Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q

 


 

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2006

or

 

¨ 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
incorporation or organization)
  (I.R.S. Employer
Identification Number)
3128 Smoketree Court, Raleigh, North Carolina   27604
(Address of principle executive offices)   (Zip code)

(919) 716-7000

(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  ¨

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  ¨                Non-accelerated filer  ¨

Indicate by check mark whether the Registrant in a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act)    Yes  x    No  ¨

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 August 7, 2006)

 



Table of Contents

INDEX

 

          Page(s)
PART I.    FINANCIAL INFORMATION   
Item 1.    Financial Statements (Unaudited)   
   Consolidated Balance Sheets at June 30, 2006, December 31, 2005, and June 30, 2005    3
   Consolidated Statements of Income for the three-and six-month periods ended June 30, 2006, and June 30, 2005    4
   Consolidated Statements of Changes in Shareholders’ Equity for the six-month periods ended June 30, 2006, and June 30, 2005    5
   Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2006, and June 30, 2005    6
   Notes to Consolidated Financial Statements    7-9
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    10-24
Item 3.    Quantitative and Qualitative Disclosures about Market Risk    25
Item 4.    Controls and Procedures    25
PART II.    OTHER INFORMATION   
Item 4.    Submission of Matters to a Vote of Security Holders    25-26
Item 6.    Exhibits.    26


Table of Contents

PART I

Item 1. Financial Statements (Unaudited)

Consolidated Balance Sheets

First Citizens BancShares, Inc. and Subsidiaries

 

(thousands, except share data)

   June 30, 2006*     December 31, 2005#     June 30, 2005*

Assets

      

Cash and due from banks

   $ 957,888     $ 777,928     $ 680,415

Overnight investments

     631,705       481,012       634,027

Investment securities available for sale

     2,626,065       2,293,020       1,842,125

Investment securities held to maturity

     398,715       636,496       802,210

Loans and leases

     10,029,045       9,642,994       9,300,984

Less allowance for loan and lease losses

     130,532       128,847       126,247
                      

Net loans and leases

     9,898,513       9,514,147       9,174,737

Premises and equipment

     663,521       639,469       609,766

Income earned not collected

     58,746       54,879       47,393

Other assets

     291,339       242,441       232,393
                      

Total assets

   $ 15,526,492     $ 14,639,392     $ 14,023,066
                      

Liabilities

      

Deposits:

      

Noninterest-bearing

   $ 2,806,242     $ 2,616,177     $ 2,633,209

Interest-bearing

     9,910,977       9,557,681       9,124,880
                      

Total deposits

     12,717,219       12,173,858       11,758,089

Short-term borrowings

     957,018       779,028       621,708

Long-term obligations

     527,478       408,987       409,964

Other liabilities

     96,198       96,460       99,063
                      

Total liabilities

     14,297,913       13,458,333       12,888,824
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

     1,083,635       1,029,005       976,955

Accumulated other comprehensive income

     (9,257 )     (2,147 )     3,086
                      

Total shareholders’ equity

     1,228,579       1,181,059       1,134,242
                      

Total liabilities and shareholders’ equity

   $ 15,526,492     $ 14,639,392     $ 14,023,066
                      

* Unaudited
# Derived from the 2005 Annual Report on Form 10-K.

See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

Consolidated Statements of Income

 

First Citizens BancShares, Inc. and Subsidiaries

 

     Three Months Ended June 30,     Six Months Ended June 30,  

(thousands, except per share data; unaudited)

   2006     2005     2006     2005  

Interest income

        

Loans

   $ 167,174     $ 139,393     $ 326,379     $ 271,736  

Investment securities:

        

U. S. Government

     26,584       16,123       50,869       28,590  

State, county and municipal

     59       64       120       130  

Dividends

     903       378       1,614       749  
                                

Total investment securities interest and dividend income

     27,546       16,565       52,603       29,469  

Overnight investments

     7,779       4,248       13,518       7,246  
                                

Total interest income

     202,499       160,206       392,500       308,451  

Interest expense

        

Deposits

     65,867       40,500       123,609       75,846  

Short-term borrowings

     9,177       2,798       16,169       4,611  

Long-term obligations

     8,522       6,238       15,971       11,657  
                                

Total interest expense

     83,566       49,536       155,749       92,114  
                                

Net interest income

     118,933       110,670       236,751       216,337  

Provision for credit losses

     2,973       6,994       9,710       12,320  
                                

Net interest income after provision for credit losses

     115,960       103,676       227,041       204,017  
Noninterest income         

Service charges on deposit accounts

     18,260       19,683       36,466       38,376  

Cardholder and merchant services income

     22,303       18,129       40,731       34,382  

Trust and asset management fees

     5,175       4,798       10,353       9,286  

Fees from processing services

     7,572       6,296       14,481       12,516  

Commission income

     8,339       6,571       16,211       12,834  

ATM income

     1,167       2,665       3,699       5,145  

Mortgage income

     1,782       2,313       3,154       3,819  

Other service charges and fees

     3,870       3,889       7,993       8,104  

Securities gains (losses)

     (353 )     (22 )     (539 )     (22 )

Other

     1,494       4,244       2,809       5,349  
                                

Total noninterest income

     69,609       68,566       135,358       129,789  
Noninterest expense         

Salaries and wages

     57,146       52,538       113,689       104,264  

Employee benefits

     13,886       13,141       27,829       25,656  

Occupancy expense

     12,389       11,448       25,264       22,886  

Equipment expense

     13,091       12,522       25,755       25,029  

Other

     38,695       34,302       74,382       67,461  
                                

Total noninterest expense

     135,207       123,951       266,919       245,296  
                                

Income before income taxes

     50,362       48,291       95,480       88,510  

Income taxes

     18,650       18,215       35,111       33,437  
                                

Net income

   $ 31,712     $ 30,076     $ 60,369     $ 55,073  
                                

Other comprehensive income (loss) net of taxes

        

Unrealized securities gains (losses) arising during period

   $ (4,076 )   $ 4,455     $ (7,670 )   $ (1,415 )

Unrealized gain on interest rate swap arising during period

     234       —         234       —    

Less: reclassified adjustment for gains (losses) included in net income

     (213 )     (13 )     (326 )     (13 )
                                

Other comprehensive income (loss) net of taxes

     (3,629 )     4,468       (7,110 )     (1,402 )
                                

Comprehensive income

   $ 28,083     $ 34,544     $ 53,259     $ 53,671  
                                

Average shares outstanding

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

Net income per share

   $ 3.04     $ 2.88     $ 5.79     $ 5.28  
                                

See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

Consolidated Statements of Changes in Shareholders’ Equity

First Citizens BancShares, Inc. and Subsidiaries

 

(thousands, except share data, unaudited)

   Class A
Common
Stock
   Class B
Common
Stock
   Surplus    Retained
Earnings
    Accumulated
Other
Comprehensive
Income
    Total
Shareholders’
Equity
 

Balance at December 31, 2004

   $ 8,757    $ 1,678    $ 143,766    $ 927,621     $ 4,488     $ 1,086,310  

Net income

              55,073         55,073  

Cash dividends

              (5,739 )       (5,739 )

Unrealized securities losses, net of deferred taxes

             (1,402 )     (1,402 )
                                             

Balance at June 30, 2005

   $ 8,757    $ 1,678    $ 143,766    $ 976,955     $ 3,086     $ 1,134,242  
                                             

Balance at December 31, 2005

   $ 8,757    $ 1,678    $ 143,766    $ 1,029,005     $ (2,147 )   $ 1,181,059  

Net income

              60,369         60,369  

Cash dividends

              (5,739 )       (5,739 )

Unrealized securities losses, net of deferred taxes

             (7,344 )     (7,344 )

Unrealized gain on interest rate swap, net of deferred taxes

             234       234  
                                             

Balance at June 30, 2006

   $ 8,757    $ 1,678    $ 143,766    $ 1,083,635     $ (9,257 )   $ 1,228,579  
                                             

See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

Consolidated Statements of Cash Flows

First Citizens BancShares, Inc. and Subsidiaries

 

     Six months ended June 30,  
     2006     2005  
     (thousands)  

OPERATING ACTIVITIES

    

Net income

   $ 60,369     $ 55,073  

Adjustments to reconcile net income to cash provided by operating activities:

    

Amortization of intangibles

     1,172       1,260  

Provision for credit losses

     9,710       12,320  

Deferred tax benefit

     2,115       (4,236 )

Change in current taxes payable

     16,310       2,227  

Depreciation

     23,578       22,354  

Change in accrued interest payable

     12,278       9,196  

Change in income earned not collected

     (3,867 )     (6,819 )

Securities losses

     539       22  

Origination of loans held for sale

     (217,532 )     (231,866 )

Proceeds from sale of loans

     237,632       466,178  

Loss (gain) on sale of loans

     176       (4,135 )

Net amortization of premiums and discounts

     (2,392 )     143  

Net change in other assets

     (47,151 )     9,950  

Net change in other liabilities

     (28,616 )     (7,334 )
                

Net cash provided by operating activities

     64,321       324,333  
                

INVESTING ACTIVITIES

    

Net change in loans outstanding

     (414,686 )     (186,697 )

Purchases of investment securities held to maturity

     (1,066 )     (245,991 )

Purchases of investment securities available for sale

     (506,083 )     (885,761 )

Proceeds from maturities of investment securities held to maturity

     241,239       321,117  

Proceeds from maturities of investment securities available for sale

     160,455       289,016  

Net change in overnight investments

     (150,693 )     (250,284 )

Dispositions of premises and equipment

     5,069       3,736  

Additions to premises and equipment

     (52,699 )     (65,718 )

Purchase and sale of branches, net of cash transferred

     —         18,343  
                

Net cash used by investing activities

     (718,464 )     (1,002,239 )
                

FINANCING ACTIVITIES

    

Net change in time deposits

     507,694       276,795  

Net change in demand and other interest-bearing deposits

     35,667       109,539  

Net change in short-term borrowings

     177,924       173,043  

Originations of long-term obligations

     118,557       125,000  

Cash dividends paid

     (5,739 )     (5,739 )
                

Net cash provided by financing activities

     834,103       678,638  
                

Change in cash and due from banks

     179,960       732  

Cash and due from banks at beginning of period

     777,928       679,683  
                

Cash and due from banks at end of period

   $ 957,888     $ 680,415  
                
CASH PAYMENTS FOR:     

Interest

   $ 168,027     $ 82,918  

Income taxes

     35,111       36,281  
                

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

    

Unrealized securities losses

   $ (12,044 )   $ (2,643 )

Unrealized gain on interest rate swap

     385       —    
                

 

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Table of Contents

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 2005 First Citizens BancShares, Inc. Annual Report, which is incorporated by reference on Form 10-K. Certain amounts for prior periods have been reclassified to conform with statement presentations for 2006. However, the reclassifications have no effect on shareholders’ equity or net income as previously reported.

Derivative Financial Instruments

During the second quarter of 2006, BancShares entered into an interest rate swap that synthetically converts the variable interest rate on trust preferred securities issued in 2006 to a fixed rate. The interest rate swap is a derivative financial instrument that qualifies as a cash flow hedge under Statement of Financial Accounting Standards No. 133 Accounting for Derivative Instruments and Hedging Activities (Statement 133). The initial assessment required under Statement 133 concluded that there was no ineffectiveness for this interest rate swap, and there was no fair value at the inception of the swap. Subject to periodic effectiveness testing over the five-year life of the swap, any change in fair value related to the effective portion of the swap will be recorded in other comprehensive income. Any change in fair value related to the ineffective portion of the swap will be reported in earnings.

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. 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 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, Neuse, Incorporated, a subsidiary that owns real property used in the banking operation and American Guaranty Insurance Corporation, a property insurance company.

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.

 

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Table of Contents
     As of and for the six months ended June 30, 2006
     ISB     FCB    Other     Total    Adjustments     Consolidated

Interest income

   $ 59,138     $ 332,778    $ 12,714     $ 404,630    $ (12,130 )   $ 392,500

Interest expense

     26,038       118,698      23,143       167,879      (12,130 )     155,749
                                            

Net interest income

     33,100       214,080      (10,429 )     236,751      —         236,751

Provision for credit losses

     2,134       7,576      —         9,710      —         9,710
                                            

Net interest income after provision for credit losses

     30,966       206,504      (10,429 )     227,041      —         227,041

Noninterest income

     5,293       133,401      809       139,503      (4,145 )     135,358

Noninterest expense

     35,853       234,025      1,186       271,064      (4,145 )     266,919
                                            

Income (loss) before income taxes

     406       105,880      (10,806 )     95,480      —         95,480

Income taxes

     328       38,545      (3,762 )     35,111      —         35,111
                                            

Net income (loss)

   $ 78     $ 67,335    $ (7,044 )   $ 60,369    $ —       $ 60,369
                                            

Period-end assets

   $ 2,003,856     $ 13,346,846    $ 2,257,134     $ 17,607,836    $ (2,081,344 )   $ 15,526,492

Loans and leases

     1,781,781       8,247,264      —         10,029,045      —         10,029,045

Allowance for loan and lease losses

     21,416       109,116      —         130,532      —         130,532

Total deposits

     1,632,358       11,259,684      —         12,892,042      (174,823 )     12,717,219
     As of and for the six months ended June 30, 2005
     ISB     FCB    Other     Total    Adjustments     Consolidated

Interest income

   $ 44,902     $ 263,409    $ 3,390     $ 311,701    $ (3,250 )   $ 308,451

Interest expense

     15,980       66,473      12,911       95,364      (3,250 )     92,114
                                            

Net interest income

     28,922       196,936      (9,521 )     216,337      —         216,337

Provision for credit losses

     3,462       8,858      —         12,320      —         12,320
                                            

Net interest income after provision for credit losses

     25,460       188,078      (9,521 )     204,017      —         204,017

Noninterest income

     3,299       129,366      718       133,383      (3,594 )     129,789

Noninterest expense

     31,495       216,223      1,172       248,890      (3,594 )     245,296
                                            

Income (loss) before income taxes

     (2,736 )     101,221      (9,975 )     88,510      —         88,510

Income taxes

     (886 )     37,786      (3,463 )     33,437      —         33,437
                                            

Net income (loss)

   $ (1,850 )   $ 63,435    $ (6,512 )   $ 55,073    $ —       $ 55,073
                                            

Period-end assets

   $ 1,719,936     $ 12,165,852    $ 1,771,306     $ 15,657,094    $ (1,634,028 )   $ 14,023,066

Loans and leases

     1,533,959       7,767,025      —         9,300,984      —         9,300,984

Allowance for loan and lease losses

     17,643       108,604      —         126,247      —         126,247

Total deposits

     1,385,843       10,412,568      —         11,798,411      (40,322 )     11,758,089

 

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Note C

Employee Benefits

BancShares recognized pension expense totaling $6,898 and $7,470, respectively, in the six-month periods ended June 30, 2006 and 2005. Pension expense is included as a component of employee benefit expense.

 

     Six months ended June 30,  

Components of Net Periodic Benefit Cost

   2006     2005  

Service cost

   $ 8,730     $ 6,828  

Interest cost

     10,056       8,122  

Expected return on plan assets

     (13,800 )     (9,390 )

Amortization of prior service cost

     140       194  

Recognized net actuarial loss

     1,772       1,716  
                

Net periodic benefit cost

   $ 6,898     $ 7,470  
                

The expected long-term rate of return on plan assets for 2006 is 8.50 percent.

 

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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). 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, Maryland, Tennessee and West Virginia. ISB operates offices in Georgia, Florida, Texas, New Mexico, Arizona, California, Oregon, Washington and Colorado.

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 2006, the reclassifications have no effect on shareholders’ equity or net income as previously reported.

SUMMARY

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 supplemental short-term and long-term 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 in the subsidiaries’ commercial banking business.

External factors influence customer demand for our loan, lease and deposit products. The general strength of the economy influences loan and lease 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. 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.

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, competitive position and strategic focus 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. 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 likelihood of a material impact on 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 constant and focused management attention.

Detailed information regarding the components of net income and other key financial data over the most recent five quarters is provided in Table 1. Tables 4 and 5 provide information on net interest income. Table 6 provides information related to asset quality.

 

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Financial Summary   Table 1

 

    2006     2005     Six Months Ended
June 30
 

(thousands, except per share data and ratios)

  Second
Quarter
   

First

Quarter

    Fourth
Quarter
   

Third

Quarter

    Second
Quarter
    2006     2005  
Summary of Operations              

Interest income

  $ 202,499     $ 190,001     $ 183,949     $ 173,534     $ 160,206     $ 392,500     $ 308,451  

Interest expense

    83,566       72,183       66,731       59,306       49,536       155,749       92,114  
                                                       

Net interest income

    118,933       117,818       117,218       114,228       110,670       236,751       216,337  

Provision for credit losses

    2,973       6,737       13,578       7,211       6,994       9,710       12,320  
                                                       

Net interest income after provision for credit losses

    115,960       111,081       103,640       107,017       103,676       227,041       204,017  

Noninterest income

    69,609       65,749       65,457       68,106       68,566       135,358       129,789  

Noninterest expense

    135,207       131,712       125,395       128,665       123,951       266,919       245,296  
                                                       

Income before income taxes

    50,362       45,118       43,702       46,458       48,291       95,480       88,510  

Income taxes

    18,650       16,461       15,866       16,505       18,215       35,111       33,437  
                                                       

Net income

  $ 31,712     $ 28,657     $ 27,836     $ 29,953     $ 30,076     $ 60,369     $ 55,073  
                                                       

Net interest income-taxable equivalent

  $ 119,351     $ 118,226     $ 117,601     $ 114,603     $ 111,038     $ 237,577     $ 217,052  
                                                       
Selected Quarterly Averages              

Total assets

  $ 15,318,019     $ 14,694,936     $ 14,516,620     $ 14,160,391     $ 13,618,161     $ 14,917,702     $ 13,464,834  

Investment securities

    2,964,308       2,896,711       2,938,833       2,764,377       2,345,056       2,930,696       2,209,440  

Loans and leases

    9,924,208       9,705,443       9,455,059       9,323,115       9,324,200       9,815,430       9,340,748  

Interest-earning assets

    13,522,235       13,129,313       13,024,871       12,750,494       12,255,663       13,326,859       12,093,277  

Deposits

    12,440,125       12,192,664       12,071,673       11,836,193       11,562,349       12,317,078       11,471,238  

Interest-bearing liabilities

    11,156,821       10,794,420       10,621,384       10,312,675       9,867,227       10,976,622       9,755,118  

Long-term obligations

    466,259       408,946       409,612       409,825       308,461       437,761       297,126  

Shareholders’ equity

  $ 1,215,481     $ 1,191,820     $ 1,169,113     $ 1,143,391     $ 1,118,122     $ 1,203,692     $ 1,106,682  

Shares outstanding

    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

  $ 15,526,492     $ 15,095,210     $ 14,639,392     $ 14,484,919     $ 14,023,066     $ 15,526,492     $ 14,023,066  

Investment securities

    3,024,780       2,896,962       2,929,516       2,871,731       2,644,335       3,024,780       2,644,335  

Loans and leases

    10,029,045       9,810,088       9,642,994       9,359,540       9,300,984       10,029,045       9,300,984  

Interest-earning assets

    13,685,530       13,455,968       13,053,522       12,996,027       12,579,346       13,685,530       12,579,346  

Deposits

    12,717,219       12,512,557       12,173,858       12,123,491       11,758,089       12,717,219       11,758,089  

Interest-bearing liabilities

    11,395,473       11,038,192       10,745,696       10,544,543       10,156,552       11,395,473       10,156,552  

Long-term obligations

    527,478       408,954       408,987       409,742       409,964       527,478       409,964  

Shareholders’ equity

  $ 1,228,579     $ 1,203,366     $ 1,181,059     $ 1,158,885     $ 1,134,242     $ 1,228,579     $ 1,134,242  

Shares outstanding

    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

    0.84 %     0.79 %     0.76 %     0.84 %     0.89 %     0.82 %     0.82 %

Shareholders’ equity

    10.46       9.75       9.45       10.39       10.79       10.11       10.04  

Dividend payout ratio

    9.05       10.00       10.30       9.58       9.55       9.50       10.42  
                                                       
Liquidity and Capital Ratios (averages)              

Loans and leases to deposits

    79.78 %     79.60 %     78.32 %     78.77 %     80.64 %     79.69       81.43  

Shareholders’ equity to total assets

    7.93       8.11       8.05       8.07       8.21       8.07       8.22  

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

    15.04       14.44       13.45       12.59       12.24       14.72       12.06  
                                                       
Per Share of Stock              

Net income

  $ 3.04     $ 2.75     $ 2.67     $ 2.87     $ 2.88     $ 5.79     $ 5.28  

Cash dividends

    0.275       0.275       0.275       0.275       0.275       0.55       0.55  

Book value at period end

    117.74       115.33       113.19       111.06       108.70       117.74       108.70  

Tangible book value at period end

    107.02       104.55       102.35       100.17       97.75       107.02       97.75  
                                                       

 

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Net income. BancShares realized an increase in earnings during the second quarter of 2006 compared to the second quarter of 2005. Consolidated net income during the second quarter of 2006 was $31.7 million, compared to $30.1 million earned during the corresponding period of 2005, a $1.6 million or 5.4 percent increase. The improvement in net income during 2006 resulted from higher net interest income and a reduction in the provision for credit losses. Net income per share during the second quarter of 2006 totaled $3.04, compared to $2.88 during the second quarter of 2005. The annualized returns on average assets and equity were 0.84 percent and 10.46 percent for the second quarter of 2006 respectively compared to 0.89 percent and 10.79 percent for the corresponding period in 2005.

For the first six months of 2006, BancShares recorded net income of $60.4 million, compared to $55.1 million earned during the first six months of 2005. The $5.3 million or 9.6 percent increase was attributable to significantly higher levels of net interest income, improved noninterest income and lower provision for credit losses. Net income per share for the first six months of 2006 was $5.79, compared to $5.28 during the same period of 2005. On an annualized basis, BancShares returned 0.82 percent on average assets during the first six months of 2006, unchanged from the corresponding period of 2005. Annualized return on average equity for the first six months of 2006 was 10.11 percent, up slightly from 10.04 percent during the same period of 2005.

ISB reported net income of $78,000 during the first six months of 2006, respectively, compared to a net loss of $1.9 million reported during 2005. Improved earnings for ISB have resulted from the favorable impact of loan growth, higher working capital finance fees and merchant income as well as lower provision expense. However, due to added costs arising from anticipated franchise expansion and the adverse impact of the flat yield curve, ISB’s profitability will remain low.

Shareholders’ Equity. BancShares continues to exceed minimum regulatory capital standards, and the banking subsidiaries remain well-capitalized. In recent years, the de novo growth of ISB has required the infusion of significant amounts of capital by BancShares to support its rapidly expanding balance sheet. BancShares infused $20.0 million into ISB during the first six months of 2006. Since ISB was chartered in 1997, BancShares has provided $270.0 million in capital. Losses incurred since ISB’s inception total $29.1 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.

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. Accordingly, 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 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 and deposit trends. When deposit growth exceeds loan demand, we invest excess funds in the securities portfolio. Conversely, when loan demand exceeds deposit growth, we use proceeds from maturing securities to fund loan demand. Overnight investments are selectively made with other financial institutions that are within our risk tolerance.

Interest-earning assets for the second quarter of 2006 averaged $13.52 billion, an increase of $1.27 billion or 10.3 percent from the second quarter of 2005. For the six months ended June 30, 2006, interest-earning assets averaged $13.33 billion, an increase of $1.23 million or 10.2 percent over the same period of 2005. These increases resulted from growth in the loan, lease and investment securities portfolios.

 

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Loans and Leases   Table 2

 

      2006    2005

(thousands)

   Second
Quarter
   First
Quarter
   Fourth
Quarter
   Third
Quarter
   Second
Quarter

Real estate:

              

Construction and land development

   $ 822,687    $ 821,477    $ 766,945    $ 716,176    $ 690,362

Commercial mortgage

     3,591,372      3,530,296      3,518,563      3,465,494      3,429,643

Residential mortgage

     1,007,616      979,572      1,016,677      990,355      980,410

Revolving mortgage

     1,368,584      1,359,483      1,368,729      1,375,145      1,395,122

Other mortgage

     172,322      173,819      172,712      179,217      171,729
                                  

Total real estate loans

     6,962,581      6,864,647      6,843,626      6,726,387      6,667,266

Commercial and industrial

     1,417,341      1,326,182      1,193,349      1,033,650      1,007,969

Consumer

     1,330,852      1,312,790      1,318,971      1,320,232      1,355,860

Lease financing

     259,253      246,544      233,499      213,603      205,056

Other

     59,018      59,925      53,549      65,668      64,833
                                  

Total loans and leases

     10,029,045      9,810,088      9,642,994      9,359,540      9,300,984

Less allowance for loan and lease losses

     130,532      130,222      128,847      126,297      126,247
                                  

Net loans and leases

   $ 9,898,513    $ 9,679,866    $ 9,514,147    $ 9,233,243    $ 9,174,737
                                  

Loans and leases. At June 30, 2006 and 2005, loans and leases totaled $10.03 billion and $9.30 billion, respectively. The $728.1 million growth from June 30, 2005 to June 30, 2006 represents a 7.8 percent annual growth rate. Table 2 details outstanding loans and leases by type for the past five quarters.

During the twelve-month period from June 30, 2005 to June 30, 2006, we have continued to see modest loan growth. Total loans secured by real estate grew from $6.67 billion at June 30, 2005 to $6.96 billion at June 30, 2006, an increase of $295.3 million or 4.4 percent. Commercial mortgage loans increased from $3.43 billion at June 30, 2005 to $3.59 billion at June 30, 2006, a $161.7 million or 4.7 percent growth rate. Construction and land development real estate loans increased $132.3 million or 19.2 percent from June 30, 2005 to June 30, 2006 due to strong market demand for these loan types.

While real estate loan growth has been generally sluggish over the past year, commercial and industrial loans increased $409.4 million or 40.6 percent from June 30, 2005 to June 30, 2006. This growth has resulted from the ISB expansion as well as continued focus on commercial lending in new and existing FCB markets. In addition, we recorded $144.5 million in loans made in conjunction with the United States Department of Agriculture tobacco buyout program. Over this same 12-month period, lease financing increased $54.2 million or 26.4 percent as demand for our lease products remains robust particularly among medical customers.

We continue to focus on customer development within the medical community. At June 30, 2006, 13.8 percent of our loan portfolio represented loans for office facilities, medical and dental equipment and other needs incidental to the respective area of practice. We do not believe that the focus on medical and dental lending presents an inappropriate risk to our portfolio.

Our continuing growth in new markets has allowed us to mitigate our historic exposure to geographic concentration in North Carolina and Virginia. We are aware that rapid loan growth in new markets may present incremental lending risks. During the expansion and growth in new markets, we have and will continue to rely on a centralized underwriting process, and we have endeavored to ensure that credit monitoring controls are functioning effectively.

 

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Investment Securities   Table 3

 

     June 30, 2006     June 30, 2005  

(thousands)

   Cost    Fair Value    Average
Maturity
(Yrs./Mos.)
   Taxable
Equivalent
Yield
    Cost    Fair Value    Average
Maturity
(Yrs./Mos.)
   Taxable
Equivalent
Yield
 

Investment securities available for sale:

                      

U.S. Government:

                      

Within one year

   $ 1,411,388    $ 1,389,174    0/5    3.26 %   $ 1,025,314    $ 1,012,111    0/4    2.71 %

One to five years

     1,122,124      1,106,228    1/7    4.49       727,676      724,662    1/10    3.54  

Five to ten years

     2,848      2,666    7/0    4.91       136      132    6/1    5.42  

Ten to twenty years

     3,003      2,827    13/11    4.92       2,266      2,231    13/5    4.76  

Over twenty years

     50,412      47,548    28/7    5.30       30,489      30,486    28/8    5.34  
                                                  

Total

     2,589,775      2,548,443    1/6    3.84       1,785,881      1,769,622    1/5    3.10  

State, county and municipal:

                      

Within one year

     941      931    0/10    2.94       901      893    0/11    2.00  

One to five years

     2,325      2,276    2/10    3.91       3,103      3,099    3/1    3.54  

Five to ten years

     904      885    6/1    4.66       1,117      1,129    6/10    4.64  

Ten to twenty years

     —                —        —        

Over twenty years

     145      145    26/5    3.01       145      145    27/5    1.15  
                                                  

Total

     4,315      4,237    3/10    3.83       5,266      5,266    4/2    3.44  

Other

                      

Within one year

     —        —             —        —        

One to five years

     —        —             —        —        

Ten to twenty years

     11,740      11,740    12/2    11.18       11,780      11,780    12/5    11.18  

Five to ten years

     —        —             —        —        
                                      

Total

     11,740      11,740           11,780      11,780      

Equity securities

     35,658      61,645           34,416      55,457      
                                      

Total investment securities available for sale

   $ 2,641,488    $ 2,626,065         $ 1,837,343    $ 1,842,125      
                                      

Investment securities held to maturity:

                      

U.S. Government:

                      

Within one year

   $ 334,211    $ 331,436    0/6    3.34 %   $ 431,114    $ 428,570    0/7    2.25 %

One to five years

     54,628      53,506    1/3    3.65       358,493      357,615    1/7    3.38  

Five to ten years

     23      21    9/8    5.09       —        —        

Ten to twenty years

     7,664      7,513    10/10    5.53       10,203      10,492    11/10    5.55  

Over twenty years

     363      352    22/6    7.13       415      416    23/5    7.23  
                                                  

Total

     396,889      392,828    0/10    3.43       800,225      797,093    1/2    2.80  

State, county and municipal:

                      

Within one year

                165      165    0/0    5.55  

One to five years

     148      153    2/10    5.88       146      155    3/10    5.88  

Five to ten years

     —        —             —        —        

Ten to twenty years

     1,428      1,543    12/0    6.02       1,424      1,578    12/10    6.02  
                                                  

Total

     1,576      1,696    11/2    6.01       1,735      1,898    10/10    5.96  

Other

                      

Within one year

     —        —             —        —        

One to five years

     250      250    2/1    3.25       250      250    3/4    7.75  

Five to ten years

     —        —             —        —        
                                                  

Total

     250      250    2/1    3.25       250      250    3/3    7.75  

Total investment securities held to maturity

     398,715      394,774    1/2    2.81       802,210      799,241    1/2    2.81  
                                      

Total investment securities

   $ 3,040,203    $ 3,020,839         $ 2,639,553    $ 2,641,366      
                                      

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.

 

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Investment securities. At June 30, 2006 and 2005, the investment portfolio totaled $3.02 billion and $2.64 billion, respectively. The $380.4 million or 14.4 percent increase in the investment portfolio since June 30, 2005 resulted from additional balance sheet liquidity provided by deposit and master note growth as well as proceeds arising from the issuance of $115.0 million in trust preferred securities. Table 3 presents detailed information relating to the investment securities portfolio.

Investment securities available for sale totaled $2.63 billion at June 30, 2006, compared to $1.84 billion at June 30, 2005. Available-for-sale securities are reported at their aggregate fair value.

Investment securities held to maturity totaled $398.7 million at June 30, 2006, compared to $802.2 million at June 30, 2005. Securities that are classified as held-to-maturity reflect BancShares’ ability and positive intent to hold those investments until maturity.

The growth in investment securities available for sale and the corresponding reduction in investment securities held to maturity results from our decision to increase balance sheet liquidity and flexibility.

Income on interest-earning assets. Interest income amounted to $202.5 million during the second quarter of 2006, a $42.3 million or 26.4 percent increase from the second quarter of 2005. This growth was the result of both higher yields and growth in interest-earning assets. For the second quarter, the taxable-equivalent yield on average interest-earning assets increased 77 basis points from 5.25 percent in 2005 to 6.02 percent in 2006.

Loan and lease interest income for the second quarter of 2006 was $167.2 million, an increase of $27.8 million or 19.9 percent from the second quarter of 2005, due to higher yields and growth in the loan portfolio. The taxable-equivalent yield on loans and leases increased 76 basis points from 6.01 percent to 6.77 percent from the second quarter of 2005 due to new loans originated at current market rates and favorable repricing of existing variable rate loans due to increases in the prime interest rate prompted by Federal Reserve actions. Average loans and leases increased $600.0 million or 6.4 percent during the second quarter of 2006.

Within the investment securities portfolio, interest income was $27.5 million during the second quarter of 2006 compared to $16.6 million during the second quarter of 2005, an increase of $11.0 million or 66.3 percent. This increase was the result of higher yields and growth in the investment securities portfolio. The short average maturity of the investment securities portfolio has allowed for rapid repricing of the investment securities portfolio as interest rates have increased. As a result, the taxable-equivalent yield on investment securities increased by 89 basis points from 2.83 percent during the second quarter of 2005 to 3.72 percent in 2006. Average investment securities increased $619.3 million or 26.4 percent during the second quarter of 2006 compared to the same period of 2005.

Overnight investments generated interest income of $7.8 million during the second quarter of 2006, compared to $4.2 million during the same period of 2005. The $3.5 million increase is the combined result of a 201 basis points yield increase and higher average balances. Overnight investments returned 4.92 percent during the second quarter of 2006 compared to 2.91 percent during the same period of 2005.

Interest income amounted to $392.5 million during the first six months of 2006, an $84.0 million or 27.2 percent increase from the same period of 2005, the result of higher yields and growth in interest-earning assets. The taxable-equivalent yield increased 80 basis points from 5.15 percent for the first six months of 2005 to 5.95 percent during the same period of 2006. Higher market interest rates during 2006 boosted the yield earned on all categories of interest-earning assets.

 

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Consolidated Taxable Equivalent Rate/Volume Variance Analysis - Second Quarter

Table 4

 

     2006     2005     Increase (decrease) due to:  

(thousands)

   Average
Balance
   Interest
Income/
Expense
   Yield/
Rate
    Average
Balance
   Interest
Income/
Expense
   Yield/
Rate
    Volume     Yield/
Rate
    Total
Change
 

Assets

                      

Loans and leases

   $ 9,924,208    $ 167,567    6.77 %   $ 9,324,200    $ 139,729    6.01 %   $ 9,580     $ 18,258     $ 27,838  

Investment securities:

                      

U. S. Government

     2,884,813      26,584    3.69       2,282,254      16,123    2.83       4,907       5,554       10,461  

State, county and municipal

     6,288      84    5.36       7,472      96    5.15       (16 )     4       (12 )

Other

     73,207      903    4.95       55,330      378    2.74       171       354       525  
                                                                

Total investment securities

     2,964,308      27,571    3.72       2,345,056      16,597    2.83       5,062       5,912       10,974  

Overnight investments

     633,719      7,779    4.92       586,407      4,248    2.91       468       3,063       3,531  
                                                                

Total interest-earning assets

   $ 13,522,235    $ 202,917    6.02 %   $ 12,255,663    $ 160,574    5.25 %   $ 15,110     $ 27,233     $ 42,343  
                                                                

Liabilities

                      

Deposits:

                      

Checking With Interest

   $ 1,565,055    $ 480    0.12 %   $ 1,575,287    $ 479    0.12 %   $ (1 )   $ 2     $ 1  

Savings

     670,613      357    0.21       756,682      383    0.20       (44 )     18       (26 )

Money market accounts

     2,631,078      18,535    2.83       2,599,379      11,444    1.77       181       6,910       7,091  

Time deposits

     4,915,311      46,495    3.79       4,104,738      28,194    2.76       6,669       11,632       18,301  
                                                                

Total interest-bearing deposits

     9,782,057      65,867    2.70       9,036,086      40,500    1.80       6,805       18,562       25,367  

Federal funds purchased

     40,114      480    4.80       43,327      300    2.78       (30 )     210       180  

Repurchase agreements

     190,736      1,600    3.36       128,872      453    1.41       369       778       1,147  

Master notes

     615,960      6,409    4.17       294,642      1,605    2.18       2,544       2,260       4,804  

Other short-term borrowings

     61,695      688    4.47       55,839      440    3.16       56       192       248  

Long-term obligations

     466,259      8,522    7.31       308,461      6,238    8.09       3,033       (749 )     2,284  
                                                                

Total interest-bearing liabilities

   $ 11,156,821    $ 83,566    3.00     $ 9,867,227    $ 49,536    2.01 %   $ 12,777     $ 21,253     $ 34,030  
                                                                

Interest rate spread

         3.02 %         3.24 %      
                              

Net interest income and net yield on interest-earning assets

      $ 119,351    3.54 %      $ 111,038    3.63 %   $ 2,333     $ 5,980     $ 8,313  
                                                        

Average loan balances include nonaccrual loans. Yields related to loans 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 6.90% for each period. The taxable-equivalent adjustment was $418 and $368 for 2006 and 2005, respectively.

For the six months ended June 30, 2006, loan and lease interest income equaled $326.4 million, an increase of $54.6 million or 20.1 percent from the same period of 2005. The improvement in interest income reflects the effect of an 85 basis point increase in loan and lease yields as well as a 5.1 percent increase in average balances.

For the six months ended June 30, 2006, income earned on the investment securities portfolio amounted to $52.6 million, compared to $29.5 million during the same period of 2005, an increase of $23.1 million or 78.5 percent. This increase was the result of portfolio growth and a 91 basis point increase in the taxable-equivalent yield resulting from the reinvestment of proceeds arising from maturing securities to current market rates.

Interest earned on overnight investments totaled $13.5 million during the first six months of 2006 compared to $7.2 million during the same period of 2005, a $6.3 million or 86.6 percent increase. This strong growth was the combined result of a 200 basis point yield increase.

 

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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 fulfill commercial customer requirements for cash management services and to stabilize our liquidity base. Certain of our long-term borrowings also provide capital strength under existing guidelines established by the Federal Reserve and other banking regulators.

At June 30, 2006 and 2005, interest-bearing liabilities totaled $11.40 billion and $10.16 billion, respectively, a $1.24 billion or 12.2 percent increase. This increase resulted from growth in interest-bearing deposits, master notes and long-term obligations.

Deposits. At June 30, 2006, total deposits were $12.72 billion, an increase of $959.1 million or 8.2 percent over June 30, 2005.

Interest-bearing deposits averaged $9.78 billion during the second quarter of 2006 compared to $9.04 billion during the second quarter of 2005, an increase of $746.0 million or 8.3 percent. In the second quarter, average time deposits increased $810.6 million or 19.7 percent from 2006 to 2005 as customers shifted liquidity out of money market and other transaction accounts into higher-yielding time deposit instruments. From the second quarter of 2005 to the second quarter of 2006, average money market increased only $31.7 million or 1.2 percent, while average savings and average Checking With Interest decreased $86.1 million and $10.2 million, respectively.

For the first six months of 2006, interest-bearing deposits averaged $9.69 billion compared to $8.97 billion during the same period of 2005. This $718.9 million or 8.0 percent increase results from continued growth in time deposits and money market accounts.

Short-term borrowings. At June 30, 2006, short-term borrowings totaled $957.0 million compared to $621.7 million at June 30, 2005. For the quarters ended June 30, 2006 and 2005, short-term borrowings averaged $908.5 million and $522.7 million, respectively. The $385.8 million or 73.8 percent increase in short-term borrowings resulted from strong master note growth as customer interest in commercial cash management sweep products improved due to higher interest rates on those products.

For the six-month periods ended June 30, 2006 and 2005, short-term borrowings averaged $847.0 million and $485.0 million, respectively, an increase of 74.6 percent prompted by improved master note demand.

Long-term obligations. At June 30, 2006 and 2005, long-term obligations totaled $527.5 million and $410.0 million, respectively. The increase reflects the impact of $115 million in trust preferred capital securities issued during the second quarter of 2006.

In addition to the trust preferred securities issued during 2006, long-term obligations also include $150.0 million in trust preferred capital securities issued in 1998 and $100.0 million in trust preferred capital securities issued in 2001 (the 2001 Securities). The 2001 Securities mature in 2031, but may be redeemed in whole or in part at par on or after October 31, 2006. Although no definitive action has been taken, given current interest rates it is likely that the 2001 Securities will be redeemed during the fourth quarter of 2006.

Expense on interest-bearing liabilities. BancShares’ interest expense amounted to $83.6 million during the second quarter of 2006, a $34.0 million or 68.7 percent increase from the second quarter of 2005. The higher interest expense was the result of increasing market interest rates and higher average volume. The rate on interest-bearing liabilities was 3.00 percent during the second quarter of 2006 compared to 2.01 percent during the same period of 2005. During the second quarter of 2006, interest-bearing liabilities averaged $11.16 billion, an increase of $1.29 billion or 13.1 percent from the second quarter of 2005.

For the year-to-date, interest expense was $155.7 million, compared to $92.1 million for the same period of 2005. The $63.6 million or 69.1 percent increase results from higher interest rates and growth in average deposits. The rate on interest-bearing liabilities increased from 1.90 percent during the first six months of 2005 to 2.86 percent for the same period of 2006, a 96 basis point difference. The rate on time deposits increased 101 basis points from 2.65 percent to 3.66 percent while the rate on average money market savings increased 102 basis points from 1.62 percent to 2.64 percent. The rate on average master notes increased 201 basis points from 1.96 percent to 3.97 percent. For the first six months, average interest-bearing liabilities increased $1.22 billion or 12.5 percent from $9.76 billion to $10.98 billion. Average time deposits increased $751.1 million to $4.80 billion and average master notes increased $312.0 million from $250.9 million to $562.8 million.

 

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Consolidated Taxable Equivalent Rate/Volume Variance Analysis - Six Months

Table 5

 

     2006     2005     Increase (decrease) due to:  

(thousands)

   Average
Balance
   Interest
Income/
Expense
   Yield/
Rate
    Average
Balance
   Interest
Income/
Expense
   Yield/
Rate
    Volume     Yield/
Rate
    Total
Change
 

Assets

                      

Loans and leases

   $ 9,815,430    $ 327,154    6.72 %   $ 9,340,748    $ 272,388    5.87 %   $ 14,606     $ 40,160     $ 54,766  

Investment securities:

                      

U. S. Government

     2,851,069      50,869    3.58       2,147,226      28,590    2.69       11,092       11,187       22,279  

State, county and municipal

     6,516      171    5.29       7,699      193    5.06       (30 )     8       (22 )

Other

     73,111      1,614    4.45       54,515      749    2.77       333       532       865  
                                                                

Total investment securities

     2,930,696      52,654    3.61       2,209,440      29,532    2.70       11,395       11,727       23,122  

Overnight investments

     580,733      13,518    4.69       543,089      7,246    2.69       694       5,578       6,272  
                                                                

Total interest-earning assets

   $ 13,326,859    $ 393,326    5.95 %   $ 12,093,277    $ 309,166    5.15 %   $ 26,695     $ 57,465     $ 84,160  
                                                                

Liabilities

                      

Deposits:

                      

Checking With Interest

   $ 1,563,258    $ 949    0.12 %   $ 1,558,736    $ 939    0.12 %   $ 6     $ 4     $ 10  

Savings

     680,796      719    0.21       752,585      756    0.20       (73 )     36       (37 )

Money market accounts

     2,647,377      34,704    2.64       2,612,335      20,980    1.62       396       13,328       13,724  

Time deposits

     4,800,473      87,238    3.66       4,049,343      53,171    2.65       11,828       22,239       34,067  
                                                                

Total interest-bearing deposits

     9,691,904      123,610    2.57       8,972,999      75,846    1.70       12,157       35,607       47,764  

Federal funds purchased

     43,578      986    4.56       43,426      552    2.56       3       431       434  

Repurchase agreements

     178,306      2,787    3.15       135,067      807    1.20       466       1,514       1,980  

Master notes

     562,847      11,094    3.97       250,897      2,444    1.96       4,591       4,059       8,650  

Other short-term borrowings

     62,226      1,301    4.22       55,603      808    2.93       117       376       493  

Long-term obligations

     437,761      15,971    7.30       297,126      11,657    7.85       5,299       (985 )     4,314  
                                                                

Total interest-bearing liabilities

   $ 10,976,622    $ 155,749    2.86 %   $ 9,755,118    $ 92,114    1.90 %   $ 22,633     $ 41,002     $ 63,635  
                                                                

Interest rate spread

         3.09 %         3.25 %      
                              

Net interest income and net yield on interest-earning assets

      $ 237,577    3.59 %      $ 217,052    3.62 %   $ 4,062     $ 16,463     $ 20,525  
                                                        

Average loan balances include nonaccrual loans. Yields related to loans 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 6.90% for each period. The taxable-equivalent adjustment was $715 and $635 for 2005 and 2004, respectively.

NET INTEREST INCOME

Net interest income totaled $118.9 million during the second quarter of 2006, an increase of $8.3 million or 7.5 percent from the $110.7 million recorded during the second quarter of 2005. On a linked quarter basis, net interest income increased by only $1.1 million, or 0.9 percent. Due primarily to the unfavorable impact of the flat yield curve and the declining asset sensitivity of the balance sheet, the taxable-equivalent net yield on interest-earning assets declined 9 basis points from 3.63 percent during the second quarter of 2005 to 3.54 percent for the second quarter of 2006. The growth in net interest income resulted primarily from higher volume of interest-earning assets.

Net interest income totaled $236.8 million for the six-month period ended June 30, 2006, a $20.4 million or 9.4 percent increase over the same period of 2005. For the year-to-date, the taxable equivalent net yield on interest-earning assets fell from 3.62 percent in 2005 to 3.59 percent in 2006. Like the second quarter comparison, the impact of the flat yield curve over the six-month period offset the balance sheet growth, causing the net yield to decline by three basis points.

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.

 

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Table of Contents

Due to customer preference for fixed-rate commercial loans, rate ceilings that are limiting the repricing of variable rate loans, and surges in shorter-term deposit balances, our interest-sensitivity position has shifted from an asset-sensitive position to a liability-sensitive position. Based upon recent trends, it appears that the liability-sensitivity position will continue to grow during the next quarter. Assuming no other changes, a liability sensitive position indicates that rising market interest rates will likely cause a contraction in the net yield on interest-earning assets and, thus, net interest income. Changes in the slope of the yield curve and shifts in the mix of interest-earning assets and interest-bearing liabilities may cause actual results to vary.

Historically, we have managed our interest rate risk through decisions regarding pricing and availability of our loan and deposit products and through selected balance sheet management activities such as sales of certain long-term fixed rate assets and revolving loans. We have not relied on interest rate floors, collars or other derivative financial instruments to hedge interest 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 of the securities to a fixed rate of 7.125% for a period of five years.

ASSET QUALITY

The maintenance of excellent asset quality is one of our primary areas of focus. Historically, we have dedicated significant resources to ensuring prudent lending practices. Accordingly, we have focused on asset quality as a key performance measure.

Nonperforming assets. At June 30, 2006, BancShares’ total nonperforming assets, consisting of nonaccrual loans and other real estate, amounted to $24.0 million or 0.24 percent of loans and leases plus other real estate, compared to $18.4 million or 0.20 percent at June 30, 2005. The increase is primarily attributable to the transfer to other real estate of three parcels of land that were initially acquired for branch sites. The transfer resulted from the subsequent decision to abandon plans for branch offices at those locations. Nonaccrual loans totaled $15.6 million at June 30, 2006, compared to $13.4 million at June 30, 2005. We closely monitor nonperforming assets, taking necessary actions to minimize potential exposure.

Allowance for credit losses. 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 for credit losses. Such factors as the financial condition of the borrower, fair market value of collateral and other considerations are recognized in estimating probable credit losses. The allowance for credit losses includes the allowance for loan and lease losses and the liability for unfunded credit commitments. At June 30, 2006, the allowance for credit losses amounted to $137.1 million or 1.37 percent of total loans and leases outstanding. This compares to $135.8 million or 1.41 percent at December 31, 2005, and $133.2 million or 1.43 percent at June 30, 2005.

The provision for credit losses charged to operations during the second quarter of 2006 was $3.0 million, compared to $7.0 million during the second quarter of 2005. For the six-month periods ended June 30, total provision for credit losses was $9.7 million for 2006 and $12.3 million for 2005. The $2.6 million decrease results from enhancements to the allowance methodology that were implemented during the second quarter of 2006.

Net charge-offs for the three months ended June 30, 2006 totaled $3.0 million, compared to $4.9 million during the same period of 2005, the combined result of lower charge offs and higher recoveries. On an annualized basis, net charge-offs represent 0.12 percent and 0.21 percent of average loans and leases outstanding during the respective periods. Net charge-offs for the six-month period ended June 30, 2006 totaled $8.4 million, unchanged from the same period of 2005. As a percentage of average loans and leases outstanding, these losses represent 0.17 percent for 2006 and 0.18 percent for 2005 on an annualized basis.

 

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Table of Contents

Summary of Loan and Lease Loss Experience and Risk Elements

   Table 6

 

     2006     2005     Six Months Ended June 30  

(thousands, except ratios)

   Second
Quarter
    First
Quarter
    Fourth
Quarter
    Third
Quarter
    Second
Quarter
    2006     2005  

Allowance for credit losses at beginning of period

   $ 137,145     $ 135,770     $ 133,220     $ 133,218     $ 132,681     $ 135,770     $ 130,832  

Provision for credit losses

     2,973       6,737       13,578       7,211       6,994       9,710       12,320  

Adjustment

     —         —         —         (48 )     (1,537 )     —         (1,537 )

Net charge-offs:

              

Charge-offs

     (4,933 )     (7,053 )     (12,408 )     (8,305 )     (6,048 )     (11,986 )     (11,793 )

Recoveries

     1,936       1,691       1,380       1,144       1,128       3,627       3,396  
                                                        

Net charge-offs

     (2,997 )     (5,362 )     (11,028 )     (7,161 )     (4,920 )     (8,359 )     (8,397 )
                                                        

Allowance for credit losses at end of period

   $ 137,121     $ 137,145     $ 135,770     $ 133,220     $ 133,218     $ 137,121     $ 133,218  
                                                        

Allowance for credit losses includes:

              

Allowance for loan and lease losses

   $ 130,532     $ 130,222     $ 128,847     $ 126,297     $ 126,247     $ 130,532     $ 126,247  

Liability for unfunded credit commitments

     6,589       6,923       6,923       6,923       6,971       6,589       6,971  
                                                        

Allowance for credit losses at end of period

   $ 137,121     $ 137,145     $ 135,770     $ 133,220     $ 133,218     $ 137,121     $ 133,218  
                                                        

Historical Statistics

              

Average loans and leases

   $ 9,924,208     $ 9,705,443     $ 9,455,059     $ 9,323,115     $ 9,324,200     $ 9,815,430     $ 9,340,748  

Loans and leases at period-end

     10,029,045       9,810,088       9,642,994       9,359,540       9,300,984       10,029,045       9,300,984  
                                                        

Risk Elements

              

Nonaccrual loans and leases

   $ 15,573     $ 15,844     $ 18,969     $ 11,065     $ 13,362     $ 15,573     $ 13,362  

Other real estate

     8,461       5,573       6,753       4,843       5,049       8,461       5,049  
                                                        

Total nonperforming assets

   $ 24,034     $ 21,417     $ 25,722     $ 15,908     $ 18,411     $ 24,034     $ 18,411  
                                                        

Accruing loans and leases 90 days or more past due

   $ 7,534     $ 6,729     $ 9,180     $ 7,712     $ 10,056     $ 7,534     $ 10,056  
                                                        

Ratios

              

Net charge-offs (annualized) to average total loans and leases

     0.12 %     0.22 %     0.46 %     0.30 %     0.21 %     0.17 %     0.18  

Percent of total loans and leases at period-end:

              

Allowance for loan and lease losses

     1.30       1.33       1.34       1.35       1.36       1.30       1.36  

Liability for unfunded credit commitments

     0.07       0.07       0.07       0.07       0.07       0.07       0.07  
                                                        

Allowance for credit losses

     1.37       1.40       1.41       1.42       1.43       1.37       1.43  
                                                        

Nonperforming assets to total loans and leases plus other real estate

     0.24       0.22       0.27       0.17       0.20       0.24       0.20  
                                                        

We consider the established allowance adequate to absorb losses that relate to loans and leases outstanding at June 30, 2006. While we use available information to establish the allowance, future additions may be necessary based on changes in economic conditions or other factors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance. 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.

 

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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 service charges on deposit accounts, cardholder and merchant services income, various types of commission-based income including the sale of investments by our broker-dealer subsidiaries, fees from processing services for client banks, mortgage income and various types of revenues derived from wealth management services. Noninterest income also includes gains and losses resulting from securities transactions as well as gains recognized from the securitization and sale of loans.

During the first six months of 2006, total noninterest income equaled $135.4 million, compared to $129.8 million during the same period of 2005. The $5.6 million or 4.3 percent increase was primarily due to growth in cardholder and merchant services income and commission income. These increases were partially offset by reductions in service charges on deposit accounts. Additionally, during 2005, noninterest income included a $2.9 million gain on the securitization and sale of home equity loans. No such gain was recognized during 2006.

Cardholder and merchant services income increased $6.3 million or 18.5 percent for the first six months of 2006 when compared to the same period in 2005. Much of the increase results from continued strong growth in merchant discount and higher transaction volume with our credit and debit card products.

Commission income increased $3.4 million or 26.3 percent from $12.8 million during the first six months of 2005 compared to $16.2 million during the first six months of 2006. Much of the growth in commission income was attributed to brokerage fees generated by First Citizens Investor Services and IronStone Securities. Broker-dealer commissions increased $2.6 million during 2006 due to improved sales performance and market returns.

Among other components of noninterest income, fees from processing services increased $2.0 million or 15.7 percent during the first six months of 2006. Much of this increase is due to higher client bank transaction volume as a result of item processing services provided to new client banks. Trust and asset management fees contributed an additional $1.1 million during the first six months of 2006 compared to the same period of 2005. This increase represents an 11.5 percent increase over the same period of 2005 due to improved investment returns and favorable business development activity within our wealth management function.

Reducing the overall growth in noninterest income, service charges on deposit accounts decreased $1.9 million or 5.0 percent during the first six months of 2006. Service charges were generally lower for both personal and commercial customers. Bad check and overdraft charges declined modestly. Mortgage income declined $665,000 or 17.4 percent during the first six months of 2006 due to losses recognized on loans held for sale due to rising interest rates.

During the second quarter of 2006, total noninterest income equaled $69.6 million, an increase of $1.0 million or 1.5 percent, compared to the $68.6 million earned during the second quarter of 2005. The trends noted during the second quarter were similar to those noted for the year-to-date, including higher cardholder and merchant services income, commission income, processing fees as well as trust and asset management fees.

NONINTEREST EXPENSE

The primary components of noninterest expense are salaries and related employee benefit costs, occupancy costs for branch offices and support facilities, and equipment costs related to branch offices and technology.

Total noninterest expense equaled $266.9 million for the first six months of 2006, an 8.8 percent increase over the $245.3 million recorded during the same period of 2005. The $21.6 million increase in noninterest expense results from higher personnel and general operating costs.

Salary expense increased $9.4 million during 2006 when compared to the same period of 2005. This 9.0 percent increase is primarily due to higher incentive-based compensation for both wealth management sales and mortgage activity and labor costs resulting from new branch offices. Employee benefits expense increased $2.2 million or 8.5 percent during the first six months of 2006, compared to the corresponding period of 2005 due to higher health insurance costs and employer social security contributions. These increases were partially offset by lower pension expense.

 

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Occupancy costs increased $2.4 million or 10.4 percent during the first six months of 2006, the result of higher building depreciation and rent expense largely resulting from the expansion of the branch network. Other expenses increased $6.9 million or 10.3 percent during 2006. Much of this increase was due to cardholder and merchant processing costs, which increased $3.2 million. We also recognized higher costs related to cardholder rewards programs and external computer processing. Partially offsetting these increases were lower consulting expense.

For the second quarter of 2006, noninterest expense totaled $135.2 million, an $11.3 million or 9.1 percent increase over the same period of 2005. Salary expense equaled $57.1 million during the second quarter of 2006, an increase of $4.6 million or 8.8 percent due primarily to higher incentive compensation and new associates hired to staff new branch offices. Occupancy expense increased $941,000 or 8.2 percent due to the expansion of the branch network.

INCOME TAXES

Income tax expense was $35.1 million during the first six months of 2006, compared to $33.4 million during the same period of 2005, a 5.0 percent increase caused primarily by higher pre-tax earnings. The effective tax rates for these periods were 36.8 percent and 37.8 percent, respectively. For the second quarters of 2006 and 2005, income tax expense was $18.7 million and $18.2 million, respectively. The effective tax rates were 37.0 percent and 37.7 percent for the respective periods.

LIQUIDITY

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 June 30, 2006, BancShares had access to $525.0 million in unfunded borrowings through its correspondent bank network.

Once we have satisfied our loan 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.

SHAREHOLDERS’ EQUITY AND CAPITAL ADEQUACY

BancShares continues to exceed all minimum regulatory capital requirements, and the banking subsidiaries remain well-capitalized. At June 30, 2006 and 2005, the leverage capital ratio of BancShares was 9.92 percent and 9.38 percent, respectively, surpassing the minimum level of 3 percent. As a percentage of risk-adjusted assets, BancShares’ Tier 1 capital ratio was 13.56 percent at June 30, 2006, and 12.45 percent as of June 30, 2005. The minimum ratio allowed is 4 percent of risk-adjusted assets. The total risk-adjusted capital ratio was 16.05 percent at June 30, 2006 and 15.01 percent as of June 30, 2005. The minimum total capital ratio is 8 percent.

The trust preferred securities issued during the second quarter of 2006 qualify as Tier 1 capital under current regulatory guidelines. As a result, BancShares’ total capital ratio was further strengthened by that transaction. However, due to the likely redemption during the fourth quarter of 2006 of the $100.0 million in trust preferred securities issued during 2001, BancShares’ capital ratios may decline. BancShares, FCB and ISB will remain well-capitalized following the anticipated redemption of those securities.

 

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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 much 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 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 large number of branch offices that have yet to attain sufficient size and maturity for adequate 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 has and will likely continue to adversely impact its financial performance.

IronStone Bank. ISB’s total assets increased from $1.72 billion at June 30, 2005 to $2.00 billion at June 30, 2006, an increase of $283.9 million or 16.5 percent. This growth resulted from significantly higher levels of loans, funded by a growing deposit base generated through the expanding branch network.

ISB recorded net income of $78,000 during the first six months of 2006 compared to a net loss of $1.9 million during the same period of 2005. This improvement, results from higher levels of net interest income, stronger noninterest income and lower provision for credit losses. Offsetting these improvements, noninterest expense was higher.

ISB’s net interest income increased $4.2 million or 14.4 percent during the first six months of 2006, when compared to the same period of 2005, the result of higher market interest rates and balance sheet growth. Provision for credit losses decreased $1.3 million or 38.4 percent due to lower net charge offs and slower growth in the allowance for loan and lease losses.

ISB’s noninterest income increased $2.0 million or 60.4 percent during the first six months of 2006, primarily the result of improved cardholder and merchant income and working capital finance commissions. Noninterest expense increased $4.4 million or 13.8 percent during 2006. Higher personnel, occupancy and equipment costs reflect the impact of the expanded branch network, much of which relates to the growth and expansion by ISB into new markets.

ISB continues to evaluate both existing and new markets for expansion. As such growth occurs, ISB will continue to incur incremental operating costs, particularly in the areas of personnel, occupancy and equipment. As a result of the plans for continued expansion, ISB’s profitability will remain low.

First-Citizens Bank & Trust Company. FCB’s total assets increased from $12.17 billion at June 30, 2005 to $13.35 billion at June 30, 2006, an increase of $1.18 billion or 9.7 percent. FCB recorded net income of $67.3 million during the first six months of 2006 compared to $63.4 million during the same period of 2005. This represents a $3.9 million or 6.1 percent increase in net income, the result of higher levels of net interest and noninterest income and lower provision for credit losses.

FCB’s net interest income increased $17.1 million or 8.7 percent during the first six months of 2006, the result of strong growth among interest-earning assets. Provision for credit losses decreased $1.3 million or 14.5 percent during 2006 due to lower net charge-offs and modifications to the allowance methodology.

FCB’s noninterest income increased $4.0 million or 3.1 percent during the first six months of 2006, the result of the $5.0 million gain in cardholder and merchant service income and a $2.6 million increase in broker-dealer fees. Deposit service charges declined.

Noninterest expense increased $17.8 million or 8.2 percent during the first six months of 2006, primarily due to higher personnel, occupancy and credit card processing expenses.

 

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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, the FASB issued FSP FAS 115-1 and FAS 124-1. Collectively, these documents consider when an investment is considered impaired, what disclosures are appropriate for impairment losses, and what disclosures are appropriate for unrealized losses that have not been recognized as other-than-temporary impairments. The new disclosure requirements are effective for reporting periods beginning after December 15. 2005.

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154 (SFAS 154), Accounting Changes and Error Corrections, which replaces prior accounting guidance related to accounting changes and error corrections. SFAS 154 changes the requirements for the accounting for 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. We adopted SFAS 154 on January 1, 2006. There will be no material impact on our consolidated financial statements.

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.

 

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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 June 30, 2006, BancShares’ market risk profile has not changed significantly from December 31, 2005. 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 second quarter of 2006 that had materially affected, or is reasonably likely to materially affect, BancShares’ internal control over financial reporting.

PART II

Item 4. Submission of Matters to a Vote of Security Holders

On April 24, 2006, at the Annual Meeting of Shareholders of Registrant, the shareholders considered the election of directors. The shareholder vote regarding the election of the nominees for Board of Directors was:

 

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Nominee

   For    Withheld    Broker
Non-votes

J.M. Alexander, Jr.

   33,348,137    63,441    —  

C.H. Ames

   33,061,888    349,690    —  

V.E. Bell, III

   33,374,141    37,437    —  

G.H. Broadrick

   32,613,644    797,934    —  

H.H. Connell

   33,062,088    349,490    —  

H.M. Craig, III

   33,347,437    64,141    —  

H.L. Durham, Jr.

   33,291,786    119,792    —  

L.M. Fetterman

   32,973,899    437,679    —  

F.B. Holding

   33,062,271    349,307    —  

F.B. Holding, Jr.

   33,062,412    349,166    —  

L.R. Holding

   33,367,169    44,409    —  

C.B.C. Holt

   32,958,233    453,345    —  

J.B. Hyler, Jr.

   33,062,423    349,155    —  

F.R. Jones

   33,369,230    42,348    —  

L.S. Jones

   33,369,550    42,028    —  

J.T. Maloney, Jr.

   32,666,446    745,132    —  

R.T. Newcomb

   31,794,318    1,617,260    —  

L.T. Nunnellee, II

   32,971,050    440,528    —  

R.C. Scheeler

   32,666,452    745,126    —  

R.K. Shelton

   33,368,836    42,742    —  

R.C. Soles, Jr.

   32,621,622    789,956    —  

D.L. Ward, Jr.

   32,984,036    427,542    —  

Item 6. Exhibits

 

  4.1 Amended and Restated Trust Agreement of FCB/NC Capital Trust III

 

  4.2 Guarantee Agreement relating to Registrant’s guarantee of the capital securities of FCB/NC Capital Trust III

 

  4.3 Junior Subordinated Debenture dated May 18, 2006 between Registrant and Wilmington Trust Company, as Debenture Trustee

 

  31.1 Certification of Chief Executive Officer

 

  31.2 Certification of Chief Financial Officer

 

  32 Certifications of Chief Executive Officer and Chief Financial Officer

 

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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: August 7, 2006   FIRST CITIZENS BANCSHARES, INC.
                          (Registrant)
  By:  

/s/ Kenneth A. Black

    Kenneth A. Black
    Vice President, Treasurer
    and Chief Financial Officer

 

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