UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 20052007

 

Commission File Number 0-16471

 


 

FIRST CITIZENS BANCSHARES, INC.

(Exact name of Registrant as specified in the charter)

 

Delaware 56-1528994      
(State or other jurisdiction (I.R.S. Employer      
of incorporation or organization)         Identification Number)

 

3128 Smoketree Court4300 Six Forks Road

Raleigh, North Carolina 2760427609

(Address of Principal Executive Offices, Zip Code)

 

(919) 716-7000

(Registrant’s Telephone Number, including Area Code)

 


 

  Securities registered pursuant to:  
      Section 12(b) of the Act:8.40% Preferred Securities of FCB/NC Capital Trust II
    Section 12(g) of the Act:  Class A Common Stock, Par Value $1
      Section 12(g) of the Act:  Class B Common Stock, Par Value $1
    

(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 x    No¨

 

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¨    Nox

 

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 twelve 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 ninety days. Yesx     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.¨

 

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

 

Large accelerated filerx Accelerated filer¨ Non-accelerated filer¨Smaller reporting company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨     Nox

 

The aggregate market value of the Registrant’s common equity held by nonaffiliates computed by reference to the price at which the common equity was last sold as of the last business day of the Registrant’s most recently completed second fiscal quarter was $864,788,307.$985,718,225.

 

On March 10, 2006,February 28, 2008, there were 8,756,778 outstanding shares of the Registrant’s Class A Common Stock and 1,677,675 outstanding shares of the Registrant’s Class B Common Stock.

 

Portions of the Registrant’s definitive Proxy Statement dated March 17, 2006for the 2008 Annual Meeting of Shareholders are incorporated in Part III of this report.

 



CROSS REFERENCE INDEX

 

        Page

PART 1  Item 1 Business  3
  Item 1A Risk Factors  6
  Item 1B Unresolved Staff Comments  None
  Item 2 Properties  6
  Item 3 Legal Proceedings  3534-35
  Item 4 Submission of Matters to a Vote of Security Holders  None
PART II  Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities  6
  Item 6 Selected Financial Data  10
  Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations  8-378-36
  Item 7A Quantitative and Qualitative Disclosures about Market Risk  2328-29
  Item 8 Financial Statements and Supplementary Data  
   Report of Independent Registered Public Accounting Firm  3837
   Management’s Annual Report on Internal Control over Financial Reporting  3938
   Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting  4039
   Consolidated Balance Sheets at December 31, 20052007 and 20042006  4140
   Consolidated Statements of Income for each of the years in the
three-year period ended December 31, 20052007
  4241
   Consolidated Statements of Changes in Shareholders’ Equity for
each of the years in the three-year period ended December 31, 20052007
  4342
   Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 20052007
  4443
   Notes to Consolidated Financial Statements  45-6844-66
   Quarterly Financial Summary for 20052007 and 20042006  3332
  Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
  None
  Item 9A Controls and Procedures  7
  Item 9B Other Information  None
PART III  Item 10 Directors and Executive Officers of the Registrantand Corporate Governance  *
  Item 11 Executive Compensation  *
  Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters  *
  Item 13 Certain Relationships and Related Transactions and Director Independence  *
  Item 14 Principal AccountantAccounting Fees and Services  *
PART IV  Item 15 Exhibits, and Financial Statement Schedules  
        (1) Financial Statements (see Item 8 for reference)  
        (2) Reissued report of predecessor independent auditor is filed as an exhibit to this report. All other Financial Statement Schedules normally required on Form 10-K are omitted since they are not applicable, except as referred to in Item 8.  
        (3) The Exhibits listed on the Exhibit Index contained in this Form 10-K are filed with or furnished to the Commission or incorporated by reference into this report and are available upon written request.  

* Information required by Item 10 is incorporated herein by reference to the information that appears under the headings or captions ‘Proposal 1: Election of Directors,’ ‘Code of Ethics,’ ‘Committees of our Board—General,’ and ‘—Audit and Compliance Committee’, ‘Executive Officers’ and ‘Section 16(a) Beneficial Ownership Reporting Compliance’ on page 5, ‘Proposal 1: Election of Directors’ on pages 6-7, ‘Audit and Compliance Committee—Function’ and ‘Audit and Compliance Committee—Members’ on page 8 and ‘Executive Officers’ on page 12 offrom the Registrant’s Proxy Statement for the 20062008 Annual Meeting of Shareholders (2006(2008 Proxy Statement) and under the headings “Procedures for Shareholder Recommendations to Nominating Committee” and “Code of Ethics” on page 7 of this Form 10-K..

 

   Information required by Item 11 is incorporated herein by reference to the information that appears under the headingheadings or captions ‘Compensation Discussion and Analysis,’ ‘Compensation Committee Report,’ ‘Executive Compensation,’ and ‘Director Compensation’ on page 7 and under the heading ‘Executive Compensation’ on pages 13-15Compensation,’ of the 20062008 Proxy Statement.

 

   Information required by Item 12 is incorporated herein by reference to the information that appears under the heading ‘Beneficial Ownership of Voting Securities’ on pages 3-5Our Common Stock’ of the 20062008 Proxy Statement.

 

   Information required by Item 13 is incorporated herein by reference to the information that appears under the headingheadings or captions ‘Corporate Governance—Director Independence’ and ‘Transactions with Related Parties’ on pages 16-17Persons’ of the 20062008 Proxy Statement.

 

   Information required by Item 14 is incorporated by reference to the information that appears under the headingcaption ‘Services and Fees During 20042007 and 2005’ on page 182006’ of the 20062008 Proxy Statement.

Business


First Citizens BancShares, Inc. (BancShares) was incorporated under the laws of Delaware on August 7, 1986, to become the holding company of First-Citizens Bank & Trust Company (First Citizens Bank or FCB), its banking subsidiary. FCB opened in 1898 as the Bank of Smithfield, Smithfield, North Carolina, and through a series of mergers and name changes, it later became First-Citizens Bank & Trust Company. As of December 31, 2005,2007, FCB operated 339340 offices in North Carolina, Virginia, West Virginia, Maryland and Tennessee.

 

On April 28, 1997, BancShares launched Atlantic States Bank (ASB), a federally chartered thrift institution. During 2004, ASB changed its name to IronStone Bank (ISB). ISB branches were initially concentrated within the metropolitan Atlanta, Georgia market. In 1999, ISB expanded its presence into Florida, focusing initially on selected markets in southwest Florida. The targeted market areas within Florida have grown to now include Jacksonville, West Palm Beach and Fort Lauderdale.

During 2002, ISB continued its expansion into high-growth markets by opening offices in Austin, Texas.

During 2003, ISB opened offices in Scottsdale, Arizona, the San Diego, Newport Beach and LaJolla communities in Southern California and Sacramento in Northern California. ISB continued its expansion in 2004 and 2005 by opening branch facilities in Denver, Colorado,Colorado; Albuquerque, New Mexico,Mexico; Santa Fe, New Mexico,Mexico; Portland, OregonOregon; and Seattle, Washington. These markets have beenwere selected based on their strong anticipated economic growth rates and the desire to bring a bank with a focus on customer service in these communities. At December 31, 2005,2007, ISB had 5356 offices. During 2006, ISB received approval to expand into Houston, Texas. During 2007, ISB received regulatory approval to open branch offices in Dallas, Texas; Oklahoma City, Oklahoma; Kansas City, Missouri; and Kansas City, Kansas.

 

BancShares’ executive offices are located at 3128 Smoketree Court,4300 Six Forks Road, Raleigh, North Carolina 27604,27609, and its telephone number is (919) 716-7000. Although BancShares does not maintain a dedicated website, information regarding BancShares is available at FCB’s website, www.firstcitizens.com. At December 31, 2005,2007, BancShares and its subsidiaries employed a full-time staff of 3,9254,014 and a part-time staff of 869767 for a total of 4,7944,781 employees.

 

BancShares’ subsidiary banks seek to meet the needs of both consumers and commercial entities in their respective market areas. These services, offered at most offices, include normal taking of deposits, cashing of checks, and providing for individual and commercial cash needs; numerous checking and savings plans; commercial, business and consumer lending; a full-service trust department; and other activities incidental to commercial banking. Triangle Life Insurance Company underwrites and sells credit-related life insurance products. First Citizens Investor Services, Inc. (FCIS) and IronStone Securities (ISS) provide various investment products, including annuities, discount brokerage services and third-party mutual funds to customers. First Citizens Bank, National Association (FCB-NA) is the issuing and processing bank for retail credit cards and provides processing services for merchants. Pending regulatory approval, FCB-NA will be merged into FCB during 2006. Various other subsidiaries are not material to BancShares’ consolidated financial position or to consolidated net income.

On January 1, 2007, American Guaranty Insurance Company, a wholly-owned subsidiary of BancShares that provides property and casualty insurance, and Triangle Life Insurance Company, a wholly-owned subsidiary of FCB that provides credit-related life insurance, were sold to a third party.

 

The business and operations of BancShares and its subsidiary banks are subject to significant federal and state governmental regulation and supervision. BancShares is a financial holding company registered with the Federal Reserve Board (FRB) under the Bank Holding Company Act of 1956, as amended. It is subject to supervision and examination by, and the regulations and reporting requirements of, the FRB.

 

FCB is a state-chartered bank, subject to supervision and examination by, and the regulations and reporting requirements of, the Federal Deposit Insurance Corporation (FDIC) and the North Carolina Commissioner of Banks. ISB is a federally-chartered thrift institution supervised by the Office of Thrift Supervision. FCB-NA operates under a national charter, is regulated by the Office of the Comptroller of the Currency and is also a member of the Federal Reserve System. Deposit obligations of FCB and ISB are insured by the FDIC.

 

The various regulatory authorities supervise all areas of the banking subsidiaries, including their reserves, loans, mergers, the payment of dividends, various compliance matters and other aspects of their operations. The regulators conduct regular examinations, and the banking subsidiaries must furnish periodic reports to their regulators containing detailed financial and other information regarding their affairs.

 

There are many statutes and regulations that apply to and restrict the activities of the banking subsidiaries, including limitations on the ability to pay dividends, capital requirements, reserve requirements, deposit insurance requirements

and restrictions on transactions with related parties. The impact of these statutes and regulations is discussed below and in the accompanying audited consolidated financial statements.

 

The Gramm-Leach-Bliley Act (GLB Act) adopted by Congress during 1999 expanded opportunities for banks and bank holding companies to provide services and engage in other revenue-generating activities that previously were prohibited to them. The GLB Act permits bank holding companies to become “financial holding companies” and expands

activities in which banks and bank holding companies may participate, including opportunities to affiliate with securities firms and insurance companies. During 2000, BancShares became a financial holding company and American Guaranty Insurance Company (AGI), formerly a wholly-owned subsidiary of FCB, became a wholly-owned subsidiary of BancShares. As a direct subsidiary of BancShares, AGI has more flexibility in its product offering than it did as a subsidiary of FCB.company. The GLB Act also contains extensive customer privacy protection provisions which require banks to adopt and implement policies and procedures for the protection of the financial privacy of their customers, including procedures that allow customers to elect that certain financial information not be disclosed to certain persons.

 

Under Delaware law, BancShares is authorized to pay dividends declared by its Board of Directors, provided that no distribution results in its insolvency on a going concern or balance sheet basis. The ability of the banking subsidiaries to pay dividends to BancShares is governed by statutes of each entity’s chartering jurisdiction and rules and regulations issued by each entity’s respective regulatory authority. Under federal law, and as insured banks, each of the banking subsidiaries is prohibited from making any capital distributions, including paying a cash dividend, if it is, or after making the distribution it would become, “undercapitalized” as that term is defined in the Federal Deposit Insurance Act (FDIA).

 

BancShares is required to comply with the capital adequacy standards established by the FRB, and the banking subsidiaries are required to comply with the capital adequacy standards established by the FDIC. The FRB and FDIC have promulgated risk-based capital and leverage capital guidelines for determining the adequacy of the capital of a bank holding company or a bank, and all applicable capital standards must be satisfied for a bank holding company or a bank to be considered in compliance with these capital requirements.

 

Current federal law establishes a system of prompt corrective action to resolve the problems of undercapitalized banks. Under this system, the FDIC has established five capital categories (“well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized”), and it is required to take certain mandatory supervisory actions, and is authorized to take other discretionary actions, with respect to banks in the three undercapitalized categories.

 

Under the FDIC’s rules implementing the prompt corrective action provisions, an insured, state-chartered bank that has a Total Capital Ratio of 10.0% or greater, a Tier 1 Capital Ratio of 6.0% or greater, a Leverage Ratio of 5.0% or greater, and is not subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the FDIC, is considered to be “well-capitalized.” Each of BancShares’ banking subsidiaries is well-capitalized.

 

Under regulations of the FRB, all FDIC-insured banks must maintain average daily reserves against their transaction accounts. Because required reserves must be maintained in the form of vault cash or in a non-interest-bearing account at a Federal Reserve Bank, the effect of the reserve requirement is to reduce the amount of the Banks’ interest-earning assets.

 

TheUnder the Federal Deposit Insurance Reform Act of 2005 (FDIRA), the FDIC currently uses a risk-based assessment system to determine the amount of a bank’s deposit insurance assessment based on an evaluation of the probability that takes into account the deposit insurance fund (DIF) will incur a loss with respect to that bank. The evaluation considers risks attributable to different categories and concentrations of the bank’s assets and liabilities for purposes of calculating deposit insurance assessmentsand other factors the FDIC considers to be paid by insured banks. The risk-based assessment system uses three capital categoriesrelevant, including information obtained from the bank’s federal and three supervisory subgroups within each capital group to establish nine assessment risk classifications, each of which has a specified deposit insurance rate.state banking regulators.

 

The FDIC is charged with the responsibility ofresponsible for maintaining the adequacy of the Bank Insurance FundDIF, and the Savings Association Insurance Fund, and the amountsamount paid by banksa bank for deposit insurance is influenced not only by the bank’s capital category and supervisory subgroupassessment of the risk it poses to the DIF, but also by the adequacy of the insurance funds at any time.fund to cover the risk posed by all insured institutions. FDIC insurance assessments could be increased substantially in the future if the FDIC finds such an increase to be necessary in order to adequately maintain the DIF. Additionally, under the FDIA, the FDIC may terminate a bank’s deposit insurance funds.if it finds that the bank has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated applicable laws, regulations, rules, or orders.

 

Each of the banking subsidiaries is subject to the provisions of Section 23A of the Federal Reserve Act. Section 23A places limits on the amount of certain transactions with affiliate entities. The total amount of the transactions by any of the banking subsidiaries with a single affiliate is limited to 10% of the banking subsidiary’s capital and surplus and, for all affiliates, to 20% of the banking subsidiary’s capital and surplus. Each of the transactions among affiliates must also meet

specified collateral requirements and must comply with other provisions of Section 23A designed to avoid transfers of low-quality assets between affiliates.

 

The banking subsidiaries are also subject to the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibits the above transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the banking subsidiary or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.

The USA Patriot Act of 2001 (Patriot Act) is intended to strengthen the ability of U.S. law enforcement and the intelligence community to work cohesively to combat terrorism on a variety of fronts. The Patriot Act contains sweeping anti-money laundering and financial transparency laws which require various new regulations, including standards for verifying customer identification at account opening, and rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering. The Patriot Act has required financial institutions to adopt new policies and procedures to combat money laundering, and it grants the Secretary of the Treasury broad authority to establish regulations and impose requirements and restrictions on financial institutions’ operations.

 

Under the Community Reinvestment Act, as implemented by regulations of the federal bank regulatory agencies, an insured bank has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods.

 

The Sarbanes-Oxley Act of 2002 (SOX Act) mandated important new corporate governance, financial reporting and disclosure requirements intended to enhance the accuracy and transparency of public companies’ reported financial results. It established new responsibilities for corporate chief executive officers, chief financial officers and audit committees in the financial reporting process, and it created a new regulatory body to oversee auditors of public companies. The SOX Act also mandated new enforcement tools, increased criminal penalties for federal mail, wire and securities fraud, and created new criminal penalties for document and record destruction in connection with federal investigations. Additionally, the SOX Act increased the opportunity for private litigation by lengthening the statute of limitations for securities fraud claims and providing new federal corporate whistleblower protection.

 

The SOX Act requires various securities exchanges, including The Nasdaq Stock Market, to prohibit the listing of the stock of an issuer unless that issuer maintains an independent audit committee. In addition, the securities exchanges have imposed various corporate governance requirements, including the requirement that various corporate matters (including executive compensation and board nominations) be approved, or recommended for approval by the issuer’s full board of directors, by directors of the issuer who are “independent” as defined by the exchanges’ rules or by committees made up of “independent” directors. Since BancShares’ Class A common stock is a listed stock, BancShares is subject to those provisions of the Act and to corporate governance requirements of The Nasdaq Stock Market.

 

The economic and operational effects of this new legislation on public companies, including BancShares, have been and will continue to be significant in terms of the time, resources and costs associated with complying with the new law.

 

FCIS and ISS are registered broker-dealers and investment advisers. Broker-dealer activities are subject to regulation by the National Association of Securities Dealers (NASD)Financial Industry Regulatory Authority (FINRA), a self-regulatory organization to which the Securities and Exchange Commission (SEC) has delegated regulatory authority for broker-dealers, as well as by the state securities authorities of the various states in which FCIS and ISS operate. Investment advisory activities are subject to direct regulation by the SEC, and investment advisory representatives must register with the state securities authorities of the various states in which they operate.

 

FCIS and ISS are also licensed as insurance agencies in connection with various investment products, such as annuities, that are regulated as insurance products. FCIS’ and ISS’ insurance sales activities are subject to concurrent regulation by securities regulators and by the insurance regulators of the various states in which FCIS and ISS do business.

 

AGI and Triangle Life Insurance Company are regulated by the North Carolina Department of Insurance.

Statistical information regarding our business activities is found in Management’s Discussion and Analysis.

Risk Factors


An

Certain risk factors that we believe apply to our business and to an investment in BancShares’our common stock will involve some level of risk. are described below. In addition to those risk factors and investment risks that apply to any financial institution, our business, financial condition and operating results could be harmed by other risks, including risks we have not yet identified or that we may currently believe are immaterial or unlikely.

As a publicly-traded security, the value of our stock moves up and down based on trends or market expectations that may affect a broad range of equity investments, specific industries, or individual securities. These movements may result from external disclosures about various topics, such as economic growth, interest rates, employment or inflation.

 

Movements in our stock price may also result from our own activities, by our earnings or by changes in strategies or management. In conjunction with our investment in ISB, over the past nine years, we have entered new markets that are not adjacent to our existing footprint. Losses generated by ISB as it continues its de novo growth have adversely impacted net income. In addition to the impact on net income, the geographic dispersion of these markets represents additional shareholder risk.

 

In addition to the capital requirements mandated by regulatory authorities, our ability to grow is limited by the amount of capital we generate. In recent years, we have focused on earnings retention and have used non-equity capital sources to support our growth. We have not traditionally issued capital stock to support balance sheet growth. Capital adequacy is therefore a significant risk factor.

 

To the extent that we are dependent on our banking subsidiaries’ lending and deposit gathering functions to generate income, shareholders are also exposed to credit risk, interest rate risk and liquidity risk.

 

Properties


Through its

As of December 31, 2007, BancShares’ subsidiary financial institutions as of December 31, 2005, BancShares operated branch offices at 392396 locations in North Carolina, Virginia, West Virginia, Maryland, Tennessee, Florida, Georgia, Texas, Arizona, California, New Mexico, Colorado, Oregon and Washington. BancShares owns many of the buildings and leases other facilities from third parties. In early 2007, ISB announced plans to expand into four new markets: Dallas, Texas; Oklahoma City, Oklahoma; Kansas City, Missouri; and Kansas City, Kansas.

 

During 2005, BancShares acquired a nine-story building in Raleigh, which will serve as our corporate headquarters beginning in mid-2006. The 163,000 square foot building was purchased for $29.3 million. Additional information relating to premises, equipment and lease commitments is set forth in Note E of BancShares’ consolidated financial statements.

 

Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities


BancShares’ Class A and Class B common stock is traded in the over-the-counter market, and the Class A common stock is quotedlisted on the Nasdaq NationalNASDAQ Global Select Market System under the symbol FCNCA. The Class B common stock is quoted on the OTC Bulletin Board under the symbol FCNCB. As of December 31, 2005,2007, there were 2,3482,122 holders of record of the Class A common stock, and 436391 holders of record of the Class B common stock.

 

The per share cash dividends declared by BancShares and the high and low sales prices for each quarterly period during 20052007 and 20042006 are set forth in Table 1817 under the caption ‘Per Share of Stock’ of this report. A cash dividend of 27.5 cents per share was declared by the Board of Directors on January 23, 2006,28, 2008, payable April 3, 2006,7, 2008, to holders of record as of March 20, 2006.17, 2008. Payment of dividends is made at the discretion of the Board of Directors and is contingent upon satisfactory earnings as well as projected future capital needs. BancShares’ principal source of liquidity for payment of shareholder dividends is the dividend it receives from FCB. FCB is subject to various requirements under federal and state banking laws that restrict the payment of dividends and its ability to lend to BancShares. Subject to the foregoing, it is currently management’s expectation that comparable cash dividends will continue to be paid in the future.

 

During the fourth quarter of 2005,2007, BancShares did not issue, sell or repurchase any Class A or Class B common stock.

The following graph compares the cumulative total shareholder return (CTSR) of our Class A common stock during the previous five years with the CTSR over the same measurement period of the Nasdaq-U.S. index and the Nasdaq Banks index. Each trend line assumes that $100 was invested on December 31, 2002, and that dividends were reinvested for additional shares.

Controls and Procedures


BancShares’ management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of BancShares’ disclosure controls and procedures in accordance with Rule 13a-15 of the Securities Exchange Act of 1934 (Exchange Act). Based on their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, BancShares’ disclosure controls and procedures were effective in enablingto provide reasonable assurance that it is able to record, process, summarize and report in a timely manner the information required to be disclosed in reports it files under the Exchange Act.

 

Management’s Annual Report on Internal Control Over Financial Reporting is included on page 3738 of this Report. The attestation report of BancShares’ independent accountants regarding management’s assessment of BancShares’ internal control over financial reporting is included on page 4039 of this Report.

 

NoAs previously reported, during the third quarter of 2007, we identified a significant deficiency in the design and operation of our internal controls over financial reporting in our Working Capital Finance lending function. As a result of changes and enhancements in internal controls within the Working Capital Finance lending function, no significant deficiency existed as of December 31, 2007. Except for the changes made within the Working Capital Finance lending group, no change in BancShares’ internal control over financial reporting was identified during the evaluation that occurred during ourthe fourth quarter of 20052007 that has materially affected, or is reasonably likelylike to materially affect, BancShares’ internal control over financial reporting.

Procedures for Shareholder Recommendations to Nominating Committee


BancShares’ Nominating Committee has adopted procedures to be followed by shareholders who wish to recommend candidates to the Committee for its consideration in connection with its recommendation of director nominees to the Board of Directors. A copy of those procedures is attached as an exhibit to this Report.

Code of Ethics


BancShares has adopted a code of ethics that applies to all its executive officers, including its principal executive and principal financial and accounting officers. A copy of the code of ethics will be provided without charge upon request. Requests for copies should be directed to Alex G. MacFadyen, Secretary, First Citizens BancShares, Inc., Post Office Box 27131, Raleigh, North Carolina 27611-7131 or by e-mail to fcbdirectors@firstcitizens.com.

Available Information


BancShares does not have its own separate Internet website. However, FCB’s Internet website (www.firstcitizens.com) includes a hyperlink to the SEC’s website where the public may obtain copies of BancShares’ annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Interested parties may also directly access the SEC’s Internet website that contains reports and other information that BancShares files electronically with the SEC. The address of the SEC’s website iswww.sec.gov.

Management’s Discussion and Analysis of Financial Condition and Results of Operations


 

Management’s

This discussion and analysis of earnings and related financial data are presented to assistshould be read in understandingconjunction with the audited consolidated financial conditionstatements and results of operationsrelated footnotes of First Citizens BancShares, Inc. (BancShares), presented on pages 37 through 66 of this report. Intercompany accounts and transactions have been eliminated. Although certain amounts for prior years have been reclassified to conform to statement presentations for 2007, the years 2005, 2004 and 2003. reclassifications have no effect on shareholders’ equity or net income as previously reported.

OVERVIEW

BancShares is a financial holding company withheadquartered in Raleigh, North Carolina that offers full-service banking through two wholly-owned banking subsidiaries:subsidiaries, First-Citizens Bank & Trust Company (FCB), a North Carolina-chartered bank, and IronStone Bank (ISB), a federally-chartered thrift institution. FCB operates branches in North Carolina, Virginia, Maryland, Tennessee and West Virginia, Maryland and Tennessee.Virginia. ISB operates branches in Florida, Georgia, Texas, New Mexico, Arizona, California, Colorado, Oregon and Washington. ISB also operates a loan production office in Missouri and plans to open similar offices in Kansas and Oklahoma in early 2008. Beyond the traditional branch network, we offer customer access through telephone and online banking and our extensive ATM network.

 

This discussionBancShares’ earnings and relatedcash flows are primarily derived from the commercial banking activities conducted by its banking subsidiaries. We offer commercial and consumer loans, deposit and cash management products, cardholder, merchant, wealth management services as well as various other products and services typically offered by commercial banks. FCB and ISB gather interest-bearing and noninterest-bearing deposits from retail and commercial customers. BancShares and its subsidiaries also secure funding through various non-deposit sources. We invest the liquidity generated from these funding sources in interest-earning assets such as loans and leases, investment securities and overnight investments. We also invest in the bank premises, furniture and equipment used to conduct the subsidiaries’ commercial banking business.

Various external factors influence customer demand for our loan and deposit products. In an effort to control the rate of economic growth and inflation, monetary actions by the Federal Reserve are significant to the business environment in which we operate. During 2007, the Federal Reserve decreased the discount rate and the federal funds rate by 100 basis points, compared to increases totaling 100 basis points during 2006, movements that triggered corresponding adjustments to the prime rate. During early 2008, in response to significant world-wide market turbulence and economic weakness, the Federal Reserve further reduced the discount rate and Federal funds rate by 125 basis points, again prompting reductions in the prime rate. Interest rate decisions by the Federal Reserve have a significant impact on the pricing of and demand for loan, deposit and cash management products.

The general strength of the economy also influences the quality and collectibility of our loan and lease portfolio. External economic indicators such as consumer bankruptcy rates and business debt service capacity closely follow trends in the economic cycle. Demand for our deposit and cash management products is also dependent on the current and anticipated volatility of alternative investment markets.

Although we are unable to control the external factors that influence our business, by managing our liquidity and interest rate exposures and by closely monitoring asset quality, we seek to minimize the potentially adverse risks of unforeseen and unfavorable economic trends and take advantage of favorable economic conditions when appropriate.

Financial institutions frequently focus their strategic and operating emphasis on maximizing profitability and therefore measure their relative success by reference to profitability measures such as return on average assets or return on average shareholders’ equity. BancShares’ return on average assets and return on average equity have historically compared unfavorably to the returns of similar-sized financial data shouldholding companies. Instead, we have placed primary emphasis upon asset quality, balance sheet liquidity and capital conservation, even when those priorities may be readdetrimental to short-term profitability.

Based on our competitive position and strategic focus within the financial services industry, we believe opportunities for significant long-term growth and expansion exist. We operate in conjunctiondiverse and growing geographic markets and believe that by offering competitive products and superior customer service, we can increase our business volumes and profitability. We continue to concentrate our marketing efforts on business owners, medical and other professionals and financially active individuals. We seek to increase fee income in areas such as wealth management, cardholder and merchant services, insurance and cash management. Leveraging on our investments in technology, we also focus on opportunities to generate income by providing various processing services to other banks.

We attempt to mitigate certain of the risks that can endanger our profitability and growth prospects. While we are attentive to all areas of risk, economic risk is especially problematic due to the potential for material financial impact and our lack of control over the various risks including recession, rapid movements in interest rates, changes in the yield curve and significant shifts in inflationary expectations.

PERFORMANCE SUMMARY

BancShares reported net income of $108.6 million during 2007, compared to $126.5 million in 2006. Net income for 2007 declined 14.1 percent when compared to 2006. Return on average assets was 0.68 percent for 2007 compared to 0.83 percent for 2006. Return on average shareholders’ equity was 7.92 percent and 10.19 percent for 2007 and 2006, respectively. Net income per share for 2007 totaled $10.41, compared to $12.12 for 2006.

Significant items contributing to the $17.9 million decrease in net income during 2007 included higher levels of noninterest expense and provision for credit losses, partially offset by higher noninterest income. Net interest income during 2007 increased only $3.8 million, or 0.8 percent versus 2006. Although average interest-earning assets grew by $654.9 million or 4.8 percent during 2007, the combined impact of a flat yield curve and highly competitive loan and deposit pricing caused the taxable-equivalent net yield on interest-earning assets to decline 13 basis points to 3.41 percent during 2007, when compared to 2006.

During 2007 average interest-earning assets grew by $654.9 million or 4.8 percent, with our auditedsuch growth funded through a $621.0 million or 5.5 percent increase in average interest-bearing liabilities. Loan growth was moderate at $523.8 million or 5.2 percent. Short-term borrowings increased $373.0 million due to strong growth in cash management. Average interest-bearing deposits increased $292.5 million due to growth in time deposits and money market accounts.

The provision for credit losses increased $12.7 million or 60.6 percent during 2007. Net charge-offs for 2007 totaled $28.0 million, compared to $18.0 million recorded during the same period of 2006. Net charge-offs as a percentage of average loans and leases equaled 0.27 percent and 0.18 percent respectively for 2007 and 2006. Nonperforming assets equaled 0.18 percent of total loans and leases and other real estate as of December 31, 2007, down from 0.20 percent as of December 31, 2006.

Noninterest income increased $24.1 million or 8.9 percent during 2007. Cardholder and merchant services income and income from wealth advisory services continued to display robust growth trends during 2007. Service charges on deposit accounts increased $5.3 million or 7.3 percent in 2007, reversing a two-year decline.

Noninterest expense increased $43.6 million or 8.2 percent during 2007. Much of the increase resulted from continued growth and expansion of the branch network.

Table 2 details business combinations during 2007, 2006 and 2005. During 2007 and 2006, BancShares sold three entities—two insurance companies and a transaction processing company. The 2005 branch acquisition was accounted for as a purchase, with the results of operations included with BancShares’ consolidated financial statements and related footnotes, presented on pages 38 through 68 of this report. Intercompany accounts andsince the respective acquisition date. No material purchase transactions have been eliminated. Although certain amounts for prior years have been reclassified to conform to statement presentations for 2005,occurred during the reclassifications have no effect on shareholders’ equity or net income as previously reported.three-year period presented.

Table 1

FINANCIAL SUMMARY AND SELECTED AVERAGE BALANCES AND RATIOS

   2007  2006  2005  2004  2003 
   (thousands, except share data and ratios) 

SUMMARY OF OPERATIONS

      

Interest income

  $904,056  $830,315  $669,540  $524,013  $512,857 

Interest expense

   423,714   353,737   218,151   133,826   148,537 
                     

Net interest income

   480,342   476,578   451,389   390,187   364,320 

Provision for credit losses

   33,594   20,922   33,514   34,690   24,617 
                     

Net interest income after provision for credit losses

   446,748   455,656   417,875   355,497   339,703 

Noninterest income

   295,470   271,367   257,666   245,884   237,725 

Noninterest expense

   574,664   531,077   496,871   477,186   460,827 
                     

Income before income taxes

   167,554   195,946   178,670   124,195   116,601 

Income taxes

   58,937   69,455   65,808   49,352   41,414 
                     

Net income

  $108,617  $126,491  $112,862  $74,843  $75,187 
                     

Net interest income, taxable equivalent

  $488,019  $482,927  $455,687  $392,242  $366,381 
                     

SELECTED AVERAGE BALANCES

      

Total assets

  $15,919,222  $15,240,327  $13,905,260  $12,856,102  $12,245,840 

Investment securities

   3,144,052   3,028,384   2,533,161   2,157,367   2,585,376 

Loans and leases

   10,513,599   9,989,757   9,375,249   8,901,628   7,893,621 

Interest-earning assets

   14,292,322   13,637,388   12,503,877   11,493,005   10,939,526 

Deposits

   12,659,236   12,452,955   11,714,569   10,961,380   10,433,781 

Interest-bearing liabilities

   11,883,421   11,262,423   10,113,999   9,327,436   9,163,960 

Long-term obligations

   405,758   450,272   353,885   287,333   255,379 

Shareholders’ equity

  $1,370,617  $1,241,254  $1,131,066  $1,053,860  $996,578 

Shares outstanding

   10,434,453   10,434,453   10,434,453   10,435,247   10,452,523 
                     

SELECTED PERIOD-END BALANCES

      

Total assets

  $16,212,107  $15,729,697  $14,639,392  $13,265,711  $12,566,961 

Investment securities

   3,236,835   3,221,048   2,929,516   2,125,524   2,469,447 

Loans and leases

   10,963,904   10,273,043   9,656,230   9,364,822   8,333,073 

Interest-earning assets

   14,466,948   13,842,688   13,066,758   11,874,089   11,096,925 

Deposits

   12,928,544   12,743,324   12,173,858   11,350,798   10,711,332 

Interest-bearing liabilities

   12,118,967   11,612,372   10,745,696   9,641,368   9,251,903 

Long-term obligations

   404,392   401,198   408,987   285,943   289,277 

Shareholders’ equity

  $1,441,208  $1,310,819  $1,181,059  $1,086,310  $1,029,305 

Shares outstanding

   10,434,453   10,434,453   10,434,453   10,434,453   10,436,345 
                     

PROFITABILITY RATIOS (averages)

      

Rate of return on:

      

Total assets

   0.68%  0.83%  0.81%  0.58%  0.61%

Shareholders’ equity

   7.92   10.19   9.98   7.10   7.54 

Dividend payout ratio

   10.57   9.08   10.17   15.34   15.30 
                     

LIQUIDITY AND CAPITAL RATIOS (averages)

      

Loans and leases to deposits

   83.05%  80.22%  80.03%  81.21%  75.65%

Shareholders’ equity to total assets

   8.61   8.14   8.13   8.20   8.14 

Time certificates of $100,000 or more to total deposits

   17.33   15.34   12.57   11.05   10.33 
                     

PER SHARE OF STOCK

      

Net income

  $10.41  $12.12  $10.82  $7.17  $7.19 

Cash dividends

   1.10   1.10   1.10   1.10   1.10 

Market price at December 31 (Class A)

   145.85   202.64   174.42   148.25   120.50 

Book value at December 31

   138.12   125.62   113.19   104.11   98.63 

Tangible book value at December 31

   127.72   115.02   102.35   93.12   87.56 
                     

Table 2

BUSINESS COMBINATIONS

Year

  

Description of transaction

  Total
Loans
  Total
Deposits
 
     (thousands) 

2007

  Sale of American Guaranty Insurance Company, a property and casualty insurance company  $—    $—   

2007

  Sale of Triangle Life Insurance Company, an accident and life insurance company   —     —   

2006

  Sale of T-TECH, Inc., a payments processing company   —     —   

2006

  Sale of one branch by FCB   (36)  (20,553)

2005

  Purchase of one branch by FCB   11   20,957 

 

CRITICAL ACCOUNTING POLICIES

 

The preparation ofInformation included in our audited financial statements and the information included in management’s discussion and analysis is governed by policies thatderived from our accounting records, which are based onmaintained in accordance with accounting principles generally accepted in the United States of America and general practices within the banking industry. AmongWhile much of the more significantinformation is definitive, certain accounting issues are highly dependent upon estimates and assumptions made by management. An understanding of these estimates and assumptions is vital to understanding BancShares’ financial statements. Critical accounting policies are those policies that govern accounting forare most important to the allowance for loandetermination of our financial condition and lease losses, impairmentresults of investment securitiesoperations or that require management to make assumptions and pension plan assumptions.estimates that are subjective or complex.

 

Estimates and judgments are integral toWe periodically evaluate our critical accounting for certain items, and those estimates and judgments affect the reported amounts of assets, liabilities, revenues, expenses and the related disclosure of contingent assets and liabilities. BancShares periodically evaluates its estimates,policies, including those related to the allowance for loan and leasecredit losses, impairment of investment securities, and pension plan assumptions.assumptions and income taxes. While we base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, actual results may differ from these estimates under different assumptions or outcomes.

 

Allowance for loan and leasecredit losses.    The allowance for credit losses, which consists of the allowance for loan and lease losses and the liability for unfunded credit commitments, reflects the estimated losses that will resultresulting from the inability of our customers to make required payments. The allowance for loan and leasecredit losses results fromreflects management’s evaluation of the risk characteristics of the loan and lease portfolio under current economic conditions and considers such factors as the financial condition of the borrower, fair market value of collateral and other items that, in our opinion, deserve current recognition in estimating possible loan and lease losses. Our evaluation process is based on historical evidence and current trends among delinquencies, defaults and nonperforming assets. Our estimate of the allowance for loan and lease losses does not include the impact of events that might occur in the future.

 

Management considers the established allowance adequate to absorb losses that relate to loans and leases as well as unfunded loan commitments outstanding at December 31, 2005,2007, although future additions may be necessary based on changes in economic conditions and other factors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan and leasecredit losses. These agencies may require the recognition of additions to the allowance based on their judgments of information available to them at the time of their examination. If the financial condition of our borrowers were to deteriorate, resulting in an impairment of their ability to make payments, our estimates would be updated, and additions to the allowance may be required.

 

Other than temporary impairment of investment securities.    An individual investment security with a fair value less than 80 percent of its carrying value over a continuous period that spans two quarter-ends is evaluated for impairment during the subsequent quarter. That evaluation includes an assessment of both qualitative and quantitative measures to determine whether, in management’s judgment, the investment is likely to recover its value. When that evaluation concludes that a recovery is unlikely, the unrealized loss is reported as an other than temporary impairment within securities losses on the consolidated statements of income. Changes in market interest rates and the resulting impact on fair value are not typically deemed to create other than temporary impairment. If evidence suggests that an unrealized loss is unlikely to be recovered, management may elect to record an other than temporary impairment even if the prescribed period of time has not lapsed.

Pension plan assumptions.    Although the assets and liabilities associated with theBancShares offers a defined benefit pension plan maintained for our associates are not included withinto qualifying employees. The calculation of the consolidated financial statements,obligation, future plan asset value, funded status and related pension expense under the selectionpension plan requires the use of key

actuarial valuation methods and assumptions. The valuations and assumptions used to determine the pension obligation and the future value of pension plan assets and liabilities are subject to management judgment and may differ significantly depending upon the plan’s assets have a direct impact on the pension expense that we report within employee benefit expense in our consolidated statements of income. We establish an appropriateassumption used. The discount rate that is used to determineestimate the present value of the benefits thatto be paid under the pension plan will pay to the plan participants. The discount rate reflects the interest rate that could be obtained byfor a suitable investment used to fund the pension obligation. Given the reductions in market interest rates during the past several years, theobligations. The assumed discount rate used to estimate the pension obligation has declined to 5.50equaled 6.25 percent at December 31, 20052007, compared to 5.75 percent at December 31, 2004 and 6.00 percent at December 31, 2003.2006 due to changes in market interest rates. Assuming other variables remain unchanged, an increase in the assumed discount rate would reduce the calculated benefit obligations, which would result in reduced expense. Conversely, a reduction in the assumed discount rate would cause an increase in the pension plan’s benefit obligations, which would resultthereby resulting in higher pension expense for BancShares.employee benefits expense.

We also derive an estimatedestimate a long-term rate of return on pension plan assets that is used to calculate the value of plan assets over time. We consider such factors as the actual return earned on plan assets, historical returns on the various asset classes in the plan assets and projections of future returns on various asset classes. Based on favorable asset returns duringthese factors, we estimated the prior two years, optimistic market conditions and forecasts for future market performance, aexpected long-term return on plan assets assumption ofto be 8.50 percent was used during 2005for 2007 and 2004, compared to 8.00 percent in 2003.2006. Assuming other variables remain unchanged, an increase in the assumed long-term rate of return on plan assets would result in quicker appreciation in the fair value ofreduces pension plan’s assets, which would trigger a reduction in pension expense for BancShares.expense.

 

The assumed rate of future compensation increases is reviewed annually based on actual experience and future salary expectations. The compensation increase assumption was adjusted downward effective January 1, 2006 to 4.25 percent compared to 4.75 percent during the previous three years.2007 and 2006. Assuming other variables remain unchanged, a reduction in the rate of future compensation reduces benefit obligations for the pension plan, which would resultincreases results in lower pension expense for BancShares.

Table 1

FINANCIAL SUMMARY AND SELECTED AVERAGE BALANCES AND RATIOS

   2005

  2004

  2003

  2002

  2001

 
   (thousands, except share data and ratios) 

SUMMARY OF OPERATIONS

                     

Interest income

  $665,934  $521,117  $510,477  $596,169  $715,427 

Interest expense

   218,151   133,826   148,537   214,018   346,510 
   


 


 


 


 


Net interest income

   447,783   387,291   361,940   382,151   368,917 

Provision for credit losses

   33,109   34,473   24,187   26,550   24,134 
   


 


 


 


 


Net interest income after provision for credit losses

   414,674   352,818   337,753   355,601   344,783 

Noninterest income

   263,352   250,956   243,936   220,295   214,643 

Noninterest expense

   499,356   479,579   465,088   432,353   421,685 
   


 


 


 


 


Income before income taxes

   178,670   124,195   116,601   143,543   137,741 

Income taxes

   65,808   49,352   41,414   50,787   50,805 
   


 


 


 


 


Net income

  $112,862  $74,843  $75,187  $92,756  $86,936 
   


 


 


 


 


Net interest income, taxable equivalent

  $449,256  $388,556  $362,991  $383,494  $370,857 
   


 


 


 


 


SELECTED AVERAGE BALANCES

                     

Total assets

  $13,905,260  $12,856,102  $12,245,840  $11,843,239  $11,235,859 

Investment securities

   2,533,161   2,157,367   2,585,376   2,610,622   2,196,473 

Loans and leases

   9,364,327   8,892,317   7,886,948   7,379,607   7,105,915 

Interest-earning assets

   12,492,955   11,483,694   10,932,853   10,553,574   10,038,074 

Deposits

   11,714,569   10,961,380   10,433,781   10,007,398   9,405,328 

Interest-bearing liabilities

   10,113,999   9,327,436   9,163,960   9,129,168   8,798,893 

Long-term obligations

   353,885   287,333   255,379   263,291   186,636 

Shareholders’ equity

  $1,131,066  $1,053,860  $996,578  $924,877  $847,374 

Shares outstanding

   10,434,453   10,435,247   10,452,523   10,478,843   10,507,289 
   


 


 


 


 


SELECTED PERIOD-END BALANCES

                     

Total assets

  $14,639,392  $13,265,711  $12,566,961  $12,237,534  $11,869,425 

Investment securities

   2,929,516   2,125,524   2,469,447   2,539,236   2,791,296 

Loans and leases

   9,642,994   9,354,387   8,326,598   7,620,263   7,196,177 

Interest-earning assets

   13,053,522   11,863,654   11,090,450   10,783,069   10,489,382 

Deposits

   12,173,858   11,350,798   10,711,332   10,439,620   9,961,605 

Interest-bearing liabilities

   10,745,696   9,641,368   9,251,903   9,298,080   9,206,903 

Long-term obligations

   408,987   285,943   289,277   253,409   284,009 

Shareholders’ equity

  $1,181,059  $1,086,310  $1,029,305  $967,291  $885,043 

Shares outstanding

   10,434,453   10,434,453   10,436,345   10,473,294   10,483,456 
   


 


 


 


 


PROFITABILITY RATIOS (averages)

                     

Rate of return on:

                     

Total assets

   0.81%  0.58%  0.61%  0.78%  0.77%

Shareholders’ equity

   9.98   7.10   7.54   10.03   10.26 

Dividend payout ratio

   10.17   15.34   15.30   11.30   12.09 
   


 


 


 


 


LIQUIDITY AND CAPITAL RATIOS (averages)

                     

Loans and leases to deposits

   79.94%  81.12%  75.59%  73.74%  75.55%

Shareholders’ equity to total assets

   8.13   8.20   8.14   7.81   7.54 

Time certificates of $100,000 or more to total deposits

   12.57   11.05   10.33   10.87   11.43 
   


 


 


 


 


PER SHARE OF STOCK

                     

Net income

  $10.82  $7.17  $7.19  $8.85  $8.27 

Cash dividends

   1.10   1.10   1.10   1.00   1.00 

Market price at December 31 (Class A)

   174.42   148.25   120.50   96.60   97.75 

Book value at December 31

   113.19   104.11   98.63   92.36   84.42 

Tangible book value at December 31

   102.35   93.12   87.56   81.73   73.78 
   


 


 


 


 


SUMMARY

BancShares’ earnings and cash flows are primarily derived from the commercial banking activities conducted by its banking subsidiaries. These activities include commercial and consumer lending, deposit and cash management products, cardholder, merchant, wealth management services as well as various other products and services incidental to commercial banking. FCB and ISB gather deposits from retail and commercial customers and, along with BancShares and other non-bank subsidiaries, obtain funding through borrowings from various non-deposit sources. We invest the liquidity generated from these funding sources in various types of interest-earning assets such as loans and leases, investment securities and overnight investments. We also invest in the bank premises, furniture and equipment incidental to the subsidiaries’ commercial banking business.expense.

 

External Influences.Income taxes    Various external factors influence customer demand. Management estimates income tax expense using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for our loan, leasefuture tax consequences attributable to differences between the amount of assets and deposit products. The general strengthliabilities reported in the consolidated financial statements and their respective tax bases. In estimating the liabilities and related expense related to income taxes, management assesses the relative merits and risks of various tax positions considering statutory, judicial and regulatory guidance. Because of the economy influences loancomplexity of tax laws and lease demandregulations, interpretation is difficult and subject to differing judgments.

Changes in the estimate of income tax liabilities occur periodically due to changes in actual or estimated future tax rates and projections of taxable income, interpretations of tax laws, the complexities of multi-state income tax reporting, the status of examinations being conducted by various taxing authorities and the impact of newly enacted legislation or guidance as well as the quality and collectibility of our loan and lease portfolio. External economic indicators such as consumer bankruptcy rates and business debt service capacity closely follow trends in the economic cycle. In an effort to stimulate and control the rate of growth of economic activity, monetary actions by the Federal Reserve are significant to the interest rate environment in which we operate. At any point in time, both the existing level and anticipated movement of interest rates have a profound impact on customer demand for our products, our pricing of those products and on our profitability.

In order to control inflation while sustaining the current level of economic growth, the Federal Reserve initiated significant interest rate increases during 2005. Within this environment of rising interest rates, we experienced relatively strong growth in deposit products and weak loan demand. During 2004, loans increased at a robust pace while deposit growth lagged. The trends in each period resulted primarily from external economic and competitive factors that significantly affected both our ability and capacity to grow our loan portfolio and to generate incremental levels of deposits. Although we are unable to control the external factors that influence our business, through the utilization of various asset–liability management and asset quality tools, we seek to minimize the potential adverse risks of unforeseen and unfavorable economic trends and take advantage of favorable economic and competitive conditions when appropriate.

Strategic emphasis.    Financial institutions frequently focus their strategic and operating emphasis on maximizing profitability, and therefore measure their relative success by reference to profitability measures such as return on average assets or return on average shareholders’ equity. BancShares’ profitability measures have historically compared unfavorably to the returns of similar-sized financial holding companies. BancShares has instead placed primary emphasis upon asset quality, balance sheet liquidity and capital conservation and creation, even when those priorities may be detrimental to short-term profitability.

Based on our organization’s strengths and competitive position within the financial services industry, we believe opportunities for significant growth and expansion exist. We operate in diverse and growing geographic markets and believe that through competitive products and superior customer service, we can increase our business volumes and profitability. In recent years, we have focused our efforts on customers who own their own businesses, medical and other professionals and individuals who are financially active. Among all of our customers, we seek to increase fee income in areas such as merchant processing, factoring, insurance, cash management, wealth management and private banking services. We also focus on opportunities to generate income by providing processing services to other banks. We attempt to mitigate certain of the risks that can endanger our profitability and growth prospects. These risks generally fall into categories of economic, industry systemic, competitive and regulatory. While we are attentive to all areas of risk, economic risk is especially problematic due to the lack of control and the potential material impact upon our financial results. Specific economic risks include recession, rapid movements in interest rates and significant changes in inflation expectations. Compared to our larger competitors, our relatively small asset size and limited capital resources create a level of economic risk that requires significant and constant management attention.

Net income.    BancShares reported net income of $112.9 million during 2005, compared to $74.8 million in 2004 and $75.2 million in 2003. Net income for 2005 represented a 50.8 percent increase when compared to 2004. Significant items affecting 2005 net income included materially higher net interest income and improved levels of noninterest income, both of which were partially offset by higher noninterest expense and income tax expense. The $344,000 decrease in net income in 2004 when compared to 2003 was the result of higher noninterest expense and provision for credit losses, as well as higher income tax expense. These unfavorable items fully offset the benefit of higher net interest income and noninterest income. Net income per share for 2005 totaled $10.82, compared to $7.17 and $7.19 for 2004 and 2003, respectively.accounting pronouncements.

Shareholders Equity.    BancShares continues to exceed minimum capital standards and the banking subsidiaries remain well-capitalized. However, ISB’s continued de novo expansion and rapid balance sheet growth has required BancShares to contribute significant amounts of additional capital. Infusions totaled $20.0 million in 2005 compared to $30.0 million in 2004 and 2003. Since ISB was formed in 1997, BancShares has provided $250.0 million in capital. ISB recorded net losses of $2.9 million, $3.0 million and $2.0 million during 2005, 2004 and 2003, respectively. Losses incurred since ISB’s inception total $29.2 million. Based on plans for further growth and expansion, BancShares will infuse $30.0 million into ISB during 2006, and additional capital infusions will likely extend into the foreseeable future.

Detailed information regarding the components of net income over the five years from 2001 through 2005 is provided in the accompanying tables. Table 1 provides a summary of key financial data. Table 5 provides information on net interest income. Table 13 provides details related to the provision for credit losses. Tables 15 and 16 present information regarding the components of noninterest income and expense, respectively.

An analysis of BancShares’ financial condition and growth can be made by examining the changes and trends in interest-earning assets and interest-bearing liabilities. The information presented in Table 5 is useful in making such an analysis. Table 2 details acquisitions and divestitures during 2005, 2004 and 2003. All of the acquisitions were accounted for as purchases, with the results of operations included with BancShares’ Consolidated Statements of Income since the respective acquisition date. There were no material purchase transactions during the three-year period presented.

Table 2

ACQUISITIONS AND DIVESTITURES

      Total  Total 

Year


  

Institution and Location


  Loans

  Deposits

 
      (thousands) 

2005

  Purchase of one branch by First Citizens Bank  $11  $20,957 

2004

  Purchase of one branch by First Citizens Bank   2,288   11,565 

2004

  Sale of one branch by IronStone Bank   —     (12,156)

2003

  Purchase of two branches by First Citizens Bank   18,523   67,887 

2003

  Sale of four branches by First Citizens Bank   (31,380)  (114,727)

 

INTEREST-EARNING ASSETS

 

Interest-earning assets include loans and leases, investment securities and overnight investments, all of which reflect varying interest rates based on the risk level and repricing characteristics of the underlying asset. Riskier investments typically carry a higher interest rate, but expose the investor to potentially higher levels of default.

We have historically focused on maintaining high asset quality, which results in a loan and lease portfolio subjected to strenuous underwriting and monitoring procedures. OurThat focus on asset quality also influences our investment securities portfolio includes high-quality assets, primarilyportfolio. At December 31, 2007, United States Treasury and government agency securities. Generally, thesecurities represented 97.8 percent of our investment securities portfolio grows and shrinks based on loan, lease and deposit trends. When deposit growth exceeds loan and lease demand, which occurred in 2005, we invest excess funds in the securities portfolio. Conversely, as we experienced during 2004, when loan and lease demand exceeds deposit growth, we use proceeds from maturing securities to fund loan and lease demand. Overnight investments are selectively made with other financial institutions that are within our risk tolerance.

 

Changes in our interest-earning assets reflect the impact of liquidity generated by deposits and short-term borrowings, the majority of which arises from various cash management products. The size of the investment securities portfolio changes based on trends among loans, deposits and short-term borrowings. When demand for deposit and cash management products exceeds loan and lease demand, we invest excess funds in the securities portfolio. Conversely, when loan demand exceeds growth in deposits and short-term borrowings, we allow overnight investments to decline and use proceeds from maturing securities to fund loan demand.

Interest-earning assets averaged $12.49$14.29 billion during 2005,2007, an increase of $1.01 billion$654.9 million or 8.84.8 percent over 20042006 levels, compared to a $550.8 million$1.13 billion or 5.09.1 percent increase in 20042006 over 20032005 levels. The increase among interest-earning assets during 20052007 and 2006 resulted from growth amongin loans, leases investment securities and overnight investments. Growth among interest-earning assets during 2004 also resulted from strong loan and lease growth, partially offset by lower investment securities.

 

Loans and leases.    As of December 31, 2005, gross2007, loans and leases outstanding were $9.64equaled $10.96 billion, a 3.16.7 percent increase over the December 31, 20042006 balance of $9.35$10.27 billion. The $288.6$690.9 million increase in loans and leases during 20052007 resulted from growth throughout multiple segments of the loanamong commercial mortgage, commercial and lease portfolio. Loanindustrial and lease growth during 2005 was negatively affected by FCB’s securitization and sale of $256.2 million of revolving mortgage loans during the second quarter. Including the impact of the securitization and sale of the revolving mortgage loans,loans. FCB loans and leases declined $17.2increased $489.1 million or 0.25.8 percent, during 2005.while ISB loans and leases increased $305.8$201.8 million or 22.310.8 percent during 2005.2007. Loan and lease balances for the last five years are presented in Table 3.

Loans secured by real estate totaled $6.84$7.46 billion at December 31, 2005,2007, compared to $6.73$7.03 billion at December 31, 2004 and $5.872006. Loans secured by commercial mortgages totaled $3.98 billion at December 31, 2003. Loans secured by mortgages on commercial property totaled $3.52 billion at December 31, 2005,2007, a $238.8$256.7 million or 7.36.9 percent increase from December 31, 2004.2006. Although we continued to see adequate growth in commercial mortgage lending during 2007, competition for high quality commercial mortgage loans remains strong. In 2006 commercial mortgage loans increased during 2005, the rate of5.9 percent over 2005. The sustained growth slowed from 2004reflects our continued focus on small business customers, particularly among medical-related and 2003, when we achieved growth rates of 23.6 percent and 12.2 percent, respectively. The reduced growth during 2005 resulted from heightened pricing pressure from competitor banks and the desireother professional customers targeted by management to reduce the level of loans considered as high loan to value.our banking subsidiaries. As a

percentage of total loans and leases, commercial mortgage loans secured by commercial mortgages represent 36.536.3 percent at December 31, 2005, compared to 35.1 percent2007 and 31.9 percent at December 31, 2004 and 2003, respectively.2006. A large percentage of our commercial mortgage portfolio is secured by owner-occupied facilities, rather than investment property. These loans are underwritten based primarily upon the cash flow from the operation of the business rather than the value of the real estate collateral.

 

RevolvingAt December 31, 2007, revolving loans secured by real estate totaled $1.49 billion, compared to $1.33 billion at December 31, 2006. The $168.0 million or 12.7 percent increase in revolving mortgage loans in 2007 reflects favorable results from competitive enhancements made to our home equity line of credit product in early 2007 to allow us to attract new, financially-active business and retail customers. At December 31, 2007, revolving mortgage loans represented 13.6 percent of gross loans and leases, compared to 12.9 percent at December 31, 2006.

Commercial and industrial loans equaled $1.71 billion at December 31, 2007, compared to $1.53 billion at December 31, 2006. Commercial and industrial loans realized growth of $180.6 million or 11.8 percent during 2007 following an increase of $320.2 million or 26.5 percent from 2005 to 2006. Growth among these loans in 2007 results from continuing focus on business owners and medical professionals and new opportunities arising from our geographic expansion. Commercial and industrial loans represented 15.6 percent and 14.9 percent of loans and leases, respectively, as of December 31, 2007 and 2006.

Consumer loans not secured by real estate experienced little growth during 2007, totaling $1.37 billion at December 31, 2005, compared2007, an increase of $7.7 million from the prior year. This compares to $1.71 billion and $1.60 billion atan increase during 2006 of $41.6 million or 3.2 percent. At December 31, 20042007 and 2003, respectively. The $345.3 million or 20.1 percent reduction in 2005 reflects the impact of the securitization and sale as well as customer preference for fixed rate closed-end residential mortgages. The securitization and sale transaction was executed in order to reduce our mix of revolving2006, consumer loans not secured by real estate represented 12.5 percent and to generate additional liquidity for other loan types. At December 31, 2005, revolving mortgage loans represent 14.213.2 percent of the total portfolio, respectively.

We anticipate moderate levels of growth in commercial mortgage and commercial and industrial loans in 2008. Our growth and expansion in new markets will favorably influence aggregate loan and lease demand among our business customers. However, projected economic instability will likely curb customer demand for loans and leases, comparedlender support for increased debt levels. All growth projections are therefore subject to 18.3 percentchange due to further economic deterioration or improvement and 19.2 percent, respectively, at December 31, 2004 and 2003.other external factors.

Table 3

LOANS AND LEASES

 

   December 31

   2005

  2004

  2003

  2002

  2001

   (thousands)

Real estate:

                    

Construction and land development

  $766,945  $588,092  $509,578  $433,123  $409,560

Commercial mortgage

   3,518,563   3,279,729   2,654,414   2,366,149   2,168,643

Residential mortgage

   1,016,677   979,663   929,096   1,077,937   1,279,708

Revolving mortgage

   1,368,729   1,714,032   1,598,603   1,335,024   1,024,181

Other mortgage

   172,712   171,700   173,489   166,023   164,045
   

  

  

  

  

Total real estate loans

   6,843,626   6,733,216   5,865,180   5,378,256   5,046,137

Commercial and industrial

   1,193,349   969,729   929,039   925,775   915,596

Consumer

   1,318,971   1,397,820   1,303,718   1,154,280   1,073,954

Lease financing

   233,499   192,164   160,390   141,372   139,966

Other

   53,549   61,458   68,271   20,580   20,524
   

  

  

  

  

Total loans and leases

   9,642,994   9,354,387   8,326,598   7,620,263   7,196,177

Less allowance for loan and lease losses

   128,847   123,861   112,304   106,888   102,653
   

  

  

  

  

Net loans and leases

  $9,514,147  $9,230,526  $8,214,294  $7,513,375  $7,093,524
   

  

  

  

  


   December 31
   2007  2006  2005  2004  2003
   (thousands)

Real estate:

          

Construction and land development

  $810,818  $783,680  $766,945  $588,092  $509,578

Commercial mortgage

   3,982,496   3,725,752   3,518,563   3,279,729   2,654,414

Residential mortgage

   1,029,030   1,025,235   1,016,677   979,663   929,096

Revolving mortgage

   1,494,431   1,326,403   1,368,729   1,714,032   1,598,603

Other mortgage

   145,552   165,223   172,712   171,700   173,489
                    

Total real estate loans

   7,462,327   7,026,293   6,843,626   6,733,216   5,865,180

Commercial and industrial

   1,707,394   1,526,818   1,206,585   980,164   935,514

Consumer

   1,368,228   1,360,524   1,318,971   1,397,820   1,303,718

Lease financing

   340,601   294,366   233,499   192,164   160,390

Other

   85,354   65,042   53,549   61,458   68,271
                    

Total loans and leases

   10,963,904   10,273,043   9,656,230   9,364,822   8,333,073

Less allowance for loan and lease losses

   136,974   132,004   128,847   123,861   112,304
                    

Net loans and leases

  $10,826,930  $10,141,039  $9,527,383  $9,240,961  $8,220,769
                    

All information presented in this table relates to domestic loans and leases.

There were no foreign loans or leases in any period.

 

Consumer loans totaled $1.32 billionInvestment securities. Investment securities available for sale at December 31, 2005,2007 and 2006 totaled $3.23 billion and $3.00 billion, respectively, a decrease$227.4 million increase. Available-for-sale securities are reported at their aggregate fair value, and unrealized gains and losses on available-for-sale securities are included as a component of $78.8 million or 5.6 percent during 2005, primarily the resultother comprehensive income, net of lower demand for indirect loans within our sales finance unit. During 2004, consumer loans increased 7.2 percent. At December 31, 2005, 2004 and 2003, consumer loans represented 13.7 percent, 14.9 percent and 15.7 percent of the total portfolio, respectively.deferred taxes.

 

Commercial and industrial loans were $1.19 billion at December 31, 2005, compared to $969.7 million at December 31, 2004 and $929.0 million at December 31, 2003. After several years of sluggish growth, commercial and industrial loans increased $223.6 million or 23.1 percent during 2005. Growth among these loans in 2005 is evidence of optimistic economic expectations by our customers and positive results from the geographic expansion of ISB. Commercial and industrial loans represent 12.4 percent, 10.4 percent and 11.2 percent of total loans and leases, respectively, as of December 31, 2005, 2004 and 2003.

Residential mortgage loans increased $37.0 million or 3.8 percent to $1.02 billion during 2005, following a $50.6 million or 5.4 percent rate of growth in 2004. Growth during both 2005 and 2004 is primarily due to moderately higher levels of origination activity of loans that are not structured as marketable.

Construction and land development loans totaled $766.9 million at December 31, 2005, an increase of $178.9 million or 30.4 percent. As of December 31, 2005, these loans represented 8.0 percent of loans and leases, compared to 6.3 percent and 6.1 percent, respectively, at December 31, 2004 and December 31, 2003.

Our recent growth through ISB has allowed us to mitigate our historic exposure to geographic risk concentration in North Carolina and Virginia. We are aware however that rapid loan growth in new markets may present incremental lending risks. As ISB continues to expand into new markets, we have endeavored to ensure that rigorous centralized underwriting and monitoring controls are functioning effectively. We will continue to place emphasis upon maintaining strong lending standards in new markets.

We maintain a well-diversified loan and lease portfolio, and seek to avoid the risk associated with large concentrations within specific industries. Over the past several years, we have aggressively sought opportunities to provide financial services to businesses associated with and professionals within the medical community. Due to strong growth within this industry, our loans for offices and clinics of medical doctors and dentists increased to $1.32 billion as of December 31, 2005, which represents 13.7 percent of total loans and leases outstanding. Except for this single concentration, no other industry represented more than 10 percent of total loans and leases outstanding at December 31, 2005.

In addition to industry concentrations, we monitor our loan and lease portfolio for other risk characteristics. Among the key indicators of credit risk are loan-to-value ratios, which measure a lender’s exposure as compared to the value of the underlying collateral. Regulatory agencies have established guidelines that define high loan-to-value loans as those real estate loans that exceed 65 percent to 85 percent of the collateral value depending upon the type of collateral. At December 31, 2005, we had $1.08 billion or 11.2 percent of loans and leases that exceeded the loan-to-value ratios recommended by the guidelines. While we continuously strive to limit our high loan-to-value loans, we believe that the inherent risk within these loans is lessened by mitigating factors, such as our strict underwriting criteria and the high rate of owner-occupied properties.

We anticipate growth in commercial mortgage and commercial and industrial loans in 2006, as our expansion into new markets translates into higher levels of loan demand among our business customers. Our continued expansion will likewise diversify risks resulting from regional concentrations. All growth projections are subject to change as a result of economic deterioration or improvement, competitive forces and other external factors. Due to uncertainty about interest rates, we will encourage variable rate loan and lease products in order to reduce our overall level of interest rate risk.

Investment Securities.    At December 31, 2005, and 2004, the investment securities portfolio totaled $2.93 billion and $2.13 billion, respectively. Investment securities held to maturity totaled $636.5$7.6 million and $877.5$219.2 million, respectively, at December 31, 20052007 and 2004.2006. The $241.0$211.6 million reduction in investment securities held to maturity during 20052007 resulted from scheduled maturities and the continued migrationdesignation of investments to the available-for-sale portfolio. In each period, U.S. Treasury and government agencyall newly-purchased securities represented substantially the entire balance of the held-to-maturity portfolio.as available-for-sale. Securities that are classified as held-to-maturity reflect BancShares’ ability and positive intent to hold those investments until maturity.

Table 4 presents detailed information relating to the investment securities portfolio.

Income on interest-earning assets. Interest income amounted to $904.1 million during 2007, a $73.7 million or 8.9 percent increase from 2006, compared to a $160.8 million or 24.0 percent increase from 2005 to 2006. The increase in interest income during 2007 resulted from higher asset yields and growth in interest-earning assets.

 

Investment securities availableTable 5 analyzes interest-earning assets and interest-bearing liabilities for sale atthe five years ending December 31, 20052007. To assess the impact of the tax-exempt status of income earned on certain loans, leases and 2004 totaled $2.29 billioninvestment securities, Table 5 is prepared on a taxable-equivalent basis. The taxable-equivalent yield on interest-earning assets was 6.38 percent during 2007, a 24 basis point increase from the 6.14 percent reported in 2006. The taxable-equivalent yield on interest-earning assets equaled 5.39 percent in 2005.

The taxable-equivalent yield on the loan and $1.25 billion, respectively, a $1.04 billion increase. Available-for-sale securities are reported at their aggregate fair value.lease portfolio increased marginally from 6.86 percent in 2006 to 6.94 percent in 2007. The combination of the 8 basis point yield increase, and the $523.8 million or 5.2 percent growth in investment securities available for sale duringaverage loans and leases contributed to an increase in loan interest income of $44.2 million or 6.5 percent over 2006. This followed an increase of $109.0 million or 19.0 percent in loan interest income in 2006 over 2005, resulted from depositthe combined result of a $614.5 million increase in average loans and short-term borrowings growth that exceeded loan demand. Generally, excess balance sheet liquidity and maturities of investment securities which have been classified as held-to-maturity are invested in the available-for-sale portfolio in order to maximize overall balance sheet management flexibility. Investment securities available for sale include U.S. Treasury obligations, government agency securitiesleases and a small equity securities portfolio. Unrealized gains and losses on available-for-sale securities are included as a component72 basis point yield increase. The higher yield during 2006 reflects the impact of shareholders’ equity, net of deferred taxes.Federal Reserve actions to increase market interest rates.

Table 4

INVESTMENT SECURITIES

 

  December 31

  2005

  2004

 2003

  Cost

 

Fair

Value


 Average
Maturity
(Yrs./Mos.)


 Taxable
Equivalent
Yield


  Cost

 

Fair

Value


 Cost

 

Fair

Value


  (thousands, except maturity and yield information)

Investment securities held to maturity:

                       

U. S. Government:

                       

Within one year

 $416,172 $413,289 0/6 2.67% $511,421 $509,932 $972,621 $976,638

One to five years

  209,207  207,234 1/4 3.67   351,264  349,425  234,640  236,429

Five to ten years

           21  22  58  62

Over ten years

  9,294  9,385 11/4 5.62   12,790  13,255  17,229  17,913
  

 

 
 

 

 

 

 

Total

  634,673  629,908 0/11 3.04   875,496  872,634  1,224,548  1,231,042
  

 

 
 

 

 

 

 

State, county and municipal:

                       

Within one year

           165  168    

One to five years

  147  155 3/4 5.88   146  155  355  355

Five to ten years

   ��           145  155

Over ten years

  1,426  1,563 12/4 6.02   1,422  1,572  1,419  1,586
  

 

 
 

 

 

 

 

Total

  1,573  1,718 11/6 6.01   1,733  1,895  1,919  2,096
  

 

 
 

 

 

 

 

Other:

                       

Within one year

                 

One to five years

  250  250 2/7 7.75   250  250  250  250

Five to ten years

                 
  

 

 
 

 

 

 

 

Total

  250  250 2/7 7.75   250  250  250  250
  

 

 
 

 

 

 

 

Total investment securities held to maturity

  636,496  631,876 0/11 3.05   877,479  874,779  1,226,717  1,233,388
  

 

 
 

 

 

 

 

Investment securities available for sale:

                       

U. S. Government:

                       

Within one year

  1,159,556  1,140,602 0/5 3.03%  927,250  916,427  878,667  875,337

One to five years

  1,055,472  1,044,913 1/8 3.94   253,120  250,317  291,787  290,774

Five to ten years

  115  109 5/7 5.45   159  156  721  723

Over ten years

  29,721  29,097 27/2 5.30   21,300  21,166  11,048  11,027
  

 

 
 

 

 

 

 

Total

  2,244,864  2,214,721 1/4 3.49   1,201,829  1,188,066  1,182,223  1,177,861
  

 

 
 

 

 

 

 

State, county and municipal:

                       

Within one year

  954  947 0/5 2.06   838  835  1,139  1,138

One to five years

  3,013  2,977 2/7 3.55   4,059  4,065  3,635  3,642

Five to ten years

  1,115  1,110 6/4 4.64   1,301  1,305  2,673  2,689

Over ten years

  145  145 26/11 1.15   145  145  145  145
  

 

 
 

 

 

 

 

Total

  5,227  5,179 3/8 3.44   6,343  6,350  7,592  7,614
  

 

 
 

 

 

 

 

Other:

                       

Within one year

                 

One to five years

                 

Five to ten years

                 

Over ten years

  11,902  11,902 11/11 11.09         
  

 

 
 

 

 

 

 

Total

  11,902  11,902 11/11 11.09         
  

 

 
 

 

 

 

 

Equity securities

  34,409  61,218       32,447  53,629  35,318  57,255
  

 

      

 

 

 

Total investment securities available for sale

  2,296,402  2,293,020       1,240,619  1,248,045  1,225,133  1,242,730
  

 

      

 

 

 

Total investment securities

 $2,932,898 $2,924,896      $2,118,098 $2,122,824 $2,451,850 $2,476,118
  

 

      

 

 

 


  December 31
  2007  2006 2005
  Cost Fair
Value
 Average
Maturity
(Yrs./Mos.)
 Taxable
Equivalent
Yield
  Cost Fair
Value
 Cost Fair
Value
  (thousands, except maturity and yield information)

Investment securities available for sale:

        

U. S. Government:

        

Within one year

 $1,667,530 $1,675,309 0/6 4.83% $1,514,194 $1,503,970 $1,159,556 $1,140,602

One to five years

  1,377,766  1,399,482 1/7 4.55   1,367,029  1,363,571  1,055,472  1,044,913

Five to ten years

  6,435  6,419 5/7 4.88   6,337  6,095  115  109

Over ten years

  78,012  77,632 26/11 5.47   53,250  52,054  29,721  29,097
                       

Total

  3,129,743  3,158,842 1/8 4.72   2,940,810  2,925,690  2,244,864  2,214,721
                       

State, county and municipal:

        

Within one year

  709  708 0/4 3.86   875  873  954  947

One to five years

  2,246  2,236 2/3 4.11   2,734  2,696  3,013  2,977

Five to ten years

  356  363 5/3 4.95   470  477  1,115  1,110

Over ten years

  66  65 21/0 4.44   211  211  145  145
                       

Total

  3,377  3,372 2/6 4.15   4,290  4,257  5,227  5,179
                       

Other:

        

Within one year

              

One to five years

              

Five to ten years

              

Over ten years

  7,771  9,390 10/4 11.08   10,173  10,240  11,902  11,902
                       

Total

  7,771  9,390 10/4 11.08   10,173  10,240  11,902  11,902
                       

Equity securities

  33,614  57,637    35,171  61,703  34,409  61,218
                    

Total investment securities available for sale

  3,174,505  3,229,241    2,990,444  3,001,890  2,296,402  2,293,020
                    

Investment securities held to maturity:

        

U. S. Government:

        

Within one year

        210,232  209,296  416,172  413,289

One to five years

        3  3  209,207  207,234

Five to ten years

  5,563  5,612 9/3 5.53   46  46    

Over ten years

  197  231 19/6 6.30   7,049  7,031  9,294  9,385
                       

Total

  5,760  5,843 9/8 5.56   217,330  216,376  634,673  629,908
                       

State, county and municipal:

        

Within one year

              

One to five years

  149  153 1/4 5.88   148  154  147  155

Five to ten years

              

Over ten years

  1,435  1,530 10/4 6.02   1,430  1,553  1,426  1,563
                       

Total

  1,584  1,683 9/6 6.01   1,578  1,707  1,573  1,718
                       

Other:

        

Within one year

  250  250 0/7 3.25         

One to five years

        250  250  250  250

Five to ten years

              
                    

Total

  250  250 0/7    250  250  250  250
                       

Total investment securities held to maturity

  7,594  7,776 9/4 5.58   219,158  218,333  636,496  631,876
                       

Total investment securities

 $3,182,099 $3,237,017   $3,209,602 $3,220,223 $2,932,898 $2,924,896
                    

The average maturity assumes callable securities mature on their earliest call date; yields are based on amortized cost; yields related to securities that are exempt from federal and/or state income taxes are stated on a taxable-equivalent basis assuming statutory rates of 35% for federal income taxes and 6.90% for state income taxes for all periods.

Table 5

AVERAGE BALANCE SHEETS

 

   2005

  2004

 
   Average
Balance


  Interest
Income/Expense


  Yield/
Rate


  Average
Balance


  Interest
Income/Expense


  Yield/
Rate


 
            (thousands, taxable equivalent) 

Assets

                       

Loans and leases

  $9,364,327  $572,129  6.11% $8,892,317  $467,429  5.26%

Investment securities:

                       

U. S. Government

   2,463,545   73,472  2.98   2,096,869   47,515  2.27 

State, county and municipal

   7,238   374  5.17   8,667   423  4.88 

Other

   62,378   2,224  3.57   51,831   1,137  2.19 
   


 

  

 


 

  

Total investment securities

   2,533,161   76,070  3.00   2,157,367   49,075  2.27 

Overnight investments

   595,467   19,208  3.23   434,010   5,878  1.35 
   


 

  

 


 

  

Total interest-earning assets

   12,492,955  $667,407  5.34%  11,483,694  $522,382  4.55%

Cash and due from banks

   654,821          679,955        

Premises and equipment

   608,668          554,480        

Other assets

   276,784          262,807        

Allowance for loan and lease losses

   (127,968)         (124,834)       
   


        


       

Total assets

  $13,905,260         $12,856,102        
   


        


       

Liabilities and shareholders’ equity

                       

Interest-bearing deposits:

                       

Checking With Interest

  $1,570,010  $1,923  0.12% $1,500,638  $1,796  0.12%

Savings

   737,830   1,521  0.21   743,629   1,492  0.20 

Money market accounts

   2,643,330   50,171  1.90   2,571,468   21,594  0.84 

Time deposits

   4,209,996   123,016  2.92   3,778,048   83,557  2.21 
   


 

  

 


 

  

Total interest-bearing deposits

   9,161,166   176,631  1.93   8,593,783   108,439  1.26 

Short-term borrowings

   598,948   14,966  2.50   446,320   3,611  0.81 

Long-term obligations

   353,885   26,554  7.50   287,333   21,776  7.58 
   


 

  

 


 

  

Total interest-bearing liabilities

   10,113,999  $218,151  2.16%  9,327,436  $133,826  1.43%

Demand deposits

   2,553,403          2,367,597        

Other liabilities

   106,792          107,209        

Shareholders’ equity

   1,131,066          1,053,860        
   


        


       

Total liabilities and shareholders’ equity

  $13,905,260         $12,856,102        
   


        


       

Interest rate spread

          3.18%         3.12%

Net interest income and net yield on interest-earning assets

      $449,256  3.60%     $388,556  3.38%
       

  

     

  


  2007  2006 
  Average
Balance
  Interest
Income/Expense
 Yield/
Rate
  Average
Balance
  Interest
Income/Expense
 Yield/
Rate
 
  (dollars in thousands, taxable equivalent) 

Assets

      

Loans and leases

 $10,513,599  $729,635 6.94% $9,989,757  $685,114 6.86%

Investment securities:

      

U.S. Government

  3,068,477   146,483 4.77   2,949,201   116,969 3.97 

State, county and municipal

  5,321   346 6.50   6,174   374 6.06 

Other

  70,254   3,100 4.41   73,009   3,304 4.53 
                    

Total investment securities

  3,144,052   149,929 4.77   3,028,384   120,647 3.98 

Overnight investments

  634,671   32,169 5.07   619,247   30,903 4.99 
                    

Total interest-earning assets

  14,292,322  $911,733 6.38%  13,637,388  $836,664 6.14%

Cash and due from banks

  705,864     757,428   

Premises and equipment

  735,465     669,748   

Allowance for loan and lease losses

  (132,530)    (131,077)  

Other assets

  318,101     306,840   
            

Total assets

 $15,919,222    $15,240,327   
            

Liabilities and shareholders’ equity

      

Interest-bearing deposits:

      

Checking With Interest

 $1,431,085  $1,971 0.14% $1,522,439  $1,875 0.12%

Savings

  573,286   1,235 0.22   649,619   1,382 0.21 

Money market accounts

  2,835,255   94,541 3.33   2,691,292   79,522 2.95 

Time deposits

  5,283,782   243,489 4.61   4,967,591   197,399 3.97 
                    

Total interest-bearing deposits

  10,123,408   341,236 3.37   9,830,941   280,178 2.85 

Short-term borrowings

  1,354,255   55,126 4.07   981,210   41,431 4.22 

Long-term obligations

  405,758   27,352 6.74   450,272   32,128 7.14 
                    

Total interest-bearing liabilities

  11,883,421  $423,714 3.57%  11,262,423  $353,737 3.14%

Demand deposits

  2,535,828     2,622,014   

Other liabilities

  129,356     114,636   

Shareholders’ equity

  1,370,617     1,241,254   
            

Total liabilities and shareholders’ equity

 $15,919,222    $15,240,327   
            

Interest rate spread

   2.81%   3.00%

Net interest income and net yield on interest-earning assets

  $488,019 3.41%  $482,927 3.54%
              

Average loan balances

Loans and leases include nonaccrual loans. Yields related to loans, leases and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only, are stated on a taxable-equivalent basis assuming a statutory federal income tax rate of 35%35.0% and a state income tax rate of 6.90%6.9% for all periods. Loan fees, which are not material for any period shown, are included in the yield calculation.

 

TotalInterest income earned on the investment securities averaged $2.53 billionportfolio amounted to $144.3 million and $116.0 million during 2005, $2.16 billion during 20042007 and $2.59 billion during 2003. As a percentage of average interest-earning assets,2006. The taxable-equivalent yield on the investment securities represented 20.3 percent, 18.8portfolio was 4.77 percent and 23.63.98 percent, respectively, for 2007 and 2006. The $28.3 million increase in investment interest income during 2005, 20042007 reflected the 79 basis points increase in the taxable-equivalent yield and 2003, respectively.a $115.7 million increase in average investment securities. The growth of average$40.1 million increase in interest income earned on investment securities during 2005 was the result of deposit growth outpacing loan demand. During 2004, loan growth exceeded the2006 resulted from an 87 basis point increase in deposit levels,the taxable-equivalent yield and maturinga $495.2 million increase in average investment securities were needed to fund loan demand. Table 4 presents detailed information relating to the investment securities portfolio.securities.

Table 5

AVERAGE BALANCE SHEETS(continued)

 

  2003

  2002

  2001

 
  Average
Balance


  Interest
Income/Expense


  Yield/
Rate


  Average
Balance


  Interest
Income/Expense


  Yield/
Rate


  Average
Balance


  Interest
Income/Expense


  Yield/
Rate


 
           (thousands, taxable equivalent)          
                                  
   $7,886,948  $445,639  5.65% $7,379,607  $491,770  6.66% $7,105,915  $568,379  8.00%
                                  
   2,525,007   59,350  2.35   2,550,835   94,794  3.72   2,147,697   117,608  5.48 
   5,151   235  4.56   3,699   301  8.14   4,804   416  8.66 
   55,218   1,345  2.44   56,088   1,673  2.98   43,972   2,288  5.20 
  

  

  

 


 

  

 


 

  

   2,585,376   60,930  2.36   2,610,622   96,768  3.71   2,196,473   120,312  5.48 
   460,529   4,959  1.08   563,345   8,974  1.59   735,686   28,676  3.90 
  

  

  

 


 

  

 


 

  

   10,932,853  $511,528  4.68%  10,553,574  $597,512  5.66%  10,038,074  $717,367  7.15%
   667,979          669,770          592,270        
   522,548          494,534          466,549        
   238,197          235,484          243,841        
   (115,737)          (110,123)         (104,875)       
  

         


        


       
   $12,245,840         $11,843,239         $11,235,859        
  

         


        


       
                                  
                                  
   $1,379,479  $1,923  0.14% $1,266,185  $3,450  0.27% $1,145,115  $6,060  0.53%
   690,705   2,151  0.31   642,764   3,435  0.53   608,882   6,680  1.10 
   2,563,589   22,208  0.87   2,305,486   35,743  1.55   1,744,389   54,309  3.11 
   3,811,476   98,507  2.58   4,121,474   145,278  3.52   4,453,109   243,703  5.47 
  

  

  

 


 

  

 


 

  

   8,445,249   124,789  1.48   8,335,909   187,906  2.25   7,951,495   310,752  3.91 
   463,332   2,795  0.60   529,968   4,528  0.85   660,762   20,643  3.12 
   255,379   20,953  8.21   263,291   21,584  8.20   186,636   15,115  8.10 
  

  

  

 


 

  

 


 

  

   9,163,960  $148,537  1.62%  9,129,168  $214,018  2.34%  8,798,893  $346,510  3.94%
   1,988,532          1,671,489          1,453,833        
   96,770          117,705          135,759        
   996,578          924,877          847,374        
  

         


        


       
  $12,245,840         $11,843,239         $11,235,859        
  

         


        


       
          3.06%         3.32%         3.21%
      $362,991  3.32%     $383,494  3.63%     $370,857  3.69%
      

  

     

  

     

  

Overnight Investments.    At December 31, 2005 and 2004, overnight investments, which include federal funds sold and interest-bearing deposits in other financial institutions, totaled $481.0 million and $383.7 million, respectively. These investments averaged $595.5 million, $434.0 million and $460.5 million, respectively, during 2005, 2004 and 2003. During 2005, average overnight securities increased $161.5 million or 37.2 percent due to general balance sheet liquidity needs. The reduction in 2004 resulted from stronger loan demand.

Income on Interest-Earning Assets.    Interest income amounted to $665.9 million during 2005, a $144.8 million or 27.8 percent increase from 2004, compared to a $10.6 million or 2.1 percent increase from 2003 to 2004. The increase in interest income during 2005 resulted from higher average assets and significantly improved yields. The taxable-equivalent yield on interest-earning assets was 5.34 percent during 2005, a 79 basis point increase from the 4.55 percent reported in 2004. The taxable-equivalent yield on interest-earning assets was 4.68 percent in 2003.

Table 5 analyzes interest-earning assets and interest-bearing liabilities for the five years ending December 31, 2005. To assess the impact of the tax-exempt status of income earned on certain loans, leases and municipal securities, Table 5 is prepared on a taxable-equivalent basis. The taxable-equivalent yield on the loan and lease portfolio increased from 5.26 percent in 2004 to 6.11 percent in 2005. The combination of the 85 basis point yield increase, and the 5.3 percent growth in average loans and leases contributed to an increase in loan and lease interest income of $104.6 million or 22.4 percent over 2004. This followed an increase of $21.7 million or 4.9 percent in loan and lease interest income in 2004 over 2003, the net result of a $1.01 billion increase in average loans and leases outstanding and a 39 basis point loan yield reduction. The higher yields during 2005 reflect the impact of Federal Reserve actions beginning during the third quarter of 2004 to increase market interest rates.

We believe that further actions by the Federal Reserve to increase interest rates during 2006 will be modest, and the yield on interest-earning assets will increase marginally compared to the end of 2005.

Interest income earned on the investment securities portfolio amounted to $75.9 million, $48.9 million and $60.9 million during 2005, 2004 and 2003, respectively. The taxable-equivalent yield on the investment securities portfolio was 3.00 percent, 2.27 percent and 2.36 percent, respectively, for 2005, 2004 and 2003. The $27.0 million increase in investment interest income during 2005 reflected higher average volume and stronger yields. The $12.0 million reduction in investment interest income from 2003 to 2004 was the result of lower average investment securities and lower yields.

  2005  2004  2003 
  Average
Balance
  Interest
Income/Expense
  Yield/
Rate
  Average
Balance
  Interest
Income/Expense
  Yield/
Rate
  Average
Balance
  Interest
Income/Expense
  Yield/
Rate
 
  (dollars in thousands, taxable equivalent) 
            
 $9,375,249  $575,735  6.14% $8,901,628  $470,325  5.28% $7,893,621  $448,019  5.68%
            
  2,463,545   76,267  3.10   2,096,869   48,304  2.30   2,525,007   60,318  2.39 
  7,238   404  5.58   8,667   424  4.89   5,151   277  5.38 
  62,378   2,224  3.57   51,831   1,137  2.19   55,218   1,345  2.44 
                                 
  2,533,161   78,895  3.11   2,157,367   49,865  2.31   2,585,376   61,940  2.40 
  595,467   19,208  3.23   434,010   5,878  1.35   460,529   4,959  1.08 
                                 
  12,503,877  $673,838  5.39%  11,493,005  $526,068  4.58%  10,939,526  $514,918  4.71%
  654,821      679,955      667,979    
  608,668      554,480      522,548    
  (127,968)     (124,834)     (115,737)   
  265,862      253,496      231,524    
                     
 $13,905,260     $12,856,102     $12,245,840    
                     
            
            
 $1,570,010  $1,923  0.12% $1,500,638  $1,796  0.12% $1,379,479  $1,923  0.14%
  737,830   1,521  0.21   743,629   1,492  0.20   690,705   2,151  0.31 
  2,643,330   50,171  1.90   2,571,468   21,594  0.84   2,563,589   22,208  0.87 
  4,209,996   123,016  2.92   3,778,048   83,557  2.21   3,811,476   98,507  2.58 
                                 
  9,161,166   176,631  1.93   8,593,783   108,439  1.26   8,445,249   124,789  1.48 
  598,948   14,966  2.50   446,320   3,611  0.81   463,332   2,795  0.60 
  353,885   26,554  7.50   287,333   21,776  7.58   255,379   20,953  8.21 
                                 
  10,113,999  $218,151  2.16%  9,327,436  $133,826  1.43%  9,163,960  $148,537  1.62%
  2,553,403      2,367,597      1,988,532    
  106,792      107,209      96,770    
  1,131,066      1,053,860      996,578    
                     
 $13,905,260     $12,856,102     $12,245,840    
                     
    3.23%    3.15%    3.09%
            
  $455,687  3.64%  $392,242  3.41%  $366,381  3.35%
                        

 

Interest earned on overnight investments was $19.2$32.2 million during 2005,2007, compared to $5.9$30.9 million during 2004 and $5.0 million during 2003.2006. The $13.3$1.3 million increase during 20052007 resulted from a 188an 8 basis point yield increase and the $161.5a $15.4 million increase in average overnight investments. During 2004,2006, interest income earned from overnight investments increased $919,000$11.7 million over 2003,2005, the netcombined result of a 27176 basis point yield increase and a $26.5$23.8 million decreaseincrease in average overnight investments.

 

Interest rate reductions initiated by the Federal Reserve in late 2007 and early 2008 will cause asset yields to decline during 2008, and we believe interest rates will likely decrease further until economic conditions improve.

INTEREST-BEARING LIABILITIES

 

Interest-bearing liabilities include our interest-bearing deposits as well as short-term borrowings and long-term obligations. Deposits are our primary funding source, although we also utilize non-deposit borrowings to stabilize our liquidity base and to fulfill commercial customer requirementsdemand for cash management services. Certain of our long-term borrowings also currently qualify as capital under guidelines established by the Federal Reserve. We currently do not gather interest-bearing liabilities on a wholesale basis or through the services of brokers.Reserve and other banking regulators.

 

At December 31, 20052007 and 2004,2006, interest-bearing liabilities totaled $10.75$12.12 billion and $9.64$11.61 billion, respectively, an increase of $1.10 billion$506.6 million or 11.54.4 percent. The higher balances during 20052007 result from our continuing focus upon the importanceincreased levels of increasinginterest-bearing deposits and short-term borrowings throughout the entire branch network. Interest-bearing liabilities averaged $10.11 billion during 2005, an increase of $786.6 million or 8.4 percent over 2004 levels. During 2004, interest-bearing liabilities averaged $9.33 billion, an increase of $163.5 million or 1.8 percent over 2003.borrowings.

 

Deposits.    At December 31, 2005,2007, deposits totaled $12.17$12.93 billion, an increase of $823.1$185.2 million or 7.31.5 percent from the $11.35$12.74 billion in deposits recorded as of December 31, 2004. Total2006. Interest-bearing deposits averaged $11.71$10.12 billion in 2005,during 2007, an increase of $753.2$292.5 million or 6.9 percent over 2004, with a significant portion of that growth attributable to time deposits. During 2004, total deposits averaged $10.96 billion, an increase of $527.6 million or 5.1 percent over 2003.

Average interest-bearing deposits were $9.16 billion during 2005, an increase of $567.4 million or 6.63.0 percent. Average interest-bearing deposits were $8.59equaled $9.83 billion during 2004,2006, an increase of $148.5$669.8 million or 1.87.3 percent over 2003.2005. In 2005,2007, the increase in average deposits was primarily the result ofresulted from growth in average time deposits, which increased $431.9

$316.2 million or 11.4 percent. Customer preference for time deposits is highly correlated to the level of interest rates. Due to the substantial increases in interest rates during 2005, customers rotated large amounts of liquidity from6.4 percent and average money market and Checking With Interest accounts, to time deposits. The growth in time deposits during 2005 reversed a three-year trend of rate-influenced run-off. In 2004, our interest-bearing non-time productswhich increased over the prior period, while$144.0 million or 5.3 percent. During 2006, average time deposits declined from the prior period. During 2004, average time deposits declined $33.4increased $757.6 million or 0.9 percent, compared to a reduction of $310.0 million or 7.5 percent in 2003.

Table 618.0 percent.

MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE

   

December 31,

2005


   (thousands)

Less than three months

  $376,732

Three to six months

   255,730

Six to 12 months

   547,118

More than 12 months

   500,255
   

Total

  $1,679,835
   

 

Competition for deposit business in our primary market areas is extremely intense. While we have access to non-deposit borrowing sources, we prefer to fund loan and lease demand with traditional core bank deposits. Therefore, generating acceptable levels ofadequate deposit growth is a critical challenge for us, particularly during periods ofwhen we experience strong loan demand.

Table 6

MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE

   December 31,
2007
   (thousands)

Less than three months

  $906,056

Three to six months

   758,998

Six to 12 months

   339,643

More than 12 months

   319,071
    

Total

  $2,323,768
    

 

Short-Term Borrowings.    At December 31, 2005,2007, short-term borrowings totaled $779.0 million,$1.31 billion, compared to $447.7 million$1.15 billion one year earlier, a 74.013.4 percent increase. For the year ended December 31, 2005,2007, short-term borrowings averaged $598.9 million,$1.35 billion, compared to $446.3 million$981.2 billion during 2004 and $463.3 million during 2003.2006. The $152.6$373.0 million or 34.238.0 percent increase in 2005short-term borrowings during 2007 was the result of significantly higher demand forsignificant growth in our commercial master note product. and repurchase agreement products. Customer interest in these commercial cash management products improved significantly due to relatively attractive rates as compared to other short-term bank deposit products.

We continue to have access to various short-term borrowings, including the purchase of federal funds, overnight repurchase obligations and acredit lines with various correspondent bank credit line.banks. At December 31, 2005,2007, we had immediate access of up to $430.0$525.0 million on an unsecured basis and additional amounts under secured borrowing agreements with the Federal Home Loan Bank of Atlanta. Table 7 provides additional information regarding short-term borrowed funds.

Table 7

SHORT-TERM BORROWINGS

   2007  2006  2005 
   Amount  Rate  Amount  Rate  Amount  Rate 
   (dollars in thousands) 

Master notes

          

At December 31

  $923,424  3.02% $741,029  4.18% $520,585  3.19%

Average during year

   910,389  4.19   643,926  4.28   353,871  2.61 

Maximum month-end balance during year

   1,035,278     776,734     520,585   

Repurchase agreements

          

At December 31

   286,090  2.27   251,135  3.68   150,054  2.69 

Average during year

   303,862  3.38   213,730  3.47   143,813  1.71 

Maximum month-end balance during year

   325,790     272,807     165,758   

Federal funds purchased

          

At December 31

   23,893  3.60   66,066  5.04   36,620  3.80 

Average during year

   59,050  5.07   47,662  4.84   45,595  3.10 

Maximum month-end balance during year

   101,753     68,620     59,139   

Other

          

At December 31

   71,880  4.54   92,617  4.56   71,769  3.43 

Average during year

   80,954  4.57   75,892  5.45   55,669  3.32 

Maximum month-end balance during year

   96,785     169,305     72,351   

 

Long-Term Obligations.    At December 31, 20052007 and 2004,2006, long-term obligations totaled $409.0$404.4 million and $285.9$401.2 million, respectively, an increase of $123.0$3.2 million or 43.00.8 percent. Long-termFor 2007 and 2006, long-term obligations include $125.0 million in 5.125 percent subordinated notes payable issued by FCB during 2005. The notes mature in 2015 and are redeemable, subject to regulatory approval, at any time based on specific redemption provisions.

For 2005 and 2004, the outstanding balance includes $257.8$273.2 million in junior subordinated debentures representing obligations to two equity method subsidiaries,special purpose entities, FCB/NC Capital Trust I and FCB/NC Capital Trust IIIII (the Capital Trusts). The Capital Trusts are the grantor trusts for $250.0$265.0 million of trust preferred capital securities.securities outstanding as of December 31, 2007. The proceeds from the trust preferred capital securities were loaned by the Capital Trustsused to BancShares in exchange forpurchase the junior subordinated debentures.debentures issued by BancShares. Under current regulatory standards, these trust preferred capital securities qualify as Tier 1 capital for BancShares.

The $150.0 million in trust preferred capital securities issued by FCB/NC Capital Trust I mature in 2028 and may be redeemed in whole or in part on or after March 1, 2008.2008 at a premium that declines until 2018, when the redemption price equals the par value of the securities. The $100.0$115.0 million in trust preferred capital securities issued by FCB/NC Capital Trust IIIII mature in 20312036 and may be redeemed at par in whole or in part on or after October 31, 2006. Although no definitive actionJune 30, 2011. BancShares has been directed byguaranteed all obligations of the board of directors, given current interest rates, it is likely that the trust preferred capital securities issued by FCB/NC Capital Trust II will be redeemed during late 2006.

Table 7Trusts.

SHORT-TERM BORROWINGS

   2005

  2004

  2003

 
   Amount

  Rate

  Amount

  Rate

  Amount

  Rate

 
   (thousands) 

Master notes

                      

At December 31

  $520,585  3.19% $213,387  1.23% $190,978  0.40%

Average during year

   353,871  2.61   197,268  0.82   216,591  0.63 

Maximum month-end balance during year

   520,585     213,387     221,346   

Repurchase agreements

                      

At December 31

   150,054  2.69   131,367  0.73   136,756  0.20 

Average during year

   143,813  1.71   141,959  0.41   156,406  0.32 

Maximum month-end balance during year

   165,758     145,884     164,899   

Federal funds purchased

                      

At December 31

   36,620  3.80   36,933  2.10   38,300  0.70 

Average during year

   45,595  3.10   46,676  1.23   45,226  0.96 

Maximum month-end balance during year

   59,139     66,125     60,535   

Other

                      

At December 31

   71,769  3.43   65,999  1.90   64,157  0.98 

Average during year

   55,669  3.32   60,417  1.39   45,109  1.12 

Maximum month-end balance during year

   72,351     74,171     71,450   

 

Expense of Interest-Bearing Liabilities.    Interest expense amounted to $218.2$423.7 million in 2005, an $84.32007, a $70.0 million or 63.019.8 percent increase from 2004.2006. This followed a $14.7$135.6 million or 9.962.2 percent decreaseincrease in interest expense during 20042006 compared to 2003. In 2005,2005. For both 2007 and 2006, the increase in interest expense was the result of higher interest rates and increased levels of interest-bearing liabilities and higher rates. For 2004, the decrease in interest expense was the result of lower rates, partially offset by moderately higher average volume.liabilities. The blended rate on alltotal interest-bearing liabilities was 2.16equaled 3.57 percent during 2005,2007, compared to 1.433.14 percent in 20042006. Interest-bearing liabilities averaged $11.88 billion during 2007, an increase of $621.0 million or 5.5 percent over 2006 levels. During 2006, interest-bearing liabilities averaged $11.26 billion, an increase of $1.15 billion or 11.4 percent over 2005.

Table 8

CHANGES IN CONSOLIDATED TAXABLE EQUIVALENT NET INTEREST INCOME

     2007   2006 
     Change from previous year due to:   Change from previous year due to: 
     Volume   Yield/
Rate
   Total
Change
   Volume   Yield/
Rate
   Total
Change
 
     (thousands) 

Assets

              

Loans and leases

    $36,232   $8,289   $44,521   $39,803   $69,576   $109,379 

Investment securities:

              

U. S. Government

     5,327    24,187    29,514    17,162    23,540    40,702 

State, county and municipal

     (54)   26    (28)   (63)   33    (30)

Other

     (121)   (83)   (204)   430    650    1,080 
                                

Total investment securities

     5,152    24,130    29,282    17,529    24,223    41,752 

Overnight investments

     770    496    1,266    991    10,704    11,695 
                                

Total interest-earning assets

    $42,154   $32,915   $75,069   $58,323   $104,503   $162,826 
                                

Liabilities

              

Interest-bearing deposits:

              

Checking With Interest

    $(120)  $216   $96   $(53)  $5   $(48)

Savings

     (164)   17    (147)   (163)   24    (139)

Money market accounts

     4,527    10,492    15,019    1,253    28,098    29,351 

Time deposits

     13,567    32,523    46,090    26,149    48,234    74,383 
                                

Total interest-bearing deposits

     17,810    43,248    61,058    27,186    76,361    103,547 

Short-term borrowings

     15,468    (1,773)   13,695    12,859    13,606    26,465 

Long-term obligations

     (3,077)   (1,699)   (4,776)   7,038    (1,464)   5,574 
                                

Total interest-bearing liabilities

    $30,201   $39,776   $69,977   $47,083   $88,503   $135,586 
                                

Net interest income

    $11,953   $(6,861)  $5,092   $11,240   $16,000   $27,240 
                                

Changes in income relating to certain loans, leases and 1.62 percentinvestment securities are stated on a fully tax-equivalent basis at a rate that approximates BancShares’ marginal tax rate. The taxable equivalent adjustment was $7,677, $6,349 and $4,298 for the years 2007, 2006 and 2005 respectively. Table 5 provides detailed information on average balances, income/expense, yield/rate by category and the relevant income tax rates. The rate/volume variance is allocated equally between the changes in 2003. The increase during 2005 was the result of higher market interest rates resulting from actions by the Federal Reservevolume and deposit mix changes toward higher cost time deposits. The extremely low rates in 2004 resulted from prior actions by the Federal Reserve Bank to reduce the discount and federal funds rates, which triggered historically low deposit and borrowing rates.rate.

 

The aggregate rate on interest-bearing deposits was 1.933.37 percent during 2005,2007, compared to 1.262.85 percent during 2004 and 1.48 percent during 2003. Interest2006. Coupled with the impact of growth in interest-bearing deposits, the higher rates caused interest expense on interest-bearing deposits amounted to $176.6reach $341.2 million during 2005,2007, a 62.921.8 percent increase from the $108.4$280.2 million recorded during 2004, which was a 13.1 percent decrease from2006. During both 2007 and 2006, increased rates and higher balances of time deposits and money market deposits caused the $124.8 million recordedgrowth in interest expense on interest-bearing deposits. The rate increases during 2003.2007 and 2006 were the result of higher market interest rates due to intense competition among banks for interest-bearing deposits combined with adjustments to index rates established by the Federal Reserve.

 

Interest expense on short-term borrowings increased $13.7 million or 33.1 percent during 2007, the result of growth among master note and repurchase obligations. Partially offsetting this growth, the rate on average short-term borrowings declined 15 basis points to 4.07 percent due to reductions in the federal funds rate during late 2007. During 2006, interest expense increased $26.5 million over 2005, the result of higher interest rates and substantial growth in average short-term borrowings.

Interest expense on long-term obligations decreased $4.8 million during 2007 due to the net impact of the issuance and redemption of junior subordinated debentures during 2006.

NET INTEREST INCOME

 

Net interest income was $447.8amounted to $480.3 million during 2005,2007, a $60.5$3.8 million or 15.60.8 percent increase over 2006. The marginal increase from 2006 resulted from balance sheet growth, the favorable varianceimpact of which offset the unfavorable influence of a lower net yield on interest-earning assets. The taxable-equivalent net yield on interest-earning assets

declined 13 basis points from 2004. 3.54 percent during 2006 to 3.41 percent during 2007. This reduction resulted from the impact of the flat yield curve and extremely competitive pricing for both loan and deposit products.

During 2004,2006, net interest income was $387.3equaled $476.6 million, a $25.4$25.2 million or 7.05.6 percent decrease from 2003. Theincrease over 2005. Higher interest rates favorably impacted net interest income during 2006, as the rate-influenced growth in interest income exceeded the growth in interest expense. Strong growth in 2006 among deposits and short-term borrowings resulted in a reduction in our net short-term asset sensitivity which caused the net yield on interest-earning assets equaled 3.60 percent in 2005, a 22to decline by 10 basis point improvement as compared to 2004 due primarily to the favorable impact of rate changes among interest-earning assets and interest-bearing liabilities. In addition, 2005’s net yield on interest earning assets was favorably impacted by higher growth in average interest-earning assets than average interest-bearing liabilities. The net yield increased 6 basis points in 2004 over 2003 as a result of a higher ratio of loans to interest-earning assets.points.

 

Theoretically, a net short-term liability-sensitive balance sheet would result in improvements in net interest income following the reductions in interest rates triggered by Federal Reserve actions in late 2007 and early 2008. However, intense competition for deposits has caused interest rates on these products to remain artificially high. Table 8 presentsisolates the annual changes in net interest income due to changes in volume yields and interest rates. Like Table 5, this table is presented on a taxable-equivalent basis to adjust for the tax-exempt status of income earned on certain loans, leases and municipalinvestment securities.

 

Table 9

NONINTEREST INCOME

   Year ended December 31
   2007  2006  2005  2004  2003
   (thousands)

Cardholder and merchant services

  $97,070  $86,103  $75,298  $65,903  $56,432

Service charges on deposit accounts

   77,827   72,561   77,376   81,478   78,273

Wealth management services

        

Trust and asset management fees

   25,262   21,586   18,588   16,913   15,005

Broker-dealer activities

   24,043   20,627   16,138   15,541   15,387
                    

Total wealth advisory services

   49,305   42,213   34,726   32,454   30,392

Fees from processing services

   32,531   29,631   25,598   23,888   20,590

Insurance commissions

   7,735   6,942   6,390   6,186   6,180

Mortgage income

   6,305   5,494   5,361   5,861   11,398

ATM income

   6,515   6,803   7,843   8,416   7,894

Other service charges and fees

   15,318   15,996   16,902   13,926   14,463

Securities gains (losses)

   1,376   (659)  (492)  1,852   309

Gain on sale of branches

      826      426   5,710

Other

   1,488   5,457   8,664   5,494   6,084
                    

Total

  $295,470  $271,367  $257,666  $245,884  $237,725
                    

NONINTEREST INCOME

The growth of noninterest income is essential to our ability to sustain adequate levels of profitability. The primary sources of noninterest income are cardholder and merchant services income, service charges on deposit accounts, wealth advisory services and fees from processing services. Noninterest income totaled $295.5 million during 2007, an increase of $24.1 million or 8.9 percent. Noninterest income during 2006 equaled $271.4 million, a $13.7 million or 5.3 percent increase from 2005. Table 9 presents the major components of noninterest income for the past five years.

The increase in noninterest income during 2007 can be primarily attributed to healthy increases in cardholder and merchant services income, fees from wealth advisory services and service charges on deposit accounts. Cardholder and merchant services income amounted to $97.1 million in 2007 up $11.0 million or 12.7 percent from 2006, the result of higher merchant discount and interchange fees for debit and credit card transactions. We continue to view this source of noninterest income as a key growth area.

Fees from wealth management services increased $7.1 million to $49.3 million in 2007 from $42.2 million in 2006. The 16.8 percent increase in 2007 resulted from growth in broker-dealer activity and increases in trust and asset management fees. Service charges on deposit accounts equaled $77.8 million during 2007, compared to $72.6 million in 2006. The $5.3 million or 7.3 percent increase in service charge income during 2007 reflects the result of higher commercial service charges and bad check income when compared to 2006. Commercial service charge income during 2007 benefited from lower interest rates, which generated reduced earnings credit for commercial customers.

During 2005, interest rate increases created a significant favorable rate variance, while growth among interest-earning assets generated favorable volume variances.2007, fees from processing services totaled $32.5 million, an increase of $2.9 million or 9.8 percent over 2006. During 2004,2006, BancShares recognized $29.6 million in fees from processing services, an increase of $4.0 million or 15.8 percent over the $25.6 million recognized during 2005. Growth in the number of transactions and the addition of new clients and services led to the favorable trend.

Table 10

NONINTEREST EXPENSE

   Year ended December 31
   2007  2006  2005  2004  2003
   (thousands)

Salaries and wages

  $243,871  $228,472  $212,997  $204,597  $195,632

Employee benefits

   52,733   50,445   51,517   48,624   45,958

Equipment

   56,404   52,490   50,291   50,125   50,436

Occupancy

   56,922   52,153   46,912   43,997   42,430

Cardholder and merchant services:

          

Cardholder and merchant processing

   41,882   37,286   32,067   28,290   24,119

Cardholder reward programs

   12,529   9,228   5,878   5,763   5,458

Telecommunications

   10,501   9,844   9,873   10,461   11,455

Postage

   9,614   8,926   8,045   8,639   8,826

Processing fees paid to third parties

   7,004   5,845   4,332   3,826   2,295

Advertising

   7,499   7,212   7,206   7,981   7,566

Legal

   6,410   5,244   4,124   5,978   5,851

Consultant

   3,324   2,254   3,362   2,980   3,747

Amortization of intangibles

   2,142   2,318   2,453   2,360   2,583

Other

   63,829   59,360   57,814   53,565   54,471
                    

Total

  $574,664  $531,077  $496,871  $477,186  $460,827
                    

NONINTEREST EXPENSE

The primary components of noninterest expense are salaries and related employee benefits, occupancy costs for branch offices and support facilities and equipment and software costs related to branch offices and technology. Noninterest expense for 2007 amounted to $574.7 million, a $43.6 million or 8.2 percent increase over 2006. Noninterest expense in 2006 was $531.1 million, a $34.2 million or 6.9 percent increase over 2005. Table 10 presents the major components of noninterest expense for the past five years. For 2007 and 2006, $8.4 million and $6.4 million of the respective increases in total noninterest expense are attributable to the continued growth and expansion of ISB.

Salary expense totaled $243.9 million during 2007, compared to $228.5 million during 2006, an increase of $15.4 million or 6.7 percent, following a $15.5 million or 7.3 percent increase in 2006 over 2005. The increase in 2007 is attributable to incremental staff costs for new branch offices and merit increases.

Employee benefits expense equaled $52.7 million during 2007, an increase of $2.3 million or 4.5 percent from 2006 due to higher health insurance costs and employer-paid payroll taxes. Partially offsetting these higher costs, pension expense decreased $1.4 million or 11.9 percent due to the favorable impact of employer contributions to the plan, partially offset by a curtailment charge. During the first quarter of 2008, as a result of the retirement of an executive officer, we recognized employee benefit expense totaling $3.0 million, representing the present value of benefits granted at the time of his retirement.

As a result of the earnings and funding volatility associated with providing a defined benefit plan, BancShares discontinued offering traditional pension benefits to newly-hired employees during 2007. Instead, employees hired after March 31, 2007 may elect to participate in an enhanced 401(k) benefit plan. Employees hired on or before March 31, 2007 were allowed the option of continued participation in the defined benefit plan and the existing 401(k) plan or enrollment in an enhanced 401(k) benefit plan. Employees who elected to enroll in the enhanced 401(k) benefit plan discontinued the accrual of future years of service benefit under the defined benefit plan. Based on the elections made by participants, a curtailment charge of $763,000 is included in employee benefit expense during 2007.

BancShares recorded occupancy expense of $56.9 million during 2007, an increase of $4.8 million or 9.1 percent during 2007. Occupancy expense during 2006 equaled $52.2 million, an increase of $5.2 million or 11.2 percent over 2005. The increase in occupancy expense in each period resulted from higher depreciation and rent expense attributable to newly constructed branches as well as costs attributable to our corporate headquarters building. ISB’s occupancy expense increased $2.9 million or 22.5 percent during 2007 due to newly-opened locations.

Equipment expense was $56.4 million for 2007 and $52.5 million in 2006. The $3.9 million increase during 2007 resulted primarily from increased technology costs and additional depreciation expense from the corporate headquarters building and new branch offices.

Other expense totaled $164.7 million for 2007, an increase of $17.2 million or 11.7 percent over 2006. Expenses related to cardholder and merchant activities amounted to $54.4 million in 2007 and $46.5 million in 2006. This increase of $7.9 million or 17.0 percent is due to growth in credit and debit card transactions, higher levels of merchant volume variance triggeredand higher costs associated with cardholder reward programs. During 2007, BancShares recognized $3.3 million of expense for litigation matters resulting from Visa International (Visa) member bank status. The exposure estimates result from two separate claims against Visa, which, under the terms of governing agreements, will be shared by loanmember banks. Visa previously announced plans to complete an initial public offering, an event that could result in a gain for current Visa member banks. Although the date for Visa’s initial public offering is uncertain any, gain recognized in future periods would offset some or all of the expenses recognized during 2007.

Losses sustained on fixed assets write-offs increased $1.6 million during 2007 due to the write-off of the unamortized cost of closed branches, abandonment of future development plans for the headquarters site and losses resulting from changes to the scope of a technology project. Legal costs increased $1.2 million during 2007 due to defense costs related to various litigation and collection matters, while consultant expenses increased $1.1 million primarily related to various technology projects.

INCOME TAXES

During 2007, BancShares recorded income tax expense of $58.9 million, compared to $69.5 million during 2006 and $65.8 million in 2005. BancShares’ effective tax rate was 35.2 percent in 2007, 35.4 percent in 2006 and 36.8 in 2005. The lower effective tax rates during 2007 and 2006 resulted from the benefit of credits earned for low-income housing investments and changes to the deferred tax asset valuation allowance and blended state tax rates when compared to 2005.

SHAREHOLDERS’ EQUITY

We continually monitor the capital levels and ratios for BancShares and the subsidiary banks to ensure that they comfortably exceed the minimum requirements imposed by their respective regulatory authorities and to ensure that the subsidiary banks’ capital is appropriate given each bank’s growth offsetprojections and risk profile. Failure to meet certain capital requirements may result in actions by regulatory agencies that could have a material effect on the unfavorable rate variance caused by falling interest rates.financial statements. Table 11 provides information on capital adequacy for BancShares, FCB and ISB as of December 31, 2007, 2006 and 2005.

Table 811

CHANGES IN CONSOLIDATED TAXABLE EQUIVALENT NET INTEREST INCOMEANALYSIS OF CAPITAL ADEQUACY

 

   2005

  2004

 
   Change from previous year due to:

  Change from previous year due to:

 
   Volume

  

Yield/

Rate


  

Total

Change


  Volume

  

Yield/

Rate


  

Total

Change


 
   (thousands) 

Assets

                         

Loans and leases

  $26,971  $77,729  $104,700  $54,676  $(32,886) $21,790 

Investment securities:

                         

U. S. Government

   9,696   16,261   25,957   (9,939)  (1,896)  (11,835)

State, county and municipal

   (72)  23   (49)  186   2   188 

Other

   301   786   1,087   (77)  (131)  (208)
   


 


 


 


 


 


Total investment securities

   9,925   17,070   26,995   (9,830)  (2,025)  (11,855)

Overnight investments

   3,675   9,655   13,330   (306)  1,225   919 
   


 


 


 


 


 


Total interest-earning assets

  $40,571  $104,454  $145,025  $44,540  $(33,686) $10,854 
   


 


 


 


 


 


Liabilities

                         

Interest-bearing deposits:

                         

Checking With Interest

  $105  $22  $127  $159  $(286) $(127)

Savings

   (29)  58   29   132   (791)  (659)

Money market accounts

   961   27,616   28,577   111   (725)  (614)

Time deposits

   11,090   28,369   39,459   (855)  (14,095)  (14,950)
   


 


 


 


 


 


Total interest-bearing deposits

   12,127   56,065   68,192   (453)  (15,897)  (16,350)

Short-term borrowings

   2,524   8,831   11,355   (130)  946   816 

Long-term obligations

   5,026   (248)  4,778   2,513   (1,690)  823 
   


 


 


 


 


 


Total interest-bearing liabilities

  $19,677  $64,648  $84,325  $1,930  $(16,641) $(14,711)
   


 


 


 


 


 


Change in net interest income

  $20,894  $39,806  $60,700  $42,610  $(17,045) $25,565 
   


 


 


 


 


 



   December 31  Regulatory
Minimum
 
   2007  2006  2005  
   (dollars in thousands)    

First Citizens BancShares, Inc.

     

Tier 1 capital

  $1,557,190  $1,456,947  $1,320,152  

Tier 2 capital

   279,573   275,079   267,989  
              

Total capital

  $1,836,763  $1,732,026  $1,588,141  
              

Risk-adjusted assets

  $11,961,124  $11,266,342  $10,510,254  

Average total assets

   16,168,165   15,518,209   14,403,567  

Risk-based capital ratios

     

Tier 1 capital

   13.02%  12.93%  12.56% 4.00%

Total capital

   15.36%  15.37%  15.11% 8.00%

Tier 1 leverage ratio

   9.63%  9.39%  9.17% 3.00%

First-Citizens Bank & Trust Company

     

Tier 1 capital

  $1,188,599  $1,104,132  $998,152  

Tier 2 capital

   244,470   240,070   234,311  
              

Total capital

  $1,433,069  $1,344,202  $1,232,463  
              

Risk-adjusted assets

  $9,716,423  $9,238,512  $8,739,531  

Average total assets

   13,497,638   13,250,610   12,523,144  

Risk-based capital ratios

     

Tier 1 capital

   12.23%  11.95%  11.42% 4.00%

Total capital

   14.75%  14.55%  14.10% 8.00%

Tier 1 leverage ratio

   8.81%  8.33%  7.97% 3.00%

IronStone Bank

     

Tier 1 capital

  $261,500  $245,402  $215,263  

Tier 2 capital

   24,801   23,576   21,101  
              

Total capital

  $286,301  $268,978  $236,364  
              

Risk-adjusted assets

  $2,190,348  $1,953,178  $1,821,048  

Adjusted total assets

   2,333,717   2,130,770   1,849,828  

Risk-based capital ratios

     

Tier 1 capital

   11.94%  12.56%  11.82% 4.00%

Total capital

   13.07%  13.77%  12.98% 8.00%

Tangible equity ratio

   11.21%  11.52%  11.64% 3.00%

Changes

BancShares continues to exceed minimum capital standards and the banking subsidiaries remain well-capitalized. The sustained growth of ISB has required BancShares to infuse significant amounts of capital into ISB to support its rapidly expanding balance sheet. Infusions totaled $24.0 million in income relating2007, $30.0 million in 2006 and $20.0 million in 2005. Since ISB was formed in 1997, BancShares has provided $304.0 million in capital. BancShares’ prospective capacity to certain loansprovide capital to support the future growth and investment securities are statedexpansion of ISB is highly dependent upon FCB’s ability to return capital through dividends to BancShares.

Dividends from FCB to BancShares provide the sole source for capital infusions into ISB to fund its growth and expansion. These dividends also fund BancShares’ payment of shareholder dividends and interest payments on a fully tax-equivalent basis atportion of its long-term obligations. During 2007, FCB declared dividends to BancShares in the amount of $44.0 million, compared to $40.0 million in 2006 and $32.2 million in 2005. At December 31, 2007, based on limitations imposed by North Carolina General Statutes, FCB had the ability to declare dividends totaling $956.0 million. However, any dividends declared in excess of $461.4 million would have caused FCB to lose its well-capitalized designation.

RISK MANAGEMENT

In the normal course of business, BancShares is exposed to various risks. To manage the major risks that are inherent in the operation of a financial holding company and to provide reasonable assurance that our long-term business objectives will be attained, various policies and risk management processes identify, monitor and manage risk within acceptable tolerances. Management continually refines and enhances its risk management policies and procedures to maintain effective risk management.

Our most prominent risk exposures are credit, interest rate that approximates BancShares’ marginal tax rate. The taxable equivalent adjustment was $1,473, $1,265 and $1,051 forliquidity risk. Credit risk is the years 2005, 2004 and 2003 respectively. Table 5 provides detailed information on average balances, income/expense, yield/risk of not collecting the amount of a loan or investment when it is contractually due. Interest rate by category andrisk is the relevantpotential reduction of net interest income tax rates. The rate/volume variance is allocated equally between theas a result of changes in volume and rate.market interest rates. Liquidity risk is the possible inability to fund obligations to depositors, creditors, investors or borrowers.

Table 12

NONPERFORMING ASSETS

   December 31, 
   2007  2006  2005  2004  2003 
   (thousands, except ratios) 

Nonaccrual loans and leases

  $13,021  $14,882  $18,969  $14,266  $18,190 

Other real estate

   6,893   6,028   6,753   9,020   5,949 
                     

Total nonperforming assets

  $19,914  $20,910  $25,722  $23,286  $24,139 
                     

Accruing loans and leases 90 days or more past due

  $7,124  $5,185  $9,180  $12,192  $11,492 

Loans and leases at December 31

  $10,963,904  $10,273,043  $9,656,230  $9,364,822  $8,333,073 

Ratio of nonperforming assets to total loans and leases plus other real estate

   0.18%  0.20%  0.27%  0.25%  0.29%
                     

Interest income that would have been earned on nonperforming loans and leases had they been performing

  $1,200  $1,271  $551  $773  $1,182 

Interest income earned on nonperforming loans and leases

   465   226   821   281   356 
                     

There were no foreign loans or leases outstanding in any period.

 

Rate SensitivityCredit Risk..    BancShares manages and monitors extensions of credit and the quality of the loan and lease portfolio through rigorous initial underwriting processes and periodic ongoing reviews. Underwriting standards reflect credit policies and procedures, and our credit decision process is highly centralized. We maintain a credit review function that conducts independent risk reviews and analyses for the purpose of ensuring compliance with credit policies and to monitor asset quality trends. The independent risk reviews include portfolio analysis by geographic location and horizontal reviews across industry and collateral sectors within the banking subsidiaries. BancShares strives to identify potential credit problems as early as possible, to take charge-offs or write-downs as appropriate and to maintain adequate allowances for credit losses that are inherent in the loan and lease portfolio. The maintenance of excellent asset quality is one of our key performance measures.

We maintain a well-diversified loan and lease portfolio, and seek to avoid the risk associated with large concentrations within specific geographic areas or industries. The ongoing expansion of our branch network has allowed us to mitigate our historic exposure to geographic risk concentration in North Carolina and Virginia.

We have historically carried a significant concentration of real estate-secured loans, although our underwriting policies principally rely on borrower cash flow ability rather than underlying collateral values. When we do rely on underlying real property values, we favor financing secured by owner-occupied real property. At December 31, 2007, loans secured by real estate totaled $7.46 billion or 68.1 percent of total loans compared to $7.03 billion or 68.4 percent at December 31, 2006.

In recent years, we have sought opportunities to provide financial services to businesses associated with and professionals within the medical community. Due to strong loan growth within this industry, our loans to borrowers in medical, dental or related fields totaled $2.26 billion as of December 31, 2007, which represents 20.6 percent of total loans and leases outstanding, compared to $1.92 billion or 18.7 percent of loans and leases at December 31, 2006. Except for this single concentration, no other industry represented more than 10 percent of total loans and leases outstanding at December 31, 2007.

In addition to geographic and industry concentrations, we monitor our loan and lease portfolio for other risk characteristics. Among the key indicators of credit risk are loan-to-value ratios, which measure a lender’s exposure as compared to the value of the underlying collateral. Regulatory agencies have established guidelines that define high loan-to-value loans as those real estate loans that exceed 65 percent to 85 percent of the collateral value depending upon the type of collateral. At December 31, 2007, we had $969.1 million or 8.8 percent of loans and leases that exceeded the loan-to-value ratios recommended by the guidelines compared to $1.08 billion or 10.6 percent at December 31, 2006. While we continuously strive to limit our high loan-to-value loans, we believe that the inherent risk within these loans is lessened by mitigating factors, such as our strict underwriting criteria and the high rate of owner-occupied properties.

Nonperforming assets include nonaccrual loans and leases and other real estate. With the exception of certain residential mortgage loans, the accrual of interest on loans and leases is discontinued when we deem that collection of additional principal or interest is doubtful. Loans and leases are returned to an accrual status when both principal and interest are current and the asset is determined to be performing in accordance with the terms of the loan instrument. The accrual of interest on certain residential mortgage loans is discontinued when a loan is more than three monthly payments past due, and the accrual of interest resumes when the loan is less than three monthly payments past due. Other real estate includes foreclosed property, branch facilities that we have closed but not sold and land that we have elected to sell that was originally acquired for future branches. Nonperforming asset balances for the past five years are presented in Table 12.

BancShares’ nonperforming assets at December 31, 2007 totaled $19.9 million, compared to $20.9 million at December 31, 2006 and $25.7 million at December 31, 2005. A principal objectiveportion of the reduction experienced during 2006 related to write downs taken on a single relationship that was classified as non-accrual as of December 31, 2005. As a percentage of total loans, leases and other real estate, nonperforming assets represented 0.18 percent, 0.20 percent, and 0.27 percent as of December 31, 2007, 2006 and 2005. During early 2008, due to deteriorating borrower cash flow and recognition of reductions in collateral value, we identified $23.1 million in residential construction loans where collection of additional interest is doubtful. These loans were placed on nonaccrual status during the first quarter of 2008. We continue to closely monitor past due accounts to identify any loans and leases that should be classified as impaired or non-accrual.

The allowance for credit losses reflects the estimated losses resulting from the inability of our customers to make required payments. In calculating the allowance, we employ a variety of modeling and estimation tools for measuring credit risk. Generally, loans and leases to commercial customers are evaluated individually and assigned a credit grade based upon factors such as the borrower’s cash flow, the value of any underlying collateral and the strength of any guarantee. Relying on data detailing historical credit grade losses and migration patterns among credit grades, we calculate a loss estimate for each credit grade. During 2007, after monitoring the migration of commercial mortgage and commercial and industrial loans between loan grades over a period of several years, we incorporated applicable data into our formula used to calculate the allowance. Relying on that information, the allowance declined $4.1 million.

Groups of consumer loans are aggregated over their remaining estimated behavioral lives and probable loss projections for each period become the basis for the allowance amount. The loss projections are based on historical losses, delinquency patterns and various other credit risk indicators. During the second quarter of 2007, after accumulating sufficient data related to the actual repayment history of an isolated pool of revolving mortgage loans that are representative of the entire portfolio, we determined that an adjustment to the formula used to calculate the allowance was appropriate. As a result, the allowance required for this portfolio of loans declined by $4.5 million.

When needed, we also establish specific allowances for impaired loans. Commercial purpose loans are considered to be impaired if they are classified as nonaccrual and have a balance in excess of $1.0 million. The allowance for each impaired loan is the difference between its carrying value and the estimated collateral value or the present value of anticipated cash flows.

The allowance for credit losses also includes an amount that is not specifically allocated to individual loan types. This unallocated allowance is based upon factors such as changes in business and economic conditions, recent loss, delinquency and asset quality issues both within BancShares and the banking industry, exposures resulting from loan concentrations or specific industry risks and other judgmental factors. Due to recent economic deterioration, unfavorable industry-wide asset quality trends,, and the increased likelihood of unanticipated adverse changes in the quality of the loan and lease portfolio, the unallocated portion of the allowance increased to 8.0 percent of the total allowance for credit losses as of December 31, 2007, up from 3.7 percent as of December 31, 2006.

Table 13

ALLOWANCE FOR CREDIT LOSSES

   2007  2006  2005  2004  2003 
   (thousands, except ratios) 

Allowance for credit losses at beginning of period

  $138,646  $135,770  $130,832  $119,357  $112,533 

Adjustment for sale of loans

         (1,585)      

Acquired allowance for credit loss

               409 

Provision for credit losses

   33,594   20,922   33,514   34,690   24,617 

Charge-offs:

      

Real estate:

      

Construction and land development

   (631)     (1)  (13)  (16)

Commercial mortgage

   (49)  (124)  (551)  (804)  (318)

Residential mortgage

   (1,246)  (1,717)  (1,912)  (2,351)  (1,594)

Revolving mortgage

   (1,363)  (1,475)  (951)  (1,384)  (1,392)

Other mortgage loans

                
                     

Total real estate loans

   (3,289)  (3,316)  (3,415)  (4,552)  (3,320)

Commercial and industrial

   (13,106)  (10,378)  (18,724)  (9,800)  (7,531)

Consumer

   (13,203)  (9,171)  (10,425)  (12,238)  (10,481)

Lease financing

   (3,092)  (1,488)  (347)  (173)  (756)
                     

Total charge-offs

   (32,690)  (24,353)  (32,911)  (26,763)  (22,088)
                     

Recoveries:

      

Real estate:

      

Construction and land development

   21         34   10 

Commercial mortgage

   8   182   409   236   164 

Residential mortgage

   261   290   432   244   631 

Revolving mortgage

   96   182   155   103   63 

Other mortgage loans

                
                     

Total real estate loans

   386   654   996   617   868 

Commercial and industrial

   1,282   1,358   2,164   1,084   1,428 

Consumer

   2,883   4,140   2,672   1,761   1,590 

Lease financing

   170   155   88   86    
                     

Total recoveries

   4,721   6,307   5,920   3,548   3,886 
                     

Net charge-offs

   (27,969)  (18,046)  (26,991)  (23,215)  (18,202)
                     

Allowance for credit losses at end of period

  $144,271  $138,646  $135,770  $130,832  $119,357 
                     

Allowance for credit losses includes:

      

Allowance for loan and lease losses

  $136,974  $132,004  $128,847  $123,861  $112,304 

Reserve for unfunded commitments

   7,297   6,642   6,923   6,971   7,053 
                     

Allowance for credit losses at end of period

  $144,271  $138,646  $135,770  $130,832  $119,357 
                     

Average loans and leases

  $10,513,599  $9,989,757  $9,375,249  $8,901,628  $7,893,621 

Loans and leases at year-end

   10,963,904   10,273,043   9,656,230   9,364,822   8,333,073 

Ratios

      

Net charge-offs to average loans and leases

   0.27%  0.18%  0.29%  0.26%  0.23%

Percent of total loans and leases at period-end:

      

Allowance for loan and lease losses

   1.25   1.28   1.33   1.32   1.35 

Reserve for unfunded commitments

   0.07   0.06   0.07   0.07   0.08 

Allowance for credit losses

   1.32   1.35   1.41   1.40   1.43 

All information presented in this table relates to domestic loans and leases as BancShares makes no foreign loans and leases.

At December 31, 2007, BancShares’ allowance for credit losses totaled $144.3 million or 1.32 percent of loans and leases outstanding. This compares to $138.6 million or 1.35 percent at December 31, 2006, and $135.8 million or 1.41 percent at December 31, 2005.

The provision for credit losses equaled $33.6 million during 2007 compared to $20.9 million during 2006 and $33.5 million during 2005. The $12.7 million or 60.6 percent increase in provision for credit losses from 2006 to 2007 resulted primarily from $8.3 million of losses related to working capital finance and increased provision for loan growth during 2007.

Net charge-offs for 2007 totaled $28.0 million, compared to $18.0 million during 2006, and $27.0 million during 2005. The ratio of net charge-offs to average loans and leases outstanding equaled 0.27 percent during 2007, 0.18 percent during 2006 and 0.29 percent during 2005. These low loss ratios reflect the quality of BancShares’ asset/liability functionloan and lease portfolio and are a key indicator of our close monitoring of loan and lease quality. Table 13 provides details concerning the allowance for credit losses and provision for credit losses for the past five years.

Table 14 details the allocation of the allowance for credit losses among the various loan types. The process used to allocate the allowance considers, among other factors, whether the borrower is to monitora retail or commercial customer, whether the loan is secured or unsecured, and managewhether the loan is an open or closed-end agreement.

Table 14

ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES

  December 31 
  2007  2006  2005  2004  2003 
  Allowance
for Credit
Losses
 Percent
of Loans
to Total
Loans
  Allowance
for Credit
Losses
 Percent
of Loans
to Total
Loans
  Allowance
for Credit
Losses
 Percent
of Loans
to Total
Loans
  Allowance
for Credit
Losses
 Percent
of Loans
to Total
Loans
  Allowance
for Credit
Losses
 Percent
of Loans
to Total
Loans
 
  (dollars in thousands) 

Allowance for loan and lease losses:

          

Real estate:

          

Construction and land development

 $9,918 7.40% $9,351 7.63% $8,985 7.94% $7,704 6.28% $7,806 6.12%

Commercial mortgage

  35,760 36.31   38,463 36.27   37,185 36.44   35,373 35.03   31,161 31.85 

Residential mortgage

  7,011 9.39   6,954 9.98   6,822 10.53   6,387 10.46   5,577 11.15 

Revolving mortgage

  5,735 13.63   8,425 12.91   8,712 14.17   11,587 18.30   9,334 19.18 

Other mortgage

  2,323 1.33   2,145 1.61   2,242 1.79   2,249 1.83   2,113 2.08 
                              

Total real estate

  60,747 68.06   65,338 68.40   63,946 70.87   63,300 71.90   55,991 70.38 

Commercial and industrial

  32,743 15.57   34,846 14.86   30,663 12.50   26,794 10.47   25,028 11.23 

Consumer

  26,925 12.48   22,396 13.24   22,695 13.66   24,072 14.92   21,688 15.65 

Lease financing

  4,649 3.11   3,562 2.87   2,389 2.42   2,229 2.05   2,518 1.92 

Other

  412 0.78   723 0.63   576 0.55   743 0.66   901 0.82 

Unallocated

  11,498   5,139   8,578   6,723   6,178 

Reserve for unfunded commitments

  7,297   6,642   6,923   6,971   7,053 
                              

Total

 $144,271 100.00% $138,646 100.00% $135,770 100.00% $130,832 100.00% $119,357 100.00%
                              

Interest Rate Risk.    Interest rate risk results principally from assets and liabilities maturing or repricing at different points in time, from assets and liabilities repricing at the same point in time but in different amounts and from short-term and long-term interest rates changing in different magnitudes, an event frequently described by the resulting impact on the shape of the yield curve. Market interest rates may also have a direct or indirect impact on the interest rate and repricing characteristics of loans and leases that are originated as well as the rate characteristics of our interest-bearing liabilities.

We assess our interest rate risk the exposureby simulating future amounts of net interest income using various interest rate scenarios and comparing those results to forecasted net interest income assuming stable rates. Table 15 provides the impact on net interest income resulting from various interest rate scenarios as of December 31, 2007 and 2006.

Table 15

INTEREST RATE RISK ANALYSIS

   Favorable (unfavorable) impact
on net interest income compared
to stable rate scenario over the
12-month period following:
 

Assumed rate change

  December 31,
2007
  December 31,
2006
 

Most likely

  (0.52%) (0.04%)

Immediate 200 basis point increase

  (5.65%) (0.54%)

Gradual 200 basis point increase

  (2.22%) (1.16%)

Gradual 200 basis point decrease

  3.05% 1.86%

Immediate 200 basis point decrease

  2.45% 0.65%

We also utilize the market value of equity as a measurement tool in measuring and managing interest rate risk. The market value of equity measures the degree to which the market values of our assets and liabilities will change given a specific degree of movement in interest rates. Our calculation methodology for the market value of equity utilizes a 200-basis point parallel rate shock. As of December 31, 2007, the market value of equity is estimated to increase by 10.1 percent given a 200-basis point immediate decrease in interest rates, and decline by 7.2 percent when interest rates immediately increase by 200 basis points. The estimated amounts for the market value of equity are highly influenced by the relatively longer maturity of the commercial loan component of interest-earning assets than for interest-bearing liabilities.

The maturity distribution and repricing opportunities of interest-earning assets have a significant impact on our interest rate risk. Table 16 provides a loan maturity distribution and information regarding the sensitivity of loans and leases to changes in interest rates. Management maintains portfolios of interest-earning assets and interest-bearing liabilities with repricing characteristics that are intended to protect against extreme interest rate fluctuations, thereby limiting, to the extent possible, the ultimate interest rate exposure. Table 4 includes maturity information for our investment securities.

We do not typically utilize interest rate swaps, floors, collars or other derivative financial instruments to attempt to hedge our rate sensitivity and interest rate risk.

Table 9 provides information relative However, during the second quarter of 2006, in conjunction with the issuance of $115.0 million in trust preferred securities, we entered into an interest rate swap to BancShares’ interest-sensitivity position assynthetically convert the variable rate coupon on the securities to a fixed rate of December 31, 2005. Checking With Interest7.125 percent for a period of five years. The interest rate swap is includeda cash flow derivative under Statement of Financial Accounting Standards No. 133. The derivative is valued each quarter, and changes in the 1-30 day sensitive category duefair value are recorded on the consolidated balance sheet with an offset to our contractual ability to changeother comprehensive income for the interest rates on such products. During 2005, however, the relative change in the actual rates on such products was insignificant as comparedeffective portion and an offset to the change in general short-term market interest rates. Thus,consolidated statements of income for any ineffective portion. The determination of effectiveness is made under the actual impact on net interest income of changes in market interest rates may not be accurately inferred purely by way of reference to the interest-sensitivity gap. As a result of the $1.23 billion one year liability-sensitive position, increases in interest rates will have an unfavorable impact on net interest income, if the interest rates on interest-earning assets and interest-bearing liabilities react identically to increased market interest rates. We believe that further actions by the Federal Reserve to increase interest rates during 2006 will be modest and that the net yield on interest-earning assets will decline slightly from the 2005 level.long-haul method.

Table 916

INTEREST-SENSITIVITY ANALYSIS

December 31, 2005


 

1-30

Days
Sensitive


  

31-90

Days
Sensitive


  91-180
Days
Sensitive


  181-365
Days
Sensitive


  Total One
Year
Sensitive


  Total
Nonsensitive


 Total

  (thousands)

Assets

                          

Loans and leases

 $4,490,289  $179,662  $264,532  $550,116  $5,484,599  $4,158,395 $9,642,994

Investment securities held to maturity

  69,980   66,028   101,429   178,735   416,172   220,324  636,496

Investment securities available for sale

     54,256   104,372   423,134   581,762   1,711,258  2,293,020

Overnight investments

  481,012            481,012     481,012
  


 


 


 


 


 

 

Total interest-earning assets

 $5,041,281  $299,946  $470,333  $1,151,985  $6,963,545  $6,089,977 $13,053,522
  


 


 


 


 


 

 

Liabilities

                          

Interest-bearing deposits

 $4,766,510  $449,472  $682,019  $1,516,603  $7,414,604  $2,143,077 $9,557,681

Short-term borrowings

  727,478   375   645   50,530   779,028     779,028

Long-term obligations

                 408,987  408,987
  


 


 


 


 


 

 

Total interest-bearing liabilities

 $5,493,988  $449,847  $682,664  $1,567,133  $8,193,632  $2,552,064 $10,745,696
  


 


 


 


 


 

 

Interest-sensitivity gap

 $(452,707) $(149,901) $(212,331) $(415,148) $(1,230,087) $3,537,913 $2,307,826
  


 


 


 


 


 

 


Assets and liabilities with maturities of one year or less and those that may be adjusted within this period are considered interest sensitive. The interest-sensitivity position has meaning only as of the date for which it was prepared.

To minimize the potential adverse impact of interest rate fluctuations, we monitor the repricing characteristics of the loan portfolio and interest-bearing liabilities to reduce our interest rate risk. Virtually all of our traditional fixed-rate residential mortgage loan production is originated through correspondents, protecting BancShares from the interest rate exposure that is typical in such lending. Table 10 details the maturity and repricing distribution of our loan and lease portfolio as of December 31, 2005. Of the loans and leases outstanding on December 31, 2005, 21.6 percent have scheduled maturities within one year, 45.3 percent have scheduled maturities between one and five years, while the remaining 33.1 percent have scheduled maturities extending beyond five years.We continue to offer competitive variable rate lending options to lessen our interest rate exposure resulting from fixed-rate loans.

Table 10

LOAN MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITYALLOCATION OF ALLOWANCE FOR CREDIT LOSSES

 

   December 31, 2005

   Within One
Year


  One to Five
Years


  After Five
Years


  Total

    (thousands)

Real estate:

                

Construction and land development

  $318,684  $311,091  $137,170  $766,945

Commercial mortgage

   835,429   1,720,569   962,565   3,518,563

Residential mortgage

   168,228   453,179   395,270   1,016,677

Revolving mortgage

   116,625   328,500   923,604   1,368,729

Other mortgage

   81,169   64,824   26,719   172,712
   

  

  

  

Total real estate loans

   1,520,135   2,878,163   2,445,328   6,843,626

Commercial and industrial

   304,740   411,135   477,474   1,193,349

Consumer

   176,220   882,084   260,667   1,318,971

Lease financing

   58,375   175,124   —     233,499

Other

   27,046   17,866   8,637   53,549
   

  

  

  

Total

  $2,086,516  $4,364,372  $3,192,106  $9,642,994
   

  

  

  

Loans maturing after one year with:

                

Fixed interest rates

      $2,308,530  $1,303,664  $3,612,194

Floating or adjustable rates

       2,055,842   1,888,442   3,944,284
       

  

  

Total

      $4,364,372  $3,192,106  $7,556,478
       

  

  

Table 11

MARKET RISK DISCLOSURES

   Maturing in Years ended December 31,

  Thereafter

  Total

   

Fair

Value


   2006

  2007

  2008

  2009

  2010

     

Assets

                                 

Investment securities held to maturity

                                 

Fixed rate

  $416,172  $209,195  $250  $  $12  $10,867  $636,496   $631,876

Average rate (%)

   2.67%  3.67%  7.75%      8.00%  5.69%  3.05%    

Investment securities available for sale

                                 

Fixed rate

   581,762   1,284,557   303,044   2,032   671   59,736   2,231,802    2,231,802

Average rate (%)

   3.02%  3.51%  4.00%  3.83%  3.47%  5.32%  3.50%    

Equity securities

                  61,218   61,218    61,218

Loans and leases

                                 

Fixed rate

   730,894   610,310   614,669   552,664   530,887   1,303,664   4,343,088    4,179,089

Average rate (%)

   5.81%  5.73%  5.65%  5.77%  5.99%  5.97%  5.84%    

Variable rate

   1,355,622   691,140   643,120   464,481   257,101   1,888,442   5,299,906    5,299,906

Average rate (%)

   7.09%  6.75%  6.54%  6.18%  5.61%  6.69%  6.68%    

Liabilities

                                 

Savings and interest-bearing checking

                                 

Fixed rate

   5,017,221                  5,017,221    5,017,221

Average rate (%)

   1.29%                      1.29%    

Time deposits

                                 

Fixed rate

   3,068,467   943,844   204,517   127,656   168,040   13   4,512,537    4,568,631

Average rate (%)

   3.22%  3.81%  3.56%  3.64%  4.12%  7.90%  3.40%    

Variable rate

   21,606   6,317               27,923    27,923

Average rate (%)

   1.75%  3.00%                  2.03%    

Short-term borrowings

                                 

Fixed rate

   779,028                  779,028    779,028

Average rate (%)

   3.20%                      3.20%    

Long-term obligation

                                 

Fixed rate

   134   25,147   160   175   190   383,181   408,987    418,221

Average rate (%)

   6.00%  3.45%  6.00%  6.00%  6.00%  7.19%  6.96%    
  December 31 
  2007  2006  2005  2004  2003 
  Allowance
for Credit
Losses
 Percent
of Loans
to Total
Loans
  Allowance
for Credit
Losses
 Percent
of Loans
to Total
Loans
  Allowance
for Credit
Losses
 Percent
of Loans
to Total
Loans
  Allowance
for Credit
Losses
 Percent
of Loans
to Total
Loans
  Allowance
for Credit
Losses
 Percent
of Loans
to Total
Loans
 
  (dollars in thousands) 

Allowance for loan and lease losses:

          

Real estate:

          

Construction and land development

 $9,918 7.40% $9,351 7.63% $8,985 7.94% $7,704 6.28% $7,806 6.12%

Commercial mortgage

  35,760 36.31   38,463 36.27   37,185 36.44   35,373 35.03   31,161 31.85 

Residential mortgage

  7,011 9.39   6,954 9.98   6,822 10.53   6,387 10.46   5,577 11.15 

Revolving mortgage

  5,735 13.63   8,425 12.91   8,712 14.17   11,587 18.30   9,334 19.18 

Other mortgage

  2,323 1.33   2,145 1.61   2,242 1.79   2,249 1.83   2,113 2.08 
                              

Total real estate

  60,747 68.06   65,338 68.40   63,946 70.87   63,300 71.90   55,991 70.38 

Commercial and industrial

  32,743 15.57   34,846 14.86   30,663 12.50   26,794 10.47   25,028 11.23 

Consumer

  26,925 12.48   22,396 13.24   22,695 13.66   24,072 14.92   21,688 15.65 

Lease financing

  4,649 3.11   3,562 2.87   2,389 2.42   2,229 2.05   2,518 1.92 

Other

  412 0.78   723 0.63   576 0.55   743 0.66   901 0.82 

Unallocated

  11,498   5,139   8,578   6,723   6,178 

Reserve for unfunded commitments

  7,297   6,642   6,923   6,971   7,053 
                              

Total

 $144,271 100.00% $138,646 100.00% $135,770 100.00% $130,832 100.00% $119,357 100.00%
                              

 

Market risk disclosuresInterest Rate Risk.    Table 11 provides information regardingInterest rate risk results principally from assets and liabilities maturing or repricing at different points in time, from assets and liabilities repricing at the marketsame point in time but in different amounts and from short-term and long-term interest rates changing in different magnitudes, an event frequently described by the resulting impact on the shape of the yield curve. Market interest rates may also have a direct or indirect impact on the interest rate and repricing characteristics of loans and leases that are originated as well as the rate characteristics of our interest-bearing liabilities.

We assess our interest rate risk profileby simulating future amounts of BancShares at December 31, 2005. Market risk is the potential economic loss resulting from changes in market prices and interest rates. This risk can result in diminished current fair values or reduced net interest income or both in future periods. The more significant changes in our market risk profileusing various interest rate scenarios and comparing those results to forecasted net interest income assuming stable rates. Table 15 provides the impact on net interest income resulting from various interest rate scenarios as of December 31, 2004 to December 31, 2005 include:

the fair value of investment securities held to maturity declined $242.9 million or 27.8 percent; all of the decrease relates to reductions in fixed-rate securities;

the fair value of investment securities available for sale increased $1.04 billion or 83.7 percent; excluding the marketable equity securities, all of the decrease relates to growth among fixed-rate securities;

the fair value of fixed rate loans2007 and leases has increased $749.5 million or 21.9 percent due to loan growth during 2005;

the fair value of variable rate loans and leases has decreased $549.1 million or 9.4 percent due to customer demand for fixed rate loans;

the fair value of savings and interest-bearing checking deposits increased $25.7million or 0.5 percent;

the fair value of fixed rate time deposits increased $645.9 million or 16.5 percent; the increase results from rate-influenced customer demand for time deposits;

the fair value of short-term borrowings increased $331.3 million or 74.0 percent due to volume increases;

the fair value of long-term obligations, all of which are fixed-rate, increased $121.7 million, primarily due to the $125.0 million of subordinated notes payable issued in 2005;

ASSET QUALITY

The maintenance of excellent asset quality is one of our key performance measures. We have historically dedicated significant resources to ensuring we are prudent both in decisions to extend credit and in the monitoring of asset quality on an ongoing basis.

Nonperforming Assets.    Nonperforming assets include nonaccrual loans and leases and other real estate. With the exception of certain residential mortgage loans, the accrual of interest on loans and leases is discontinued when we deem that collection of additional principal or interest is doubtful. Loans and leases are returned to an accrual status when both principal and interest are current and the loan is determined to be performing in accordance with the applicable loan terms. The accrual of interest on certain residential mortgage loans is discontinued when a loan is more than three monthly payments past due, and the accrual of interest resumes when the loan is less than three monthly payments past due.

Other real estate includes foreclosed property as well as branch facilities that we have closed but not sold. Nonperforming asset balances for the past five years are presented in Table 12.2006.

 

Table 1215

INTEREST RATE RISK ELEMENTSANALYSIS

 

   December 31,

 
   2005

  2004

  2003

  2002

  2001

 
   (thousands, except ratios) 

Nonaccrual loans and leases

  $18,969  $14,266  $18,190  $15,521  $13,983 

Other real estate

   6,753   9,020   5,949   7,330   6,263 
   


 


 


 


 


Total nonperforming assets

  $25,722  $23,286  $24,139  $22,851  $20,246 
   


 


 


 


 


Accruing loans and leases 90 days or more past due

  $9,180  $12,192  $11,492  $9,566  $12,981 

Loans and leases at December 31

  $9,642,994  $9,354,387  $8,326,598  $7,620,263  $7,196,177 

Ratio of nonperforming assets to total loans and leases plus other real estate

   0.27%  0.25%  0.29%  0.30%  0.28%
   


 


 


 


 


Interest income that would have been earned on nonperforming loans and leases had they been performing

  $549  $773  $1,182  $1,190  $1,060 

Interest income earned on nonperforming loans and leases

   226   281   356   753   333 
   


 


 


 


 



There were no foreign loans or leases outstanding in any period.

   Favorable (unfavorable) impact
on net interest income compared
to stable rate scenario over the
12-month period following:
 

Assumed rate change

  December 31,
2007
  December 31,
2006
 

Most likely

  (0.52%) (0.04%)

Immediate 200 basis point increase

  (5.65%) (0.54%)

Gradual 200 basis point increase

  (2.22%) (1.16%)

Gradual 200 basis point decrease

  3.05% 1.86%

Immediate 200 basis point decrease

  2.45% 0.65%

 

BancShares’ nonperformingWe also utilize the market value of equity as a measurement tool in measuring and managing interest rate risk. The market value of equity measures the degree to which the market values of our assets at December 31, 2005 totaled $25.7 million, compared to $23.3 million at December 31, 2004 and $24.1 million at December 31, 2003.liabilities will change given a specific degree of movement in interest rates. Our calculation methodology for the market value of equity utilizes a 200-basis point parallel rate shock. As a percentage of total loans, leases and other real estate, nonperforming assets represented 0.27 percent, 0.25 percent and 0.29 percent as of December 31, 2005, 20042007, the market value of equity is estimated to increase by 10.1 percent given a 200-basis point immediate decrease in interest rates, and 2003. These ratiosdecline by 7.2 percent when interest rates immediately increase by 200 basis points. The estimated amounts for the market value of equity are lowhighly influenced by industry standards, evidencethe relatively longer maturity of our strong focus on asset quality.the commercial loan component of interest-earning assets than for interest-bearing liabilities.

 

NonperformingThe maturity distribution and repricing opportunities of interest-earning assets included nonaccrual loanshave a significant impact on our interest rate risk. Table 16 provides a loan maturity distribution and leases totaling $19.0 million at December 31, 2005, compared to $14.3 million at December 31, 2004 and $18.2 million at December 31, 2003. At December 31, 2005, nonaccrual loans and leases included $15.1 million in balances classified as impaired. At December 31, 2004, impaired loans totaled $8.0 million. The increase in loan balances classified as nonaccrual and impaired resulted from a single relationship. We do not believe this represents an unfavorable trend in nonperforming assets.

We continue to closely monitor past due accounts to identify any loans and leases that should be classified as impaired or nonaccrual.

Table 13

ALLOWANCE FOR CREDIT LOSSES

   2005

  2004

  2003

  2002

  2001

 
   (thousands, except ratios) 

Allowance for credit losses at beginning of period

  $130,832  $119,357  $112,533  $107,087  $102,655 

Adjustment for sale of loans

   (1,585)           (777)

Acquired allowance for credit loss

         409       

Provision for credit losses

   33,109   34,473   24,187   26,550   24,134 

Charge-offs:

                     

Real estate:

                     

Construction and land development

   (1)  (13)  (16)  (580)  (205)

Commercial mortgage

   (551)  (804)  (318)  (1,186)  (2,758)

Residential mortgage

   (1,912)  (2,351)  (1,594)  (2,916)  (1,171)

Revolving mortgage

   (951)  (1,384)  (1,392)  (902)  (899)

Other mortgage loans

                
   


 


 


 


 


Total real estate loans

   (3,415)  (4,552)  (3,320)  (5,584)  (5,033)

Commercial and industrial

   (18,319)  (9,583)  (7,101)  (7,654)  (6,736)

Consumer

   (10,425)  (12,238)  (10,481)  (10,117)  (10,101)

Lease financing

   (347)  (173)  (756)  (1,585)  (422)
   


 


 


 


 


Total charge-offs

   (32,506)  (26,546)  (21,658)  (24,940)  (22,292)
   


 


 


 


 


Recoveries:

                     

Real estate:

                     

Construction and land development

      34   10       

Commercial mortgage

   409   236   164   954   504 

Residential mortgage

   432   244   631   239   260 

Revolving mortgage

   155   103   63   15   58 

Other mortgage loans

                
   


 


 


 


 


Total real estate loans

   996   617   868   1,208   822 

Commercial and industrial

   2,164   1,084   1,428   1,212   755 

Consumer

   2,672   1,761   1,590   1,413   1,787 

Lease financing

   88   86      3   3 
   


 


 


 


 


Total recoveries

   5,920   3,548   3,886   3,836   3,367 
   


 


 


 


 


Net charge-offs

   (26,586)  (22,998)  (17,772)  (21,104)  (18,925)
   


 


 


 


 


Allowance for credit losses at end of period

  $135,770  $130,832  $119,357  $112,533  $107,087 
   


 


 


 


 


Allowance for credit losses includes:

                     

Allowance for loan and lease losses

  $128,847  $123,861  $112,304  $106,889  $102,653 

Liability for unfunded credit commitments

   6,923   6,971   7,053   5,644   4,434 
   


 


 


 


 


Allowance for credit losses at end of period

  $135,770  $130,832  $119,357  $112,533  $107,087 
   


 


 


 


 


Average total loans and leases

  $9,364,327  $8,892,317  $7,886,948  $7,379,607  $7,105,915 

Loans and leases at year-end

   9,642,994   9,354,387   8,326,598   7,620,263   7,196,177 

Ratios

                     

Net charge-offs to average total loans and leases

   0.28%  0.26%  0.23%  0.29%  0.27%

Percent of total loans and leases at period-end:

                     

Allowance for loan and lease losses

   1.34   1.32   1.35   1.40   1.43 

Liability for unfunded credit commitments

   0.07   0.07   0.08   0.07   0.06 
   


 


 


 


 


Allowance for credit losses

   1.41   1.40   1.43   1.48   1.49 
   


 


 


 


 



All information presented in this table relates to domestic loans and leases as BancShares makes no foreign loans and leases.

Allowance for credit losses.    At December 31, 2005, BancShares’ allowance for credit losses was $135.8 million or 1.41 percentregarding the sensitivity of loans and leases outstanding. This compares to $130.8 million or 1.40 percent at December 31, 2004, and $119.4 million or 1.43 percent at December 31, 2003.changes in interest rates. Table 4 includes maturity information for our investment securities.

 

We do not typically utilize interest rate swaps, floors, collars or other derivative financial instruments to attempt to hedge our rate sensitivity and interest rate risk. However, during the second quarter of 2006, in conjunction with the issuance of $115.0 million in trust preferred securities, we entered into an interest rate swap to synthetically convert the variable rate coupon on the securities to a fixed rate of 7.125 percent for a period of five years. The provisioninterest rate swap is a cash flow derivative under Statement of Financial Accounting Standards No. 133. The derivative is valued each quarter, and changes in the fair value are recorded on the consolidated balance sheet with an offset to other comprehensive income for credit losses charged to operations was $33.1 million during 2005 compared to $34.5 million during 2004the effective portion and $24.2 million during 2003. The $1.4 million or 4.0 percent decrease in provision for credit losses from 2004 to 2005 resulted from slower loan growth, which required smaller additionsan offset to the allowance.consolidated statements of income for any ineffective portion. The determination of effectiveness is made under the long-haul method.

Net charge-offs for 2005 totaled $26.6 million, compared to $23.0 million during 2004, and $17.8 million during 2003. The ratio of net charge-offs to average loans and leases outstanding equaled 0.28 percent during 2005, 0.26 percent during 2004 and 0.23 percent during 2003. These low loss ratios reflect the quality of BancShares’ loan and lease portfolio and are a key indicator that we closely monitor to evaluate our financial performance. Table 13 provides details concerning the allowance for credit losses and provision for credit losses for the past five years.

Table 1416

ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES

 

 December 31

  December 31 
 2005

 2004

 2003

 2002

 2001

  2007 2006 2005 2004 2003 
 

Allowance

for Credit

Losses


 

Percent

of Loans

to Total

Loans


 

Allowance

for Credit

Losses


 

Percent

of Loans

to Total

Loans


 

Allowance

for Credit

Losses


 

Percent

of Loans

to Total

Loans


 

Allowance

for Credit

Losses


 

Percent

of Loans

to Total

Loans


 

Allowance

for Credit

Losses


 

Percent

of Loans

to Total

Loans


  Allowance
for Credit
Losses
 Percent
of Loans
to Total
Loans
 Allowance
for Credit
Losses
 Percent
of Loans
to Total
Loans
 Allowance
for Credit
Losses
 Percent
of Loans
to Total
Loans
 Allowance
for Credit
Losses
 Percent
of Loans
to Total
Loans
 Allowance
for Credit
Losses
 Percent
of Loans
to Total
Loans
 
     (thousands)      (dollars in thousands) 

Allowance for loan and lease losses:

          

Real estate:

           

Construction and land development

 $8,985 7.95% $7,704 6.29% $7,806 10.26% $7,911 10.49% $7,099 11.14% $9,918 7.40% $9,351 7.63% $8,985 7.94% $7,704 6.28% $7,806 6.12%

Commercial mortgage

  39,356 36.49   37,769 35.06   33,054 28.20   31,380 26.71   32,875 25.14   35,760 36.31   38,463 36.27   37,185 36.44   35,373 35.03   31,161 31.85 

Residential mortgage

  6,822 10.54   6,387 10.47   5,577 10.86   5,581 13.89   6,498 17.51   7,011 9.39   6,954 9.98   6,822 10.53   6,387 10.46   5,577 11.15 

Revolving mortgage

  9,094 14.19   11,992 18.32   9,725 19.20   7,519 17.52   5,349 14.23   5,735 13.63   8,425 12.91   8,712 14.17   11,587 18.30   9,334 19.18 

Other mortgage

  2,242 1.79   2,249 1.84   2,113 1.92   1,863 1.97   2,290 2.10   2,323 1.33   2,145 1.61   2,242 1.79   2,249 1.83   2,113 2.08 
 

 

 

 

 

 

 

 

 

 

                         

Total real estate

  66,499 70.96   66,101 71.98   58,275 70.44   54,254 70.58   54,111 70.12   60,747 68.06   65,338 68.40   63,946 70.87   63,300 71.90   55,991 70.38 

Commercial and industrial

  32,834 12.38   29,191 10.37   26,921 11.16   23,705 12.15   19,833 12.72   32,743 15.57   34,846 14.86   30,663 12.50   26,794 10.47   25,028 11.23 

Consumer

  24,519 13.68   25,845 14.94   24,564 15.65   25,326 15.14   23,754 14.92   26,925 12.48   22,396 13.24   22,695 13.66   24,072 14.92   21,688 15.65 

Lease financing

  2,389 2.42   2,229 2.05   2,518 1.93   2,036 1.86   1,624 1.95   4,649 3.11   3,562 2.87   2,389 2.42   2,229 2.05   2,518 1.92 

Other

  576 0.56   743 0.66   901 0.82   255 0.27   151 0.29   412 0.78   723 0.63   576 0.55   743 0.66   901 0.82 

Unallocated

  8,953  6,723  6,178  6,957  7,614   11,498   5,139   8,578   6,723   6,178 

Reserve for unfunded commitments

  7,297   6,642   6,923   6,971   7,053 
 

 

 

 

 

 

 

 

 

 

                         

Total

 $135,770 100.00% $130,832 100.00% $119,357 100.00% $112,533 100.00% $107,087 100.00% $144,271 100.00% $138,646 100.00% $135,770 100.00% $130,832 100.00% $119,357 100.00%
 

 

 

 

 

 

 

 

 

 

                         

 

Table 14 detailsInterest Rate Risk.    Interest rate risk results principally from assets and liabilities maturing or repricing at different points in time, from assets and liabilities repricing at the allocationsame point in time but in different amounts and from short-term and long-term interest rates changing in different magnitudes, an event frequently described by the resulting impact on the shape of the allowance for credit losses amongyield curve. Market interest rates may also have a direct or indirect impact on the various loan types. The process used to allocate the allowance considers, among other factors, whether the borrower is a retail or commercial customer, whether the loan is secured or unsecured,interest rate and whether the loan is an open or closed-end agreement. Generally, loans, leases and unfunded commitments to commercial customers are evaluated individually and assigned a credit grade, while loans to retail customers are evaluated among groupsrepricing characteristics of loans with similar characteristics. Loans,and leases and commitments evaluated individuallythat are assigned a credit grade using such factorsoriginated as well as the borrower’s cash flow, the valuerate characteristics of any underlying collateral and the strength of any guarantee. The credit grade becomes the basis for the allowance allocation. Groups of loans are aggregated over their remaining estimated behavioral lives and probable loss projections for each period become the basis for the allowance allocation. The loss projections are based on historical loss patterns and current economic conditions. The amount of the allowance for loan and lease losses not allocated through these loss models represents the unallocated portion of the allowance. The increase in the unallocated allowance during 2005 and 2004 results from growth in the loan portfolio.our interest-bearing liabilities.

NONINTEREST INCOME

The growthWe assess our interest rate risk by simulating future amounts of noninterestnet interest income is essentialusing various interest rate scenarios and comparing those results to our ability to sustain adequate levels of profitability. The primary sources of noninterestforecasted net interest income are service charges generated from deposit accounts, cardholder and merchant service income, various types of commission-based income, fees from processing services, and various types of revenues derived from wealth management services, including trust and asset management fees and commission income earned from broker-dealer activities. Total noninterest income was $263.4 million during 2005, an increase of $12.4 million or 4.9 percent over 2004. Noninterest income during 2004 was $251.0 million, a $7.0 million or 2.9 percent increase over the $243.9 million recorded during 2003.assuming stable rates. Table 15 presentsprovides the major components of noninterestimpact on net interest income for the past five years.

Much of the increase in noninterest income during 2005 can be attributed to increases in cardholder and merchant services income, gains resulting from the securitizationvarious interest rate scenarios as of December 31, 2007 and sale of revolving mortgage loans and check cashing fees. These increases were partially offset by reductions in service charge income. Cardholder and merchant services income was $72.9 million in 2005, compared to $64.1 million in 2004 and $55.3 million in 2003. The growth in 2005 represents an $8.8 million or 13.7 percent increase, the result of higher credit card merchant discount and interchange fees for debit and credit card transactions. We continue to view this source of noninterest income as a key growth area.2006.

 

Table 15

NONINTEREST INCOMEINTEREST RATE RISK ANALYSIS

 

   Year ended December 31

   2005

  2004

  2003

  2002

  2001

   (thousands)

Service charges on deposit accounts

  $77,376  $81,478  $78,273  $75,870  $70,066

Cardholder and merchant services

   72,921   64,118   55,321   49,387   44,399

Commission-based income:

                    

Investments

   15,119   14,719   15,387   14,000   12,585

Insurance

   7,318   7,008   6,180   5,930   5,220

Factoring

   3,606   2,896   2,380   2,037   1,969
   


 

  

  


 

Total commission-based income

   26,043   24,623   23,947   21,967   19,774

Fees from processing services

   25,598   23,888   20,590   18,929   17,452

Trust and asset management fees

   18,588   16,913   15,005   14,897   15,114

Mortgage income

   7,868   8,352   15,469   11,605   11,645

ATM income

   10,220   10,201   9,005   9,205   9,552

Other service charges and fees

   16,507   13,688   14,463   14,744   13,896

Securities transactions

   (492)  1,852   309   (1,081)  7,189

Gain on sale of branches

      426   5,710      

Other

   8,723   5,417   5,844   4,772   5,556
   


 

  

  


 

Total

  $263,352  $250,956  $243,936  $220,295  $214,643
   


 

  

  


 

   Favorable (unfavorable) impact
on net interest income compared
to stable rate scenario over the
12-month period following:
 

Assumed rate change

  December 31,
2007
  December 31,
2006
 

Most likely

  (0.52%) (0.04%)

Immediate 200 basis point increase

  (5.65%) (0.54%)

Gradual 200 basis point increase

  (2.22%) (1.16%)

Gradual 200 basis point decrease

  3.05% 1.86%

Immediate 200 basis point decrease

  2.45% 0.65%

We also utilize the market value of equity as a measurement tool in measuring and managing interest rate risk. The market value of equity measures the degree to which the market values of our assets and liabilities will change given a specific degree of movement in interest rates. Our calculation methodology for the market value of equity utilizes a 200-basis point parallel rate shock. As of December 31, 2007, the market value of equity is estimated to increase by 10.1 percent given a 200-basis point immediate decrease in interest rates, and decline by 7.2 percent when interest rates immediately increase by 200 basis points. The estimated amounts for the market value of equity are highly influenced by the relatively longer maturity of the commercial loan component of interest-earning assets than for interest-bearing liabilities.

 

The securitizationmaturity distribution and salerepricing opportunities of $256.2 million in revolving mortgage loans generatedinterest-earning assets have a gain of $2.9 million during 2005. This gain is included in other noninterest income. No revolving mortgage loan securitization activities were recorded in prior periods.

During 2005, check cashing fees totaled $3.2 million compared to $939,000 in 2004. The growth in this fee source during 2005 reflects the initiation of policies surrounding charging non-customers for cashing checks drawnsignificant impact on our commercial deposit accounts. Check cashing fees are includedinterest rate risk. Table 16 provides a loan maturity distribution and information regarding the sensitivity of loans and leases to changes in other service charges and fees.

Service charge income was $77.4 million during 2005, compared to $81.5 million in 2004 and $78.3 million in 2003. The $4.1 million or 5.0 percent decrease in service charge income during 2005 reflects the net impact of lower service chargesinterest rates. Table 4 includes maturity information for both personal and commercial customers and higher bad check income when compared to 2004. Personal service charge income decreased during 2005 due to the growth of low-cost and free checking accounts. Commercial service charge income declined due to higher interest rates, which allowed customers on commercial analysis to offset a higher amount of various services by the earnings credit for amounts on deposit.

During 2005, fees from processing services totaled $25.6 million, an increase of $1.7 million or 7.2 percent over 2004. During 2004, BancShares recognized $23.9 million in fees from processing services, an increase of $3.3 million or 16.0 percent over the $20.6 million recognized during 2003. Growth in the number of transactions processed and the addition of new client banks created a favorable volume variance during 2005. In each year, a substantial portion of the income resulted from services provided to related parties. We continue to seek opportunities to provide processing services to unrelated parties.

During 2005, trust and asset management fees totaled $18.6 million, compared to $16.9 million during 2004 and $15.0 million in 2003. Improvements in capital market conditions and our emphasis on wealth management services have resulted in higher income.

Commission-based income increased $1.4 million to $26.0 million in 2005 from $24.6 million in 2004. In 2003, commission-based income was $23.9 million. The 5.8 percent increase in 2005 resulted from growth in broker-dealer activities and higher factoring fees. The increase during 2004 resulted from growth within our life insurance and factoring operations.

Mortgage income was $7.9 million, a decrease of $484,000 or 5.8 percent from the $8.4 million recorded in 2004. The reduction during 2005 was caused by $915,000 of unrealized losses incurred on discounted affordable mortgage loans that were originated in late 2005 and were held for sale at December 31, 2005.investment securities.

 

We anticipate continued growthdo not typically utilize interest rate swaps, floors, collars or other derivative financial instruments to attempt to hedge our rate sensitivity and interest rate risk. However, during the second quarter of 2006, among cardholderin conjunction with the issuance of $115.0 million in trust preferred securities, we entered into an interest rate swap to synthetically convert the variable rate coupon on the securities to a fixed rate of 7.125 percent for a period of five years. The interest rate swap is a cash flow derivative under Statement of Financial Accounting Standards No. 133. The derivative is valued each quarter, and merchant serviceschanges in the fair value are recorded on the consolidated balance sheet with an offset to other comprehensive income processing services, trust and asset management fees and selected commission-based income sources.

NONINTEREST EXPENSE

The primary components of noninterest expense are salaries and related employee benefit costs, equipment and software costs related to branch offices and technology, and occupancy costs related to branch offices and support facilities. Noninterest expense for 2005 amounted to $499.4 million, a $19.8 million or 4.1 percent increase over 2004. Noninterest expense in 2004 was $479.6 million, a $14.5 million or 3.1 percent increase over 2003. Table 16 presents the major components of noninterest expense for the past five years. For 2005effective portion and 2004, $12.9 million and $7.7 million of the respective increases in total noninterest expense are attributablean offset to the continued growth and expansionconsolidated statements of ISB.

Salary expense was $215.5 million during 2005, compared to $207.1 million during 2004, an increaseincome for any ineffective portion. The determination of $8.4 million or 4.1 percent, following a $7.4 million or 3.7 percent increase in 2004 over 2003. ISB’s salary costs increased by $4.5 million in 2005, primarily related to additional staff for expansion and growth in new markets. The balance ofeffectiveness is made under the overall increase related primarily to annual merit increases. ISB’s continuing expansion requires additional staff, which will contribute to higher 2006 salary expense.

Employee benefits expense equaled $51.5 million during 2005, an increase of $2.9 million or 5.9 percent from 2004. During 2005, we incurred a $1.8 million increase in the costs related to supplemental post-retirement benefits for company executives. We also recognized a $1.3 million increase in pension expense, primarily the result of a reduction in the discount rate used to calculate future pension obligations. Employee health expense declined $1.1 million in 2005 when compared to 2004 due to more favorable claims experience of our self-insured plan.

Our equipment expense has remained stable for the past three years. Equipment expense for 2005 was $50.3 million and $50.1 million in 2004. The $166,000 change during 2005 resulted from higher costs for depreciation on furniture and equipment, software depreciation, ATM expense and software maintenance, offset by reduced hardware depreciation and equipment maintenance costs. During 2004, equipment expense was $311,000 or 0.62 percent below the amount recorded during 2003, the result of lower hardware rental costs.

BancShares recorded occupancy expense of $46.9 million during 2005, an increase of $2.9 million or 6.6 percent during 2005. Occupancy expense during 2004 was $44.0 million, an increase of $1.6 million or 3.7 percent over 2003. The increase in occupancy expense in each period resulted from higher depreciation expense attributable to newly constructed branches both in new markets and as replacement branches in existing markets. The growth during 2005 also reflected thelong-haul method.

acquisition of a 163,000 square foot nine-store office building in Raleigh, North Carolina, which will become our corporate headquarters during 2006. Our branch expansion plans for 2006 will result in continued increases in occupancy costs.

Expenses related to card processing were $32.1 million in 2005 and $28.3 million in 2004. This increase of $3.8 million or 13.4 percent is due to growth in credit and debit card transactions as well as higher levels of merchant volume. In 2004, card processing expense increased $4.2 million or 17.3 percent from 2003, likewise due to volume increases. We anticipate this volume-based expense will continue to increase during 2006.

Telecommunications expense decreased $588,000 during 2005, a 5.6 percent reduction that resulted from competitive pricing for the telecommunications services that we use.

Advertising expense equaled $7.2 million during 2005, a $775,000 decrease from the $8.0 million reported in 2004. The 9.7 percent decrease was primarily the result of utilizing less expensive forms of advertising media.

Table 16

NONINTEREST EXPENSELOAN MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY

 

   Year ended December 31

   2005

  2004

  2003

  2002

  2001

   (thousands)

Salaries and wages

  $215,504  $207,088  $199,703  $186,756  $180,288

Employee benefits

   51,517   48,624   45,958   42,199   35,715

Equipment expense

   50,291   50,125   50,436   45,406   40,861

Occupancy expense

   46,912   43,997   42,430   38,316   35,584

Cardholder and merchant services expense

   32,067   28,290   24,119   22,123   19,514

Telecommunication expense

   9,873   10,461   11,455   10,753   11,052

Postage expense

   8,045   8,639   8,826   8,242   8,055

Advertising expense

   7,206   7,981   7,566   7,520   6,928

Legal expense

   4,124   5,978   5,851   5,063   3,713

Consultant expense

   3,362   2,980   3,747   2,543   3,470

Amortization of intangibles

   2,453   2,360   2,583   2,803   11,585

Other

   68,002   63,056   62,414   60,629   64,920
   

  

  

  

  

Total

  $499,356  $479,579  $465,088  $432,353  $421,685
   

  

  

  

  

   December 31, 2007
   Within One
Year
  One to Five
Years
  After Five
Years
  Total
   (thousands)

Real estate:

        

Construction and land development

  $392,185  $270,710  $147,923  $810,818

Commercial mortgage

   1,263,329   1,734,938   984,229   3,982,496

Residential mortgage

   271,865   396,486   360,679   1,029,030

Revolving mortgage

   487,144   932,562   74,725   1,494,431

Other mortgage

   45,592   64,475   35,485   145,552
                

Total real estate loans

   2,460,115   3,399,171   1,603,041   7,462,327

Commercial and industrial

   524,745   682,820   499,829   1,707,394

Consumer

   299,382   898,673   170,173   1,368,228

Lease financing

   85,150   255,451      340,601

Other

   29,105   34,563   21,686   85,354
                

Total

  $3,398,497  $5,270,678  $2,294,729  $10,963,904
                

Loans maturing after one year with:

        

Fixed interest rates

    $3,554,545  $1,923,236  $5,477,781

Floating or adjustable rates

     1,716,133   371,493   2,087,626
              

Total

    $5,270,678  $2,294,729  $7,565,407
              

 

INCOME TAXES

Liquidity Risk.    Liquidity risk results from the mismatching of asset and liability cash flows. BancShares continually monitorsmanages this risk by structuring its balance sheet prudently and evaluates theby maintaining various borrowing resources to fund potential impact of current events on the estimates used to establish income tax expenses and income tax liabilities. On a periodic basis, BancShares evaluates its income tax positions based on current tax law, positions taken by various tax auditors within the jurisdictions that BancShares is required to file income tax returns, as well as potential or pending audits or assessments by such tax auditors.

During 2005, BancShares recorded total income tax expense of $65.8 million, compared to $49.4 million during 2004 and $41.4 million in 2003. BancShares’ effective tax rate was 36.8 percent in 2005, 39.7 in 2004 and 35.5 percent in 2003. The higher 2004 effective tax rate resulted from additional state income tax expense. We do not anticipate material changes to the effective tax rate during 2006.

During 2004, in conjunction with our ongoing review of the adequacy of our income tax obligations, we identified unallocated income tax liabilities that were no longer needed and were therefore reversed. Also during 2004, the North Carolina Department of Revenue conducted an examination of BancShares’ North Carolina tax returns for 2000, 2001 and 2003. Including interest and net of federal benefit, the net additional amount of tax expense recorded for these items amounted to $2.7 million.

LIQUIDITY

cash needs. BancShares has historically maintained a strong focus on liquidity, and our deposit base represents our primary liquidity source.

The rate of growth in average deposits was 1.7 percent during 2007, 6.3 percent during 2006 and 6.9 percent during 2005, 5.1 percent2005. Short-term borrowings also experienced significant growth during 2004,both 2007 and 4.3

percent during 2003.2006 due to strong customer demand for our cash management products. Through our deposit and cash management product pricing strategies, and our extensive branch network, we have the ability to stimulate or curtail liability growth. Due to its primary focus on commercial customers, ISB has continued to face liquidity challenges caused by rapid loan growth. As a result, ISB has utilized both borrowings from the Federal Home Loan Bank of Atlanta and brokered deposits to augment the liquidity generated from its deposit growth. customers.

In addition to deposits, BancShares maintains additional sources for borrowed funds through federal funds lines of credit and other borrowing facilities. At December 31, 2005,2007, BancShares had access to $480.0$525.0 million in unfunded borrowings through its various sources.

 

Once we have generated the needed liquidity and have satisfied our loan demand and other funding needs, residual liquidity is held in cash or invested in overnight and longer-term investment products. Investment securities available for sale provide immediate liquidity as needed. At December 31, 2005, investment securities available for sale2007, these highly-liquid assets totaled $2.29$4.29 billion compared to $1.25 billion at December 31, 2004. At December 31, 2005 and 2004, the sum of cash and due from banks, overnight investments and investment securities available for sale represent 24.3 percent and 17.4or 26.5 percent of total assets, respectively.

In addition, investment securities held to maturity provide an ongoing liquidity source based on the scheduled maturity dates of the securities. These securities totaled $636.5 million at December 31, 2005 compared to $877.5 million at December 31, 2004. Total investment securities represent 20.0 percent and 16.0$4.36 billion or 27.7 percent of total assets at December 31, 2005 and 2004, respectively.2006.

 

SHAREHOLDERS’ EQUITY AND CAPITAL ADEQUACY

BancShares maintains an adequate capital position and exceeds all minimum regulatory capital requirements. BancShares’ total risk-based capital ratios were 15.1 percent at December 31, 2005, 13.5 percent at December 31, 2004 and 14.2 percent at December 31, 2003. BancShares’ Tier 1 capital ratios for December 31, 2005, 2004 and 2003 were 12.6 percent, 12.1 percent and 12.9 percent, respectively. The minimum capital ratios established by Federal Reserve guidelines are 8 percent for total capital and 4 percent for Tier 1 capital. At December 31, BancShares’ leverage capital ratio was 9.2 percent for 2005 and 9.3 percent for 2004 and 2003. The minimum leverage ratio is 3 percent. Failure to meet certain capital requirements may result in actions by regulatory agencies that could have a material effect on the financial statements.

FCB’s total risk-based capital ratios were 14.1 percent at December 31, 2005 compared to 11.7 percent December 31, 2004. The improvement in total capital during 2005 for both BancShares and FCB resulted from $125 million in subordinated notes issued during the second quarter of 2005. The subordinated notes mature in 2015 and qualify as Tier 2 capital under current risk-based capital guidelines.

Due to significant growth in risk-adjusted assets during 2005, ISB’s total risk-based capital ratio declined from 15.0 percent at December 31, 2004 to 13.0 percent at December 31, 2005. In order to maintain adequate capital levels, BancShares infused $20 million and $30 million into ISB during 2005 and 2004, respectively.

Dividends from FCB to BancShares provide the source for capital infusions into ISB to fund its continuing growth and expansion. These dividends also fund BancShares’ payment of shareholder dividends and interest payments on its long-term obligations. During 2005, FCB declared dividends to BancShares in the amount of $32.2 million compared to $50.2 million in 2004.

Table 17

ANALYSIS OF BANCSHARES’ CAPITAL ADEQUACY

   December 31

  

Regulatory

Minimum


 
   2005

  2004

  2003

  
   (dollars in thousands)    

Tier 1 capital

  $1,320,152  $1,217,149  $1,152,309    

Tier 2 capital

   267,989   134,386   121,348    
   


 


 


   

Total capital

  $1,588,141  $1,351,535  $1,273,657    
   


 


 


   

Risk-adjusted assets

  $10,510,254  $10,023,469  $8,951,402    

Risk-based capital ratios

                

Tier 1 capital

   12.56%  12.14%  12.87% 4.00%

Total capital

   15.11%  13.48%  14.23% 8.00%

Tier 1 leverage ratio

   9.17%  9.26%  9.34% 3.00%

SEGMENT REPORTING

 

BancShares conducts its banking operations through its two wholly owned subsidiaries, FCB and ISB. Although FCB and ISB offer similar products and services to customers, each entity operates in distinct geographic markets and has separate management groups. We monitor growth and financial results in these institutions separately and, within each institution, by further geographic segregation.

 

Although FCB has grown through acquisition in certain markets, throughout its history, much of its expansion has been accomplished on a de novo basis. However, becauseSince it first opened in 1997, ISB has followed a similar business model for growth and expansion. Because of FCB’s relativeits size, the costs associated with de novo branching at itsFCB’s current rate of expansion are not material to FCB’sits financial performance. ISB has followed a similar business model of expanding on a de novo basis since it first opened in 1997. However, due to the largerapid pace of its growth and the number of branch offices that have yet to attain sufficient size for profitability, the financial results and trends of ISB are significantly affected by its current and continuing growth. Each new market ISB enters creates additional operating costs that are typically not fully offset by revenues until the third year of operation. Losses incurred since ISB’s rapid growth in new markets in recent years has continued to adversely impact its financial performance.inception total $34.7 million.

 

IronStone Bank.    At December 31, 2005,2007, ISB operated 5356 facilities in Florida, Georgia, Texas, New Mexico, Arizona, California, Colorado, Oregon, Washington and Washington, having established seven new bankingMissouri. ISB will continue its expansion during 2008, establishing facilities during 2005.in Kansas and Oklahoma. ISB continues to focus on markets with favorable growth prospects. Our business model for these new markets has two pivotal requirements. First, we hire experienced bankers who are established in the markets we are entering and who focusare focused on delivering high quality customer service while maintaining strong asset quality. Second, we occupy attractive and accessible branch facilities that are located in areas conducive to attracting medical and professional customers.facilities. Both of these are costly goals, but we believe that they are critical to establishing a solid foundation for our future success in these new markets.

 

As a result of expansion into new markets and rapid growth in existing markets, ISB’s total assets increased from $1.50$2.14 billion at December 31, 20042006 to $1.86$2.34 billion at December 31, 2005,2007, an increase of $355.1$204.5 million or 23.79.6 percent. ISB’s total assets represented 14.4 percent of consolidated assets at December 31, 2007 compared to 13.6 percent at December 31, 2006.

ISB recorded a net loss of $7.7 million during 2007 compared to net income of $2.2 million during 2006 and a net loss of $2.9 million in 2005. The $9.9 million reduction in net income resulted from significantly higher provision for credit losses, higher noninterest expense and lower net interest income. ISB’s net interest income increased $14.4decreased $2.5 million or 30.63.8 percent during 2005,2007, the result of balance sheet growth and an improveda significant reduction in the net yield on interest-earning assets. Loans and leases increased 22.3$201.8 million or 10.8 percent from $1.37$1.87 billion at December 31, 20042006 to $1.68$2.07 billion at December 31, 2005.2007.

 

Provision for credit losses increased $3.1$5.5 million or 62.1154.6 percent during 2005,2007, due primarily to increasedhigher net charge-offs.charge offs and loan growth. Net charge-offs equaled $3.7amounted to $6.7 million during 2005,2007, compared to $1.2$1.0 million in 2004, an2006. This $5.7 million increase of $2.5 million.includes $4.2 million in losses on working capital finance loans.

 

ISB’s noninterest income increased $1.7$2.1 million or 28.618.7 percent during 2005,2007, primarily the result of higher cardholder and merchant services income and factoring commissions. These favorable variances were partially offset by lower mortgage and service charge income.referral fees generated through working capital finance.

 

Noninterest expense increased $12.9$8.4 million or 24.611.8 percent during 2005,2007, the result of costs incurred in conjunction with additionalthe opening of new branch offices.offices and higher cardholder processing expenses.

 

ISB recorded a net loss of $2.9 million during 2005 compared to a net loss of $3.0 million during 2004. During the fourth quarter of 2005, ISB generated net income of $385,000, compared to a net loss of $756,000 recorded during the fourth quarter of 2004, a favorable variance of $1.1 million. The improvement in fourth quarter net income reflects the impact of positive earnings from maturing branch locations and the relatively less material impact of incremental costs for each additional new branch. As its growth continues, ISB will continue to incur incremental operating costs, particularly in the areas of personnel, occupancy and equipment. AsPrimarily as a result of the planned de novocontinued pressure on net interest income and continued growth during 2006, ISB’s earningsin noninterest expenses, ISB will likely continue to be adversely impacted.unprofitable during 2008.

 

First-Citizens Bank & Trust Company.    At December 31, 2005,2007, FCB operated 339340 branches compared to 338 branches at December 31, 2004. First Citizens opened new offices in Maryland and Tennessee during 2005, while still operating in North Carolina, Virginia, West Virginia, Maryland and West Virginia. PlannedTennessee. During 2007, FCB continued to expand into high-growth areas throughout its footprint with expansion continuing in 2006 includes further expansion in Maryland, Tennessee and the urban areas of North Carolina and Virginia.2008.

 

FCB’s total assets increased from $11.69$13.33 billion at December 31, 20042006 to $12.71$13.58 billion at December 31, 2005,2007, an increase of $1.02 billion or 8.7 percent, the result of growth in investment securities. FCB’s net interest income increased

$45.9$252.7 million or 12.81.9 percent. FCB’s total assets represented 83.8 percent during 2005, benefiting from an improvement in the net yield on interest-earning assets. Provision for credit losses decreased $4.4 million or 15.0and 84.7 percent during 2005 due to slower loan growth.of consolidated assets at December 31, 2007 and 2006, respectively.

 

FCB’s noninterest income increased $13.9 million or 5.6 percent during 2005, primarily the result of higher cardholder and merchant services income, the gain on the securitization and sale of revolving mortgages and check cashing fees.

Noninterest expense increased $8.0 million or 1.8 percent during 2005, due to higher personnel, credit card processing and occupancy expense. FCB recorded net income of $128.5$125.2 million during 20052007 compared to $89.4$139.1 million during 2004.2006. This represents a $39.2$14.0 million or 43.810.0 percent increasedecrease in net income, the net impact of higher noninterest expense and provision for credit losses and slightly reduced levels of net interest income offset in part by strong growth in noninterest income.

Table 1817

SELECTED QUARTERLY DATA

 

   2005

  2004

 
   Fourth
Quarter


  Third
Quarter


  Second
Quarter


  First
Quarter


  Fourth
Quarter


  Third
Quarter


  Second
Quarter


  First
Quarter


 
   (thousands, except per share data and ratios) 

SUMMARY OF OPERATIONS

                                 

Interest income

  $183,949  $173,534  $160,206  $148,245  $141,352  $131,411  $124,660  $123,694 

Interest expense

   66,731   59,306   49,536   42,578   38,159   33,320   31,120   31,227 
   


 


 


 


 


 


 


 


Net interest income

   117,218   114,228   110,670   105,667   103,193   98,091   93,540   92,467 

Provision for credit losses

   13,578   7,211   6,994   5,326   8,737   7,972   9,917   7,847 
   


 


 


 


 


 


 


 


Net interest income after provision for credit losses

   103,640   107,017   103,676   100,341   94,456   90,119   83,623   84,620 

Noninterest income

   65,457   68,106   68,566   61,223   62,878   63,634   62,901   61,543 

Noninterest expense

   125,395   128,665   123,951   121,345   118,954   120,381   121,348   118,896 
   


 


 


 


 


 


 


 


Income before income taxes

   43,702   46,458   48,291   40,219   38,380   33,372   25,176   27,267 

Income taxes

   15,866   16,505   18,215   15,222   13,608   16,504   9,304   9,936 
   


 


 


 


 


 


 


 


Net income  $27,836  $29,953  $30,076  $24,997  $24,772  $16,868  $15,872  $17,331 
   


 


 


 


 


 


 


 


Net interest income, taxable equivalent  $117,601  $114,603  $111,038  $106,014  $103,511  $98,403  $93,850  $92,792 
   


 


 


 


 


 


 


 


SELECTED QUARTERLY AVERAGES

                                 

Total assets

  $14,516,620  $14,160,391  $13,618,161  $13,309,802  $13,251,848  $12,935,674  $12,723,435  $12,508,227 

Investment securities

   2,938,833   2,764,377   2,345,056   2,072,316   2,115,389   2,022,450   2,152,615   2,340,956 

Loans and leases

   9,455,059   9,323,115   9,324,200   9,357,480   9,232,186   9,058,562   8,818,359   8,454,599 

Interest-earning assets

   13,024,871   12,750,494   12,255,663   11,929,086   11,852,896   11,561,331   11,376,825   11,138,812 

Deposits

   12,071,673   11,836,193   11,562,349   11,379,079   11,323,508   11,039,247   10,843,065   10,634,865 

Interest-bearing liabilities

   10,621,384   10,312,675   9,867,227   9,640,417   9,532,116   9,330,244   9,234,863   9,210,244 

Long-term obligations

   409,612   409,825   308,461   285,666   286,060   286,536   287,597   289,161 

Shareholders’ equity

  $1,169,113  $1,143,391  $1,118,122  $1,094,213  $1,075,566  $1,057,749  $1,044,864  $1,037,260 

Shares outstanding

   10,434,453   10,434,453   10,434,453   10,434,453   10,434,453   10,434,453   10,435,756   10,436,345 
   


 


 


 


 


 


 


 


SELECTED QUARTER-END BALANCES

                                 

Total assets

  $14,639,392  $14,484,919  $14,023,066  $13,592,675  $13,265,711  $13,025,690  $12,836,454  $12,714,237 

Investment securities

   2,929,516   2,871,731   2,644,335   2,187,374   2,125,524   2,027,837   2,038,227   2,150,738 

Loans and leases

   9,642,994   9,359,540   9,300,984   9,404,742   9,354,387   9,150,859   8,988,095   8,616,987 

Interest-earning assets

   13,053,522   12,996,027   12,579,346   12,234,577   11,863,654   11,647,239   11,426,363   11,389,937 

Deposits

   12,173,858   12,123,491   11,758,089   11,629,382   11,350,798   11,124,996   10,962,062   10,795,536 

Interest-bearing liabilities

   10,745,696   10,544,543   10,156,552   9,818,651   9,641,368   9,426,235   9,266,406   9,327,152 

Long-term obligations

   408,987   409,742   409,964   285,312   285,943   286,437   286,657   289,118 

Shareholders’ equity

  $1,181,059  $1,158,885  $1,134,242  $1,102,568  $1,086,310  $1,068,014  $1,046,483  $1,047,083 

Shares outstanding

   10,434,453   10,434,453   10,434,453   10,434,453   10,434,453   10,434,453   10,434,453   10,436,345 
   


 


 


 


 


 


 


 


PROFITABILITY RATIOS (averages)

                                 

Rate of return (annualized) on:

                                 

Total assets

   0.76%  0.84%  0.89%  0.76%  0.74%  0.52%  0.50%  0.56%

Shareholders’ equity

   9.45   10.39   10.79   9.26   9.16   6.34   6.11   6.72 

Dividend payout ratio

   10.30   9.58   9.55   11.46   11.60   16.98   18.09   16.57 
   


 


 


 


 


 


 


 


LIQUIDITY AND CAPITAL RATIOS (averages)

                                 

Loans and leases to deposits

   78.32%  78.77%  80.64%  82.23%  81.53%  82.06%  81.33%  79.50%

Shareholders’ equity to total assets

   8.05   8.07   8.21   8.22   8.12   8.18   8.21   8.29 

Time certificates of $100,000 or more to total deposits

   13.45   12.59   12.24   11.90   11.43   11.16   10.91   10.69 
   


 


 


 


 


 


 


 


PER SHARE OF STOCK

                                 

Net income

  $2.67  $2.87  $2.88  $2.40  $2.37  $1.62  $1.52  $1.66 

Cash dividends (Class A and B)

   0.275   0.275   0.275   0.275   0.275   0.275   0.275   0.275 

Class A sales price

                                 

High

   191.75   174.25   147.66   154.36   153.00   122.86   126.84   126.40 

Low

   160.00   144.21   126.20   132.71   115.63   113.78   109.10   115.51 

Class B sales price

                                 

High

   188.00   170.00   143.00   152.35   151.50   121.00   123.00   123.00 

Low

   165.00   136.00   130.25   138.00   118.00   116.00   109.25   116.00 
   


 


 


 


 


 


 


 



  2007  2006 
  Fourth
Quarter
  Third
Quarter
  Second
Quarter
  First
Quarter
  Fourth
Quarter
  Third
Quarter
  Second
Quarter
  First
Quarter
 
  (thousands, except share data and ratios) 

SUMMARY OF OPERATIONS

        

Interest income

 $230,826  $232,120  $223,473  $217,637  $219,493  $216,170  $203,784  $190,868 

Interest expense

  109,197   111,185   103,884   99,448   101,215   96,773   83,567   72,182 
                                

Net interest income

  121,629   120,935   119,589   118,189   118,278   119,397   120,217   118,686 

Provision for credit losses

  11,795   17,333   934   3,532   7,462   3,758   2,936   6,766 
                                

Net interest income after provision for credit losses

  109,834   103,602   118,655   114,657   110,816   115,639   117,281   111,920 

Noninterest income

  76,534   77,285   72,620   69,031   67,873   70,288   68,326   64,880 

Noninterest expense

  146,285   146,906   142,878   138,595   130,026   134,123   135,246   131,682 
                                

Income before income taxes

  40,083   33,981   48,397   45,093   48,663   51,804   50,361   45,118 

Income taxes

  13,920   11,362   17,546   16,109   15,468   18,877   18,649   16,461 
                                

Net income

 $26,163  $22,619  $30,851  $28,984  $33,195  $32,927  $31,712  $28,657 
                                

Net interest income, taxable equivalent

 $123,666  $122,980  $121,409  $119,964  $120,110  $121,082  $120,636  $119,093 
                                

SELECTED QUARTERLY AVERAGE BALANCES

        

Total assets

 $16,276,649  $16,092,009  $15,725,976  $15,572,613  $15,628,835  $15,477,992  $15,322,373  $14,699,290 

Investment securities

  3,272,015   3,162,011   3,047,753   3,092,261  ��3,176,845   3,072,113   2,964,308   2,896,711 

Loans and leases

  10,831,571   10,623,247   10,360,913   10,230,858   10,167,157   10,106,194   9,943,057   9,736,606 

Interest-earning assets

  14,655,309   14,476,247   14,118,884   13,908,622   13,984,789   13,851,788   13,541,084   13,160,476 

Deposits

  12,876,549   12,728,527   12,524,786   12,502,206   12,601,708   12,571,525   12,440,125   12,192,664 

Interest-bearing liabilities

  12,216,067   12,052,307   11,698,285   11,557,940   11,601,752   11,485,378   11,156,821   10,794,420 

Long-term obligations

  404,367   405,101   405,339   408,277   424,597   500,564   466,259   408,946 

Shareholders’ equity

 $1,420,348  $1,385,284  $1,353,739  $1,323,327  $1,292,771  $1,254,551  $1,219,835  $1,196,174 

Shares outstanding

  10,434,453   10,434,453   10,434,453   10,434,453   10,434,453   10,434,453   10,434,453   10,434,453 
                                

SELECTED QUARTER-END BALANCES

        

Total assets

 $16,212,107  $16,311,870  $16,008,605  $15,853,778  $15,729,697  $15,633,597  $15,530,846  $15,099,564 

Investment securities

  3,236,835   3,266,150   3,023,799   3,031,798   3,221,048   3,118,025   3,024,780   2,896,962 

Loans and leases

  10,963,904   10,763,158   10,513,041   10,262,356   10,273,043   10,160,661   10,059,723   9,822,674 

Interest-earning assets

  14,466,948   14,542,241   14,232,802   14,094,002   13,842,688   13,849,766   13,716,208   13,468,554 

Deposits

  12,928,544   12,980,447   12,772,322   12,722,532   12,743,324   12,681,150   12,717,247   12,512,557 

Interest-bearing liabilities

  12,118,967   12,170,559   11,830,904   11,671,127   11,612,372   11,510,073   11,395,473   11,038,192 

Long-term obligations

  404,392   404,266   405,314   405,356   401,198   424,351   527,478   408,954 

Shareholders’ equity

 $1,441,208  $1,401,575  $1,367,980  $1,342,327  $1,310,819  $1,276,608  $1,232,933  $1,207,720 

Shares outstanding

  10,434,453   10,434,453   10,434,453   10,434,453   10,434,453   10,434,453   10,434,453   10,434,453 
                                

PROFITABILITY RATIOS (averages)

        

Rate of return (annualized) on:

        

Total assets

  0.64%  0.56%  0.79%  0.75%  0.84%  0.84%  0.84%  0.79%

Shareholders’ equity

  7.31   6.48   9.14   8.88   10.19   10.41   10.43   9.72 

Dividend payout ratio

  10.96   12.67   9.29   9.89   8.65   8.70   9.05   10.00 
                                

LIQUIDITY AND CAPITAL RATIOS (averages)

        

Loans and leases to deposits

  84.12%  83.46%  82.72%  81.83%  80.68%  80.39%  79.93%  79.86%

Shareholders’ equity to total assets

  8.73   8.61   8.61   8.50   8.27   8.11   7.96   8.14 

Time certificates of $100,000 or more to total deposits

  18.04   17.67   16.95   16.60   16.17   15.74   15.04   14.44 
                                

PER SHARE OF STOCK

        

Net income

 $2.51  $2.17  $2.96  $2.78  $3.18  $3.16  $3.04  $2.75 

Cash dividends

  0.275   0.275   0.275   0.275   0.275   0.275   0.275   0.275 

Class A sales price

        

High

  181.91   195.66   209.01   214.59   202.64   217.79   201.92   201.78 

Low

  143.00   152.47   182.10   199.41   183.57   191.00   175.76   174.72 

Class B sales price

        

High

  205.00   211.50   213.00   214.95   205.00   214.00   198.50   191.00 

Low

  200.00   204.00   207.50   205.50  ��196.50   198.00   184.00   180.00 
                                

Average loan and lease balances include nonaccrual loans and leases. Yields related to loans, leases and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only, are stated on a taxable-equivalent basis assuming a federal income tax rate of 35% and a state income tax rate of 6.9% for all periods.

Stock information related to Class A common stock reflects the sales price, as reported on the Nasdaq National Market System.NASDAQ Global Select Market. Stock information related to Class B common stock reflects the sales price as reported on the OTC Bulletin Board. As of December 31, 2005,2007, there were 2,3482,122 holders of record of the Class A common stock and 436391 holders ofor record of the Class B common stock.

FCB’s net interest income decreased $2.1 million or 0.5 percent during 2007 due to a lower net yield on interest-earning assets. Provision for credit losses increased $7.2 million or 41.4 percent during 2007 caused by higher net charge-offs and continued loan growth. The increase in net charge-offs includes $4.2 million in working capital finance losses.

FCB’s noninterest income increased $24.2 million or 9.0 percent during 2007, primarily the result of higher cardholder and merchant services income, fees from wealth management services, deposit service charges and gains from securities transactions. Noninterest expense increased $38.1 million or 8.2 percent during 2007, due to higher personnel, credit card processing, equipment and occupancy expense.

Other includes the parent company, which during 2007 experienced an $8.4 million reduction in its net interest expense due to growth in its master note obligations, the proceeds from which were invested in investment securities and overnight repurchase obligations. The parent company’s net interest expense was also affected by the 2006 redemption of $103.1 million of junior subordinated debentures.

FOURTH QUARTER ANALYSIS

 

BancShares reported net income of $27.8$26.2 million for the quarter endingended December 31, 2005,2007, compared to $24.8$33.2 million for the corresponding period of 2004, an increase2006, a decrease of 12.421.2 percent. Per share income for the fourth quarter 20052007 totaled $2.67$2.51 compared to $2.37$3.18 for the same period of 2004.2006. BancShares’ results generated an annualized return on average assets of 0.760.64 percent for the fourth quarter of 2005,2007, compared to 0.740.84 percent for the same period of 2004.2006. The annualized return on average equity equaled 9.457.31 percent during the fourth quarter of 2005,2007, compared to 9.1610.19 percent for the same period of 2004.2006. In the fourth quarter, higher net interestnoninterest expense and noninterest incomehigher provision for credit losses contributed to the improvementdecline in net income. These benefitsadded costs were partially offset by higher provision for credit losses,net interest and noninterest expense and income tax expense.income.

 

Net interest income increased $14.0$3.4 million or 13.62.8 percent in the fourth quarter of 2005,2007, compared to the same period of 2004. The improvement in net interest income resulted from growth in loans and leases and investment securities and an improved net yield on interest-earning assets.2006. The taxable-equivalent net yield on interest-earning assets increaseddecreased from 3.473.41 percent in the fourth quarter of 20042006 to 3.583.35 percent for the fourth quarter of 2005.2007.

 

Interest income increased $42.6 million or 30.1 percent in the fourth quarter of 2005 when compared to the same period of 2004. Average interest-earning assets increased $1.17 billion$670.5 million to $13.02$14.66 billion from the fourth quarter of 20042006 to the fourth quarter of 2005.2007. Average loans and leases outstanding during the fourth quarter of 2005 were $9.462007 equaled $10.83 billion, an increase of $222.9$664.4 million or 2.46.5 percent over 2004.2006. The yield on interest-earning assets increased 865 basis points from 4.766.26 percent in 20042006 to 5.626.31 percent in 2005. The yield on average loans and leases improved 97 basis points to 6.44 percent while the taxable-equivalent yield on investment securities increased 101 basis points to 3.33 percent.2007.

 

Interest expenseAverage interest-bearing liabilities increased $28.6$614.3 million from $38.2to $12.22 billion. Average time deposits increased $350.9 million in the fourth quarter of 2004or 6.8 percent to $66.7$5.48 billion while average short-term borrowings increased $257.4 million in the fourth quarter of 2005or 21.8 percent to $1.44 billion due to increased ratesstrong growth among master note borrowings and higher average volume.repurchase obligations. The rate on average interest-bearing liabilities increased 909 basis points to 2.493.55 percent in 2005. Average interest-bearing liabilities increased $1.09 billion to $10.62 billion.2007.

 

The provision for credit losses increased $4.8$4.3 million or 55.458.1 percent in the fourth quarter of 2005,2007, compared to the same period of 20042006 due to higher net charge-offs.charge-offs and loan growth. Net charge-offs were $11.0$8.4 million during the fourth quarter of 2005,2007, compared to $5.8$7.0 million during the same period of 2004, primarily due to losses incurred on a single relationship during 2005.2006.

 

Noninterest income increased $2.6$8.7 million or 4.112.8 percent during the fourth quarter. CardholderDeposit service charges increased $3.1 million or 17.3 percent in the quarter while cardholder and merchant services income increased $2.2$2.4 million or 13.2 percent caused by favorable volume growth, while commission income increased $944,000 or 16.911.0 percent due to improved broker-dealer revenue. Growth was also noted in feesfavorable volume growth. Fees from processingwealthy management services and trust and asset management fees. These increases were partially offset by an $826,000 reduction in service charge income. Mortgage income decreased duringincreased $1.4 million or 27.6 percent for the fourth quarter of 2005, primarily due to a $918,000 reserve established for unrealized losses related to loans held for sale at December 31, 2005. Securities losses totaled $470,000 during2007, the fourth quarterresult of 2005.our expanded focus on trust and broker-dealer services.

 

Noninterest expense increased $6.4$16.3 million or 5.412.5 percent during the fourth quarter of 2005,2007, when compared to the same period of 2004.2006. Salaries increased $3.7$4.6 million or 7.07.9 percent from the fourth quarter of 20042006 to the fourth quarter of 2005. Employee benefits expense increased $769,000 or 6.8 percent to $12.1 million from 2004 to 2005.2007. Occupancy costs increased $1.2 million or 11.48.8 percent from $10.7$17.1 million during the fourth quarter of 20042006 to $11.9$18.5 million during the fourth quarter of 2005.2007. Higher personnel and occupancy costs were impacted byare primarily related to the continued expansion of the ISB branch network. Among other expense, credit card processing fees increased $909,000$1.5 million or 12.517.3 percent due to higher transaction volume in the fourth quarter of 20052007 when compared to the fourth quarter of 2004.2006. Legal costs increased $1.3 million during the fourth quarter of 2007 due to heightened loan collection activities.

Table 17 provides quarterly information for each of the quarters in 2007 and 2006. Table 18 analyzes the components of changes in net interest income between the fourth quarter of 2007 and 2006.

Table 1918

CONSOLIDATED TAXABLE EQUIVALENT RATE/VOLUME VARIANCE ANALYSIS—FOURTH QUARTER

 

   2005

  2004

  Increase (decrease) due to:

 
   Average
Balance


  Interest
Income/
Expense


  Yield/
Rate


  Average
Balance


  Interest
Income/
Expense


  Yield/
Rate


  Volume

  Yield/
Rate


  Total
Change


 
   (thousands) 

Assets

                                   

Loans and leases

  $9,455,059  $153,386  6.44% $9,232,186  $126,936  5.47% $3,475  $22,975  $26,450 

Investment securities:

                                   

U. S. Government

   2,859,418   23,851  3.31   2,055,678   11,936  2.31   5,707   6,208   11,915 

State, county and municipal

   6,761   91  5.34   8,144   100  4.88   (18)  9   (9)

Other

   72,654   729  3.98   51,567   281  2.17   164   284   448 
   

  

  

 

  

  

 


 


 


Total investment securities

   2,938,833   24,671  3.33   2,115,389   12,317  2.32   5,853   6,501   12,354 

Overnight investments

   630,979   6,275  3.95   505,321   2,417  1.90   924   2,934   3,858 
   

  

  

 

  

  

 


 


 


Total interest-earning assets

  $13,024,871  $184,332  5.62% $11,852,896  $141,670  4.76% $10,252  $32,410  $42,662 
   

  

  

 

  

  

 


 


 


Liabilities

                                   

Deposits:

                                   

Checking With Interest

  $1,589,807  $495  0.12% $1,533,394  $466  0.12% $23  $6  $29 

Savings

   711,796   381  0.21   751,416   380  0.20   (19)  20   1 

Money market accounts

   2,678,368   15,320  2.27   2,596,916   7,534  1.15   345   7,441   7,786 

Time deposits

   4,471,095   37,113  3.29   3,897,595   22,987  2.35   4,144   9,982   14,126 
   

  

  

 

  

  

 


 


 


Total interest-bearing deposits

   9,451,066   53,309  2.24   8,779,321   31,367  1.42   4,493   17,449   21,942 

Short-term borrowings

   760,706   5,982  3.12   466,735   1,349  1.15   1,584   3,049   4,633 

Long-term obligations

   409,612   7,440  7.21   286,060   5,443  7.57   2,307   (310)  1,997 
   

  

  

 

  

  

 


 


 


Total interest-bearing liabilities

  $10,621,384  $66,731  2.49% $9,532,116  $38,159  1.59% $8,384  $20,188  $28,572 
   

  

  

 

  

  

 


 


 


Interest rate spread

          3.13%         3.17%            
           

         

            

Net interest income and net yield on interest-earning assets

      $117,601  3.58%     $103,511  3.47% $1,868  $12,222  $14,090 
       

  

     

  

 


 


 



  2007  2006  Increase (decrease) due to: 
  Average
Balance
 Interest
Income/
Expense
 Yield/
Rate
  Average
Balance
 Interest
Income/
Expense
 Yield/
Rate
  Volume  Yield/
Rate
  Total
Change
 
  (dollars in thousands) 

Assets

         

Loans and leases

 $10,831,571 $186,426 6.83% $10,167,157 $178,565 6.97% $11,561  $(3,700) $7,861 

Investment securities:

         

U. S. Government

  3,197,797  39,178 4.89   3,098,167  33,262 4.28   1,139   4,777   5,916 

State, county and municipal

  4,949  83 6.65   5,847  122 8.28   (17)  (22)  (39)

Other

  69,269  773 4.43   72,831  844 4.60   (41)  (30)  (71)
                              

Total investment securities

  3,272,015  40,034 4.88   3,176,845  34,228 4.30   1,081   4,725   5,806 

Overnight investments

  551,723  6,403 4.60   640,787  8,532 5.28   (1,108)  (1,021)  (2,129)
                              

Total interest-earning assets

 $14,655,309 $232,863 6.31% $13,984,789 $221,325 6.26% $11,534  $4  $11,538 
                              

Liabilities

         

Deposits:

         

Checking With Interest

 $1,384,226 $536 0.15% $1,477,601 $464 0.12% $(34) $106  $72 

Savings

  546,410  299 0.22   606,635  326 0.21   (37)  10   (27)

Money market accounts

  2,964,472  24,181 3.24   2,784,676  23,125 3.29   1,449   (393)  1,056 

Time deposits

  5,476,849  63,973 4.63   5,125,904  56,664 4.39   4,046   3,263   7,309 
                              

Total interest-bearing deposits

  10,371,957  88,989 3.40   9,994,816  80,579 3.20   5,424   2,986   8,410 

Short-term borrowings

  1,439,743  13,362 3.68   1,182,339  13,461 4.52   2,668   (2,767)  (99)

Long-term obligations

  404,367  6,846 6.72   424,597  7,175 6.70   (346)  17   (329)
                              

Total interest-bearing liabilities

 $12,216,067 $109,197 3.55% $11,601,752 $101,215 3.46% $7,746  $236  $7,982 
                              

Interest rate spread

   2.76%   2.80%   

Net interest income and net yield on interest-earning assets

  $123,666 3.35%  $120,110 3.41% $3,788  $(232) $3,556 
                          

Average loan balances includeloans and leases includes nonaccrual loans.loans and leases. Yields related to loans, leases and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only, are stated on a taxable-equivalent basis assuming a statutory federal income tax rate of 35% and a state income tax rate of 6.9% for each period.

 

COMMITMENTS AND CONTRACTUAL OBLIGATIONS

 

As a normal part of its business, BancShares, FCB, ISB and other subsidiaries enter into various contractual obligations and participate in certain commercial commitments. Table 2019 identifies significant obligations and commitments as of December 31, 2005.2007.

 

LEGAL PROCEEDINGS

 

On February 24, 2006 DataTreasury Corporation (“DataTreasury”) filed a lawsuit in the United States District Court for the Eastern District of Texas against a number of large financial institutions including BancShares and itsFCB alleging patent infringement. DataTreasury claims to be the owner of multiple patents that cover check processing, and seeks to enjoin the defendants from infringing those patents and to recover damages, including royalty payment for checks processed since February 2000 and for checks processed in the future, costs and attorneys’ fees. The United States Patent and Trademark Office recently issued reexamination certificates with respect to two of four patents at issue in the claims asserted against BancShares and FCB, reaffirming all of the claims in these patents and allowing DataTreasury to include additional claims. BancShares and FCB challenge the validity of these patents, and claim that even if the patents are valid, BancShares and FCB are not liable for infringement because BancShares does not process checks and FCB’s check processing system does not infringe the patents. BancShares and FCB strenuously deny liability and are vigorously defending their positions. BancShares and FCB also have placed certain software and equipment vendors on notice of claims for defense and for indemnification in the event DataTreasury prevails.

BancShares and various subsidiaries have been named as defendants in various other legal actions arising from their normal business activities in which damages in various amounts are claimed. Although the amount of any ultimate liability with respect to such matters cannot be determined, in the opinion of management, any such liability associated with those other actions will not have a material effect on BancShares’ consolidated financial statements.

 

In addition to claims that have been brought against BancShares, there are also exposures related to unasserted claims that may or may not be initiated. These unasserted claims relate to relationships with customers, supervisory agencies and other governmental agencies that have authority over BancShares and its subsidiaries. Unless and until those claims are made, we are unable to estimate the ultimate liability that may exist.

Table 2019

COMMITMENTS AND CONTRACTUAL OBLIGATIONS

 

  Payments due by period

  Payments due by period

Type of obligation


  Less than 1 year

  1-3 years

  4-5 years

  Thereafter

  Total

  Less than 1 year  1-3 years  4-5 years  Thereafter  Total

Contractual obligations

               
  (thousands)

Contractual obligations:

          

Deposits

  $10,723,471  $1,154,678  $295,696  $13  $12,173,858  $12,293,715  $435,264  $187,107  $12,458  $12,928,544

Short-term borrowings

   779,028            779,028   1,305,287            1,305,287

Long-term obligations

   134   25,307   365   383,181   408,987   1,273   683   784   401,652   404,392

Operating leases

   13,291   22,855   14,676   61,286   112,108   15,582   22,702   15,704   60,272   114,260
  

  

  

  

  

               

Total contractual obligations

  $11,515,924  $1,202,840  $310,737  $444,480  $13,473,981  $13,615,857  $458,649  $203,595  $474,382  $14,752,483
  

  

  

  

  

               

Commitments

               

Commitments:

          

Loan commitments

  $1,912,240  $173,792  $90,713  $2,043,896  $4,220,641  $1,266,300  $965,016  $155,976  $2,585,223  $4,972,515

Standby letters of credit

   36,414   7,503   155      44,072   45,945   5,668   83      51,696

Affordable housing partnerships

   7,304   1,434   140     8,878
  

  

  

  

  

               

Total commercial commitments

  $1,948,654  $181,295  $90,868  $2,043,896  $4,264,713

Total commitments

  $1,319,549  $972,118  $156,199  $2,585,223  $5,033,089
  

  

  

  

  

               

 

TRANSACTIONS WITH RELATED PARTY TRANSACTIONSPERSONS

 

BancShares’ related partiespersons include our directors and officers, their immediate family members and any businesses or entities they control. AsThere are several other financial institutions that, as a result of significant common ownership, several financial institutions that are not a part of BancShares’ corporate organization are also viewed as related parties.persons. We routinely conduct business with these individuals and entities. Some of these relationships with related party relationshipspersons and the entities they control affect our consolidated statements of income. Fees from processing services includes $24.0included $29.2 million, $23.0$26.1 million and $20.0$23.0 million recorded during 2005, 20042007, 2006 and 2003,2005, for services we provided to related parties. The rates chargedpersons, and fee income recognized from the largest individual related parties for such processing services are determined on an arm’s length basisinstitution totaled $18.0 million, $16.9 million and are subject to rigorous pricing$14.4 million, during the respective periods.

During 2007, 2006 and competitive reviews. During 2003, BancShares recognized a $5.7 million gain on sale of branches to a related party. The prices negotiated for the sale of the branches are believed to be reflective of appropriate prices for similar transactions among unrelated parties. During 2005, 2004 and 2003, we recognized legal expense of $4.3$3.8 million, $5.3$4.4 million and $4.9$4.3 million to the law firm that serves as our General Counsel. The senior member of that firm isCounsel and employs a member of our board of directors.

 

Certain of these transactions with related party transactionspersons also affect our consolidated balance sheets. At December 31, 20052007 and 2004,2006, loans and leases outstanding include $34.0$38.2 million and $31.6$34.7 million due fromin loans to related parties.persons. Investment securities available for sale include an equity investment in aan entity controlled by related partypersons with a carrying value of $25.2$23.8 million and $18.9$25.1 million at December 31, 20052007 and 2004,2006, respectively. The carrying value of this equity investment is established based upon the quoted price per share as of December 31 in the over-the-counter market on the OTC Bulletin Board. Short-term borrowings include $29.9$13.7 million and $24.6$41.3 million in federal funds purchased from financial institutions controlled by related partiespersons at December 31, 20052007 and 2004.2006. Additionally, BancShares had off balance sheet obligations for unfunded loan commitments to related partiespersons that totaled $15.4$20.5 million and $16.3$20.9 million at December 31, 20052007 and 2004,2006, respectively.

 

CURRENT ACCOUNTING AND REGULATORY ISSUES

 

In November 2003, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“EITF 03- 01”). In September 2004, the Financial Accounting Standards Board (FASB) issued a FASB Staff Position (FSP EITF 03-1-b). In November 2005,June 2006, the FASB issued FSP FAS 115-1Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 clarifies uncertainty in income taxes recognized by establishing a recognition threshold and FAS 124-1. Collectively, these documents consider when an investment is considered impaired, what disclosures are appropriatea measurement attribute for impairment losses, and what disclosures are appropriatethe financial statement treatment of a tax position taken or expected to be taken in a tax return. We adopted FIN 48 effective January 1, 2007. The adoption of FIN 48 resulted in a reduction in the liability for unrealized losses that have not been recognized as other-than-temporary impairments. The new disclosure requirements are effective for reporting periodsunrecognized tax benefits, which was offset by a $962,000 adjustment to the beginning after December 15, 2005.balance of retained earnings.

In May 2005,September 2006, the FASB issued Statement of Financial Accounting Standards No. 154 (SFAS 154), “Accounting Changes157 “Fair Value Measurements” (Statement 157). Statement 157 defines fair value, establishes a framework for measuring fair value, and Error Corrections”,expands disclosures about fair value measurements. Statement 157 does not require any new fair value measurements, but clarifies and standardizes some divergent practices that have emerged since prior guidance was issued. Statement 157 creates a three-level hierarchy under which replaces prior accounting guidance relatedindividual fair value estimates are to accounting changes and error corrections. SFAS 154 changesbe ranked based on the requirementsrelative reliability of the inputs used in the valuation. This hierarchy is the basis for the accounting fordisclosure requirements, with fair value estimates based on the least reliable inputs requiring more extensive disclosures about the valuation method used and reporting of a change in an accounting

principle. SFAS 154 requires retrospective application for voluntary changes in an accounting principle unless it is impracticable to do so. SFAS 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005.the gains and losses associated with those estimates. We adopted SFAS 154Statement 157 on January 1, 2006. There will be no2008, and the adoption did not have a material impact on ourfinancial condition, results of operations, or liquidity.

In September 2006, the FASB issued Summary of Statement No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (Statement 158). Statement 158 requires sponsors of defined benefit and other post-retirement plans to recognize the overfunded or underfunded status of that plan as an asset or liability in the sponsor’s statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. The recognition of the funded status of the defined benefit plan and additional disclosures outlined in Statement 158 were reflected in BancShares’ December 31, 2006 consolidated financial statements. Statement 158 also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, although that requirement is not effective until 2008.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities” (Statement 159). Statement 159 allows an entity to elect to measure certain financial assets and liabilities at fair value with changes in fair value recognized in the income statement each period. The statement also requires additional disclosures to identify the effects of an entity’s fair value election on its earnings. We adopted Statement 159 on January 1, 2008, and the adoption did not have a material impact on financial condition, results of operations, or liquidity.

 

Management is not aware of any current recommendations by regulatory authorities that, if implemented, would have or would be reasonably likely to have a material effect on liquidity, capital ratios or results of operations.

 

FORWARD-LOOKING STATEMENTS

 

Statements in this Report and exhibits relating to plans, strategies, economic performance and trends, projections of results of specific activities or investments, expectations or beliefs about future events or results, and other statements that are not descriptions of historical facts, may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

 

Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed in our Annual Report on Form 10-K and in other documents filed by us from time to time with the Securities and Exchange Commission.Commission from time to time.

 

Forward-looking statements may be identified by terms such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “forecasts,” “projects,” “potential” or “continue,” or similar terms or the negative of these terms, or other statements concerning opinions or judgments of BancShares’ management about future events.

 

Factors that could influence the accuracy of those forward-looking statements include, but are not limited to, the financial success or changing strategies of our customers, customer acceptance of our services, products and fee structure, the competitive nature of the financial services industry, our ability to compete effectively against other financial institutions in our banking markets, actions of government regulators, the level of market interest rates and our ability to manage our interest rate risk, changes in general economic conditions particularly changes that affect our loan and lease portfolio, the abilities of our borrowers to repay their loans, and leases, and the values of real estate and other loan collateral, and other developments or changes in our business that we do not expect.

 

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We have no obligation to update these forward-looking statements.

Financial Statements and Supplementary Data


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

Board of Directors And Stockholdersand Shareholders

First Citizens BancShares, Inc.

 

We have audited the accompanying consolidated balance sheets of First Citizens BancShares, Inc. and subsidiaries (BancShares) as of December 31, 20052007 and 2004,2006, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for each of the years then ended.in the three-year period ended December 31, 2007. These consolidated financial statements are the responsibility of the Company’sBancShares’ management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The accompanying consolidated statements of income, changes in shareholders’ equity, and cash flows for the year ended December 31, 2003, were audited by other auditors whose report thereon dated February 20, 2004, expressed an unqualified opinion thereon.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by Management,management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the 2005 and 2004 consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Citizens BancShares Inc. and subsidiaries as of December 31, 20052007 and 2004,2006, and the results of their operations and their cash flows for each of the years thenin the three-year period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note A to the consolidated financial statements, effective January 1, 2007, BancShares adopted Financial Accounting Standards Board Interpretation No. 48,Accounting for Uncertainty in Income Taxes, and effective December 31, 2006, BancShares adopted the recognition and disclosure provisions of Statement of Financial Accounting Standards No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of First Citizens BancShares’ internal control over financial reporting as of December 31, 2005,2007, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 13, 2006February 28, 2008, expressed an unqualified opinionsopinion on both management’s assessment of the company’s internal control over financial reporting and the effectiveness of the company’sBancShares’ internal control over financial reporting.

 

Raleigh, North Carolina

March 13, 2006February 28, 2008

MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

The management of First Citizens BancShares, Inc. (BancShares) is responsible for establishing and maintaining adequate internal control over financial reporting. BancShares’ internal control system was designed to provide reasonable assurance to the company’s management and board of directors regarding the preparation and fair presentation of published financial statements.

 

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

 

BancShares’ management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2005.2007. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control—Integrated Framework. Based on that assessment, we believe that, as of December 31, 2005,2007, the company’s internal control over financial reporting is effective based on those criteria.

 

BancShares’ independent auditors have issued an audit report on our assessment of the company’s internal control over financial reporting. This report appears on page 40.39.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and StockholdersShareholders

First Citizens BancShares, Inc.

 

We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, that First Citizens BancShares, Inc. and subsidiaries (BancShares) maintained effective’s internal control over financial reporting as of December 31, 2005,2007, based on criteria established inInternal ControlControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. BancShares’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting.reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’sBancShares’ internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment,assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control andbased on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, management’s assessment that BancShares maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, BancShares maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005,2007, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheetsfinancial statements of BancShares as of December 31, 20052007 and 2004,2006 and the related consolidated statementsfor each of income, changes in shareholders’ equity and cash flows for the years thenin the three-year period ended December 31, 2007, and our report dated March 13, 2006,February 28, 2008, expressed an unqualified opinion.

opinion on those consolidated financial statements. As discussed in Note A to the consolidated financial statements, effective January 1, 2007, BancShares adopted Financial Accounting Standards Board Interpretation No. 48,Accounting for Uncertainty in Income Taxes, and effective December 31, 2006, BancShares adopted the recognition and disclosure provisions of Statement of Financial Accounting Standards No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.

 

Raleigh, North Carolina

March 13, 2006February 28, 2008

CONSOLIDATED BALANCE SHEETS

 

First Citizens BancShares, Inc. and Subsidiaries

 

  December 31

  December 31
  2005

 2004

  2007  2006
  (thousands, except share
data)
  (thousands, except share data)

ASSETS

        

Cash and due from banks

  $777,928  $679,683  $793,788  $1,010,984

Overnight investments

   481,012   383,743   266,209   348,597

Investment securities held to maturity (fair value of $631,876 in 2005 and $874,779 in
2004)

   636,496   877,479

Investment securities available for sale (cost of $2,296,402 in 2005 and $1,240,619 in
2004)

   2,293,020   1,248,045

Investment securities available for sale
(cost of $3,174,505 in 2007 and $2,990,444 in 2006)

   3,229,241   3,001,890

Investment securities held to maturity
(fair value of $7,776 in 2007 and $218,333 in 2006)

   7,594   219,158

Loans and leases

   9,642,994   9,354,387   10,963,904   10,273,043

Less allowance for loan and lease losses

   128,847   123,861   136,974   132,004
  


 

      

Net loans and leases

   9,514,147   9,230,526   10,826,930   10,141,039

Premises and equipment

   639,469   568,365   757,694   702,926

Income earned not collected

   54,879   40,574   79,343   71,562

Goodwill

   102,735   102,635   102,625   102,625

Other intangible assets

   10,318   12,037   5,858   8,000

Other assets

   129,388   122,624   142,825   122,916
  


 

      

Total assets

  $14,639,392  $13,265,711  $16,212,107  $15,729,697
  


 

      

LIABILITIES

       

Deposits:

       

Noninterest-bearing

  $2,616,177  $2,443,059  $2,519,256  $2,682,997

Interest-bearing

   9,557,681   8,907,739   10,409,288   10,060,327
  


 

      

Total deposits

   12,173,858   11,350,798   12,928,544   12,743,324

Short-term borrowings

   779,028   447,686   1,305,287   1,150,847

Long-term obligations

   408,987   285,943   404,392   401,198

Other liabilities

   96,460   94,974   132,676   123,509
  


 

      

Total liabilities

   13,458,333   12,179,401   14,770,899   14,418,878

SHAREHOLDERS’ EQUITY

       

Common stock:

       

Class A—$1 par value (11,000,000 shares authorized; 8,756,778 shares issued for each period)

   8,757   8,757   8,757   8,757

Class B—$1 par value (2,000,000 shares authorized; 1,677,675 shares issued for each period)

   1,678   1,678   1,678   1,678

Surplus

   143,766   143,766   143,766   143,766

Retained earnings

   1,029,005   927,621   1,246,473   1,148,372

Accumulated other comprehensive income (loss)

   (2,147)  4,488

Accumulated other comprehensive income

   40,534   8,246
  


 

      

Total shareholders’ equity

   1,181,059   1,086,310   1,441,208   1,310,819
  


 

      

Total liabilities and shareholders’ equity

  $14,639,392  $13,265,711  $16,212,107  $15,729,697
  


 

      

 

See accompanying Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF INCOME

 

First Citizens BancShares, Inc. and Subsidiaries

 

  Year Ended December 31

  Year Ended December 31 
  2005

 2004

 2003

  2007  2006 2005 
  (thousands, except share and per share
data)
  (thousands, except share and per share data) 

INTEREST INCOME

         

Loans and leases

  $570,778  $466,312  $444,639  $727,581  $683,412  $574,384 

Investment securities:

        

U. S. Government

   73,472   47,515   59,350   140,986   112,461   73,472 

State, county and municipal

   252   275   184   220   235   252 

Other

   2,224   1,137   1,345   3,100   3,304   2,224 
  


 


 

          

Total investment securities interest and dividend income

   75,948   48,927   60,879   144,306   116,000   75,948 

Overnight investments

   19,208   5,878   4,959   32,169   30,903   19,208 
  


 


 

          

Total interest income

   665,934   521,117   510,477   904,056   830,315   669,540 

INTEREST EXPENSE

        

Deposits

   176,631   108,439   124,789   341,236   280,178   176,631 

Short-term borrowings

   14,966   3,611   2,795   55,126   41,431   14,966 

Long-term obligations

   26,554   21,776   20,953   27,352   32,128   26,554 
  


 


 

          

Total interest expense

   218,151   133,826   148,537   423,714   353,737   218,151 
  


 


 

          

Net interest income

   447,783   387,291   361,940   480,342   476,578   451,389 

Provision for credit losses

   33,109   34,473   24,187   33,594   20,922   33,514 
  


 


 

          

Net interest income after provision for credit losses

   414,674   352,818   337,753   446,748   455,656   417,875 

NONINTEREST INCOME

        

Cardholder and merchant services

   97,070   86,103   75,298 

Service charges on deposit accounts

   77,376   81,478   78,273   77,827   72,561   77,376 

Cardholder and merchant services income

   72,921   64,118   55,321

Commission-based income

   26,043   24,623   23,947

Wealth management services

   49,305   42,213   34,726 

Fees from processing services

   25,598   23,888   20,590   32,531   29,631   25,598 

Trust and asset management fees

   18,588   16,913   15,005

Insurance commissions

   7,735   6,942   6,390 

Mortgage income

   7,868   8,352   15,469   6,305   5,494   5,361 

ATM income

   10,220   10,201   9,005   6,515   6,803   7,842 

Other service charges and fees

   16,507   13,688   14,463   15,318   15,996   16,902 

Gain on sale of branches

      426   5,710

Securities gains (losses)

   (492)  1,852   309   1,376   (659)  (492)

Other

   8,723   5,417   5,844   1,488   6,283   8,665 
  


 


 

          

Total noninterest income

   263,352   250,956   243,936   295,470   271,367   257,666 

NONINTEREST EXPENSE

        

Salaries and wages

   215,504   207,088   199,703   243,871   228,472   212,997 

Employee benefits

   51,517   48,624   45,958   52,733   50,445   51,517 

Occupancy expense

   46,912   43,997   42,430   56,922   52,153   46,912 

Equipment expense

   50,291   50,125   50,436   56,404   52,490   50,291 

Other

   135,132   129,745   126,561   164,734   147,517   135,154 
  


 


 

          

Total noninterest expense

   499,356   479,579   465,088   574,664   531,077   496,871 
  


 


 

          

Income before income taxes

   178,670   124,195   116,601   167,554   195,946   178,670 

Income taxes

   65,808   49,352   41,414   58,937   69,455   65,808 
  


 


 

          

Net income

   112,862   74,843   75,187  $108,617  $126,491  $112,862 
  


 


 

          

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES

   

Unrealized securities gains (losses) arising during period

   (6,933)  (5,023)  2,163

Less: reclassification adjustment for gains (losses) included in net income

   (298)  1,121   187
  


 


 

Other comprehensive income (loss)

   (6,635)  (6,144)  1,976
  


 


 

Comprehensive income

  $106,227  $68,699  $77,163
  


 


 

PER SHARE INFORMATION

        

Net income available to common shareholders

  $10.82  $7.17  $7.19

Weighted average shares outstanding

   10,434,453   10,435,247   10,452,523

Net income per share

  $10.41  $12.12  $10.82 

Average shares outstanding

   10,434,453   10,434,453   10,434,453 
  


 


 

          

 

See accompanying Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

 

First Citizens BancShares, Inc. and Subsidiaries

 

  Class A
Common
Stock


 Class B
Common
Stock


  Surplus

  Retained
Earnings


 Accumulated
Other
Comprehensive
Income (Loss)


 Total
Shareholders’
Equity


  Class A
Common
Stock
 Class B
Common
Stock
 Surplus Retained
Earnings
 Accumulated
Other
Comprehensive
Income (loss)
 Total
Shareholders’
Equity
 
  (thousands, except share data)  (thousands, except share data) 

Balance at December 31, 2002

  $8,794  $1,678  $143,766  $804,397  $8,656  $967,291 

Redemption of 35,999 shares of Class A common stock

   (35)       (3,530)  (3,565)

Redemption of 950 shares of Class B common stock

         (87)  (87)

Balance at December 31, 2004

 $8,757 $1,678 $143,766 $927,621  $4,488  $1,086,310 

Comprehensive income:

      

Net income

         75,187   75,187   —    —    —    112,862   —     112,862 

Unrealized securities gains, net of deferred taxes

          1,976   1,976 

Unrealized securities losses arising during period, net of $4,367 deferred tax benefit

  —    —    —    —     (6,933)  (6,933)

Less: reclassification adjustment for losses included in net income, net of $194 deferred tax benefit

  —    —    —    —     (298)  (298)
               

Unrealized securities losses, net of deferred taxes

  —    —    —    —     (6,635)  (6,635)
        

Total comprehensive income

       106,227 
        

Cash dividends

         (11,497)  (11,497)  —    —    —    (11,478)  —     (11,478)
  


 

  

  


 


 


               

Balance at December 31, 2003

   8,759   1,678   143,766   864,470   10,632   1,029,305 

Balance at December 31, 2005

  8,757  1,678  143,766  1,029,005   (2,147)  1,181,059 

Adjustment resulting from adoption of :

      

Staff Accounting Bulletin No. 108, net of $2,803 deferred tax

  —    —    —    4,354   —     4,354 

SFAS No. 158, net of $1,610 deferred tax

  —    —    —    —     2,502   2,502 

Comprehensive income:

      

Net income

         74,843   74,843   —    —    —    126,491   —     126,491 

Redemption of 1,892 shares of Class A common stock

   (2)       (213)  (215)

Unrealized securities gains arising during period, net of $4,315 deferred tax

  —    —    —    —     8,577   8,577 

Less: reclassification adjustment for losses included in net income, net of $260 deferred tax benefit

  —    —    —    —     (399)  (399)
               

Unrealized securities gains, net of deferred taxes

  —    —    —    —     8,976   8,976 

Change in unrecognized loss on cash flow hedge,
net of $708 deferred tax benefit

  —    —    —    —     (1,085)  (1,085)
        

Total comprehensive income

       134,382 
        

Cash dividends

         (11,479)  (11,479)  —    —    —    (11,478)  —     (11,478)

Unrealized securities losses, net of deferred taxes

          (6,144)  (6,144)
  


 

  

  


 


 


               

Balance at December 31, 2004

   8,757   1,678   143,766   927,621   4,488   1,086,310 

Balance at December 31, 2006

  8,757  1,678  143,766  1,148,372   8,246   1,310,819 

Adjustment resulting from adoption of FASB Interpretation No. 48

  —    —    —    962   —     962 

Comprehensive income:

      

Net income

         112,862   112,862   —    —    —    108,617   —     108,617 

Unrealized securities gains arising during period, net of $17,453 deferred tax

  —    —    —    —     27,213   27,213 

Less: reclassification adjustment for gains included in net income, net of $543 deferred tax

  —    —    —    —     833   833 
               

Unrealized securities gains, net of deferred taxes

  —    —    —    —     26,380   26,380 

Change in unrecognized loss on cash flow hedge,
net of $1,406 deferred tax benefit

  —    —    —    —     (2,155)  (2,155)

Change in prepaid pension asset, net of
$5,190 deferred tax

  —    —    —    —     8,063   8,063 
        

Total comprehensive income

       140,905 
        

Cash dividends

         (11,478)  (11,478)  —    —    —    (11,478)  —     (11,478)

Unrealized securities losses, net of deferred taxes

          (6,635)  (6,635)
  


 

  

  


 


 


               

Balance at December 31, 2005

  $8,757  $1,678  $143,766  $1,029,005  $(2,147) $1,181,059 

Balance at December 31, 2007

 $8,757 $1,678 $143,766 $1,246,473  $40,534  $1,441,208 
  


 

  

  


 


 


               

At December 31, 2007, Accumulated Other Comprehensive Income includes $33,209 in unrealized gains on investment securities available for sale, $10,565 in pension asset recognized under FASB Statement No. 158, and an unrealized loss of $3,240 on a cash flow hedge.

 

See accompanying Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

First Citizens BancShares, Inc. and Subsidiaries

 

  For the Year Ended

   For the Year Ended 
  2005

 2004

 2003

   2007 2006 2005 
  (thousands)   (thousands) 

OPERATING ACTIVITIES

       

Net income

  $112,862  $74,843  $75,187   $108,617  $126,491  $112,862 

Adjustments to reconcile net income to cash provided by operating activities:

       

Amortization of intangibles

   2,453   2,360   2,583    2,142   2,318   2,453 

Provision for credit losses

   33,109   34,473   24,187    33,594   20,922   33,514 

Deferred tax expense (benefit)

   (1,573)  4,715   5,154    1,597   694   (1,573)

Change in current taxes payable

   1,581   (15,475)  9,375    497   5,394   1,581 

Depreciation

   45,075   43,810   41,628    51,822   48,286   45,075 

Change in accrued interest payable

   15,005   4   (8,162)   (1,091)  19,777   15,005 

Change in income earned not collected

   (14,305)  1,355   5,030    (7,781)  (9,526)  (14,305)

Securities losses (gains)

   492   (1,852)  (309)   (1,376)  659   492 

Origination of loans held for sale

   (535,897)  (518,079)  (938,598)   (509,655)  (488,220)  (535,897)

Proceeds from sale of loans

   731,913   502,314   937,468    507,591   508,883   731,913 

Gain on sale of loans

   (4,680)  (3,781)  (7,166)

Loss (gain) on sale of loans

   633   (1,246)  (4,680)

Gain on sale of branches

   —     (426)  (5,710)   —     (826)  —   

Loss on premises and equipment, net

   1,886   272   —   

Net amortization of premiums and discounts

   (1,436)  6,954   17,800    (4,175)  (5,307)  (1,436)

Net change in other assets

   (1,022)  (23,252)  (15,895)   (28,415)  (12,793)  1,779 

Net change in other liabilities

   (15,100)  3,672   (9,944)   6,509   366   (15,100)
  


 


 


          

Net cash provided by operating activities

   368,477   111,635   132,628    162,395   216,144   371,683 
  


 


 


          

INVESTING ACTIVITIES

       

Net change in loans outstanding

   (508,055)  (1,028,953)  (728,668)   (717,401)  (654,312)  (511,261)

Purchases of investment securities held to maturity

   (264,700)  (630,471)  (719,034)   —     (26,074)  (264,700)

Purchases of investment securities available for sale

   (1,334,214)  (275,263)  (1,615,817)   (1,661,277)  (1,265,212)  (1,334,214)

Proceeds from maturities of investment securities held to maturity

   507,119   972,755   1,892,100    211,816   444,807   507,119 

Proceeds from maturities of investment securities available for sale

   277,939   261,629   543,555    1,480,591   573,429   277,939 

Proceeds from sales of securities

   1,392   994   —   

Net change in overnight investments

   (97,269)  (89,338)  329,165    82,388   132,415   (97,269)

Dispositions of premises and equipment

   9,542   8,201   20,930    2,164   6,438   9,542 

Additions to premises and equipment

   (123,948)  (80,707)  (92,261)   (106,482)  (118,694)  (123,948)

Purchase and sale of branches, net of cash transferred

   18,343   (2,497)  (79,403)   —     (19,450)  18,343 
  


 


 


          

Net cash used by investing activities

   (1,515,243)  (864,644)  (449,433)   (706,809)  (925,659)  (1,518,449)
  


 


 


          

FINANCING ACTIVITIES

       

Net change in time deposits

   603,248   241,081   (273,438)   341,399   590,132   603,248 

Net change in demand and other interest-bearing deposits

   198,855   398,976   591,990    (156,179)  (113)  198,855 

Net change in short-term borrowings

   329,386   14,161   (33,087)   154,440   345,715   329,386 

Originations of long-term obligations

   125,000   —     25,000 

Redemption of common stock

   —     (215)  (3,652)

Origination of long-term obligations

   180   121,408   125,000 

Redemption of long-term obligation

   (1,144)  (103,093)  —   

Cash dividends paid

   (11,478)  (11,479)  (11,497)   (11,478)  (11,478)  (11,478)
  


 


 


          

Net cash provided by financing activities

   1,245,011   642,524   295,316    327,218   942,571   1,245,011 
  


 


 


          

Change in cash and due from banks

   98,245   (110,485)  (21,489)   (217,196)  233,056   98,245 

Cash and due from banks at beginning of period

   679,683   790,168   811,657    1,010,984   777,928   679,683 
  


 


 


          

Cash and due from banks at end of period

  $777,928  $679,683  $790,168   $793,788  $1,010,984  $777,928 
  


 


 


          

CASH PAYMENTS FOR:

       

Interest

  $203,146  $133,822  $156,699   $424,805  $373,514  $203,146 

Income taxes

   65,860   39,973   22,499    57,765   61,795   65,860 
  


 


 


SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

       

Unrealized securities gains (losses)

  $(10,808) $(10,171) $3,293   $43,290  $11,446  $(10,808)
  


 


 


Unrealized loss on cash flow hedge

   (3,561)  (1,793)  —   

Prepaid pension benefit

   13,253   4,112   —   

 

See accompanying Notes to Consolidated Financial Statements.

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Dollars in thousands)

 

NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation and Consolidation

 

First Citizens BancShares, Inc. (BancShares) is a financial holding company with two banking subsidiaries: First-Citizens Bank & Trust Company, headquartered in Raleigh, North Carolina (FCB), which operates branches in North Carolina, Virginia, West Virginia, Maryland and Tennessee; and IronStone Bank (ISB), a federally-chartered thrift institution headquartered in Fort Myers, Florida with branch offices in Florida, Georgia, Texas, Arizona, California, New Mexico, Colorado, Oregon and Washington. ISB also operates loan production offices in certain of these states as well as Missouri and plans to open additional loan production offices during 2008 in Oklahoma and Kansas.

 

FCB and ISB offer full-service banking services designed to meet the needs of retail and commercial customers in the markets in which they operate. The services offered include transaction and savings deposit accounts, commercial and consumer lending, trust, asset management and broker-dealer services, insurance services and other activities incidental to commercial banking. BancShares is also the parent company of American Guaranty Insurance Company, which is engaged in writing property and casualty insurance, and Neuse, Incorporated, which owns some of the real property from which ISB operates its branches.

 

FCB has severalother subsidiaries that support its full-service banking operation. First Citizens Investor Services and IronStone Securities are registered broker-dealers in securities that provide investment services, including sales of annuities and third party mutual funds. First Citizens Bank, National Association is the issuing and processing bank for FCB’s retail credit cards and merchant accounts. Triangle Life Insurance Company writes credit life and credit accident and health insurance. Neuse Financial Services, Inc. is a title insurance agency. T-TECH, Inc. provides payment processing services

On January 1, 2007, American Guaranty Insurance Company (AGI), a property and casualty insurance company, and Triangle Life Insurance Company (TLI), a credit life and credit accident and health insurance company were sold to third parties.an unrelated party.

 

The accounting and reporting policies of BancShares and its subsidiaries are in accordance with accounting principles generally accepted in the United States of America and, with regard to the banking subsidiaries, conform to general industry practices. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates made by BancShares in the preparation of its consolidated financial statements are the determination of the allowance for credit losses, the existence of any other-than-temporary impairments of investment securities,pension plan assumptions and fair value estimates.income taxes.

 

Intercompany accounts and transactions have been eliminated. Certain amounts for prior years have been reclassified to conform to statement presentations for 2005.2007. However, the reclassifications have no effect on shareholders’ equity or net income as previously reported.

 

Investment Securities

BancShares has the ability and the positive intent to hold investment securities held to maturity until the scheduled maturity date. These securities are stated at cost adjusted for amortization of premium and accretion of discount. Accreted discounts and amortized premiums are included in interest income on an effective yield basis.

 

Investment securities available for sale are carried at their fair value with unrealized gains and losses, net of deferred income taxes, recorded as a component of other comprehensive income within shareholders’ equity. Gains and losses realized from the sales of securities available for sale are determined by specific identification and are included in noninterest income.

 

BancShares has the ability and the positive intent to hold investment securities held to maturity until the scheduled maturity date. These securities are stated at cost adjusted for amortization of premium and accretion of discount. Accreted discounts and amortized premiums are included in interest income on an effective yield basis.

Investment securities with a fair value less than 80 percent of cost for more than two consecutive quarters are periodically evaluated to determine whether the investment is other than temporarily impaired. If an investment security is determined to be other than temporarily impaired, the security is written down to its fair value with an offsetting securities loss.

 

At December 31, 20052007 and 2004,2006, BancShares had no investment securities held for trading purposes.

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

(Dollars in thousands)

 

Overnight Investments

 

Overnight investments include federal funds sold and interest-bearing demand deposit balances in other banks.

 

Loans and Leases

 

Loans and leases that are held for investment purposes are carried at the principal amount outstanding. Loans that are classified as held for sale are carried at the lower of aggregate cost or fair value. Interest on substantially all loans is accrued and credited to interest income on a constant yield basis based upon the daily principal amount outstanding.

 

Loan Fees

 

Fees collected and certain costs incurred related to loan originations are deferred and amortized as an adjustment to interest income over the life of the related loans. Deferred fees and costs are recorded as an adjustment to loans outstanding using a method that approximates a constant yield.

Mortgage Servicing Rights

The estimated value of the right to service mortgage loans for others (MSRs) is included in other assets on the consolidated balance sheet. Capitalization of MSRs occurs when the underlying loan is sold. Capitalized MSRs are amortized over the projected life of the serviced loans and are subject to periodic review for impairment.

 

Allowance for Loan and Lease Losses and Reserve for Unfunded Commitments

 

The allowance for loan and lease losses (ALLL) represents management’s estimate of probable credit losses within the loan and lease portfolio. The reserve for unfunded commitments (RUC) represents the estimate of probable credit losses among off-balance sheet loan commitments. Adjustments to the ALLL and the RUC are established by charges to the provision for credit losses. To determine the appropriate amount of the ALLL and RUC, management evaluates the risk characteristics of the loan and lease portfolio and outstanding loan commitments under current economic conditions and considers such factors as the financial condition of the borrower, fair value of collateral and other items that, in management’s opinion, deserve current recognition in estimating credit losses.

 

Management considers the established ALLL adequate to absorb probable losses that relate to loans and leases outstanding as of December 31, 2005.2007. Management considers the established RUC adequate to absorb probable losses that relate to off-balance sheet loan commitments outstanding as of December 31, 2005.2007. Future additionsadjustments to the ALLL and the RUC may be necessary based on changes in economic and other conditions. Additionally, various regulatory agencies, as an integral part of their examination process, periodically review BancShares’ ALLL and the RUC. Such agencies may require the recognition of additionsadjustments to the ALLL and RUC based on their judgments of information available to them at the time of their examination.

 

Nonaccrual Loans, Impaired Loans and Other Real Estate

 

Accrual of interest on certain residential mortgage loans is discontinued when the loan is more than three payments past due. Accrual of interest on all other loans and leases is discontinued when management deems that collection of additional principal or interest is doubtful. Residential mortgage loans return to an accrual status when the loan balance is less than three payments past due. Other loans and leases are returned to an accrual status when both principal and interest are current and the loan is determined to be performing in accordance with the applicable terms.

 

Management considers a loan to be impaired when based on current information and events, it is probable that a borrower will be unable to pay all amounts due according to contractual terms of the loan agreement. Impaired loans are valued usingby either the discounted expected cash flow method using the loan’s original effective interest rate or the collateral value. When the ultimate collectibility of an impaired loan’s principal is doubtful, all cash receipts are applied to principal. Once the recorded principal balance has been reduced to zero, future cash receipts are applied to interest income, to the extent that any interest has been foregone.

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands)

 

Other real estate is valued at the lower of the loan balance at the time of foreclosure or estimated fair value net of selling costs and is included in other assets. Once acquired, other real estate is periodically reviewed to ensure that the fair value of the property supports the carrying value, with writedowns recorded when necessary. Gains and losses resulting from the sale or writedown of other real estate and income and expenses related to the operation of other real estate are recorded in other expense.

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands)

Premises and Equipment

 

Premises and equipment are stated at cost less accumulated depreciation and amortization. For financial reporting purposes, depreciation and amortization are computed by the straight-line method and are charged to operationsexpensed over the estimated useful lives of the assets, which range from 25 to 40 years for premises and three to 10 years for furniture, software and equipment. Leasehold improvements are amortized over the terms of the respective leases or the useful lives of the improvements, whichever is shorter. Gains and losses on dispositions are recorded in other expense. Maintenance and repairs are charged to occupancy expense or equipment expense as incurred.

 

Goodwill and Other Intangible Assets

 

Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. Goodwill is tested at least annually for impairment.

 

Other intangible assets with estimable lives are amortized on a straight-line basis over their estimated useful lives, which are periodically reviewed for reasonableness.

 

Income Taxes

 

Income tax expense is based on consolidated income before income taxes and generally differs from income taxes paid due to deferred income taxes and benefits arising from income and expenses being recognized in different periods for financial and income tax reporting purposes. BancShares uses the asset and liability method to account for deferred income taxes. The objective of the asset and liability method is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the income tax basis of BancShares’ assets and liabilities at enacted rates expected to be in effect when such amounts are realized or settled.

 

BancShares continually monitors and evaluates the potential impact of current events on the estimates used to establish income tax expenseexpenses and income tax assets and liabilities. On a periodic basis, BancShares evaluates its income tax positions based on current tax law, positions taken by various tax auditors within the jurisdictions that BancShares is required to file income tax returns, as well as potential or pending audits or assessments by such tax auditors.

 

BancShares and its subsidiaries file a consolidated federal income tax return. BancShares and its subsidiaries each file separate state income tax returns except where unitary filing is required.

 

Derivative Financial Instruments

Derivative financial instruments include interest rate swaps, caps, floors, collars, options or other financial instruments designed to hedge exposures to interest rate risk or for speculative purposes. During 2006, BancShares entered into an interest rate swap that is a cash flow derivative under Statement of Financial Accounting Standards No. 133. The derivative is valued each quarter, and changes in the fair value are recorded on the consolidated balance sheet with an offset to other comprehensive income for the effective portion and an offset to the consolidated statements of income for any ineffective portion. The assessment of effectiveness is performed using the long-haul method. There are no speculative derivative financial instruments in any period.

Per Share Data

 

Net income per share has been computed by dividing net income by the weighted average number of both classes of common shares outstanding during each period. The weighted average number of shares outstanding for 2007, 2006 and 2005 2004 and 2003 was 10,434,453; 10,435,247; and 10,452,523, respectively.10,434,453. BancShares had no potential common stock outstanding in any period.

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands)

 

Cash dividends per share apply to both Class A and Class B common stock. Shares of Class A common stock carry one vote per share, while shares of Class B common stock carry 16 votes per share.

 

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands)

Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) consists entirely of unrealized gains (losses) on investment securities available for sale.

The tax effects applicable to the components of other comprehensive income (loss) included in the consolidated statements of income are as follows for the years ended December 31:

   2005

  2004

  2003

Unrealized gains (losses) arising during the period

  $(4,367) $(3,296) $1,439

Less: reclassification adjustments for gains (losses) included in net income

   (194)  731   122
   


 


 

Total

  $(4,173) $(4,027) $1,317
   


 


 

Current Accounting Matters

 

In November 2003, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“EITF 03- 01”). In September 2004, the Financial Accounting Standards Board (FASB) issued a FASB Staff Position (FSP EITF 03-1-b). In November 2005,June 2006, the FASB issued FSP FAS 115-1Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 clarifies uncertainty in income taxes recognized by establishing a recognition threshold and FAS 124-1. Collectively, these documents consider when an investment is considered impaired, what disclosures are appropriatea measurement attribute for impairment losses, and what disclosures are appropriatethe financial statement treatment of a tax position taken or expected to be taken in a tax return. We adopted FIN 48 effective January 1, 2007. The adoption of FIN 48 resulted in a reduction in the liability for unrealized losses that have not been recognized as other-than-temporary impairments. The new disclosure requirements are effective for reporting periodsunrecognized tax benefits, resulting in a $962 increase to the beginning after December 15, 2005.balance of retained earnings.

 

In May 2005,September 2006, the FASB issued Statement of Financial Accounting Standards No. 154 (SFAS 154), “Accounting Changes157 “Fair Value Measurements” (Statement 157). Statement 157 defines fair value, establishes a framework for measuring fair value, and Error Corrections”,expands disclosures about fair value measurements. Statement 157 does not require any new fair value measurements, but clarifies and standardizes some divergent practices that have emerged since prior guidance was issued. Statement 157 creates a three-level hierarchy under which replaces prior accounting guidance relatedindividual fair value estimates are to accounting changes and error corrections. SFAS 154 changesbe ranked based on the requirementsrelative reliability of the inputs used in the valuation. This hierarchy is the basis for the accounting fordisclosure requirements, with fair value estimates based on the least reliable inputs requiring more extensive disclosures about the valuation method used and reporting of a change in an accounting principle. SFAS 154 requires retrospective application for voluntary changes in an accounting principle unless it is impracticable to do so. SFAS 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. Wethe gains and losses associated with those estimates. BancShares adopted SFAS 154Statement 157 on January 1, 2006. There will be2008, with no material impact on our consolidatedthe financial statements.condition, results of operations, or liquidity.

 

ManagementIn September 2006, the FASB issued Summary of Statement No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (Statement 158). Statement 158 requires sponsors of defined benefit and other post-retirement plans to recognize the overfunded or underfunded status of that plan as an asset or liability in the sponsor’s statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. Statement 158 also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, although that requirement is not awareeffective until 2008.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities” (Statement 159). Statement 159 allows an entity to elect to measure certain financial assets and liabilities at fair value with changes in fair value recognized in the income statement each period. The statement also requires additional disclosures to identify the effects of any current recommendations by regulatory authorities that, if implemented, would have or would be reasonably likely to have aan entity’s fair value election on its earnings. BancShares adopted Statement 159 on January 1, 2008, with no material effectimpact on liquidity, capital ratios orfinancial condition, results of operations.operations, or liquidity.

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

(Dollars in thousands)

 

NOTE B—INVESTMENT SECURITIES

 

The aggregate values of investment securities at December 31 along with gains and losses determined on an individual security basis are as follows:

 

   Cost

  Gross
Unrealized
Gains


  Gross
Unrealized
Losses


  Fair Value

Investment securities held to maturity

                

2005

                

U. S. Government

  $634,673  $162  $4,927  $629,908

State, county and municipal

   1,573  ��145      1,718

Other

   250         250
   

  

  

  

Total investment securities held to maturity

  $636,496  $307  $4,927  $631,876
   

  

  

  

2004

                

U. S. Government

  $875,496  $707  $3,569  $872,634

State, county and municipal

   1,733   162      1,895

Other

   250         250
   

  

  

  

Total investment securities held to maturity

  $877,479  $869  $3,569  $874,779
   

  

  

  

Investment securities available for sale

                

2005

                

U. S. Government

  $2,244,864  $45  $30,188  $2,214,721

Equity securities

   34,409   26,809      61,218

State, county and municipal

   5,227   8   56   5,179

Other

   11,902         11,902
   

  

  

  

Total investment securities available for sale

  $2,296,402  $26,862  $30,244  $2,293,020
   

  

  

  

2004

                

U. S. Government

  $1,201,829  $71  $13,834  $1,188,066

Equity securities

   32,447   21,182      53,629

State, county and municipal

   6,343   34   27   6,350
   

  

  

  

Total investment securities available for sale

  $1,240,619  $21,287  $13,861  $1,248,045
   

  

  

  

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands)

   Cost  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair Value

Investment securities available for sale

        

2007

        

U. S. Government

  $3,129,743  $30,209  $1,110  $3,158,842

Equity securities

   33,614   24,023   —     57,637

State, county and municipal

   3,377   11   16   3,372

Other

   7,771   1,619   —     9,390
                

Total investment securities available for sale

  $3,174,505  $55,862  $1,126  $3,229,241
                

2006

        

U. S. Government

  $2,940,810  $1,218  $16,338  $2,925,690

Equity securities

   35,171   26,532   —     61,703

State, county and municipal

   4,290   10   43   4,257

Other

   10,173   67   —     10,240
                

Total investment securities available for sale

  $2,990,444  $27,827  $16,381  $3,001,890
                

Investment securities held to maturity

        

2007

        

U. S. Government

  $5,760  $109  $26  $5,843

State, county and municipal

   1,584   99   —     1,683

Other

   250   —     —     250
                

Total investment securities held to maturity

  $7,594  $208  $26  $7,776
                

2006

        

U. S. Government

  $217,330  $54  $1,008  $216,376

State, county and municipal

   1,578   129   —     1,707

Other

   250   —     —     250
                

Total investment securities held to maturity

  $219,158  $183  $1,008  $218,333
                

 

The following table provides maturity information for investment securities at December 31. Callable securities are assumed to mature on their earliest call date.

 

  2005

  2004

  2007  2006
  Cost  Fair Value  Cost  Fair Value

Investment securities available for sale

        

Maturing in:

        

One year or less

  $1,668,239  $1,676,017  $1,515,069  $1,504,843

One through five years

   1,380,012   1,401,718   1,369,763   1,366,267

Five through 10 years

   6,791   6,782   6,807   6,572

Over 10 years

   85,849   87,087   63,634   62,505

Equity securities

   33,614   57,637   35,171   61,703
            

Total investment securities available for sale

  $3,174,505  $3,229,241  $2,990,444  $3,001,890
  Cost

  Fair Value

  Cost

  Fair Value

            

Investment securities held to maturity

                    

Maturing in:

                    

One year or less

  $416,172  $413,289  $511,586  $510,100  $250  $250  $210,232  $209,296

One through five years

   209,604   207,639   351,660   349,830   149   153   401   407

Five to 10 years

         21   22

Five through 10 years

   5,563   5,612   46   46

Over 10 years

   10,720   10,948   14,212   14,827   1,632   1,761   8,479   8,584
  

  

  

  

            

Total investment securities held to maturity

  $636,496  $631,876  $877,479  $874,779  $7,594  $7,776  $219,158  $218,333
  

  

  

  

            
  2005

  2004

  Cost

  Fair Value

  Cost

  Fair Value

Investment securities available for sale

            

Debt securities maturing in:

            

One year or less

  $1,160,510  $1,141,549  $928,088  $917,262

One through five years

   1,058,485   1,047,890   257,179   254,382

Five to 10 years

   1,230   1,219   1,460   1,461

Over 10 years

   41,768   41,144   21,445   21,311

Equity securities

   34,409   61,218   32,447   53,629
  

  

  

  

Total investment securities available for sale

  $2,296,402  $2,293,020  $1,240,619  $1,248,045
  

  

  

  

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands)

 

The amount of securities gains (losses) reported includes the following:

 

  Year ended December 31,

   Year ended
December 31,
 
  2005

 2004

 2003

   2007  2006 2005 

Gains on sales of investment securities available for sale

  $  $1,923  $1,515 

Losses on sales of investment securities available for sale

      (71)  (231)

Gross gains on sales of investment securities available for sale

  $1,376  $328  $—   

Other than temporary impairment losses

   (469)     (980)   —     (987)  (469)

Other

   (23)     5    —     —     (23)
  


 


 


          

Total securities gains (losses)

  $(492) $1,852  $309   $1,376  $(659) $(492)
  


 


 


          

 

In conjunction with the securitization and sale of revolving mortgage loans during 2005, BancShares retained a residual interest in the securitized assets in the form of an interest-only strip, which is included within investment securities available for sale and is carried at its estimated fair value. Quoted market prices are not readily available for retained residual interests, so the fair value was estimated based on various factors that may have an impact on the fair value of the retainedresidual interests. The assumed discount rate was 10 percent; the assumed rate of credit losses was 10 basis points; the estimated weighted average loan life was 3.3 years. Based on the assumptions used, the estimated fair value of the retained residual interest wasequaled $11,586 at the date of the securitization. Based on changes that occurred after the date of the securitization, an other than temporary impairment of $469 wasimpairments were recorded during 2006 and 2005. The carrying value of the retainedresidual interest was $9,390 at December 31, 2007, $10,240 at December 31, 2006 and $11,902 at December 31, 2005.

 

The following table provides additional information regarding unrealized losses as of December 31:

   Less than 12 months  12 months or more  Total
   Fair
Value
  Unrealized
Losses
  Fair
Value
  Unrealized
Losses
  Fair
Value
  Unrealized
Losses
December 31, 2007            

Investment securities available for sale:

            

U.S. Government

  $145,612  $237  $208,711  $873  $354,323  $1,110

Equity securities

   —     —     —     —     —     —  

State, county and municipal

   25   —     2,163   16   2,188   16
                        

Total

  $145,637  $237  $210,874  $889  $356,511  $1,126
                        

Investment securities held to maturity:

            

U.S. Government

  $—    $—    $48  $26  $48  $26

State, county and municipal

   —     —     —     —     —     —  

Other

   —     —     —     —     —     —  
                        

Total

  $—    $—    $48  $26  $48  $26
                        

December 31, 2006

            

Investment securities available for sale:

            

U.S. Government

  $835,311  $2,867  $1,635,549  $13,471  $2,470,860  $16,338

Equity securities

   —     —     —     —     —     —  

State, county and municipal

   389   1   3,080   42   3,469   43
                        

Total

  $835,700  $2,868  $1,638,629  $13,513  $2,474,329  $16,381
                        

Investment securities held to maturity:

            

U.S. Government

  $—    $—    $209,451  $1,008  $209,451  $1,008

State, county and municipal

   —     —     —     —     —     —  

Other

   —     —     —     —     —     —  
                        

Total

  $—    $—    $209,451  $1,008  $209,451  $1,008
                        

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

(Dollars in thousands)

 

The following table provides additional information regarding unrealized losses as of December 31, 2005 and 2004:

   Less than 12 months

  12 months or more

  Total

December 31, 2005  

Fair

Value


  Unrealized
Losses


  Fair
Value


  Unrealized
Losses


  

Fair

Value


  Unrealized
Losses


Investment securities held to maturity:

                        

U.S. Government

  $246,462  $2,310  $373,969  $2,617  $620,431  $4,927

State, county and municipal

                  

Other

                  
   

  

  

  

  

  

Total

  $246,462  $2,310  $373,969  $2,617  $620,431  $4,927
   

  

  

  

  

  

Investment securities available for sale:

                        

U.S. Government

  $1,285,442  $11,477  $870,378  $18,711  $2,155,820  $30,188

Equity securities

                  

State, county and municipal

   1,898   27   2,098   29   3,996   56
   

  

  

  

  

  

Total

  $1,287,340  $11,504  $872,476  $18,740  $2,159,816  $30,244
   

  

  

  

  

  

December 31, 2004                  

Investment securities held to maturity:

                        

U.S. Government

  $751,893  $3,433  $54,612  $136  $806,505  $3,569

State, county and municipal

                  

Other

                  
   

  

  

  

  

  

Total

  $751,893  $3,433  $54,612  $136  $806,505  $3,569
   

  

  

  

  

  

Investment securities available for sale:

                        

U.S. Government

  $465,920  $3,004  $714,481  $10,830  $1,180,401  $13,834

Equity securities

                  

State, county and municipal

   1,153   5   1,832   22   2,985   27
   

  

  

  

  

  

Total

  $467,073  $3,009  $716,313  $10,852  $1,183,386  $13,861
   

  

  

  

  

  

Investment securities with an aggregate fair value of $1,246,445$210,922 have had continuous unrealized losses for more than twelve months as of December 31, 2005.2007. The aggregate amount of thatthe unrealized losslosses among those 99 securities was $21,357$915 at December 31, 2005.2007. These securities include U.S. Government, government agency and state, county and municipal securities. The unrealized losses relate to fixed-rate debt securities that have incurred fair value reductions due to higher market interest rates since the securities were purchased.respective purchase date. The unrealized losses are not likely to reverse unless and until market interest rates decline to the levels that existed when the securities were purchased. Since none of the unrealized losses relate to the marketability of the securities or the issuer’s ability to honor redemption obligations, none of the securities are deemed to be other than temporarily impaired.

 

Investment securities having an aggregate carrying value of $1,597,723$2,402,221 at December 31, 20052007 and $1,666,003$2,401,839 at December 31, 2004,2006, were pledged as collateral to secure public funds on deposit, to secure certain short-term borrowings and for other purposes as required by law.

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands)

 

NOTE C—LOANS AND LEASES

 

Loans and leases outstanding at December 31 include the following:

 

  2005

  2004

  2007  2006

Real estate:

          

Construction and land development

  $766,945  $588,092  $810,818  $783,680

Commercial mortgage

   3,518,563   3,279,729   3,982,496   3,725,752

Residential mortgage

   1,016,677   979,663   1,029,030   1,025,235

Revolving mortgage

   1,368,729   1,714,032   1,494,431   1,326,403

Other real estate mortgage loans

   172,712   171,700

Other mortgage

   145,552   165,223
  

  

      

Total real estate loans

   6,843,626   6,733,216   7,462,327   7,026,293

Commercial and industrial

   1,193,349   969,729   1,707,394   1,526,818

Consumer

   1,318,971   1,397,820   1,368,228   1,360,524

Lease financing

   233,499   192,164   340,601   294,366

Other

   53,549   61,458   85,354   65,042
  

  

      

Total loans and leases

  $9,642,994  $9,354,387  $10,963,904  $10,273,043
  

  

      

 

During 2005, BancShares completed the securitization and sale of $256,232 of its revolving mortgage loans. The transaction generated a pre-tax gain of $2,874, which is included in other noninterest income. BancShares continues to service the assets that were sold. The transaction was accounted for under the provisions of Statement of Financial Accounting Standards No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (Statement 140). The transaction was completed using a Qualified Special Purpose Entity (QSPE) which, in accordance with Statement 140, is a legally isolated, bankruptcy remote entity beyond the control of the seller. The QSPE is therefore not included within the consolidated financial statements. BancShares received cash totaling $240,399 from the sale, net of the $7,816 of loans retained by the trust and $8,017 for cash collections and fees retained by the advisors.

 

In conjunction with the securitization and sale, BancShares established a servicing asset of $1,401, whichthat represented the estimated fair value of the right to service the loans that were securitized and sold. This asset is being amortized over the estimated servicing life of 149 months. Net of the $222 in amortization recorded during 2005, the carrying value of the servicing asset at December 31, 2005 was $1,179. There were no capitalized mortgage servicing rights during 2004.

 

At December 31, 2005, 13.7 percent of total loans and leases represent loans to customers in medical-related fields. At December 31, 2005, 11.2 percent of loans and leases exceeded the loan-to-value ratios recommended by guidelines established by regulatory agencies. Depending on the type of collateral, the guidelines assign a recommended loan-to-value limit that, for real estate loans, ranges from 65 percent to 85 percent. There were no foreign loans outstanding during either period, nor were there any loans to finance highly leveraged transactions. Substantially all loans are to customers domiciled within BancShares’ principal market areas.

At December 31, 2005 loans totaling $377,946 were pledged to secure long-term borrowings, compared to $417,488 at December 31, 2004.

At December 31, 2005 and 2004 nonperforming loans consisted of nonaccrual loans of $18,969 and $14,266, respectively. Gross interest income on nonperforming loans that would have been recorded had these loans been performing was $551, $773 and $1,182, respectively, during 2005, 2004 and 2003. Interest income recognized on nonperforming loans was $821, $281 and $356 during the respective periods. As of December 31, 2005 and 2004, the balance of other real estate was $6,753 and $9,020. Loans transferred to other real estate totaled $6,431, $5,801 and $4,112 during 2005, 2004 and 2003. Loans 90 days or more past due and still accruing totaled $9,180 and $12,192 at December 31, 2005 and 2004, respectively.

   2007  2006  2005

Carrying value of servicing asset at January 1

  $936  $1,179  $—  

Servicing asset created from securitization and sale

   —     —     1,401

Amortization expense recognized during the year

   187   243   222

Impairment recognized during the year

   190   —     —  
            

Carrying value of servicing asset at December 31

  $559  $936  $1,179
            

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

(Dollars in thousands)

 

At December 31, 2007, 20.6 percent of total loans and leases represent loans to customers in medical-related fields, compared to 18.7 percent at December 31, 2006. There were no foreign loans outstanding during either period, nor were there any loans to finance highly leveraged transactions. Substantially all loans and leases are to customers domiciled within BancShares’ principal market areas.

At December 31, 2007 loans totaling $245,165 were pledged to secure debt obligations, compared to $274,692 at December 31, 2006.

At December 31, 2007 and 2006 nonperforming loans and leases totaled $13,021 and $14,882, respectively, all of which are nonaccrual. Gross interest income on nonperforming loans that would have been recorded had these loans been performing was $1,200, $1,271 and $551, respectively, during 2007, 2006 and 2005. Interest income recognized on nonperforming loans was $465, $226 and $821 during the respective periods. As of December 31, 2007 and 2006, the balance of other real estate was $6,893 and $6,028. Loans transferred to other real estate totaled $4,779, $4,338 and $6,431 during 2007, 2006 and 2005. Loans past due 90 days or more and still accruing totaled $7,124 and $5,185 at December 31, 2007 and 2006, respectively.

 

In each period, BancShares originated much of its residential mortgage loan production through correspondent mortgage banks. Loan sale activity for 2005, 20042007, 2006 and 20032005 is summarized below:

 

  2005

  2004

  2003

  2007 2006  2005

Loans held for sale at December 31

  $61,185  $22,770  $11,520  $75,822  $80,805  $90,923

For the year ended December 31:

              

Loans sold

   727,233   498,533   930,302   508,224   507,637   727,233

Net gain on sale of loans

   4,680   3,781   7,166

Net gain (loss) on sale of loans

   (633)  1,246   4,680

 

NOTE D—ALLOWANCE FOR LOAN AND LEASECREDIT LOSSES AND RESERVE FOR UNFUNDED COMMITMENTS

 

Activity in the allowance for credit losses, which includes the allowance for loan and lease losses and the reserve for unfunded commitments, is summarized as follows:

 

   Allowance for
Loan and
Lease Losses


  Reserve for
Unfunded
Commitments


  Allowance
for
Credit Losses


 

Balance at December 31, 2002

  $106,889  $5,644  $112,533 

Acquired reserve

   409      409 

Provision for credit losses

   22,778   1,409   24,187 

Loans and leases charged off

   (21,658)     (21,658)

Loans and leases recovered

   3,886      3,886 
   


 


 


Net charge-offs

   (17,772)     (17,772)
   


 


 


Balance at December 31, 2003

   112,304   7,053   119,357 
   


 


 


Provision for credit losses

   34,555   (82)  34,473 

Loans and leases charged off

   (26,546)     (26,546)

Loans and leases recovered

   3,548      3,548 
   


 


 


Net charge-offs

   (22,998)     (22,998)
   


 


 


Balance at December 31, 2004

   123,861   6,971   130,832 
   


 


 


Reserves released from sale of loans

   (1,537)  (48)  (1,585)

Provision for credit losses

   33,109      33,109 

Loans and leases charged off

   (32,506)     (32,506)

Loans and leases recovered

   5,920      5,920 
   


 


 


Net charge-offs

   (26,586)     (26,586)
   


 


 


Balance at December 31, 2005

  $128,847  $6,923  $135,770 
   


 


 


At December 31, 2005 and 2004, impaired loans totaled $15,094 and $8,019, respectively, all of which were classified as nonaccrual. Total allowances of $1,653 and $1,615 have been established for impaired loans outstanding as of December 31, 2005 and 2004, respectively.

The average recorded investment in impaired loans during the years ended December 31, 2005, 2004 and 2003, was $8,480, $9,787 and $10,541, respectively. For the years ended December 31, 2005, 2004 and 2003, BancShares recognized cash basis interest income on those impaired loans of $113, $101 and $211 respectively.

   Allowance for
Loan and
Lease Losses
  Reserve for
Unfunded
Commitments
  Allowance
for Credit
Losses
 

Balance at December 31, 2004

  $123,861  $6,971  $130,832 

Allowance released from sale of loans

   (1,537)  (48)  (1,585)

Provision for credit losses

   33,514   —     33,514 

Loans and leases charged off

   (32,911)  —     (32,911)

Loans and leases recovered

   5,920   —     5,920 
             

Net charge-offs

   (26,991)  —     (26,991)
             

Balance at December 31, 2005

   128,847   6,923   135,770 
             

Provision for credit losses

   21,203   (281)  20,922 

Loans and leases charged off

   (24,353)  —     (24,353)

Loans and leases recovered

   6,307   —     6,307 
             

Net charge-offs

   (18,046)  —     (18,046)
             

Balance at December 31, 2006

   132,004   6,642   138,646 
             

Provision for credit losses

   32,939   655   33,594 

Loans and leases charged off

   (32,690)  —     (32,690)

Loans and leases recovered

   4,721   —     4,721 
             

Net charge-offs

   (27,969)  —     (27,969)
             

Balance at December 31, 2007

  $136,974  $7,297  $144,271 
             

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

(Dollars in thousands)

 

At December 31, 2007 and 2006, impaired loans, exclusive of those loans evaluated collectively as a homogeneous group, totaled $10,621 and $11,557, respectively, all of which were classified as nonaccrual. Total allowances of $2,148 and $1,874 have been established for impaired loans outstanding as of December 31, 2007 and 2006, respectively. Allowances have been established for all impaired loans.

The average recorded investment in impaired loans during the years ended December 31, 2007, 2006 and 2005 was $10,844, $13,986 and $8,480, respectively. For the years ended December 31, 2007, 2006 and 2005, BancShares recognized cash basis interest income on those impaired loans of $391, $153 and $113 respectively.

During early 2008, due to deteriorating borrower cash flow and recognition of reductions in collateral value, we identified $23,067 in residential construction loans where collection of additional interest is doubtful. These loans were placed on nonaccrual status during the first quarter of 2008. Allowances associated with these loans totaled $1,202 following their classification as nonaccrual.

 

NOTE E—PREMISES AND EQUIPMENT

 

Major classifications of premises and equipment at December 31 are summarized as follows:

 

  2005

  2004

  2007  2006

Land

  $145,881  $137,456  $163,314  $152,313

Premises and leasehold improvements

   531,461   460,688   656,640   595,325

Furniture and equipment

   278,911   254,844   297,193   273,866
  

  

      

Total

   956,253   852,988   1,117,147   1,021,504

Less accumulated depreciation and amortization

   316,784   284,623   359,453   318,578
  

  

      

Premises and equipment

  $639,469  $568,365

Total premises and equipment

  $757,694  $702,926
  

  

      

 

There were no premises pledged to secure borrowings at December 31, 20052007 and 2004.2006.

 

BancShares leases certain premises and equipment under various lease agreements that provide for payment of property taxes, insurance and maintenance costs. Generally, operating leases provide for one or more renewal options on the same basis as current rental terms. However, certain leases require increased rentals under cost of living escalation clauses. Some leases also provide purchase options.

 

Future minimum rental commitments for noncancellable operating leases with initial or remaining terms of one or more years consisted of the following at December 31, 2005:2007:

 

Year Ending December 31:

     

2006

  $13,291

2007

   12,123

2008

   10,732  $15,582

2009

   8,399   13,079

2010

   6,277   9,623

2011

   8,417

2012

   7,287

Thereafter

   61,286   60,272
  

   

Total minimum payments

  $112,108  $114,260
  

   

 

Total rent expense for all operating leases amounted to $18,034 in 2007, $15,207 in 2006 and $14,433 in 2005, $14,332 in 2004 and $14,468 in 2003, net of rent income, which totaled $1,930, $1,962 and $1,977 $1,200during 2007, 2006 and $1,723 during 2005, 2004 and 2003.2005.

 

NOTE F—DEPOSITS

 

Deposits at December 31 are summarized as follows:

 

   2005

  2004

Demand

  $2,616,177  $2,443,059

Checking With Interest

   1,658,569   1,594,092

Money market accounts

   2,657,653   2,655,829

Savings

   700,999   741,563

Time

   4,540,460   3,916,255
   

  

Total deposits

  $12,173,858  $11,350,798
   

  

   2007  2006

Demand

  $2,519,256  $2,682,997

Checking With Interest

   1,459,123   1,600,925

Money market accounts

   2,961,794   2,755,502

Savings

   536,933   593,861

Time

   5,451,438   5,110,039
        

Total deposits

  $12,928,544  $12,743,324
        

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

(Dollars in thousands)

 

Time deposits with a minimum denomination of $100 totaled $1,679,835$2,323,768 and $1,300,243$2,061,676 at December 31, 20052007 and 2004,2006, respectively.

 

At December 31, 20052007 the scheduled maturities of time deposits were:

 

2006

  $3,090,073

2007

   950,161

2008

   204,517  $4,816,609

2009

   127,656   293,236

2010

   168,040   142,028

2011

   128,415

2012

   58,692

Thereafter

   13   12,458
  

   

Total time deposits

  $4,540,460  $5,451,438
  

   

 

NOTE G—SHORT-TERM BORROWINGS

 

Short-term borrowings at December 31 are as follows:

 

  2005

  2004

  2007  2006

Master notes

  $520,585  $213,387  $923,424  $741,029

Repurchase agreements

   150,054   131,367   286,090   251,135

Notes payable to Federal Home Loan Bank of Atlanta

   50,000   75,000

Federal funds purchased

   36,620   36,933   23,893   66,066

Notes payable to Federal Home Loan Bank of Atlanta

   50,000   50,000

Other

   21,769   15,999   21,880   17,617
  

  

      

Total short-term borrowings

  $779,028  $447,686  $1,305,287  $1,150,847
  

  

      

 

At December 31, 2005,2007, BancShares and its subsidiaries had unused credit lines allowing access to overnight borrowings of up to $525,000 on an unsecured basis. Additionally, under various borrowing arrangements with the Federal Reserve and the Federal Home Loan Bank of Atlanta, BancShares and its subsidiaries have access, on a secured basis, to additional borrowings as needed.

 

NOTE H—LONG-TERM OBLIGATIONS

 

Long-term obligations at December 31 include:

 

   2005

  2004

Junior subordinated debenture at 8.05 percent maturing March 5, 2028

  $154,640  $154,640

Junior subordinated debenture at 8.40 percent maturing October 31, 2031

   103,093   103,093

Subordinated notes at 5.125 percent maturing June 1, 2015

   125,000   

Obligation to the Federal Home Loan Bank of Atlanta maturing December 17, 2007 at a fixed rate of 3.44 percent, secured by mortgage loans

   25,000   25,000

Obligations under capitalized leases extending to January 2013

   1,254   2,674

Other

      536
   

  

Total long-term obligations

  $408,987  $285,943
   

  

   2007  2006

Junior subordinated debenture at 8.05 percent maturing March 5, 2028

  $154,640  $154,640

Junior subordinated debenture at 3-month LIBOR plus 1.75 percent maturing June 30, 2036

   118,557   118,557

Subordinated notes payable at 5.125 percent maturing June 1, 2015

   125,000   125,000

Obligations under capitalized leases extending to July 2026

   6,015   3,001

Note payable at 7.50 percent maturing on October 17, 2022

   180   —  
        

Total long-term obligations

  $404,392  $401,198
        

 

The 8.05 percent junior subordinated debenture issued in 1998 (the 1998 Debenture) is held by FCB/NC Capital Trust I. The 8.40 percent junior subordinated debenture issued in 2001 (the 2001 Debenture) is held by FCB/NC Capital Trust II. FCB/NC Capital Trust I and FCB/NC Capital Trust IIpurchased the 1998 Debenture with the proceeds from the $150,000 in 8.05 percent trust preferred capital securities issued in 1998 (the 1998 Preferred Securities). The 1998 Debenture is the sole asset of the trust. The 1998 Preferred Securities are grantor trusts established by BancShares forredeemable in whole or in part after March 1, 2008 at a premium that declines until 2018, when the redemption price equals the par value.

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

(Dollars in thousands)

 

purpose of issuing trust preferred capital securities.The variable rate junior subordinated debenture issued in 2006 (the 2006 Debenture) is held by FCB/NC Capital Trust I issued $150,000 in 8.05 percent trust preferred capital securities in 1998 (the 1998 Preferred Securities), whileIII. FCB/NC Capital Trust II issued $100,000III purchased the 2006 Debenture with the proceeds from the $115,000 in 8.40 percentadjustable rate trust preferred capital securities issued in 20012006 (the 20012006 Preferred Securities).

FCB/NC Capital Trust I invested the proceeds generated by the sale of the 1998 Preferred Securities in the 1998 The 2006 Debenture and that investment is the sole asset of the trust. The 19982006 Preferred Securities are redeemable in whole or in part after March 1, 2008.June 30, 2011.

The 2006 Preferred Securities and the 2006 Debenture were issued with a variable rate of 175 basis points above the 3-month LIBOR. During the second quarter of 2006, BancShares entered into an interest rate swap to synthetically convert the variable rate coupon on the securities to a fixed rate of 7.125 percent for a period of five years.

 

FCB/NC Capital Trust II investedI and FCB/NC Capital Trust III are grantor trusts established by BancShares for the proceeds generated by the salepurpose of the 2001 Preferred Securities in the 2001 Debenture, and that investment is the sole asset of the trust. The 2001 Preferred Securities are redeemable in whole or in part on or after October 31, 2006.issuing trust preferred capital securities.

 

The subordinated notes issued during 2005 are unsecured obligations of FCB and are junior to existing and future senior indebtedness and obligations to depositors and general or secured creditors.

 

Long-term obligations maturing in each of the five years subsequent to December 31, 20052007 include:

 

2006

  $134

2007

   25,147

2008

   160  $1,273

2009

   175   330

2010

   190   353

2011

   379

2012

   405

Thereafter

   383,181   401,652
  

   

Total long-term obligations

  $404,392
  $408,987   
  

 

NOTE I—ESTIMATED FAIR VALUES

 

Fair value estimates are made at a specific point in time based on relevant market information and information about each financial instrument. Where information regarding the fair value of a financial instrument is available, those values are used, as is the case with investment securities and residential mortgage loans. In these cases, an open market exists in which those financial instruments are actively traded.

 

Because no market exists for many financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. For these financial instruments with a fixed interest rate, an analysis of the related cash flows was the basis for estimating fair values. The expected cash flows were then discounted to the valuation date using an appropriate discount rate. The discount rates used represent the rates under which similar transactions would be currently negotiated. Generally, the fair value of variable rate financial instruments equals the book value.

 

  December 31, 2005

  December 31, 2004

  December 31, 2007  December 31, 2006
  Carrying
Value


  

Fair

Value


  Carrying
Value


  

Fair

Value


  Carrying
Value
  Fair
Value
  Carrying
Value
  Fair
Value

Cash and due from banks

  $777,928  $777,928  $679,683  $679,683  $793,788  $793,788  $1,010,984  $1,010,984

Overnight investments

   481,012   481,012   383,743   383,743   266,209   266,209   348,597   348,597

Investment securities available for sale

   3,229,241   3,229,241   3,001,890   3,001,890

Investment securities held to maturity

   636,496   631,876   877,479   874,779   7,594   7,776   219,158   218,333

Investment securities available for sale

   2,293,020   2,293,020   1,248,045   1,248,045

Loans, net of allowance for loan and lease losses

   9,514,147   9,478,995   9,230,526   9,285,560   10,826,930   11,242,024   10,141,039   9,944,260

Income earned not collected

   54,879   54,879   40,574   40,574   79,343   79,343   71,562   71,562

Deposits

   12,173,858   12,229,952   11,350,798   11,389,785   12,928,544   12,989,047   12,743,324   12,805,792

Short-term borrowings

   779,028   779,028   447,686   447,686   1,305,287   1,305,287   1,150,847   1,150,847

Long-term obligations

   408,987   418,221   285,943   296,547   404,392   406,639   401,198   403,488

Accrued interest payable

   43,602   43,602   28,597   28,597   62,288   62,288   63,379   63,379

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

(Dollars in thousands)

 

No forward commitments to sell loans existed atAt December 31, 2005 or 2004. 2007, the $115,000 interest rate swap had a fair value of $5,354, which is included in other liabilities. At December 31, 2006, the fair value of the swap was $1,793.

For other off-balance sheet commitments and contingencies, carrying amounts are reasonable estimates of the fair values for such financial instruments. Carrying amounts include unamortized fee income and, in some cases, reserves for any credit losses from those financial instruments. These amounts are not material to BancShares’ financial position.

 

NOTE J—EMPLOYEE BENEFIT PLANS

 

BancShares sponsors two employee benefit plans for the benefit of its qualifying employees:employees including a noncontributory defined benefit pension plan and a 401(k) Savings Plan.savings plan. Both of the plans are qualified under the Internal Revenue Code. BancShares also maintains agreements with certain executives that provide supplemental post-retirement andbenefits that are paid upon death benefits.or separation from service at an agreed-upon age.

 

Defined Benefit Pension Plan

 

Employees who qualify under length of service and other requirements participate in a noncontributory defined benefit pension plan. Under the plan, retirement benefits are based on years of service and average earnings. The policy is to fund amounts approximating the maximum amount that is deductible for federal income tax purposes. BancShares contributed $20,000 in 2007, $25,000 in 2006 and $30,000 in 2005, $20,000 in 2004 and $35,000 in 2003 to the plan.2005. The plan’s assets consist of investments in FCB’s common trust funds, which include listed common stocks and fixed income securities, as well as investments in mid-cap, small-cap, REIT and international stocks through unaffiliated money managers.

 

BancShares discontinued offering benefits under the defined benefit pension plan to employees hired after March 31, 2007. Employees hired on or before March 31, 2007 were allowed the option of continued participation in the defined benefit plan and the existing 401(k) plan or enrollment in an enhanced 401(k) benefit plan beginning January 1, 2008. Employees who elected to enroll in the enhanced 401(k) benefit plan discontinued the accrual of additional years of service under the defined benefit plan after January 1, 2008. Based on the elections made by participants, a curtailment charge of $763 was recorded during 2007.

Benefit Obligations

 

The following table calculates the projected benefit obligation at December 31, 20052007 and 2004:2006:

 

  2005

 2004

   2007 2006 

Benefit obligation at beginning of year

  $277,833  $242,520   $300,981  $296,709 

Service cost

   13,504   12,273    14,428   14,408 

Interest cost

   16,101   15,206    18,388   16,598 

Actuarial loss (gain)

   (1,026)  13,427 

Transfer from related parties

      127 

Actuarial gain

   (16,571)  (16,200)

Transfer to related parties

   (8)  (225)

Benefits paid

   (9,703)  (9,370)   (10,767)  (10,309)

Plan amendments

      3,650    1,064   —   
  


 


       

Benefit obligation at end of year

  $296,709  $277,833   $307,515  $300,981 
  


 


       

 

The accumulated benefit obligation for the plan at December 31, 20052007 and 2004 was $236,3782006 equaled $248,992 and $212,027,$242,130, respectively. The plan uses a measurement date of December 31.

 

The weighted average assumptions used to determine the benefit obligations as of December 31 are as follows:

 

   2005

  2004

 

Discount rate

  5.50% 5.75%

Rate of compensation increase

  4.25% 4.75%

Plan Assets

The following table describes the changes in plan assets during 2005 and 2004. Employer contributions and benefits paid include only those amounts contributed directly to or paid directly from plan assets.

   2005

  2004

 

Fair value of plan assets at beginning of year

  $255,069  $219,350 

Actual return on plan assets

   21,253   24,913 

Employer contributions

   30,000   20,000 

Transfer from related parties

      176 

Benefits paid

   (9,703)  (9,370)
   


 


Fair value of plan assets at end of year

  $296,619  $255,069 
   


 


   2007  2006 

Discount rate

  6.25% 5.75%

Rate of compensation increase

  4.25% 4.25%

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

(Dollars in thousands)

 

Plan Assets

The following table describes the changes in plan assets during 2007 and 2006. Employer contributions and benefits paid include only those amounts contributed directly to or paid directly from plan assets.

   2007  2006 

Fair value of plan assets at beginning of year

  $352,425  $296,619 

Actual return on plan assets

   20,531   41,373 

Employer contributions

   20,000   25,000 

Transfer to related parties

   (9)  (258)

Benefits paid

   (10,767)  (10,309)
         

Fair value of plan assets at end of year

  $382,180  $352,425 
         

 

The following table describes the actual allocation of plan assets as of December 31, 20052007 and 20042006 and the projected allocation for 2006.2008. The expected long-term rate of return on plan assets was 8.50% at December 31, 20052007 and 2004.2006.

 

  2006
Target


  Actual,
December 31,


   2008
Target
  Actual,
December 31,
 
   2005

 2004

    2007 2006 

Equity securities

  60% 60% 66%  60% 59% 61%

Debt securities

  40% 39% 33%  40% 40% 38%

Cash and equivalents

    1% 1%    1% 1%
  

 

 

          

Total

  100% 100% 100%  100% 100% 100%
  

 

 

          

 

Investment decisions regarding the plan’s assets seek to achieve a favorable annual return through a diversified portfolio that will provide needed capital appreciation and cash flow to allow both current and future benefit obligations to be paid. The target asset mix may change if the objectives for the plan’s assets or risk tolerance change or if a major shift occurs in the expected long-term risk and reward characteristics of one or more asset classes.

 

Funded Status

 

The funded status of the plan, which represents the prepaid pension asset included within other assets on the consolidated balance sheet, is:

 

   December 31,

 
   2005

  2004

 

Fair value of plan assets

  $296,619  $255,069 

Benefit obligation

   296,709   277,833 
   


 


Funded status

   (90)  (22,764)

Amounts not yet recognized:

         

Unrecognized net loss

   31,374   36,539 

Unrecognized prior service cost

   2,432   3,772 
   


 


Net asset recognized

  $33,716  $17,547 
   


 


Prepaid benefit cost

  $33,716  $17,547 

Accrued benefit cost

       
   


 


Net asset recognized

  $33,716  $17,547 
   


 


At December 31, 2005 and 2004, the projected benefit obligation, the accumulated benefit obligation and the fair value of plan assets for a pension plan with a projected benefit obligation in excess of plan assets and for a pension plan with an accumulated benefit obligation in excess of plan assets equals:

   

Projected

Benefit Obligation
Exceeds Fair Value

of Plan Assets at
December 31,


  Accumulated
Benefit Obligation
Exceeds Fair Value
of Plan Assets at
December 31,


   2005

  2004

  2005

  2004

Projected benefit obligation

  $296,709  $277,833  $  $

Accumulated benefit obligation

   236,378   212,027      

Fair value of plan assets

   296,619   255,069      
   December 31,
   2007  2006

Fair value of plan assets

  $382,180  $352,425

Benefit obligation

   307,515   300,981
        

Funded status

   74,665   51,444

Amounts not yet recognized:

    

Unrecognized net loss

   —     —  

Unrecognized prior service cost

   —     —  
        

Net asset recognized

  $74,665  $51,444
        

Prepaid benefit cost

  $74,665  $51,444

Accrued benefit cost

   —     —  
        

Net asset recognized

  $74,665  $51,444
        

Accumulated other comprehensive income, excluding income taxes

    

Net gain

  $19,602  $6,314

Less prior service cost

   2,237   2,202
        

Accumulated other comprehensive income, excluding income taxes

  $17,365  $4,112
        

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

(Dollars in thousands)

 

At December 31, 2007 and 2006, the fair value of plan assets exceeded both the projected benefit obligation and the accumulated benefit obligation.

Cash Flows

During 2008, BancShares anticipates making contributions to the pension plan totaling $10,000. Following are estimated payments to pension plan participants in the indicated periods:

   Projected
Benefit payments

2008

  $10,581

2009

   11,440

2010

   12,441

2011

   13,586

2012

   14,971

2013-2017

   97,879

 

Net Periodic Cost

 

The following table shows the components of periodic benefit cost related to the pension plan for the years ended December 31, 2005, 20042007, 2006 and 2003.2005.

 

  2005

 2004

 2003

   2007 2006 2005 

Service cost

  $13,504  $12,273  $9,911   $14,428  $14,408  $13,504 

Interest cost

   16,101   15,206   14,042    18,388   16,598   16,101 

Expected return on assets

   (18,893)  (17,350)  (14,411)   (25,716)  (22,776)  (18,893)

Amortization of prior service cost

   283   154   154    266   231   283 

Amortization of net actuarial loss

   2,836   2,291   716    1,902   2,924   2,836 

Amortization of transition asset

          
          

Total net periodic benefit cost

   9,268   11,385   13,831 

Curtailment cost

   763   —     —   
  


 


 


          

Total net periodic benefit cost

  $13,831  $12,574  $10,412   $10,031  $11,385  $13,831 
  


 


 


          

 

The weighted average assumptions used to determine the net periodic benefit cost for the years ended December 31, 2005, 20042007, 2006 and 20032005 are as follows:

 

   2005

  2004

  2003

 

Discount rate

  5.75% 6.00% 6.50%

Rate of compensation increase

  4.75% 4.75% 4.75%

Expected return on plan assets

  8.50% 8.50% 8.00%

The expected return on plan assets represents the average estimated weighted-average rate of return on plan assets over the period the benefit obligation will be paid. The assumed rate is based on historical market data and expectations of future earnings rates for each investment type.

Cash Flows

During 2006, BancShares anticipates making contributions to the pension plan totaling $30,000. The pension plan anticipates making benefit payments in the following periods:

   Projected
Benefit
payments
   

2006

  $9,387

2007

   10,042

2008

   10,792

2009

   11,677

2010

   12,666

2011-2015

   83,358
   2007  2006  2005 

Discount rate

  5.75% 5.50% 5.75%

Rate of compensation increase

  4.25% 4.25% 4.75%

Expected return on plan assets

  8.50% 8.50% 8.50%

 

401(k) Savings Plan

 

Employees are also eligible to participate in a 401(k) plan after 31 days of service through the deferral of portions of their salary. Based on the employee’s contribution, BancShares will matchmatches up to 75%75 percent of the employee contribution. BancShares made participating contributions of $6,863, $6,381 and $5,965 $5,725during 2007, 2006 and $5,532 during 2005, 2004 and 2003, respectively.

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

(Dollars in thousands)

 

Post-RetirementAdditional Benefits for Executives and Directors and Officers of Acquired Entities

 

FCB and ISB have entered into contractual agreements with certain executives that under various circumstances, provide supplemental post-retirement income in exchangepayments for consulting services and adherence to covenants not to compete. Thea period of ten years following separation from service at an agreed-upon age. These agreements also provide a death benefit in the event a participant dies before the term of the agreement ends. FCB has also assumed liability for contractual obligations to directors and officers of acquired entities.

 

The following table provides the accrued liability as of December 31, 20052007 and 20042006 and the changes in the accrued liability during the years then ended.

 

  Year Ended December 31,

   Year Ended December 31, 
        2005      

       2004      

       2007         2006     

Present value of accrued liability as of January 1

  $15,268  $15,085   $17,358  $18,119 

Benefit expense

   2,082   75    1,491   —   

Benefits paid

   (745)  (758)   (725)  (851)

Benefits forfeited

   (170)  (187)   (213)  (475)

Interest cost

   1,684   1,053    17   565 
  


 


       

Present value of accrued liability as of December 31

  $18,119  $15,268   $17,928  $17,358 
  


 


       

Discount rate at December 31

   5.50%  6.00%   6.25%  5.75%

 

NOTE K—NONINTEREST INCOME AND NONINTEREST EXPENSE

During 2005, commission-based income included $15,119 in income from investments, $7,318 from insurance and $3,606 from factoring.

 

Other noninterest expense for the years ended December 31 included the following:

 

   2005

  2004

  2003

Cardholder and merchant services expense

  $32,067  $28,290  $24,119

Telecommunications expense

   9,873   10,461   11,455

Postage expense

   8,045   8,639   8,826

Advertising expense

   7,206   7,981   7,566

Courier service expense

   5,076   4,757   4,657

Legal expense

   4,124   5,978   5,851

Consultant expense

   3,362   2,980   3,747

Amortization of intangibles

   2,453   2,360   2,583

Other

   62,926   58,299   57,757
   

  

  

Total other noninterest expense

  $135,132  $129,745  $126,561
   

  

  

   2007  2006  2005

Cardholder and merchant processing

  $41,882  $37,286  $32,067

Cardholder reward programs

   12,529   9,228   5,878

Telecommunications

   10,501   9,844   9,873

Postage

   9,614   8,926   8,045

Advertising

   7,499   7,212   7,206

Processing fees paid to third parties

   7,004   5,845   4,332

Legal

   6,410   5,244   4,124

Courier service

   5,401   6,624   5,076

Other

   63,894   57,308   58,553
            

Total other noninterest expense

  $164,734  $147,517  $135,154
            

NOTE L—INCOME TAXES

At December 31, income tax expense consisted of the following:

   2007  2006  2005 

Current tax expense

     

Federal

  $53,794  $62,389  $59,190 

State

   3,546   6,372   8,191 
             

Total current tax expense

   57,340   68,761   67,381 
             

Deferred tax expense (benefit)

     

Federal

   941   (146)  (2,120)

State

   656   840   547 
             

Total deferred tax expense (benefit)

   1,597   694   (1,573)
             

Total income tax expense

  $58,937  $69,455  $65,808 
             

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

(Dollars in thousands)

 

NOTE L—INCOME TAXES

At December 31, income tax expense consisted of the following:

   2005

  2004

  2003

 

Current tax expense

             

Federal

  $59,190  $29,342  $30,969 

State

   8,191   15,295   5,291 
   


 


 


Total current tax expense

   67,381   44,637   36,260 
   


 


 


Deferred tax expense (benefit)

             

Federal

   (2,120)  6,242   8,915 

State

   547   (1,527)  (3,761)
   


 


 


Total deferred tax expense (benefit)

   (1,573)  4,715   5,154 
   


 


 


Total tax expense

  $65,808  $49,352  $41,414 
   


 


 


Income tax expense differed from the amounts computed by applying the federal income tax rate of 35 percent in each period to pretax income as a result of the following:

 

  2005

 2004

 2003

   2007 2006 2005 

Income at statutory rates

  $62,535  $43,468  $40,810 

Income taxes at statutory rates

  $58,644  $68,581  $62,535 

Increase (reduction) in income taxes resulting from:

       

Nontaxable income on loans and investments, net of nondeductible expenses

   (797)  (783)  (714)

Nontaxable income on loans, leases and investments, net of nondeductible expenses

   (1,419)  (1,053)  (797)

State and local income taxes, including change in valuation allowance, net of federal income tax benefit

   5,680   8,949   995    2,731   4,688   5,680 

Tax credits

   (1,128)  (857)  (500)   (1,771)  (1,645)  (1,128)

Other, net

   (482)  (1,425)  823    752   (1,116)  (482)
  


 


 


          

Total tax expense

  $65,808  $49,352  $41,414 

Total income tax expense

  $58,937  $69,455  $65,808 
  


 


 


          

 

During 2004,The net deferred tax asset included the following components at December 31:

   2007  2006

Allowance for loan and lease losses

  $54,664  $52,414

Executive separation from service agreements

   7,064   6,833

State operating loss carryforward

   1,249   959

Unrealized loss on cash flow hedge

   2,114   708

FIN48 gross-up

   9,761   —  

Other

   6,588   5,080
        

Gross deferred tax asset

   81,440   65,994

Less valuation allowance

   785   694
        

Deferred tax asset

   80,655   65,300
        

Accelerated depreciation

   5,693   7,085

Lease financing activities

   11,783   12,825

Pension asset

   29,422   20,292

Net unrealized gains (losses) included in comprehensive income

   21,402   4,576

Net deferred loan fees and costs

   5,444   4,533

Intangible asset

   9,460   8,023

Other

   5,541   3,610
        

Deferred tax liability

   88,745   60,944
        

Net deferred tax (liability) asset

  $(8,090) $4,356
        

The valuation allowance necessary to reduce BancShares’ gross state deferred tax asset to the amount that is more likely than not to be realized was $785 and $694 at December 31, 2007 and 2006, respectively.

With few exceptions, BancShares settled assessments fromand its subsidiaries are no longer subject to U.S. federal, or state and local income tax examinations by tax authorities for years before 2004.

BancShares adopted the North Carolina Departmentprovisions of Revenue arising from a routine audit of North Carolina tax returnsFASB Interpretation No. 48, Accounting for 2002, 2001 and 2000. Including interest, 2004 state income taxes increased $5,033 asUncertainty in Income Taxes (FIN48), on January 1, 2007. As a result of that settlement.the implementation of FIN48, BancShares recognized a $962 decrease in the liability for unrecognized income tax benefits, which was accounted for as an increase to the beginning balance of retained earnings during 2007.

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

(Dollars in thousands)

 

A reconciliation of the beginning and ending amount of unrecognized income tax benefits follows. Unrecognized state tax benefits are not adjusted for the impact of federal taxes.

The net

   2007 

Unrecognized tax benefits at beginning of year

  $10,068 

Additions based on tax positions related to current year

   2,586 

Additions based on tax positions related to prior years

   2,792 

Reductions based on lapse of statute

   (4,106)

Settlements

   —   
     

Unrecognized tax benefits at end of year

  $11,340 
     

Included in the balance at December 31, 2007, are $9,761 of tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Additions based on tax positions related to prior years primarily relate to interest. Because of the impact of deferred tax asset includedaccounting, other than interest and penalties, the following components at December 31:disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.

   2005

  2004

 

Allowance for loan and lease losses

  $51,199  $51,970 

Supplemental post-retirement expense

   7,139   6,053 

Unrealized gain (loss) on equity securities

   1,235   (2,938)

State operating loss carryforward

   979   991 

Other

   4,100   2,137 
   

  


Gross deferred tax asset

   64,652   58,213 

Less valuation allowance

   1,629   1,317 
   

  


Deferred tax asset

   63,023   56,896 
   

  


Accumulated depreciation

   10,187   13,351 

Lease financing activities

   13,860   17,539 

Prepaid pension asset

   13,351   6,983 

Net deferred loan fees and costs

   4,311   5,670 

Intangible asset

   6,267   4,946 

Other

   3,124   2,230 
   

  


Deferred tax liability

   51,100   50,719 
   

  


Net deferred tax asset

  $11,923  $6,177 
   

  


 

The valuation allowancetotal amount of $1,629unrecognized income tax benefits as of January 1, 2007 and $1,317 at December 31, 20052007 that, if recognized, would affect the effective tax rate is $1,178 and 2004, respectively, is$1,579 (net of the amount necessaryfederal benefit on state tax issues) respectively.

BancShares recognizes accrued interest and penalties related to reduce BancShares’ gross state deferredunrecognized tax asset to the amount that is more likely than not to be realized.benefits in tax expense. Accrued interest and penalties on unrecognized income tax benefits totaled $700 and $800 as of January 1, 2007 and December 31, 2007 respectively.

 

NOTE M—TRANSACTIONS WITH RELATED PARTY TRANSACTIONSPERSONS

 

BancShares, FCB and ISB have had, and expect to have in the future, banking transactions in the ordinary course of business with directors, officers and their associates (Related Parties), on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others.

Persons). An analysis of changes in the aggregate amounts of loans to Related PartiesPersons for the year ended December 31, 20052007 is as follows:

 

Balance at beginning of year

  $31,601  $34,660

New loans

   14,880   16,242

Repayments

   12,526   12,722
  

   

Balance at end of year

  $33,955  $38,180
  

   

 

In addition to these outstanding loan balances there is $15,373$20,496 available to Related PartiesPersons in unfunded loan commitments.

 

BancShares provides processing and operational services to other financial institutions. Certain of these institutions are deemed to be Related PartiesPersons since significant shareholders of BancShares are also deemed to be significant shareholders of the other banks. During 2007, 2006 and 2005, 2004BancShares received $29,234, $26,057 and 2003, BancShares recognized income totaling $23,961, $23,043 and $20,036, respectively, for services rendered to these Related Parties,Persons, substantially all of which is included in fees from processing services and relates to data processing services. The amount recorded from the largest individual institution totaled $17,960, $16,914 and $14,433 for 2007, 2006 and 2005, respectively.

 

During 2003, BancShares sold severalOther expense includes $3,773, $4,376 and $4,299 in legal expense incurred during 2007, 2006 and 2005, respectively, for the firm that serves as BancShares’ general counsel. The senior attorney of its branch offices tothat firm is a Related Party. Income from salePerson since he is member of branches includes gainsBancShares’ board of $5,710 recognized on the sale of these branches.directors.

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

(Dollars in thousands)

 

Other expense includes $4,299, $5,325 and $4,897 in legal expense incurred during 2005, 2004 and 2003, respectively, for the firm that serves as BancShares’ general counsel. The senior attorney of that firm is a Related Party since he is member of BancShares’ board of directors.

Investment securities available for sale includes an investment in a financial institution controlled by Related Party.Persons. This investment had a carrying value of $25,229, $18,922$23,788 and $18,742$25,085 at December 31, 2005, 20042007 and 2003,2006, respectively. For each period, the investment had a cost of $508. Short-term borrowings includes $13,700 and $41,300 in federal funds purchased from financial institutions controlled by Related Persons at December 31, 2007 and 2006.

 

NOTE N—ACQUISITIONS AND DIVESTITURESBUSINESS COMBINATIONS

On January 1, 2007, BancShares completed the sale of American Guaranty Insurance Company and Triangle Life Insurance Company. During the fourth quarter of 2006, BancShares completed the sale of the principal assets of T-TECH, Inc. (T-TECH). T-TECH provided payment processing services to third parties. T-TECH was subsequently dissolved. These transactions did not have a material impact on the consolidated financial statements.

 

BancShares and its banking subsidiaries have participated in numerousvarious business transactions in recent years.involving branch offices. All of the acquisitions have been accounted for as purchases, with the results of operations included in BancShares’ Consolidated Statements of Incomeconsolidated financial statements after the transaction date. The pro forma impact of the acquisitions as though they had been made at the beginning of the periods presented is not material to BancShares’ consolidated financial statements.

 

The following table provides information regarding the acquisitions and divestitures of branches that have been consummated during the three-year period ended December 31, 2005:2007:

 

Year

    

Transaction


  Assets1

  Deposits

 
2005    Purchase of one branch by First Citizens Bank  $1,783  $20,957 
2004    Sale of one branch by IronStone Bank      (12,156)
2004    Purchase of one branch by First Citizens Bank   2,343   11,565 
2003    Purchase of two branches by First Citizens Bank   76,687   67,887 
2003    Sale of four branches by First Citizens Bank2   (32,631)  (114,727)

Year

  

Transaction

  Assets1  Deposits 
2006  

Sale of one branch by First Citizens Bank

  $(278) $(20,553)
2005  

Purchase of one branch by First Citizens Bank

   1,783   20,957 
 
 

1

 

Excludes the transfer of cash and the recognition of goodwill and intangible assets

2Sale of offices to a Related Party; see Note M

The pro forma impact of the acquisitions and divestitures as though they had been made at the beginning of the periods presented is not material to BancShares’ consolidated financial statements.

 

NOTE O—GOODWILL AND INTANGIBLE ASSETS

 

The following table summarizes goodwill activity during 20052007 and 2004:2006:

 

  2005

  2004

   2007  2006 

Balance, January 1

  $102,635  $102,071   $102,625  $102,735 

Goodwill generated by branch purchases

   100   573 

Goodwill written off due to sale of branches

      (9)

Goodwill written off due to sale of branch

   —     (110)
  

  


       

Balance, December 31

  $102,735  $102,635   $102,625  $102,625 
  

  


       

 

The following information relates to other intangible assets, all of which are being amortized over their estimated useful lives:

 

  2005

 2004

   2007 2006 

Balance, January 1

  $12,037  $13,928   $8,000  $10,318 

Intangible generated by branch purchases

   734   469 

Amortization

   (2,453)  (2,360)   (2,142)  (2,318)
  


 


       

Balance, December 31

  $10,318  $12,037   $5,858  $8,000 
  


 


       

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands)

 

Based on current estimated useful lives and current carrying values, BancShares anticipates amortization expense for intangible assets in subsequent periods will be:

 

2006

  $2,318

2007

   2,142

2008

   2,049

2009

   1,656

2010

   1,534

Beyond 2010

   619
   

   $10,318
   

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands)

2008

  $2,049

2009

   1,656

2010

   1,534

2011

   248

2012

   202

Beyond 2012

   169
    
  $5,858
    

 

NOTE P—REGULATORY REQUIREMENTS

 

Various regulatory agencies have implementedestablished guidelines that evaluate capital adequacy based on risk-adjusted assets. An additional capital computation evaluates tangible capital based on tangible assets. Minimum capital requirements set forth by the regulatorsregulatory agencies require a Tier 1 capital ratio of no less than 4 percent of risk-weighted assets, a total capital ratio of no less than 8 percent of risk adjustedrisk-weighted assets, and a leverage capital ratio of no less than 3 percent of tangible assets. To meet the FDIC’s well-capitalized standards, the Tier 1 and total capital ratios must be at least 6 percent and 10 percent, respectively. Failure to meet minimum capital requirements may result in certain actions by regulators that could have a direct material effect on the consolidated financial statements.

 

Based on the most recent notifications from its regulators, FCB and ISB are well-capitalized under the regulatory framework for prompt corrective action. Management believes that as of December 31, 20052007 BancShares, FCB and ISB met all capital adequacy requirements to which they are subject and was not aware of any conditions or events that would affect FCB’s and ISB’s well-capitalized status.

 

Following is an analysis of capital ratios for BancShares, FCB and ISB capital ratios as of December 31, 20052007 and 2004.2006.

 

  December 31, 2005

 December 31, 2004

 
  Actual Capital

 

Requirement for

Well-Capitalized


  Actual Capital

 

Requirement for

Well-Capitalized


   December 31, 2007 December 31, 2006 
  Amount

  Ratio

 Amount

  Ratio

   Amount  Ratio Requirement for
Well-Capitalized
 Amount  Ratio Requirement for
Well-Capitalized
 

BancShares

                  

Tier 1 capital

  $1,320,152  12.56% 6.00% $1,217,149  12.14% 6.00%  $1,557,190  13.02% 6.00% $1,456,947  12.93% 6.00%

Total capital

   1,588,141  15.11  10.00   1,351,535  13.48  10.00    1,836,763  15.36  10.00   1,732,026  15.37  10.00 

Leverage capital

   1,320,152  9.17  5.00   1,217,149  9.26  5.00    1,557,190  9.63  5.00   1,456,947  9.39  5.00 

FCB

                  

Tier 1 capital

  $998,152  11.42% 6.00% $900,183  10.48% 6.00%   1,188,599  12.23  6.00   1,104,132  11.95  6.00 

Total capital

   1,232,463  14.10  10.00   1,007,650  11.73  10.00    1,433,069  14.75  10.00   1,344,202  14.55  10.00 

Leverage capital

   998,152  7.97  5.00   900,183  7.75  5.00    1,188,599  8.81  5.00   1,104,132  8.33  5.00 

ISB

                  

Tier 1 capital

  $215,263  11.82% 6.00% $199,577  13.85% 6.00%   261,500  11.94  6.00   245,402  12.56  6.00 

Total capital

   236,364  12.98  10.00   215,974  14.98  10.00    286,301  13.07  10.00   268,978  13.77  10.00 

Leverage capital

   215,263  11.64  5.00   199,577  13.35  5.00    261,500  11.21  5.00   245,402  11.52  5.00 

 

The Board of Directors of FCB may declare a dividend on a portion of its undivided profits as it may deemdeems appropriate, subject to the requirements of the FDIC and the General Statutes of North Carolina, without prior regulatory approval. As of December 31, 20052007, the amount was $774,271.$956,007. However, to preserve its well-capitalizedwell- capitalized status, the maximum amount of the dividend was limited to $357,238.$461,427. Dividends declared by FCB amounted to $43,830 in 2007, $39,952 in 2006 and $32,194 in 2005, $50,2302005.

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in 2004 and $67,394 in 2003.thousands)

 

BancShares and its banking subsidiaries are subject to certainvarious requirements imposed by state and federal banking statutes and regulations. These regulations, requireincluding regulations requiring the maintenance of noninterest-bearing reserve balances at the Federal Reserve Bank. Banks are allowed to reduce the required balances by the amount of vault cash. For 20052007 the requirements averaged $152,307$169,386 for FCB and $7,325$9,502 for ISB.

 

NOTE Q—COMMITMENTS AND CONTINGENCIES

 

In order to meet the financing needs of its customers, BancShares and its subsidiaries have financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve to varying degrees, elements of credit, interest rate or liquidity risk.

 

Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. Established credit standards control the credit-risk exposure associated with these commitments. In some cases, BancShares requires that collateral be pledged to secure the commitment. At December 31, 20052007 and 2004,2006, BancShares had unused commitments totaling $4,220,641$4,972,515 and $4,285,962$4,453,178 respectively.

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands)

 

Standby letters of credit are commitments guaranteeing performance of a customer to a third party. Those guarantees are issued primarily to support public and private borrowing arrangements. In order to minimize its exposure, BancShares’ credit policies govern the issuance of standby letters of credit. At December 31, 20052007 and 2004,2006, BancShares had standby letters of credit amounting to $44,072$51,696 and $41,484,$47,666, respectively.

DataTreasury Corporation (“DataTreasury”) has sued a number of large financial institutions including BancShares and FCB alleging patent infringement. DataTreasury claims to be the owner of multiple patents that cover check processing, and seeks royalty payment for checks processed since February 2000 and for checks processed in the future. The United States Patent and Trademark Office recently issued reexamination certificates with respect to two of four patents at issue in the claims asserted against BancShares and FCB, reaffirming all of the claims in these patents and allowing DataTreasury to include additional claims. BancShares and FCB challenge the validity of these patents, and claim that even if the patents are valid, BancShares and FCB are not liable for infringement because BancShares does not process checks and FCB’s check processing system does not infringe the patents. BancShares and FCB strenuously deny liability and are vigorously defending their positions. BancShares and FCB also have placed certain software and equipment vendors on notice of claims for defense and for indemnification in the event DataTreasury prevails.

 

BancShares and various subsidiaries have been named as defendants in various other legal actions arising from their normal business activities in which damages in various amounts are claimed. Although the amount of any ultimate liability with respect to such matters cannot be determined, in the opinion of management, any such liability will not have a material effect on BancShares’ consolidated financial statements.

 

NOTE R—SEGMENT DISCLOSURES

 

BancShares conducts its banking operations through its two wholly-owned subsidiaries, FCB and ISB. Although FCB and ISB offer similar products and services to customers, each entity operates in distinct geographic markets and each entity has separate management groups. Additionally, the financial results and trends of ISB reflect the de novo nature of its growth.

 

FCB is a mature banking institution that operates from a single charter from its branch network in North Carolina, Virginia, West Virginia, Maryland and Tennessee. ISB began operations in 1997 and operates from a thrift charter in Florida, Georgia, Texas, New Mexico, Arizona, California, New Mexico,Oregon, Washington, Colorado Oregon and Washington.Missouri. ISB’s significance to BancShares’ consolidated financial results continues to grow.

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands)

 

Management has determined that FCB and ISB are reportable business segments. In the aggregate, FCB and its consolidated subsidiaries, which are integral to its branch operation, and ISB account for more than 90 percent of consolidated assets, revenues and net income. The ‘Other’ category in the accompanying table includes activities of the parent company and Neuse, Incorporated, a subsidiary that owns real property used in the banking operation and American Guaranty Insurance Corporation, a property insurance company.operation.

 

The adjustments in the accompanying tables represent the elimination of the impact of certain inter-company transactions. The adjustments for interest income and interest expense neutralize the earnings and cost of inter-company borrowings. The adjustments to noninterest income and noninterest expense reflect the elimination of management fees and other service fees paid from one company to another within BancShares’ consolidated group.

 

The following table provides selected financial information for BancShares’ reportable business segments:

 

  2005

  2007
  ISB

 FCB

  Other

 Total

  Adjustments

 Consolidated

  ISB FCB  Other Total  Adjustments Consolidated

Interest income

  $97,840  $567,521  $11,622  $676,983  $(11,049) $665,934  $141,071  $752,383  $44,884  $938,338  $(34,282) $904,056

Interest expense

   36,622   161,895   30,683   229,200   (11,049)  218,151   77,257   322,374   58,365   457,996   (34,282)  423,714
  


 

  


 

  


 

                  

Net interest income

   61,218   405,626   (19,061)  447,783      447,783

Net interest income (expense)

   63,814   430,009   (13,481)  480,342   —     480,342

Provision for credit losses

   8,029   25,080      33,109      33,109   9,034   24,560   —     33,594   —     33,594
  


 

  


 

  


 

                  

Net interest income after provision for credit losses

   53,189   380,546   (19,061)  414,674      414,674

Net interest income (expense) after provision for credit losses

   54,780   405,449   (13,481)  446,748   —     446,748

Noninterest income

   7,692   261,681   1,547   270,920   (7,568)  263,352   13,509   291,496   421   305,426   (9,956)  295,470

Noninterest expense

   65,150   439,683   2,091   506,924   (7,568)  499,356   79,933   504,173   514   584,620   (9,956)  574,664
  


 

  


 

  


 

                  

Income (loss) before income taxes

   (4,269)  202,544   (19,605)  178,670      178,670   (11,644)  192,772   (13,574)  167,554   —     167,554

Income taxes

   (1,390)  74,001   (6,803)  65,808      65,808   (3,935)  67,579   (4,707)  58,937   —     58,937
  


 

  


 

  


 

                  

Net income (loss)

  $(2,879) $128,543  $(12,802) $112,862  $  $112,862  $(7,709) $125,193  $(8,867) $108,617  $—    $108,617
  


 

  


 

  


 

                  

At December 31, 2005

         

At December 31, 2007

         

Total assets

  $1,855,981  $12,707,475  $1,913,563  $16,477,019  $(1,837,627) $14,639,392  $2,341,223  $13,582,263  $2,595,256  $18,518,742  $(2,306,635) $16,212,107

Loans and leases

   1,679,883   7,963,111      9,642,994      9,642,994   2,071,681   8,892,223   —     10,963,904   —     10,963,904

Allowance for loan and lease losses

   19,443   109,404      128,847      128,847   23,648   113,326   —     136,974   —     136,974

Deposits

   1,423,456   10,798,361      12,221,817   (47,959)  12,173,858   1,856,927   11,129,545   —     12,986,472   (57,928)  12,928,544

   2006
   ISB  FCB  Other  Total  Adjustments  Consolidated

Interest income

  $124,895  $702,596  $31,345  $858,836  $(28,521) $830,315

Interest expense

   58,593   270,460   53,205   382,258   (28,521)  353,737
                        

Net interest income (expense)

   66,302   432,136   (21,860)  476,578   —     476,578

Provision for credit losses

   3,548   17,374   —     20,922   —     20,922
                        

Net interest income (expense) after provision for credit losses

   62,754   414,762   (21,860)  455,656   —     455,656

Noninterest income

   11,383   267,340   1,177   279,900   (8,533)  271,367

Noninterest expense

   71,500   466,034   2,076   539,610   (8,533)  531,077
                        

Income (loss) before income taxes

   2,637   216,068   (22,759)  195,946   —     195,946

Income taxes

   456   76,919   (7,920)  69,455   —     69,455
                        

Net income (loss)

  $2,181  $139,149  $(14,839) $126,491  $—    $126,491
                        

At December 31, 2006

          

Total assets

  $2,136,683  $13,329,580  $2,249,501  $17,715,764  $(1,986,067) $15,729,697

Loans and leases

   1,869,884   8,403,159   —     10,273,043   —     10,273,043

Allowance for loan and lease losses

   22,446   109,558   —     132,004   —     132,004

Deposits

   1,763,095   11,027,482   —     12,790,577   (47,253)  12,743,324

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

(Dollars in thousands)

 

   2004

   ISB

  FCB

  Other

  Total

  Adjustments

  Consolidated

Interest income

  $67,987  $452,908  $3,112  $524,007  $(2,890) $521,117

Interest expense

   21,120   93,153   22,443   136,716   (2,890)  133,826
   


 

  


 

  


 

Net interest income

   46,867   359,755   (19,331)  387,291      387,291

Provision for credit losses

   4,954   29,519      34,473      34,473
   


 

  


 

  


 

Net interest income after provision for credit losses

   41,913   330,236   (19,331)  352,818      352,818

Noninterest income

   5,981   247,767   4,216   257,964   (7,008)  250,956

Noninterest expense

   52,282   431,698   2,607   486,587   (7,008)  479,579
   


 

  


 

  


 

Income (loss) before income taxes

   (4,388)  146,305   (17,722)  124,195      124,195

Income taxes

   (1,405)  56,941   (6,184)  49,352      49,352
   


 

  


 

  


 

Net income (loss)

  $(2,983) $89,364  $(11,538) $74,843  $  $74,843
   


 

  


 

  


 

At December 31, 2004

                        

Total assets

  $1,500,921  $11,686,131  $1,550,055  $14,737,107  $(1,471,396) $13,265,711

Loans and leases

   1,374,055   7,980,332      9,354,387      9,354,387

Allowance for loan and lease losses

   14,713   109,148      123,861      123,861

Deposits

   1,093,272   10,306,079      11,399,351   (48,553)  11,350,798
   2003

   ISB

  FCB

  Other

  Total

  Adjustments

  Consolidated

Interest income

  $58,232  $451,434  $3,149  $512,815  $(2,338) $510,477

Interest expense

   19,103   109,050   22,722   150,875   (2,338)  148,537
   


 

  


 

  


 

Net interest income

   39,129   342,384   (19,573)  361,940      361,940

Provision for credit losses

   2,891   21,296      24,187      24,187
   


 

  


 

  


 

Net interest income after provision for credit losses

   36,238   321,088   (19,573)  337,753      337,753

Noninterest income

   5,546   240,269   2,922   248,737   (4,801)  243,936

Noninterest expense

   44,625   421,564   3,700   469,889   (4,801)  465,088
   


 

  


 

  


 

Income (loss) before income taxes

   (2,841)  139,793   (20,351)  116,601      116,601

Income taxes

   (857)  49,076   (6,805)  41,414      41,414
   


 

  


 

  


 

Net income (loss)

  $(1,984) $90,717  $(13,546) $75,187  $  $75,187
   


 

  


 

  


 

At December 31, 2003

                        

Total assets

  $1,211,322  $11,287,945  $1,452,184  $13,951,451  $(1,384,490) $12,566,961

Loans and leases

   1,087,136   7,239,462      8,326,598      8,326,598

Allowance for loan and lease losses

   11,571   100,733      112,304      112,304

Deposits

   849,649   9,894,438      10,744,087   (32,755)  10,711,332

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands)

   2005
   ISB  FCB  Other  Total  Adjustments  Consolidated

Interest income

  $97,840  $571,127  $11,622  $680,589  $(11,049) $669,540

Interest expense

   36,622   161,895   30,683   229,200   (11,049)  218,151
                        

Net interest income (expense)

   61,218   409,232   (19,061)  451,389   —     451,389

Provision for credit losses

   8,029   25,485   —     33,514   —     33,514
                        

Net interest income (expense) after provision for credit losses

   53,189   383,747   (19,061)  417,875   —     417,875

Noninterest income

   7,692   255,995   1,547   265,234   (7,568)  257,666

Noninterest expense

   65,150   437,198   2,091   504,439   (7,568)  496,871
                        

Income (loss) before income taxes

   (4,269)  202,544   (19,605)  178,670   —     178,670

Income taxes

   (1,390)  74,001   (6,803)  65,808   —     65,808
                        

Net income (loss)

  $(2,879) $128,543  $(12,802) $112,862  $—    $112,862
                        

At December 31, 2005

         

Total assets

  $1,855,981  $12,720,711  $1,913,563  $16,490,255  $(1,837,627) $14,652,628

Loans and leases

   1,679,883   7,976,347   —     9,656,230   —     9,656,230

Allowance for loan and lease losses

   19,443   109,404   —     128,847   —     128,847

Deposits

   1,423,456   10,798,361   —     12,221,817   (47,959)  12,173,858

 

NOTE S—FIRST CITIZENS BANCSHARES, INC. (PARENT COMPANY)

 

First Citizens BancShares, Inc.’s principal assets are its investments in and receivables from its subsidiaries. Its sources of income are dividends and interest income. The Parent Company’s condensed balance sheets as of December 31, 20052007 and 2004,2006, and the related condensed statements of income and cash flows for the years ended December 31, 2005, 20042007, 2006 and 20032005 are as follows:

 

CONDENSED BALANCE SHEETS

 

   December 31

   2005

  2004

Assets

        

Cash

  $3,698  $18,449

Investment securities available for sale

   114,887   94,160

Investment in subsidiaries

   1,356,696   1,251,510

Due from subsidiaries

   430,827   144,290

Other assets

   61,763   60,010
   

  

Total assets

  $1,967,871  $1,568,419
   

  

Liabilities and Shareholders’ Equity

        

Short-term borrowings

  $520,585  $213,387

Long-term obligations

   257,733   257,733

Other liabilities

   8,494   10,989

Shareholders’ equity

   1,181,059   1,086,310
   

  

Total liabilities and shareholders’ equity

  $1,967,871  $1,568,419
   

  

CONDENSED STATEMENTS OF INCOME

   Year Ended December 31

 
   2005

  2004

  2003

 

Interest income

  $11,446  $3,003  $2,975 

Interest expense

   31,048   22,277   22,643 
   


 


 


Net interest income (expense)

   (19,602)  (19,274)  (19,668)

Dividends from subsidiaries

   32,194   50,230   67,394 

Other income

   (202)  2,077   (269)

Other operating expense

   1,553   1,504   1,458 
   


 


 


Income before income tax benefit and equity in undistributed net income of subsidiaries

   10,837   31,529   45,999 

Income tax benefit

   (7,516)  (6,584)  (7,241)
   


 


 


Income before equity in undistributed net income of subsidiaries

   18,353   38,113   53,240 

Equity in undistributed net income of subsidiaries

   94,509   36,730   21,947 
   


 


 


Net income

  $112,862  $74,843  $75,187 
   


 


 


   December 31
   2007  2006

Assets

    

Cash

  $28,364  $9,403

Investment securities

   315,490   217,423

Investment in subsidiaries

   1,625,072   1,494,838

Due from subsidiaries

   641,643   563,445

Other assets

   46,753   54,948
        

Total assets

  $2,657,322  $2,340,057
        

Liabilities and Shareholders’ Equity

    

Short-term borrowings

  $923,424  $741,029

Long-term obligations

   273,197   273,197

Other liabilities

   19,493   15,012

Shareholders’ equity

   1,441,208   1,310,819
        

Total liabilities and shareholders’ equity

  $2,657,322  $2,340,057
        

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

(Dollars in thousands)

 

CONDENSED STATEMENTS OF INCOME

  Year Ended December 31 
  2007  2006  2005 

Interest income

 $44,884  $31,109  $11,446 

Interest expense

  58,610   53,679   31,048 
            

Net interest expense

  (13,726)  (22,570)  (19,602)

Dividends from subsidiaries

  43,830   44,952   32,194 

Other income (loss)

  421   (175)  (202)

Other operating expense

  2,084   1,670   1,553 
            

Income before income tax benefit and equity in undistributed net income of subsidiaries

  28,441   20,537   10,837 

Income tax benefit

  (5,414)  (8,570)  (7,516)
            

Income before equity in undistributed net income of subsidiaries

  33,855   29,107   18,353 

Equity in undistributed net income of subsidiaries

  74,762   97,384   94,509 
            

Net income

 $108,617  $126,491  $112,862 
            

CONDENSED STATEMENTS OF CASH FLOWS

 

  Year Ended December 31

  Year Ended December 31 
  2005

 2004

 2003

  2007 2006 2005 

OPERATING ACTIVITIES

      

Net income

  $112,862  $74,843  $75,187  $108,617  $126,491  $112,862 

Adjustments

      

Undistributed net income of subsidiaries

   (94,509)  (36,730)  (21,947)  (74,762)  (97,384)  (94,509)

Net amortization of premiums and discounts

   (215)  99   485   (247)  308   (215)

Securities (gains) losses

      (1,852)  (306)

Securities gains

  —     (328)  —   

Change in other assets

   2,420   (11,795)  5,677   11,149   5,762   2,420 

Change in other liabilities

   (2,495)  (14,916)  18,689   1,695   6,518   (2,495)
  


 


 


         

Net cash provided by operating activities

   18,063   9,649   77,785   46,452   41,367   18,063 
  


 


 


         

INVESTING ACTIVITIES

      

Net change in due from subsidiaries

   (286,537)  70,933   (39,234)  (78,198)  (132,618)  (286,537)

Purchase of investment securities held to maturity

      (9,936)  (5,031)

Purchase of investment securities available for sale

   (34,837)  (59,755)  (20,095)

Maturities of investment securities held to maturity

      29,932    

Maturities of investment securities available for sale

   3,517   1,241    

Proceeds from sales of investment securities available for sale

      7,584   52,351 

Purchases of investment securities

  (149,906)  (161,655)  (34,837)

Maturities of investment securities

  53,696   70,585   3,517 

Investment in subsidiaries

   (10,677)  (50,000)  (30,000)  (24,000)  (36,404)  (10,677)
  


 


 


         

Net cash used by investing activities

   (328,534)  (10,001)  (42,009)  (198,408)  (260,092)  (328,534)
  


 


 


         

FINANCING ACTIVITIES

      

Net change in short-term borrowings

   307,198   22,409   (48,740)  182,395   220,444   307,198 

Redemption of common stock

      (215)  (3,652)

Origination of long-term obligations

  —     118,557   —   

Redemption of long-term obligations

  —     (103,093)  —   

Cash dividends paid

   (11,478)  (11,479)  (11,497)  (11,478)  (11,478)  (11,478)
  


 


 


         

Net cash provided (used) by financing activities

   295,720   10,715   (63,889)

Net cash provided by financing activities

  170,917   224,430   295,720 
  


 


 


         

Net change in cash

   (14,751)  10,363   (28,113)  18,961   5,705   (14,751)

Cash balance at beginning of year

   18,449   8,086   36,199   9,403   3,698   18,449 
  


 


 


         

Cash balance at end of year

  $3,698  $18,449  $8,086  $28,364  $9,403  $3,698 
  


 


 


         

Cash payments for

      

Interest

  $30,415  $21,644  $14,962  $58,159  $54,214  $30,415 

Income taxes

   65,860   39,973   22,499   57,765   61,795   65,860 

Supplemental disclosure of noncash investing and financing activities:

      

Unrealized securities gains (losses)

   (10,808)  (10,171)  3,293   43,290   11,446   (10,808)

Unrealized loss on cash flow hedge

  (3,561)  (1,793)  —   

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated: March 14, 2006February 28, 2008

FIRST CITIZENS BANCSHARES, INC. (Registrant)

 

/S/    JFAMESRANK B. HYLEROLDING, JR.*        

                                                                                                                                 

JamesFrank B. Hyler,Holding, Jr.

Vice ChairmanPresident and DirectorChief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, on behalf of the Registrant and in the capacities indicated on March 14, 2006.February 28, 2008.

 

Signature


  

Title


 

Date


/s/    LEWIS R. HOLDING*      

                                                                                         

Lewis R. Holding

  

Chairman and Chief Executive Officer (principal executive officer)

 March 14, 2006February 28, 2008

/s/    FRANK B. HOLDING*    

                                                                                           

Frank B. Holding

  

Executive Vice Chairman

 March 14, 2006

/s/    JAMES B. HYLER, JR.        

James B. Hyler, Jr.

Vice Chairman

March 14, 2006February 28, 2008

/s/    FRANK B. HOLDING, JR.*          

                                                                                         

Frank B. Holding, Jr.

  

President and Chief Executive Officer

 March 14, 2006February 28, 2008

/S/    KENNETH A. BLACK        

                                                                                         

Kenneth A. Black

  

Vice President, Treasurer, and Chief Financial Officer (principal financial

and accounting officer)

 March 14, 2006February 28, 2008

/s/    JOHN M. ALEXANDER, JR.  *      

                                                                                         

John M. Alexander, Jr.

  

Director

 March 14, 2006February 28, 2008

/s/    CARMEN HOLDING AMES  *      

                                                                                         

Carmen Holding Ames

  

Director

 March 14, 2006February 28, 2008

/s/    VICTOR E. BELL, III  *      

                                                                                         

Victor E. Bell, III

  

Director

 March 14, 2006February 28, 2008

/s/    GEORGE H. BROADRICK  *      

                                                                                         

George H. Broadrick

  

Director

 March 14, 2006February 28, 2008

/s/    HOPE HOLDING CONNELL  *    

Hope Holding Connell

Director

February 28, 2008

/s/    HUBERT M. CRAIG, III  *      

                                                                                         

Hubert M. Craig, III

  

Director

 March 14, 2006February 28, 2008

/s/    H. LEE DURHAM, JR.  *      

                                                                                         

H. Lee Durham, Jr.

  

Director

 March 14, 2006February 28, 2008

/s/    LEWIS M. FETTERMAN  *  

                                                                                         

Lewis M. Fetterman

  

Director

 March 14, 2006February 28, 2008

/s/    CDHARLESANIEL B.C.L. HOLTEAVNER  *      

Daniel L. Heavner

Director

February 28, 2008

                                                                                         

     Charles B.C. Holt

  

Director

 March 14, 2006

Signature


  

Title


 

Date


/s/    FREEMAN R. JONES    *    

    Freeman R. Jones

Director

March 14, 2006

/s/    LUCIUS S. JONES    *    

                                                                                         

    Lucius S. Jones

  

Director

 March 14, 2006February 28, 2008

/s/    ROBERT E. MASON, IV    *    

                                                                                         

Joseph T. Maloney, Jr.Robert E. Mason, IV

  

Director

 February 28, 2008

/s/    ROBERT T. NEWCOMB  *      

                                                                                         

Robert T. Newcomb

  

Director

 March 14, 2006February 28, 2008

/s/    LEWIS T. NUNNELEE, II    *    

                                                                                         

Lewis T. Nunnelee, II

  

Director

 March 14, 2006February 28, 2008

/s/    C. RJONALDAMES SM. PCHEELERARKER  *  

                                                                                         

C. Ronald ScheelerJames M. Parker

  Director March 14, 2006February 28, 2008

/s/    RALPH K. SHELTON    *    

                                                                                         

Ralph K. Shelton

  Director March 14, 2006February 28, 2008

/s/    R. C. SOLES, JR.  *      

                                                                                         

R. C. Soles, Jr.

  

Director

 March 14, 2006February 28, 2008

/s/    DAVID L. WARD, JR    *    

                                                                                         

David L. Ward, Jr.

  

Director

 March 14, 2006February 28, 2008

 

* Alexander G. MacFadyen, Jr.Kenneth A. Black hereby signs this Annual Report on Form 10-K on March 14, 2006,February 28, 2008, on behalf of each of the indicated persons for whom he is attorney-in-fact pursuant to a Power of Attorney filed herewith.

 

By:

 

/s/    ALEXANDERS/    KENNETH G. MA. BACLACK      FADYEN, JR.      


 

Alexander G. MacFadyen, Jr.Kenneth A. Black

As Attorney-In-Fact

EXHIBIT INDEX

 

3.1 Certificate of Incorporation of the Registrant, as amended (incorporated by reference from Registrant’s Form 10-K for the year ended December 31, 1992)
3.2 Bylaws of the Registrant, as amended (incorporated by reference from Registrant’s Form 10-K for the year ended December 31, 2003)8-K dated January 25, 2008)
4.1 Specimen of Registrant’s Class A Common Stock certificate (incorporated by reference from Registrant’s Form 10-K for the year ended December 31, 1993)
4.2 Specimen of Registrant’s Class B Common Stock certificate (incorporated by reference from Registrant’s Form 10-K for the year ended December 31, 1993)
4.3 Amended and Restated Trust Agreement of FCB/NC Capital Trust I (incorporated by reference from Registration No. 333-59039)
4.4 Form of Guarantee Agreement (incorporated by reference from Registration No. 333-59039)
4.5 Junior Subordinated Indenture dated March 5, 1998 between Registrant and Bankers Trust Company, as Debenture Trustee (incorporated by reference from Registration No. 333-59039)
4.6 Indenture dated June 1, 2005 between Registrant’s subsidiary First-Citizens Bank & Trust Company and Deutsche Bank Trust Company Americas, as Trustee (incorporated by reference from Registrant’s 8-K dated
June 1, 2005)
4.7First Supplemental Indenture dated June 1, 2005 between Registrant’s subsidiary First-Citizens Bank & Trust Company and Deutsche Bank Trust Company Americas, as Trustee (incorporated by reference from Registrant’s Form 8-K dated June 1, 2005)
4.8Amended and Restated Trust Agreement of FCB/NC Capital Trust IIIII (incorporated by reference from Registration No. 333-68340)Registrant’s Form 10-Q for the quarter ended June 30, 2006)
4.74.9 Guarantee Agreement relating to Registrant’s guarantee of the capital securities of FCB/NC Capital Trust IIIII (incorporated by reference from Registration No. 333-68340)Registrant’s Form 10-Q for the quarter ended June 30, 2006)
4.84.10 Junior Subordinated IndentureDebenture dated October 10, 2001,May 18, 2006 between Registrant and BankersWilmington Trust Company, as DelawareDebenture Trustee (incorporated by reference from Registration No. 333-68340)Registrant’s Form 10-Q for the quarter ended June 30, 2006)
10.1 Amended and Restated EmployeeExecutive Consultation, Post-Retirement Non-CompetitionSeparation from Service and Death Benefit Agreement dated October 25, 2005September 17, 2007 between Registrant’s Subsidiary First-Citizens Bank & Trust Company and Lewis R. Holding (incorporated by reference from Registrant’s Form 10-Q for the quarter ended September 30, 2005)2007)
10.2 Amended and Restated EmployeeExecutive Consultation, Post-Retirement Non-CompetitionSeparation from Service and Death Benefit Agreement dated October 25, 2005September 28, 2007 between Registrant’s Subsidiary First-Citizens Bank & Trust Company and Frank B. Holding (incorporated by reference from Registrant’s Form 10-Q for the quarter ended September 30, 2005)2007)
10.3 Amended and Restated EmployeeExecutive Consultation, Post-Retirement Non-CompetitionSeparation from Service and Death Benefit Agreement dated October 25, 2005September 17, 2007 between Registrant’s Subsidiary First-Citizens Bank & Trust Company and James B. Hyler, Jr. (incorporated by reference from Registrant’s Form 10-Q for the quarter ended September 30, 2005)2007)
10.4 Amended and Restated EmployeeOffer of employment by Registrant’s Subsidiary First-Citizens Bank & Trust Company to Carol B. Yochem dated August 3, 2005 (incorporated by reference to Registrant’s 2006 Form 10-K)
10.5Executive Consultation, Post-Retirement Non-CompetitionSeparation from Service and Death Benefit Agreement dated October 25, 2005September 17, 2007, between Registrant’s Subsidiary First-Citizens Bank & Trust Company and Carol B. Yochem (incorporated by reference to Registrant’s Form 10-Q for the quarter ended September 30, 2007)
10.6Executive Consultation, Separation from Service and Death Benefit Agreement dated September 17, 2007, between Registrant’s Subsidiary First-Citizens Bank & Trust Company and Kenneth A. Black (incorporated by reference to Registrant’s Form 10-Q for the quarter ended September 30, 2007)
10.8Executive Consultation, Separation from Service and Death Benefit Agreement dated September 17, 2007 between Registrant’s Subsidiary First-Citizens Bank & Trust Company and Frank B. Holding, Jr. (incorporated by reference from Registrant’s Form 10-Q for the quarter ended September 30, 2005)2007)
10.510.9 Amended and Restated EmployeeExecutive Consultation, Post-Retirement Non-CompetitionSeparation from Service and Death Benefit Agreement dated October 25, 2005September 17, 2007 between Registrant’s Subsidiary First-Citizens Bank & Trust Company and Hope Holding Connell (incorporated by reference to Registrant’s Form 10-Q for the quarter ended September 30, 2007)

10.10Consultation Agreement dated July 24, 2006, between Registrant’s subsidiary, First-Citizens Bank & Trust Company, and George H. Broadrick (incorporated by reference to Registrant’s 2006 Form 10-K)
10.11Executive Consultation, Separation from Service and Death Benefit Agreement dated September 17, 2007, between Registrant’s Subsidiary IronStone Bank and James M. Parker (incorporated by reference from Registrant’s Form 10-Q for the quarter ended September 30, 2005)
10.6Second Death Benefit and Post-Retirement Non-Competition and Consultation Agreement dated April 28, 1997, between Registrant’s subsidiary, First-Citizens Bank & Trust Company, and George H. Broadrick (incorporated by reference from Registrant’s Form 10-K for the year ended December 31, 1997)
10.7Consulting Agreement dated February 17, 1988, between Registrant’s subsidiary, First-Citizens Bank & Trust Company, and George H. Broadrick (incorporated by reference from Registrant’s Form 10-K for the year ended December 31, 1987)2007)
10.13 Article IV Section 4.1.d of the Agreement and Plan of Reorganization and Merger by and among First Investors Savings Bank, Inc., SSB, First-Citizens Bank & Trust Company and First Citizens BancShares, Inc., dated October 25, 1995, located at page II-38 of Registrant’s S-4 Registration Statement filed with the SEC on December 19, 1994 (Registration No. 33-84514)

10.14 Article IV Section 4.1.e of the Agreement and Plan of Reorganization and Merger by and among State Bank and First-Citizens Bank & Trust Company and First Citizens BancShares, Inc., dated October 25, 1995, located at page I-36 of Registrant’s S-4 Registration Statement filed with the SEC on November 16, 1994 (Registration No.
33-86286)
21 Subsidiaries of the Registrant (filed herewith)
24 Power of Attorney (filed herewith)
31.1 Certification of Lewis R. Holding, Chief Executive Officer prior to January 28, 2008 (filed herewith)
31.2Certification of Frank B. Holding, Jr., Chief Executive Officer effective January 28, 2008 (filed herewith)
31.3 Certification of Chief Financial Officer (filed herewith)
32 Certification of Chief Executive Officer and Chief Financial Officer (filed herewith)
99.1 Proxy Statement for Registrant’s 20062008 Annual Meeting (separately filed)
99.2Procedures for Shareholder Recommendations to Nominating Committee (incorporated by reference from Registrant’s Form 10-K for the year ended December 31, 2004)
99.3Reissued report of predecessor independent auditor as of and for the year ended December 31, 2003 (filed herewith)

 

COPIES OF EXHIBITS ARE AVAILABLE UPON WRITTEN REQUEST TO

KENNETH A. BLACK, CHIEF FINANCIAL OFFICER OF FIRST CITIZENS BANCSHARES, INC.

 

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