Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
xQuarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For
the
quarterly period ended March 31, 2007
or
o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act
of 1934
Commission
File Number: 0-16471
First
Citizens BancShares, Inc
(Exact
name of Registrant as specified in its charter)
Delaware
|
56-1528994
|
(State
or other jurisdiction of
|
(I.R.S.
Employer Identification Number)
|
incorporation
or organization)
|
|
|
|
4300
Six Forks Road, Raleigh, North Carolina
|
27609
|
(Address
of principle executive offices)
|
(Zip
code)
|
(Registrant’s
telephone number, including area code)
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.
Yes
x
No o
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of ‘accelerated
filer and large accelerated filer’ in Rule 12b-2 of the Exchange Act (Check
one):
Large
accelerated filer x
Accelerated filer o Non-accelerated
filer o.
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o
No
x
Class
A
Common Stock—$1 Par Value—8,756,778 shares
Class
B
Common Stock—$1 Par Value—1,677,675 shares
(Number
of shares outstanding, by class, as of May 4, 2007)
INDEX
|
|
Page(s)
|
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
|
|
Item
1.
|
Financial
Statements (Unaudited)
|
|
|
|
|
|
Consolidated
Balance Sheets at March 31, 2007, December 31, 2006
|
|
|
and
March 31, 2006
|
3
|
|
|
|
|
Consolidated
Statements of Income for the three-month
|
|
|
periods
ended March 31, 2007, and March 31, 2006
|
4
|
|
|
|
|
Consolidated
Statements of Changes in Shareholders’ Equity for the
|
|
|
three-month
periods ended March 31, 2007, and March 31, 2006
|
5
|
|
|
|
|
Consolidated
Statements of Cash Flows for the three-month
|
|
|
periods
ended March 31, 2007, and March 31, 2006
|
6
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
7-9
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and
|
|
|
Results
of Operations
|
10-25
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
26
|
|
|
|
Item
4.
|
Controls
and Procedures
|
26
|
|
|
|
|
|
|
|
|
|
PART
II.OTHER
INFORMATION
|
|
|
|
Item
6.
|
Exhibits.
|
26
|
PART
I
Item
1.
Financial Statements (Unaudited)
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
First
Citizens BancShares, Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31*
|
|
December
31#
|
|
March
31*
|
|
|
|
2007
|
|
2006
|
|
2006
|
|
Assets
|
|
(thousands,
except share data)
|
|
Cash
and due from banks
|
|
$
|
847,202
|
|
$
|
1,010,984
|
|
$
|
805,757
|
|
Overnight
investments
|
|
|
799,848
|
|
|
348,597
|
|
|
748,918
|
|
Investment
securities available for sale
|
|
|
2,934,995
|
|
|
3,001,890
|
|
|
2,396,001
|
|
Investment
securities held to maturity
|
|
|
96,803
|
|
|
219,158
|
|
|
500,961
|
|
Loans
and leases
|
|
|
10,221,578
|
|
|
10,239,551
|
|
|
9,810,088
|
|
Less
allowance for loan and lease losses
|
|
|
132,640
|
|
|
132,004
|
|
|
130,222
|
|
Net
loans and leases
|
|
|
10,088,938
|
|
|
10,107,547
|
|
|
9,679,866
|
|
Premises
and equipment
|
|
|
726,041
|
|
|
702,926
|
|
|
657,141
|
|
Income
earned not collected
|
|
|
74,648
|
|
|
71,562
|
|
|
55,680
|
|
Goodwill
|
|
|
102,625
|
|
|
102,625
|
|
|
102,735
|
|
Other
intangible assets
|
|
|
7,427
|
|
|
8,000
|
|
|
9,732
|
|
Other
assets
|
|
|
175,251
|
|
|
156,408
|
|
|
138,419
|
|
Total
assets
|
|
$
|
15,853,778
|
|
$
|
15,729,697
|
|
$
|
15,095,210
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
2,701,786
|
|
$
|
2,682,997
|
|
$
|
2,733,885
|
|
Interest-bearing
|
|
|
10,020,746
|
|
|
10,060,327
|
|
|
9,778,672
|
|
Total
deposits
|
|
|
12,722,532
|
|
|
12,743,324
|
|
|
12,512,557
|
|
Short-term
borrowings
|
|
|
1,245,025
|
|
|
1,150,847
|
|
|
850,566
|
|
Long-term
obligations
|
|
|
405,356
|
|
|
401,198
|
|
|
408,954
|
|
Other
liabilities
|
|
|
138,538
|
|
|
123,509
|
|
|
119,767
|
|
Total
liabilities
|
|
|
14,511,451
|
|
|
14,418,878
|
|
|
13,891,844
|
|
Shareholders'
Equity
|
|
|
|
|
|
|
|
|
|
|
Common
stock:
|
|
|
|
|
|
|
|
|
|
|
Class
A - $1 par value (8,756,778 shares issued for all periods)
|
|
|
8,757
|
|
|
8,757
|
|
|
8,757
|
|
Class
B - $1 par value (1,677,675 shares issued for all periods)
|
|
|
1,678
|
|
|
1,678
|
|
|
1,678
|
|
Surplus
|
|
|
143,766
|
|
|
143,766
|
|
|
143,766
|
|
Retained
earnings
|
|
|
1,175,449
|
|
|
1,148,372
|
|
|
1,054,793
|
|
Accumulated
other comprehensive income (loss)
|
|
|
12,677
|
|
|
8,246
|
|
|
(5,628
|
)
|
Total
shareholders' equity
|
|
|
1,342,327
|
|
|
1,310,819
|
|
|
1,203,366
|
|
Total
liabilities and shareholders' equity
|
|
$
|
15,853,778
|
|
$
|
15,729,697
|
|
$
|
15,095,210
|
|
*
Unaudited
|
|
|
|
#
Derived from the 2006 Annual Report on Form 10-K.
|
|
|
|
See
accompanying Notes to Consolidated Financial Statements.
|
|
|
Consolidated
Statements of Income
|
|
|
|
|
|
First
Citizens BancShares, Inc. and Subsidiaries
|
|
|
|
|
|
|
|
Three
Months Ended March 31
|
|
|
|
2007
|
|
2006
|
|
Interest
income
|
|
(thousands,
except share and per share data)
|
|
Loans
and leases
|
|
$
|
175,024
|
|
$
|
159,205
|
|
Investment
securities:
|
|
|
|
|
|
|
|
U.
S. Government
|
|
|
32,744
|
|
|
24,285
|
|
State,
county and municipal
|
|
|
58
|
|
|
61
|
|
Other
|
|
|
774
|
|
|
711
|
|
Total
investment securities interest and dividend income
|
|
|
33,576
|
|
|
25,057
|
|
Overnight
investments
|
|
|
7,461
|
|
|
5,739
|
|
Total
interest income
|
|
|
216,061
|
|
|
190,001
|
|
Interest
expense
|
|
|
|
|
|
|
|
Deposits
|
|
|
80,011
|
|
|
57,742
|
|
Short-term
borrowings
|
|
|
12,682
|
|
|
6,992
|
|
Long-term
obligations
|
|
|
6,755
|
|
|
7,449
|
|
Total
interest expense
|
|
|
99,448
|
|
|
72,183
|
|
Net
interest income
|
|
|
116,613
|
|
|
117,818
|
|
Provision
for credit losses
|
|
|
3,532
|
|
|
6,737
|
|
Net
interest income after provision for credit losses
|
|
|
113,081
|
|
|
111,081
|
|
Noninterest
income
|
|
|
|
|
|
|
|
Cardholder
and merchant services income
|
|
|
22,377
|
|
|
18,428
|
|
Service
charges on deposit accounts
|
|
|
17,157
|
|
|
18,206
|
|
Commission-based
income
|
|
|
9,264
|
|
|
7,872
|
|
Fees
from processing services
|
|
|
8,187
|
|
|
6,909
|
|
Trust
and asset management fees
|
|
|
6,078
|
|
|
5,178
|
|
ATM
income
|
|
|
1,587
|
|
|
2,532
|
|
Mortgage
income
|
|
|
2,374
|
|
|
1,372
|
|
Other
service charges and fees
|
|
|
3,770
|
|
|
4,123
|
|
Securities
losses
|
|
|
-
|
|
|
(186
|
)
|
Other
|
|
|
409
|
|
|
1,315
|
|
Total
noninterest income
|
|
|
71,202
|
|
|
65,749
|
|
Noninterest
expense
|
|
|
|
|
|
|
|
Salaries
and wages
|
|
|
59,189
|
|
|
56,543
|
|
Employee
benefits
|
|
|
13,177
|
|
|
13,943
|
|
Occupancy
expense
|
|
|
13,855
|
|
|
12,875
|
|
Equipment
expense
|
|
|
13,772
|
|
|
12,664
|
|
Other
|
|
|
39,197
|
|
|
35,687
|
|
Total
noninterest expense
|
|
|
139,190
|
|
|
131,712
|
|
Income
before income taxes
|
|
|
45,093
|
|
|
45,118
|
|
Income
taxes
|
|
|
16,109
|
|
|
16,461
|
|
Net
income
|
|
$
|
28,984
|
|
$
|
28,657
|
|
Average
shares outstanding
|
|
|
10,434,453
|
|
|
10,434,453
|
|
Net
income per share
|
|
$
|
2.78
|
|
$
|
2.75
|
|
See
accompanying Notes to Consolidated Financial Statements.
|
|
|
|
|
|
|
|
Consolidated
Statements of Changes in Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
First
Citizens BancShares, Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Class
A
|
|
Class
B
|
|
|
|
|
|
Other
|
|
Total
|
|
|
|
Common
|
|
Common
|
|
|
|
Retained
|
|
Comprehensive
|
|
Shareholders'
|
|
|
|
Stock
|
|
Stock
|
|
Surplus
|
|
Earnings
|
|
Income
(loss)
|
|
Equity
|
|
|
|
(thousands,
except share data)
|
Balance
at December 31, 2005
|
|
$
|
8,757
|
|
$
|
1,678
|
|
$
|
143,766
|
|
$
|
1,029,005
|
|
$
|
(2,147
|
)
|
$
|
1,181,059
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
28,657
|
|
|
-
|
|
|
28,657
|
|
Unrealized
securities losses arising during
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
period,
net of deferred taxes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,481
|
)
|
|
(3,481
|
)
|
Total
comprehensive income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
28,657
|
|
|
(3,481
|
)
|
|
25,176
|
|
Cash
dividends
|
|
|
|
|
|
|
|
|
|
|
|
(2,869
|
)
|
|
|
|
|
(2,869
|
)
|
Balance
at March 31, 2006
|
|
$
|
8,757
|
|
$
|
1,678
|
|
$
|
143,766
|
|
$
|
1,054,793
|
|
$
|
(5,628
|
)
|
$
|
1,203,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
28,984
|
|
|
-
|
|
|
28,984
|
|
Unrealized
securities gains arising during
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
period,
net of deferred taxes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,722
|
|
|
4,722
|
|
Change
in unrecognized loss on cash flow
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
hedge,
net of deferred taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(291
|
)
|
|
(291
|
)
|
Total
comprehensive income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
28,984
|
|
|
4,431
|
|
|
33,415
|
|
Cash
dividends
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,869
|
)
|
|
-
|
|
|
(2,869
|
)
|
Balance
at March 31, 2007
|
|
$
|
8,757
|
|
$
|
1,678
|
|
$
|
143,766
|
|
$
|
1,175,449
|
|
$
|
12,677
|
|
$
|
1,342,327
|
|
See
accompanying Notes to Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
First
Citizens BancShares, Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended
|
|
|
|
2007
|
|
2006
|
|
|
|
(thousands)
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
Net
income
|
|
$
|
28,984
|
|
$
|
28,657
|
|
Adjustments
to reconcile net income to cash
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
Amortization
of intangibles
|
|
|
573
|
|
|
586
|
|
Provision
for credit losses
|
|
|
3,532
|
|
|
6,737
|
|
Deferred
tax benefit
|
|
|
(2,654
|
)
|
|
(5,104
|
)
|
Change
in current taxes payable
|
|
|
15,058
|
|
|
19,172
|
|
Depreciation
|
|
|
12,678
|
|
|
11,603
|
|
Change
in accrued interest payable
|
|
|
(907
|
)
|
|
1,800
|
|
Change
in income earned not collected
|
|
|
(3,086
|
)
|
|
(801
|
)
|
Securities
losses
|
|
|
-
|
|
|
186
|
|
Origination
of loans held for sale
|
|
|
(118,184
|
)
|
|
(84,096
|
)
|
Proceeds
from sale of loans
|
|
|
128,448
|
|
|
123,165
|
|
Gain
on sale of loans
|
|
|
(467
|
)
|
|
274
|
|
Net
amortization of premiums and discounts
|
|
|
(1,208
|
)
|
|
(1,140
|
)
|
Net
change in other assets
|
|
|
(19,162
|
)
|
|
(1,697
|
)
|
Net
change in other liabilities
|
|
|
1,335
|
|
|
2,335
|
|
Net
cash provided by operating activities
|
|
|
44,940
|
|
|
101,677
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
Net
change in loans outstanding
|
|
|
5,494
|
|
|
(211,799
|
)
|
Purchases
of investment securities held to maturity
|
|
|
-
|
|
|
(1,066
|
)
|
Purchases
of investment securities available for sale
|
|
|
(309,431
|
)
|
|
(161,631
|
)
|
Proceeds
from maturities of investment securities held to maturity
|
|
|
122,355
|
|
|
137,741
|
|
Proceeds
from maturities of investment securities available for
sale
|
|
|
385,229
|
|
|
52,753
|
|
Net
change in overnight investments
|
|
|
(451,251
|
)
|
|
(267,906
|
)
|
Dispositions
of premises and equipment
|
|
|
505
|
|
|
2,779
|
|
Additions
to premises and equipment
|
|
|
(32,140
|
)
|
|
(32,054
|
)
|
Net
cash used by investing activities
|
|
|
(279,239
|
)
|
|
(481,183
|
)
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
Net
change in time deposits
|
|
|
(17,073
|
)
|
|
278,962
|
|
Net
change in demand and other interest-bearing deposits
|
|
|
(3,719
|
)
|
|
59,737
|
|
Net
change in short-term borrowings
|
|
|
94,178
|
|
|
71,505
|
|
Cash
dividends paid
|
|
|
(2,869
|
)
|
|
(2,869
|
)
|
Net
cash provided by financing activities
|
|
|
70,517
|
|
|
407,335
|
|
Change
in cash and due from banks
|
|
|
(163,782
|
)
|
|
27,829
|
|
Cash
and due from banks at beginning of period
|
|
|
1,010,984
|
|
|
777,928
|
|
Cash
and due from banks at end of period
|
|
$
|
847,202
|
|
$
|
805,757
|
|
CASH
PAYMENTS FOR:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
98,541
|
|
$
|
73,982
|
|
Income
taxes
|
|
|
3,562
|
|
|
25,352
|
|
SUPPLEMENTAL
DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
|
Unrealized
securities gains (losses)
|
|
$
|
7,695
|
|
$
|
(5,711
|
)
|
See
accompanying Notes to Consolidated Financial Statements.
|
|
|
|
|
|
|
|
(Dollars
in thousands, except per share amounts)
Note
A
Accounting
Policies
The
accompanying unaudited consolidated financial statements have been prepared
in
accordance with accounting principles generally accepted in the United States
of
America for interim financial information. Accordingly, they do not include
all
of the information and notes required by accounting principles generally
accepted in the United States of America for complete financial
statements.
In
the
opinion of management, the consolidated financial statements contain all
material adjustments necessary to present fairly the financial position of
First
Citizens BancShares, Inc. as of and for each of the periods presented, and
all
such adjustments are of a normal recurring nature. The preparation of 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 disclosures
of
contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the period. Actual results could differ
from those estimates.
These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes included in the 2006 First Citizens
BancShares, Inc. Form 10-K. Certain amounts for prior periods have been
reclassified to conform with statement presentations for 2007. However, the
reclassifications have no effect on shareholders’ equity or net income as
previously reported.
Note
B
Operating
Segments
BancShares
conducts its banking operations through its two wholly-owned subsidiaries,
First-Citizens Bank & Trust Company (FCB) and IronStone Bank (ISB). Although
FCB and ISB offer similar products and services to customers, each entity
operates in distinct geographic markets and each entity operates under a
separate charter. The financial results and trends of ISB reflect the impact
of
the de novo nature of its growth.
FCB
is a
mature banking institution that operates under a state bank charter from its
branch network in North Carolina, Virginia, West Virginia, Maryland and
Tennessee. ISB began operations in 1997 and currently operates in Georgia,
Florida, Texas, Arizona, California, New Mexico, Colorado, Oregon and Washington
under a federal thrift charter.
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. Other includes activities of the parent company
and Neuse, Incorporated, a subsidiary that owns real property used in the
banking operation. For 2006, other also includes American Guaranty Insurance
Corporation, a property insurance company that was sold January 1, 2007.
The
adjustments in the accompanying tables represent the elimination of the impact
of certain inter-company transactions. The adjustments to 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 services fees paid by one company
to
another within BancShares’ consolidated group.
|
|
March
31, 2007
|
|
|
|
ISB
|
|
FCB
|
|
Other
|
|
Total
|
|
Adjustments
|
|
Consolidated
|
|
|
|
|
|
Interest
income
|
|
$
|
33,808
|
|
$
|
180,291
|
|
$
|
9,851
|
|
$
|
223,950
|
|
$
|
(7,889
|
)
|
$
|
216,061
|
|
Interest
expense
|
|
|
17,935
|
|
|
76,123
|
|
|
13,279
|
|
|
107,337
|
|
|
(7,889
|
)
|
|
99,448
|
|
Net
interest income
|
|
|
15,873
|
|
|
104,168
|
|
|
(3,428
|
)
|
|
116,613
|
|
|
-
|
|
|
116,613
|
|
Provision
for credit losses
|
|
|
318
|
|
|
3,214
|
|
|
-
|
|
|
3,532
|
|
|
-
|
|
|
3,532
|
|
Net
interest income after provision
|
|
|
15,555
|
|
|
100,954
|
|
|
(3,428
|
)
|
|
113,081
|
|
|
-
|
|
|
113,081
|
|
for
credit losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
income
|
|
|
3,201
|
|
|
70,598
|
|
|
(127
|
)
|
|
73,672
|
|
|
(2,470
|
)
|
|
71,202
|
|
Noninterest
expense
|
|
|
19,105
|
|
|
122,436
|
|
|
119
|
|
|
141,660
|
|
|
(2,470
|
)
|
|
139,190
|
|
Income
(loss) before income taxes
|
|
|
(349
|
)
|
|
49,116
|
|
|
(3,674
|
)
|
|
45,093
|
|
|
-
|
|
|
45,093
|
|
Income
taxes
|
|
|
(83
|
)
|
|
17,463
|
|
|
(1,271
|
)
|
|
16,109
|
|
|
-
|
|
|
16,109
|
|
Net
income (loss)
|
|
$
|
(266
|
)
|
$
|
31,653
|
|
$
|
(2,403
|
)
|
$
|
28,984
|
|
$
|
-
|
|
$
|
28,984
|
|
At
March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
2,225,229
|
|
$
|
13,359,371
|
|
$
|
2,438,870
|
|
$
|
18,023,470
|
|
$
|
(2,169,692
|
)
|
$
|
15,853,778
|
|
Loans
and leases
|
|
|
1,881,368
|
|
|
8,340,210
|
|
|
-
|
|
|
10,221,578
|
|
|
-
|
|
|
10,221,578
|
|
Allowance
for loan and lease losses
|
|
|
22,580
|
|
|
110,060
|
|
|
-
|
|
|
132,640
|
|
|
-
|
|
|
132,640
|
|
Deposits
|
|
|
1,826,095
|
|
|
10,935,271
|
|
|
-
|
|
|
12,761,366
|
|
|
(38,834
|
)
|
|
12,722,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2006
|
|
|
|
ISB
|
|
|
FCB
|
|
|
Other
|
|
|
Total
|
|
|
Adjustments
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
28,595
|
|
$
|
161,433
|
|
$
|
5,390
|
|
$
|
195,418
|
|
$
|
(5,417
|
)
|
$
|
190,001
|
|
Interest
expense
|
|
|
12,347
|
|
|
55,071
|
|
|
10,182
|
|
|
77,600
|
|
|
(5,417
|
)
|
|
72,183
|
|
Net
interest income
|
|
|
16,248
|
|
|
106,362
|
|
|
(4,792
|
)
|
|
117,818
|
|
|
-
|
|
|
117,818
|
|
Provision
for credit losses
|
|
|
966
|
|
|
5,771
|
|
|
-
|
|
|
6,737
|
|
|
-
|
|
|
6,737
|
|
Net
interest income after provision
|
|
|
15,282
|
|
|
100,591
|
|
|
(4,792
|
)
|
|
111,081
|
|
|
-
|
|
|
111,081
|
|
for
credit losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
income
|
|
|
2,544
|
|
|
64,612
|
|
|
543
|
|
|
67,699
|
|
|
(1,950
|
)
|
|
65,749
|
|
Noninterest
expense
|
|
|
17,992
|
|
|
115,115
|
|
|
555
|
|
|
133,662
|
|
|
(1,950
|
)
|
|
131,712
|
|
Income
(loss) before income taxes
|
|
|
(166
|
)
|
|
50,088
|
|
|
(4,804
|
)
|
|
45,118
|
|
|
-
|
|
|
45,118
|
|
Income
taxes
|
|
|
(19
|
)
|
|
18,147
|
|
|
(1,667
|
)
|
|
16,461
|
|
|
-
|
|
|
16,461
|
|
Net
income (loss)
|
|
$
|
(147
|
)
|
$
|
31,941
|
|
$
|
(3,137
|
)
|
$
|
28,657
|
|
$
|
-
|
|
$
|
28,657
|
|
At
March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,945,156
|
|
$
|
13,003,924
|
|
$
|
2,070,063
|
|
$
|
17,019,143
|
|
$
|
(1,923,933
|
)
|
$
|
15,095,210
|
|
Loans
and leases
|
|
|
1,719,046
|
|
|
8,091,042
|
|
|
-
|
|
|
9,810,088
|
|
|
-
|
|
|
9,810,088
|
|
Allowance
for loan and lease losses
|
|
|
20,268
|
|
|
109,954
|
|
|
-
|
|
|
130,222
|
|
|
-
|
|
|
130,222
|
|
Deposits
|
|
|
1,576,990
|
|
|
11,002,133
|
|
|
-
|
|
|
12,579,123
|
|
|
(66,566
|
)
|
|
12,512,557
|
|
Note
C
Employee
Benefits
BancShares
recognized pension expense totaling $2,625 and $3,690, respectively, in the
three-month periods ended March 31, 2007 and 2006. Pension expense is included
as a component of employee benefit expense.
|
|
Three
month periods ended March 31,
|
|
Components
of Net Periodic Benefit Cost
|
|
2007
|
|
2006
|
|
Service
cost
|
|
$
|
4,235
|
|
$
|
4,128
|
|
Interest
cost
|
|
|
5,250
|
|
|
4,885
|
|
Expected
return on assets
|
|
|
(7,442
|
)
|
|
(6,423
|
)
|
Amortization
of prior service cost
|
|
|
59
|
|
|
66
|
|
Amortization
of net actuarial loss
|
|
|
523
|
|
|
1,034
|
|
Total
net periodic benefit cost
|
|
$
|
2,625
|
|
$
|
3,690
|
|
The
expected long-term rate of return on plan assets for 2007 is 8.50 percent,
and
the assumed discount rate is 5.75 percent.
Note
D
Income
Taxes
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. BancShares and its subsidiaries are generally no
longer subject to federal, state or local income tax examinations for years
before 2002.
BancShares
adopted the provisions of FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes (FIN
48),
on January 1, 2007. As a result of the implementation of FIN 48, BancShares
recognized a decrease in the liability for uncertain tax positions of $962,
which was accounted for as an increase to the January 1, 2007 balance of
retained earnings.
The
total
amount of uncertain tax positions at the date of adoption of FIN 48 was $1,700.
The total amount of uncertain tax positions that, if recognized, would affect
the effective tax rate at the date of adoption of FIN 48 was $500. BancShares
recognizes accrued interest and penalties related to uncertain tax positions
in
tax expense. At the date of adoption of FIN 48, BancShares had recognized
approximately $700 for the payment of interest and penalties. BancShares is
not
aware of any positions for which it is reasonably possible that the total
amounts of uncertain tax positions will significantly increase or decrease
within the next twelve months.
Item
2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
INTRODUCTION
Management's
discussion and analysis of earnings and related financial data are presented
to
assist in understanding the financial condition and results of operations of
First Citizens BancShares, Inc. and Subsidiaries (BancShares). This discussion
and analysis should be read in conjunction with the unaudited Consolidated
Financial Statements and related notes presented within 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 reclassifications have no effect on shareholders'
equity or net income as previously reported.
OVERVIEW
BancShares
is a financial holding company with two wholly owned banking 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, West Virginia, Maryland and Tennessee.
ISB
operates in Georgia, Florida, Texas, New Mexico, Arizona, California, Oregon,
Washington and Colorado. ISB has announced plans to expand into Oklahoma City,
Oklahoma; Kansas City, Missouri; Kansas City, Kansas; and Dallas, Texas.
BancShares’
earnings and cash flows are derived primarily 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 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 various types of interest-earning assets such as loans and leases,
investment securities and overnight investments. We also invest in bank
premises, furniture and equipment used to conduct the subsidiaries’ commercial
banking business.
Various
external factors influence customer demand for our loan, lease and deposit
products. 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
addition to the interest rate environment, the general strength of the economy
influences demand 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.
Demand for our deposit and cash management products is highly dependent on
interest rates and, to some extent, the volatility of alternative investment
markets.
Although
we are unable to control the external factors that influence our business,
through the utilization of various liquidity, interest rate and credit risk
management tools, 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’ profitability measures have
historically compared unfavorably to the returns of similar-sized financial
holding companies. We have historically placed significant emphasis upon asset
quality, balance sheet liquidity and capital conservation, 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.
We
seek
to increase fee income in areas such as merchant processing, working capital
finance, 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. 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, changes in the yield curve and significant
shifts 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 constant and focused management attention.
PERFORMANCE
SUMMARY
BancShares
realized an increase in earnings during the first quarter of 2007 compared
to
the first quarter of 2006. Consolidated net income during the first quarter
of
2007 was $29.0 million, compared to $28.7 million earned during the
corresponding period of 2006. The annualized return on average assets was 0.75
percent during the first quarter of 2007, compared to 0.79 percent during the
same period of 2006. The annualized return on average equity was 8.88 percent
during 2007, compared to 9.72 percent during the same period of 2006. Net income
per share during the first quarter of 2007 totaled $2.78, compared to $2.75
during the first quarter of 2006, a 1.1 percent increase.
The
$327,000 or 1.1 percent earnings increase resulted from higher noninterest
revenue, lower net charge-offs and a lower effective tax rate, partially offset
by increased levels of noninterest expense and a marginal reduction in net
interest income.
Financial
Summary
|
|
|
|
|
|
|
|
|
|
Table
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
First
|
|
Fourth
|
|
Third
|
|
Second
|
|
First
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Summary
of Operations
|
|
(thousands,
except share data and ratios)
|
|
Interest
income
|
|
$
|
216,061
|
|
$
|
218,102
|
|
$
|
214,650
|
|
$
|
202,499
|
|
$
|
190,001
|
|
Interest
expense
|
|
|
99,448
|
|
|
101,215
|
|
|
96,773
|
|
|
83,566
|
|
|
72,183
|
|
Net
interest income
|
|
|
116,613
|
|
|
116,887
|
|
|
117,877
|
|
|
118,933
|
|
|
117,818
|
|
Provision
for credit losses
|
|
|
3,532
|
|
|
7,383
|
|
|
3,813
|
|
|
2,973
|
|
|
6,737
|
|
Net
interest income after provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
credit losses
|
|
|
113,081
|
|
|
109,504
|
|
|
114,064
|
|
|
115,960
|
|
|
111,081
|
|
Noninterest
income
|
|
|
71,202
|
|
|
71,381
|
|
|
72,605
|
|
|
69,609
|
|
|
65,749
|
|
Noninterest
expense
|
|
|
139,190
|
|
|
132,223
|
|
|
134,865
|
|
|
135,207
|
|
|
131,712
|
|
Income
before income taxes
|
|
|
45,093
|
|
|
48,662
|
|
|
51,804
|
|
|
50,362
|
|
|
45,118
|
|
Income
taxes
|
|
|
16,109
|
|
|
15,467
|
|
|
18,877
|
|
|
18,650
|
|
|
16,461
|
|
Net
income
|
|
$
|
28,984
|
|
$
|
33,195
|
|
$
|
32,927
|
|
$
|
31,712
|
|
$
|
28,657
|
|
Net
interest income-taxable equivalent
|
|
$
|
117,056
|
|
$
|
117,394
|
|
$
|
118,345
|
|
$
|
119,351
|
|
$
|
118,226
|
|
Selected
Quarterly Averages
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
15,572,613
|
|
$
|
15,628,835
|
|
$
|
15,477,992
|
|
$
|
15,322,373
|
|
$
|
14,699,290
|
|
Investment
securities
|
|
|
3,092,261
|
|
|
3,176,845
|
|
|
3,072,113
|
|
|
2,964,308
|
|
|
2,896,711
|
|
Loans
and leases
|
|
|
10,198,638
|
|
|
10,133,502
|
|
|
10,075,016
|
|
|
9,924,208
|
|
|
9,705,443
|
|
Interest-earning
assets
|
|
|
13,876,402
|
|
|
13,951,134
|
|
|
13,820,610
|
|
|
13,522,235
|
|
|
13,129,313
|
|
Deposits
|
|
|
12,502,206
|
|
|
12,601,708
|
|
|
12,571,525
|
|
|
12,440,125
|
|
|
12,192,664
|
|
Interest-bearing
liabilities
|
|
|
11,557,940
|
|
|
11,601,752
|
|
|
11,485,378
|
|
|
11,156,821
|
|
|
10,794,420
|
|
Long-term
obligations
|
|
|
408,277
|
|
|
424,597
|
|
|
500,564
|
|
|
466,259
|
|
|
408,946
|
|
Shareholders'
equity
|
|
$
|
1,323,244
|
|
$
|
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
|
|
Selected
Quarter-End Balances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
15,853,778
|
|
$
|
15,729,697
|
|
$
|
15,633,597
|
|
$
|
15,530,846
|
|
$
|
15,099,564
|
|
Investment
securities
|
|
|
3,031,798
|
|
|
3,221,048
|
|
|
3,118,025
|
|
|
3,024,780
|
|
|
2,896,962
|
|
Loans
and leases
|
|
|
10,221,578
|
|
|
10,239,551
|
|
|
10,129,423
|
|
|
10,029,045
|
|
|
9,810,088
|
|
Interest-earning
assets
|
|
|
14,053,224
|
|
|
13,809,196
|
|
|
13,818,528
|
|
|
13,685,530
|
|
|
13,455,968
|
|
Deposits
|
|
|
12,722,532
|
|
|
12,743,324
|
|
|
12,681,150
|
|
|
12,717,219
|
|
|
12,512,557
|
|
Interest-bearing
liabilities
|
|
|
11,671,127
|
|
|
11,612,372
|
|
|
11,510,073
|
|
|
11,395,473
|
|
|
11,038,192
|
|
Long-term
obligations
|
|
|
405,356
|
|
|
401,198
|
|
|
424,351
|
|
|
527,478
|
|
|
408,954
|
|
Shareholders'
equity
|
|
$
|
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
|
|
Profitability
Ratios (averages)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate
of return (annualized) on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
0.75
|
%
|
|
0.84
|
%
|
|
0.84
|
%
|
|
0.84
|
%
|
|
0.79
|
|
Shareholders'
equity
|
|
|
8.88
|
|
|
10.19
|
|
|
10.41
|
|
|
10.43
|
|
|
9.72
|
|
Dividend
payout ratio
|
|
|
9.89
|
|
|
8.65
|
|
|
8.70
|
|
|
9.05
|
|
|
10.00
|
|
Liquidity
and Capital Ratios (averages)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
and leases to deposits
|
|
|
81.57
|
%
|
|
80.41
|
%
|
|
80.14
|
%
|
|
79.78
|
%
|
|
79.60
|
|
Shareholders'
equity to total assets
|
|
|
8.50
|
|
|
8.27
|
|
|
8.11
|
|
|
7.96
|
|
|
8.14
|
|
Time
certificates of $100,000 or more to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
total
deposits
|
|
|
16.60
|
|
|
16.17
|
|
|
15.74
|
|
|
15.04
|
|
|
14.44
|
|
Per
Share of Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2.78
|
|
$
|
3.18
|
|
$
|
3.16
|
|
$
|
3.04
|
|
$
|
2.75
|
|
Cash
dividends
|
|
|
0.275
|
|
|
0.275
|
|
|
0.275
|
|
|
0.275
|
|
|
0.275
|
|
Book
value at period end
|
|
|
128.64
|
|
|
125.62
|
|
|
122.35
|
|
|
118.16
|
|
|
115.74
|
|
Tangible
book value at period end
|
|
|
118.10
|
|
|
115.02
|
|
|
111.68
|
|
|
107.44
|
|
|
104.97
|
|
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 maturity 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. Our investment securities portfolio includes high-quality
assets, primarily United States Treasury and government agency securities.
Generally, the investment securities portfolio grows and shrinks based on loan,
lease and deposit trends. When deposit growth exceeds loan and lease demand,
we
invest excess funds in the securities portfolio. Conversely, 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.
During
the first quarter of 2007, interest-earning assets averaged $13.87 billion,
an
increase of $747.1 million or 5.7 percent from the first quarter of 2006. This
increase reflects growth in both the loan and investment securities
portfolios.
Loans
and
Leases. At March 31, 2007 and 2006, loans and leases totaled $10.22 billion
and
$9.81 billion, respectively. The $411.5 million or 4.2 percent growth from
March
31, 2006 to March 31, 2007 resulted from growth within the commercial mortgage
and commercial and industrial loan portfolios.
Commercial
real estate loans totaled $3.74 billion at March 31, 2007, representing 36.6
percent of total loans and leases. This represents an increase of $209.7 million
or 5.9 percent since March 31, 2006. Although demand for commercial real estate
financing remains stable for owner-occupied medical and professional facilities,
competition for this type of high-quality lending continues to be strong. 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.
Commercial
and industrial loans equaled $1.51 billion or 14.8 percent of total loans and
leases outstanding. These loans have increased $184.6 million or 13.9 percent
since March 31, 2006. Healthy customer demand and franchise expansion have
supported the growth of these loans.
At
March
31, 2007, revolving mortgage loans totaled $1.30 billion at March 31, 2007,
representing 12.7 percent of total loans outstanding. This component of the
loan
and lease portfolio has declined slightly compared to March 31, 2006, reflecting
continued migration of customers to closed-end fixed-rate lending alternatives.
This trend results from the yield curve inversion, which has caused the
short-term rate on variable mortgage products to exceed those offered on
longer-term fixed-rate products.
Residential
mortgage loans totaled $1.02 billion or 10.0 percent of total loans at March
31,
2007, an increase of $41.4 million or 4.2 percent since March 31, 2006. Growth
has been caused primarily by loans within the medical customer base.
Our
continuing expansion into new markets has allowed us to mitigate our historic
exposure to geographic concentration in North Carolina and Virginia. As we
continue 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
anticipate growth in commercial mortgage and commercial and industrial loans
in
2007, as our expansion into new markets translates into modestly higher levels
of loan and lease demand among our business customers. Our continued expansion
will likewise continue to 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.
Loans
and Leases
|
|
|
|
|
|
|
|
|
|
Table
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
First
|
|
Fourth
|
|
Third
|
|
Second
|
|
First
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Real
estate:
|
|
(thousands)
|
|
Construction
and land development
|
|
$
|
779,718
|
|
$
|
783,680
|
|
$
|
833,505
|
|
$
|
822,687
|
|
$
|
821,477
|
|
Commercial
mortgage
|
|
|
3,739,948
|
|
|
3,725,752
|
|
|
3,626,600
|
|
|
3,591,372
|
|
|
3,530,296
|
|
Residential
mortgage
|
|
|
1,020,945
|
|
|
1,025,235
|
|
|
1,040,202
|
|
|
1,007,616
|
|
|
979,572
|
|
Revolving
mortgage
|
|
|
1,301,311
|
|
|
1,326,403
|
|
|
1,331,055
|
|
|
1,368,584
|
|
|
1,359,483
|
|
Other
mortgage
|
|
|
157,576
|
|
|
165,223
|
|
|
167,238
|
|
|
172,322
|
|
|
173,819
|
|
Total
real estate loans
|
|
|
6,999,498
|
|
|
7,026,293
|
|
|
6,998,600
|
|
|
6,962,581
|
|
|
6,864,647
|
|
Commercial
and industrial
|
|
|
1,510,754
|
|
|
1,493,326
|
|
|
1,448,554
|
|
|
1,417,341
|
|
|
1,326,182
|
|
Consumer
|
|
|
1,345,631
|
|
|
1,360,524
|
|
|
1,331,597
|
|
|
1,330,852
|
|
|
1,312,790
|
|
Lease
financing
|
|
|
302,581
|
|
|
294,366
|
|
|
284,230
|
|
|
259,253
|
|
|
246,544
|
|
Other
|
|
|
63,114
|
|
|
65,042
|
|
|
66,442
|
|
|
59,018
|
|
|
59,925
|
|
Total
loans and leases
|
|
|
10,221,578
|
|
|
10,239,551
|
|
|
10,129,423
|
|
|
10,029,045
|
|
|
9,810,088
|
|
Less
allowance for loan and lease losses
|
|
|
132,640
|
|
|
132,004
|
|
|
131,652
|
|
|
130,532
|
|
|
130,222
|
|
Net
loans and leases
|
|
$
|
10,088,938
|
|
$
|
10,107,547
|
|
$
|
9,997,771
|
|
$
|
9,898,513
|
|
$
|
9,679,866
|
|
Investment
Securities. Investment securities available for sale equaled $2.93 billion
at
March 31, 2007, compared to $2.40 billion at March 31, 2006. The $539.0 million
or 22.5 percent increase resulted from deposit and short-term borrowings growth
that exceeded loan and lease demand and the reinvestment of proceeds from
maturing held-to-maturity securities into newly purchased securities classified
as available-for- sale. Available-for-sale securities are reported at their
aggregate fair value. Investment securities held to maturity totaled $96.8
million at March 31, 2007, compared to $501.0 million at March 31, 2006.
Securities that are classified as held-to-maturity reflect BancShares’ ability
and positive intent to hold those investments until maturity. Table 3 presents
detailed information relating to the investment securities
portfolio.
Income
on
Interest-Earning Assets. Interest income amounted to $216.1 million during
the
first quarter of 2007, a $26.1 million or 13.7 percent increase from the first
quarter of 2006. Improved yields and growth in the volume of interest-earning
assets caused the increase in interest income when compared to the same period
of 2006. The taxable-equivalent yield on interest-earning assets for the first
quarter of 2007 equaled 6.31 percent, compared to 5.87 percent for the
corresponding period of 2006.
Loan
interest income for the first quarter of 2007 was $175.0 million, an increase
of
$15.8 million or 9.9 percent from the first quarter of 2006, the combined result
of balance sheet growth and higher yields. The taxable-equivalent yield on
the
loan portfolio was 6.96 percent during the first quarter of 2007, up 30 basis
points from the same period of 2006. The higher loan yields resulted from new
loans originated at current market rates and repricing of outstanding
variable-rate loans. Average loans increased $493.2 million or 5.1 percent
from
2006 to 2007.
Interest
income earned on the investment securities portfolio amounted to $33.6 million
during the first quarter of 2007 and $25.1 million during the same period of
2006, an increase of $8.5 million or 34.0 percent. This increase in income
is
the result of improved yields and higher average volume. The taxable-equivalent
yield increased 89 basis points from 3.48 percent in the first quarter of 2006
to 4.37 percent in the first quarter of 2007 due to higher market rates. Average
investment securities increased $195.6 million from $2.90 billion during the
first quarter of 2006 to $3.09 billion during the first quarter of 2007.
Maturing securities not needed to fund loan and lease growth were reinvested
in
higher-yielding securities.
Interest
income from overnight investments amounted to $7.5 million during the first
quarter of 2007, an increase of $1.7 million from the $5.7 million earned during
the first quarter of 2006, the combined result of a 75 basis point yield
increase and $58.3 million growth in average overnight investments.
Investment
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2007
|
|
March
31, 2006
|
|
|
|
|
|
|
|
Average
|
|
Taxable
|
|
|
|
|
|
Average
|
|
Taxable
|
|
|
|
|
|
Fair
|
|
Maturity
|
|
Equivalent
|
|
|
|
Fair
|
|
Maturity
|
|
Equivalent
|
|
|
|
Cost
|
|
Value
|
|
(Yrs./Mos.)
|
|
Yield
|
|
Cost
|
|
Value
|
|
(Yrs./Mos.)
|
|
Yield
|
|
|
|
(thousands)
|
|
Investment
securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.
S. Government:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
one year
|
|
$
|
1,522,251
|
|
$
|
1,515,123
|
|
|
0/6
|
|
|
4.06
|
%
|
$
|
1,284,299
|
|
$
|
1,264,371
|
|
|
0/5
|
|
|
3.16
|
%
|
One
to five years
|
|
|
1,267,976
|
|
|
1,268,807
|
|
|
1/7
|
|
|
4.92
|
|
|
1,009,952
|
|
|
997,206
|
|
|
1/7
|
|
|
4.10
|
|
Five
to ten years
|
|
|
6,335
|
|
|
6,139
|
|
|
6/4
|
|
|
4.88
|
|
|
1,852
|
|
|
1,788
|
|
|
7/3
|
|
|
4.99
|
|
Over
ten years
|
|
|
71,151
|
|
|
70,047
|
|
|
27/5
|
|
|
5.45
|
|
|
55,963
|
|
|
54,198
|
|
|
27/11
|
|
|
5.28
|
|
Total
|
|
|
2,867,713
|
|
|
2,860,116
|
|
|
1/0
|
|
|
5.45
|
|
|
2,352,066
|
|
|
2,317,563
|
|
|
1/7
|
|
|
3.62
|
|
State,
county and municipal:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
one year
|
|
|
871
|
|
|
870
|
|
|
0/3
|
|
|
3.02
|
|
|
1,076
|
|
|
1,074
|
|
|
0/3
|
|
|
2.37
|
|
One
to five years
|
|
|
2,726
|
|
|
2,692
|
|
|
2/6
|
|
|
3.97
|
|
|
2,872
|
|
|
2,823
|
|
|
2/5
|
|
|
3.54
|
|
Five
to ten years
|
|
|
470
|
|
|
476
|
|
|
5/11
|
|
|
4.90
|
|
|
1,114
|
|
|
1,104
|
|
|
6/1
|
|
|
4.65
|
|
Over
ten years
|
|
|
211
|
|
|
211
|
|
|
24/4
|
|
|
3.46
|
|
|
145
|
|
|
145
|
|
|
26/8
|
|
|
3.01
|
|
Total
|
|
|
4,278
|
|
|
4,249
|
|
|
3/6
|
|
|
3.86
|
|
|
5,207
|
|
|
5,145
|
|
|
3/5
|
|
|
3.52
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over
ten years
|
|
|
9,566
|
|
|
10,039
|
|
|
11/2
|
|
|
10.66
|
|
|
11,740
|
|
|
11,740
|
|
|
11/8
|
|
|
11.09
|
|
Total
|
|
|
9,566
|
|
|
10,039
|
|
|
11/2
|
|
|
10.66
|
|
|
11,740
|
|
|
11,740
|
|
|
11/8
|
|
|
11.09
|
|
Equity
securities
|
|
|
34,297
|
|
|
60,591
|
|
|
|
|
|
|
|
|
36,081
|
|
|
61,553
|
|
|
|
|
|
|
|
Total
investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available
for sale
|
|
$
|
2,915,854
|
|
$
|
2,934,995
|
|
|
|
|
|
|
|
$
|
2,405,094
|
|
$
|
2,396,001
|
|
|
|
|
|
|
|
Investment
securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.
S. Government:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
one year
|
|
$
|
88,294
|
|
$
|
87,889
|
|
|
0/4
|
|
|
3.71
|
%
|
$
|
398,692
|
|
$
|
395,491
|
|
|
0/7
|
|
|
3.12
|
%
|
One
to five years
|
|
|
3
|
|
|
3
|
|
|
2/11
|
|
|
8.00
|
|
|
91,589
|
|
|
90,213
|
|
|
1/4
|
|
|
3.71
|
|
Five
to ten years
|
|
|
1,175
|
|
|
1,165
|
|
|
9/11
|
|
|
5.71
|
|
|
15
|
|
|
13
|
|
|
9/10
|
|
|
5.22
|
|
Over
ten years
|
|
|
5,500
|
|
|
5,502
|
|
|
10/1
|
|
|
5.59
|
|
|
8,841
|
|
|
8,834
|
|
|
11/7
|
|
|
5.59
|
|
Total
|
|
|
94,972
|
|
|
94,559
|
|
|
1/0
|
|
|
3.85
|
|
|
499,137
|
|
|
494,551
|
|
|
0/11
|
|
|
3.27
|
|
Within
one year
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
One
to five years
|
|
|
149
|
|
|
154
|
|
|
4/1
|
|
|
5.88
|
|
|
147
|
|
|
154
|
|
|
4/1
|
|
|
5.88
|
|
Over
ten years
|
|
|
1,432
|
|
|
1,548
|
|
|
12/1
|
|
|
6.02
|
|
|
1,427
|
|
|
1,553
|
|
|
12/1
|
|
|
6.02
|
|
Total
|
|
|
1,581
|
|
|
1,702
|
|
|
10/3
|
|
|
6.01
|
|
|
1,574
|
|
|
1,707
|
|
|
11/3
|
|
|
6.01
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
one year
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
One
to five years
|
|
|
250
|
|
|
250
|
|
|
1/4
|
|
|
3.25
|
|
|
250
|
|
|
250
|
|
|
3/4
|
|
|
7.75
|
|
Five
to ten years
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
Total
|
|
|
250
|
|
|
250
|
|
|
1/4
|
|
|
3.25
|
|
|
250
|
|
|
250
|
|
|
3/4
|
|
|
7.75
|
|
Total
investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
held
to maturity
|
|
|
96,803
|
|
|
96,511
|
|
|
1/0
|
|
|
3.88
|
|
|
500,961
|
|
|
496,508
|
|
|
0/11
|
|
|
3.28
|
|
Total
investment securities
|
|
$
|
3,012,657
|
|
$
|
3,031,506
|
|
|
|
|
|
|
|
$
|
2,906,055
|
|
$
|
2,892,509
|
|
|
|
|
|
|
|
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 tax purposes
and
6.9% for state income taxes for all periods.
|
INTEREST-BEARING
LIABILITIES
Interest-bearing
liabilities include our interest-bearing deposits as well as short-term
borrowings and long-term obligations. Deposits represent our primary funding
source, although we also utilize non-deposit borrowings to stabilize our
liquidity base and, in some cases, to fulfill commercial customer requirements
for cash management services. Certain of our long-term borrowings also provide
capital strength under existing guidelines established by the Federal Reserve
Bank and other banking regulators.
Deposits.
At March 31, 2007, total deposits equaled $12.72 billion, an increase of $210.0
million or 1.7 percent over March 31, 2006. Average interest-bearing deposits
were $9.95 billion during the first quarter of 2007, an increase of $347.6
million or 3.6 percent from the first quarter of 2006. Average time deposits
increased $427.2 million or 9.1 percent to $5.11 billion from the first quarter
of 2006 to the same period of 2007. During the first quarter of 2007, money
market accounts averaged $2.77 billion, compared to $2.66 billion in the first
quarter of 2006. Partially offsetting these increases, average balances of
both
Checking With Interest and savings accounts declined marginally.
We
attribute the growth of time deposits to the higher interest rate environment,
and expect that the mix of time deposit balances within interest-bearing
deposits will continue to increase throughout much of 2007 due to generally
higher market rates than those paid on existing accounts. Competition for
deposit business in our market areas is extremely intense. While we have access
to non-deposit borrowing sources, we prefer to fund loan and lease demand with
traditional bank deposits. Therefore, generating acceptable levels of deposit
growth is a critical challenge for us, particularly during periods of strong
loan and lease demand.
Short-term
Borrowings. At March 31, 2007, short-term borrowings totaled $1.25 billion
compared to $850.6 million at March 31, 2006. For the quarters ended March
31,
2007 and 2006, short-term borrowings averaged $1.20 billion and $784.7 million,
respectively. The growth in short-term borrowings was the result of
significantly higher customer demand for our commercial master note and
overnight repurchase obligation products, key offerings within our cash
management suite of products.
Expense
on Interest-Bearing Liabilities. Interest expense amounted to $99.4 million
during the first quarter of 2007, a $27.3 million or 37.8 percent increase
from
the first quarter of 2006. The higher interest expense was the result of higher
rates and higher average volume. The rate on average interest-bearing
liabilities equaled 3.49 percent during the first quarter of 2007, a 78 basis
point increase in the aggregate blended rate on interest-bearing liabilities
as
compared to the first quarter of 2006. Average interest-bearing liabilities
increased $763.5 million or 7.1 percent from first quarter of 2006 to the first
quarter of 2007.
NET
INTEREST INCOME
Net
interest income totaled $116.6 million during the first quarter of 2007, a
decrease of $1.2 million or 1.0 percent from the first quarter of 2006. The
taxable-equivalent net yield on interest-earning assets equaled 3.42 percent
for
the first quarter of 2007, compared to the 3.65 percent achieved for the first
quarter of 2006. This 23 basis point reduction primarily resulted from the
unfavorable impact of the flat yield curve which has persisted since the first
quarter of 2006.
Net
interest income during the first quarter of 2007 was $274,000 less than the
$116.9 million recognized during the fourth quarter of 2006. However, the
taxable-equivalent net yield on interest-earning assets improved slightly from
the 3.34 percent recorded during the fourth quarter of 2006.
Our
asset/liability management strategy continues to focus on maintaining high
levels of balance sheet liquidity and managing our interest rate risk. We
maintain portfolios of interest-earning assets and interest-bearing liabilities
with maturities or repricing characteristics that will protect against wide
interest rate fluctuations, thereby limiting, to the extent possible, the
ultimate interest rate exposure.
Consolidated
Taxable Equivalent Rate/Volume Variance Analysis - First
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Increase
(decrease) due to:
|
|
|
|
|
|
Interest
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Income/
|
|
Yield/
|
|
Average
|
|
Income/
|
|
Yield/
|
|
|
|
Yield/
|
|
Total
|
|
(thousands)
|
|
Balance
|
|
Expense
|
|
Rate
|
|
Balance
|
|
Expense
|
|
Rate
|
|
Volume
|
|
Rate
|
|
Change
|
|
Assets
|
|
(thousands)
|
Loans
and leases
|
|
$
|
10,198,638
|
|
$
|
175,453
|
|
|
6.96
|
%
|
$
|
9,705,443
|
|
$
|
159,587
|
|
|
6.66
|
%
|
$
|
8,393
|
|
$
|
7,473
|
|
$
|
15,866
|
|
Investment
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.
S. Government
|
|
|
3,014,804
|
|
|
32,744
|
|
|
4.37
|
|
|
2,816,950
|
|
|
24,285
|
|
|
3.47
|
|
|
1,951
|
|
|
6,508
|
|
|
8,459
|
|
State,
county and municipal
|
|
|
5,830
|
|
|
72
|
|
|
5.01
|
|
|
6,745
|
|
|
87
|
|
|
5.23
|
|
|
(12
|
)
|
|
(3
|
)
|
|
(15
|
)
|
Other
|
|
|
71,627
|
|
|
774
|
|
|
4.38
|
|
|
73,016
|
|
|
711
|
|
|
3.95
|
|
|
(14
|
)
|
|
77
|
|
|
63
|
|
Total
investment securities
|
|
|
3,092,261
|
|
|
33,590
|
|
|
4.37
|
|
|
2,896,711
|
|
|
25,083
|
|
|
3.48
|
|
|
1,925
|
|
|
6,582
|
|
|
8,507
|
|
Overnight
investments
|
|
|
585,503
|
|
|
7,461
|
|
|
5.17
|
|
|
527,159
|
|
|
5,739
|
|
|
4.42
|
|
|
691
|
|
|
1,031
|
|
|
1,722
|
|
Total
interest-earning assets
|
|
$
|
13,876,402
|
|
$
|
216,504
|
|
|
6.31
|
%
|
$
|
13,129,313
|
|
$
|
190,409
|
|
|
5.87
|
%
|
$
|
11,009
|
|
$
|
15,086
|
|
$
|
26,095
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Checking
With Interest
|
|
$
|
1,475,547
|
|
$
|
454
|
|
|
0.12
|
%
|
$
|
1,561,441
|
|
$
|
469
|
|
|
0.12
|
%
|
$
|
(20
|
)
|
$
|
5
|
|
$
|
(15
|
)
|
Savings
|
|
|
592,804
|
|
|
311
|
|
|
0.21
|
|
|
691,093
|
|
|
362
|
|
|
0.21
|
|
|
(51
|
)
|
|
-
|
|
|
(51
|
)
|
Money
market accounts
|
|
|
2,768,393
|
|
|
22,555
|
|
|
3.30
|
|
|
2,663,856
|
|
|
16,169
|
|
|
2.46
|
|
|
751
|
|
|
5,635
|
|
|
6,386
|
|
Time
deposits
|
|
|
5,111,594
|
|
|
56,691
|
|
|
4.50
|
|
|
4,684,360
|
|
|
40,742
|
|
|
3.53
|
|
|
4,232
|
|
|
11,717
|
|
|
15,949
|
|
Total
interest-bearing deposits
|
|
|
9,948,338
|
|
|
80,011
|
|
|
3.26
|
|
|
9,600,750
|
|
|
57,742
|
|
|
2.44
|
|
|
4,912
|
|
|
17,357
|
|
|
22,269
|
|
Federal
funds purchased
|
|
|
78,535
|
|
|
1,002
|
|
|
5.17
|
|
|
47,080
|
|
|
506
|
|
|
4.36
|
|
|
370
|
|
|
126
|
|
|
496
|
|
Repurchase
agreements
|
|
|
272,767
|
|
|
2,469
|
|
|
3.67
|
|
|
165,737
|
|
|
1,188
|
|
|
2.91
|
|
|
869
|
|
|
412
|
|
|
1,281
|
|
Master
notes
|
|
|
774,306
|
|
|
8,295
|
|
|
4.34
|
|
|
509,145
|
|
|
4,685
|
|
|
3.73
|
|
|
2,641
|
|
|
969
|
|
|
3,610
|
|
Other
short-term borrowings
|
|
|
75,717
|
|
|
916
|
|
|
4.91
|
|
|
62,762
|
|
|
613
|
|
|
3.96
|
|
|
141
|
|
|
162
|
|
|
303
|
|
Long-term
obligations
|
|
|
408,277
|
|
|
6,755
|
|
|
6.62
|
|
|
408,946
|
|
|
7,449
|
|
|
7.29
|
|
|
(15
|
)
|
|
(679
|
)
|
|
(694
|
)
|
Total
interest-bearing liabilities
|
|
$
|
11,557,940
|
|
$
|
99,448
|
|
|
3.49
|
%
|
$
|
10,794,420
|
|
$
|
72,183
|
|
|
2.71
|
%
|
$
|
8,918
|
|
$
|
18,347
|
|
$
|
27,265
|
|
Interest
rate spread
|
|
|
|
|
|
|
|
|
2.82
|
%
|
|
|
|
|
|
|
|
3.16
|
%
|
|
|
|
|
|
|
|
|
|
Net
interest income and net yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on
interest-earning assets
|
|
|
|
|
$
|
117,056
|
|
|
3.42
|
%
|
|
|
|
$
|
118,226
|
|
|
3.65
|
%
|
$
|
2,091
|
|
$
|
(3,261
|
)
|
$
|
(1,170
|
)
|
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 statutory federal income tax rate of 35%
and
state income tax rate of 6.90% for each period. The taxable-equivalent
adjustment was $443 for 2007 and $408 for 2006.
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,
various types of commission-based income, fees from processing services and
various types of revenues derived from wealth management services.
During
the first three months of 2007, noninterest income amounted to $71.2 million,
compared to $65.7 million during the same period of 2006. The $5.5 million
or
8.3 percent increase was primarily due to improvements in cardholder and
merchant services income, commission income generated by First Citizens Investor
Services and the working capital finance group, mortgage income and fees from
processing services.
Cardholder
and merchant services generated $22.4 million during the first quarter of 2007,
an increase of $3.9 million or 21.4 percent compared to the first quarter of
2006. This increase resulted from higher merchant discount and higher
interchange income, the result of growth in transaction volumes generated by
both debit and credit cardholders.
Within
commission income, fees of $5.4 million generated by broker-dealer activities
increased 18.1 percent due to strong market conditions and higher referral
activity generated from the branch network. The $1.6 million of commission
income generated by the working capital finance group increased 81.8 percent
as
receivables purchased continued to surge.
Fees
from
processing services totaled $8.2 million in the first quarter of 2007 and $6.9
million in the first quarter of 2006. The $1.3 million or 18.5 percent increase
was the combined result of increased volume and rate changes that were effective
January 1, 2007.
Service
charges on deposit accounts generated $17.2 million and $18.2 million for the
first quarter of 2007 and 2006, respectively. The $1.0 million or 5.8 percent
decrease was primarily due to lower bad debt and overdraft charges. Commercial
service charges also declined, the result of higher interest rates, which reduce
service charge income earned on commercial analysis accounts.
NONINTEREST
EXPENSE
The
primary components of noninterest expense are salaries and related employee
benefit costs, occupancy expenses related to branch offices and support
facilities, and equipment costs related to branch offices and technology.
Noninterest
expense equaled $139.2 million for the first three months of 2007, a $7.5
million or 5.7 percent increase over the $131.7 million recorded during the
same
period of 2006. As a result of its continued growth and expansion, ISB’s
noninterest expense increased from $18.0 million for the first quarter of 2006
to $19.1 million in 2007, a $1.1 million or 6.2 percent increase.
Salaries
and wages increased $2.6 million or 4.7 percent during the first quarter of
2007
when compared to the same period of 2006. The increase resulted from workforce
expansions both as a result of new branch offices and headcount additions in
various support functions and 2006 merit increases. Employee benefits expense
totaled $13.2 million for the first three months of 2007, a decrease of
$766,000. This 5.5 percent decrease resulted from reduced pension
costs.
Occupancy
expense amounted to $13.9 million during the first quarter of 2007 and $12.9
million during the first quarter of 2006. The $980,000 or 7.6 percent increase
resulted from higher building depreciation, utilities, local taxes and other
costs arising from branch expansion. Equipment costs rose $1.1 million or 8.7
percent from $12.7 million in the first quarter of 2006 to $13.8 million in
the
first quarter of 2007, primarily due to higher technology costs.
Other
expenses increased $3.5 million or 9.8 percent from the first quarter of 2006
to
the first quarter of 2007. This increase includes a $1.5 million increase in
the
cost of cardholder reward programs, a $432,000 increase in card processing
costs
and smaller increases among advertising and losses incurred on asset sales.
Partially offsetting these increases, declines were noted in sponsorships and
promotions, recording fees and courier agency costs.
INCOME
TAXES
BancShares
continually monitors and evaluates the potential impact of current events on
the
estimates used to establish income tax expenses and income tax liabilities.
On a
periodic basis, we evaluate our 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.
Income
tax expense amounted to $16.1 million during the three months ended March 31,
2007, compared to $16.5 million during the same period of 2006. The 2.1 percent
decrease in income tax expense was primarily the result of lower blended state
tax rates and changes to the deferred tax asset valuation allowance. The
effective tax rates for these periods were 35.7 percent and 36.5 percent,
respectively.
On
January 1, 2007, we adopted the provisions of FASB Interpretation No. 48
Accounting
for Uncertainty in Income Taxes
(FIN
48). FIN 48 clarifies uncertainty in income taxes recognized by establishing
a
recognition threshold and a measurement attribute for the financial statement
treatment of a tax position taken or expected to be taken in a tax return.
The
adoption of FIN 48 resulted in a reduction in the liability for uncertain tax
positions, which was offset by a $962,000 increase in the beginning balance
of
retained earnings.
SHAREHOLDERS'
EQUITY AND CAPITAL ADEQUACY
BancShares
continues to exceed minimum regulatory capital standards, and the banking
subsidiaries remain well-capitalized. At March 31, 2007 and 2006, the leverage
capital ratios of BancShares were 9.60 percent and 9.26 percent, respectively,
surpassing the minimum level of 3 percent. As a percentage of risk-adjusted
assets, BancShares' Tier 1 capital ratios were 13.09 percent at March 31, 2007
and 12.55 percent at March 31, 2006. The minimum ratio allowed is 4 percent
of
risk-adjusted assets. The total risk-adjusted capital ratios were 15.52 percent
at March 31, 2007 and 15.07 percent as of March 31, 2006. The minimum total
capital ratio is 8 percent.
The
continued de novo growth and operating losses of ISB have required BancShares
to
infuse significant amounts of capital into ISB to support its expanding balance
sheet. BancShares infused $5.0 million into ISB during the first quarter of
2007. Since ISB was formed in 1997, BancShares has provided $285.0 million
in
capital. Losses incurred since ISB’s inception total $27.3 million. BancShares’
prospective capacity to provide capital to support the growth and expansion
of
ISB is highly dependent upon FCB’s ability to return capital through dividends
to BancShares.
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.
The
most
prominent risk exposures are credit, interest rate and liquidity risk. Credit
risk is the risk of not collecting the amount of a loan, lease or investment
security when it is contractually due. Interest rate risk is the potential
reduction of net interest income as a result of changes in market interest
rates. Liquidity risk is the possible inability to fund obligations to
depositors, creditors, investors or borrowers.
Credit
Risk. The maintenance of excellent asset quality is one of our key performance
measures. 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 much of the credit decision process is 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 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.
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 recent expansion of our branch network has allowed us to
mitigate our historic exposure to geographic risk concentration in North
Carolina and Virginia.
In
recent
years, we have aggressively sought opportunities to provide financial services
to businesses associated with and professionals within the medical community.
Due to strong loan growth within this segment of our loan and lease portfolio,
our loans and leases to borrowers in medical, dental or related fields totaled
$1.84 billion as of March 31, 2007, which represents 18.0 percent of total
loans
and leases outstanding, compared to $1.56 billion or 15.9 percent of loans
and
leases at March 31, 2006. Except for this single concentration, no other
industry represented more than 10 percent of total loans and leases outstanding
at March 31, 2007.
Nonperforming
Assets. Nonperforming assets include nonaccrual loans and leases and other
real
estate. Other real estate includes foreclosed property as well as branch
facilities that we have closed but not sold. At March 31, 2007, BancShares'
nonperforming assets amounted to $21.2 million or 0.21 percent of loans and
leases plus foreclosed properties, compared to $21.4 million at March 31, 2006.
Management views these levels of nonperforming assets as evidence of strong
asset quality. Management continues to closely monitor nonperforming assets,
taking necessary actions to minimize potential exposure.
Summary
of Loan and Lease Loss Experience and Risk
Elements
|
|
|
|
|
|
Table
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
First
|
|
Fourth
|
|
Third
|
|
Second
|
|
First
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
|
|
(thousands,
except ratios)
|
|
Allowance
for credit losses at beginning of period
|
|
$
|
138,646
|
|
$
|
138,246
|
|
$
|
137,121
|
|
$
|
137,145
|
|
$
|
135,770
|
|
Provision
for credit losses
|
|
|
3,532
|
|
|
7,383
|
|
|
3,813
|
|
|
2,973
|
|
|
6,737
|
|
Adjustment
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
(3,980
|
)
|
|
(8,162
|
)
|
|
(4,189
|
)
|
|
(4,933
|
)
|
|
(7,053
|
)
|
Recoveries
|
|
|
1,298
|
|
|
1,179
|
|
|
1,501
|
|
|
1,936
|
|
|
1,691
|
|
Net
charge-offs
|
|
|
(2,682
|
)
|
|
(6,983
|
)
|
|
(2,688
|
)
|
|
(2,997
|
)
|
|
(5,362
|
)
|
Allowance
for credit losses at end of period
|
|
$
|
139,496
|
|
$
|
138,646
|
|
$
|
138,246
|
|
$
|
137,121
|
|
$
|
137,145
|
|
Allowance
for credit losses includes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan and lease losses
|
|
$
|
132,640
|
|
$
|
132,004
|
|
$
|
131,652
|
|
$
|
130,532
|
|
$
|
130,222
|
|
Liability
for unfunded credit commitments
|
|
|
6,856
|
|
|
6,642
|
|
|
6,594
|
|
|
6,589
|
|
|
6,923
|
|
Allowance
for credit losses at end of period
|
|
$
|
139,496
|
|
$
|
138,646
|
|
$
|
138,246
|
|
$
|
137,121
|
|
$
|
137,145
|
|
Historical
Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
loans and leases
|
|
$
|
10,198,638
|
|
$
|
10,133,502
|
|
$
|
10,075,016
|
|
$
|
9,924,208
|
|
$
|
9,705,443
|
|
Loans
and leases at period-end
|
|
|
10,221,578
|
|
|
10,239,551
|
|
|
10,129,423
|
|
|
10,029,045
|
|
|
9,810,088
|
|
Risk
Elements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual
loans and leases
|
|
$
|
14,943
|
|
$
|
14,882
|
|
$
|
18,348
|
|
$
|
15,573
|
|
$
|
15,844
|
|
Other
real estate
|
|
|
6,245
|
|
|
6,028
|
|
|
6,711
|
|
|
8,461
|
|
|
5,573
|
|
Total
nonperforming assets
|
|
$
|
21,188
|
|
$
|
20,910
|
|
$
|
25,059
|
|
$
|
24,034
|
|
$
|
21,417
|
|
Accruing
loans and leases 90 days or more past due
|
|
$
|
8,396
|
|
$
|
5,185
|
|
$
|
6,974
|
|
$
|
7,534
|
|
$
|
6,729
|
|
Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
charge-offs (annualized) to average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
total
loans and leases
|
|
|
0.11
|
%
|
|
0.27
|
|
|
0.11
|
%
|
|
0.12
|
|
|
0.22
|
|
Percent
of loans and leases at period-end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan and lease losses
|
|
|
1.30
|
|
|
1.29
|
|
|
1.29
|
|
|
1.30
|
|
|
1.33
|
|
Reserve
for unfunded commitments
|
|
|
0.07
|
|
|
0.06
|
|
|
0.07
|
|
|
0.07
|
|
|
0.07
|
|
Allowance
for credit losses
|
|
|
1.36
|
|
|
1.35
|
|
|
1.36
|
|
|
1.37
|
|
|
1.40
|
|
Nonperforming
assets to total loans and leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
plus
other real estate
|
|
|
0.21
|
|
|
0.20
|
|
|
0.25
|
|
|
0.24
|
|
|
0.22
|
|
Allowance
for credit losses. At March 31, 2007, the allowance for credit losses totaled
$139.5 million or 1.36 percent of total loans and leases, compared to 1.40
percent at March 31, 2006. The allowance for credit losses includes the
allowance for loan and lease losses and the reserve for unfunded credit
commitments. We continuously analyze the growth and risk characteristics of
the
loan and lease portfolio under current economic conditions in order to evaluate
the adequacy of the allowance. Such factors as the financial condition of
borrowers, fair market value of collateral and other considerations are
recognized in estimating probable credit losses.
Management
considers the established allowance adequate to absorb estimated probable losses
that relate to loans and leases outstanding at March 31, 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 credit losses. Such
agencies may require the recognition of adjustments to the allowance based
on
their judgments of information available to them at the time of their
examination.
The
provision for credit losses charged to operations during the first quarter
of
2007 was $3.5 million, compared to $6.7 million during the first quarter of
2006. The $3.2 million decrease in the provision for credit losses during 2007
resulted primarily from lower net charge-offs. Net charge-offs during the first
quarter of 2007 equaled $2.7 million compared to $5.4 million during the first
quarter of 2006. On an annualized basis, net charge-offs represent 0.11 percent
of average loans and leases during the first quarter of 2007 compared to 0.22
percent in the first quarter of 2006. Table 5 provides details concerning the
allowance and provision for credit losses during the past five quarters.
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.
External 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
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.
Liquidity
Risk. Liquidity risk results from the mismatching of asset and liability cash
flows. BancShares manages this risk by structuring its balance sheet prudently
and by maintaining various borrowing resources to fund potential cash needs.
BancShares has historically maintained a strong focus on liquidity, and our
deposit base represents our primary liquidity source. Through our deposit
pricing strategies, we have the ability to stimulate or curtail deposit growth.
BancShares also maintains additional sources for borrowed funds through federal
funds lines of credit and other borrowing facilities. At March 31, 2007,
BancShares had access to $525.0 million in unfunded borrowings through its
correspondent bank network.
Once
we
have generated the needed liquidity and satisfied our loan and lease demand,
residual liquidity is invested in overnight and longer-term investment products.
Investment securities available for sale provide immediate liquidity as needed.
In addition, investment securities held to maturity provide an ongoing liquidity
source based on the scheduled maturity dates of the securities.
SEGMENT
REPORTING
BancShares
conducts its banking operations through its two banking 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 geographic segregation.
Although
FCB has grown through acquisition in certain of its markets, throughout its
history the majority of its expansion has been accomplished on a de novo basis.
However, because of FCB’s size, market share and maturity as well as the current
modest expansion of its branch network, the costs associated with de novo
branching are not material to FCB’s financial performance. Since it first opened
in 1997, ISB has followed a similar business model for growth and expansion.
Yet, due to the magnitude of 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 operating revenues until the third year after initial opening.
ISB’s rapid growth in new markets in recent years has continued to adversely
impact its financial performance.
IronStone
Bank. At March 31, 2007, ISB operated 58 branches in Florida, Georgia, Texas,
New Mexico, Arizona, California, Oregon, Washington and Colorado. ISB continues
to focus on markets with favorable growth prospects. At the beginning of 2007,
IronStone announced plans to expand into new areas, Oklahoma City, Kansas City
and Dallas. Our business model for these new markets has two primary
requirements. First, we recruit experienced bankers who are established in
the
markets we are entering and who are focused on strong asset quality and
delivering high quality customer service. Second, we occupy attractive branch
facilities located in areas conducive to attracting medical and professional
customers. While these are costly goals, we believe that they are critical
to
establishing a solid foundation for future success in new markets.
ISB’s
total assets equaled $2.23 billion at March 31, 2007 compared to $1.95 billion
at March 31, 2006, an increase of $280.1 million or 14.4 percent. Net interest
income decreased $375,000 or 2.3 percent during the first quarter of 2007,
the
result of a lower net yield on interest-earning assets.
The
provision for credit losses decreased $648,000 during the first quarter of
2007
due to lower provision expense attributable to reduced levels of loan growth.
Net charge-offs increased from $141,000 in the first quarter of 2006 to $219,000
in the first quarter of 2007. On an annualized basis, the ratio of current
quarter net charge-offs to average loans and leases outstanding equaled 0.05
percent, compared to 0.03 percent in the prior year.
ISB’s
noninterest income increased $657,000 or 25.8 percent during the first quarter
of 2007 as cardholder and merchant services income increased $307,000 and
working capital finance commissions increased $278,000.
Noninterest
expense increased $1.1 million or 6.2 percent during the first quarter of 2007,
versus the same period of 2006. Personnel costs increased $162,000 or 1.8
percent, while occupancy expense was up $507,000 or 16.0 percent. Other expense
equaled $5.3 million during the first quarter of 2007 compared to $4.9 million
during the first quarter of 2006 caused by higher general operating expenses,
such as credit card processing and service fee expense. Due to continuing branch
expansions, we expect ISB’s noninterest expenses will continue to grow in future
periods.
ISB
recorded a net loss of $266,000 during the first quarter of 2007, compared
to
net loss of $147,000 during the same period of 2006. This represents an
unfavorable variance of $119,000. ISB continues to evaluate expansion
opportunities. As a result of the anticipated growth of its franchise, ISB
expects to operate at a near breakeven level during 2007.
First-Citizens
Bank & Trust Company. At March 31, 2007, FCB operated 339 branches in North
Carolina, Virginia, West Virginia, Maryland and Tennessee.
FCB’s
total assets increased from $13.00 billion at March 31, 2006 to $13.36 billion
at March 31, 2007, an increase of $355.4 million or 2.7 percent. FCB’s net
interest income decreased $2.2 million or 2.1 percent during 2007 due to a
lower
net yield, partially offset by slightly higher balances of interest-earning
assets.
The
provision for credit losses decreased $2.6 million due to lower net charge
offs,
which declined by 52.8 percent. FCB’s noninterest income increased $6.0 million
or 9.3 percent during the first quarter of 2007, primarily the result of higher
cardholder and merchant services income, mortgage income and commission-based
income. Noninterest expense increased $7.3 million or 6.4 percent during 2007,
caused principally by higher personnel, occupancy and technology related costs.
FCB
recorded net income of $31.7 million during the first quarter of 2007 compared
to $31.9 million during the same period of 2006. This represents a $288,000
or
0.9 percent decrease in net income due to a lower net yield on interest-earning
assets and higher noninterest expense.
CURRENT
ACCOUNTING AND REGULATORY ISSUES
In
June
2006, the FASB issued Interpretation No. 48 “Accounting for Uncertainty in
Income Taxes” (FIN 48). FIN 48 clarifies uncertainty in income taxes recognized
by establishing a recognition threshold and a measurement attribute for the
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 uncertain tax positions, which
was offset by a $962,000 adjustment to the beginning balance of retained
earnings.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157 “Fair Value Measurements” (Statement 157). Statement 157 defines
fair value, establishes a framework for measuring fair value, and 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
will
become effective for BancShares on January 1, 2008. We do not anticipate a
material impact on our consolidated financial statements.
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.
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.
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 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.
Item
3. Quantitative
and Qualitative Disclosures about Market Risk
Market
risk is the potential economic loss resulting from changes in market prices
and
interest rates. This risk can either result in diminished current fair values
of
financial instruments or reduced net interest income in future periods. As
of
March 31, 2007, BancShares’ market risk profile has not changed significantly
from December 31, 2006. Changes in fair value that result from movement in
market rates cannot be predicted with any degree of certainty. Therefore, the
impact that future changes in market rates will have on the fair values of
financial instruments is uncertain.
Item
4. 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 enabling it to record, process,
summarize and report in a timely manner the information required to be disclosed
in reports it files under the Exchange Act.
No
change
in BancShares’ internal control over financial reporting occurred during the
first quarter of 2007 that had materially affected, or is reasonably likely
to
materially affect, BancShares’ internal control over financial reporting.
PART
II
Item
6.
Exhibits
31.1
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Certification
of Chief Executive Officer
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31.2
|
Certification
of Chief Financial Officer
|
32
|
Certifications
of Chief Executive Officer and Chief Financial
Officer
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Dated:
May 4, 2007
|
FIRST
CITIZENS BANCSHARES, INC.
|
|
(Registrant)
|
|
|
|
|
By:
|
/s/Kenneth
A. Black
|
|
|
Kenneth
A. Black
|
|
|
Vice
President, Treasurer
|
|
|
and
Chief Financial Officer
|