UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2014

OR

For the transition period from ___to ___

Commission file number 0-11709

FIRST CITIZENS BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (731) 285 - 4410

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

None.

(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 þ

     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 þ

     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 ☑ No ☐

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☑ No ☐

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. þ

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

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

     The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant on June 30, 2014 was approximately $129,315,510 based upon the last known sale price prior to such date.

     As of February 27, 2015, the registrant had 3,836,721 outstanding shares of common stock and 140,202 outstanding shares of Class A common stock.  

DOCUMENTS INCORPORATED BY REFERENCE

None.

PART I

ITEM 1.  BUSINESS.

General

First Citizens Bancshares, Inc. (“First Citizens” or the “Company”) is a financial holding company incorporated in Tennessee in 1982. Through its principal bank subsidiary, First Citizens National Bank (“FCNB”), First Citizens conducts commercial banking and financial services operations primarily in West and Middle Tennessee. On October 1, 2014, First Citizens acquired Southern Heritage Bank which continues to operate as a separate depository institution.  At December 31, 2014, First Citizens and its subsidiaries had total assets of $1.48 billion and total deposits of $1.21 billion. First Citizens’ principal executive offices are located at One First Citizens Place, Dyersburg, Tennessee 38024 and its telephone number is (731) 285-4410.

First Citizens, headquartered in Dyersburg, Tennessee, is the holding company for FCNB, Southern Heritage Bank (“SHB” and together with FCNB, the “Banks”), First Citizens (TN) Statutory Trusts III and IV and Southern Heritage Bancshares Statutory Trust I.  The trusts hold the Banks’ trust preferred debt and are not consolidated but are accounted for under the equity method in accordance with generally accepted accounting principles (“GAAP”).

FCNB is a diversified financial services institution that provides banking and other financial services to its customers. FCNB provides customary banking services, such as checking and savings accounts, fund transfers, various types of time deposits, safe deposit facilities, financing of commercial transactions and making and servicing both secured and unsecured loans to individuals, firms and corporations. FCNB is the only community bank in Tennessee recognized as a preferred lender for the Farm Service Agency of the U.S. Department of Agriculture (“FSA”), which provides emergency farm loans to help producers recover from production and physical losses caused by natural disasters or quarantine. FCNB’s agricultural services include operating loans as well as financing for the purchase of equipment and farmland. FCNB’s consumer lending department makes direct loans to individuals for personal, automobile, real estate, home improvement, business and collateral needs. FCNB typically sells long-term residential mortgages that it originates to the secondary market without retaining servicing rights. FCNB’s commercial lending operations include various types of credit services for customers.

FCNB has the following subsidiaries:

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

• White and Associates/First Citizens Insurance, LLC was chartered in 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. FCNB holds a 50% ownership interest in the agency, which is accounted for using the equity method. The insurance agency operates nine offices in Northwest Tennessee.

• First Citizens/White and Associates Insurance Company was organized and existed under the laws of the State of Arizona. Its principal activity is credit insurance. FCNB held a 50% ownership in the agency, which was accounted for using the equity method until the entity was liquidated and dissolved as of September 29, 2014.  The dissolution and liquidation of assets did not have a material impact to the Consolidated Financial Statements for the year ended December 31, 2014 included in Item 8 of this Annual Report on Form 10-K.

• First Citizens Investments, Inc. was organized and exists under laws of the State of Nevada. The principal activities of this entity are to acquire and sell investment securities and to collect income from its portfolio. First Citizens Investments, Inc. has the following subsidiaries:

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

 

• First Citizens Properties, Inc. is a real estate investment trust organized and existing under the laws of the State of Maryland, the principal activity of which is to invest in participation interests in real estate loans made by FCNB and provide FCNB with an alternative vehicle for raising capital. First Citizens Holdings, Inc. owns 100% of the outstanding common stock and 60% of the outstanding preferred stock of First Citizens Properties, Inc. Directors, executive officers and certain employees and affiliates of FCNB own approximately 40% of the preferred stock which is reported as Noncontrolling Interest in Consolidated Subsidiaries in the Consolidated Balance Sheets of First Citizens included in Item 8 of this Annual Report on Form 10-K.

Southern Heritage Bank is a financial services institution that provides banking services to its customers. Southern Heritage Bank conducts commercial banking operations primarily in Bradley County in East Tennessee.  Southern Heritage Bank provides customary banking services, such as checking and savings accounts, fund transfers, various types of time deposits, safe deposit facilities, financing of commercial transactions and making and servicing both secured and unsecured loans to individuals, firms and corporations. Southern Heritage Bank’s consumer lending department makes direct loans to individuals for personal, automobile, real estate, home improvement, business and collateral needs. Southern Heritage Bank typically sells long-term residential mortgages that it originates to the secondary market without retaining servicing rights. Southern Heritage Bank’s commercial lending operations include various types of credit services for customers.

The following table sets forth a comparative analysis of key balance sheet metrics of First Citizens as of December 31, for the years indicated (in thousands):

The table below provides a comparison of First Citizens’ performance to industry standards based on information provided by the Federal Reserve. According to the Bank Holding Company Performance Report as of December 31, 2014 (the most recent report available as of the date of this Annual Report on Form 10-K), First Citizens’ peer group consisted of 343 bank holding companies with assets totaling $1 billion to $3 billion. The following table presents comparisons of First Citizens with its peers as indicated in Bank Holding Company Performance (“BHCP”) Reports for the years ended December 31 for each of the years indicated:

___________________

First Citizens and its subsidiaries employed a total of 348 full-time equivalent employees as of December 31, 2014. First Citizens and its subsidiaries are committed to hiring and retaining high quality employees to execute First Citizens’ strategic plan.

First Citizens’ website address is www.FirstCNB.com. First Citizens makes its Annual Reports and all amendments to those reports available free of charge by link on its website on the “About – Investor Relations” webpage as soon as reasonably practicable. Shareholders may request a copy of the annual report without charge by contacting Laura Beth Butler, Secretary, First Citizens Bancshares, Inc., P. O. Box 370, Dyersburg, Tennessee 38025-0370.

First Citizens is an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 and, as such, may elect to comply with certain reduced public company reporting requirements.

Recapitalization

During a special meeting on July 16, 2014, First Citizens’ shareholders voted on and approved the First Citizens Charter Amendment authorizing an additional class of common stock (Class A common stock) to be issued to certain shareholders of First Citizens. Upon the filing of the First Citizens Charter Amendment, each share of First Citizens common stock outstanding immediately prior to such filing owned by a shareholder of record who owned less than 300 shares of such common stock, was, by virtue of the filing of the First Citizens Charter Amendment and without any action on the part of the holders, reclassified as Class A common stock, on the basis of one share of Class A common stock per each share of common stock so reclassified. Each share of First Citizens common stock outstanding immediately prior to the filing of the First Citizens Charter Amendment owned by a shareholder of record who owned 300 or more shares of such common stock was not reclassified and continued to be classified as common stock. The First Citizens common stock continues to have unlimited voting rights. Each outstanding share of First Citizens Class A common stock has no voting rights except as may be required by law.

Merger

                On October 1, 2014, the Company completed its previously announced acquisition of Southern Heritage pursuant to the terms of the Merger Agreement. In accordance with the Merger Agreement, Southern Heritage merged with and into the Company, with the Company continuing as the surviving corporation.

Expansion

First Citizens, through its strategic planning process, intends to seek profitable opportunities that utilize excess capital and maximize income in Tennessee. In determining whether to acquire other banking institutions, First Citizens’ objective is asset growth and diversification into other market areas. Management believes acquisitions and de novo branches afford First Citizens increased economies of scale within operation functions and better utilization of human resources. First Citizens only pursues an acquisition or opens a de novo branch if First Citizens’ board of directors determines it to be in the best interest of First Citizens and its shareholders.

Competition

The business of providing financial services is highly competitive. In addition to competing with other commercial banks in the service area, both FCNB and SHB compete 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 criteria. Expanded membership criteria coupled with existing tax-exempt status give credit unions a competitive advantage compared to banks.   

Both Banks build and implement strategic plans and commitments to address competitive factors in the various markets served.  The primary strategic focus is on obtaining and maintaining profitable customer relationships in all markets the Banks serve.  The markets demand competitive pricing, but the Banks compete on high quality customer service that will attract and enhance loyal, profitable customers.  Industry surveys have consistently revealed that 65-70% of customers leave banks because of customer service issues.  Accordingly, the Banks are committed to providing excellent customer service in all markets that they serve as a means of branding and distinguishing from other financial institutions.  The Banks utilize advertising, including both newspaper and radio, and promotional activities to support strategic plans. 

The Banks offer a typical mix of interest-bearing transaction, savings and time deposit products, as well as traditional non-interest bearing deposit accounts. FCNB is a leader in deposit market share compared to competitors in the Counties of  Dyer, Fayette, Lauderdale, Obion, Tipton and Weakley in Tennessee. FCNB has consistently been a leader in market share of deposits in its markets for several years. FCNB’s market share has been 19% to 20% in Dyer, Fayette, Lauderdale, Obion, Tipton and Weakley Counties combined and in excess of 62% in Dyer County for the last three years.  The following market share information for these counties (banks only, deposits inside of market) is from the Deposit Market Share Report, as of June 30, 2014, prepared annually by the Federal Deposit Insurance Corporation (the “FDIC”) (dollars in thousands):

FCNB also competes in the Shelby County and Williamson County markets.  Because the size and composition of these two markets is much larger and more diverse than the other markets in which FCNB operates, Shelby and Williamson Counties are excluded from the above table.  FCNB’s market share in Shelby County was 1.05% and 1.02% as of June 30, 2014 and 2013, respectively.  FCNB’s market share in Williamson County was 0.97% and 1.25% as of June 30, 2014 and 2013, respectively.

SHB competes in Bradley County and has been 13% to 14% for the last three years.  The following market share information for this county (banks only, deposits inside of market) is from the Deposit Market Share Report, as of June 30, 2014, prepared annually by the FDIC (dollars in thousands):

Regulation and Supervision

The following discussion sets forth certain material elements of the regulatory framework applicable to the Corporation and the Banks. This discussion is a brief summary of the regulatory environment in which the Corporation and its subsidiaries operate and is not designed to be a complete discussion of all statutes and regulations affecting such operations.  Regulation of financial institutions is intended primarily for the protection of depositors, the deposit insurance fund and the banking system, and generally is not intended for the protection of shareholders. Changes in applicable laws, and their application by regulatory agencies, cannot necessarily be predicted, but could have a material effect on the business and results of the Corporation and its subsidiaries.

General

The Corporation is subject to regulation and supervision by the Board of Governors of the Federal Reserve System (the “Federal Reserve”).  The Corporation is required to file annual reports with the Federal Reserve and such other information as the Federal Reserve may require.  The Federal Reserve also conducts examinations of the Corporation. The Banks are subject to regulation and supervision by the Office of the Comptroller of the Currency (the “OCC”).  The Banks are required to file annual reports with the OCC and such other information as the OCC may require.  The OCC also conducts examinations of the Banks.

The Bank Holding Corporation Act requires every bank holding company to obtain the prior approval of the Federal Reserve before:

• it may acquire direct or indirect ownership or control of any voting shares of any other bank holding company if, after the acquisition, the bank holding company will directly or indirectly own or control more than 5% of the voting shares of the other bank holding company;

• it may acquire direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding company will directly or indirectly own or control more than 5% of the voting shares of the bank;

• it or any of its subsidiaries, other than a bank, may acquire all or substantially all of the assets of any bank; or

• it may merge or consolidate with any other bank holding company.

The Bank Holding Company Act further provides that the Federal Reserve may not approve any transaction that would result in a monopoly or that would substantially lessen competition in the banking business, unless the public interest in meeting the needs of the communities to be served outweighs the anticompetitive effects. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks involved and the convenience and needs of the communities to be served. Consideration of financial resources generally focuses on capital adequacy, and consideration of convenience and needs issues focuses, in part, on the performance under the Community Reinvestment Act of 1977, both of which are discussed below in more detail.

Subject to various exceptions, the Bank Holding Company Act and the Change in Bank Control Act, together with related regulations, require Federal Reserve approval prior to any person or company acquiring “control” of a bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of a bank holding company. Control is also presumed to exist, although rebuttable, if a person or company acquires 10% or more, but less than 25%, of any class of voting securities and either:

• the bank holding company has registered securities under Section 12 of the Exchange Act of 1934, as amended (“Exchange Act”); or

• no other person owns a greater percentage of that class of voting securities immediately after the transaction.

 

The Corporation’s common stock is registered under Section 12 of the Exchange Act. The regulations provide a procedure for challenging rebuttable presumptions of control.

The Bank Holding Company Act generally prohibits a bank holding company from engaging in activities other than banking, managing or controlling banks or other permissible subsidiaries and acquiring or retaining direct or indirect control of any company engaged in any activities other than activities closely related to banking or managing or controlling banks. In determining whether a particular activity is permissible, the Federal Reserve considers whether performing the activity can be expected to produce benefits to the public that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. The Federal Reserve has the power to order a bank holding company or its subsidiaries to terminate any activity or control of any subsidiary when the continuation of the activity or control constitutes a serious risk to the financial safety, soundness or stability of any bank subsidiary of that bank holding company.

The Banks are incorporated under the laws of the United States and is subject to the applicable provisions of the National Bank Act and regulations promulgated by the OCC.  The Banks are subject to the supervision of the OCC and to regular examinations by that department.  Deposits in the Banks are insured by FDIC and, therefore, the Banks are subject to the provisions of the Federal Deposit Insurance Act.

Federal Reserve policy historically has required bank holding companies to act as a source of strength to their bank subsidiaries and to commit capital and financial resources to support those subsidiaries. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) codifies this policy as a statutory requirement. This support may be required by the Federal Reserve at times when the Corporation might otherwise determine not to provide it. In addition, if a bank holding company commits to a federal bank regulator that it will maintain the capital of its bank subsidiary, whether in response to the Federal Reserve’s invoking its source-of-strength authority or in response to other regulatory measures, that commitment will be assumed by the bankruptcy trustee and the bank will be entitled to priority payment in respect of that commitment, ahead of other creditors of the bank holding company.

In addition, the Corporation is required to file certain reports with, and otherwise comply with the rules and regulations of, the U.S. Securities and Exchange Commission (the “SEC”) under federal securities laws.

The Dodd-Frank Act

The Dodd-Frank Act, enacted in 2010, significantly restructured financial regulation in the United States, including through the creation of a new resolution authority, mandating higher capital and liquidity requirements, requiring banks to pay increased fees to regulatory agencies, and through numerous other provisions intended to strengthen the financial services sector.

The Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”), which has extensive regulatory and enforcement powers over consumer financial products and services, and the Financial Stability Oversight Council, which has oversight authority for monitoring and regulating systemic risk. In addition, the Dodd-Frank Act altered the authority and duties of the federal banking and securities regulatory agencies, implemented certain corporate governance requirements for all public companies, including financial institutions, with regard to executive compensation, proxy access by shareholders, and certain whistleblower provisions, and restricted certain proprietary trading and hedge fund and private equity activities of banks and their affiliates. The Dodd-Frank Act also required the issuance of numerous implementing regulations, many of which have not yet been issued.

In January 2013, the CFPB issued final regulations governing mainly consumer mortgage lending. One rule imposes additional requirements on lenders, including rules designed to require lenders to ensure borrowers’ ability to repay their mortgage. The CFPB also finalized a rule on escrow accounts for higher priced mortgage loans and a rule expanding the scope of the high-cost mortgage provision in the Truth in Lending Act. The CFPB also issued final rules implementing provisions of the Dodd-Frank Act that relate to mortgage servicing. In November 2013, the CFPB issued a final rule on integrated mortgage disclosures under the Truth in Lending Act and the Real Estate Settlement Procedures Act, compliance with which is required by August 1, 2015.

The Dodd-Frank Act authorizes national and state banks to establish de novo branches in other states to the same extent as a bank chartered by that state would be so permitted.  Previously, banks could only establish branches in other states if the host state expressly permitted out-of-state banks to establish branches in that state. Accordingly, banks are now able to enter new markets more freely.

Recently, the CFPB and banking regulatory agencies have increasingly used a general consumer protection statute to address unethical or otherwise bad business practices that may not necessarily fall directly under the purview of a specific banking or consumer finance law. Prior to the Dodd-Frank Act, there was little formal guidance to provide insight to the parameters for compliance with the “unfair or deceptive acts or practices” (“UDAP”) law. However, the UDAP provisions have been expanded under the Dodd-Frank Act to apply to “unfair, deceptive or abusive acts or practices,” which has been delegated to the CFPB for supervision.

Many aspects of the Dodd-Frank Act are subject to further rulemaking and will take effect over several years. The overall financial impact on the Corporation and its subsidiaries or the financial services industry generally cannot be anticipated at this time.

Dividends

The Corporation is a legal entity that is separate and distinct from its subsidiaries. The primary source of funds for dividends paid to the Corporation’s shareholders are dividends paid to the Corporation by the Banks.  Federal law limits the amount of dividends that the Banks may pay to the Corporation without regulatory approval.  The Banks are required by to obtain the prior approval of the OCC for payments of dividends if the total of all dividends declared by its board of directors in any calendar year will exceed (i) the total of the Banks’ retained net income for that year, plus (ii) the Banks’ retained net income for the preceding two years. The OCC also has the authority to prohibit the Banks from engaging in business practices that the OCC considers to be unsafe or unsound, which, depending on the financial condition of the Banks, could include the payment of dividends.

In addition, the Federal Reserve has the authority to prohibit the payment of dividends by a bank holding company if its actions constitute unsafe or unsound practices. The Federal Reserve has issued a policy statement, Supervisory Release 09-4, on the payment of cash dividends by bank holding companies, which outlines the Federal Reserve’s view that a bank holding company that is experiencing earnings weaknesses or other financial pressures should not pay cash dividends that exceed its net income, that are inconsistent with its capital position, or that could only be funded in ways that weaken its financial health, such as by borrowing or selling assets.  The Federal Reserve has indicated that, in some instances, it may be appropriate for a bank holding company to eliminate its dividends.

Capital

The Federal Reserve has issued risk-based capital ratio and leverage ratio guidelines for bank holding companies. The risk-based capital ratio guidelines establish a systematic analytical framework that:

• makes regulatory capital requirements sensitive to differences in risk profiles among banking organizations;

• takes off-balance sheet exposures into explicit account in assessing capital adequacy; and

• minimizes disincentives to holding liquid, low-risk assets.

Under the guidelines and related policies, banks and bank holding companies must maintain capital sufficient to meet both a risk-based asset ratio test and a leverage ratio test on a consolidated basis. The risk-based ratio is determined by allocating assets and specified off-balance sheet commitments into four weighted categories, with higher weighting assigned to categories perceived as representing greater risk. The risk-based ratio represents capital divided by total risk-weighted assets. The leverage ratio is core capital divided by total assets adjusted as specified in the guidelines.

Generally, under the applicable guidelines, a financial institution’s capital is divided into two tiers. “Total capital” is Tier 1 plus Tier 2 capital. These two tiers are:

• “Tier 1,” or core capital, that includes total equity plus qualifying capital securities and minority interests, excluding unrealized gains and losses accumulated in other comprehensive income, and non-qualifying intangible and servicing assets; and

• “Tier 2,” or supplementary capital, includes, among other things, cumulative and limited-life preferred stock, mandatory convertible securities, qualifying subordinated debt, and the allowance for credit losses, up to 1.25% of risk-weighted assets.

 The Federal Reserve and the other federal banking regulators require that all intangible assets (net of deferred tax), except originated or purchased mortgage-servicing rights, non-mortgage servicing assets, and purchased credit card relationships, be deducted from Tier 1 capital. However, the total amount of these items included in Total capital cannot exceed 100% of an institution’s Tier 1 capital.

Under the risk-based capital guidelines existing prior to January 1, 2015, financial institutions were required to maintain a risk-based ratio of 8%, with 4% being Tier 1 capital. The appropriate regulatory authority may set higher capital requirements when they believe an institution’s circumstances warrant.

Under the leverage guidelines existing prior to January 1, 2015, financial institutions are required to maintain a leverage ratio of at least 3%. The minimum ratio is applicable only to financial institutions that meet certain specified criteria, including excellent asset quality, high liquidity, low interest rate risk exposure, and the highest regulatory rating. Financial institutions not meeting these criteria are required to maintain a minimum Tier 1 leverage ratio of 4%.

The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the Federal Reserve has indicated that it will consider a “tangible Tier 1 capital leverage ratio” (deducting all intangibles) and other indicators of capital strength in evaluating proposals for expansion or new activities.

Failure to meet applicable capital guidelines could subject the financial institution to a variety of enforcement remedies available to the federal regulatory authorities. These include limitations on the ability to pay dividends, the issuance of a capital directive to increase capital, and the termination of deposit insurance by the FDIC. In addition, the financial institution could be subject to the measures described below under “Prompt Corrective Action” as applicable to “under-capitalized” institutions.

New Capital Rules

On July 2, 2013, the Federal Reserve approved the final rule for BASEL III capital requirements for all bank holding companies chartered in the United States and banks that are members of the Federal Reserve System. The rule implements in the United States certain of the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Act. The major provisions of the new rule applicable to the Corporation and the Banks are:

• The new rule implements higher minimum capital requirements, includes a new common equity Tier 1 capital requirement, and establishes criteria that instruments must meet in order to be considered common equity Tier 1 capital, additional Tier 1 capital, or Tier 2 capital. These enhancements both improve the quality and increase the quantity of capital required to be held by banking organizations, better equipping the United States banking system to deal with adverse economic conditions.

• The new minimum capital to risk-weighted assets requirements are a common equity Tier 1 capital ratio of 4.5% and a Tier 1 capital ratio of 6.0% which is an increase from 4.0%, and a total capital ratio that remains at 8.0%. The minimum leverage ratio (Tier 1 capital to total assets) is 4.0%.

• The new rule improves the quality of capital by implementing changes to the definition of capital. Among the most important changes are stricter eligibility criteria for regulatory capital instruments that would disallow the inclusion of instruments such as trust preferred securities in Tier 1 capital going forward, and new constraints on the inclusion of minority interests, mortgage-servicing assets, deferred tax assets, and certain investments in the capital of unconsolidated financial institutions. In addition, the new rule requires that most regulatory capital deductions be made from common equity Tier 1 capital.

• Under the new rule, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of common equity Tier 1 capital above its minimum risk-based capital requirements. This buffer will help to ensure that banking organizations conserve capital when it is most needed, allowing them to better weather periods of economic stress. The buffer is measured relative to risk weighted assets. Phase-in of the capital conservation buffer requirements will begin on January 1, 2016. A banking organization with a buffer greater than 2.5% would not be subject to limits on capital distributions or discretionary bonus payments; however, a banking organization with a buffer of less than 2.5% would be subject to increasingly stringent limitations as the buffer approaches zero. The new rule also prohibits a banking organization from making distributions or discretionary bonus payments during any quarter if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% at the beginning of the quarter. When the new rule is fully phased in, the minimum capital requirements plus the capital conservation buffer will exceed the prompt corrective action well-capitalized thresholds.

• The new rule also increases the risk weights for past-due loans, certain commercial real estate loans, and some equity exposures, and makes selected other changes in risk weights and credit conversion factors.

The transition period for implementation of Basel III is January 1, 2015, through December 31, 2018.

Prompt Corrective Action

The Federal Deposit Insurance Corporation Improvement Act of 1991, known as FDICIA, requires federal banking regulatory authorities to take “prompt corrective action” with respect to depository institutions that do not meet minimum capital requirements. For these purposes, FDICIA establishes five capital tiers: “well-capitalized,” “adequately-capitalized,” “under-capitalized,” “significantly under-capitalized,” and “critically under-capitalized.”

An institution is deemed to be:

• “well-capitalized” if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater (8% after January 1, 2015), a Tier 1 leverage ratio of 5% or greater, and, after January 1, 2015, a common equity Tier 1 capital ratio of 6.5% or greater, and is not subject to a regulatory order, agreement, or directive to meet and maintain a specific capital level for any capital measure;

• “adequately-capitalized” if it has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or greater (6% after January 1, 2015), generally, a Tier 1 leverage ratio of 4% or greater, and, after January 1, 2015, a common equity Tier 1 capital ratio of 4.5% or greater, and the institution does not meet the definition of a “well-capitalized” institution;

• “under-capitalized” if it does not meet one or more of the “adequately-capitalized” tests;

• “significantly under-capitalized” if it has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 3% (less than 4% after January 1, 2015), a Tier 1 leverage ratio that is less than 3%, and, after January 1, 2015, a common equity Tier 1 capital ratio that is less than 3%; and

• “critically under-capitalized” if it has a ratio of tangible equity, as defined in the regulations, to total assets that is equal to or less than 2%.

Throughout 2014, the Banks’ regulatory capital ratios were in excess of the levels established for “well-capitalized” institutions.

FDICIA generally prohibits a depository institution from making any capital distribution, including payment of a cash dividend or paying any management fee to its holding company, if the depository institution would be “under-capitalized” after such payment. “Under-capitalized” institutions are subject to growth limitations and are required by the appropriate federal banking agency to submit a capital restoration plan. If any depository institution subsidiary of a holding company is required to submit a capital restoration plan, the holding company would be required to provide a limited guarantee regarding compliance with the plan as a condition of approval of such plan.

If an “under-capitalized” institution fails to submit an acceptable plan, it is treated as if it is “significantly under-capitalized.” “Significantly under-capitalized” institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately-capitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks.

“Critically under-capitalized” institutions may not, beginning 60 days after becoming “critically under-capitalized,” make any payment of principal or interest on their subordinated debt. In addition, “critically under-capitalized” institutions are subject to appointment of a receiver or conservator within 90 days of becoming so classified.

Under FDICIA, a depository institution that is not “well-capitalized” is generally prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market. As previously stated, the Banks are “well-capitalized” and the FDICIA brokered deposit rule did not adversely affect its ability to accept brokered deposits. The Banks had approximately $4.9 million of such brokered deposits at December 31, 2014.

Interstate Banking and Branching Legislation

Federal law allows banks to establish and operate a de novo branch in a state other than the bank’s home state if the law of the state where the branch is to be located would permit establishment of the branch if the bank were chartered by that state, subject to standard regulatory review and approval requirements. Federal law also allows the Banks to acquire an existing branch in a state in which the banks are not headquartered and does not maintain a branch if the OCC approves the branch or acquisition, and if the law of the state in which the branch is located or to be located would permit the establishment of the branch if the banks were chartered by that state.

Once a bank has established branches in a state through an interstate merger transaction or through de novo branching, the bank may then establish and acquire additional branches within that state to the same extent that a state chartered bank is allowed to establish or acquire branches within the state.

Under the Bank Holding Company Act, a bank holding company may not directly or indirectly acquire ownership or control of more than 5% of the voting shares or substantially all of the assets of any bank holding company or bank or merge or consolidate with another bank holding company without the prior approval of the Federal Reserve. Current federal law authorizes interstate acquisitions of banks and bank holding companies without geographic limitation. Furthermore, a bank headquartered in one state is authorized to merge with a bank headquartered in another state, as long as neither of the states have opted out of such interstate merger authority prior to such date, and subject to any state requirement that the target bank shall have been in existence and operating for a minimum period of time, not to exceed five years, and subject to certain deposit market-share limitations.

FDIC Insurance

The deposits of the Banks are insured by the Deposit Insurance Fund (the “DIF”), which the FDIC administers. The Dodd-Frank Act permanently increased deposit insurance on most accounts to $250,000. To fund the DIF, FDIC-insured banks are required to pay deposit insurance assessments to the FDIC. For institutions like the Banks with less than $10 billion in assets, the amount of the assessment is based on its risk classification. The higher an institution’s risk classification, the higher its rate of assessments (on the assumption that such institutions pose a greater risk of loss to the DIF). An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern that the institution poses to the regulators. In addition, the FDIC can impose special assessments in certain instances.

In addition, all institutions with deposits insured by the FDIC must pay assessments to fund interest payments on bonds issued by the Financing Corporation, a mixed-ownership government corporation established as a financing vehicle for the Federal Savings & Loan Insurance Corporation. The assessment rate for the first quarter of fiscal 2015 is 1.28% of insured deposits and is adjusted quarterly. These assessments will continue until the bonds mature in 2019.

The FDIC may terminate the deposit insurance of any insured depository institution, including the Banks, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. If the FDIC terminates an institution’s deposit insurance, accounts insured at the time of the termination, less withdrawals, will continue to be insured for a period of six months to two years, as determined by the FDIC.

Affiliate Transactions

The Banks are subject to Regulation W, which comprehensively implements statutory restrictions on transactions between a bank and its affiliates. Regulation W combines the Federal Reserve’s interpretations and exemptions relating to Sections 23A and 23B of the Federal Reserve Act. Regulation W and Section 23A place limits on the amount of loans or extensions of credit to, investments in, or certain other transactions with affiliates, and on the amount of advances to third parties collateralized by the securities or obligations of affiliates. In general, the Banks’ “affiliates” are the Corporation and its non-bank subsidiaries.

Regulation W and Section 23B prohibit, among other things, a bank from engaging in certain transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the bank, as those prevailing at the time for comparable transactions with non-affiliated companies.

The Banks are also subject to certain restrictions on extensions of credit to executive officers, directors, certain principal shareholders and their related interests. Such extensions of credit must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties and must not involve more than the normal risk of repayment or present other unfavorable features.

The Community Reinvestment Act

The Community Reinvestment Act of 1977 (“CRA”) and its implementing regulations provide an incentive for regulated financial institutions to meet the credit needs of their local community or communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of such financial institutions.  The regulations provide that the appropriate regulatory authority will assess reports under CRA in connection with applications for establishment of domestic branches, acquisitions of banks or mergers involving bank holding companies.  An unsatisfactory rating under CRA may serve as a basis to deny an application to acquire or establish a new bank, to establish a new branch or to expand banking services.  As of December 31, 2014, the Banks had a “satisfactory” rating under the CRA.

Patriot Act

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, as extended and revised by the PATRIOT Improvement and Reauthorization Act of 2005 (the “Patriot Act”), requires each financial institution to: (i) establish an anti-money laundering program; (ii) establish due diligence policies, procedures and controls with respect to its private banking accounts and correspondent banking accounts involving foreign individuals and certain foreign financial institutions; and (iii) avoid establishing, maintaining, administering or managing correspondent accounts in the United States for, or on behalf of, foreign financial institutions that do not have a physical presence in any country.  The Patriot Act also requires that financial institutions follow certain minimum standards to verify the identity of customers, both foreign and domestic, when a customer opens an account.  In addition, the Patriot Act contains a provision encouraging cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities.  Federal banking regulators are required, when reviewing bank holding company acquisition and bank merger applications, to take into account the effectiveness of the anti-money laundering activities of the applicants.

Consumer Privacy and Other Consumer Protection Laws

The Banks, like all other financial institutions, are required to maintain the privacy of its customers’ non-public, personal information. Such privacy requirements direct financial institutions to:

• provide notice to customers regarding privacy policies and practices;

• inform customers regarding the conditions under which their non-public personal information may be disclosed to non-affiliated third parties; and

• give customers an option to prevent disclosure of such information to non-affiliated third parties.

Under the Fair and Accurate Credit Transactions Act of 2003, the Banks’ customers may also opt out of information sharing between and among the Banks and its affiliates.

The Banks are also subject, in connection with its deposit, lending and leasing activities, to numerous federal and state laws aimed at protecting consumers, including the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the Equal Credit Opportunity Act, the Truth in Lending Act,  the Truth-in-Savings Act, the Fair Housing Act, the Fair Credit Reporting Act, the Electronic Funds Transfer Act, the Currency and Foreign Transactions Reporting Act, the National Flood Insurance Act, the Flood Protection Act, the Bank Secrecy Act, laws and regulations  governing unfair, deceptive, and/or abuse acts and practices, the Servicemembers Civil Relief Act, the Housing and Economic Recovery Act, and the Credit Card Accountability Act, among others, as well as various state laws.

Incentive Compensation

In 2010, the Federal Reserve issued guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.

Any deficiencies in compensation practices that are identified may be incorporated into the organization’s supervisory ratings, which can affect its ability to make acquisitions or perform other actions. The guidance also provides that enforcement actions may be taken against a banking organization if its incentive compensation arrangements or related risk-management control or governance processes pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

The federal banking agencies have proposed rule-making implementing provisions of the Dodd-Frank Act to prohibit incentive-based compensation plans that expose “covered financial institutions” to inappropriate risks. Covered financial institutions are institutions that have over $1 billion in assets and offer incentive-based compensation programs. If adopted, the proposed rules would require incentive-based compensation plans:

• to provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks;

• be compatible with effective internal controls and risk management, and

• be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors and appropriate policies, procedures and monitoring.

The scope and content of banking regulators’ policies on executive compensation are continuing to develop and are likely to continue evolving in the near future. It cannot be determined at this time whether compliance with such policies will adversely affect the Corporation’s ability to hire, retain and motivate its key employees.

Sarbanes-Oxley

The Sarbanes-Oxley Act of 2002 is applicable to all companies with equity or debt securities registered under the Exchange. In particular, the Sarbanes-Oxley Act established: (i) requirements for audit committees, including independence, expertise and responsibilities; (ii) certification and related responsibilities regarding financial statements for the Chief Executive Officer and Chief Financial Officer of the reporting Corporation; (iii) standards for auditors and regulation of audits; (iv) disclosure and reporting obligations for the reporting Corporation and its directors and executive officers; and (v) civil and criminal penalties for violation of the securities laws.

Effect of Governmental Policies

The Corporation and the Banks are affected by the policies of regulatory authorities, including the Federal Reserve, the FDIC, and the OCC. An important function of the Federal Reserve is to regulate the national money supply. Among the instruments of monetary policy used by the Federal Reserve are: (i) purchases and sales of U.S. government and other securities in the marketplace; (ii) changes in the discount rate, which is the rate any depository institution must pay to borrow from the Federal Reserve; (iii) changes in the reserve requirements of depository institutions; and (iv) indirectly, changes in the federal funds rate, which is the rate at which depository institutions lend money to each other overnight. These instruments are intended to influence economic and monetary growth, interest rate levels, and inflation.

The monetary policies of the Federal Reserve and other governmental policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. Because of changing conditions in the national and international economy and in the money markets, as well as the result of actions by monetary and fiscal authorities, it is not possible to predict with certainty future changes in interest rates, deposit levels, loan demand, or the business and results of operations of the Corporation and the Banks, or whether changing economic conditions will have a positive or negative effect on operations and earnings.

Other Proposals

Bills occasionally are introduced in the United States Congress, and regulations occasionally are proposed by regulatory agencies, any of which could affect the Company’s businesses, financial results, and financial condition. Generally it cannot be predicted whether or in what form any particular proposals will be adopted or the extent to which the Corporation and the Banks may be affected.

ITEM 1A.  RISK FACTORS.

Information contained herein includes forward-looking statements with respect to the beliefs, plans, risks, goals and estimates of the Company.  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,” “will,” “intend,” “is likely,” “going forward,” “could,” “may” and other expressions are intended to identify forward-looking statements.  These forward-looking statements are within the meaning of section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and section 21E of the Exchange Act.  Such statements may include, but are not limited to, capital resources, strategic planning, acquisitions or de novo branching, ability to meet capital guidelines, legislation and governmental regulations affecting financial services companies, construction of new branch locations, dividends, critical accounting policies, allowance for loan losses, fair value estimates, goodwill, occupancy and depreciation expense, held-to-maturity securities, available-for-sale securities, trading securities, cash flows, core deposit intangibles, diversification in the real estate loan portfolio, interest income, maturity of loans, loan impairment, loan ratings, charge-offs, other real estate owned, maturity and re-pricing of deposits, borrowings with call features, dividend payout ratio, off-balance sheet arrangements, the impact of recently issued accounting standards, changes in funding sources, liquidity, interest rate sensitivity, net interest margins, debt securities, non-accrual status of loans, contractual maturities of mortgage-backed securities and collateralized mortgage obligations, other-than-temporary impairment of securities, amortization expense, deferred tax assets, independent appraisals for collateral, property enhancement or additions, efficiency ratio, ratio of assets to employees, net income, changes in interest rates, loan policies, categorization of loans, maturity of  Federal Home Loan Bank (“FHLB”) borrowings and the effectiveness of internal control over financial reporting.

Forward-looking statements are based upon information currently available and represent management’s expectations or predictions of the future. As a result of risks and uncertainties involved, actual results could differ materially from such forward-looking statements. The potential factors that could affect the Company’s results include but are not limited to:

• Changes in general economic and business conditions;

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

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

• Changes in government fiscal and monetary policies;

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

• Concentrations within the loan portfolio;

• Fluctuations in prevailing interest rates and the effectiveness of the Company’s interest rate hedging strategies;

• The Company’s ability to maintain credit quality;

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

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

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

• Geographic concentration of the Company’s assets and susceptibility to economic downturns in that area;

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

• Changes in consumer preferences; and

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

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

Changes in interest rates could have an adverse effect on First Citizens’ earnings.

First Citizens’ profitability is in part a function of interest rate spread, or the difference between interest rates earned on investments, loans and other interest-earning assets and the interest rates paid on deposits and other interest-bearing liabilities. Interest rates are largely driven by monetary policies set by the Federal Open Market Committee (“FOMC”) and trends in the prevailing market rate of interest embodied by the yield curve. The FOMC establishes target rates of interest to influence the cost and availability of capital and promote national economic goals. Rates remained at a historical low range of 0.00% to 0.25% through the end of 2014. In March 2015, the FOMC indicated that rates of 0.00% to 0.25% remain appropriate. The yield curve is a representation of the relationship between short-term interest rates to longer-term debt maturity rates. Currently, the yield curve is fairly steep as short-term rates continue at historic lows. As of December 31, 2014, FCNB was liability sensitive in terms of interest rate risk exposure, meaning that FCNB will likely experience margin compression when federal funds rates increase. In other words, upward pressure on deposit interest rates will outpace increases in the interest rates on interest-earning assets. Deposits are currently priced at historically low levels and are likely to reprice at a faster pace than interest-earning assets when the rate environment begins rising. The majority of variable-rate loans are priced at floors that will require significant increases in federal fund and prime rates before loan yields increase.

If the rate of interest paid on deposits and other borrowings increases more than the rate of interest earned on loans and other investments, First Citizens’ net interest income and, therefore, earnings could be adversely affected. Earnings could also be adversely affected if the rates on loans and other investments fall more quickly than those on deposits and other borrowings. While management takes measures to guard against interest rate risk, there can be no assurance that such measures will be effective in minimizing the exposure to interest rate risk. A sudden and significant increase in the market rate of interest could have a material adverse effect on the First Citizens’ financial condition and earnings.

First Citizens is subject to credit quality risks and First Citizens’ credit policies may not be sufficient to avoid losses.

First Citizens is subject to the risk of losses resulting from the failure of borrowers, guarantors and related parties to pay interest and principal amounts on loans. Although First Citizens maintains credit policies and credit underwriting, monitoring and collection procedures that management believes are sufficient to manage this risk, these policies and procedures may not prevent losses, particularly during periods in which the local, regional or national economy suffers a general decline. If a large number of borrowers fail to repay their loans, First Citizens’ financial condition and results of operations may be adversely affected.

If First Citizens’ allowance for loan losses becomes inadequate, First Citizens’ financial condition and results of operations could be adversely affected.

First Citizens maintains an allowance for loan losses that management believes is a reasonable estimate of known and inherent potential losses in its loan portfolio. Management uses various assumptions and judgments to evaluate on a quarterly basis the adequacy of the allowance for loan losses in accordance with GAAP as well as regulatory guidelines. The amount of future losses is susceptible to changes in economic, operating and other conditions, as well as changes in interest rates, most of which are beyond First Citizens’ control, and these losses may exceed current estimates. Although First Citizens believes the allowance for loan losses is a reasonable estimate of known and inherent potential losses in its loan portfolio, First Citizens cannot fully predict such potential losses or that its loan loss allowance will be adequate in the future. Excessive loan losses could have an adverse effect on First Citizens’ financial performance.

Federal and state regulators periodically review First Citizens’ allowance for loan losses and may require First Citizens to increase its provision for loan losses or recognize further loan charge-offs, based on judgments different than those of its management. Any increase in the amount of First Citizens’ provision or loans charged-off as required by these regulatory agencies could have an adverse effect on First Citizens’ results of operations.

First Citizens no longer has reporting obligations pursuant to the Exchange Act and it cannot be certain if the less publicly available information will make First Citizens’ stock  trade less frequently and be less attractive to investors.

First Citizens no longer has reporting obligations pursuant to the Exchange Act, which will result in less publicly available information about First Citizens and could cause its stock to trade less frequently and be less attractive to investors.

First Citizens is geographically concentrated in West Tennessee, and changes in local economic conditions may impact its profitability.

First Citizens operates primarily in West Tennessee and the majority of all loan customers and most deposit and other customers live or have operations in this area. Accordingly, First Citizens’ success depends significantly upon growth in population, income levels, deposits, housing starts and continued attraction of business ventures to this area. First Citizens’ profitability is impacted by changes in general economic conditions in this market. First Citizens’ management remains concerned about unemployment levels and economic conditions in its rural markets. Additionally, unfavorable local or national economic conditions could reduce First Citizens’ growth rate, affect the ability of its customers to repay their loans and generally affect First Citizens’ financial condition and results of operations.

First Citizens is less able than larger institutions to spread the risks of unfavorable local economic conditions across a large number of diversified economies. Moreover, First Citizens is unable to give assurance that it will benefit from any market growth or favorable economic conditions in its primary market areas if they do occur.

Earnings could be adversely affected if values of other real estate owned decline.

First Citizens is subject to the risk of losses from the liquidation and/or valuation adjustments on other real estate owned. First Citizens owns approximately 74 properties totaling $5.7 million in other real estate owned as of December 31, 2014. Other real estate owned is valued at the lower of cost or fair market value less cost to sell. Fair market values are based on independent appraisals for properties valued at $50,000 or greater and appraisals are updated annually. First Citizens may incur future losses on these properties if economic and real estate market conditions result in declines in the fair market value of these properties.

If financial market conditions worsen or First Citizens’ loan demand increases significantly, First Citizens’ liquidity position could be adversely affected. First Citizens may be required to rely on secondary sources of liquidity to meet withdrawal needs or fund operations, and there can be no assurance that these sources will be sufficient to meet future liquidity demands.

First Citizens relies on dividends from the Banks as its primary source of funds. The Banks’ primary sources of funds are client deposits, loan repayments and proceeds from the sale or maturity of securities. While scheduled loan repayments have historically been a relatively stable source of funds, they are susceptible to the inability of borrowers to repay the loans. The ability of borrowers to repay loans can be adversely affected by a number of factors, including changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, business closings or lay-offs, natural disasters and national or international instability. Additionally, deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, regulatory capital requirements, returns available to clients on alternative investments and general economic conditions. Accordingly, First Citizens may be required from time to time to rely on secondary sources of liquidity to meet withdrawal demands or otherwise fund operations. Such sources include FHLB advances, sales of securities and loans, and federal funds lines of credit from correspondent banks, as well as out-of-market time deposits. While First Citizens believes that these sources are currently adequate, there can be no assurance they will be sufficient to meet future liquidity demands, particularly if First Citizens continues to grow and experience increasing loan demand. First Citizens may be required to slow or discontinue loan growth, capital expenditures or other investments or liquidate assets should such sources not be adequate.

Market conditions could adversely affect First Citizens’ ability to obtain additional capital on favorable terms should it need it.

First Citizens’ business strategy calls for continued growth. First Citizens anticipates that it will be able to support this growth through the generation of additional deposits at new branch locations, as well as through returns realized as a result of investment opportunities. However, First Citizens may need to raise additional capital in the future to support continued growth and maintain adequate capital levels. First Citizens may not be able to obtain additional capital in the amounts or on terms satisfactory to it. Growth may be constrained if First Citizens is unable to raise additional capital as needed.

Failure to remain competitive in an increasingly competitive industry may adversely affect results of operations and financial condition.

First Citizens encounters strong competition from other financial institutions in its market areas. In addition, established financial institutions not already operating in First Citizens’ market areas may open branches in its market areas at future dates or may compete via the internet. Certain aspects of First Citizens’ banking business also compete with savings institutions, credit unions, mortgage banking companies, consumer finance companies, insurance companies and other institutions, some of which are not subject to the same degree of regulation or restrictions imposed on First Citizens. Many of these competitors have substantially greater resources and lending limits and are able to offer services that First Citizens does not provide. While First Citizens believes that it competes effectively with these other financial institutions in its market areas, First Citizens may face a competitive disadvantage as a result of its smaller size, smaller asset base, lack of geographic diversification and inability to spread its marketing costs across a broader market. If First Citizens has to raise interest rates paid on deposits or lower interest rates charged on loans to compete effectively, First Citizens’ net interest margin and income could be negatively affected. Failure to compete effectively to attract new or to retain existing clients may reduce or limit First Citizens’ margins and its market share and may adversely affect First Citizens’ results of operations and financial condition.

First Citizens and its subsidiaries are subject to extensive government regulation and supervision. Changes in laws, government regulation and monetary policy may have a material adverse effect on our results of operations.

First Citizens and its subsidiaries are subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not First Citizens’ shareholders. These regulations affect First Citizens’ lending practices, capital structure, investment practices and dividend policy and growth, among other things. Future changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect First Citizens in substantial and unpredictable ways. Such changes could subject First Citizens to additional costs, limit the types of financial services and products First Citizens may offer and/or increase the ability of non-banks to offer competing financial services and products, or decrease the flexibility in pricing certain products and services by the Banks, among other things. Failure to comply with laws, regulations or policies could result in sanctions imposed by regulatory agencies, civil money penalties, civil liability and/or reputation damage, which could have a material adverse effect on First Citizens’ financial condition and results of operations. While First Citizens’ policies and procedures are designed to deter and detect any such violations, there can be no assurance that such violations will not occur.

First Citizens stock is not listed or traded on any established securities market and is less liquid than most securities traded in those markets; First Citizens has filed to revert to non-reporting status following the filing of this Annual Report on Form 10-K.

First Citizens stock is not listed or traded on any established securities exchange or market and First Citizens has no plans to seek to list its stock on any recognized exchange or qualify it for trading in any market. Accordingly, First Citizens stock has substantially fewer trades than the average securities listed on any national securities exchange. Most transactions in First Citizens stock are privately negotiated trades and its stock is very thinly traded. There is no dealer for First Citizens stock and no “market maker.” First Citizens’ shares do not have a trading symbol. The lack of a liquid market can produce downward pressure on First Citizens stock price and can reduce the marketability of First Citizens stock. On January 5, 2015, First Citizens filed a Form 15 with the SEC terminating First Citizens reporting obligations pursuant to Section 15(d) of the Exchange Act, which will result in less publicly available information about First Citizens and could cause its stock to trade less frequently.

First Citizens’ ability to pay dividends may be limited.

As a holding company, First Citizens is a separate legal entity from the Banks and does not conduct significant income-generating operations of its own. It currently depends upon the Banks’ cash and liquidity to pay dividends to its shareholders. First Citizens cannot provide assurance that the Banks will have the capacity to pay dividends to First Citizens in the future. Various statutes and regulations limit the availability of dividends from the Banks. It is possible that, depending upon the Banks’ respective financial condition and other factors, the Banks’ regulators could assert that payment of dividends by the Banks to First Citizens is an unsafe or unsound practice. In the event that the Banks are unable to pay dividends to First Citizens, First Citizens may not be able to pay dividends to its shareholders.

A failure or breach of First Citizens’ operational or security systems or infrastructure, or those of First Citizens’ third party vendors and other service providers or other third parties, including as a result of cyber-attacks, could disrupt First Citizens’ businesses, result in the disclosure or misuse of confidential or proprietary information, damage its reputation, increase its costs, and cause losses.

First Citizens relies heavily on communications and information systems to conduct its business. Information security risks for financial institutions such as First Citizens have generally increased in recent years in part because of the proliferation of new technologies, the use of the internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, activists, and other external parties. As customer, public, and regulatory expectations regarding operational and information security have increased, First Citizens’ operating systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions, and breakdowns. First Citizens’ business, financial, accounting, and data processing systems, or other operating systems and facilities, may stop operating properly or become disabled or damaged as a result of a number of factors, including events that are wholly or partially beyond First Citizens’ control. For example, there could be electrical or telecommunication outages; natural disasters such as earthquakes, tornadoes, and hurricanes; disease pandemics; events arising from local or larger scale political or social matters, including terrorist acts; and, as described below, cyber-attacks.

As noted above, First Citizens’ business relies on its digital technologies, computer and email systems, software and networks to conduct its operations. Although First Citizens has information security procedures and controls in place, First Citizens’ technologies, systems and networks and its customers’ devices may become the target of cyber-attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss, or destruction of First Citizens’ or its customers’ or other third parties’ confidential information. Third parties with whom First Citizens does business or that facilitate First Citizens’ business activities, including financial intermediaries, or vendors that provide service or security solutions for First Citizens’ operations, and other unaffiliated third parties, could also be sources of operational and information security risk to First Citizens, including from breakdowns or failures of their own systems or capacity constraints.

While First Citizens has disaster recovery and other policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of its information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. First Citizens’ risk and exposure to these matters remain heightened because of the evolving nature of these threats. As a result, cyber security and the continued development and enhancement of First Citizens’ controls, processes, and practices designed to protect its systems, computers, software, data, and networks from attack, damage or unauthorized access remain a focus for First Citizens. As threats continue to evolve, First Citizens may be required to expend additional resources to continue to modify or enhance its protective measures or to investigate and remediate information security vulnerabilities. Disruptions or failures in the physical infrastructure or operating systems that support First Citizens’ businesses and clients, or cyber-attacks or security breaches of the networks, systems or devices that First Citizens’ clients use to access First Citizens’ products and services could result in client attrition, regulatory fines, penalties or intervention, reputation damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could have a material effect on First Citizens’ results of operations or financial condition.

Shares of First Citizens stock are not insured.

Shares of First Citizens stock are not deposits and are not insured by the FDIC or any other entity.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None. 

ITEM 2. PROPERTIES.

Properties

First Citizens National Bank Properties

FCNB has 17 full-service bank financial centers, two drive-through only branches and 28 ATMs spread over eight Tennessee counties. A list of available banking locations and hours is maintained on FCNB’s website (www.firstCNB.com) under the “Locations” section. FCNB owns and occupies the following properties:

• FCNB’s main branch and executive offices are located in a six-story building at One First Citizens Place (formerly 200 West Court), Dyersburg, Dyer County, Tennessee. This property also includes the Banking Annex, which has an address of 215-219 Masonic Street. The Banking Annex houses FCNB’s operations, information technology, call center, bank security and mail departments;

• FCNB’s downtown drive-through branch is located at 117 South Church Street, Dyersburg, Dyer County, Tennessee, and is a remote motor bank with six drive-through lanes and a drive-up ATM lane;

• The Green Village Financial Center, located at 710 U.S. 51 Bypass adjacent to the Green Village Shopping Center in Dyersburg, Dyer County, Tennessee, is a full-service banking facility;

• The Newbern Financial Center, a full-service facility, is located at 104 North Monroe Street, Newbern, Dyer County, Tennessee;

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

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

• The Troy Financial Center is a full-service banking facility located at 220 East Harper Street in Troy, Obion County, Tennessee;

• The Union City Financial Center, a full-service banking facility, is located 215 W. Lee Street, Union City, Tennessee.

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

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

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

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

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

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

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

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

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

• The Cool Springs Financial Center is a full-service facility located at 9045 Carothers Parkway, Franklin, Williamson County, Tennessee;

• The Jackson Financial Center is a full-service facility located at 381 Walker Road in Jackson, Tennessee which was opened October 1, 2014.  The lot for this financial center is located on the corner of Walker Road and Union University Drive and was originally reported in prior filings as located on Union University Drive in Jackson, Madison County, Tennessee.  However, after construction, the address assigned by 911 Authorities was 381 Walker Road rather than Union University Drive; and

• A lot located on Christmasville Cove in Jackson, Madison County, Tennessee, that was purchased in 2007 on which First Citizens expects to construct a full-service facility in the next three to five years.

FCNB owns all properties and there are no liens or encumbrances against any properties owned by FCNB. All facilities described above are adequate and appropriate 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 as necessary, including, among other things, licensing and marketing and sales practices.

Southern Heritage Bank Properties

Southern Heritage Bank has three full-service bank financial centers and ATMs spread over two Tennessee counties. A list of available banking locations and hours is maintained on Southern Heritage Bank’s website (www.southernheritagebank.com) under the “Locations & Hours” section. Southern Heritage Bank owns and occupies the following properties:

• Southern Heritage Bank’s main branch and executive offices are located in a two-story building at 3020 Keith Street, Cleveland, Bradley County, Tennessee 37312. This property also houses Southern Heritage Bank’s operations, information technology, call center, bank security and mail departments;

• Southern Heritage Bank’s Waterville Springs office is located at 2530 Dalton Pike, Cleveland, Bradley County, Tennessee 37323, and is a full-service banking facility with 3 drive-through lanes and a drive-up ATM lane;

• The Georgetown Road office is located at 3795 Georgetown Road, Cleveland, Bradley County, Tennessee 37312, and is a full-service banking facility with 3 drive-through lanes and a drive-up ATM lane; and

• Southern Heritage Bank’s stand-alone ATM location is located at the corner of Hwy 64 and 411, 116 White Water Drive, Ocoee, Polk County, Tennessee 37361.

Southern Heritage Bank owns all branch properties and there are no liens or encumbrances against any properties owned by Southern Heritage Bank; the ATM location in Polk County is leased. All facilities described above are adequate and appropriate 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 as necessary.

ITEM 3. LEGAL PROCEEDINGS.

The Company and its subsidiaries are defendants in various lawsuits arising out of the normal course of business. In the opinion of management, the ultimate resolution of such matters should not have a material adverse effect on the Company’s consolidated financial condition or results of operations. Litigation is, however, inherently uncertain, and the Company cannot make assurances that it will prevail in any of these actions, nor can it estimate with reasonable certainty the amount of damages that it might incur.

PART II

ITEM 5.        MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Holders and Market Information

As of February 27, 2015, there were 786 shareholders of the Company’s common stock and 792 holders of the Company’s Class A Common Stock. The Company’s common stock and Class A common stock are not listed or traded on any established public trading market. The table below shows the quarterly range of high and low sale prices for the Company’s common stock and Class A common stock during the fiscal years 2014 and 2013.  These sale prices represent known transactions reported to the Company and do not necessarily represent all trading transactions for the periods.

Dividends

The Company paid aggregate dividends per share of the Company’s common stock of $1.30 in 2014, $1.30 in 2013 an $1.20 per share in 2012.  The following quarterly dividends per share of common stock were paid for 2014, 2013 and 2012:

Future dividends will depend on the Company’s earnings, financial condition, regulatory capital levels and other factors, which the Company’s Board of Directors considers relevant.  See the section above entitled “Item 1. Business – Regulation and Supervision” and Note 17 to the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on 10-K for more information on restrictions and limitations on the Company’s ability to pay dividends.

Issuer Purchases of Equity Securities

The Company had no publicly announced plans or programs to purchase the Company’s stock during 2014. There were no shares of Company common stock or Class A common stock repurchased during the quarter ended December 31, 2014.

Unregistered Sale of Securities

None.

ITEM 6. SELECTED FINANCIAL DATA.

The following table presents selected financial data of the Company for the 12 months ended December 31, for the years indicated (dollars in thousands, except per share data):

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⁽¹⁾    Long-term obligations consist of FHLB advances that mature after December 31, 2015, and trust-preferred securities.

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

Executive Overview

For the year ended December 31, 2014, the Company’s financial condition, results of operations and key performance metrics were significantly impacted by the acquisition of Southern Heritage Bancshares, Inc. and its subsidiary Southern Heritage Bank which occurred on October 1, 2014.  Southern Heritage Bancshares, Inc. was merged into the Company as of the acquisition date and Southern Heritage Bank (a wholly owned subsidiary) continues to operate as a separate financial institution and has not yet been merged into FCNB.  Significant areas of impact from the acquisition are summarized as follows:

• Total assets increased approximately $250 million.

• Total equity increased $17 million due to new equity issued as merger consideration.

• Total long-term debt increased due to $12 million correspondent loan to finance cash portion of merger consideration.

• Results of Operations for 2014 include three months (October to December 2014) of net income from Southern Heritage Bank.

• Results of Operations include transaction expenses of approximately $1 million (pre-tax) charged to earnings related to investment banker advisory, legal, accounting and other non-recurring expenses related to the acquisition.

For the year ended December 31, 2014, net income of $13.5 million resulted in a return on equity (“ROE”) of 10.7% compared to ROE of 12.1% and net income of $13.8 million for 2013.  Return on equity declined due to capital growth outpacing earnings growth during 2014.  Capital growth of 28.3% in 2014 consists primarily of $17.0 million in new equity issued as merger consideration in the acquisition of Southern Heritage Bancshares, Inc. Return on assets (“ROA”) was 1.08%, 1.19% and 1.25% for 2014, 2013 and 2012, respectively.  For 2014, ROE of 10.7% and ROA of 1.08% exceeded the same measures for the Southeast Public Bank Peer Report, as produced by Mercer Capital’s Financial Institutions Group (the “Peer Report”), which reported an average ROE of 7.9% and average ROA of 0.88% for 2014.  The Peer Report provides market pricing and performance data on publicly traded banks in Alabama, Arkansas, Georgia, Kentucky, Louisiana, Mississippi, Missouri, and Tennessee. 

Earnings per share were $3.72 for the year ended December 31, 2014, compared to $3.83 and $3.75 for the years ended December 31, 2013 and 2012, respectively.  Dividends per common share were flat at $1.30 annually in 2014 and 2013.  Dividends were held flat in 2014 as part of overall capital growth and preservation strategy after the recent acquisition.  In 2014, the Company’s dividend payout ratio was 35% compared to 34% in 2013.  The dividend payout ratio has trended in the range of 30-40% the past three years.  Dividend yield for 2014 was 3.05% compared to 3.33% in 2013 and consistent with historical dividend yields in the range of 3% to 3.4%.  The Peer Report reported an average dividend yield of 1.68% for 2014. 

During 2014, asset growth totaled $307 million or 26.1% with the acquisition accounting for $250 million in total asset growth.  Capital growth was greater than asset growth at $31.9 million or 28.3% was attributable not only to new equity of $17.0 million but also to a $8.6 million increase in retained earnings and a $6.3 million increase in accumulated other comprehensive income.  Retained earnings increased 9.1% in 2014 as a result of undistributed net income and conservative dividend payout ratio of 35%.  Accumulated other comprehensive income increased due to increase of $6.3 million in unrealized appreciation (net of tax) on the available-for-sale securities portfolio compared to prior year. 

Maintaining stable and strong net interest margins is a top priority for the Company.  The Company’s net interest margin had been stable at 3.83% in 2014 and 2013.  As of December 31, 2014, the Company’s interest rate risk position was liability sensitive.  For more information, see Item 7A of this Annual Report on Form 10-K. 

The efficiency ratio is a measure of non-interest expense as a percentage of total revenue.  The Company computes the efficiency ratio by dividing non-interest expense by the sum of net interest income on a tax equivalent basis and non-interest income.  This is a non-GAAP financial measure, which management believes provides investors with important information regarding the Company’s operational efficiency.  Comparison of the Company’s efficiency ratio with those of other companies may not be possible because other companies may calculate the efficiency ratio differently.  The efficiency ratio for the years ended December 31, 2014, 2013 and 2012 was 64.3%, 61.3%, and 60.2%, respectively. 

The tangible common equity ratio is a non-GAAP measure used by management to evaluate capital adequacy. Tangible common equity is total equity less net accumulated other comprehensive income, goodwill and deposit-based intangibles.  Tangible assets are total assets less goodwill and deposit-based intangibles.  The tangible common equity ratio was 7.85% as of year-end 2014 compared to 8.53% at year-end 2013 and 7.71% at year-end 2012.

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

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Critical Accounting Policies

The accounting and reporting of the Company and its subsidiaries conform to 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. Management believes that the Company’s estimates are reasonable under the facts and circumstances based on past experience and information supplied from professionals, regulators and others.  Accounting estimates are considered critical if (i) management is required to make assumptions or judgments about items that are highly uncertain at the time estimates are made and (ii) 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 Company’s Consolidated Financial Statements. 

The development, selection and disclosure of critical accounting policies are discussed and approved by the Audit Committee of the Banks’ Boards of Directors.  Because of 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 consist of the allowance for loan losses, fair value of financial instruments and goodwill.

Allowance for Loan Losses

The allowance for losses on loans 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.  Management believes the allowance for loan loss estimate is a critical accounting estimate because:  (i) changes can materially affect provision for loan loss expense on the income statement, (ii) changes in the borrower’s cash flows can impact the reserve, and (iii) management makes estimates 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.  In addition, as a part of their examination process, federal regulatory agencies periodically review the Banks’ loans and allowances for loan losses and may require the Banks to recognize adjustments based on their judgment about information available to them at the time of their examination.  See Note 1 of the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for more information.

Fair Value of Financial Instruments

Certain assets and liabilities are required to be carried on the balance sheet at fair value.  Further, the fair value of financial instruments must be disclosed as a part 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 counterparties. 

Fair values for the majority of the Banks’ available-for-sale investment securities are based on observable market prices obtained from independent asset pricing services that are based on observable transactions but not quoted market prices.  

Fair value of derivatives (if any) held by the Company is determined using a combination of quoted 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 derivatives (if any). For more information, see Notes 1 and 21 in the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. 

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 are critical because estimates and assumptions are made based on prevailing market factors, historical earnings and multiples and other contingencies. For more information, see Notes 1 and 9 in the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Financial Condition

                Changes in the statement of financial condition for the year ended December 31, 2014 reflect the Company’s acquisition of Southern Heritage Bancshares, Inc. as well as modest organic growth.  Asset growth in 2014 totaled $307 million or 26.1% and $58 million of the $307 million was attributable to organic growth.  In 2014, loan growth of 22% was outpaced by growth of 31.4% in cash and cash equivalents, 87.5% in interest bearing deposits in banks and 27.8% in investments.  Total deposit growth of 25.1% was driven by 27.0% growth in non-interest bearing deposits and 24.5% growth in interest-bearing deposits.  Other borrowings increased 30.6% in 2014 in relation to new debt associated with the acquisition of Southern Heritage Bancshares, Inc.

Investment Securities Analysis

The following table presents the composition of total investment securities as of December 31 for the last five years (in thousands):

                In 2014, total investment securities portfolio growth of $126.8 million consisted of a $63.3 million increase in agency mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMO”) and a $63.6 million increase in municipal securities.  Growth in the overall portfolio of $77 million was attributable to the acquisition of Southern Heritage Bancshares, Inc.

The allocation to tax-exempt municipal securities as a percent of the total portfolio was 34% as of December 31, 2014 compared to 30% and 25% as of December 31, 2013 and 2012, respectively.  This range of ratios is consistent with recent allocations, as the Company typically strategically targets 25-35% of its portfolio in the tax-exempt municipal sector. 

Maturity and Yield on Securities

Contractual maturities on investment securities are generally over ten years.  However, the expected remaining lives of such bonds are expected to be much shorter due to anticipated payments from U. S. Treasury and government agency securities.  These securities comprised 66% of the portfolio at December 31, 2014 and are primarily amortizing payments that provide stable monthly cash inflows of principal and interest payments.  The following table presents contractual maturities and yields by category for debt securities as of December 31, 2014 (dollars in thousands):

________________

Held-To-Maturity and Available-For-Sale Securities

                The Company held no securities in the held-to-maturity or trading categories as of December 31, 2014 or 2013. The following table presents amortized cost and fair value of available-for-sale securities as of December 31, 2014 (in thousands):

In addition to amounts presented above, the Banks had $5.7 million in FHLB and Federal Reserve Bank stock at both December 31, 2014 and 2013, recorded at cost. 

Objectives of the Company’s investment portfolio management are to provide safety of principal, provide 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 FDIC-insured limits.  Pledged investments at December 31, 2014 and 2013 had a fair market value of $250 million and $204 million, respectively.  The average expected life of the investment securities portfolio was 4.6 years as of December 31, 2014 and 2013.  Portfolio yields (on a tax equivalent basis) were 3.25% as of December 31, 2014 compared to 3.35% as of December 31, 2013.

The Company classifies investments, based on intent, into trading, available-for-sale and held-to-maturity categories in accordance with GAAP. The Company held no securities in the trading or held-to-maturity categories for any of the periods presented in this Annual Report on Form 10-K and does not expect to hold any such securities in 2014. The Company’s investment strategy is to classify most of the securities 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. Treasury securities and government agencies and corporate obligations consisted primarily of MBSs and CMOs and accounted for 66.0% and 70.5% of the investment portfolio for years ended December 31, 2014 and 2013, respectively. The credit quality of the overall MBS and CMO portfolio was considered stable and reflected a net unrealized gain (pre-tax) of approximately $534,000 as of December 31, 2014. The unrealized loss positions are attributable to market factors as values are heavily influenced by market rates and the yield curve, including but not limited to the 10-year Treasury rates, which decreased approximately 87 basis points from December 31, 2013 to December 31, 2014.  Credit quality factors on the bonds and related underlying mortgages are evaluated at the time of purchase and on a periodic basis thereafter. These factors typically include, but are not limited to, average loan-to-value ratios, average FICO credit scores, payment seasoning (how many months of payment history), geographic dispersion, average maturity and average duration. Management believes that this level of amortizing securities provides steady cash flows. Principal cash flows for 2015 are projected to be $70 million to $75 million.

As of December 31, 2014, approximately 34% of the investment portfolio was invested in municipal securities, which were geographically diversified, compared to 30% as of December 31, 2013. The fair value of municipal securities totaled $198.3 million ($196.9 million tax-exempt and $1.4 million taxable) at December 30, 2014. Approximately 66% of municipal securities were general obligation municipal bonds and the remaining 34% were revenue bonds at December 31, 2014. The revenue bonds are primarily essential services bonds such as for water and sewer, school systems and other public improvement projects. Overall credit quality of the municipal portfolio was considered strong and reflected a net unrealized gain of $9.0 million as of year-end 2014.

The following table indicates by category gross unrealized gains and losses within the available-for-sale portfolio as of December 31, 2014 (in thousands):

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

Loan Portfolio Analysis

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

For purposes of the table above, loans do not include loans that are sold in the secondary mortgage market.  The Company classifies loans to be sold in the secondary mortgage market separately in its consolidated financial statements. Secondary market mortgages totaled $4.3 million, $3.1 million and $4.7 million as of December 31, 2014, 2013 and 2012, respectively.  For more information, see Notes 4, 5 and 6 in the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.  Interest and fees earned on secondary mortgage loans were included in mortgage banking income as reported in other non-interest income in the Company’s Consolidated Financial Statements.

Changes In Loan Categories

Total loans at December 31, 2014 were $711 million compared to $580 million at December 31, 2013 and $587 million at December 31, 2012. Loan growth in 2014 was primarily as result of the acquisition but also includes modest organic loan growth of $10 million.  The following table details the breakdown of changes by category for the year ended December 31, 2014 (dollars in thousands):

The loan portfolio remains heavily weighted in real estate loans, which accounted for $555 million or 78% of total loans as of December 31, 2014 compared to $460 million or 79% of total loans as of December 31, 2013.  Commercial and residential construction loans accounted for $63 million of the $555 million invested in real estate loans.  Within real estate loans, residential mortgage loans (including residential construction) was the largest category, comprising 30% of total loans as of December 31, 2014 and December 31, 2013.  Diversification of the real estate portfolio is a necessary and desirable goal of the Company’s 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, the Company strives 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.  The following table presents real estate loans as a percent of total risk based capital as of December 31 for each of the last five years:

________________

*      Total risk based capital is a non-GAAP measure used by regulatory authorities and reported on quarterly regulatory filings.  Total risk based capital for the Banks was $136.3 million, $116.0 million, $107.2 million, $99.8 million and $92.6 million as of December 31, 2014, 2013, 2012, 2011 and 2010, respectively.

Average Loan Yields

The average yield on loans of the Banks has trended downward over the past five years, as loans have repriced during the historically low interest rate environment.  Average yield on loans for the years indicated were as follows:

The aggregate amount of unused guarantees, commitments to extend credit and standby letters of credit was $101.2 million at year-end 2014.  For more information regarding commitments and standby letters of credit, see Note 18 in the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Loan Maturities

As of December 31, 2014, contractual maturities of loans were as follows (in thousands):

                As of December 31, 2014, loans with a remaining maturity of more than one year consisted of the following (in thousands):

The degree of interest rate risk to which a bank is subjected can be controlled through a well-defined funds management program.  The Company controls interest rate risk by matching interest sensitive assets and liabilities.  At December 31, 2014, the Company was liability-sensitive, meaning that liabilities reprice at a faster rate than assets.  Therefore, in a rising rate environment (with a normal yield curve) net interest income would decline.  The majority of the Company’s loan portfolio will reprice or mature in less than five years.  Approximately $255 million or 36% of total loans will either reprice or mature over the next 12 months, while $165 million or 23.0% of total loans will mature or reprice after one year but less than three years.  Approximately $230 million or 32% of total loans will mature or reprice after three years but in less than five years.  The remaining 9% or $61 million reprices or matures in greater than five years.

Loan Policy Guidelines

Management has established policies approved by the Company’s 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 LTV ratios and maturities related to various types of collateral at December 31, 2014, were as follows:

___________________________

The Company’s policy manages risk in the real estate portfolio by adherence to regulatory limits in regards to LTV percentages, as designated by the following categories:

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

Loans may be approved in excess of the LTV limits, provided that they are approved on a case by case basis pursuant to the Banks’ loan policy as follows:

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

• The loan, if approved, is designated in the Banks’ 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 Banks’ total capital; and

• The aggregate portion of these loans in excess of the LTV limits that are classified as commercial, agricultural, multi-family or non-one-to-four family residential property shall not exceed 30% of the Banks’ total capital.

The Banks’ loan policies additionally require every loan to have a documented repayment arrangement.  While reasonable flexibility is necessary to meet credit needs of customers, in general, real estate loans are to be repaid within the following time frames:

Credit Risk Management and Allowance for Loan Losses

Loan portfolio quality was stable in 2014 compared to 2013 and 2012 and remains very stable relative to prevailing market conditions, as is evidenced through improving trends in impaired loans and changes to the allowance for loan losses. The ratio of net charge-offs to average net loans outstanding was 0.16%, 0.16% and 0.14% for the years ended December 31, 2014, 2013 and 2012, respectively.  Management believes that the Company’s strong credit risk management practices continue to provide a means for timely identification and assessment of problem credits in order to minimize losses. For additional information regarding the Company’s credit risk management procedures and practices and allowance for loan losses, refer to Notes 1 and 5 in the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.  

Non-Performing Assets

Non-performing assets consist of non-performing loans, Other Real Estate Owned (“OREO”) and non-accrual debt securities. Non-performing loans consist of non-accrual loans, loans 90 days or more past due and still accruing interest and restructured loans. 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 aggregate of non-performing loans and OREO as a percent of total loans plus OREO at December 31, 2014 totaled 2.03% compared to 2.62% at December 31, 2013 and 3.14% at December 31, 2012.  The gross interest income that would have been recorded for the 12 months ended December 31, 2014 if all loans reported as non-accrual had been current in accordance with their original terms and had been outstanding throughout the period was approximately $349,000 compared to approximately $473,000 and $596,000, for the 12 months ended December 31, 2013 and 2012, respectively. 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, or troubled debt restructurings (“TDRs”).  First Citizens had TDRs totaling $8.0 million of December 31, 2014, compared to $4.8 million as of December 31, 2013. For additional discussion regarding non-performing assets, see Note 4 in the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Other Real Estate Owned

The book value of OREO was $5.7 million as of December 31, 2014, compared to $6.8 million and $8.6 million as of December 31, 2013 and 2012, respectively. As of December 31, 2014, there were approximately 74 properties accounted for as OREO consisting of vacant land, residential lots and other residential and commercial properties. Approximately 83% of the $5.7 million accounted for as OREO as of December 31, 2014, was located in Shelby County, Tennessee and surrounding counties. Management continues efforts to market and liquidate OREO.

Activity in OREO for the years ended December 31, 2014, 2013, and 2012 was as follows (in thousands):

Capitalized costs consist of costs to complete construction of homes partially complete at the time of foreclosure, significant repairs or renovations or include costs to complete certain phases of a development project for raw land. Capitalized costs were incurred in order to improve marketability of certain properties. Valuation adjustments through earnings reflected above includes write down of properties subsequent to foreclosure and realized gains and losses on sale of OREO.

OREO is recorded at the time of foreclosure at the lesser of its appraised value (less cost to sell) or the loan balance. Any reduction in value at the time of foreclosure is charged to the allowance for loan losses. All other real estate parcels are appraised at least annually and carrying values adjusted to reflect the decline, if any, in their realizable value. Such adjustments made subsequent to foreclosure are charged against earnings.

Other non-interest expenses for property taxes, maintenance and other costs related to acquisition or maintenance of OREO totaled approximately $333,000, $415,000, and $455,000 for the years ended December 31, 2014, 2013 and 2012, respectively. The positive trend in other non-interest expense and losses related to OREO from 2011 through 2013 was attributable to the declining trend in OREO volume. 

Composition of Deposits

The average balance of deposits and average interest rates paid on such deposits are summarized in the following table for the years ended December 31, 2014, 2013 and 2012 (dollars in thousands):

The decrease in average cost of deposits for the year ended December 31, 2014 compared to the prior two years was a result of the continued historically low interest rate environment and a result of the impact of the FOMC decision to maintain low federal funds rates during that timeframe. It is expected that federal fund rates will remain at the current range of 0.00% to 0.25% through mid-2015.  During 2014, the prevailing market and competitive environment continued to yield strong competition in the pricing of interest-bearing deposit products, but overall pricing remained very low compared to long-term historical trends. The Company 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.

Total deposits grew 25% from December 31, 2013 to December 31, 2014. Savings deposit growth was $141.5 million or 29.0% and demand deposit balances grew $38.9 million or 27.2% during 2014, largely due to acquisition of Southern Heritage Bank. Time deposit growth was 20.2%, or $66.4 million.

FCNB participates in the Certificate of Deposit Account Registry Service (“CDARS”), a deposit placement service that allows FCNB to accept very large denomination (up to $50 million) certificates of deposit (“CDs”) from customers and ensures that 100% of those CDs are FDIC-insured. Participating in this network enhances FCNB’s ability to attract and retain large-denomination depositors without having to place funds in a sweep or repurchase agreement. The CDARS network provides a means to place reciprocal deposits for FCNB’s customers, purchase time deposits (referred to as “one-way buy” deposits) or to sell excess deposits (referred to as “one-way sell” deposits). One-way buy deposits are structured similarly to traditional brokered deposits. FCNB held reciprocal deposits and “one-way buy” deposits in the CDARS program totaling $4.9 million at year-end 2014 compared to $8.4 million at year-end 2013. CDARS accounts are classified as brokered time deposits for regulatory reporting purposes.

Time deposits over $100,000 (including brokered time deposits) comprised 58.6% of total time deposits as of December 31, 2014 compared to 58.7% as of year-end 2013.  As of December 31, 2014, 75.3% of time deposits, including brokered time deposits, will mature or reprice over the next 12 months as the prevailing competitive market and rate environment continued to exhibit strong demand for shorter terms during 2014.

Other Borrowings

In addition to deposits, First Citizens uses a combination of short-term and long-term borrowings to supplement its funding needs. Short-term borrowings are used to manage fluctuations in liquidity based on seasonality of agricultural production loans and other factors. Short-term borrowings were used on a very limited basis during the most recent two fiscal years because of First Citizens’ strategic efforts to maintain a strong liquidity position, modest loan demand, and steady growth in core deposits.  In 2014, other borrowings increased $15.7 million due to assumption of trust preferred debt totaling $3.6 million and a new $12 million credit facility from a correspondent bank associated with the acquisition.  For more information about short-term and long-term borrowings, see Notes 13 and 14 in the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

The Company’s junior subordinated debentures commonly referred to as trust preferred debt totaled $13.9 million as of December 31, 2014 compared to $10.3 million as of December 31, 2013.  These debentures have 30-year terms and variable rates with rates in the range of 1.99% to 2.29% as of December 31, 2014. 

The Company’s $12 million credit facility with a correspondent bank was obtained as of October 1, 2014 as funding for cash consideration in the acquisition of Southern Heritage Bancshares, Inc.  The credit facility consists of $6 million at a fixed rate of 3.76% for five years and $6 million at variable rate based on 90-day LIBOR plus 2% that reprices quarterly.  Principal and interest payments are due quarterly based on a ten-year amortization. 

FCNB’s other borrowings consist of advances from the FHLB. The average volume of FHLB advances for 2014 was $41.8 million at an average rate of 1.82% compared to $46.1 million at an average rate of 1.93% in 2013.  The average remaining maturity for FHLB long-term borrowings was approximately three years at December 31, 2014. As of December 31, 2014, FHLB borrowings were comprised primarily of fixed rate positions ranging from 0.31% to 7.05% and maturities from 2015 to 2023.  Approximately 15% of total other borrowings or $6.4 million will mature on or before December 31, 2015.  As of December 31, 2014, advances totaling $16 million require repayment if call features are exercised. Under the existing and forecasted rate environments, borrowings with call features in place are not likely to be called in the next 12 months and, therefore, were not included in current liabilities. For more information about liquidity, see the section below entitled “– Liquidity.”  

Aggregate Contractual Obligations

At December 31, 2014, contractual obligations were due as follows (in thousands):

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*              Other borrowings presented as principal only, excluding interest.

For more information about long-term obligations, see Notes 14 and 19 in the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Off-Balance Sheet Arrangements

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

For more information about off-balance sheet risk, see Note 19 in the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Results of Operations

The Company reported consolidated net income of $13.5 million for the year ended December 31, 2014, compared to $13.8 million for the year ended December 31, 2013 and $13.5 million in 2012.  Results of operations include three months of net income from Southern Heritage Bank (which continues to operate as a separate entity but is reported on a consolidated basis from the acquisition date forward).   The 1.9% decrease in net income from 2013 to 2014 was attributed to a 12.0% increase in non-interest expense which was mostly offset by favorable variances in net interest income, provision for loan losses, and total non-interest income.  Earnings per share were $3.72 for 2014 compared to $3.83 for 2013 and $3.75 for 2012.  Return on average assets was 1.08%, 1.19% and 1.25% for the years ended December 31, 2014, 2013 and 2012, respectively.  Return on average equity was 10.7%, 12.1% and 12.2% for 2014, 2013 and 2012, respectively. 

Net yield on average earning assets was 3.83% for both 2014 and 2013 and 4.01% for 2012.  Stability in net interest margin during 2014 and 2013 was attributable to the Company’s ability to maintain stable to slightly declining cost of interest bearing liabilities while yields on loans and tax exempt-securities continued to decline.  The Banks are liability sensitive as of December 31, 2014 and are expected to face margin compression in a rising rate environment.  For more information about the Company’s interest rate sensitivity, see Item 7A of this Annual Report on Form 10-K.

Total non-interest income for the year ended December 31, 2014 increased approximately $390,000 compared to the year ended December 31, 2013.  The net increase was primarily attributable to reduced losses recognized on OREO totaling approximately $336,000 in 2014 compared to approximately $593,000 in 2013.  Other contributors to increased earnings were increased income from ATM and debit card transactions of approximately $295,000 and increase in brokerage fees of approximately $135,000. 

There were no other-than-temporary credit impairment losses on available-for-sale securities for the years ended December 31, 2014, 2013 or 2012.  Also, no impairment of goodwill was recognized in any of the periods presented in this report. 

The Company’s effective tax rates were in the range of 20% to 23% over the past three years.  Effective tax rates were impacted by fluctuations in certain factors including, but not limited to, the volume of and related earnings on tax-free investments within the Banks’ investment portfolios, tax-exempt earnings and expenses on bank-owned life insurance (“BOLI”), certain tax benefits that result from dividends and payouts under the Banks’ Employee Stock Ownership Plan (“ESOP”), 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 were the largest contributors to the various effective rates for the past three years. 

Interest earning assets in 2014 averaged $1.14 billion at an average rate of 4.37% compared to $1.05 billion at an average rate of 4.42% in 2013 and $973 million at an average rate of 4.77% in 2012.  Interest bearing liabilities at December 31, 2014 averaged $981 million at an average cost of 0.64% compared to $912 million at an average cost of 0.68% at December 31, 2013 and $836 million at an average cost of 0.88% at December 31, 2012.  The declining asset yields and cost of funds are attributed to the continued historical low rate environment.

The following table presents the annual average balance sheet and net interest income analysis for the years ended December 31, 2014, 2013 and 2012 (dollars in thousands):

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Volume/Rate Analysis

The following table provides an analysis of the impact of changes in balances and rates on interest income and interest expense changes from 2014 to 2013 and 2013 to 2012 (in thousands):

Non-Interest Income

The following table compares non-interest income for the years ended December 31, 2014, 2013 and 2012 (dollars in thousands):

In 2014, total non-interest income contributed 23.5% of total revenue in 2014 compared to 24.1% and 22.0% for 2013 and 2012, respectively.  Total non-interest income increased 2.7% in 2014 compared to 2013. Income from ATM and debit cards increased 11.83% or approximately $295,000 in 2014 compared to 2013, largely due to increased transaction volume.  Brokerage fees increased 9.85% or approximately $135,000 in 2014 compared to 2013 also driven by increased volume.  Mortgage banking income and service charges on deposit accounts each declined less than 3% in 2014.  Mortgage banking income declined as the volume of mortgages originated and sold on the secondary market was negatively impacted by the increased regulatory and compliance burdens.  Service charges on deposits decreased in 2014 primarily due to declining trend in overdraft fee income.

Loss on sale of foreclosed property includes write downs of OREO subsequent to foreclosure and has had a favorable trend over the past three years due to declining volumes of OREO and stabilization of real estate values.  For more information regarding OREO, see the section below entitled “– Financial Condition – Other Real Estate Owned” and Note 10  in the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. 

Gain on sale of available-for-sale securities totaled approximately $1.3 million per year in 2014 and 2013 as a result of specific strategies designed to realize appreciation in the investment portfolio.  See additional information regarding sale of securities in Note 4 of the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. 

Other non-interest income decreased approximately $185,000 due to the aggregate effect of several small balance non-interest income streams that declined in 2014 such as service charges on letters of credit, check revenue, and other fees.

Income from Insurance Activities in the Consolidated Statements of Income totaled $867,000 and $858,000 in 2014 and 2013, respectively and includes income from White and Associates/First Citizens Insurance, LLC, a full-service insurance agency (“WAFCI”), accounted for under the equity method.  Non-interest income generated by WAFCI for 2014, 2013 and 2012 totaled approximately $874,000, $859,000 and $730,000, respectively.   Income from insurance activities also includes commissions from sale of credit life policies and the Company’s proportionate share of income from FCNB’s other 50% owned insurance agency, First Citizens/White and Associates Insurance Company which was dissolved in late 2014.

Non-Interest Expense

The following table compares non-interest expense for the years ended December 31, 2014, 2013 and 2012 (dollars in thousands):

Total non-interest expense increased 12.0% in 2014 compared to 2013.  Total non-interest expense includes three months of non-interest expense of Southern Heritage Bank as well as approximately $1 million of costs associated with the acquisition such as but not limited to legal, accounting, and investment banker fees.  The most significant component of non-interest expense was salaries and employee benefits expense, which comprised 56.1% of total non-interest expense in 2014 compared to 56.8% in 2013 and 56.2% in 2012.  Salary and employee benefits expense increased 10.9% or $2.1 million in 2014 compared to 2013.  Significant expense associated with salaries and benefits is consistent with First Citizens’ strategic plan to hire and retain high quality employees to provide outstanding customer service and strive for exceptional shareholder returns.  Increased expense in 2014 is attributable to a combination of increased total number of employees (including three months of expense associated with approximately 65 employees from the acquisition of Southern Heritage Bank), pay increases to existing employees, increased cost of employee benefits, including health insurance, and contributions to retirement plans and incentive plans.  Over the past two years, First Citizens also incurred additional salaries and benefits expense for investments in new hires necessary to achieve expansion and growth goals, absorb regulatory burdens and plan for succession.  Personnel expense to average assets was 1.67% compared to peer at 1.69% per the BHCP Report for the year ended December 31, 2014.