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To Our Shareholders:

 

2014 has been another record year thanks to the dedication of our 300 teammates working together toward a common mission. First Citizens Bancshares, Inc. is pleased to report quality growth continues with strong earnings and stable financial position for the six months ended June 30, 2014. The Company produced value for our shareholders as reflected in return on equity of 12.34% and dividend yield of 3.05% for the first six months of 2014. Growth is expected to continue through the remainder of 2014 as we anticipate opening of the full service Jackson, Tennessee Financial Center in early October 2014. Consummation of the recently announced acquisition of Southern Heritage Bancshares, Inc. and its subsidiary, Southern Heritage Bank is also expected to occur by October 2014.  We expect to create positive long-term shareholder return with this merger by combining the strengths of two successful banks.
 
As a part of the overall acquisition strategy, the new Class A Common Stock became effective July 17, 2014. The Charter Amendment necessary to create a new class of stock was voted for by shareholders at a special meeting held July 16, 2014 with a record vote in favor of the amendment. Proxy votes for 76% of our outstanding shares were received at the time of the meeting with 75% of outstanding shares voting in favor of the proposal recommended by the Board of Directors. Record holders with less than 300 shares of First Citizens Bancshares, Inc. common stock as of July 17, 2014 are being reclassified into the equivalent number of shares in the new Class A Common Stock. Additional communications are being sent to each record holder affected by the reclassification on or about the same time of distribution of this quarterly report with instructions on how to complete this process.
 
Operating Results
 
Net income totaled $7.3 million or $2.01 per share for the six months ended June 30, 2014 compared to $6.8 million or $1.88 earnings per share for the same period in 2013. Increased earnings in 2014 were attributable to increased net interest income, decreased provision for loan losses and increased non-interest income. Net interest income to average assets was 3.27% for first two quarters of 2014 compared to 3.24% in first two quarters 2013. Net interest income totaled $19.4 million for the six months ended June 30, 2014 compared to $18.9 million for the same period in 2013. Non-interest income increased 9.5% due to reduced losses on other real estate and increased net gains on the sale of available-for-sale investment securities compared to last year. Non-interest expenses also increased 4.0% primarily due to increased salary and benefit expense, occupancy expense and expense related to the pending acquisition. 
 
The Company recorded $375,000 in provision for loan losses in first two quarters of 2014 compared to $525,000 during first two quarters of 2013.  Reduced provision for loan losses in 2014 compared to 2013 is a result of overall positive trend in asset quality. Net loans charged-off in first two quarters 2014 totaled approximately $445,000 compared to approximately $635,000 in first two quarters of 2013. 
 
Financial Position
 
Commitment to quality growth balanced by both strong liquidity and capital positions is perpetual and steadfast. Total assets increased 3.5% to $1.20 billion as of June 30, 2014 compared to $1.16 billion as of June 30, 2013. Growth in available-for-sale investments and loans totaled 2.6% and 4.5%, respectively from June 2013 to June 2014. Deposits grew 2.7% to $967 million as June 30, 2014 compared to $942 million as of June 30, 2013. Other borrowings, consisting primarily of advances from the Federal Home Loan Bank (“FHLB”), increased to $104 million as of June 2014 compared to $101 million in June 2013. Capital increased 10.7% to $122 million as of June 30, 2014 compared to $110 million in June 2013.  Capital growth is attributable to undistributed net income of $9.6 million from June 2013 to June 2014 and increased accumulated other comprehensive income of $2.2 million from improved unrealized gains on the investment portfolio. Unrealized gains on investments fluctuate relative to the overall market yield curve particularly with 10-year Treasury yields. 
 
First Citizens National Bank was recognized again this year as the fourth top giving company to United Way of West Tennessee as part of ongoing efforts to contribute time and resources that make a positive difference in communities we serve. We thank our shareholders for your continued support and trust in First Citizens.
 
Jeff Agee, President & CEO                                                                                 Katie Winchester, Chairman