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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
________________________

FORM 10-K

(Mark One)

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

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

Commission file number 0-11709
________________________

First Citizens Bancshares, Inc.
(Exact name of registrant as specified in its charter)

Tennessee	62-1180360
(State or other jurisdiction of	(IRS Employer Identification No.)
incorporation or organization)

P.O. Box 370, First Citizens Place
Dyersburg, Tennessee 38025-0370
(Address of principal executive offices including zip code)

(731) 285-4410
(Registrant's telephone number, including area code)
________________________

Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of class)
________________________

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ]   No [ x ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(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 if disclosure of delinquent filers pursuant to Item 405 Regulation S-K (Section 229.40) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [ ]

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes [ ]  No [x]

________________________

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

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

________________________

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DOCUMENTS INCORPORATED BY REFERENCE:

Certain information called for by Part III of Form 10-K is incorporated by reference to the Proxy Statement for our 2008 Annual Meeting of Stockholders to be filed with the Commission within 120 days after December 31, 2007.

 

PART I

FORWARD LOOKING STATEMENTS

Information contained herein includes forward-looking statements with respect to the beliefs, plans, risks, goals and estimates of First Citizens Bancshares, Inc..  Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant banking, economic, and competitive uncertainties, many of which are beyond management's control.  When used in this discussion, the words "anticipate," "project," "expect," "believe," "should," "intend," "is likely," "going forward" and other expressions are intended to identify forward-looking statements.  These forward-looking statements are within the meaning of section 27A of the Securities Exchange Act of 1934, as amended (the "Exchange Act").  Such statements may include, but are not limited to, projections of income or loss, expenses, acquisitions, plans for the future, and others.

Forward-looking statements are based upon information currently available and represent management's expectations or predictions of the future.  Due to risks and uncertainties involved, actual results could differ materially from such forward-looking statements.  Some of the potential factors that could affect our results are described in Item 1A, "Risk Factors."  Examples of such risks and uncertainties include but are not limited to:

• Changes in general economic and business conditions that are not anticipated and result in changes in loan and deposit demands and/or increases in loan delinquencies and defaults;

• Changes in market rates and prices may adversely impact the value of securities, loans, deposits and other financial instruments;

• Effect of changes in legislative or regulatory developments including changes in tax, banking, insurance, securities, or other financial service related laws.

ITEM 1.  BUSINESS

PRESENTATION OF AMOUNTS

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

GENERAL

First Citizens Bancshares, Inc. ("Bancshares" or the "Company") is a Tennessee corporation organized and incorporated in 1982 and commenced operations in September 1983.  Bancshares is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended and elected, effective April 19, 2000 to become a financial holding company pursuant to the provisions of the Gramm-Leach Bliley Act.   As a financial holding company, Bancshares may engage in activities that are financial in nature or incidental to a financial activity.  Permissible activities for a financial holding company are contained in Regulation Y of Federal Reserve regulations.  Bancshares may continue to claim the benefits of financial holding company status so long as each depository institution owned by the company remains well capitalized and well managed.  In addition, Bancshares may not commence new activities under sections 4(k) or 4(n) of the Bank Holding Company Act or acquire control of a company engaged in activities under those sections if any of the Company's insured depository institutions receive a rating of less than satisfactory under any examination conducted to determine compliance with the Community Reinvestment Act. Bancshares is a one-bank holding company. At December 31, 2007, the Corporation had total assets of $876 million compared to $831 million at December 31, 2006. 

The Company's principal executive offices are located at One First Citizens Place, Dyersburg, Tennessee 38024.   Our telephone number is 731-285-4410.  Our website is www.firstcitizens-bank.com.  In accordance with the Exchange Act and other related laws, Bancshares files reports with the United States Securities Exchange Commission ("SEC") including annual and quarterly reports (Forms 10-K and 10-Q) as well as current reports on Form 8-K and amendments to those reports, if any.  As of the end of the second fiscal quarter of 2005, the market value of outstanding voting and non-voting common equity held by non-affiliates exceeded $75 million and thus, Bancshares began filing required periodic reports with the SEC under accelerated status beginning with the filing of Form 10-K for the year ended December 31, 2005. 

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

Shareholders desiring to communicate directly with the Board of Directors of the Corporation may do so through the Corporate Governance Committee by contacting the Chairman or any member of the committee.  Committee membership is identified on the Bank's website at www.firstcitizens-bank.com or may be obtained by calling the Audit Department of the Bank at 731-287-4275.  Letters sent via the US Postal Service may be mailed to Chairman, Corporate Governance Committee, First Citizens National Bank, Audit Department, P.O. Box 890, Dyersburg, TN  38025-0890.

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Bancshares, through its principal banking subsidiary, First Citizens National Bank (the "Bank"), provides a broad range of financial services. The Company is engaged in both retail and commercial banking business.  The Bank was chartered as a national bank in 1900 and operates in West Tennessee.  The Bank operates under the supervision of the Comptroller of the Currency, and is a member of the Federal Reserve System.  Deposits at the Bank are insured up to applicable limits by the Federal Deposit Insurance Corporation (FDIC).  The Bank is also subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and interest that may be charged thereon and limitations on the types of investments that may be made, activities that may be engaged in, and types of services that may be offered.  Various consumer laws and regulations also affect operations of the Bank.  In addition to the impact of regulation, commercial banks are affected significantly by the actions of the Federal Reserve as it attempts to control the money supply and credit availability in order to influence the economy.  The Bank operates under the day-to-day management of its officers and directors; and formulates its own policies with respect to lending practices, interest rates and service charges and other banking matters.

Bancshares' primary source of income is dividends received from the Bank.  Dividend payments are determined in relation to earnings, deposit growth and capital position of the subsidiaries in compliance with regulatory guidelines. Management anticipates that future increases in the capital of Bancshares will be accomplished through earnings retention or capital injection.

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

Individual bank performance is compared to industry standards through utilization of the Federal Reserve Board's Division of Banking Supervision and Regulation.  Bancshares is grouped with peers with assets totaling $500 million to $1 billion.  The group consisted of 410 bank holding companies per the September 30, 2007 Bank Holding Company Performance Report, which is the most recent report available as of the date of this report.

The following presents comparisons of Bancshares with its peers as indicated on Bank Holding Company Performance Reports for the periods indicated:

	12-31-2007		12-31-2006		12-31-2005
	Bancshares	Peer**	Bancshares	Peer	Bancshares	Peer
Net Interest Income/Average Assets	3.36 %	3.61 %	3.60 %	3.74 %	3.53 %	3.81 %
Net Operating Income/Average Assets	1.08 %	0.96 %	1.10 %	1.01 %	1.10 %	1.10 %
Net Loan Losses/ Average Total Loans	0.13 %	0.13 %	0.23 %	0.11 %	0.09 %	0.12 %
Primary Capital/Average Assets	8.55 %	9.32 %	8.11 %	9.27 %	7.88 %	9.28 %
Cash Dividends/Net Income	45.93 %	30.82 %	46.04 %	29.09 %	47.03 %	25.17 %

**Peer information for December 31, 2007 is compared to the September 30, 2007 Bank Holding Company Performance Report (most recent report available).

EXPANSION

Bancshares through its strategic planning process has stated its intention to seek profitable opportunities that would utilize excess capital and maximize income in Tennessee.  Bancshares' objective in acquiring other banking institutions would be for asset growth and diversification into other market areas.  Acquisitions and de-novo branches afford Bancshares increased economies of scale within the operation functions and better utilization of human resources.  Any acquisition or de-novo branching approved by Bancshares would be deemed to be in the best interest of Bancshares and its shareholders. 

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

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

 

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CAPITAL ADEQUACY

Bancshares is subject to capital adequacy requirements imposed by the Federal Reserve.   The Federal Reserve has adopted risk-based capital guidelines for bank holding companies.  The minimum guideline for the ratio of total capital to risk weighted assets (including certain off-balance-sheet items such as standby letters of credit) is 8%, and the minimum ratio of Tier 1 Capital to risk-weighted assets is 4%.  At least half of the Total Capital must be composed of common stock, minority interests in the equity capital accounts of consolidated subsidiaries, non-cumulative perpetual preferred stock and a limited amount of cumulative perpetual preferred stock, less goodwill and certain other intangible assets (Tier 1 Capital).  The remainder may consist of qualifying subordinated debt, certain types of mandatory convertible securities and perpetual debt, other preferred stock and a limited amount of loan loss reserves.  At December 31, 2007, Bancshares' total risked-based capital ratio was 12.45%, significantly in excess of 8% mandated by regulation.  The risk based capital ratio was 12.49% for 2006 and 12.11% for 2005.  Our strategic plan directs the company to leverage capital by growing assets.  Risk based capital focuses primarily on broad categories of credit risk and incorporates elements of transfer, interest rate and market risks.  The calculation of risk-based capital ratio is accomplished by dividing qualifying capital by risk weighted assets.  Tier 1 leverage ratio at year-end 2007 was 8.47%, with total capital as a percentage of total assets at 8.56%.

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

BANKING BUSINESS

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

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

Mortgage lending makes available long term fixed and variable rate loans to finance the purchase of residential real estate.  These loans are sold in the secondary market without retaining servicing rights.  Commercial lending operations include various types of credit services for customers.

The Bank has the following banking locations in nine Tennessee counties: 15 full service branch banks, four drive-thru only branches, two loan production offices and 33 ATMs.  A list of available banking locations and hours are noted on the Bank's website (www.firstcitizens-bank.com) under the "About Us" section.  Subsidiaries of the Bank consist of the following:

• First Citizens Financial Plus, Inc., a bank service corporation wholly owned by the Bank, provides licensed brokerage services that allow the Bank to compete on a limited basis with numerous non-bank entities that pose a continuing threat to our customer base. The brokerage firm operates three locations in West Tennessee.
   

• White and Associates/First Citizens Insurance, LLC was chartered by the State of Tennessee and is a general insurance agency offering a full line of insurance products including casualty, life and health, and crop insurance. The Bank holds a 50% ownership in the company, which is accounted for using the equity method. The insurance agency operates nine offices in Northwest Tennessee.
   

• First Citizens/White and Associates Insurance Company, is organized and existing under the laws of the state of Arizona. Its principal activity is credit insurance. The Bank holds a 50 percent ownership in the company and is accounted for using the equity method.
   

• First Citizens Investments, Inc. was organized and exists under laws of the state of Nevada. The principal activity of this entity is to acquire and sell investment securities as well as collect the income from the portfolio. First Citizens Investments owns the following:
   

• First Citizens Holdings, a wholly owned subsidiary of First Citizens Investments, acquires and sells certain investment securities, collects income from its portfolio, and owns the following subsidiary:
   

• First Citizens Properties, Inc., a real estate investment trust (REIT), whose principal activity is to invest in participation interests of real estate loans made by the Bank and provides the Bank with an alternative vehicle for raising capital. First Citizens Holdings owns 98% and directors, executive officers and certain employees own the remaining 2%. The minority interest is immaterial to the consolidated financial statements of the Company.

COMPETITIVE ENVIRONMENT

The business of providing financial services is highly competitive. Competition involves not only other banks but non-financial enterprises as well.  In addition to competing with other commercial banks in the service area, the Bank competes with savings and loan associations, insurance companies, savings banks, small loan companies, finance companies, mortgage companies, real estate investment trusts, certain governmental agencies, credit card organizations, credit unions and other enterprises.  In 1998, federal legislation allowed credit unions to expand their membership criterion.  Expanded membership criterion coupled with an existing tax free status give credit unions a competitive advantage compared to banks.   

The Bank builds and implements strategic plans and commitments to address competitive factors in the various markets it serves.  The primary strategic focus is on obtaining and maintaining profitable customer relationships in all markets.  The markets demand competitive pricing, but the Bank competes on high quality customer service that will attract and enhance loyal, profitable customers to the Bank.  Industry surveys have consistently revealed that 65-70 percent of customers leave due to customer service issues.  The Bank is committed to excellent customer service in all markets served as a means of branding and distinguishing itself from other financial institutions.  Advertising and promotional activities such as newspaper and radio ads are also utilized to support defined strategic plans. 

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

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

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

The following tabular analysis presents the number of offices, deposits (in thousands), and market share percentage for deposits:

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

(Banks only, Deposits Inside of Market)

As of June 30, 2007

EMPLOYEES

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

SUPERVISION AND REGULATION

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

1)     Acquire ownership or control of any voting securities of a bank or bank holding company where the acquisition results in the bank holding company owning or controlling more than 5 percent of a class of voting securities of that bank or bank holding company; or

2)     Acquire substantially all assets of a bank or bank holding company or merge with another bank holding company.

Federal Reserve approval is not required for a bank subsidiary of a bank holding company to merge with or acquire substantially all assets of another bank if prior approval of a federal supervisory agency, such as the Comptroller of the Currency is required under the Bank Merger Act.  Relocation of a subsidiary bank of a bank holding company from one state to another requires prior approval of the Federal Reserve and is subject to the prohibitions of the Douglas Amendment.

The Bank Holding Company Act provides that the Federal Reserve shall not approve any acquisition, merger or consolidation which would result in a monopoly or which would be in furtherance of any combination or conspiracy to monopolize or attempt to monopolize the business of banking in any part of the United States.  Further, the Federal Reserve may not approve any other proposed acquisition, merger, or consolidation, the effect of which might be to substantially lessen competition or tend to create a monopoly in any section of the country, or which in any manner would be in restraint of trade, unless the anti-competitive effect of the proposed transaction is clearly outweighed in favor of public interest by the probable effect of the transaction in meeting convenience and needs of the community to be served. An amendment effective February 4, 1993 further provides that an application may be denied if the applicant has failed to provide the Federal Reserve with adequate assurances that it will make available such information on its operations and activities, and the operations and activities of any affiliate, deemed appropriate to determine and enforce compliance with the Bank Holding Company Act and any other applicable federal banking statutes and regulations.  In addition, consideration is given to the competence, experience and integrity of the officers, directors and principal shareholders of the applicant and any subsidiaries as well as the banks and bank holding companies concerned.  The Federal Reserve also considers the record of the applicant and its affiliates in fulfilling commitments to conditions imposed by the Federal Reserve in connection with prior applications.

A bank holding company is prohibited with limited exceptions from engaging directly or indirectly through its subsidiaries in activities unrelated to banking or managing or controlling banks. One exception to this limitation permits ownership of a company engaged solely in furnishing services to banks; another permits ownership of shares of the company, all of the activities of which the Federal Reserve has determined after due notice and opportunity for hearing, to be so closely related to banking or managing or controlling banks, as to be a proper incident thereto. Moreover, under the 1970 amendments to the Act and to the Federal Reserve regulations, a financial holding company and its subsidiaries are prohibited from engaging in certain "tie-in" arrangements in connection with any extension of credit or provision of any property or service. Subsidiary banks of a financial holding company are subject to certain restrictions imposed by the Federal Reserve Act on any extension of credit to the financial holding company or to any of its other subsidiaries, or investments in the stock or other securities thereof, and on the taking of such stock for securities as collateral for loans to any borrower.

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

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USURY, RECENT LEGISLATION AND ECONOMIC ENVIRONMENT

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

Legislation enacted in 1983 amends Tennessee usury laws to permit interest at an annual rate of four (4) percentage points above the average prime loan rate for the most recent week for which such an average rate has been published by the Board of Governors of the Federal Reserve, or twenty-four percent (24%), whichever is less (TCA 47-14-102(3)). The "Most Favored Lender Doctrine" permits national banks to charge the highest rate permitted by any state lender.

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

IMPACT OF GRAMM LEACH-BLILEY ACT

The Gramm Leach-Bliley Financial Modernization Act of 1999 ("GLBA") permits bank holding companies meeting certain management, capital, and community reinvestment act standards to engage in a substantially broader range of non-banking activities than permitted previously, including insurance underwriting and merchant banking activities.  GLBA repeals sections 20 and 32 of the Glass Steagall Act, permitting affiliations of banks with securities firms and registered investment companies.  GLBA authorizes financial holding companies, permitting banks to be owned by security firms, insurance companies and merchant banking companies and vice-versa. Some of these affiliations are also permissible for bank subsidiaries.  GLBA gives the Federal Reserve Board authority to regulate financial holding companies, but provides for functional regulation of subsidiary activities.

GLBA also modifies financial privacy and community reinvestment laws. The new financial privacy provisions generally prohibit financial institutions such as the Bank from disclosing non-public personal financial information to third parties unless customers have the opportunity to opt out of the disclosure.  GLBA also magnifies the consequences of a bank receiving less than a satisfactory community reinvestment act rating, by freezing new activities until the institution achieves a better community reinvestment act rating.

BANK SECRECY ACT

Over the past thirty plus years, Congress has passed several laws impacting a financial institution's responsibilities relating to Bank Secrecy Act.  The most recent change was in 2001 with the enactment of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism ACT (the "Patriot Act").  The Patriot Act significantly amended and expanded the application of the Bank Secrecy Act, including enhanced measures regarding customer identity, new suspicious activity reporting rules and enhanced anti-money laundering programs.   In 2005, there was no new legislation enacted relating to Bank Secrecy Act.  However, on June 30, 2005, the Federal Financial Institutions Examination Council ("FFIEC") and the federal bank examination agencies released the new interagency "Bank Secrecy Act Anti-Money Laundering Examination Manual".  The manual emphasizes a banking organization's responsibility to establish and implement risk-based policies, procedures, and processes to comply with the Bank Secrecy Act and safeguard its operations from money laundering and terrorist financing.   It is a compilation of existing regulatory requirements, supervisory expectations, and sound practices for Bank Secrecy Act/Anti-Money Laundering ("BSA/AML") compliance.  An effective BSA/AML compliance program requires sound risk management; therefore, the manual also provides guidance on identifying and controlling risk associated with money laundering and terrorist financing.  The development of this manual was a collaborative effort of the federal banking agencies and the Financial Crimes Enforcement Network ("FinCEN"), a bureau of the U. S. Department of the Treasury, to ensure consistency in the application of the BSA/AML requirements and consistent examinations of banking organizations. 

The specific examination procedures performed will depend on the BSA/AML risk profile of the banking organization, the quality and quantity of independent testing, the financial institutions history of BSA/AML compliance and other relevant factors.   The Bank has implemented effective risk-based policies and procedures that reinforce existing practices and encourages a vigilant determination to prevent the institution from becoming associated with criminals or being used as a channel for money laundering or terrorist financing activities.

PATRIOT ACT

On October 26, 2001, President Bush signed the Patriot Act into law.  The Patriot Act enhances the powers of the federal government and law enforcement organizations to combat terrorism, organized crime and money laundering.   The Patriot Act significantly amends and expands the application of the Bank Secrecy Act, including enhanced measures regarding customer identity, new suspicious activity reporting rules and enhanced anti-money laundering programs.  Under the Act, each financial institution is required to establish and maintain anti-money laundering programs, which include, at a minimum, the development of internal policies, procedures, and controls; the designation of a compliance officer; an ongoing employee training program; and an independent audit function to test programs.  In addition, the Patriot Act requires the bank regulatory agencies to consider the record of a bank or banking holding company in combating money laundering activities in their evaluation of bank and bank holding company merger or acquisition transactions.  Regulations proposed by the U.S. Department of Treasury to effectuate certain provisions of the Patriot Act provide that all transaction or other correspondent accounts held by a U.S. financial institution on behalf of any foreign bank must be closed within ninety days after the final regulations are issued, unless the foreign bank has provided the U.S. financial institution with a means of verification that the institution is not a shell bank. The Bank has implemented policies and procedures in compliance with stated regulations of the Patriot Act. 

FEDERAL DEPOSIT INSURANCE REFORM ACT OF 2005

The Federal Deposit Insurance Reform Act of 2005 ("FDIRA") was passed on February 8, 2006, as part of the Deficit Reduction Act of 2005.  The primary components of FDIRA are as follows:  merges the two major funds into a new Deposit Insurance Fund, raises coverage on retirement accounts to $250,000, establishes indexing insurance levels for inflation, caps the fund, sets up a system of dividends, gives banks credit for past payments to the fund and provides for flexibility if the fund should ever face financial difficulty.  The FDIC was required to implement most of the provisions of FDIRA by November 5, 2006. 

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CUSTOMER INFORMATION SECURITY AND CUSTOMER FINANCIAL PRIVACY

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

The three principal requirements relating to the Privacy of Consumer Financial Information in GLBA are as follows:

• Financial institutions must provide customers with notices describing their privacy policies and practices, including policies with respect to disclosure of nonpublic personal information to affiliates and to nonaffiliated third parties. Notices must be provided at the time the customer relationship is established and annually thereafter.

• Subject to specified exceptions, financial institutions may not disclose nonpublic personal information about consumers to any nonaffiliated third party unless consumers are given a reasonable opportunity to direct that such information not be shared (to "opt out"). 

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

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

The guidelines require financial institutions to establish an information security program to:

• Identify and assess the risks that may threaten customer information;

• Develop a written plan containing policies and procedures to manage and control these risks;

• Implement and test the plan; and

• Adjust the plan on a continuing basis to account for changes in technology, the sensitivity of customer information, and internal or external threats to information security.

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

The regulatory agencies also published the Interagency Guidance on Response Programs for Unauthorized Access to Customer Information and Customer Notice.  Each financial institution is required to implement a response program to address unauthorized access to sensitive customer information maintained by the institution or its service providers.  The Bank has implemented an appropriate response program, which includes: formation of an "Incident Response Team"; properly assessing and investigating any incident; notifying the Office of the Comptroller of the Currency (the "OOC") of any security breach, if necessary; taking appropriate steps to contain and control any incident; and notifying affected customers when required. 

Monetary policies of regulatory authorities, including the Federal Reserve have a significant effect on operating results of bank holding companies and their subsidiary banks.  The Federal Reserve regulates the national supply of bank credit by open market operations in United States Government securities, changes in the discount rate on bank borrowings, and changes in reserve requirements against bank deposits. A tool once extensively used by the Federal Reserve to control growth and distribution of bank loans, investments and deposits has been eliminated through deregulation.  Competition, not regulation, dictates rates, which must be paid and/or charged in order to attract and retain customers.

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

INSURANCE ACTIVITIES

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

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ITEM 1A. RISK FACTORS

Our asset value and earnings as well as the value of our common stock is subject to various types of risks.  Our ability to continue our history of strong financial performance and return on investment is dependent on the ability to continue to effectively manage multiple areas of risk.  Significant risks can be broadly divided into three categories:  credit risk, market risk and operational risks.  Such risk categories are discussed as follows:

CREDIT RISK

Credit risks are risks to earnings and capital that a borrower may fail to meet the terms of any contract with the Bank.  Many factors may impact the risk of credit losses on loans and include but are not limited to types and terms of loans within the portfolio, creditworthiness of borrowers, and the value and marketability of collateral securing various loans.  Changes in general economic conditions of markets served also impact the risk of credit losses.  Some credit losses are expected and the levels of losses may vary over time.  Credit risks are managed throughout the lending process beginning with strict underwriting guidelines designed to control risks and limit exposure.  Then, our management uses various assumptions and judgments to evaluate on a quarterly basis the adequacy of the allowance for loan losses in accordance with generally accepted accounting principles as well as regulatory guidelines.  If management's estimate of credit losses proves to be incorrect resulting in an allowance for loan losses inadequate to absorb losses or if regulatory authorities require an increase to the allowance as a result of their examination process, earnings and capital could be significantly and adversely impacted.

Current economic conditions have increased credit risks across the industry in 2007 and such trends are expected to continue in 2008.  The Bank does not participate in sub-prime lending or non-traditional mortgages, thus, our increased credit risk exposure has been limited compared to that of institutions that did participate in such activities. 

MARKET RISK

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

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

Competition is another significant factor that directly affects the net interest margin and therefore our overall earnings.  Historically, banks competed with other banks.  As discussed in the Competitive Environment section of Item 1, we now compete against a much broader range of entities that offer similar products and services.  Some of those entities include insurance companies, finance companies, credit unions, and industrial loan companies.  We must be able to compete in our markets in order to remain profitable.  Competition is often intense in the pricing of both loans and deposits and can lead to reduced earnings if we earn less on loans or pay more for deposits in order to compete against such a diverse mix of competitors.  Changes in technology and regulation, the trend of consolidations in the financial services industry, and competition for experienced, qualified employees also affect our ability to compete. 

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

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

OPERATIONAL RISK

Transaction risk, compliance risk, strategic risk, and reputation risk are our primary operational risks.  Transaction risk is the risk to earnings and capital which could result from an inability to deliver products or services.  Transaction risk can arise from ineffective or inefficient processes, fraud, theft, breaches in data security, and exposure of other external threats or events.  Losses related to transaction risk can occur from within our organization or as a result of errors or disruption from a vendor or other outside party for which we have limited control, if any.  Two specific types of transaction risk include fraud risk and systemic risk.  The risk that a payment transaction will be initiated or altered in an attempt to misdirect or misappropriate funds.  Examples of fraud risk are embezzlement by a financial institution employee or by an interloper who gains unauthorized access to a system.  Another type of transaction risk, systemic risk is the risk of inability of one funds transfer system participant to settle its commitments, which causes other participants to be unable to settle their commitments.  Risk management procedures to identify, measure, monitor and control these types of risk are critical to successful management of operational risks.

Compliance risk is the risk to capital and earnings as a result of violations of applicable laws, regulations and ethical standards.  Our board of directors and executive management lead by example with a commitment to honesty and integrity which provide the foundation for the Company's core values.  The board of directors and management also implemented and enforce a Code of Conduct which is posted on our website (www.firstcitizens-bank.com). 

We are subject to extensive regulation including banking and financial services laws, tax legislation, accounting standards and interpretations thereof.  Thus, certain activities may be restricted such as the ability to pay dividends, ability to participate in mergers and acquisitions, and location of offices.  The scope, complexity and cost of corporate governance, reporting and disclosure procedures required to comply with the Sarbanes-Oxley Act of 2002 as well as other regulations have significantly increased compliance costs over the past three years.  Compliance costs are expected to continue to escalate at a significant level.  Legislation introduced or changed at the state or national level has the potential to impact the banking industry and its operating environment substantially.  We cannot determine whether such legislation will be enacted or the ultimate impact on our financial position or earnings. 

Strategic risk arises from adverse business decisions or improper implementation of strategic action plans.  Current strategies include growth and development of current markets as well as expansion into new markets.  In addition to market expansion geographically, the range of products and services offered is also being expanded to include a more diverse range of products and services, including but not limited to new electronic banking products and services for commercial customers.  If implementation of market and product strategies is ineffective, our financial results could be adversely impacted. 

Reputation risk is the risk of negative public opinion.  The public perception of our ability to conduct business and expand our customer base is affected by practices of our board, management and employees.  Significant relationships with vendors, customers and other external parties may also affect our reputation.  Adverse perceptions about our business practices or practices of those with whom we have significant relationships, could adversely impact our financial results or condition.  The board and executive management oversee the management of reputation risks.  

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ITEM 1B UNRESOLVED STAFF COMMENTS

 None. 

ITEM 2. PROPERTIES

The Bank owns and occupies the following properties:

• Main branch and executive offices are in a six-story building at One First Citizens Place (formerly 200 West Court), Dyersburg, Tennessee.  This property also includes the Banking Annex, which has a municipal address of 215-219 Masonic Street.  The Annex was converted into a new operations center in 2006 which houses the Bank's operations, information technology, call center, bank security and mail departments. 

• The Downtown Drive-Thru Branch is located at 113 South Church Street, Dyersburg, Tennessee, and is a remote motor bank with six drive-thru lanes and a drive-up ATM lane. 

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

• The Newbern Branch, a full service facility is located on North Monroe Street, Newbern, Tennessee. 

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

• The Ripley, Lauderdale County full service facility is located at 316 Cleveland Street in Ripley, Tennessee. 

• The Troy Branch is full service banking facility located on Harper Street just west of Highway 51 in Troy, Tennessee. 

• The Union City branch operates one full service facility, two motor branches and three ATM's in Obion County .  The main office is located at 100 Washington Avenue in Union City, Tennessee.  Motor branches are located at First and Harrison Streets across from the main office and at 1509 East Reelfoot Avenue in Union City.

• The Martin office is located at 200 University Avenue, Martin, Tennessee, and is a full service banking facility. 

• The Munford, Tennessee branch is located at 1426 Munford Avenue.  A remote building located at 1483 Munford Avenue serves as a drive-thru facility.

• Atoka full service branch is located on the Atoka-Idaville Road at 123 Atoka-Munford Avenue, Atoka, Tennessee. 

• Millington Branch is a full service branch facility located at 8170 Highway 51 N. Millington, Shelby County, Tennessee.

• Full service Bartlett branch is located at 7580 Highway 70, Bartlett, Shelby County, Tennessee. 

• Arlington branch located at 5845 Airline Road, Arlington, Tennessee serves as a full service branch facility.

• Oakland branch was opened in February 2005 at 7285 Highway 64, Oakland, Fayette County, Tennessee. 

• The Collierville, Tennessee branch facility opened January 2006 and is located at 3668 South Houston Levee in Collierville.

• A building and lot at 1304 Murfreesboro Road in Franklin, Williamson County, Tennessee was purchased in 2007.  The building is currently being renovated and is expected to open as a full service branch by the end of second quarter 2008.

• A lot located on Christmasville Cove in Jackson was purchased in 2007 and will be used to construct a full service branch location in two to five years.

• In February 2008, a lot located on Union University Drive in Jackson, Tennessee was purchased.  Construction of a full service branch at this location is expected to begin in late 2008 or early 2009.

The Bank owns all properties and there are no liens or encumbrances against any properties owned by the Bank.  All of the properties described above are adequate and appropriate facilities to provide banking services as noted and are adequate to handle growth expected in the foreseeable future.  As growth continues or needs change, individual property enhancements or additional properties will be evaluated if considered necessary.

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ITEM 3. LEGAL PROCEEDINGS

Various legal claims arise from time to time through the normal course of business of the Company and its subsidiaries.  There is no material pending or threatened litigation as of December 31, 2007.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the fourth quarter of the year ending December 31, 2007 there were no meetings, annual or special, of the shareholders of Bancshares. No matters were submitted to a vote of the shareholders nor were proxies solicited by management or any other person.

PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

As of December 31, 2007, there were 1,073 shareholders of Bancshares' common stock. Bancshares' common stock is not actively traded on any market.  The following graph reflects the Company's cumulative return (including dividends) as compared to the S&P 500 and Southeast Bank Stocks over a five-year period:

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

Aggregate dividends paid per share were $1.16 in each of 2007 and 2006.  Dividends were paid quarterly as follows for 2007 and 2006:

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

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

The Company sold 413 shares of treasury stock in 2007 at a weighted average price of $36.10 per share.  Proceeds from such sales were used to reacquire additional treasury shares. 

ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected financial data for Bancshares for the twelve months ended December 31, for the years indicated:

 (1)  Long-Term Obligations consist of FHLB advances and acquisition debts funded by a line of credit with First Tennessee Bank and trust-preferred securities.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

See Banking Business under Item 1 of this report regarding details of Bancshares, the Bank and other subsidiaries and what types of activities each engage in. 

EXECUTIVE SUMMARY

Financial performance for year ended December 31, 2007 consists of stable earnings and moderate balance sheet growth.  Net income of $9.16 million for 2007 is flat compared to 2006.  Asset growth of 5.38% was outpaced by capital growth of approximately 8%.  Flat earnings combined with moderate capital growth decreased 2007 return on average equity to 12.79% compared to 13.88% and 13.71% in 2006 and 2005, respectively.  Return on assets is 1.08%, 1.10%, and 1.10% for 2007, 2006 and 2005, respectively.  The return on equity ("ROE") of 12.79% and return on assets ("ROA") of 1.08% for 2007 exceeds the Southeast Bank Group Index tracked by Mercer Capital which reported an average ROE of 10.62% and average ROA of 0.98% for 2007.  Earnings per share were $2.53 for the year ended December 31, 2007 compared to $2.52 and $2.38 per share in 2006 and 2005, respectively.  Flat earnings are the result of growth in net interest income and other income being offset by increases in provision for loan losses, expenses related to other real estate and other non-interest expenses.

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

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

As evidenced in the cash flow statements, Bancshares continues to deploy capital for purchases of premises and equipment totaling $4.2 million, $2.7 million and $5.9 million in 2007, 2006 and 2005, respectively.  Opportunity cost on the 2007 purchases is approximately $300,000 based on the average yield on earning assets of 7.34%, as the funds likely would have been invested in loans or investments if fixed assets were not purchased.  In 2007, investments were made in two properties that are to become full service de novo branch locations in Jackson and Franklin, Tennessee over the next 12 to 24 months. 

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CRITICAL ACCOUNTING POLICIES

The accounting and reporting of Bancshares and its subsidiaries conform to accounting principles generally accepted in the United States ("GAAP") and follow general practices within the industry.  Preparation of financial statements requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. The Company's estimates are based on historical experience, information supplied from professionals, regulators and others believed to be reasonable under the facts and circumstances.  Accounting estimates are considered critical if (1) management is required to make assumptions or judgments about items that are highly uncertain at the time estimates are made, and (2) different estimates reasonably could have been used during the current period or changes in such estimates are reasonably likely to occur from period to period, that could have a material impact on presentation of the Consolidated Financial Statements. 

The development, selection and disclosure of critical accounting policies are discussed with the Audit Committee of the Board of Directors.  Due to the potential impact on the financial condition or results of operations and the required subjective or complex judgments involved, management believes its critical accounting policies to consist of the allowance for loan losses, fair value of financial instruments, and goodwill and assessment of impairment.

Allowance For Loan Losses

The allowance for loan losses represents management's best estimate of inherent losses in the existing loan portfolio.  Management's policy is to maintain the allowance for loan losses at a level sufficient to absorb reasonably estimated and probable losses within the portfolio.  The Company believes the loan loss reserve estimate is a critical accounting estimate because:  changes can materially affect bad debt expense on the income statement, changes in the borrower's cash flows can impact the reserve, and estimates must be made at the balance sheet date and also into the future in reference to the reserve.  While management uses the best information available to establish the allowance for loan losses, future adjustments may be necessary if economic or other conditions change materially.  The Loan Portfolio Analysis included in this Management's Discussion and Analysis provides further detail regarding how loans are monitored and evaluated in relation to the determination of the allowance for loan losses.  Also, refer to Note 1 of the Consolidated Financial Statements included in Item 8 of this report.

Fair Value Of Financial Instruments

GAAP requires that certain assets and liabilities be carried on the balance sheet at fair value.  Furthermore, fair value of financial instruments is required to be disclosed as a part of the notes to the Consolidated Financial Statements for other assets and liabilities.  Fair values are volatile and may be influenced by a number of factors, including market interest rates, prepayment speeds, discount rates, the shape of yield curves and the credit worthiness of counter parties. 

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

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

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

Goodwill

The Company's policy is to review goodwill for impairment at the reporting unit level on an annual basis unless an event occurs that could potentially impair the goodwill amount.  Goodwill represents the excess of the cost of an acquired entity over fair value assigned to assets and liabilities.  Management believes accounting estimates associated with determining fair value, as part of the goodwill test is a critical accounting estimate because estimates and assumptions are made based on prevailing market factors, historical earnings and multiples and other contingencies.  See also the Goodwill footnote in the Company's  Consolidated Financial Statements included in Item 8 of this report for additional policy information.

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RESULTS OF OPERATIONS

Bancshares reports consolidated net income of $9.16 million for the year ended December 31, 2007 compared to $9.16 million in 2006 and $8.67 million in 2005.  Earnings per share increased to $2.53 per share for 2007 compared to $2.52 per share in 2006 and $2.38 per share for 2005. Return on average assets was 1.08%, 1.10%, and 1.10% for the years ending December 31, 2007, 2006 and 2005, respectively.  Return on average equity is 12.79%, 13.88% and 13.71% for 2007, 2006 and 2005, respectively.  Flat earnings and decreased return on average equity in 2007 are the result of moderate balance sheet growth outpacing earnings growth.  Increases in net interest income and other non-interest income were offset by increases in provision for loan losses and other non-interest expenses.

Balance sheet growth improved to 5.38% in 2007 compared to less than 2 percent in 2006.  Growth in 2006 was unusually slow as a result of slow loan growth coupled with a reduction in borrowings from the Federal Home Loan Bank ("FHLB").  Growth in 2007 is comparable to historical trends in the range of 6%-8% annually.  Asset growth was primarily driven by 7.4% growth in investments and 6.6% growth in loans.  Loan growth was partially funded through a decrease in federal funds sold of approximately $11.5 million, which reduced the overall impact of loan growth on total asset growth.

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

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

The accompanying Summary Average Balance Sheet and Net Interest Income Schedule indicate a slight improvement in net yield on average earning assets at 3.78% for year 2007 compared to 3.75% and 3.77% for 2006 and 2005, respectively.  This is primarily due to the fairly neutral position of the balance sheet in terms of interest rate risk.  Thus, increases in yields on interest-earning assets were primarily offset by increases in the costs of interest-bearing liabilities during 2007.  The Bank, along with other financial institutions, continued to battle net interest margins compressed by current market and competitive factors in 2007.  The slight improvement in yield is primarily from interest income growth generated by the two new loan production offices.  See Item 7A of this report for additional information regarding interest rate risk and market sensitivity. 

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

The effective tax rate is 25% in 2007 compared to 24% in 2006 and 26% in 2005.  The effective tax rate and changes therein are impacted by fluctuations in certain factors, including but not limited to the level of tax-free investments within our investment portfolio, tax-exempt earnings on Bank owned life insurance policies, certain tax benefits which result from ESOP dividends and payouts, temporary differences resulting from use of accelerated deprecation for tax purposes and other factors incidental to the financial services business.  Fluctuations in the deduction related to the ESOP dividends and payouts and tax-exempt interest earned in the investment portfolio are the largest contributors to the various effective rates for the past three years.

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

 

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SUMMARY - AVERAGE BALANCE SHEET AND NET INTEREST INCOME ANALYSIS (cont'd)

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

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

(3)           Includes loans on non-accrual status.

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

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VOLUME/RATE ANALYSIS

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

NON-INTEREST INCOME

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

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Non-interest income increased 9% driven primarily by increases in service charges on deposits. Of the $903,000 increase in service charges, approximately $700,000 is a result of expansion and changes to the overdraft protection program.  Such changes to the program also resulted in additional expense in 2007 of approximately $215,000 which is included in non-interest expense totals.   The other $200,000 increase in deposit fees are primarily related to interchange and surcharge fees earned on the use of ATM and debit cards.   Trust and brokerage fees increased about $275,000 combined as a result of increased sales of such services.  Earnings on BOLI assets were flat in 2007 compared to 2006.  The decrease in earnings on BOLI in 2007 and 2006 compared to 2005 is due to non-recurring income earned in 2005 of approximately $260,000 from a death benefit received on a policy inherited through a prior bank acquisition.  In year 2007, total non-interest income (fee income) contributed 19.2% of total revenue compared to 19.6% and 21.2% for the same periods in 2006 and 2005, respectively. 

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

NON-INTEREST EXPENSE

The following table compares non-interest expense for the years ended December 31, 2007, 2006 and 2005 (in thousands):

The non-interest expense category is dominated by salaries and benefits expense and comprises 57% of the total in 2007, and 58% in each of years 2006 and 2005.  Employees receive performance-based incentives based on factors including achievement of a certain Return on Equity level (calculated excluding incentives at the holding company level), accomplishing annual budget goals and attaining or exceeding business development goals.  Incentive pay totaled 10.43% of salaries and benefits compared to 10.95% in 2006 and 11.89% in 2005.  The significant expense associated with salaries and benefits is consistent with Bancshares' strategic plan to hire and retain high quality employees to provide outstanding customer service and strive for exceptional shareholder returns. 

The efficiency ratio is a measurement of non-interest expense as a percentage of total revenue.  A comparison of the efficiency ratio for the years 2007, 2006 and 2005 reflects ratios of 65.98%, 65.44%, and 64.62%, respectively. 

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

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

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

Total non-interest expense increased approximately 5% and 3% in 2007 and 2006, respectively.  The digestion of newer branches and increasing regulatory burdens continue to put pressure on non-interest expenses.  Successful implementation of strategies to increase non-interest income streams also yields higher non-interest expenses.  As discussed in the other non-interest income section above, approximately $200,000 additional expense was incurred related to changes in the overdraft protection program.  Advertising costs increased $111,000 in 2007 as a result of promotion efforts to establish brand awareness of the Bank in the new Jackson and Franklin, Tennessee markets.  Expenses incurred related to other real estate owned increased approximately $280,000 in 2007.  See additional discussion in Other Real Estate Section noted below.

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

INVESTMENT SECURITIES ANALYSIS

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

MATURITY AND YIELD ON SECURITIES - DECEMBER 31, 2007

The following presents contractual maturities and yields by category for debt securities:

*Yields on tax-exempt investments are stated on a tax-equivalent basis calculated using a federal statutory rate of 34 percent.

HELD TO MATURITY & AVAILABLE FOR SALE SECURITIES - DECEMBER 31, 2007

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

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

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

The Company has one interest rate swap classified as a cash flow hedge, which is described in Note 3 of the Consolidated Financial Statements.

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

LOAN PORTFOLIO ANALYSIS

The following compares the portfolio mix of loans held for investment as of year-end for the last five years:

CHANGES IN LOAN CATEGORIES

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

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

Overall, loan growth improved to 6.5% in 2007 compared to less than 1% growth in 2006 and 2.7% in 2005.  Growth in 2007 was primarily generated from commercial and residential construction loans originated in the loan production offices in Franklin and Jackson, Tennessee as well as branches in Shelby, Tipton and Fayette Counties.  Weaker loan growth in 2005 and 2006 can be attributed to the slowing economy and a tightening in consumer credit underwriting standards. 

The loan portfolio is heavily weighted in real estate loans, which account for approximately $460 million or 79 percent of total portfolio.  Commercial and residential construction loans account for $107 million of the $460 million invested in real estate loans.  Although the portfolio is heavily weighted in real estate, the Bank does not invest in sub-prime or non-traditional mortgages.  The Bank monitors its concentrations in commercial real estate in accordance with regulatory guidelines.

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Portfolio quality remains strong with the ratio of net charge offs to average net loans outstanding for the years of 2007, 2006, and 2005 at 0.13%, 0.23%, and 0.09%, respectively.  Non performing assets as a percent of total loans plus foreclosed property at current year end represent 0.71% compared to 0.57% and 0.38% at year end 2006 and 2005, respectively.  A very small volume of significant balance loans account for the increase in net charge offs and increase in other real estate owned in 2006 and 2007.  A negative trend in problem credits and charge offs was expected given industry historical trends during rising rate environment experienced in 2006 and 2007.  However, strong credit risk management provides a means for timely identification and assessment of problem credits in order to minimize losses.  Negative trends in problem credits are not expected to increase materially. 

Unemployment rates serve as one measurement tool to evaluate the stability and condition of local economies of our markets.  Unemployment rates increased in all markets served over the last 12 months.  Unemployment rates for year-end 2007, 2006 and 2005 in Tennessee counties served during 2007 are as follows:

Unemployment rates for the state of Tennessee as of the end of each quarter of 2007 were 4.7%, 4.1%, 4.7%, and 5.3%, consecutively.

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

Internally classified loans are those loans that have certain characteristics or circumstances that warrant additional credit quality monitoring and may require specific reserve allocations as determined in accordance with SFAS No. 114.

Real estate loans account for approximately 79% of the total loan portfolio.  Within real estate loans, residential mortgage loans (including residential construction) are the largest category comprising 36% of total loans, which historically have low loan loss experience.  Diversification of the real estate portfolio is a necessary and desirable goal of the real estate loan policy.  In order to achieve and maintain a prudent degree of diversity, given the composition of the market area and the general economic state of the market area, Bancshares will strive to maintain real estate loan portfolio diversification.  Risk monitoring of commercial real estate concentrations is performed in accordance with regulatory guidelines and includes assessment of risk levels of various types of commercial real estate and review of ratios of various concentrations of commercial real estate as a percentage of capital. 

POLICY GUIDELINES

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

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

**New farm equipment can be amortized over seven years.

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Bancshares' policy further manages risk in the real estate portfolio by adherence to supervisory limits in regards to loan to value percentages, as designated by the following categories:

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

On an approved exception basis, loans may be approved in excess of the LTV limits, provided that:

• The request is fully documented to support the fact that other credit factors justify the approval of that particular loan as an exception to the LTV limit;

• The loan, if approved, is designated in the Bank's records and reported as an aggregate number with all other such loans approved by the full Board of Directors on at least a quarterly basis;

• The aggregate total of all loans so approved, including the extension of credit then under consideration, shall not exceed 65% of the Bank's total capital; and

• Provided further that the aggregate portion of these loans in excess of the LTV limits that are classified as commercial, agricultural, multi-family or non-1-to-4 family residential property shall not exceed 30% of the Bank's total capital.

AMORTIZATION SCHEDULES

Loan policy requires every loan to have a documented repayment arrangement.  While reasonable flexibility is necessary to meet credit needs of customers, in general all loans should be repaid within the following time frames:

AVERAGE LOAN YIELDS

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

The aggregate amount of unused guarantees, commitments to extend credit and standby letters of credit was approximately $128 million at year end.  Other information in reference to commitments and standby letter of credits is included in Note 18 of the Consolidated Financial Statements included in Item 8 of this report.

LOAN MATURITIES

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

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

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NON-PERFORMING LOANS

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

	2007			2006			2005			2004			2003
Non-Accrual Loans	$	1,678		$	371		$	1,524		$	1,581		$	1,174
Foreclosed Property Other Real Estate,	2,302			1,815			129			337			535
Other Repossessed Assets	-			-			-			2			-
Loans and Leases 90 Days Past Due and Still
Accruing Interest	204			945			431			798			223
Total Non-Performing Loans and Other Assets	$	4,184		$	3,131		$	2,084		$	2,718		$	1,932
Non-Performing Assets as a Percent of Loans and
Leases Plus Foreclosed Property at End of Year	0.71 %			0.57 %			0.38 %			0.51 %			0.39 %
Allowance as a Percent of:
Non-Performing Assets	151.24 %			198.37 %			327.74 %			229.54 %			316.97 %
Gross Loans	1.08 %			1.13 %			1.25 %			1.16 %			1.25 %
Addition to Reserve as a Percent of Charge-Offs	76.09 %			44.41 %			167.56 %			90.44 %			237.80 %
Loans and Leases 90 days Past Due as a Percent of
Loans and Leases at Year-End	0.32 %			0.24 %			0.36 %			0.44 %			0.04 %
Recoveries as a Percent of Gross Charge-Offs	34.58 %			15.34 %			25.95 %			20.66 %			55.38 %

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

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

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

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

LOAN LOSS EXPERIENCE & RESERVE FOR LOAN LOSSES

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

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

An analysis of the allocation of the Allowance for Loan Losses is made on a fiscal quarter at the end of the month, (February, May, August, and November) and reported to the board at its meeting immediately preceding quarter-end.  The allowance for loan losses is estimated using methods consistent with GAAP as well as regulatory guidance on the allowance.  Such guidance considered specifically includes but is not limited to SFAS 114 and 118 and the Interagency Policy Statement on the Allowance for Loan and Lease Losses issued December 13, 2006. 

The evaluation of the adequacy of the allowance includes the identification of impaired loans and allocation of specific reserves if considered necessary on a case-by-case basis for significant loans.  A loan is impaired when it is probable that a creditor will be unable to collect all amounts due of principal and interest according to the original contractual terms of the loan. Impairment occurs under the following circumstances:  (1) Impairment of a loan shall exist when the present value of expected future cash flows discounted at the loans effective interest rate impede full collection of the contract; and (2) Fair value of the collateral, if the loan is collateral dependent, indicates unexpected collection of full contract value.  Specific reserve allocations shall be made to for loans found to be collateral or interest cash flow deficient.  In addition, an allowance shall be determined for pools of loans including all other criticized assets as well as small homogeneous loans managed by delinquency. Impairment decisions are reported to the Board of Directors and in external reports as required by regulations.  Income recognition from impaired loans is determined in accordance with GAAP, as well as financial institution regulatory guidance.

Credit risk management procedures include assessment of loan quality through use of an internal loan rating system.  Each loan is assigned a rating upon origination and the rating may be revised over the life of the loan as circumstances warrant.  The rating system utilizes eight major classification types based on risk of loss. 

Credit risk management process also includes an annual review of a minimum of 70% of the gross portfolio less installment loans.  The loan review function is independent of the lending process itself and results of loan review are reported to the Board.  In addition, any single note or series of notes directly or indirectly related to one borrower which equals 25% of the Bank's legal lending limit are included in the review.  The results of loan review as well as current portfolio mix by rating are incorporated into the quarterly evaluation of the allowance for loan losses.

Examples of factors taken into consideration during assessment of loan quality for rating purposes, for independent loan review, and for evaluation of the adequacy of the allowance 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, adherence to loan policy and adherence to loan documentation requirements.

OTHER REAL ESTATE OWNED

The book value of other real estate ("ORE") owned was $2.3 million at December 31, 2007 compared to $1.8 million at December 31, 2006 compared to $129,000 in 2005.  ORE is significantly higher in 2006 and 2007 as a result of foreclosures on a small volume of significant balance loans.  Management continues efforts to liquidate ORE. 

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

Accounting for adjustments to the value of ORE when recorded subsequent to foreclosure is accomplished on the basis of an independent appraisal.  The asset is recorded at the time of foreclosure at the lesser of its appraised value or the loan balance.  Any reduction in value is charged to the allowance for loan losses.  All other real estate parcels are appraised annually and the carrying value adjusted to reflect the decline, if any, in its realizable value.  Such adjustments are charged directly to expense.

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COMPOSITION OF DEPOSITS

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

	2007					2006					2005
	Average			Average		Average			Average		Average			Average
	Balance			Rate		Balance			Rate		Balance			Rate
Non-Interest Bearing Demand Deposits	$	93,413		0.00 %		$	90,360		0.00 %		$	78,586		0.00 %
Savings Deposits	$	201,506		1.88 %		$	197,115		1.66 %		$	190,106		1.18 %
Time Deposits	$	372,109		4.79 %		$	365,839		4.26 %		$	331,973		3.09 %
Total Deposits	$	667,028		3.24 %		$	653,314		2.88 %		$	600,665		2.08 %

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

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

Time deposits grew in excess of $20 million in 2005 and 2006 but slowed to approximately $10.5 million in 2007.  Time deposits over $100,000 and brokered time deposits comprise 52.2% of total time deposits as of year end 2007 compared to 51.8% as of year-end 2006 and 51.5% at year-end 2005.  Approximately 90% of over $100,000 time deposits will reprice over the next twelve months as a result of established strategies to deal with the current competitive market and rate environment. 

MATURITY DISTRIBUTION OF TIME DEPOSITS IN AMOUNTS OF $100,000 AND OVER

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

	2007					2006
	Amount			Percent		Amount			Percent
Maturing in:
3 Months or Less	$	46,427		27.29 %		$	48,963		25.55 %
Over 3 Through 12 Months	112,743			66.26 %		124,604			65.02 %
Over 12 Months	10,972			6.45 %		18,081			9.43 %
Total	$	170,142		100.00 %		$	191,648		100.00 %

OTHER BORROWINGS

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

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

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

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The Bank's long-term debt consists of advances from the FHLB.  In 2006, as a result of slow loan growth, solid deposit growth and inverted yield curve, the Company reduced long-term debt at the Bank by $17.5 million.  As loan growth increased in 2007, one additional advance of $5 million was issued increasing the volume to $52.1 million as of year end 2007.  Average volume of FHLB advances for 2007 was $48.8 million at an average rate of 5.58% compared to average volume of $58 million at an average rate of 5.67% in 2006 and  $73 million at an average rate of 4.87% in 2005. The average remaining maturity for FHLB long-term borrowings is 2 years.  FHLB borrowings are comprised of fixed rate positions ranging from 3.99% to 6.55%.  Most of the FHLB borrowings have quarterly call features and maturities range from 2008 to 2011.  Approximately 70% or $36 million will mature or is expected to be called in 2010.  Most of the advances with call features when called offer the option to pay off the advance without penalty or to have the advance reprice at a variable rate tied to the 90-day LIBOR.  One $5 million advance requires repayment if the call feature is exercised.  Under the current and forecasted rate environments, borrowings with call features in place are not likely to be called in the next 12 months and therefore are not included in current liabilities on the Consolidated Balance Sheet included in Item 8 of this report.  Liquidity management and long term borrowings are discussed within the Liquidity section of this report.       

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

	Average		Average	Average	Repricing
	Volume		Rate	Maturity	Frequency
FHLB Borrowings	$	48,763	5.58%	3 Years	Fixed
Revolving Line of Credit	1,250		7.04%	1 year	Variable
Trust Preferred Debt	10,310		7.64%	25 years	Variable

CAPITAL RESOURCES

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

	2007	2006	2005	2004	2003
Percentage of Net Income to:
Average Total Assets	1.08%	1.10%	1.10%	1.08%	1.09%
Average Shareholders Equity	12.79%	13.88%	13.71%	13.56%	13.88%
Percentage of Dividends Declared
to Net Income	45.93%	46.04%	47.03%	50.83%	50.49%
Percentage of Average Equity
to Average Assets	8.45%	7.93%	8.01%	7.95%	7.91%

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

Total capital increased 7.96% to $75.0 million in 2007 from $69.5 million at year-end 2006.  Growth in capital during 2007 is from undistributed net income from the Bank coupled with increases in other comprehensive income from improved fair market values of available-for-sale investments securities.  Adjustments to capital resulting from changes in market value of available-for-sale securities and cash flow hedge are made quarterly and contributed $836,000 to the growth in 2007.  Bancshares has historically maintained capital in excess of minimum levels established by regulation and reflects continuous improvement when comparing previous years.  The risk based capital ratio of 12.5% percent at December 31, 2007 was significantly in excess of the 8 percent mandated by regulation.  This ratio has been maintained in the 10-12 percent range over the past three years.  Total capital as a percentage of total assets was 8.56%, 8.36%, and 7.80% at December 31, 2007, 2006 and 2005, respectively. 

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

Dividends for 2006 and 2007 were $1.16 per share compared to $1.12 per share in 2005.  Bancshares continues its trend over the last several years with dividend payout ratio and dividend yield in excess of average reported for the Southeast Bank Group as tracked by Mercer Capital.  The dividend payout ratio is 45.93% in 2007, 46.04% in 2006 and 47.06% in 2005.  The projected payout ratio for 2008 is in the range of 45-50 percent.  Dividend payout for Southeast Bank Group for 2007 was 43.14%.  The dividend yield in 2007 is 3.31% compared to 3.52% in 2006.  The dividend yield for Southeast Bank Group is 3.30% for 2007. 

As of year-end 2007, there are approximately $12 million of retained earnings available for the payment of future dividends from the Bank to Bancshares.  Banking regulations require certain capital levels to be maintained and may limit dividends paid by the Bank to Bancshares or by Bancshares to its shareholders.  These restrictions pose no practical limit on the ability of the Bank or Bancshares to pay dividends at historical levels.

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

AGGREGATE CONTRACTUAL OBLIGATIONS AND OFF BALANCE SHEET ARRANGEMENTS

Contractual Obligations are due as follows:

	Total			< 1 Year			1-3 Years			3-5 Years			> 5 Years
Unfunded Loan Commitments	$	122,573		$	122,573		$	-		$	-		$	-
Standby Letters of Credit	5,925			5,925			-			-			-
Long Term Debt*	63,165			1,366			35,588			10,235			15,976
Capital Lease Obligations	-			-			-			-			-
Operating Leases	480			211			240			29			-
Purchase Obligations	-			-			-			-			-
Other Long Term Liabilities	-			-			-			-			-
Total	$	192,143		$	130,075		$	35,828		$	10,264		$	15,976

                *Long-term debt is presented as principal only excluding interest.

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

Notes 13 and 18 of the Consolidated Financial Statements included in Item 8 of this report reflect long term obligations and off balance sheet risk.

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RECENTLY ISSUED ACCOUNTING STANDARDS

Fair Value Measurements

In September 2006, FASB issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. This statement was issued to address the need for increased consistency and comparability in fair value measurements and for expanded disclosures about fair value measurements. The statement emphasizes that fair value measurement should be determined based on assumptions that market participants would use in pricing the asset or liability. Also, SFAS 157 establishes a fair value hierarchy that prioritizes information used to develop those assumptions. On February 12, 2008, FASB issued a Staff Position which delays the effective date of SFAS No. 157 until fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Adoption of this statement is not expected to materially impact Bancshares' Consolidated Financial Statements.

Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements

In September 2006, FASB ratified Emerging Issues Task Force (EITF) Issue No. 06-4, "Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements" (EITF 06-4). EITF 06-4 addresses accounting for split-dollar life insurance arrangements after the employer purchases a life insurance policy on the covered employee. This EITF states that an obligation arises as a result of a substantive agreement with an employee to provide future postretirement benefits. Under this issue, the obligation is not settled upon entering into an insurance arrangement. Since the obligation is not settled, a liability should be recognized in accordance with applicable authoritative guidance. EITF 06-4 is effective for fiscal years beginning after December 15, 2007. The adoption of EITF 06-4 will have a material impact on Bancshares' Consolidated Financial Statements. See Subsequent Event footnote to Consolidated Financial Statements for additional information regarding impact of adoption of this pronouncement.

The Fair Value Option for Financial Assets and Financial Liabilities

In February 2007, FASB issued SFAS No. 159 "The Fair Value Option for Financial Assets and Financial Liabilities" to permit entities to choose to measure certain financial instruments at fair value. This statement is expected to expand the use of fair value measurement with the intent to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FASB Statement No. 157, Fair Value Measurements. Bancshares does not anticipate adoption of this pronouncement to result in a material effect on the Company's Consolidated Financial Statements.

Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51

In December 2007, FASB issued Statement of Financial Accounting Standards No. 160, "Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51" to improve the relevance, comparability, and transparency of financial information that a reporting entity provides in its consolidated financial statements. The standard establishes reporting requirements for ownership interests in subsidiaries held by parties other than the parent, net income attributable to the parent and to the noncontrolling interest, changes in parent's ownership interest, initially recording any retained noncontrolling equity investment at fair value rather than carrying amount of retained investment, and sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of noncontrolling owners. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 (that is, January 1, 2009, for entities with calendar year-ends).

Business Combinations-Revised

In December 2007, FASB revised Statement of Financial Accounting Standards No. 141, "Business Combinations." This Statement establishes principles and requirements for how the acquirer: (a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree (b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and, (c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The effective dates of this statement are the same as SFAS No. 160 described above.

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ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

LIQUIDITY AND INTEREST RATE SENSITIVITY

Liquidity is managed in a manner to ensure the availability of ample funding to satisfy loan demand, fund investment opportunities, and large deposit withdrawals.  Primary funding sources for Bancshares includes customer core deposits, FHLB borrowings, as well as correspondent bank and other borrowings.  Customer based sources accounted for 86% of funding for the current year versus 87% for the prior year.  Borrowed funds from the FHLB amounted to 6.5% ($52 million) of total funding at year-end 2007 compared to 6.3 percent ($48 million) of total funding at year-end 2006.  The Bank had additional borrowing capacity of approximately $28 million with FHLB at year-end 2007.  The Bank also has lines of credit for federal funds purchases totaling $52.5 million with four correspondent banks.  As of December 31, 2007, the Bank held $23 million in short term Certificates of Deposit from the State of Tennessee and held $34 million in brokered Certificates of Deposit, representing 4.93% of total deposits.  Brokered time deposits were approximately $31 million and 4.65% of total deposits as of year-end 2006. 

Bancshares' liquidity position is further strengthened by ready access to a diversified base of wholesale borrowings which include lines of credit with the FHLB, FTN Financial, federal funds purchased, securities sold under agreements to repurchase, Brokered certificates of deposit and others.  Bancshares has a line of credit with First Tennessee Bank for $13 million earmarked for acquisitions and other financial needs of the holding company with approximately $12 million available at year-end 2007.  Bancshares has a crisis contingency liquidity plan to defend against any material downturn in the liquidity position.

When evaluating liquidity, comparison is made between funding needs and the current level of liquidity, plus liquidity that would likely be available from other sources. This comparison provides a means for determining whether funds management practices are adequate. Management should be able to manage unplanned changes in funding sources, as well as react to changes in market conditions that could hinder the Bank's ability to quickly liquidate assets with minimal loss.  Funds management practices are designed and implemented to ensure that Bancshares does not maintain liquidity by paying up for funds or by relying unduly on wholesale or credit-sensitive funding sources.  Office of the Comptroller of the Currency has established benchmarks to be used for guidelines in managing liquidity. The following areas are considered liquidity red flags:

• Significant increases in reliance on wholesale funding.

• Significant increases in large certificates of deposit, brokered deposits, or deposits with interest rates higher than the market.

• Mismatched funding - funding long-term assets with short-term liabilities or short-term assets with long-term liabilities.

• Significant increases in borrowings.

• Significant increases in dependence on funding sources other than core deposits.

• Reduction in borrowing lines by correspondent banks.

• Increases in cost of funds.

• Declines in levels of core deposits.

• Significant decreases in short-term investments.

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

The above comparison is one quantitative means of monitoring liquidity levels.  However, other quantitative and qualitative factors are considered in the overall risk management process for liquidity.  Such other factors evaluated by management include but are not limited to diversification of funding sources, degree of reliance on short-term volatile funding sources, deposit volume trends and stability of deposits.  There are no known trends or uncertainties that are likely to have a material effect on Bancshares' liquidity or capital resources. There currently exist no recommendations by regulatory authorities, which, if implemented, would have such an effect.  There are no matters of which management is aware that have not been disclosed.

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

Bancshares monitors and employs multiple strategies to continuously manage interest rate risk and liquidity at acceptable levels.  Such strategies include but are not limited to use of FHLB borrowings, adjustment of re-pricing date of loans, use of interest rate swaps, and investments in mortgage back investments that enables the company to have constant cash inflows. 

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

Interest rate risk is separated and analyzed according to the following categories of risk: (1) re-pricing (2) yield curve (3) option risk (4) price risk and (5) basis risk. Trading assets are utilized infrequently and are addressed in the investment policy.  Any unfavorable trends reflected in interest rate margins will cause an immediate adjustment to the Bank's gap position or asset/liability management strategies.  The following data schedule reflects a summary of Bancshares' interest rate risk using simulations. The projected 12-month exposure is based on different rate movements (flat, rising, or declining).  In a rising rate cycle, non-maturity deposits will not re-price until a 100 basis point rise takes place.  In a declining rate cycle, non-maturity deposits will re-price with market conditions when deposits hit a floor position. 

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The following condensed gap report provides an analysis of interest rate sensitivity of earning assets and costing liabilities.

CONDENSED GAP REPORT
CURRENT BALANCES
DECEMBER 31, 2007

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CONDENSED GAP REPORT
CURRENT BALANCES
DECEMBER 31, 2006

NOTES TO THE GAP REPORTS

1.             The gap report reflects the interest sensitivity positions during a flat rate environment.  Time frames could change depending on whether rates rise or fall.

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

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

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

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

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Bancshares exposure to interest rate risk is well within established policy limits as noted in the table below. 

Interest Rate Risk
December 2007
(In Thousands)

Tier 1 Capital                              $72,198

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)		$	28,202		$	25,999		$	(2,203)		-7.81%		-20.00%
Declining 1	(100)		28,202			27,314			(888)			-3.15%		-10.00%
Flat	0		28,202			28,202			-			0.00%		0.00%
Rising 1	100		28,202			28,518			316			1.12%		-10.00%
Rising 2	200		28,202			28,699			497			1.76%		-25.00%

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

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

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ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 

MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING 

The management of First Citizens Bancshares, Inc. (Bancshares) is responsible for establishing and maintaining an adequate internal control structure, which governs financial reporting.  Bancshares' internal control system is designed to provide reasonable assurance to management and the Board of Directors regarding the preparation and fair presentation of the Bancshares' annual financial statements in accordance with generally accepted accounting principles of the United States. 

Inherent limitations 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 reasonable assurance with respect to financial statement preparation. 

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

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

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

Members of:                                                                                                                                                                                                                                                                    American Institute of Certified Public Accountants                                                                                                                                                                                                         Governmental Audit Quality Center - AICPA                                                                                                                                                                                                                    Tennessee Society of Certified Public Accountants