementBenefits*

FASB ASC Topic 715, "Compensation -Retirement Benefits" provides guidance related to an employer's disclosuresabout plan assets of a defined benefit pension or other postretirement plan. The disclosures about plan assets required by this accounting guidance shall beprovided for fiscal years ending after December 15, 2009.  The requireddisclosures are reported in Note 12 - Defined Benefit and Other PostretirementBenefits.  The Company does not expect this guidance to have a material impacton its financial condition or results of operations. 

-23-
ITEM 7A.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK
**Interest Rate Sensitivity**

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

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

Overall, theCompany maintained steady net interest margins in the range of 3.7% to 4.0%from December 2005 to December 2008.  Then, margins steadily improved in 2009to above 4% for the first time in over five years.  Margin improvement is aresult of the Company's ability to keep interest earning asset yields decliningat a pace slower than the decline of interest bearing liabilities.  TheCompany's overall fairly neutral interest rate risk position is evidenced bycomparison of the range of federal funds rate compared to range of theCompany's net yield on average earning assets.  From 2005 to 2009, the averagequarterly federal funds rate fluctuated between 0.25% and 5.25% while theCompany's average quarterly net yield range for the same period is 3.59% to4.41%.  

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

-24-

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

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

** **

One

Three

Six

12

Two

Three

Five

More than Five

Non

Month

Months

Months

Months

Years

Years

Years

Years

Sensitive

Balance

Balance

Balance

Balance

Balance

Balance

Balance

Balance

Balance

Total

Assets:

Total Cash and Due

   From

 $

-    

 $

-    

 $

-    

 $

-    

 $

-    

 $

-    

 $

-    

 $

-    

 $

21,177  

 $

21,177  

Total Investments

4,767  

9,734  

10,390  

19,649  

31,705  

25,162  

38,442  

102,931  

7,011  

249,791  

Total Fed Funds Sold

11,170  

-    

-    

-    

-    

-    

-    

-    

-    

11,170  

Total Net Loans

150,869  

43,716  

44,568  

73,936  

100,028  

118,876  

55,552  

-    

(8,931)

578,614  

Total Other Assets

-  

-  

-  

-  

-  

-  

-  

-  

-  

95,803  

Total Assets

 $

166,806  

 $

53,450  

 $

54,958  

 $

93,585  

 $

131,733  

 $

144,038  

 $

93,994  

 $

102,931  

 $

19,257  

 $

956,555  

Liabilities:

Total Demand

 $

-    

 $

-    

 $

-    

 $

10,068  

 $

5,034  

 $

5,034  

 $

-    

 $

80,368  

 $

-    

 $

100,504  

Total Savings

62,852  

-  

-  

-  

24,453  

24,453  

63,594  

119,848  

-  

295,200  

Total Time

49,689  

106,404  

73,948  

98,354  

16,806  

7,208  

3,954  

79  

-  

356,442  

Total Deposits

112,541  

106,404  

73,948  

108,422  

46,293  

36,695  

67,548  

200,295  

-  

752,146  

Total Borrowings

32,376  

7,157  

6,888  

22,606  

11,536  

5,858  

2,180  

24,310  

-  

112,911  

Other Liabilities

7,186  

7,186  

Total Other Liabilities

32,376  

7,157  

6,888  

22,606  

11,536  

5,858  

2,180  

24,310  

7,186  

120,097  

Total Liabilities

144,917  

113,561  

80,836  

131,028  

57,829  

42,553  

69,728  

224,605  

7,186  

872,243  

Total Equity

-  

-  

-  

-  

-  

-  

-  

-  

84,312  

84,312  

Total Liabilities/Equity

 $

144,917  

 $

113,561  

 $

80,836  

 $

131,028  

 $

57,829  

 $

42,553  

 $

69,728  

 $

224,605  

 $

91,498  

 $

956,555  

Period Gap

(66,068)

(60,111)

(25,878)

(37,443)

73,904  

101,485  

24,266  

(121,674)

12,071  

-  

Cumulative Gap

21,889  

(38,222)

(64,100)

(101,543)

(27,639)

73,846  

98,112  

(23,562)

(11,491)

- 

RSA/RSL

54.41 %

47.07 %

67.99 %

71.42 %

227.80 %

338.49 %

134.80 %

23.00 %

21.05 %

0.00 %

** **

_______________

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

-25-

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

**CONDENSEDGAP REPORT****CURRENT BALANCESDECEMBER 31, 2008**

One

Three

Six

12

Two

Three

Five

More than Five

Non

Month

Months

Months

Months

Years

Years

Years

Years

Sensitive

Balance

Balance

Balance

Balance

Balance

Balance

Balance

Balance

Balance

Total

Assets:

Total Cash and Due

   From

 $

-    

 $

-    

 $

-    

 $

-    

 $

-    

 $

-    

 $

-    

 $

-    

 $

17,888   

 $

17,888   

Total Investments

4,549  

16,307  

35,849  

41,196  

28,408  

15,564  

17,217  

50,555  

855  

210,500

Total Fed Funds Sold

22,816  

- 

- 

- 

- 

- 

- 

- 

- 

22,816  

Total Net Loans

182,842  

36,848  

47,802  

76,698  

86,676  

73,644  

92,144  

-    

(7,196)

589,458  

Total Other Assets

- 

- 

- 

- 

- 

- 

- 

- 

86,840  

86,840  

Total Assets

 $

210,207  

 $

53,155  

 $

83,651  

 $

117,894  

 $

115,084  

 $

89,208  

 $

109,361  

 $

50,555  

 $

98,387  

 $

927,502  

Liabilities:

Total Demand

 $

-    

 $

-    

 $

-    

 $

10,841   

 $

5,440   

 $

5,440   

 $

-    

 $

87,041   

 $

-    

 $

108,762   

Total Savings

48,603  

-  

-  

-  

19,785  

19,785  

50,814  

94,326  

-  

233,313  

Total Time

46,111  

88,003  

114,611  

113,033  

17,698  

5,039  

7,905  

433  

7  

392,840  

Total Deposits

94,714  

88,003  

114,611  

123,874  

42,923  

30,264  

58,719  

181,800  

7  

734,915  

Total Borrowings

26,088  

12,167  

800  

7,213  

30,653  

10,978  

5,571  

14,138  

-  

107,608  

Other Liabilities

- 

- 

- 

- 

- 

- 

- 

- 

7,971  

7,971  

Total Other Liabilities

26,088  

12,167  

800  

7,213  

30,653  

10,978  

5,571  

14,138  

7,971  

115,579  

Total Liabilities

120,802  

100,170  

115,411  

131,087  

73,576  

41,242  

64,290  

195,721  

7,978  

850,494  

Total Equity

- 

- 

- 

- 

- 

- 

- 

- 

77,008  

77,008  

Total Liabilities/Equity

 $

120,802  

 $

100,170  

 $

115,411  

 $

131,087  

 $

73,576   

 $

41,242  

 $

64,290  

 $

195,721  

 $

84,984  

 $

927,502  

Period Gap

(15,174)

(47,015)

(31,760)

(13,193)

41,508  

47,966  

45,071  

(145,383)

13,401  

-  

Cumulative Gap

89,405  

42,390  

10,630  

(2,563)

38,945  

86,911  

131,982  

(13,401)

-  

-  

RSA/RSL*

87.44%

53.06%

72.48%

89.94%

156.42%

216.30%

170.11%

25.80%

115.77%

0.00%

_______________

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

*Notes to the Gap Reports*

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

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

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

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

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

-26-

The Company'sinterest rate risk position is liability sensitive at year-end 2009. Therefore, net interest margins would be diluted slightly by increases in ratesover the next 12 months under a normal interest rate environment.  As ofDecember 2009, federal funds rates continue at the historical low range of0.00% - 0.25%.  Federal funds rates at this level do not have the capacity todecrease even 100 basis points.  Therefore, in the interest rate risk models,the rates on federal funds and prime hit a floor of zero and 3.0%,respectively.  The prime rate floor of 3% assumes that the normal spreadbetween federal funds rates and prime is maintained and remains fixed at 300basis points.   While prime rate in the model reaches a floor of 3%, the Bank'svariable rate loan pricing carries an average floor of 5.5%.  As rates in themodel are shocked, loans will decrease only until the floor position is reachedwhile some liabilities continue to re-price downward.  Therefore, the variancebetween the flat rate scenario and the down rate shocks are positive.  Withfederal funds rates currently at 0.00% to 0.25%, the down 100 basis points anddown 200 basis point scenarios are the most unlikely scenarios.  Scenarios forexposure in the up 100 basis points and up 200 basis points are considered morerealistic.  

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

NetInterest Income at Risk*December31, 2009

Tier 1 Capital                             $78,336

Projected 12  Month Exposure

Rate

**POLICY**

Moves In

Current

Possible

% of Net Int

% of Net Int

Net Interest  Income Levels

Basis Pts

 

Position

 

Scenarios

 

Variance

 

Income

 

Income

Declining 2

(200)

 $

31,010   

 $

32,874   

 $

1,864   

6.0%

-20.0%

Declining 1

(100)

31,010   

31,803   

793   

2.6%

-10.0%

**Most Likely-Base**

**0**

** **

**31,010 **

** **

**31,010 **

** **

**-   **

** **

**0.0%**

** **

**0.0%**

Rising 1

100  

31,010   

30,419   

(591)

-1.9%

-10.0%

Rising 2

200  

31,010   

29,615   

(1,395)

-4.5%

-25.0%

____________________________

*              Netinterest income assumes that interest rates would change immediately within thetotal portfolio, a scenario which would reflect a worst case position and isunlikely to happen.  
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.Management's Annual Report on Internal Control Over Financial Reporting
Management of the Company isresponsible for establishing and maintaining adequate internal control overfinancial reporting.  The Company's internal control system is designed toprovide reasonable assurance to management and the Board of Directors regardingthe preparation and fair presentation of the Company's annual financialstatements in accordance with GAAP.  

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

Managementassessed the effectiveness of the Company's internal control over financialreporting as of December 31, 2009, based on criteria for effective internalcontrol over financial reporting described in Internal Control-IntegratedFramework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of December 31, 2009,the Company's internal control over financial reporting was effective. 

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

 -27-
**185 N. Church  Street                   Telephone:  (731) 285-7900  Dyersburg, TN  38024                                  (800)  608-5612                                                         Fax:           (731) 285-6221

**Members of**

American Institute of Certified Public  Accountants  AICPA Center for Public Company Audit Firms  AICPA Governmental Audit Quality Center  AICPA Employee Benefit Plan Audit Quality Center  Tennessee Society of Certified Public  Accountants  Kentucky Society of Certified Public  Accountants

* www.atacpa.net*

REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

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

Wehave audited the accompanying consolidated balance sheets of First CitizensBancshares, Inc., and subsidiaries as of December 31, 2009 and 2008, and therelated consolidated statements of income, comprehensive income, stockholders'equity, and cash flows for each of the years in the three year period ended December31, 2009.  We also have audited First Citizens Bancshares, Inc. andsubsidiaries' internal control over financial reporting as of December 31, 2009,based on criteria established in *Internal Control-Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO).  First Citizens Bancshares, Inc. and subsidiaries' management isresponsible for these financial statements, for maintaining effective internalcontrol over financial reporting, and for its assessment of the effectivenessof internal control over financial reporting.  Our responsibility is to expressan opinion on these financial statements and an opinion on the company'sinternal control over financial reporting based on our audits.

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States).  Those standards require that weplan and perform the audits to obtain reasonable assurance about whether thefinancial statements are free of material misstatement and whether effectiveinternal control over financial reporting was maintained in all materialrespects.  Our audits of the financial statements included examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation.  Our audit of internal control over financial reporting includedobtaining an understanding of internal control over financial reporting, assessingthe risk that a material weakness exists, and testing and evaluating the designand operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considerednecessary in the circumstances.  We believe that our audits provide areasonable basis for our opinions.

Acompany's internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles.  A company's internal controlover financial reporting includes those policies and procedures that (1)pertain to the maintenance of records that, in reasonable detail, accuratelyand fairly reflect the transactions and dispositions of the assets of thecompany; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations of managementand directors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company's assets that could have a material effect on the financialstatements.

-28 -

 

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

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of First Citizens Bancshares, Inc.,and subsidiaries as of December 31, 2009 and 2008, and the results of itsoperations and its cash flows for each of the years in the three-year periodended December 31, 2009, in conformity with accounting principles generallyaccepted in the United States of America.  Also, in our opinion, First CitizensBancshares, Inc. and subsidiaries maintained, in all material respects,effective internal control over financial reporting as of December 31, 2009, basedon criteria established in *Internal Control-Integrated Framework* issuedby the Committee of Sponsoring Organizations of the Treadway Commission(COSO).  
** 

/s/ ALEXANDER THOMPSON ARNOLD PLLC

Dyersburg, Tennessee

February 25, 2010
**   
 

 

 

 

Dyersburg, TN

Milan, TN

Fulton, KY

McKenzie, TN

Henderson, TN

Murray, KY

Jackson, TN

Paris, TN

Martin, TN

Trenton, TN

Union City, TN

 

 

 

-29-
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES**CONSOLIDATEDBALANCE SHEETS**DECEMBER 31, 2009 AND 2008***(dollars in thousands)***
**December 31,  2009**

** **

**December 31,  2008**

ASSETS

Cash and due from banks

 $

21,177   

 $

17,888   

Federal funds sold

11,170   

22,816   

Cash and cash equivalents

32,347   

40,704   

Investment securities:

Held-to-Maturity, at amortized cost, fair

value of $0 at December 31, 2009

and $115 at December 31, 2008

-   

115   

Available-for-Sale, stated at market

249,791   

210,385   

Loans (excluding unearned income of $434 at December 31,  2009

and $425 at December 31, 2008)

587,398   

596,758   

Less:  allowance for loan losses

8,784   

7,300   

Net loans

578,614   

589,458   

Loans held-for-sale

2,741   

2,632   

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

5,684   

5,684   

Premises and equipment

30,525   

31,746   

Accrued interest receivable

5,405   

5,581   

Goodwill

11,825   

11,825   

Other intangible assets

204   

289   

Other real estate owned

10,527   

5,424   

Bank-owned life insurance policies

21,116   

20,627   

Other assets

7,776   

3,032   

TOTAL ASSETS

 $

956,555   

 $

927,502   

LIABILITIES AND SHAREHOLDERS' EQUITY

Non-interest bearing demand deposits

 $

100,504   

 $

108,762   

Interest bearing time deposits

356,442   

392,840   

Interest bearing savings deposits

295,200   

233,313   

Total deposits

752,146   

734,915   

Securities sold under agreements to 

repurchase

36,881   

32,765   

Federal funds purchased and other short-

term borrowings

748   

1,000   

Other borrowings

75,282   

73,843   

Other liabilities

7,186   

7,971   

Total liabilities

872,243   

850,494   

Shareholders' equity:

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

shares authorized; 3,717,593 shares issued and  

outstanding at December 31, 2009 and 

December 31, 2008

 

3,718   

 

3,718   

Surplus

15,331   

15,331   

Retained earnings

63,448   

58,890   

Accumulated other comprehensive income

4,256   

1,526   

Total common stock and retained earnings

86,753   

79,465   

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

 and 93,094 treasury shares, at cost as of December 31,  2008

2,441   

2,457   

Total shareholders' equity

84,312   

77,008   

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

 $

956,555   

 $

927,502   

*Note:  Seeaccompanying notes to consolidated financial statements.*

-30-

**FIRST CITIZENSBANCSHARES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME****YEARS ENDED DECEMBER 31, 2009, 2008 AND 200****7(In thousands)**

**2009**

** **

**2008**

** **

**2007**

**Interest income**

   Interest and fees on loans

 $

38,402   

 $

42,357   

 $

44,700   

   Interest and dividends on investment securities:

     Taxable

7,029   

7,334   

6,679   

     Tax-exempt

3,285   

2,329   

1,993   

     Dividends

231   

309   

408   

   Other interest income

64   

138   

499   

     Total interest income

49,011   

52,467   

54,279   

**Interest expense**

   Interest on deposits

11,729   

17,517   

21,616   

   Interest on borrowings

3,428   

4,166   

4,057   

   Other interest expense

655   

951   

1,177   

     Total interest expense

15,812   

22,634   

26,850   

         Net interest income

33,199   

29,833   

27,429   

**Provision for loan losses**

7,060   

2,858   

834   

 Net interest income after provision for loan losses

26,139   

26,975   

26,595   

**Non-interest income**

   Mortgage banking income

1,111   

1,139   

1,178   

   Income from fiduciary activities

806   

816   

1,007   

   Service charges on deposit accounts

6,941   

7,272   

6,962   

   Brokerage fees

1,317   

1,473   

1,565   

   Earnings on bank-owned life insurance

832   

833   

695   

   Loss on sale of foreclosed property

(470)

(284)

(97)

   Gain (loss) on sale of available-for-sale  securities

1,196   

436   

(29)

   Other non-interest income

1,380   

1,511   

1,536   

     Total non-interest income

13,113   

13,196   

12,817   

Total other-than temporary impairment losses

1,357   

1,810   

-     

Portion of loss recognized in other

   comprehensive income (before taxes)

(706)

-     

-     

Net impairment losses recognized in earnings

651   

1,810   

-     

**Non-interest expenses**

   Salaries and employee benefits

 

15,285   

 

16,832   

 

15,687   

   Net occupancy expense

1,804   

1,745   

1,685   

   Depreciation

1,852   

1,868   

2,095   

   Data processing expense

1,192   

984   

843   

   Legal and professional fees

305   

353   

327   

   Stationary and office supplies

254   

259   

286   

   Amortization of intangibles

85   

85   

85   

   Advertising and promotions

622   

711   

765   

   Premiums for FDIC insurance

1,671   

95   

78   

   Expenses related to other real estate owned

642   

435   

235   

   Other non-interest expense

4,597   

4,697   

5,161   

     Total non-interest expense

28,309   

28,064   

27,247   

Net income before income taxes

10,292   

10,297   

12,165   

Provision for income taxes 

1,965   

2,768   

3,005   

Net income

 $

8,327   

 $

7,529   

 $

9,160   

Earnings per common share:

 Net income

 $

2.30   

 $

2.08   

 $

2.53   

Weighted average shares outstanding

3,625   

3,625   

3,626   

*Note:  Seeaccompanying notes to consolidated financial statements.*

** **-31-

**FIRST CITIZENSBANCSHARES, INC. AND SUBSIDIARIESCONSOLIDATEDSTATEMENTS OF COMPREHENSIVE INCOMEYEARS ENDEDDECEMBER 31, 2009, 2008 AND 2007(In thousands)**

**2009**

** **

**2008**

** **

**2007**

Net income for year

 $

8,327   

 $

7,529   

 $

9,160   

Other comprehensive income, net of tax:

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

44   

(14)

(37)

    Net change in unrealized gains on available-

       for-sale securities

2,687   

596   

873   

         Total other comprehensive income, net of tax

2,731   

582   

836   

**  Total comprehensive income**

** **

 $

11,058   

 $

8,111   

 $

9,996   

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

Before-tax

Tax (Expense)

Net-of-tax

Amount

or Benefit

Amount

**Year ended December 31, 2009:**

 Unrealized gains (losses) on cash flow hedge

 $

71   

 $

(27)

 $

44   

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

           Unrealized gains (losses) arising during the  period

4,901   

(1,878)

3,023   

           Reclassification adjustments for net (losses)  gains included in net income

(545)

209   

(336)

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

4,356   

(1,669)

2,687   

                  Net unrealized gains (losses)

 $

4,427   

 $

(1,696)

 $

2,731   

**Year ended December 31, 2008:**

 Unrealized  (losses) gains on cash flow hedge

 $

(23)

 $

9   

 $

(14)

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

           Unrealized gains (losses) arising during the  period

(408)

156   

(252)

           Reclassification adjustments for net gains  (losses) included in net income

1,374   

(526)

848   

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

966   

(370)

596   

                  Net unrealized gains (losses)

 $

943   

 $

(361)

 $

582   

**Year ended December 31, 2007:**

 Unrealized (losses) gains on cash flow hedge

 $

(60)

 $

23   

 $

(37)

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

           Unrealized gains (losses) arising during the  period

1,385   

(530)

855   

           Reclassification  adjustments for net gains (losses) included in net income

29   

(11)

18   

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

1,414   

(541)

873   

                  Net unrealized gains (losses)

 $

1,354   

 $

(518)

 $

836   

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

** **-32-

**FIRST CITIZENSBANCSHARES, INC.CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS' EQUITYYEARS ENDEDDECEMBER 31, 2009, 2008 AND 2007*(In thousands,except per share data)***

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Accum.**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Other**

** **

** **

** **

** **

**Common Stock**

** **

** **

** **

**Retained**

** **

**Compre.**

** **

**Treasury**

** **

** **

**Shares**

** **

**Amount**

** **

**Surplus**

** **

**Earnings**

** **

**Income**

** **

**Stock**

** **

**Total**

**(#)**

** **

**($)**

** **

**($)**

** **

**($)**

** **

**($)**

** **

**($)**

** **

**($)**

**Balance January 1, 2007**

3,718  

 $

3,718  

 $

15,331  

 $

52,532  

 $

108  

 $

(2,191)

 $

69,498  

Net income, year ended  December 31, 2007

9,160  

9,160  

Adjustment of unrealized  gain on

 securities  available-for-sale, net of tax

873  

873  

Adjustment of unrealized  loss on

 cash flow hedge, net of  tax

(37)

(37)

Cash dividends paid - $1.16  per share

(4,207)

(4,207)

Treasury stock transitions,  net

(256)

(256)

**Balance December 31, 2007**

3,718  

 $

3,718  

 $

15,331  

 $

57,485  

 $

944  

 $

(2,447)

 $

75,031  

Net income, year ended  December 31, 2008

7,529  

7,529  

Cumulative effect for  change in accounting

   principle (adoption of  EITF 06-04)

(1,919)

(1,919)

Adjustment of unrealized  gain on

 securities available-for-sale,  net of tax

596  

596  

Adjustment of unrealized  gain on

 cash flow hedge, net of  tax

(14)

(14)

Cash dividends paid - $1.16  per share

(4,205)

(4,205)

Treasury stock transitions,  net

(10)

(10)

**Balance December 31, 2008**

3,718  

 $

3,718  

 $

15,331  

 $

58,890  

 $

1,526  

 $

(2,457)

 $

77,008  

Net income, year ended  December 31, 2009

8,327  

8,327  

Adjustment of unrealized  gain (loss) on

 securities  available-for-sale, net of tax

2,686  

2,687  

Adjustment of unrealized  gain (loss) on

 cash flow hedge, net of  tax

44  

44  

Cash dividends paid - $1.04  per share

(3,769)

(3,770)

Treasury stock transitions,  net

16  

16  

**Balance December 31, 2009**

3,718  

 $

3,718  

 $

15,331  

 $

63,448 

 $

4,256  

 $

(2,441)

 $

84,312  

** **

*Note:  Seeaccompanying notes to consolidated financial statements.*

-33-

** FIRST CITIZENSBANCSHARES, INC. AND SUBSIDIARIESCONSOLIDATEDSTATEMENT OF CASH FLOWSYEARS ENDEDDECEMBER 31, 2009, 2008 AND 2007*(in thousands)***

*** ***

**2009**

** **

**2008**

** **

**2007**

 
**Operating activities**

 
Net income

 $

8,327   

 $

7,529   

 $

9,160   

 
Adjustments to reconcile net income to net

 
 cash provided by operating activities:

 
     Provision for loan losses

7,060   

2,858   

834   

 
     Provision for depreciation

1,852   

1,868   

2,095   

 
     Provision for amortization - intangibles

85   

85   

85   

 
     Deferred income taxes

(789)

(870)

669   

 
     Gains (losses) on sale or call of securities

(1,196)

(436)

29   

 
     Impairment losses on securities recorded in earnings

651   

1,810   

-   

     Net losses on sale or write down of other real estate

470   

284   

97   

 
     Net (increase) decrease in loans held-for-sale

(109)

(445)

1,262   

 
     (Increase) decrease in accrued interest receivable

176   

983   

196   

 
     Increase (decrease) in accrued interest payable

(980)

148   

245   

 
     (Increase) in cash surrender value of bank-owned life  insurance

(489)

(694)

(564)

 
     Net (increase) decrease in other assets

(5,174)

(296)

(493)

 
     Net increase (decrease) in other liabilities

(1,500)

2,821   

(362)

 
NET CASH PROVIDED BY OPERATING ACTIVITIES

 $

8,384   

 $

15,645   

 $

13,253   

 
 
**Investing activities**

 
 Proceeds of maturities of held-to-maturity investment  securities

 $

115   

 $

175   

 $

-   

 
 Proceeds of sales of available-for-sale investment  securities

41,041   

30,497   

23,413   

 
 Proceeds of paydowns and maturities of  available-for-sale

 
     investment securities

36,943   

50,402   

18,572   

 
 Purchases of available-for-sale investment securities

(111,550)

(101,226)

(53,361)

 
 Increase in loans - net

(4,040)

(18,807)

(38,286)

 
 Proceeds from sale of other real estate

2,600   

1,396   

962   

 
 Premiums on bank-owned life insurance

-   

-   

(2,145)

 
 Purchase of premises and equipment

(631)

(3,306)

(4,169)

 
NET CASH USED BY INVESTING ACTIVITIES

 $

(35,522)

 $

(40,869)

 $

(55,014)

 
 
**Financing activities**

 
 Net increase in demand deposits, NOW accounts,

 
     and savings accounts

 $

53,629   

 $

32,142   

 $

14,016   

 
 Net increase (decrease) in time deposits

(36,398)

12,178   

10,516   

 
 Net increase (decrease) in short-term borrowings

3,864   

(10,100)

10,762   

 
 Issuance of other borrowings

2,000   

12,000   

10,155   

 
 Payment of principal on other borrowings

(561)

(1,319)

(6,528)

 
 Cash dividends paid

(3,769)

(4,205)

(4,207)

 
 Treasury stock transactions - net

16   

(10)

(256)

 
NET CASH PROVIDED BY FINANCING ACTIVITIES

18,781   

40,686   

34,458   

 
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

(8,357)

15,462   

(7,274)

Cash and cash equivalents at beginning of year

40,704   

25,242   

32,545   

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

 $

32,347   

 $

40,704   

 $

25,271   

Supplemental cash flow information:

 Interest paid

 $

16,792   

 $

22,782   

 $

27,095   

 Income taxes paid

 $

3,788   

 $

2,425   

 $

2,950   

Supplemental noncash disclosures:

 Transfers from loans to foreclosed assets

 $

9,493   

 $

5,440   

 $

488   

 Transfers from foreclosed assets to loans

 $

1,940   

 $

400   

 $

416   

*Note:  Seeaccompanying notes to consolidated financial statements.*

** **-34-

**FIRST CITIZENSBANCSHARES, INC. AND SUBSIDIARIESNOTES TOCONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2009AND 2008**

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

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

**Basis of Presentation**

The ConsolidatedFinancial Statements include all accounts of the Company and its subsidiary,First Citizens National Bank (the "Bank").  First Citizens (TN) StatutoryTrusts III and IV are reported under the equity method in accordance with GAAPfor Variable Interest Entities for all periods presented.  These investmentsare included in Other Assets and the proportionate share of income (loss) isincluded in other non-interest income.  The Bank also has two wholly ownedsubsidiaries, First Citizens Financial Plus, Inc. and First CitizensInvestments, Inc., which are consolidated into its financial statements.  TheCompany's investment in these subsidiaries is reflected on the Company'scondensed balance sheet.  See Note 22 for more information.  

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

The principalactivity of First Citizens Investments, Inc. is to acquire and sell investmentsecurities and collect income from the securities portfolio.  First CitizensHoldings, Inc., a wholly owned subsidiary of First Citizens Investments, Inc.,acquires and sells certain investment securities, collects income from itsportfolio, and owns First Citizens Properties, Inc., a real estate investmenttrust.  First Citizens Properties, Inc. invests in participation interests inreal estate loans made by the Bank and provides the Company with an alternativevehicle for raising capital.  First Citizens Holdings, Inc. owns 98% of theoutstanding preferred stock of First Citizens Properties, Inc. while directors,executive officers and certain employees of the Bank own the remaining 2%. 

The Company hastwo additional wholly owned subsidiaries, First Citizens (TN) Statutory TrustIII and First Citizens (TN) Statutory Trust IV.  First Citizens (TN) StatutoryTrust II was dissolved in March 2007.  The purpose and activities of thesetrusts are further discussed in Note 13.  

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

**Nature of Operations**

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

**Basis of Accounting**

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

**Use of Estimates**

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

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

**Cash Equivalents**

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

-35-

**Securities**

Investmentsecurities are classified as follows:

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

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

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

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

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

**Loans Held for Sale**

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

**Loans**

Loans thatmanagement has the intent and ability to hold for the foreseeable future oruntil maturity or payoff are reflected on the Consolidated Balance Sheets atthe unpaid principal amount less the allowance for loan losses and unearnedinterest and fees.

Loans aregenerally placed on non-accrual status when, in the judgment of management, theloans have become impaired.  Unpaid interest on loans placed on non-accrualstatus is reversed from income and further accruals of income are not usuallyrecognized.  Subsequent collections related to impaired loans are usuallycredited first to principal and then to previously uncollected interest.

**Allowancefor Loan Losses**

The allowancefor loan losses is established as losses are estimated to have occurred througha provision for loan losses charged to earnings.  Loan losses are chargedagainst the allowance when management believes the uncollectability of a loanbalance is confirmed.  Subsequent recoveries, if any, are credited to theallowance.

The allowancefor loan losses is evaluated on a regular basis by management and is based uponmanagement's periodic review of the collectability of the loans in light ofhistorical experience, the nature and volume of the loan portfolio, adversesituations that may affect the borrower's ability to repay, estimated value ofany underlying collateral and prevailing economic conditions.  This evaluationis inherently subjective, as it requires estimates that are susceptible tosignificant revision as more information becomes available.

The allowanceconsists of specific and general components.  The specific component relates tospecific loans that are considered impaired in accordance with GAAP.  For eachimpaired loan, a specific allowance is established when the discounted cashflows (or collateral value or observable market price) of the impaired loan islower than the carrying value of that loan.  The general component coversnon-impaired loans and pools of homogeneous loans not evaluated individuallyfor impairment.  The general component is based on historical loss experienceadjusted for qualitative factors.  

A loan isconsidered impaired when, based on current information and events, it isprobable that the Bank will be unable to collect scheduled payments ofprincipal or interest when due according to contractual terms of the loanagreement.  Factors considered by management in determining impairment includepayment status, collateral value, and the probability of collecting scheduledprincipal and interest payments when due.  Loans that experience insignificantpayment delays and payment shortfalls generally are not classified asimpaired.  Management determines the significance of payment delays and paymentshortfalls on a case-by-case basis, taking into consideration all circumstancessurrounding the loan and the borrower, including the length of delay, reasonsfor the delay, the borrower's prior payment record, and the amount of theshortfall in relation to principal and interest owed.  Impairment is measuredon a loan by loan basis for commercial and construction loans by either thepresent value of expected future cash flows discounted at the loan's effectiveinterest rate, the loan's obtainable market price, or fair value of thecollateral if the loan is collateral dependent.

Large groups ofsmaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer andsmaller balance residential loans for impairment disclosures, unless such loansare the subject of a restructuring agreement.

**Premises and Equipment**

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

**Other Real Estate**

Real estateacquired through foreclosure is separately stated on the Consolidated BalanceSheets as Other Real Estate and recorded at the lower of cost or fair valueless cost to sell.  Adjustments made at the date of foreclosure are charged tothe allowance for loan losses.  Expenses incurred in connection with ownership,subsequent adjustments to book value, and gains and losses upon disposition areincluded in other non-interest expenses.  

Adjustments tonet realizable value subsequent to acquisition are made at least annually ifnecessary based on appraisal.

-36-

**Income Taxes**

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

**InterestIncome on Loans**

Interest incomeon commercial and real estate loans is computed on the basis of daily principalbalance outstanding using the accrual method.  Interest on installment loans iscredited to operations by the level-yield method.  Interest income on loans isdiscontinued at the time the loan is 90 days delinquent unless the loan is wellsecured and in process of collection.  Loans may be placed on non-accrualstatus at an earlier date if collection of principal or interest is considereddoubtful.  All interest accrued but not received for loans placed onnon-accrual status is reversed against interest income.  Interest received on suchloans 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 pershare of common stock is computed by dividing net income by the weightedaverage number of shares of common stock outstanding during the period, aftergiving retroactive effect to stock dividends and stock splits.

**Income from FiduciaryActivities**

Income fromfiduciary activities is recorded on the accrual basis.

**Advertising and Promotions**

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

**Fair Value**

Fair valuemeasurements are used to record fair value adjustments to certain assets andliabilities and to determine fair value disclosures.  The Company measures fairvalue under guidance provided by the Financial Accounting Standards Board("FASB") Accounting Standards Codification ("ASC") Topic 820, "Fair ValueMeasurements and Disclosures" ("ASC 820"), and was effective January 1, 2008for all applicable financial and non-financial assets and liabilities.  ASC 820defines fair value, establishes a framework for measuring fair value andexpands disclosure requirements regarding fair value measurements.  ASC 820does not expand the use of fair value in any new circumstances but clarifiesthe principle that fair value should be based on assumptions that marketparticipants would use when pricing the asset or liability. ASC 820 outlinesthe following three acceptable valuation techniques may be used to measure fairvalue:  
- Market approach-The market     approach uses prices and other relevant information generated by market     transactions involving identical or similar assets or liabilities.  This     technique includes matrix pricing that is a mathematical technique used     principally to value debt securities without relying solely on quoted     prices for specific securities but rather by relying on securities'     relationship to other benchmark quoted securities.   
- Income approach-The income     approach uses valuation techniques to convert future amounts such as     earnings or cash flows to a single present discounted amount.  The     measurement is based on the value indicated by current market expectations     about those future amounts.  Such valuation techniques include present     value techniques, option-pricing models (such as the Black-Scholes-Merton     formula or a binomial model), and multi-period excess earnings method     (used to measure fair value of certain intangible assets).
- Cost approach-The cost approach     is based on current replacement cost which is the amount that would     currently be required to replace the service capacity of an asset.   

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

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

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

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

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

Assets andliabilities may be measured for fair value on a recurring basis (daily, weekly,monthly or quarterly) or on a non-recurring basis in periods subsequent toinitial recognition.  Recurring valuations are measured regularly forinvestment securities and the cash flow hedge.  Loans held for sale, other realestate and impaired loans are measured at fair value on a non-recurring basisand do not necessarily result in a change in the amount recorded on theConsolidated Balance Sheets.  Generally, these assets have non-recurringvaluations that are the result of application of other accountingpronouncements that require the assets be assessed for impairment or at thelower of cost or fair value.  Fair values of loans held for sale are consideredLevel 2.  Fair values for other real estate and impaired loans are consideredLevel 3.  See Note 20 for more information.

The Company obtains fair valuemeasurements for securities and the cash flow hedge from a third party vendor. The cash flow hedge and the majority of the available-for-sale securities arevalued using Level 2 inputs.  Collateralized debt obligation securities thatare backed by trust preferred securities and account for less than 1% of theavailable-for-sale securities portfolio are valued using Level 3 inputs.  Thefair value measurements reported in Level 2 are primarily matrix pricing thatconsiders observable data (such as dealer quotes, market spreads, cash flows,the U.S. Treasury yield curve, live trading levels, trade execution data,market consensus prepayment speeds, credit information and terms and conditionsof bonds, and other factors).  Fair value measurements for pooledtrust-preferred securities are obtained through the use of valuation modelsthat include unobservable inputs which are considered Level 3.  See additionaldiscussion of valuation techniques and inputs in Note 20.

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

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

**Subsequent Events**

                The Company has reviewed subsequentevents through February 25, 2010, the date the financial statements wereavailable to be issued.  

-37-

**NOTE 2 - CASH RESERVEREQUIREMENTS**

The Bankmaintains cash reserve balances as required by the Federal Reserve Bank. Average required balances during both 2009 and 2008 were approximately$500,000.  

**NOTE 3 - INVESTMENT SECURITIES**

The followingtables reflect amortized cost, unrealized gains, unrealized losses and fairvalue of investment securities for the dates presented, segregated intoheld-to-maturity and available-for-sale categories (in thousands):

** **

** **

**Gross**

** **

**Gross**

** **

** **

**Amortized**

** **

**Unrealized**

** **

**Unrealized**

** **

**Fair**

**Cost**

** **

**Gains**

** **

**Losses**

** **

**Value**

**As of December 31, 2009*:**

Securities Available-for-Sale:

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

 government agencies and corporations

 $

153,924   

 $

4,774   

 $

(240)

 $

158,458   

Obligations of states and political subdivisions

85,574   

3,735   

(98)

89,211   

All others

3,289   

4   

(1,171)

2,122   

     Total investment securities

 $

242,787   

 $

8,513   

 $

(1,509)

 $

249,791   

**As of December 31, 2008:**

Securities Held-to-Maturity:

 

 

 

 

 

 

 

Obligations of states and political subdivisions

 $

115   

 $

-   

 $

-   

 $

115   

 

 

 

 

 

 

 

Securities Available-for-Sale:

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

 government agencies and corporations

 $

144,595 

 $

3,688   

 $

(14)

 $

148,269   

Obligations of states and political subdivisions

59,196   

1,065   

(788)

59,473 

All others

3,940   

7   

(1,304)

2,643   

     Total securities available-for-sale

 $

207,731   

 $

4,760   

 $

(2,106)

 $

210,385   

           Total investment securities

 $

270,846   

 $

4,760   

 $

(2,106)

 $

210,500   

_______________

*              There were no securities classified as held-to-maturityas of December 31, 2009. 

At December 31,2009 and 2008, investment securities were pledged to secure government, publicand trust deposits as follows (in thousands):

 

Amortized Cost

 

Fair Value

2009

 $

143,089   

 $

148,369   

2008

 $

121,820   

 $

124,868   

The following table summarizescontractual maturities of debt securities available-for-sale as of December 31,2009 (in thousands):

Amortized Cost

Fair Value

Amounts maturing in:

 One year or less

 $

775   

 $

776   

 After one year through five years

16,103   

16,761   

 After five years through ten years

36,080   

37,584   

 After ten years*

189,799   

194,636   

 $

242,757   

 $

249,757   

Equity securities

30   

34   

       Total securities

 $

242,787   

 $

249,791   

 _______________

*              This table includes agency mortgage-backed securities("MBS") and collateralized mortgage obligations ("CMO") based on contractualmaturities (primarily in the After ten years category).  However, the remaininglives of such securities are expected to be much shorter because of anticipatedpayments.  

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

**Gross Sales**

**Gains**

**Losses**

**Net**

**Year Ended December 31,**

2009

 $

41,041   

 $

1,196   

 $

-   

 $

1,196    

2008

30,497   

396   

(40)

356*

2007

23,341   

77   

(106)

(29) 

_______________

*              For the year ended December 31, 2008, the Company alsohad realized gain of approximately $80,000 on call of available-for-salesecurities totaling $6.1 million. 

-38-

The followingtable presents information on securities with gross unrealized losses atDecember 31, 2009, aggregated by investment category and the length of timethat the individual securities have been in a continuous loss position (inthousands):

** **

*Less Than  Twelve Months*

*Twelve Months  and Over*

*Total*

 
** **

**Gross**

** **

** **

** **

**Gross**

** **

** **

** **

**Gross**

** **

** **

 
**Unrealized**

** **

**Fair**

** **

**Unrealized**

** **

**Fair**

** **

**Unrealized**

** **

**Fair**

 
**Losses**

** **

**Value**

** **

**Losses**

** **

**Value**

** **

**Losses**

** **

**Value**

 
Securities available-for-sale:

 
 U.S. Treasury securities and

 
     obligations of U.S. government

 
     corporations and agencies

 $

(239)

 $

19,351   

 $

(1)

 $

38   

 $

(240)

 $

19,389   

 
Obligations of states and political

 
 Subdivisions

(59)

5,803   

(39)

1,305   

(98)

7,108   

 
 
Other debt securities

-   

-   

(1,171)

2,088   

(1,171)

2,088   

 
 
**  Total securities available-for -sale**

** $**

**(298)**

** **

** $**

**25,154 **

** **

** $**

**(1,211)**

** **

** $**

**3,431 **

** $**

**(1,509)**

** **

** $**

**28,585 **

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

As of December31, 2009, the Company had 28 debt securities with unrealized losses, with tenof those securities having been in an unrealized loss position for greater than12 months.  Of the 28 debt securities, four corporate bonds accounted forapproximately 78% of the unrealized gross losses as of December 31, 2009.  Theremaining 24 bonds with unrealized loss positions as of year-end 2009 consistedof 17 municipal bonds and seven agency MBSs or CMOs.  Of the 17 municipalbonds, four had been in an unrealized loss for more than 12 months at December31, 2009.  Of the seven agency MBSs, two had been in an unrealized lossposition for more than 12 months.  The securities in an unrealized loss positionas of December 31, 2009 had been evaluated for other-than-temporaryimpairment.  In analyzing reasons for the unrealized losses, managementconsiders various factors including, but not limited to, whether the securitiesare issued by the federal government or its agencies, whether downgrades ofbond ratings have occurred, and also reviews any applicable industry analysts'reports.  With respect to unrealized losses on municipal and agency and theanalysis performed relating to the securities, management believes thatdeclines in market value were not other-than-temporary at December 31, 2009 andasserts positive intent and ability to hold such investments until anticipatedrecovery.  The unrealized losses on the agency and municipal securities areconsidered immaterial on an individual basis and in the aggregate and have notbeen recognized for other-than-temporary impairment.  

Four corporatebonds accounted for $1.2 million of the $1.5 million unrealized loss as ofDecember 31, 2009.  Three of the four corporate debt securities are pooledcollateralized debt obligation securities that are backed by trust-preferredsecurities ("TRUP CDOs") issued by banks, thrifts and insurance companies.  Thefourth bond is an individual corporate debt security.  All four of these bondswere rated below investment grade (BBB) by Moody's and/or S&P at December31, 2009.  

At December 31,2009, the one single-issuer corporate debt security carried an amortized costof approximately $458,000 and one TRUP CDO with an amortized cost of $1 millionhad a gross unrealized loss aggregating approximately $465,000 reflected inother comprehensive income.  The single issuer corporate debt security paidaccording to terms in 2009 and is projected to continue paying according toterms going forward.  Based on management's review of the financial conditionof the issuer including current capital levels, this bond has not beenrecognized for other-than-temporary impairment.  Management believes that theunrealized loss was attributable primarily to market factors and assertspositive intent and ability to hold the bond until anticipated recovery atDecember 31, 2009.

The three TRUPCDOs have an aggregate book value of $2.8 million and fair market value of $1.7million and each of the three are the mezzanine or "B" class tranches.  One ofthe bonds has a book value of $1 million and fair value of approximately$632,000 with the unrealized loss reflected in accumulated other comprehensiveincome as of December 31, 2009.  This bond has experienced only one deferral(4% of performing collateral) and no defaults.  This bond has not experiencedan adverse change in projected cash flows as quarterly testing in 2009 for thisbond yielded present value of projected cash flows above book value.  Therefore,no other-than-temporary impairment has been recognized to date on this bond. 

The other twoTRUP CDOs had an aggregate book value of $1.8 million and aggregate fair valueof $1.1 million as of year end 2009.  These two bonds have been recognized forother-than-temporary impairment because of adverse changes in present value ofprojected cash flows resulting from multiple deferrals and defaults during2009.  The credit component of other-than-temporary impairment on these twosecurities totaled approximately $651,000 and was reflected in earnings for theyear ended December 31, 2009.  The gross unrealized loss related to factorsother than credit totaled approximately $706,000 that was reflected inaccumulated other comprehensive income net of applicable taxes as of December31, 2009.  The credit component of the unrealized loss was based on thedifference between the book value of the security and the present value ofprojected cash flows at December 31, 2009.  

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

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

** Year ended**

** **

** Year ended**

**December 31,  2009**

** **

**December 31,  2008**

Balance of credit losses on available-for-sale securities

 $

-   

 $

-   

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

651   

1,810   

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

-   

-   

Balance of credit losses on available-for-sale securities

 $

651   

 $

1,810   

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

GAAP hasestablished accounting and reporting standards for derivative financialinstruments, including certain derivative instruments embedded in othercontracts and for hedging activities. These standards require that derivativesbe reported either as assets or liabilities on the Consolidated Balance Sheetsand be reflected at fair value. The accounting for changes in the fair value ofa derivative instrument depends on the intended use of the derivative and theresulting designation.   The Company has one derivative transaction, which isan interest rate swap that was purchased in June 2000.  Because a Federal HomeLoan Bank Variable LIBOR Borrowing has been designated as the hedged item, theCompany has effectively fixed the cost of this liability.  As a floating rateliability was hedged, there are no significant fluctuations in its market valuebut there are fluctuations in the cash flows.  Therefore, the swap isdesignated as a cash flow hedge, hedging the "benchmark interest rate."   Themarket value gain or loss of the swap is adjusted through other comprehensiveincome.  The purpose of the transaction was to reduce exposure to interest raterisk.  Volume of the transaction is $1.5 million and the term is 10 years. 

The value of thederivative was a liability of approximately $111,000 as of December 31, 2009and approximately $183,000 as of December 31, 2008.  The value of the cash flowhedge improved in 2009 because of fluctuations in market factors.  Therefore,the liability decreased approximately $72,000 and related negative accumulatedother comprehensive income also improved by approximately $44,000, net of tax,during the year ended December 31, 2009.  There were no reclassificationadjustments to other comprehensive income for gains or losses related to thecash flow hedge for any of the periods presented in the Consolidated FinancialStatements.

**NOTE 4 - LOANS**

Loansoutstanding at December 31, 2009 and 2008, were comprised of the following (inthousands):

**2009**

**2008**

 
 
Commercial, financial and agricultural

 $

71,301   

 $

80,317   

Real estate - construction

66,414   

97,340   

 
Real estate - mortgage

407,058   

375,714   

 
Installment loans to individuals

34,071   

36,220   

 
Other loans

8,554   

7,167   

 
587,398   

596,758   

 
Less: allowance for loan losses

8,784   

7,300   

 
 Net loans

 $

578,614   

 $

589,458   

 
The Company recognized impairedloans totaling $10.0 million as of December 31, 2009 compared to $12.2 millionas of December 31, 2008.  The balance maintained in the Allowance for LoanLosses related to these loans was approximately $450,000 at December 31, 2009and $2.0 million at December 31, 2008.  Average investment in impaired loans in2009 and 2008 was $14.0 million and $10.0 million, respectively.  Interestincome recognized under the accrual method on impaired loans was approximately$105,000, $609,000 and $356,000 for the years ended December 31, 2009, 2008 and2007, respectively.  Loans on non-accrual status totaled $3.8 million and $3.7million as of year-end 2009 and 2008, respectively.   Loans 90 days past dueand still accruing interest totaled $5.3 million as of year end 2009 comparedto approximately $747,000 as of year-end 2008 and $204,000 as of year-end2007.  

-39-

**NOTE 5 - ALLOWANCE FOR LOANLOSSES**

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

**2009**

** **

**2008**

** **

**2007**

Balance  - beginning of year

 $

7,300   

 $

6,328   

 $

6,211   

Provision for loan losses

7,060   

2,858   

834   

Loans charged to allowance

(5,951)

(2,274)

(1,096)

Recovery of loans previously charged off

375   

388   

379   

 Net charge-offs

(5,576)

(1,886)

(717)

Balance - end of year

 $

8,784   

 $

7,300   

 $

6,328   

**NOTE 6 - SECONDARY MORTGAGEMARKET ACTIVITIES**

Mortgage loans originated andintended for sale in the secondary market are carried at the lower of aggregatecost or market, as determined by outstanding commitments from investors.  Netunrealized losses, if any, are recorded as a valuation allowance and charged toearnings.  There were no such losses for any of the years ended December 31,2009, 2008 and 2007.  There has been no material difference between cost andfair market values of loans held for sale for any of the periods presented. 

Servicing rightsare not retained on any mortgage loans held for sale.  Mortgage banking incomeincluded in non-interest income was $1.1 million for each of the years endedDecember 31, 2009 and 2008 and $1.2 million for the year ended December 31,2007.  

**NOTE 7 - PREMISES ANDEQUIPMENT**

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

Useful Lives

in Years

 

**2009**

 

**2008**

Land

 $

8,479   

 $

8,479   

Buildings

5 to 50

28,040   

28,730   

Furniture and equipment

3 to 20

13,134   

17,689   

49,653   

54,898   

Less: Accumulated depreciation

19,128   

23,152   

 Net fixed assets

 $

30,525   

 $

31,746   

**NOTE 8 - GOODWILL AND OTHERINTANGIBLE ASSETS**

Goodwill is not amortized buttested at least annually for impairment.  No impairment charges were recordedfor any periods presented in the Consolidated Financial Statements and notesand no impairment charges have been recorded since December 31, 2009.  Therewas no activity in goodwill during the years ended December 31, 2009, 2008 and2007.  Total goodwill as of December 31, 2009 was $11.8 million or 1.24% oftotal assets and 14.24% of total capital.  

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

**2009**

** **

**2008**

 Core deposit intangible

 $

289   

 $

373   

 Accumulated amortization

(85)

(84)

      Net core deposit intangible

 $

204   

 $

289   

Amortizationexpense was approximately $84,500 per year for 2009, 2008 and 2007. Amortization expense is estimated to be approximately $84,500 per year in 2010and 2011 and approximately $35,000 in 2012.
NOTE 9 - OTHER REAL ESTATE 
The carryingvalue of foreclosed real estate on the Consolidated Balance Sheets was $10.5million as of December 31, 2009 and $5.4 million as of December 31, 2008.  Thevalue of other real estate is based on the lower of cost or fair value.   Fairvalue is based on independent appraisals for significant properties and may beadjusted by management as discussed in Note 20.
NOTE 10 - BANK-OWNED LIFE INSURANCEAND IMPUTED INCOME TAX REIMBURSEMENT AGREEMENTS
The Bank has asignificant investment in bank-owned life insurance policies ("BOLI") andprovides the associated fringe benefit to certain employees in the position ofVice President and higher after one year of service.  The cash surrender valuesof BOLI were $21.1 million and $20.6 million as of December 31, 2009 and 2008,respectively.  BOLI are initially recorded at the amount of premiums paid andare adjusted to current cash surrender values.  Changes in cash surrendervalues are recorded in other non-interest income and are based on premiums paidless expenses plus accreted interest income.  Earnings on BOLI resulted innon-interest income of approximately $832,000, $833,000, and $695,000 for theyears ended December 31, 2009, 2008 and 2007, respectively.  

The Companyadopted guidance in ASC 715-60 effective January 1, 2008.  The cumulativeeffect adjustment to retained earnings for change in accounting principle wasrecorded January 1, 2008 in the amount of $1.9 million to accrue thepost-retirement death benefits for endorsement split dollar life insuranceplans.  Expense related to these accruals is reflected in Salaries and EmployeeBenefits on the Consolidated Income Statements and was approximately $164,000for the year ended December 31, 2009 and $265,000 for the year ended December31, 2008.   The accrual for the post-retirement death benefits is included inOther Liabilities on the Consolidated Balance Sheet and totaled $2.3 millionand $2.2 million as of December 31, 2009 and 2008, respectively.   

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

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

Eachparticipant was 100% vested in benefits provided under Imputed Income TaxReimbursement Agreements as of January 1, 2008. Therefore, 100% of theprincipal (or service) cost of the plan was accrued for as of January 1, 2008and expensed through earnings in the year ended December 31, 2008. Servicecosts are based on the net present value of the sum of payments in accordancewith each participant's agreement.   Interest accrues monthly at a rate of 7.0%. 

-40-

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

**2009**

** **

**2008**

 

Service cost

 $

-     

 $

349   

Interest cost

25   

22   

   Net other post-retirement benefits expense

 $

25   

 $

371   

Theaccumulated post-retirement defined benefit obligation for Imputed Income TaxReimbursement Agreements is included in Other Liabilities on the ConsolidatedBalance Sheet as follows (in thousands):  

**2009**

** **

**2008**

**Accumulated other postretirement benefit obligation:**

 

 

 

   Beginning balance

 $ 371 

 $    - *  

   Service cost

         -  

    349 

   Interest cost

      25 

      22 

   Benefit payments

    (14)

         -  

   Ending balance

 $ 382 

 $ 371 

_______________

*              Because Imputed Income Tax Reimbursement Agreementsbecame effective in 2008, there was no reportable activity or balance prior toJanuary 1, 2008.  

Theaccumulated post-retirement benefit obligation is included in Other Liabilitiesas of December 31, 2009 and 2008 is equal to the funded status of the plan asof each applicable year-end as there are no related assets recognized on theConsolidated Balance Sheet for the Imputed Income Tax Reimbursement Agreements.

**NOTE 11 - DEPOSITS**

Included indeposits shown on the Consolidated Balance Sheets are the following time andsavings deposits in denominations of $100,000 or more (in thousands):

**2009**

** **

**2008**

Time Deposits

 $

189,619   

 $

159,114   

Savings Deposits

182,201   

123,756   

NOW accounts, included insavings deposits on the Consolidated Balance Sheets, totaled $62.1 million atDecember 31, 2009 and $49.9 million at December 31, 2008.  Demand depositbalances reclassified as loans consisted of overdrafts totaling approximately$296,000 and $452,000 as of December 31, 2009 and 2008, respectively. 

Time depositsmaturing in years subsequent to December 31, 2009, were as follows (inthousands):

* *

* *

On or before December 31, 2010

 $

327,939   

On or during year ended December 31, 2011

17,325   

On or during year ended December 31, 2012

7,314   

On or during year ended December 31, 2013

2,210   

During or after year ended December 31, 2014

1,654   

 $

356,442   

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

The Bank hasthree sources of short-term borrowings, which consist of cash managementadvances from the Federal Home Loan Bank ("FHLB"), Treasury, Tax and Loan("TT&L") option note, and federal funds purchased from correspondentbanks.  Short-term borrowings are used to manage seasonal fluctuations inliquidity.  

Cash managementadvances from FHLB are secured by one-to-four family first mortgages under theblanket collateral pledge agreement that also collateralizes long-term advancesfrom FHLB and have maturities of 90 days or less.  See Note 13 for moreinformation about maximum borrowing capacity with FHLB.  There were noshort-term borrowings outstanding against this line as of December 31, 2009.

The Bank is anOption B bank in regards to TT&L and up to $1 million in collected TT&Lpayments collected can be retained as a short-term option note.  This optionnote is callable upon demand by the TT&L.  The balance of this line wasapproximately $748,000 and $1.0 million as of December 31, 2009 and December31, 2008, respectively.  

The Bank hasfederal fund lines of credit available with seven correspondent banks totaling$90.5 million.  There were no federal funds purchased as of December 31, 2009or 2008.  

The following tabular analysispresents short-term borrowing year-end balance, maximum month-end balance,yearly average and weighted average interest rates for 2009, 2008 and 2007 (inthousands):

**2009**

**2008**

**2007**

 
Amount outstanding at end of year

 $

748   

 $

1,000   

 $

11,100   

Weighted average interest rate at end of year

0.00 %

0.00 %

4.35 %

 
Maximum outstanding at any month end

 $

1,000   

 $

48,500   

 $

22,400   

 
Average outstanding during year

 $

1,029   

 $

20,679   

 $

8,804   

 
Weighted average interest rate during year

0.00 %

2.70 %

5.30 %

 
**NOTE 13 - OTHER BORROWINGS**

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

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

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

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

-41-

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

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

The Bank hadsecured advances from the FHLB totaling $65.0 million as of December 31, 2009and $63.5 million as of December 31, 2008.  FHLB borrowings are comprisedprimarily of fixed rate positions with principal due at call date or maturitydate ranging from 1.89% to 6.55%.  Most of these FHLB borrowings have quarterlycall features and maturities range from 2010 to 2017.  Most of the advanceswith call features when called offer the option to pay off the advance withoutpenalty or to have the advance reprice at a variable rate tied to the 90-dayLIBOR.  Advances totaling $16 million require repayment if the call feature isexercised.  Under the existing and forecasted rate environments, borrowingswith call features in place are not likely to be called in the next 12 months. Also included in the FHLB borrowings total reported above is a pool of smallerbalance amortizing advances that total $2.0 million as of year end 2009 and$2.5 million as of year end 2008.  These smaller balance advances have ratesranging from 3.34% to 7.55% and maturities range from 2010 to 2019. Obligations are secured by loans totaling $382 million consisting of the Bank'sentire portfolio of fully disbursed, one-to-four family residential mortgages,commercial mortgages, farm mortgages, second mortgages and multi-familyresidential mortgages.  The Bank had additional borrowing capacity of $37million as of December 31, 2009.

Annual averagevolume, rates and maturities of other borrowings for 2009 and 2008 were asfollows (dollars in thousands):

Average

Average

Average  

 
Volume

Interest Rate

Maturity

 
2009

 

 

 

 
First Citizens Bancshares, Inc.

 $

10,734   

4.86%

27 years

First Citizens National Bank

63,524   

5.06%

2 years

 
 
2008

 

 

 

 
First Citizens Bancshares, Inc.

 $

10,734   

4.86%

28 years

 
First Citizens National Bank

63,524   

5.06%

3 years

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

2010

 $

33,065   

2011

9,919   

2012

3,316   

2013

165   

2014

2,105   

Thereafter

26,712   

 $

75,282   

**NOTE 14 - INCOME TAXES**

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

**2009**

**2008**

**2007**

Income tax expense (benefit):

 Current

 $

2,754   

 $

3,638   

 $

2,336   

 Deferred

(789)

(870)

669   

 State income tax expense (benefit of operating loss  carryforwards)

41   

(260)

(514)

 Change in valuation allowance

(41)

260   

514   

 $

1,965   

 $

2,768   

 $

3,005   

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

**2009**

**2008**

**2007**

Tax expenses at statutory rate

 $

3,499   

 $

3,501   

 $

4,136   

(Decrease) increase resulting from:

 Tax exempt interest income

(1,207)

(858)

(728)

 Net earnings on bank-owned life insurance

(193)

(162)

(236)

 ESOP dividend

(265)

(295)

(157)

 Impairment loss on equity securities

-   

615   

-   

 Other items

131   

(33)

(10)

 $

1,965   

 $

2,768   

 $

3,005   

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

**2009**

**2008**

**2007**

Deferred tax assets:

   Allowance for loan losses

 $

2,987   

 $

2,482   

 $

2,423   

   Impairment loss on equity securities

615   

615   

-   

   Impairment loss on debt securities

221   

-   

-   

   Net unrealized loss on cash flow hedge

43   

70   

61   

   Deferred loan fees

111   

108   

135   

   State income tax benefit for net operating loss  carryforwards

1,395   

1,436   

1,176   

   Imputed income tax reimbursement plan

130   

43   

-   

   Unrealized loss on other real estate owned

119   

-   

-   

   Other

73   

-   

98   

     Total deferred tax assets

5,694   

4,754   

3,893   

Deferred tax liabilities:

** **

** **

** **

   Depreciation

(2,046)

(1,757)

(1,781)

   FHLB stock dividends

(748)

(748)

(773)

   Net unrealized gain on available-for-sale

      debt securities

(2,684)

(1,016)

(649)

   Prepaid expenses

(113)

(111)

(115)

   Other

-   

(72)

(288)

      Total deferred tax liabilities

(5,591)

(3,704)

(3,606)

Valuation allowance for state income tax benefit

(1,395)

(1,436)

(1,176)

          Net deferred tax liabilities

 $

(1,292)

 $

(386)

 $

(889)

At year-end2009, the Company had a net operating loss carryforward for state tax purposesof $3.2 million expiring in 2020, $6.2 million expiring in 2021, $7.9 millionexpiring in 2022 and an estimated $4.0 million expiring in 2023.  As ofDecember 31, 2009 and 2008, the Company had no unrecognized tax benefits.  TheCompany's policy is to recognize penalties and interest on unrecognized taxbenefits in Provision for Income Tax Expense in the Consolidated Statements ofIncome.  There were no amounts related to interest and penalties recognized foreach of the years ended December 31, 2009, 2008 and 2007.  The tax yearssubject to examination by federal and state taxing authorities are the yearsended December 31, 2009, 2008, 2007 and 2006.

-42-

**NOTE 15 - REGULATORY MATTERS**

The Company issubject 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.

Quantitativemeasures established by regulation to ensure capital adequacy require the Bankto maintain minimum amounts and ratios (set forth in the table below) of Tier Icapital (as defined in the regulations) to total average assets (as defined),and minimum ratios of Tier I and total risk-based capital (as defined) torisk-weighted assets (as defined).  To be considered adequately capitalized (asdefined) under the regulatory framework for prompt corrective action, the Bankmust maintain minimum Tier I leverage, Tier I risk-based and total risk-basedratios as set forth in the table.  The Bank's actual capital amounts and ratiosare presented in the table below.

As of December31, 2009, the most recent notification from the Bank's primary regulatoryauthorities categorized the Bank and the Company as well capitalized under theregulatory framework for prompt corrective action. To be categorized as wellcapitalized, the Bank must maintain minimum total risk-based, Tier I risk-basedand Tier I leverage ratios as set forth in the table.  There are no conditionsor events since notification that management believes have changed theinstitution's category.

The Company'sand  the Bank's actual and minimum capital amounts and ratios are presented inthe following table:

To Be Well

 
Capitalized Under

 
For Capital

Prompt Corrective

 
Actual

Adequacy Purposes

Action  Provisions

 
**Amount**

**Ratio**

**Amount**

**Ratio**

**Amount**

**Ratio**

 
*(In Thousands)*

 
**December 31, 2009:**

 
Total Capital to Risk

 
Weighted Assets:

 
 First Citizens Bancshares, Inc.

 $

86,307   

13.6 %

 $

50,956   

8.0 %

 $

    N/A

10.0 %

 First Citizens National Bank

85,811   

13.5 %

50,926   

8.0 %

63,658   

10.0 %

 
 
Tier I Capital to Risk

 
Weighted Assets:

 
 First Citizens Bancshares, Inc.

78,336   

12.3 %

25,475   

4.0 %

N/A

6.0 %

 
 First Citizens National Bank

77,897   

12.2 %

25,457   

4.0 %

38,185   

6.0 %

 
 
Tier I Capital to 

 
Average Assets:

 
 First Citizens Bancshares, Inc.

78,336   

8.3 %

37,662   

4.0 %

N/A

5.0 %

 
 First Citizens National Bank

77,897   

8.3 %

37,677   

4.0 %

47,096   

5.0 %

 
 
**December 31, 2008:**

 
Total Capital to Risk

 
Weighted Assets:

 
 First Citizens Bancshares, Inc.

 $

80,978   

12.8 %

 $

50,810   

8.0 %

 $

    N/A

10.0 %

 
 First Citizens National Bank

80,661   

12.7 %

50,770   

8.0 %

63,463   

10.0 %

 
 
Tier I Capital to Risk

 
Weighted Assets:

 
 First Citizens Bancshares, Inc.

73,678   

11.6 %

25,406   

4.0 %

N/A

6.0 %

 
 First Citizens National Bank

73,361   

11.6 %

25,384   

4.0 %

38,077   

6.0 %

 
 
Tier I Capital to 

 
Average Assets:

 
 First Citizens Bancshares, Inc.

73,678   

8.1 %

36,250   

4.0 %

N/A

5.0 %

 
 First Citizens National Bank

73,361   

8.1 %

36,228   

4.0 %

45,285   

5.0 %

 
**NOTE 16 - CAPITAL**

The Company issubject to capital adequacy requirements imposed by the Federal Reserve.  Inaddition, the Bank is restricted by the Office of the Comptroller of theCurrency from paying dividends in an amount in excess of the net earnings ofthe current year plus retained profits of the preceding two years.  As ofDecember 31, 2009, $10 million of retained earnings were available for futuredividends from the Bank to the Company.

AccumulatedOther Comprehensive Income as of December 31, 2009 and 2008 was as follows (inthousands):

**December 31,  2009**

**December 31,  2008**

 
 Unrealized gain (loss) on cash flow hedge, net of tax

 $

(69)

 $

(113)

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

 
            without other-than-temporary impairment, net  of tax

4,791 

1,639   

 
 Unrealized losses on available-for-sale securities with

 
            other-than-temporary impairment, net of tax

(466)

-     

 
           Total accumulated other comprehensive income

 $

4,256   

 $

1,526   

 
-43-

**NOTE 17 - RELATED PARTYTRANSACTIONS**

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

Activity inloans to executive officers, directors and their affiliates was as follows forthe three years ended December 31, 2009, 2008 and 2007 (in thousands):

**2009**

** **

**2008**

** **

**2007**

Balance at Beginning of Period

 $

16,076   

 $

17,247   

 $

13,450   

New Loans

6,369   

10,665   

5,887   

Repayments

(11,870)

(11,836)

(2,090)

Balance at End of Period

 $

10,575   

 $

16,076   

 $

17,247   

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

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

The Bank routinely enters intodeposit relationships with its directors, officers and employees in the normalcourse of business.  These deposits bear the same terms and conditions as thoseprevailing at the time for comparable transactions with unrelated parties. Balances of executive officers and directors on deposit as of December 31, 2009and 2008 were $17.5 million and $15.2 million, respectively.

The Bank hasinvested in the construction of new branches and the operations center over thepast three years.  Contracts for construction and/or renovation of branchfacilities, operations center and leasehold improvements for the loanproduction offices were awarded on a competitive bid basis to a related party. Contract payments were paid to the related party and totaled less than $60,000in 2009 compared to $1.2 million and approximately $117,000 in years endedDecember 31, 2008 and 2007, respectively.  

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

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

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

Commitments toextend credit are agreements to lend to a customer as long as there is noviolation of any condition established in the contract. Loan commitmentsgenerally have fixed expiration dates or other termination clauses and mayrequire payment of a fee. Since many commitments are expected to expire withoutbeing drawn upon, total commitment amounts do not necessarily represent futurecash requirements. Each customer's credit-worthiness is evaluated on acase-by-case basis, including the collateral required, if deemed necessary bythe Bank upon extension of credit, and is based on management's creditevaluation of the counter party. At December 31, 2009 and 2008, the Bank hadoutstanding loan commitments of $79.8 million and $115.0 million,respectively.  As of year-end 2009, variable rate commitments were $59.4million and fixed rate commitments were $20.5 million. As of year-end 2008,variable rate commitments were $91.6 million and fixed rate commitments were$23.4 million. Of these commitments, none had an original maturity in excess ofone year.

Standby lettersof credit and financial guarantees are conditional commitments issued by theBank to guarantee performance of a customer to a third party. Those guaranteesare issued primarily to support public and private borrowing arrangements, andthe credit risk involved is essentially the same as that involved in extendingloans to customers. The Bank requires collateral to secure these commitmentswhen deemed necessary. At December 31, 2009 and 2008, outstanding standbyletters of credit totaled $4.5 million and $6.4 million, respectively.

In the normalcourse of business, the Bank extends loans, which are subsequently sold toother lenders, including agencies of the U.S. government.  Certain of theseloans are conveyed with recourse creating off-balance sheet risk with regard tothe collectibility of the loan.  At December 31, 2009 and 2008, the Bank had noloans sold with recourse. 

The Bank alsohad an off-balance sheet liability at December 31, 2009 and 2008 in the form ofa $25 million standby letter of credit issued by FHLB on the Bank's behalf. This letter of credit is used to collateralize public fund deposits. 

**NOTE 19 - SIGNIFICANTCONCENTRATIONS OF CREDIT RISK**

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

**NOTE 20 - FAIR VALUEMEASUREMENTS**

**Recurring Basis**

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

*Availablefor Sale Securities*

Fair values for available-for-salesecurities are obtained from a third party vendor and are valued using Level 2inputs, except for TRUP CDOs which are accounted for using Level 3 inputs. TRUP CDOs accounted for less than 2% of the portfolio at December 31, 2009 and2008.  

The markets forTRUP CDOs and other similar securities were not active at December 31, 2008 or2009.  The inactivity was evidenced first by a significant widening of thebid-ask spread in the brokered markets in which these securities trade and thenby a significant decrease in the volume of trades relative to historicallevels.  The new issue market has also been relatively inactive. 

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

Given conditionsin debt markets at December 31, 2009 and the relative inactivity in thesecondary and new issue markets, the Company determined:
-          Few observable transactions existed and market quotations thatwere available were not reliable for purposes of determining fair value as ofDecember 31, 2009;
-        An income valuation approach technique (present value technique)that maximized the use of relevant observable inputs and minimized the use ofunobservable inputs were equally or more representative of fair value than themarket approach valuation technique used at prior measurement dates; and 
-        The Company's TRUP CDOs should be classified within Level 3 ofthe fair value hierarchy because significant adjustments were required todetermine fair value at the measurement date.

The Company'sTRUP CDO valuations were prepared by an independent third party. The thirdparty's approach to determining fair value involved these steps as of December31, 2008:
-          The credit quality of the collateral was estimated using averagerisk-neutral probability of default values for each industry (i.e., banks andinsurance companies are evaluated separately);
-          Asset defaults were generated taking into account both theprobability of default of the asset and an assumed level of correlation amongthe assets;
-          A higher level of correlation was assumed among assets from thesame industry (e.g., banks with other banks) than among those from differentindustries;
-          The loss given a default was assumed to be 95% (i.e., a 5 %recovery);
-          The cash flows were forecast for the underlying collateral andapplied to each TRUP CDO tranche to determine the resulting distribution amongthe securities;
-          The calculations were modeled in several thousand scenarios usinga Monte Carlo engine;
-          The expected cash flows for each scenario were discounted at therisk-free rate plus 200 basis points (for illiquidity) to calculate the presentvalue of the security; and
-          The average price was used for valuation purposes.

The thirdparty's methodology was adjusted slightly in third quarter 2009 and theapproach to determining fair value as of December 31, 2009 involved thesesteps:
-          The credit quality of the collateral was calibrated by assigningdefault probabilities to each issuer;
-          Asset defaults were generated taking into account both theprobability of default of the asset and an assumed level of correlation amongthe assets;
-          A 50% level of correlation was assumed among assets from the sameindustry (e.g., banks with other banks) while a lower (30%) correlation levelis assumed among those from different industries;
-          The loss given default was assumed to be 100% (i.e., norecovery);
-          The cash flows were forecast for the underlying collateral andapplied to each TRUP CDO tranche to determine the resulting distribution amongthe securities;
-          The calculations were modeled in 10,000 scenarios using a Monte Carlo engine; 
-          The expected cash flows for each scenario were discounted at therisk-free rate (three-month LIBOR) plus 300 basis points (for illiquidity) tocalculate the present value of the security; and
-          The prices were aggregated and the average price was used forvaluation purposes.

The primarydifference in the steps used to determine fair value as of December 31, 2008compared to December 31, 2009 is basis for assignment of default probabilitiesbeing changed from an industry standard to an issuer specific basis.  Thischange resulted in lower overall default rates compared to default rates usedin prior year and had a small positive impact on fair values as of December 31,2009 compared to December 31, 2008.  

The Companyrecalculated the overall effective discount rates for these valuations.  Theoverall discount rates ranged from 10% to 39% and were highly dependent uponthe credit quality of the collateral, the relative position of the tranche inthe capital structure of the TRUP CDO and the prepayment assumptions.

-44-

*Cash Flow Hedge*

The Company'scash flow hedge is valued by a third party vendor and based on matrix pricingusing Level 2 inputs as specified in Note 1.

A summary ofassets and liabilities as of December 31, 2009 and 2008 measured at estimatedfair value on a recurring basis is as follows (in thousands):

**Level 1**

** **

**Level 2**

** **

**Level 3**

** **

**Total Fair**

**Inputs**

** **

**Inputs**

** **

**Inputs**

** **

**Value**

**December 31, 2009:**

** **

** **

** **

** **

** **

** **

** **

Financial assets:

** **

** **

** **

** **

** **

** **

** **

     Securities available-for-sale

 $

-   

 $

248,064   

 $

1,727   

 $

249,791   

Financial liabilities:

     Cash flow hedge

 $

-   

 $

111   

 $

-   

 $

111   

**December 31, 2008:**

** **

** **

** **

** **

** **

** **

** **

Financial assets:

** **

** **

** **

** **

** **

** **

** **

     Securities available-for-sale

 $

-   

 $

208,043   

 $

2,342   

 $

210,385   

Financial liabilities:

     Cash flow hedge

 $

-   

 $

182   

 $

-   

 $

182   

The followingtable presents a reconciliation and income statement classification of gainsand losses for all assets measured at fair value on a recurring basis usingsignificant unobservable inputs (Level 3) for the years ended December 31, 2009and 2008 (in thousands):

**2009**

**2008**

**Available-for-sale securities**

** **

** **

Beginning balance

 $

2,342   

 $

-     

   Total unrealized gains (losses) included in:

         Net income

(651)

-   

         Other comprehensive income

36   

-   

   Purchases, sales, issuances and settlements, net

-   

-   

   Transfers in and (out) of Level 3

-   

2,342   

Ending balance

 $

1,727   

 $

2,342   

**Non-Recurring Basis**

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

*Impaired Loans*

Impaired loansare evaluated and valued at the time the loan is identified as impaired at thelower of cost or fair value.  Fair value is measured based on the value of thecollateral securing these loans.  Collateral may be real estate and/or businessassets including equipment, inventory and/or accounts receivable.  Independentappraisals for collateral are obtained and may be discounted by managementbased on historical experience, changes in market conditions from time ofvaluation and/or management's knowledge of the borrower and the borrower'sbusiness.  As such discounts may be significant, these inputs are considered Level3 in the hierarchy for determining fair value.  Values of impaired loans arereviewed on at least a quarterly basis to determine if specific allocations inthe reserve for loan losses are adequate.  

*Loans Held for Sale*

Loans held forsale are recorded at the lower of cost or fair value.  Fair value of loans heldfor sale are based upon binding contracts and quotes from third party investorsthat qualify as Level 2 inputs for determining fair value.  Loans held for saledid not have an impairment charge in 2009 or 2008.

*Other Real Estate*

Other realestate is recorded at the lower of cost or fair value.  Fair value is measuredbased on independent appraisals and may be discounted by management based onhistorical experience and knowledge and changes in market conditions from timeof valuation.  As such discounts may be significant, these inputs areconsidered Level 3 in the hierarchy for determining fair value.  Values ofother real estate are reviewed at least annually or more often if circumstancesrequire more frequent evaluations.  

A summary ofassets as of December 31, 2009 and 2008 measured at estimated fair value on anon-recurring basis were as follows:

**Level 1**

** **

**Level 2**

** **

**Level 3**

** **

**Total Fair**

**Inputs**

** **

**Inputs**

** **

**Inputs**

** **

**Value**

**December 31, 2009:**

** **

** **

** **

** **

** **

** **

** **

Assets:

** **

** **

** **

** **

** **

** **

** **

     Impaired loans

 $

-   

 $

-   

 $

10,059   

 $

10,059   

     Loans held for sale

-   

2,741   

-   

2,741   

     Other real estate

- 

- 

10,527   

10,527   

**December 31, 2008:**

** **

** **

** **

** **

** **

** **

** **

Assets:

** **

** **

** **

** **

** **

** **

** **

     Impaired loans

 $

-   

 $

-   

 $

12,200   

 $

12,200   

     Loans held for sale

-   

2,632   

-   

2,632   

     Other real estate

- 

- 

5,424   

5,424   

**FairValue Estimates**

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

*Cash and Cash Equivalents*

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

*Loans*

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

*Accrued Interest Receivable*

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

*Federal Home Loan Bank and FederalReserve Bank Stock*

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

*Bank-Owned Life Insurance*

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

*Deposit Liabilities*

Demand Deposits

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

Variable-Rate Deposits

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

Fixed-Rate Deposits

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

-45-
*Other Borrowings*
For securitiessold under repurchase agreements payable upon demand, the carrying amount is areasonable estimate of fair value.  For securities sold under repurchaseagreements for a fixed term, fair values are estimated using the samemethodology as fixed rate time deposits discussed above.  The fair value of theadvances from the FHLB and other long-term borrowings are estimated bydiscounting the future cash outflows using the current market rates. 
*Other Liabilities*
Fair value of other liabilities isassumed to be the carrying values.

The carryingamount and fair value of assets and liabilities as of year-end 2009 and 2008was as follows (in thousands):

2009

2008

Carrying  

Fair  

Carrying  

Fair  

Amount

Value

Amount

Value

**Financial assets**

Cash and cash equivalents

 $

32,347   

 $

32,347   

 $

40,704   

 $

40,704   

Investment securities

249,791   

249,791   

210,500   

210,500   

Loans

587,398   

596,758   

Less: allowance for loan losses

(8,784)

(7,300)

        Loans, net of allowance

578,614   

579,465   

589,458   

593,336   

Loans held for sale

2,741   

2,741   

2,632   

2,632   

Accrued interest receivable

5,405   

5,405   

5,581   

5,581   

Federal Reserve Bank and Federal

    Home Loan Bank Stock

5,684   

5,684   

5,684   

5,684   

Other real estate

10,527   

10,527   

5,424   

5,424   

Bank-owned life insurance

21,116   

21,116   

20,627   

20,627   

**Financial liabilities**

** **

Deposits

 $

752,146   

 $

754,452   

 $

734,915   

 $

738,466   

Short-term borrowings

37,629   

37,679   

33,765   

33,811   

Other borrowings

75,282   

76,307   

73,843   

75,913   

Other liabilities

7,186   

7,186   

7,971   

7,971   

**Off-balance sheet arrangements**

** **

Commitments to extend credit

 $

79,776   

 $

79,776   

 $

114,982   

 $

114,982   

Standby letters of credit

4,534   

4,534   

6,442   

6,442   

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

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

The Company annually contributesamounts equal to 3% of total eligible compensation to the 401(k) Plan and 7% oftotal eligible compensation through 2008.  In 2009, the plan was changed to adiscretionary percentage of total eligible compensation to the ESOP.  Thediscretionary percentage of total eligible compensation for 2009 was 2%.  Totaleligible compensation for both plans consists of total compensation subject toincome tax.  Total eligible compensation includes any salary deferrals madethrough the 401(k) Plan and Section 125 Cafeteria Plan and is subject tomaximum limits set annually by the IRS.  Each participant may also elect todefer up to 75% of his or her pay into the 401(k) Plan, subject to dollarlimitations imposed by law. 

Employer cash contributions tothe 401(k) Plan totaled approximately $362,000 in 2009, $339,000 in 2008 and$346,000 in 2007.  Cash contributions to the ESOP totaled approximately$243,000 in 2009, $785,000 in 2008 and $851,000 in 2007.  Cash contributions tothe 401(k) Plan and ESOP are reported in Salaries and Employee Benefits inOther Expenses on the Consolidated Statements of Income. 

The ESOP is a non-leveraged planand all shares owned by the ESOP were allocated to participants as of December31, 2009 and 2008.  Cash dividends paid by the Company on common stock held bythe ESOP are charged to retained earnings.  All shares owned by the ESOP areconsidered outstanding for earnings per share computations.  In the event aterminated or retired ESOP participant desires to sell his or her shares ofCompany common stock, or if certain employees elect to diversify their accountbalances, the Company may be required to purchase the shares from theparticipant at their fair market value.  The ESOP owned 754,985 shares ofCompany common stock with an estimated fair value of $24.2 million as ofDecember 31, 2009 and 735,223 shares of Company common stock with an estimatedfair value of $22.8 million as of December 31, 2008.  

-46-

**NOTE 22 - CONDENSED FINANCIAL INFORMATION**

**FIRST CITIZENSBANCSHARES, INC.(Parent CompanyOnly)Balance Sheets****December 31, 2009 and 2008*******(In Thousands)*

2009

2008

**ASSETS**

 Cash

 $

206   

 $

69   

 Investment in subsidiaries

              94,493   

            87,311   

TOTAL ASSETS

 $

94,699   

 $

87,380   

**LIABILITIES AND STOCKHOLDERS' EQUITY**

LIABILITIES

 Long term debt

 $

10,310   

 $

10,310   

 Accrued expenses

77   

62   

TOTAL LIABILITIES

10,387   

10,372   

STOCKHOLDERS' EQUITY

84,312   

77,008   

 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 $

94,699   

 $

87,380   

**FIRST CITIZENSBANCSHARES, INC.(Parent CompanyOnly)Condensed IncomeStatementsYears endedDecember 31, 2009 and 2008***(In Thousands)*
   
** **
   
2009
   
2008

**INCOME**
   
 Dividends from bank subsidiary

 $

4,195   
   
 $

5,268   

 Other income

9   
   
22   

TOTAL INCOME

4,204   
   
5,290   
   
**EXPENSES**
   
 Interest expense

288   
   
538   

 Other expenses

204   
   
165   

TOTAL EXPENSES

492   
   
703   
   
Income before income taxes and equity in undistributed
   
 Net income of bank subsidiary

3,712   
   
4,587   

Income tax expense (benefit)

(164)
   
(257)

3,876   
   
4,844   

Equity in undistributed net income of bank subsidiary

4,451   
   
2,685   

**  NET INCOME**

 $

8,327   
   
 $

7,529   
      
**FIRST CITIZENSBANCSHARES, INC.(Parent CompanyOnly)CondensedStatements of Cash FlowsYears endedDecember 31, 2009 and 2008***(In Thousands)*

2009

2008

**Operating activities**

Net income

 $

8,327   

 $

7,529   

Adjustments to reconcile net income to net cash

 provided by operating activities:

     Undistributed income of subsidiary

(4,451)

(2,685)

     Increase (decrease) in other liabilities

15   

(38)

Net cash provided by operating activities

 $

3,891   

 $

4,806   

**Financing activities**

Payment of dividends and payments in lieu of fractional  shares

(3,770)

(4,205)

Payment of principal on long term debt

0   

(755)

Treasury stock transactions - net

16   

(10)

Net cash used by financing activities

(3,754)

(4,970)

Increase (decrease) in cash

137   

(164)

Cash at beginning of year

69   

233   

**CASH AT END OF YEAR**

 $

206   

 $

69   

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

Interest  

Net Interest  

Net

E.P.S.

E.P.S.

Income

Income

Income

Basic

Diluted

**2009**

First Quarter

 $

12,207   

 $

7,609   

 $

1,779   

 $

0.49   

 $

0.49   

Second Quarter

12,124   

8,069   

2,285   

0.63   

0.63   

Third Quarter

12,376   

8,631   

2,418   

0.67   

0.67   

Fourth Quarter

12,304   

8,889   

1,845   

0.51   

0.51   

Total

 $

49,011   

 $

33,198   

 $

8,327   

 $

2.30   

 $

2.30   

**2008**

First Quarter

 $

13,384   

 $

7,092   

 $

2,131   

 $

0.59   

 $

0.59   

Second Quarter

13,091   

7,390   

2,265   

0.62   

0.62   

Third Quarter

13,255   

7,766   

1,072   

0.30   

0.30   

Fourth Quarter

12,737   

7,585   

2,061   

0.57   

0.57   

Total

 $

52,467   

 $

29,833   

 $

7,529   

 $

2.08   

 $

2.08   

 -47-

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

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

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

The Company, under supervision ofand with the participation of its management, including the Chief ExecutiveOfficer and Chief Financial Officer, evaluated the effectiveness of the designand operation of the Company's disclosure controls and procedures as of the endof the period covered by this Annual Report on Form 10-K.  Disclosure controlsand procedures are defined in accordance with Rule 13a-15(e) and Rule 15d-15(e)under the Securities Exchange Act of 1934 as amended.  Based upon thatevaluation as of the end of the period covered by this Annual Report on Form10-K, the Company's disclosure controls and procedures were effective. 

There have been no changes ininternal control over financial reporting during the quarter ending December31, 2009 that have materially affected, or are reasonably likely to materiallyaffect, the Company's internal control over financial reporting. Management'sreport and the attestation report of the Company's independent registeredpublic accounting firm regarding internal control over financial reporting areincluded in Item 8 of this Annual Report on Form 10-K.****

-48-

**PART III**

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

Information appearing in thesections entitled "Proposal 1: Election of Directors," "General Information -Section 16(a) Beneficial Ownership Reporting Compliance," "Corporate Governance- Code of Ethics," "General Information - Proposals by Shareholders/DirectorSelection," "Audit Committee Report" and "Corporate Governance - Committees ofthe Board of Directors" of the Company's 2010 Proxy Statement is incorporatedherein by reference.

**Executive Officers**

The followinginformation relates to the executive officers of the Company, as of December31, 2009:

Name

Age

Position and Office

Jeffrey D. Agee

49

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

Sherrell Armstrong

47

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

Laura Beth Butler

34

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

Christian Heckler

42

Appointed Regional President of the Southwest Region for  the Bank in April 2006. Previously served as Community Bank President and  Commercial Lender of the Bank.  Elected to the Board in June 2006.

Judy Long

55

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

Bennett Ragan, Jr.

61

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

Katie S. Winchester

69

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

-49-

**ITEM 11.  EXECUTIVECOMPENSATION.**

Information appearing in thesections entitled "Compensation Discussion and Analysis," "Corporate Governance- Compensation Committee Interlocks and Insider Participation" and"Compensation Committee Report" of the Company's 2010 Proxy Statement isincorporated herein by reference.  

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

Information in the section entitled"Security Ownership of Certain Beneficial Owners and Management" of theCompany's 2010 Proxy Statement is incorporated herein by reference. 

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

Information appearing in thesections entitled "Certain Relationships and Related Transactions" and"Corporate Governance - Director Independence" of the Company's 2010 ProxyStatement is incorporated herein by reference.  

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

Information appearing in thesection entitled "Proposal 2: Ratification of Independent Registered PublicAccounting Firm" of the Company's 2010 Proxy Statement is incorporated hereinby reference.  

-50-

**PARTIV**

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

1.  *Financial Statements*.  Thefollowing financial statements of the Company are set forth in Item 8 above:
- Reports of Independent Registered Public Accounting Firm;
- Consolidated Balance Sheets as of December 31, 2009 and     2008;
- Consolidated Statements of Income for the years ended     December 31, 2009, 2008 and 2007;
- Consolidated Statements of Changes in Shareholders' Equity     and Other Comprehensive Income for the years ended December 31, 2009, 2008     and 2007;
- Consolidated Statements of Cash Flows for the years ended     December 31, 2009, 2008 and 2007; and
- Notes to Consolidated Financial Statements.

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

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

ExhibitNumber                Description

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

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

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

10.2                      Formof First Citizens National Bank Amended and Restated Split Dollar Agreement(1)*

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

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

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

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

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

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

21                           Subsidiaries of the Registrant

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

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

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

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

_____________________________

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

*             Management contract or compensatory plan or arrangement.

-51-

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, 2010                               /s/ JEFFREY D. AGEE                                                                                                      PRESIDENT AND CHIEF EXECUTIVE OFFICER                                                                                                    

 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following personson behalf of the Registrant and in the capacitiesindicated on March 15, 2010.
/s/ Jeffrey D. Agee

/s/ Larry W. Gibson

/s/ Green Smitheal III

Jeffrey D. Agee

Larry W. Gibson

Green Smitheal III

President and Chief   Executive Officer; Director

Director

Director

 

 

 

/s/ Eddie E. Anderson

/s/ Christian E. Heckler

/s/ David R. Taylor

Eddie E. Anderson  Director

Christian E. Heckler  Director

David R. Taylor  Director

 

 

 

/s/ J. Walter Bradshaw

/s/ Ralph E. Henson

/s/ Larry S. White

J. Walter Bradshaw  Director

Ralph E. Henson  Director

Larry S. White  Director

 

 

 

/s/ Laura Beth Butler

/s/ Barry T. Ladd

/s/ Dwight S. Williams

Laura Beth Butler  Chief Financial Officer

Barry T. Ladd  Director

Dwight S. Williams  Director

 

 

 

/s/ J. Daniel Carpenter

/s/ John M. Lannom

/s/ Katie S. Winchester

J. Daniel Carpenter  Director

John M. Lannom  Director

Katie S. Winchester  Director

 

 

 

/s/ William C. Cloar

/s/ Stallings Lipford

/s/ Joseph S. Yates

William C. Cloar  Director

Stallings Lipford  Director

Joseph S. Yates  Director

 

 

 

/s/ Richard W. Donner

/s/ Milton E. Magee

 

Richard W. Donner  Director

Milton E. Magee  Director

 

 

/s/ Bentley F. Edwards

/s/ Allen Searcy

Bentley F. Edwards  Director

Allen Searcy  Director

 

 

 

-52-
************************