UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended September 30, 2006
or
Commission File Number: 0-16471
First Citizens BancShares, Inc
(Exact name of Registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
(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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Class A Common Stock—$1 Par Value—8,756,778 shares
Class B Common Stock—$1 Par Value—1,677,675 shares
(Number of shares outstanding, by class, as of November 7, 2006)
INDEX
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PART I
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
First Citizens BancShares, Inc. and Subsidiaries
(thousands, except share data)
Assets
Cash and due from banks
Overnight investments
Investment securities available for sale
Investment securities held to maturity
Loans and leases
Less allowance for loan and lease losses
Net loans
Premises and equipment
Income earned not collected
Other assets
Total assets
Liabilities
Deposits:
Noninterest-bearing
Interest-bearing
Total deposits
Short-term borrowings
Long-term obligations
Other liabilities
Total liabilities
Shareholders’ Equity
Common stock:
Class A - $1 par value (8,756,778 shares issued during all periods)
Class B - $1 par value (1,677,675 shares issued during all periods)
Surplus
Retained earnings
Accumulated other comprehensive income (loss)
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying Notes to Consolidated Financial Statements.
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Consolidated Statements of Income
(thousands, except per share data; unaudited)
Interest income
Loans
Investment securities:
U. S. Government
State, county and municipal
Dividends
Total investment securities interest and dividend income
Total interest income
Interest expense
Deposits
Total interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Noninterest income
Cardholder and merchant services income
Service charges on deposit accounts
Commission income
Fees from processing services
Trust and asset management fees
Mortgage income
ATM income
Other service charges and fees
Securities losses
Other
Total noninterest income
Noninterest expense
Salaries and wages
Employee benefits
Occupancy expense
Equipment expense
Total noninterest expense
Income before income taxes
Income taxes
Net income
Other comprehensive income (loss) net of taxes
Unrealized securities gains (losses) arising during period
Unrealized loss on interest rate swap arising during period
Less: reclassification adjustment for gains (losses) included in net income
Other comprehensive income (loss)
Comprehensive income
Average shares outstanding
Net income per share
4
Consolidated Statements of Changes in Shareholders’ Equity
(thousands, except share data, unaudited)
Balance at December 31, 2004
Comprehensive income:
Unrealized securities losses, net of deferred taxes
Cash dividends
Balance at September 30, 2005
Balance at December 31, 2005
Unrealized securities gains, net of deferred taxes
Change in unrecognized loss on cash flow hedge, net of deferred taxes
Balance at September 30, 2006
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Consolidated Statements of Cash Flows
OPERATING ACTIVITIES
Adjustments to reconcile net income to cash provided by operating activities:
Amortization of intangibles
Deferred tax expense (benefit)
Change in current taxes payable
Depreciation
Change in accrued interest payable
Change in income earned not collected
Origination of loans held for sale
Proceeds from sale of loans
Gain on sale of loans
Gain on sale of branch office
Net amortization of premiums and discounts
Net change in other assets
Net change in other liabilities
Net cash provided by operating activities
INVESTING ACTIVITIES
Net change in loans outstanding
Purchases of investment securities held to maturity
Purchases of investment securities available for sale
Proceeds from maturities of investment securities held to maturity
Proceeds from maturities of investment securities available for sale
Net change in overnight investments
Dispositions of premises and equipment
Additions to premises and equipment
Purchase and sale of branches, net of cash transferred
Net cash used in investing activities
FINANCING ACTIVITIES
Net change in time deposits
Net change in demand and other interest-bearing deposits
Net change in short-term borrowings
Originations of long-term obligations
Cash dividends paid
Net cash provided by financing activities
Change in cash and due from banks
Cash and due from banks at beginning of period
Cash and due from banks at end of period
CASH PAYMENTS FOR:
Interest
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Unrealized securities gains (losses)
Unrealized loss on interest rate swap
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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.
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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Income (loss) before income taxes
Net income (loss)
Allowance for loan and lease losses
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Note C
Employee Benefits
BancShares recognized pension expense totaling $9,142 and $11,205, respectively, in the nine-month periods ended September 30, 2006 and 2005. Pension expense is included as a component of employee benefit expense.
Components of Net Periodic Benefit Cost
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Recognized net actuarial loss
Net periodic benefit cost
The expected long-term rate of return on plan assets for 2006 and 2005 is 8.50 percent.
Note D
Derivative Financial Instruments
During the second quarter of 2006, BancShares entered into an interest rate swap that synthetically converts the variable interest rate on long-term borrowings 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.
At September 30, 2006, the interest rate swap, which has a notional amount of $115,000, had an estimated fair value of ($1,981). Based on the effectiveness test performed as of September 30, 2006, the swap was determined to be effective, and the change in the fair value was recorded as a component of other comprehensive income net of income taxes.
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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, Tennessee, Maryland 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 focused strategic emphasis, competitive products and superior customer service, we can increase our business volumes and profitability. In recent years, we have concentrated 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 various processing services to other banks.
We attempt to mitigate certain of the risks that can endanger our profitability and growth prospects. While we are attentive to all areas of risk, economic risk is especially problematic due to the lack of control and the likelihood of a material impact on our financial results. Specific economic risks include recession, rapid movements in interest rates, changes in the yield curve and significant shifts in inflation expectations. Compared to our larger competitors, our relatively small asset size and limited capital resources create a level of economic risk that requires constant and focused management attention.
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.
Net income. BancShares realized an increase in earnings during the third quarter of 2006 compared to the third quarter of 2005. Consolidated net income during the third quarter of 2006 equaled $32.9 million, compared to $30.0 million earned during the corresponding period of 2005. The $3.0 million or 9.9 percent increase resulted from improved levels of net interest income and noninterest income and lower provision for credit losses, partially offset by higher noninterest
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expense. Net income per share during the third quarter of 2006 totaled $3.16, compared to $2.87 during the third quarter of 2005, a 10.1 percent increase. Return on average assets amounted to 0.84 percent for the third quarter of 2006, unchanged from the same period of 2005. Return on average equity for the third quarter of 2006 equaled 10.45 percent compared to 10.39 percent during the third quarter of 2005.
For the first nine months of 2006, BancShares recorded net income of $93.3 million, compared to $85.0 million earned during the first nine months of 2005. The $8.3 million or 9.7 percent increase was also the result of improved net interest income, higher noninterest income as well as lower provision for credit losses. These favorable variances were partially offset by higher noninterest expense. Net income per share for the first nine months of 2006 was $8.94, compared to $8.15 recorded during the same period of 2005. BancShares returned 0.83 percent on average assets during both the first nine months of 2006 and 2005. The annualized return on average equity amounted to 10.23 percent for the first nine months of 2006 compared to 10.16 percent during the same period of 2005.
FCB’s net income amounted to $104.2 million for the nine month period ended September 30, 2006, a 6.3 percent increase from the comparable period of 2005. Higher revenues more than offset the unfavorable impact of increased noninterest expenses.
ISB reported a net income of $654,000 during the first nine months of 2006, compared to a net loss of $3.3 million during the same period of 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 for credit losses. Partially offsetting the favorable impact of these trends is a declining net yield on interest-earning assets resulting from the adverse impact of the flat yield curve. Due to added costs arising from anticipated franchise expansion and the pressure resulting from the flat yield curve, ISB’s profitability will likely remain low.
Shareholders’ equity. BancShares continues to exceed minimum regulatory capital standards, and the banking subsidiaries remain well-capitalized. During the past several 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 $25.0 million into ISB during the first nine months of 2006. Since ISB was chartered in 1997, BancShares has provided $275.0 million in capital. Losses incurred since ISB’s inception total $28.6 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.
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(thousands, except per share dataand ratios)
Nine Months Ended
September 30
Third
Quarter
First
Summary of Operations
Net interest income-taxable equivalent
Selected Quarterly Averages
Investment securities
Interest-earning assets
Interest-bearing liabilities
Shareholders’ equity
Shares outstanding
Selected Quarter-End Balances
Profitability Ratios (averages)
Rate of return (annualized) on:
Dividend payout ratio
Liquidity and Capital Ratios (averages)
Loans and leases to deposits
Shareholders’ equity to total assets
Time certificates of $100,000 or more to total deposits
Per Share of Stock
Book value at period end
Tangible book value at period end
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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 consists almost exclusively of 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 third quarter of 2006 averaged $13.82 billion, an increase of $1.07 billion or 8.4 percent from the third quarter of 2005. For the nine months ended September 30, 2006, interest-earning assets averaged $13.49 billion, an increase of $1.18 billion or 9.6 percent over the same period of 2005. These increases primarily resulted from growth in the loan and lease portfolio and investment securities.
Loans and leases. At September 30, 2006 and 2005, loans and leases totaled $10.13 billion and $9.36 billion, respectively. The $769.9 million growth in loans and leases from September 30, 2005 to September 30, 2006 primarily reflects growth within BancShares’ commercial and industrial, commercial mortgage and construction and land development lending. Table 2 details outstanding loans and leases by type for the past five quarters. During the twelve-month period from September 30, 2005 to September 30, 2006, FCB’s loan growth rate was 6.9 percent, compared to 14.6 percent at ISB. ISB’s rate of loan growth continues to exceed that of FCB due to the rapid increase in loan balances that are typically experienced during the initial three-year period after entry into new markets.
Commercial real estate loans totaled $3.63 billion at September 30, 2006, 35.8 percent of total loans and leases. This represents an increase of $161.1 million or 4.6 percent since September 30, 2005. Both FCB and ISB have experienced continuing demand for commercial real estate financing in recent quarters. A large percentage of our commercial real estate loans are secured by owner-occupied properties, and were underwritten based primarily upon the cash flow from the operation of the business rather than the value of the underlying real estate collateral.
During the 12-month period ended September 30, 2006, we also experienced a $414.9 million or 40.1 percent increase in commercial and industrial loans, generated primarily in ISB markets. In addition, we recorded $144.6 million in loans made in conjunction with the United States Department of Agriculture tobacco buyout program. Commercial and industrial loans totaled $1.45 billion at September 30, 2006, 14.3 percent of total loans and leases, compared to $1.03 billion at September 30, 2005.
Revolving mortgage loans totaled $1.33 billion at September 30, 2006, representing 13.1 percent of total loans outstanding. This component of the loan portfolio has decreased $44.1 million since September 30, 2005, a trend we largely attribute to the flat yield curve making long-term fixed-rate financing relatively attractive versus variable rate revolving loans.
During the third quarter of 2006, total loans and leases averaged $10.08 billion, an increase of $751.9 million or 8.1 percent from the comparable period of 2005. For the year-to-date, total loans and leases have averaged $9.90 billion for 2006 compared to $9.33 billion for the same period of 2005, an increase of $568.1 million or 6.1 percent increase over the prior year.
We continue to focus on expansion of banking services to the medical community. At September 30, 2006, 12.3 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 the overall quality of our loan and lease portfolio.
Our continuing growth in new markets has allowed us to mitigate our geographic concentration in North Carolina and Virginia. Although we are pleased with the diversification that we have realized through the growth of ISB, we are aware that, in the absence of rigorous underwriting and monitoring controls, rapid loan and lease growth in new markets may present incremental lending risks. During the expansion of ISB into new markets, we have endeavored to ensure that such controls are functioning effectively and will continue to place emphasis upon maintaining strong lending standards in new markets.
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(thousands)
Real estate:
Construction and land development
Commercial mortgage
Residential mortgage
Revolving mortgage
Other mortgage
Total real estate
Commercial and industrial
Consumer
Lease financing
Total loans and leases
Net loans and leases
Investment securities. At September 30, 2006 and 2005, the investment securities portfolio totaled $3.12 billion and $2.87 billion, respectively. Total investment securities have increased 8.6 percent since September 30, 2005. Table 3 presents detailed information relating to the investment securities portfolio. During 2006, growth in deposits and master notes has exceeded loan demand, resulting in excess liquidity that has been invested in the investment securities portfolio. In addition to deposit growth, investable liquidity resulted from the $115.0 million in trust preferred securities issued during the second quarter of 2006.
Investment securities held to maturity totaled $287.2 million at September 30, 2006, compared to $696.9 million at September 30, 2005. This component of our investment securities portfolio continues to decline as securities mature and virtually all newly-purchased investment securities are classified as available for sale. The average maturity of the held-to-maturity portfolio increased from ten months at September 30, 2005 to thirteen months at September 30, 2006. Securities classified as held-to-maturity reflect BancShares’ ability and positive intent to hold those investments until maturity.
Investment securities available for sale totaled $2.83 billion at September 30, 2006, compared to $2.17 billion at September 30, 2005, a $656.0 million or 30.2 percent increase. Available-for-sale securities are reported at their aggregate fair value.
Income on interest-earning assets. Interest income amounted to $214.7 million during the third quarter of 2006, a $41.1 million or 23.7 percent increase from the third quarter of 2005. This increase resulted from higher yields as well as healthy growth in interest-earning assets. The taxable-equivalent yield on interest-earning assets increased 76 basis points from 5.42 percent in the third quarter of 2005 to 6.18 percent in the third quarter of 2006.
Loan interest income for the third quarter of 2006 was $175.3 million, an increase of $29.3 million or 20.0 percent from the third quarter of 2005, due to improved loan yields and growth in the loan portfolio. The taxable-equivalent yield on average loans grew from 6.24 percent to 6.93 percent from the third quarter of 2005 to the third quarter of 2006 due to higher market rates.
Within the investment securities portfolio, interest income amounted to $30.5 million during the third quarter of 2006 compared to $21.8 million during the third quarter of 2005, an increase of $8.7 million or 39.7 percent. The increase in interest income resulted from higher yields and growth in average investment securities. Average investment securities increased $307.7 million or 11.1 percent in the third quarter of 2006 when compared to the same period of 2005.
Overnight investments generated interest income of $8.9 million during the third quarter of 2006, compared to $5.7 million during the same period of 2005. The higher income is primarily the result of substantially higher yields.
Interest income totaled $607.2 million during the first nine months of 2006, a $125.2 million or 26.0 percent increase from the same period of 2005, the combined result of favorable rate and volume variances. The taxable-equivalent yield on interest-earning assets increased 78 basis points from 5.25 percent for the first nine months of 2005 to 6.03 percent during the same period of 2006. Higher market interest rates during 2006 contributed to the favorable rate variance.
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Fair
Value
AverageMaturity
(Yrs./Mos.)
Investment securities available for sale:
U. S. Government:
Within one year
One to five years
Five to ten years
Ten to twenty years
Over twenty years
Total
State, county and municipal:
Equity securities
Total investment securities available for sale
Investment securities held to maturity:
Total investment securities held to maturity
Total investment securities
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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For the nine months ended September 30, 2006, loan interest income was $501.7 million, an increase of $83.9 million or 20.1 percent from the same period of 2005. The increase in interest income reflects higher interest rates and growth in the loan portfolio. For the first nine months of 2006, the taxable-equivalent loan yield was 6.79 percent compared to 6.00 percent during the same period of 2005, up 79 basis points.
For the nine months ended September 30, 2006, income earned on the investment securities portfolio amounted to $83.1 million, compared to $51.3 million during the same period of 2005, an increase of $31.8 million or 62.0 percent. This increase is the combined result of an 86 basis point increase in the taxable-equivalent yield and a $581.9 million increase in average investment securities. Due to a 193 basis point yield increase, interest earned on overnight investments increased by $9.4 million, or 73.0 percent, during the first nine months of 2006 compared to the same period of 2005.
INTEREST-BEARING LIABILITIES
Interest-bearing liabilities include 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 Bank and other banking regulators.
During the third quarter of 2006, interest-bearing liabilities averaged $11.49 billion, an increase of $1.17 billion or 11.4 percent from the third quarter of 2005. This increase primarily resulted from higher levels of time deposits as customers shifted funds from money market and other short-term deposit products to time deposits in order to take advantage of higher market interest rates. Master notes also experienced strong growth due to customer demand.
Deposits. At September 30, 2006, total deposits were $12.68 billion, an increase of $557.7 million or 4.6 percent over September 30, 2005. Interest-bearing deposits averaged $9.94 billion during the third quarter of 2006 compared to $9.24 billion during the third quarter of 2005, an increase of $699.1 million or 7.6 percent. Average time deposits increased $873.1 million or 20.5 percent to $5.14 billion while money market balances remained stable at $2.68 billion. Average balances of both savings and Checking With Interest declined as compared to the same quarter of 2005.
For the first nine months of 2006, interest-bearing deposits averaged $9.78 billion compared to $9.06 billion during the same period of 2005. This $712.2 million or 7.9 percent increase results from substantial growth in time deposits due to customer rotation of liquidity from short-term deposit instruments.
Short-term borrowings. At September 30, 2006, short-term borrowings totaled $1.13 billion compared to $696.9 million at September 30, 2005. For the quarters ended September 30, 2006 and 2005, short-term borrowings averaged $1.04 billion and $661.4 million, respectively. The $382.8 million or 57.9 percent increase in average short-term borrowings is the result of the growth in master notes. Customer interest in these commercial cash management products has improved due to increased interest rates making these sweep products attractive investment alternatives. A similar increase was noted in average balances for the nine-month period ended September 30, 2006 versus September 30, 2005.
Long-term obligations. At September 30, 2006 and 2005, long-term obligations totaled $424.4 million and $409.7 million, respectively. The increase reflects the impact of $115 million in trust preferred securities issued during the second quarter of 2006.
For September 30, 2005, long-term obligations included $100.0 million in trust preferred capital securities issued in 2001 (the 2001 Securities). The 2001 Securities had a scheduled maturity date in 2031, but were called on October 31, 2006. The 2001 Securities were included in other short-term borrowings as of September 30, 2006.
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Total interest-earning assets
Checking With Interest
Savings
Money market accounts
Time deposits
Total interest-bearing deposits
Federal funds purchased
Repurchase agreements
Master notes
Other short-term borrowings
Total interest-bearing liabilities
Interest rate spread
Net interest income and net yield on interest-earning assets
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 35.0% and state income tax rate of 6.9% for each period. The taxable-equivalent adjustment was $468 for 2006 and $375 for 2005.
Expense on interest-bearing liabilities. BancShares’ interest expense amounted to $96.8 million during the third quarter of 2006, a $37.5 million or 63.2 percent increase from the third quarter of 2005. The higher interest expense was the result of higher deposit funding costs caused by escalating market rates and higher average balances of interest-bearing liabilities. The rate on interest-bearing liabilities was 3.34 percent during the third quarter of 2006 compared to 2.28 percent during the same period of 2005.
For the year-to-date, interest expense was $252.5 million, compared to $151.4 million for the same period of 2005. The $101.1 million or 66.8 percent increase results from higher interest rates and higher average volume. The rate on interest-bearing liabilities increased from 2.04 percent during the first nine months of 2005 to 3.03 percent for the same period of 2006, a 99 basis point increase. During 2006, money market deposits have experienced a 106 basis point rate increase, while the rate on time deposits increased 104 basis points.
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NET INTEREST INCOME
Net interest income totaled $117.9 million during the third quarter of 2006, an increase of $3.6 million or 3.2 percent from the $114.2 million recorded during the third quarter of 2005. On a linked quarter basis, current quarter net interest income declined by $1.1 million, or 0.9 percent as compared the second quarter of 2006. The taxable-equivalent net yield on interest-earning assets was 3.40 percent for the third quarter of 2006, down 14 basis points from the previous quarter and 17 basis points from the third quarter of 2005. Net interest income equaled $354.6 million and $330.6 million for the nine-month periods ended September 30, 2006 and 2005, respectively, an increase of $24.1 million or 7.3 percent. The taxable-equivalent net yield on interest-earning assets decreased 7 basis points from 3.60 percent during the first nine months of 2005 to 3.53 percent during the same period of 2006. For both the third quarter and the first nine months of 2006, the unfavorable impact of the flat yield curve and the growing net short-term liability-sensitivity of our balance sheet caused the net yields to decline despite the growth in net interest income.
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 are designed to protect against wide interest rate fluctuations, thereby limiting, to the extent possible, the ultimate interest rate exposure.
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 a net asset-sensitive position to a net liability-sensitive position. Based upon recent trends, it appears that the net liability-sensitivity position will continue to grow into 2007. Assuming no other changes, a net liability sensitive position indicates that rising market interest rates would likely cause a contraction in the net yield on interest-earning assets and, thus, net interest income will decline. Falling market interest rates would create a reverse impact. 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 residential 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.
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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 35.0% and state income tax rate of 0.0% for each period. The taxable-equivalent adjustment was $1,294 for 2006 and $1,090 for 2005.
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ASSET QUALITY
The maintenance of excellent asset quality is one of our primary areas of operational focus. Historically, we have dedicated significant resources to ensuring that we are prudent in our lending practices. Accordingly, we have focused on asset quality as a key performance measure. Table 6 provides asset quality information for the past five quarters and for the year-to-date for 2006 and 2005.
Nonperforming assets. At September 30, 2006, BancShares’ nonperforming assets, consisting of nonaccrual loans and other real estate, amounted to $25.1 million or 0.25 percent of loans plus other real estate compared to $15.9 million at September 30, 2005. Nonaccrual loans totaled $18.3 million at September 30, 2006, compared to $11.1 million at September 30, 2005, the increase primarily resulting from the fourth quarter 2005 classification of a single large commercial relationship as nonaccrual. Other real estate totaled $6.7 million at September 30, 2006, compared to $4.8 million at September 30, 2005. The increase in other real estate is attributable to the transfer from premises and equipment of certain parcels of land that were initially acquired for branch sites. The transfer resulted from the subsequent decision to abandon plans for branch offices at these locations. We closely monitor nonperforming assets, taking necessary actions to minimize potential exposure.
Allowance for credit losses. Our allowance for credit losses includes the allowance for loan and lease losses and the liability for unfunded credit commitments. We continuously analyze the growth and risk characteristics of the total loan and lease portfolio under current economic conditions in order to evaluate the adequacy of the allowance for loan and lease 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.
At September 30, 2006, the allowance for credit losses amounted to $138.2 million or 1.36 percent of loans outstanding. This compares to $133.2 million or 1.42 percent at September 30, 2005.
The provision for credit losses charged to operations during the third quarter of 2006 equaled $3.8 million, compared to $7.2 million during the third quarter of 2005, a decrease of $3.4 million or 47.1 percent. Net charge-offs for the three months ended September 30, 2006 totaled $2.7 million, compared to net charge-offs of $7.2 million during the same period of 2005. On an annualized basis, these net charge-offs represent 0.11 percent and 0.30 percent of average loans and leases outstanding during the respective periods.
For the nine-month periods ended September 30, total provision for credit losses equaled $13.5 million for 2006 and $19.5 million for 2005, a decrease of $6.0 million or 30.8 percent. The reduction in provision expense resulted primarily from lower net charge-offs. Net charge-offs for the nine-month period ended September 30, 2006 totaled $11.0 million, compared to $15.6 million during the same period of 2005. As a percentage of average loans and leases outstanding, these losses represent 0.15 percent for 2006 and 0.22 percent for 2005 on an annualized basis.
We consider the established allowance for credit losses adequate to absorb losses inherent in the loan and lease portfolio at September 30, 2006. While we use available information to establish provisions for credit losses, future additions to the allowance 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 for credit losses. Such agencies may require the recognition of adjustments based on their judgments of information available to them at the time of their examination.
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(thousands, except ratios)
Allowance for credit losses at beginning of period
Adjustments
Net charge-offs:
Charge-offs
Recoveries
Net charge-offs
Allowance for credit losses at end of period
Allowance for credit losses includes:
Liability for unfunded credit commitments
Historical Statistics
Average loans and leases
Loans and leases at period-end
Risk Elements
Nonaccrual loans and leases
Other real estate
Total nonperforming assets
Accruing loans and leases 90 days or more past due
Ratios
Net charge-offs (annualized) to average total loans and leases
Percent of total loans and leases at period-end:
Allowance for credit losses
Nonperforming assets to total loans plus other real estate
NONINTEREST INCOME
The growth of noninterest income is essential to our ability to sustain adequate levels of profitability. The primary sources of noninterest income are cardholder and merchant services income, service charges on deposit accounts, various types of commission-based income including the sale of investments by our broker-dealer subsidiaries, fees from processing services for client banks, various types of revenues derived from wealth management services and mortgage income. Noninterest income also includes gains and losses resulting from securities transactions, gains recognized from the securitization and sale of loans and gains recognized on branch sales.
During the first nine months of 2006, noninterest income was $208.0 million, compared to $197.9 million during the same period of 2005. The $10.1 million or 5.1 percent increase resulted from higher cardholder and merchant services income, commission income and fees from processing services. The favorable variances in these areas more than offset the impact of reductions in service charge income.
Cardholder and merchant services income increased $8.3 million from $55.6 million earned in the first nine months of 2005 to $63.9 million in the first nine months of 2006. This 14.9 percent increase in cardholder income was due to higher merchant discount and interchange fees for debit and credit card transactions.
Commission income totaled $24.7 million during the first nine months of 2006, compared to $19.5 million during the first nine months of 2005. This $5.2 million or 26.7 percent increase reflects higher fees from our broker-dealer subsidiaries due in part to stronger sales activity during 2006.
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In the first nine months of 2006, fees from processing services produced $22.0 million in noninterest income, an increase of $3.2 million or 16.7 percent from the same time period in 2005. New item processing clients and higher transaction volume for processed banks accounted for the favorable variance.
Trust and asset management fees contributed an additional $1.6 million during the first nine months of 2006 compared to the same period of 2005. This increase represents an 11.4 percent increase over the same period of 2005, the result of higher fees earned for various trust, fiduciary and asset management services.
Other income decreased $3.1 million during the first nine months of 2006. During 2005, other income included a gain of $2.9 million resulting from the securitization and sale of revolving mortgage loans. There were no securitization and sale transactions in 2006. During 2006, other income included a $936,000 gain that resulted from sale of a branch.
Service charge income decreased $3.4 million or 5.9 percent from the $57.9 million earned during the first nine months of 2005. Much of the reduction relates to commercial service charge income, which has declined as interest rates have increased for accounts subject to commercial analysis.
During the third quarter of 2006, noninterest income was $72.6 million, a $4.5 million or 6.6 percent increase over the $68.1 million earned during the third quarter of 2005. Cardholder and merchant services income increased $3.0 million or 15.0 percent during 2006 due to higher merchant discount and interchange income for debit and credit transactions. Commission income increased $1.8 million due to improved broker-dealer revenues generated during 2006. Fees from processing services increased $1.2 million or 18.7 percent.
Partially offsetting these increases, service charges on deposit accounts decreased $1.5 million or 7.8 percent during the third quarter of 2006 due to reductions in commercial service charge income.
NONINTEREST EXPENSE
The primary components of noninterest expense are salaries and related employee benefit costs, occupancy costs related to branch offices and support facilities, equipment costs and other operating costs. Noninterest expense amounted to $401.8 million for the first nine months of 2006, a 7.4 percent increase over the $374.0 million recorded during the same period of 2005. The $27.8 million increase in noninterest expense results from higher personnel and general operating costs. ISB noninterest expenses increased $6.0 million or 12.4 percent over 2005 due to branch expansion.
Salary expense increased $13.1 million during 2006 when compared to the same period of 2005. This 8.2 percent increase is due to higher incentive compensation costs and incremental staff costs for new branch offices in both FCB, ISB and support functions. Incentive compensation increased $3.1 million or 29.3 percent during the first nine months of 2006, primarily due to higher wealth management incentives. ISB’s salary expense increased $2.5 million or 12.4 percent as additional personnel costs were incurred to staff new offices.
Employee benefits expense decreased $598,000 or 1.5 percent during the first nine months of 2006, compared to the corresponding period of 2005. This reduction reflects the favorable impact of a $2.1 million reduction in pension expense and the absence of a $1.8 million expense recorded during 2005 to adjust the accrued liability for a post-retirement benefit plan for certain executive officers. These items were partially offset by a $2.6 million increase in health and disability costs.
Occupancy expense increased $3.6 million to $38.6 million during the first nine months of 2006. This 10.4 percent increase resulted from higher depreciation and rent expense for branch facilities and incremental costs associated with a new corporate headquarters building. As a result of additional locations, ISB’s occupancy expense increased $1.4 million or 16.7 percent during 2006.
Other expenses increased $10.1 million or 9.8 percent during the first nine months of 2006 when compared to the first nine months of 2005. Increases in other noninterest expense occurred in cardholder processing costs, courier expense and costs related to various cardholder loyalty programs.
For the third quarter of 2006, noninterest expense totaled $134.9 million, a $6.2 million or 4.8 percent increase over the same period of 2005. Salary expense totaled $59.3 million during the third quarter of 2006, an increase of $3.7 million or 6.6 percent due primarily to costs for new associates hired to support the continuing branch expansion. Occupancy expense increased $1.3 million or 10.4 percent due to higher building costs.
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INCOME TAXES
BancShares continually monitors and evaluates the potential impact of current events on the estimates used to establish income tax expenses and income tax liabilities. On a periodic basis, we evaluate our income tax positions based on current tax law, positions taken by various tax auditors within the jurisdictions that BancShares is required to file income tax returns as well as potential or pending audits or assessments by tax auditors.
For the third quarters of 2006 and 2005, the effective tax rates were 36.4 percent and 35.5 percent, respectively. The effective tax rates for the nine-month periods ended September 30, 2006 and 2005 were 36.7 percent and 37.0 percent, respectively.
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 September 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.
On October 31, 2006, BancShares redeemed $100.0 million of trust preferred securities that had been issued in 2001.
SHAREHOLDERS’ EQUITY AND CAPITAL ADEQUACY
BancShares continues to exceed all minimum regulatory capital requirements, and the banking subsidiaries remain well-capitalized. At September 30, 2006 and 2005, the leverage capital ratio of BancShares was 9.90 percent and 9.22 percent, respectively, surpassing the minimum level of 3 percent. As a percentage of risk-adjusted assets, BancShares’ Tier 1 capital ratio was 13.61 percent at September 30, 2006, and 12.51 percent as of September 30, 2005. The minimum ratio allowed is 4 percent of risk-adjusted assets. The total risk-adjusted capital ratio was 16.07 percent at September 30, 2006 and 15.08 percent as of September 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 October 31, 2006 redemption of the $100.0 million in trust preferred securities issued during 2001, BancShares’ capital ratios will decline. BancShares, FCB and ISB will remain well-capitalized following the redemption.
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 current modest expansion of its branch network, the costs associated with de novo branching are not material to FCB’s financial performance. Since it first opened in 1997, ISB has followed a similar business model for growth and expansion. Yet, due to the large number of branch offices that have yet to attain sufficient size for profitability, the financial results and trends of ISB are significantly affected by its current and continuing growth. Each new market ISB enters creates additional operating costs that are typically not fully offset by operating revenues until the third year after initial opening. ISB’s rapid growth in new markets in recent years has continued to adversely impact its financial performance.
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ISB. ISB’s total assets increased from $1.78 billion at September 30, 2005 to $2.06 billion at September 30, 2006, an increase of $282.7 million or 15.9 percent. ISB’s net interest income increased $5.2 million or 11.5 percent during the first nine months of 2006, when compared to the same period of 2005, the result of higher loan yields and higher levels of average loans and leases. Provision for credit losses decreased $4.3 million or 64.4 percent due to lower net charge-offs and reduced loan growth.
ISB’s noninterest income increased $2.8 million or 51.5 percent during the first nine months of 2006, due to higher working capital finance and cardholder and merchant services income, partially offset by a reduction in mortgage income. Noninterest expense increased $6.0 million or 12.4 percent during 2006, caused by higher personnel, occupancy and card processing costs. Higher personnel and occupancy result from the continuing expansion of the ISB branch network .
ISB recorded net income of $654,000 during the first nine months of 2006 compared to a net loss of $3.3 million during the same period of 2005. This represents a favorable variance of $3.9 million, the result of a higher revenues and lower provision costs.
ISB continues to evaluate both existing and new markets for expansion. As such growth occurs, ISB will continue to incur incremental personnel and occupancy costs. As a result of the de novo status of much of the ISB franchise and plans for continued expansion, ISB’s profitability will likely remain low for the foreseeable future.
FCB. FCB’s total assets increased from $12.59 billion at September 30, 2005 to $13.43 billion at September 30, 2006, an increase of $842.0 million or 6.7 percent. FCB’s net interest income increased $21.6 million or 7.2 percent during the first nine months of 2006, the result of higher loan yields and loan growth. Provision for credit losses decreased $1.7 million or 13.5 percent due to lower net charge-offs.
FCB’s noninterest income increased $8.3 million or 4.2 percent during the first nine months of 2006, primarily the result of cardholder and merchant income and commission income. Noninterest expense increased $22.7 million or 6.9 percent during the first nine months of 2006, primarily due to higher personnel, occupancy and card processing costs.
FCB recorded net income of $104.2 million during the first nine months of 2006 compared to $98.0 million during the same period of 2005. This represents a $6.2 million or 6.3 percent increase in net income, reflecting the favorable impact on net interest income of increases in market interest rates during the past 12 months.
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.
In June 2006, the FASB issued Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 clarifies uncertainty in income taxes recognized by establishing a recognition threshold and a measurement attribute for the financial statement treatment of a tax position taken or expected to be taken in a tax return. FIN 48 is effective January 1, 2007. We continue to evaluate the impact that FIN 48 may ultimately have on our consolidated financial statements.
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In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 “Fair Value Measurements” (Statement 157). Statement 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Statement 157 does not require any new fair value measurements, but clarifies and standardizes some divergent practices that have emerged since prior guidance was issued. Statement 157 will become effective for BancShares on January 1, 2008. There will be no material impact on our consolidated financial statements.
In September 2006, the FASB issued Summary of Statement No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (Statement 158). Statement 158 requires sponsors of defined benefit and other post-retirement plans to recognize the overfunded or underfunded status of that plan as an asset or liability in the sponsor’s statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. The recognition of the funded status of the defined benefit plan and additional disclosures outlined in Statement 158 will be included in BancShares’ December 31, 2006 consolidated financial statements. The impact of that recognition will not be known until the fair value of the plan assets is known. Statement 158 also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, although that requirement is not effective until 2008.
Management is not aware of any current recommendations by regulatory authorities that, if implemented, would have or would be reasonably likely to have a material effect on liquidity, capital ratios or results of operations.
FORWARD-LOOKING STATEMENTS
Statements in this Report and exhibits relating to plans, strategies, economic performance and trends, projections of results of specific activities or investments, expectations or beliefs about future events or results, and other statements that are not descriptions of historical facts, may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed in our Annual Report on Form 10-K and in other documents filed by us from time to time with the Securities and Exchange Commission.
Forward-looking statements may be identified by terms such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “forecasts,” “projects,” “potential” or “continue,” or similar terms or the negative of these terms, or other statements concerning opinions or judgments of BancShares’ management about future events.
Factors that could influence the accuracy of those forward-looking statements include, but are not limited to, the financial success or changing strategies of our customers, customer acceptance of our services, products and fee structure, the competitive nature of the financial services industry, our ability to compete effectively against other financial institutions in our banking markets, actions of government regulators, the level of market interest rates and our ability to manage our interest rate risk, changes in general economic conditions particularly changes that affect our loan and lease portfolio, the abilities of our borrowers to repay their loans and leases, and the values of collateral, and other developments or changes in our business that we do not expect.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We have no obligation to update these forward-looking statements.
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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 September 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 third quarter of 2006 that had materially affected, or is reasonably likely to materially affect, BancShares’ internal control over financial reporting.
PART II
Item 6. Exhibits
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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.
FIRST CITIZENS BANCSHARES, INC.
(Registrant)
/s/ Kenneth A. Black
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