Edgar Filing: FIRST CITIZENS BANCSHARES INC /DE/

Form 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2007

Commission File Number 0-16471

FIRST CITIZENS BANCSHARES, INC.

(Exact name of Registrant as specified in the charter)


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

4300 Six Forks Road

Raleigh, North Carolina 27609

(Address of Principal Executive Offices, Zip Code)

(919) 716-7000

(Registrant’s Telephone Number, including Area Code)


		Securities registered pursuant to:
		Section 12(b) of the Act:		Class A Common Stock, Par Value $1
		Section 12(g) of the Act:		Class B Common Stock, Par Value $1
				(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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


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

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

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

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

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

CROSS REFERENCE INDEX


			Page
PART 1	Item 1	Business	3
	Item 1A	Risk Factors	6
	Item 1B	Unresolved Staff Comments	None
	Item 2	Properties	6
	Item 3	Legal Proceedings	34-35
	Item 4	Submission of Matters to a Vote of Security Holders	None
PART II	Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	6
	Item 6	Selected Financial Data	10
	Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	8-36
	Item 7A	Quantitative and Qualitative Disclosures about Market Risk	28-29
	Item 8	Financial Statements and Supplementary Data
		Report of Independent Registered Public Accounting Firm	37
		Management’s Annual Report on Internal Control over Financial Reporting	38
		Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting	39
		Consolidated Balance Sheets at December 31, 2007 and 2006	40
		Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2007	41
		Consolidated Statements of Changes in Shareholders’ Equity for each of the years in the three-year period ended December 31, 2007	42
		Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2007	43
		Notes to Consolidated Financial Statements	44-66
		Quarterly Financial Summary for 2007 and 2006	32
	Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	None
	Item 9A	Controls and Procedures	7
	Item 9B	Other Information	None
PART III	Item 10	Directors and Executive Officers and Corporate Governance	*
	Item 11	Executive Compensation	*
	Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	*
	Item 13	Certain Relationships and Related Transactions and Director Independence	*
	Item 14	Principal Accounting Fees and Services	*
PART IV	Item 15	Exhibits, Financial Statement Schedules
	(1)	Financial Statements (see Item 8 for reference)
	(2)	All Financial Statement Schedules normally required on Form 10-K are omitted since they are not applicable, except as referred to in Item 8.
	(3)	The Exhibits listed on the Exhibit Index contained in this Form 10-K are filed with or furnished to the Commission or incorporated by reference into this report and are available upon written request.

Information required by Item 10 is incorporated herein by reference to the information that appears under the headings or captions ‘Proposal 1: Election of Directors,’ ‘Code of Ethics,’ ‘Committees of our Board—General,’ and ‘—Audit and Compliance Committee’, ‘Executive Officers’ and ‘Section 16(a) Beneficial Ownership Reporting Compliance’ from the Registrant’s Proxy Statement for the 2008 Annual Meeting of Shareholders (2008 Proxy Statement) .

Information required by Item 11 is incorporated herein by reference to the information that appears under the headings or captions ‘Compensation Discussion and Analysis,’ ‘Compensation Committee Report,’ ‘Executive Compensation,’ and ‘Director Compensation,’ of the 2008 Proxy Statement.

Information required by Item 12 is incorporated herein by reference to the information that appears under the heading ‘Beneficial Ownership of Our Common Stock’ of the 2008 Proxy Statement.

Information required by Item 13 is incorporated herein by reference to the information that appears under the headings or captions ‘Corporate Governance—Director Independence’ and ‘Transactions with Related Persons’ of the 2008 Proxy Statement.

Information required by Item 14 is incorporated by reference to the information that appears under the caption ‘Services and Fees During 2007 and 2006’ of the 2008 Proxy Statement.

Business

First Citizens BancShares, Inc. (BancShares) was incorporated under the laws of Delaware on August 7, 1986, to become the holding company of First-Citizens Bank & Trust Company (First Citizens Bank or FCB), its banking subsidiary. FCB opened in 1898 as the Bank of Smithfield, Smithfield, North Carolina, and through a series of mergers and name changes, it later became First-Citizens Bank & Trust Company. As of December 31, 2007, FCB operated 340 offices in North Carolina, Virginia, West Virginia, Maryland and Tennessee.

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

During 2002, ISB continued its expansion into high-growth markets by opening offices in Austin, Texas. During 2003, ISB opened offices in Scottsdale, Arizona, the San Diego, Newport Beach and LaJolla communities in Southern California and Sacramento in Northern California. ISB continued its expansion in 2004 and 2005 by opening branch facilities in Denver, Colorado; Albuquerque, New Mexico; Santa Fe, New Mexico; Portland, Oregon; and Seattle, Washington. These markets were selected based on their strong anticipated economic growth rates and the desire to bring a bank with a focus on customer service in these communities. At December 31, 2007, ISB had 56 offices. During 2006, ISB received approval to expand into Houston, Texas. During 2007, ISB received regulatory approval to open branch offices in Dallas, Texas; Oklahoma City, Oklahoma; Kansas City, Missouri; and Kansas City, Kansas.

BancShares’ executive offices are located at 4300 Six Forks Road, Raleigh, North Carolina 27609, and its telephone number is (919) 716-7000. Although BancShares does not maintain a dedicated website, information regarding BancShares is available at FCB’s website, www.firstcitizens.com. At December 31, 2007, BancShares and its subsidiaries employed a full-time staff of 4,014 and a part-time staff of 767 for a total of 4,781 employees.

BancShares’ subsidiary banks seek to meet the needs of both consumers and commercial entities in their respective market areas. These services, offered at most offices, include taking of deposits, cashing of checks, and providing for individual and commercial cash needs; numerous checking and savings plans; commercial, business and consumer lending; a full-service trust department; and other activities incidental to commercial banking. First Citizens Investor Services, Inc. (FCIS) and IronStone Securities (ISS) provide various investment products, including annuities, discount brokerage services and third-party mutual funds to customers. Various other subsidiaries are not material to BancShares’ consolidated financial position or to consolidated net income.

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

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

FCB is a state-chartered bank, subject to supervision and examination by, and the regulations and reporting requirements of, the Federal Deposit Insurance Corporation (FDIC) and the North Carolina Commissioner of Banks. ISB is a federally-chartered thrift institution supervised by the Office of Thrift Supervision. Deposit obligations of FCB and ISB are insured by the FDIC.

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

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

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

The Gramm-Leach-Bliley Act (GLB Act) adopted by Congress during 1999 expanded opportunities for banks and bank holding companies to provide services and engage in other revenue-generating activities that previously were prohibited to them. The GLB Act permits bank holding companies to become “financial holding companies” and expands activities in which banks and bank holding companies may participate, including opportunities to affiliate with securities firms and insurance companies. During 2000, BancShares became a financial holding company. The GLB Act also contains extensive customer privacy protection provisions which require banks to adopt and implement policies and procedures for the protection of the financial privacy of their customers, including procedures that allow customers to elect that certain financial information not be disclosed to certain persons.

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

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

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

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

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

Under the Federal Deposit Insurance Reform Act of 2005 (FDIRA), the FDIC uses a risk-based assessment system to determine the amount of a bank’s deposit insurance assessment based on an evaluation of the probability that the deposit insurance fund (DIF) will incur a loss with respect to that bank. The evaluation considers risks attributable to different categories and concentrations of the bank’s assets and liabilities and other factors the FDIC considers to be relevant, including information obtained from the bank’s federal and state banking regulators.

The FDIC is responsible for maintaining the adequacy of the DIF, and the amount paid by a bank for deposit insurance is influenced not only by the assessment of the risk it poses to the DIF, but also by the adequacy of the insurance fund to cover the risk posed by all insured institutions. FDIC insurance assessments could be increased substantially in the future if the FDIC finds such an increase to be necessary in order to adequately maintain the DIF. Additionally, under the FDIA, the FDIC may terminate a bank’s deposit insurance if it finds that the bank has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated applicable laws, regulations, rules, or orders.

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

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

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

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

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

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

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

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

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

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

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

Risk Factors

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

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

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

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

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

Properties

As of December 31, 2007, BancShares’ subsidiary financial institutions operated branch offices at 396 locations in North Carolina, Virginia, West Virginia, Maryland, Tennessee, Florida, Georgia, Texas, Arizona, California, New Mexico, Colorado, Oregon and Washington. BancShares owns many of the buildings and leases other facilities from third parties. In early 2007, ISB announced plans to expand into four new markets: Dallas, Texas; Oklahoma City, Oklahoma; Kansas City, Missouri; and Kansas City, Kansas.

Additional information relating to premises, equipment and lease commitments is set forth in Note E of BancShares’ consolidated financial statements.

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

BancShares’ Class A and Class B common stock is traded in the over-the-counter market, and the Class A common stock is listed on the NASDAQ Global Select Market under the symbol FCNCA. The Class B common stock is quoted on the OTC Bulletin Board under the symbol FCNCB. As of December 31, 2007, there were 2,122 holders of record of the Class A common stock, and 391 holders of record of the Class B common stock.

The per share cash dividends declared by BancShares and the high and low sales prices for each quarterly period during 2007 and 2006 are set forth in Table 17 under the caption ‘Per Share of Stock’ of this report. A cash dividend of 27.5 cents per share was declared by the Board of Directors on January 28, 2008, payable April 7, 2008, to holders of record as of March 17, 2008. Payment of dividends is made at the discretion of the Board of Directors and is contingent upon satisfactory earnings as well as projected future capital needs. BancShares’ principal source of liquidity for payment of shareholder dividends is the dividend it receives from FCB. FCB is subject to various requirements under federal and state banking laws that restrict the payment of dividends and its ability to lend to BancShares. Subject to the foregoing, it is currently management’s expectation that comparable cash dividends will continue to be paid in the future.

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

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

LOGO

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 to provide reasonable assurance that it is able to record, process, summarize and report in a timely manner the information required to be disclosed in reports it files under the Exchange Act.

Management’s Annual Report on Internal Control Over Financial Reporting is included on page 38 of this Report. The report of BancShares’ independent accountants regarding BancShares’ internal control over financial reporting is included on page 39 of this Report.

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

Available Information

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

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

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

OVERVIEW

BancShares is a financial holding company headquartered in Raleigh, North Carolina that offers full-service banking through 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 branches in Florida, Georgia, Texas, New Mexico, Arizona, California, Colorado, Oregon and Washington. ISB also operates a loan production office in Missouri and plans to open similar offices in Kansas and Oklahoma in early 2008. Beyond the traditional branch network, we offer customer access through telephone and online banking and our extensive ATM network.

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

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

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

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

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

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

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

PERFORMANCE SUMMARY

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

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

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

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

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

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

Table 2 details business combinations during 2007, 2006 and 2005. During 2007 and 2006, BancShares sold three entities—two insurance companies and a transaction processing company. The 2005 branch acquisition was accounted for as a purchase, with the results of operations included with BancShares’ consolidated financial statements since the respective acquisition date. No material purchase transactions occurred during the three-year period presented.

Table 1

FINANCIAL SUMMARY AND SELECTED AVERAGE BALANCES AND RATIOS


	2007			2006			2005			2004			2003
	(thousands, except share data and ratios)
SUMMARY OF OPERATIONS
Interest income	$	904,056		$	830,315		$	669,540		$	524,013		$	512,857
Interest expense		423,714			353,737			218,151			133,826			148,537

Net interest income		480,342			476,578			451,389			390,187			364,320
Provision for credit losses		33,594			20,922			33,514			34,690			24,617

Net interest income after provision for credit losses		446,748			455,656			417,875			355,497			339,703
Noninterest income		295,470			271,367			257,666			245,884			237,725
Noninterest expense		574,664			531,077			496,871			477,186			460,827

Income before income taxes		167,554			195,946			178,670			124,195			116,601
Income taxes		58,937			69,455			65,808			49,352			41,414

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

Net interest income, taxable equivalent	$	488,019		$	482,927		$	455,687		$	392,242		$	366,381

SELECTED AVERAGE BALANCES
Total assets	$	15,919,222		$	15,240,327		$	13,905,260		$	12,856,102		$	12,245,840
Investment securities		3,144,052			3,028,384			2,533,161			2,157,367			2,585,376
Loans and leases		10,513,599			9,989,757			9,375,249			8,901,628			7,893,621
Interest-earning assets		14,292,322			13,637,388			12,503,877			11,493,005			10,939,526
Deposits		12,659,236			12,452,955			11,714,569			10,961,380			10,433,781
Interest-bearing liabilities		11,883,421			11,262,423			10,113,999			9,327,436			9,163,960
Long-term obligations		405,758			450,272			353,885			287,333			255,379
Shareholders’ equity	$	1,370,617		$	1,241,254		$	1,131,066		$	1,053,860		$	996,578
Shares outstanding		10,434,453			10,434,453			10,434,453			10,435,247			10,452,523

SELECTED PERIOD-END BALANCES
Total assets	$	16,212,107		$	15,729,697		$	14,639,392		$	13,265,711		$	12,566,961
Investment securities		3,236,835			3,221,048			2,929,516			2,125,524			2,469,447
Loans and leases		10,963,904			10,273,043			9,656,230			9,364,822			8,333,073
Interest-earning assets		14,466,948			13,842,688			13,066,758			11,874,089			11,096,925
Deposits		12,928,544			12,743,324			12,173,858			11,350,798			10,711,332
Interest-bearing liabilities		12,118,967			11,612,372			10,745,696			9,641,368			9,251,903
Long-term obligations		404,392			401,198			408,987			285,943			289,277
Shareholders’ equity	$	1,441,208		$	1,310,819		$	1,181,059		$	1,086,310		$	1,029,305
Shares outstanding		10,434,453			10,434,453			10,434,453			10,434,453			10,436,345

PROFITABILITY RATIOS (averages)
Rate of return on:
Total assets		0.68	%		0.83	%		0.81	%		0.58	%		0.61	%
Shareholders’ equity		7.92			10.19			9.98			7.10			7.54
Dividend payout ratio		10.57			9.08			10.17			15.34			15.30

LIQUIDITY AND CAPITAL RATIOS (averages)
Loans and leases to deposits		83.05	%		80.22	%		80.03	%		81.21	%		75.65	%
Shareholders’ equity to total assets		8.61			8.14			8.13			8.20			8.14
Time certificates of $100,000 or more to total deposits		17.33			15.34			12.57			11.05			10.33

PER SHARE OF STOCK
Net income	$	10.41		$	12.12		$	10.82		$	7.17		$	7.19
Cash dividends		1.10			1.10			1.10			1.10			1.10
Market price at December 31 (Class A)		145.85			202.64			174.42			148.25			120.50
Book value at December 31		138.12			125.62			113.19			104.11			98.63
Tangible book value at December 31		127.72			115.02			102.35			93.12			87.56

Table 2

BUSINESS COMBINATIONS


Year	Description of transaction	Total Loans			Total Deposits
			(thousands)
2007	Sale of American Guaranty Insurance Company, a property and casualty insurance company	$	—		$	—
2007	Sale of Triangle Life Insurance Company, an accident and life insurance company		—			—
2006	Sale of T-TECH, Inc., a payments processing company		—			—
2006	Sale of one branch by FCB		(36	)		(20,553	)
2005	Purchase of one branch by FCB		11			20,957

CRITICAL ACCOUNTING POLICIES

Information included in our audited financial statements and management’s discussion and analysis is derived from our accounting records, which are maintained in accordance with accounting principles generally accepted in the United States of America and general practices within the banking industry. While much of the information is definitive, certain accounting issues are highly dependent upon estimates and assumptions made by management. An understanding of these estimates and assumptions is vital to understanding BancShares’ financial statements. Critical accounting policies are those policies that are most important to the determination of our financial condition and results of operations or that require management to make assumptions and estimates that are subjective or complex.

We periodically evaluate our critical accounting policies, including those related to the allowance for credit losses, pension plan assumptions and income taxes. While we base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, actual results may differ from these estimates under different assumptions or outcomes.

Allowance for credit losses. The allowance for credit losses, which consists of the allowance for loan and lease losses and the liability for unfunded credit commitments, reflects the estimated losses resulting from the inability of our customers to make required payments. The allowance for credit losses reflects management’s evaluation of the risk characteristics of the loan and lease portfolio under current economic conditions and considers such factors as the financial condition of the borrower, fair market value of collateral and other items that, in our opinion, deserve current recognition in estimating possible loan and lease losses. Our evaluation process is based on historical evidence and current trends among delinquencies, defaults and nonperforming assets.

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

Pension plan assumptions. BancShares offers a defined benefit pension plan to qualifying employees. The calculation of the obligation, future plan asset value, funded status and related pension expense under the pension plan requires the use of actuarial valuation methods and assumptions. The valuations and assumptions used to determine the future value of pension plan assets and liabilities are subject to management judgment and may differ significantly depending upon the assumption used. The discount rate used to estimate the present value of the benefits to be paid under the pension plan reflects the interest rate that could be obtained for a suitable investment used to fund the obligations. The assumed discount rate equaled 6.25 percent at December 31, 2007, compared to 5.75 percent at December 31, 2006 due to changes in market interest rates. Assuming other variables remain unchanged, an increase in the assumed discount rate would reduce the calculated benefit obligations, which would result in reduced expense. Conversely, a reduction in the assumed discount rate would cause an increase in obligations, thereby resulting in higher employee benefits expense.

We also estimate a long-term rate of return on pension plan assets that is used to calculate the value of plan assets over time. We consider such factors as the actual return earned on plan assets, historical returns on the various asset classes in the plan assets and projections of future returns on various asset classes. Based on these factors, we estimated the expected long-term return on plan assets to be 8.50 percent for 2007 and 2006. Assuming other variables remain unchanged, an increase in the long-term rate of return on plan assets reduces pension expense.

The assumed rate of future compensation increases is reviewed annually based on actual experience and future salary expectations. The compensation increase assumption was 4.25 percent during 2007 and 2006. Assuming other variables remain unchanged, a reduction in the rate of future compensation increases results in lower pension expense.

Income taxes. Management estimates income tax expense using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the amount of assets and liabilities reported in the consolidated financial statements and their respective tax bases. In estimating the liabilities and related expense related to income taxes, management assesses the relative merits and risks of various tax positions considering statutory, judicial and regulatory guidance. Because of the complexity of tax laws and regulations, interpretation is difficult and subject to differing judgments.

Changes in the estimate of income tax liabilities occur periodically due to changes in actual or estimated future tax rates and projections of taxable income, interpretations of tax laws, the complexities of multi-state income tax reporting, the status of examinations being conducted by various taxing authorities and the impact of newly enacted legislation or guidance as well as income tax accounting pronouncements.

INTEREST-EARNING ASSETS

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

We have historically focused on maintaining high asset quality, which results in a loan and lease portfolio subjected to strenuous underwriting and monitoring procedures. That focus on asset quality also influences our investment securities portfolio. At December 31, 2007, United States Treasury and government agency securities represented 97.8 percent of our investment securities portfolio. Overnight investments are selectively made with other financial institutions that are within our risk tolerance.

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

Interest-earning assets averaged $14.29 billion during 2007, an increase of $654.9 million or 4.8 percent over 2006 levels, compared to a $1.13 billion or 9.1 percent increase in 2006 over 2005 levels. The increase among interest-earning assets during 2007 and 2006 resulted from growth in loans, leases and investment securities.

Loans and leases. As of December 31, 2007, loans and leases outstanding equaled $10.96 billion, a 6.7 percent increase over the December 31, 2006 balance of $10.27 billion. The $690.9 million increase in loans and leases during 2007 resulted from growth among commercial mortgage, commercial and industrial and revolving mortgage loans. FCB loans and leases increased $489.1 million or 5.8 percent, while ISB loans and leases increased $201.8 million or 10.8 percent during 2007. Loan balances for the last five years are presented in Table 3.

Loans secured by real estate totaled $7.46 billion at December 31, 2007, compared to $7.03 billion at December 31, 2006. Loans secured by commercial mortgages totaled $3.98 billion at December 31, 2007, a $256.7 million or 6.9 percent increase from December 31, 2006. Although we continued to see adequate growth in commercial mortgage lending during 2007, competition for high quality commercial mortgage loans remains strong. In 2006 commercial mortgage loans increased 5.9 percent over 2005. The sustained growth reflects our continued focus on small business customers, particularly among medical-related and other professional customers targeted by our banking subsidiaries. As a

percentage of total loans and leases, commercial mortgage loans represent 36.3 percent at December 31, 2007 and December 31, 2006. A large percentage of our commercial mortgage portfolio is secured by owner-occupied facilities, rather than investment property. These loans are underwritten based primarily upon the cash flow from the operation of the business rather than the value of the real estate collateral.

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

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

Consumer loans not secured by real estate experienced little growth during 2007, totaling $1.37 billion at December 31, 2007, an increase of $7.7 million from the prior year. This compares to an increase during 2006 of $41.6 million or 3.2 percent. At December 31, 2007 and 2006, consumer loans not secured by real estate represented 12.5 percent and 13.2 percent of the total portfolio, respectively.

We anticipate moderate levels of growth in commercial mortgage and commercial and industrial loans in 2008. Our growth and expansion in new markets will favorably influence aggregate loan and lease demand among our business customers. However, projected economic instability will likely curb customer demand for loans and lender support for increased debt levels. All growth projections are therefore subject to change due to further economic deterioration or improvement and other external factors.

Table 3

LOANS AND LEASES


	December 31
	2007		2006		2005		2004		2003
	(thousands)
Real estate:
Construction and land development	$	810,818	$	783,680	$	766,945	$	588,092	$	509,578
Commercial mortgage		3,982,496		3,725,752		3,518,563		3,279,729		2,654,414
Residential mortgage		1,029,030		1,025,235		1,016,677		979,663		929,096
Revolving mortgage		1,494,431		1,326,403		1,368,729		1,714,032		1,598,603
Other mortgage		145,552		165,223		172,712		171,700		173,489

Total real estate loans		7,462,327		7,026,293		6,843,626		6,733,216		5,865,180
Commercial and industrial		1,707,394		1,526,818		1,206,585		980,164		935,514
Consumer		1,368,228		1,360,524		1,318,971		1,397,820		1,303,718
Lease financing		340,601		294,366		233,499		192,164		160,390
Other		85,354		65,042		53,549		61,458		68,271

Total loans and leases		10,963,904		10,273,043		9,656,230		9,364,822		8,333,073
Less allowance for loan and lease losses		136,974		132,004		128,847		123,861		112,304

Net loans and leases	$	10,826,930	$	10,141,039	$	9,527,383	$	9,240,961	$	8,220,769

There were no foreign loans or leases in any period.

Investment securities. Investment securities available for sale at December 31, 2007 and 2006 totaled $3.23 billion and $3.00 billion, respectively, a $227.4 million increase. Available-for-sale securities are reported at their aggregate fair value, and unrealized gains and losses on available-for-sale securities are included as a component of other comprehensive income, net of deferred taxes.

Investment securities held to maturity totaled $7.6 million and $219.2 million, respectively, at December 31, 2007 and 2006. The $211.6 million reduction in investment securities held to maturity during 2007 resulted from scheduled maturities and the designation of all newly-purchased securities as available-for-sale. Securities that are classified as held-to-maturity reflect BancShares’ ability and positive intent to hold those investments until maturity.

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

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

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

The taxable-equivalent yield on the loan and lease portfolio increased marginally from 6.86 percent in 2006 to 6.94 percent in 2007. The combination of the 8 basis point yield increase, and the $523.8 million or 5.2 percent growth in average loans and leases contributed to an increase in loan interest income of $44.2 million or 6.5 percent over 2006. This followed an increase of $109.0 million or 19.0 percent in loan interest income in 2006 over 2005, the combined result of a $614.5 million increase in average loans and leases and a 72 basis point yield increase. The higher yield during 2006 reflects the impact of Federal Reserve actions to increase market interest rates.

Table 4

INVESTMENT SECURITIES


	December 31
	2007							2006				2005
	Cost		Fair Value		Average Maturity (Yrs./Mos.)	Taxable Equivalent Yield		Cost		Fair Value		Cost		Fair Value
	(thousands, except maturity and yield information)
Investment securities available for sale:
U. S. Government:
Within one year	$	1,667,530	$	1,675,309	0/6	4.83	%	$	1,514,194	$	1,503,970	$	1,159,556	$	1,140,602
One to five years		1,377,766		1,399,482	1/7	4.55			1,367,029		1,363,571		1,055,472		1,044,913
Five to ten years		6,435		6,419	5/7	4.88			6,337		6,095		115		109
Over ten years		78,012		77,632	26/11	5.47			53,250		52,054		29,721		29,097

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

State, county and municipal:
Within one year		709		708	0/4	3.86			875		873		954		947
One to five years		2,246		2,236	2/3	4.11			2,734		2,696		3,013		2,977
Five to ten years		356		363	5/3	4.95			470		477		1,115		1,110
Over ten years		66		65	21/0	4.44			211		211		145		145

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

Other:
Within one year		—		—					—		—		—		—
One to five years		—		—					—		—		—		—
Five to ten years		—		—					—		—		—		—
Over ten years		7,771		9,390	10/4	11.08			10,173		10,240		11,902		11,902

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

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

Total investment securities available for sale		3,174,505		3,229,241					2,990,444		3,001,890		2,296,402		2,293,020

Investment securities held to maturity:
U. S. Government:
Within one year		—		—					210,232		209,296		416,172		413,289
One to five years		—		—					3		3		209,207		207,234
Five to ten years		5,563		5,612	9/3	5.53			46		46		—		—
Over ten years		197		231	19/6	6.30			7,049		7,031		9,294		9,385

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

State, county and municipal:
Within one year		—		—					—		—		—		—
One to five years		149		153	1/4	5.88			148		154		147		155
Five to ten years		—		—					—		—		—		—
Over ten years		1,435		1,530	10/4	6.02			1,430		1,553		1,426		1,563

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

Other:
Within one year		250		250	0/7	3.25			—		—		—		—
One to five years		—		—					250		250		250		250
Five to ten years		—		—					—		—		—		—

Total		250		250	0/7	—			250		250		250		250

Total investment securities held to maturity		7,594		7,776	9/4	5.58			219,158		218,333		636,496		631,876

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

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

Table 5

AVERAGE BALANCE SHEETS


	2007							2006
	Average Balance			Interest Income/Expense		Yield/ Rate		Average Balance			Interest Income/Expense		Yield/ Rate
	(dollars in thousands, taxable equivalent)
Assets
Loans and leases	$	10,513,599		$	729,635	6.94	%	$	9,989,757		$	685,114	6.86	%
Investment securities:
U.S. Government		3,068,477			146,483	4.77			2,949,201			116,969	3.97
State, county and municipal		5,321			346	6.50			6,174			374	6.06
Other		70,254			3,100	4.41			73,009			3,304	4.53

Total investment securities		3,144,052			149,929	4.77			3,028,384			120,647	3.98
Overnight investments		634,671			32,169	5.07			619,247			30,903	4.99

Total interest-earning assets		14,292,322		$	911,733	6.38	%		13,637,388		$	836,664	6.14	%
Cash and due from banks		705,864							757,428
Premises and equipment		735,465							669,748
Allowance for loan and lease losses		(132,530	)						(131,077	)
Other assets		318,101							306,840

Total assets	$	15,919,222						$	15,240,327

Liabilities and shareholders’ equity
Interest-bearing deposits:
Checking With Interest	$	1,431,085		$	1,971	0.14	%	$	1,522,439		$	1,875	0.12	%
Savings		573,286			1,235	0.22			649,619			1,382	0.21
Money market accounts		2,835,255			94,541	3.33			2,691,292			79,522	2.95
Time deposits		5,283,782			243,489	4.61			4,967,591			197,399	3.97

Total interest-bearing deposits		10,123,408			341,236	3.37			9,830,941			280,178	2.85
Short-term borrowings		1,354,255			55,126	4.07			981,210			41,431	4.22
Long-term obligations		405,758			27,352	6.74			450,272			32,128	7.14

Total interest-bearing liabilities		11,883,421		$	423,714	3.57	%		11,262,423		$	353,737	3.14	%
Demand deposits		2,535,828							2,622,014
Other liabilities		129,356							114,636
Shareholders’ equity		1,370,617							1,241,254

Total liabilities and shareholders’ equity	$	15,919,222						$	15,240,327

Interest rate spread						2.81	%						3.00	%
Net interest income and net yield on interest-earning assets				$	488,019	3.41	%				$	482,927	3.54	%

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

Interest income earned on the investment securities portfolio amounted to $144.3 million and $116.0 million during 2007 and 2006. The taxable-equivalent yield on the investment securities portfolio was 4.77 percent and 3.98 percent, respectively, for 2007 and 2006. The $28.3 million increase in investment interest income during 2007 reflected the 79 basis points increase in the taxable-equivalent yield and a $115.7 million increase in average investment securities. The $40.1 million increase in interest income earned on investment securities during 2006 resulted from an 87 basis point increase in the taxable-equivalent yield and a $495.2 million increase in average investment securities.

Table 5

AVERAGE BALANCE SHEETS (continued)


2005							2004							2003
Average Balance			Interest Income/Expense		Yield/ Rate		Average Balance			Interest Income/Expense		Yield/ Rate		Average Balance			Interest Income/Expense		Yield/ Rate
(dollars in thousands, taxable equivalent)

$	9,375,249		$	575,735	6.14	%	$	8,901,628		$	470,325	5.28	%	$	7,893,621		$	448,019	5.68	%

	2,463,545			76,267	3.10			2,096,869			48,304	2.30			2,525,007			60,318	2.39
	7,238			404	5.58			8,667			424	4.89			5,151			277	5.38
	62,378			2,224	3.57			51,831			1,137	2.19			55,218			1,345	2.44

	2,533,161			78,895	3.11			2,157,367			49,865	2.31			2,585,376			61,940	2.40
	595,467			19,208	3.23			434,010			5,878	1.35			460,529			4,959	1.08

	12,503,877		$	673,838	5.39	%		11,493,005		$	526,068	4.58	%		10,939,526		$	514,918	4.71	%
	654,821							679,955							667,979
	608,668							554,480							522,548
	(127,968	)						(124,834	)						(115,737	)
	265,862							253,496							231,524

$	13,905,260						$	12,856,102						$	12,245,840



$	1,570,010		$	1,923	0.12	%	$	1,500,638		$	1,796	0.12	%	$	1,379,479		$	1,923	0.14	%
	737,830			1,521	0.21			743,629			1,492	0.20			690,705			2,151	0.31
	2,643,330			50,171	1.90			2,571,468			21,594	0.84			2,563,589			22,208	0.87
	4,209,996			123,016	2.92			3,778,048			83,557	2.21			3,811,476			98,507	2.58

	9,161,166			176,631	1.93			8,593,783			108,439	1.26			8,445,249			124,789	1.48
	598,948			14,966	2.50			446,320			3,611	0.81			463,332			2,795	0.60
	353,885			26,554	7.50			287,333			21,776	7.58			255,379			20,953	8.21

	10,113,999		$	218,151	2.16	%		9,327,436		$	133,826	1.43	%		9,163,960		$	148,537	1.62	%
	2,553,403							2,367,597							1,988,532
	106,792							107,209							96,770
	1,131,066							1,053,860							996,578

$	13,905,260						$	12,856,102						$	12,245,840

					3.23	%						3.15	%						3.09	%

			$	455,687	3.64	%				$	392,242	3.41	%				$	366,381	3.35	%

Interest earned on overnight investments was $32.2 million during 2007, compared to $30.9 million during 2006. The $1.3 million increase during 2007 resulted from an 8 basis point yield increase and a $15.4 million increase in average overnight investments. During 2006, interest income earned from overnight investments increased $11.7 million over 2005, the combined result of a 176 basis point yield increase and a $23.8 million increase in average overnight investments.

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

INTEREST-BEARING LIABILITIES

Interest-bearing liabilities include interest-bearing deposits as well as short-term borrowings and long-term obligations. Deposits are our primary funding source, although we also utilize non-deposit borrowings to stabilize our liquidity base and to fulfill commercial customer demand for cash management services. Certain of our long-term borrowings also currently qualify as capital under guidelines established by the Federal Reserve and other banking regulators.

At December 31, 2007 and 2006, interest-bearing liabilities totaled $12.12 billion and $11.61 billion, respectively, an increase of $506.6 million or 4.4 percent. The higher balances during 2007 result from increased levels of interest-bearing deposits and short-term borrowings.

Deposits. At December 31, 2007, deposits totaled $12.93 billion, an increase of $185.2 million or 1.5 percent from the $12.74 billion in deposits recorded as of December 31, 2006. Interest-bearing deposits averaged $10.12 billion during 2007, an increase of $292.5 million or 3.0 percent. Average interest-bearing deposits equaled $9.83 billion during 2006, an increase of $669.8 million or 7.3 percent over 2005. In 2007, the increase in average deposits resulted from growth in average time deposits, which increased $316.2 million or 6.4 percent and average money market accounts, which increased $144.0 million or 5.3 percent. During 2006, average time deposits increased $757.6 million or 18.0 percent.

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

Table 6

MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE


	December 31, 2007
	(thousands)
Less than three months	$	906,056
Three to six months		758,998
Six to 12 months		339,643
More than 12 months		319,071

Total	$	2,323,768

Short-Term Borrowings. At December 31, 2007, short-term borrowings totaled $1.31 billion, compared to $1.15 billion one year earlier, a 13.4 percent increase. For the year ended December 31, 2007, short-term borrowings averaged $1.35 billion, compared to $981.2 billion during 2006. The $373.0 million or 38.0 percent increase in short-term borrowings during 2007 was the result of significant growth in our commercial master note and repurchase agreement products. Customer interest in these commercial cash management products improved significantly due to relatively attractive rates as compared to other short-term bank deposit products.

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

Table 7

SHORT-TERM BORROWINGS


	2007				2006				2005
	Amount		Rate		Amount		Rate		Amount		Rate
	(dollars in thousands)
Master notes
At December 31	$	923,424	3.02	%	$	741,029	4.18	%	$	520,585	3.19	%
Average during year		910,389	4.19			643,926	4.28			353,871	2.61
Maximum month-end balance during year		1,035,278	—			776,734	—			520,585	—

Repurchase agreements
At December 31		286,090	2.27			251,135	3.68			150,054	2.69
Average during year		303,862	3.38			213,730	3.47			143,813	1.71
Maximum month-end balance during year		325,790	—			272,807	—			165,758	—

Federal funds purchased
At December 31		23,893	3.60			66,066	5.04			36,620	3.80
Average during year		59,050	5.07			47,662	4.84			45,595	3.10
Maximum month-end balance during year		101,753	—			68,620	—			59,139	—

Other
At December 31		71,880	4.54			92,617	4.56			71,769	3.43
Average during year		80,954	4.57			75,892	5.45			55,669	3.32
Maximum month-end balance during year		96,785	—			169,305	—			72,351	—

Long-Term Obligations. At December 31, 2007 and 2006, long-term obligations totaled $404.4 million and $401.2 million, respectively, an increase of $3.2 million or 0.8 percent. For 2007 and 2006, long-term obligations includes $273.2 million in junior subordinated debentures representing obligations to two special purpose entities, FCB/NC Capital Trust I and FCB/NC Capital Trust III (the Capital Trusts). The Capital Trusts are the grantor trusts for $265.0 million of trust preferred capital securities outstanding as of December 31, 2007. The proceeds from the trust preferred capital securities were used to purchase the junior subordinated debentures issued by BancShares. Under current regulatory standards, these trust preferred capital securities qualify as capital for BancShares. The $150.0 million in trust preferred capital securities issued by FCB/NC Capital Trust I mature in 2028 and may be redeemed in whole or in part on or after March 1, 2008 at a premium that declines until 2018, when the redemption price equals the par value of the securities. The $115.0 million in trust preferred capital securities issued by FCB/NC Capital Trust III mature in 2036 and may be redeemed at par in whole or in part on or after June 30, 2011. BancShares has guaranteed all obligations of the Capital Trusts.

Expense of Interest-Bearing Liabilities. Interest expense amounted to $423.7 million in 2007, a $70.0 million or 19.8 percent increase from 2006. This followed a $135.6 million or 62.2 percent increase in interest expense during 2006 compared to 2005. For both 2007 and 2006, the increase in interest expense was the result of higher interest rates and increased levels of interest-bearing liabilities. The blended rate on total interest-bearing liabilities equaled 3.57 percent during 2007, compared to 3.14 percent in 2006. Interest-bearing liabilities averaged $11.88 billion during 2007, an increase of $621.0 million or 5.5 percent over 2006 levels. During 2006, interest-bearing liabilities averaged $11.26 billion, an increase of $1.15 billion or 11.4 percent over 2005.

Table 8

CHANGES IN CONSOLIDATED TAXABLE EQUIVALENT NET INTEREST INCOME


	2007									2006
	Change from previous year due to:									Change from previous year due to:
	Volume			Yield/ Rate			Total Change			Volume			Yield/ Rate			Total Change
	(thousands)
Assets
Loans and leases	$	36,232		$	8,289		$	44,521		$	39,803		$	69,576		$	109,379
Investment securities:
U. S. Government		5,327			24,187			29,514			17,162			23,540			40,702
State, county and municipal		(54	)		26			(28	)		(63	)		33			(30	)
Other		(121	)		(83	)		(204	)		430			650			1,080

Total investment securities		5,152			24,130			29,282			17,529			24,223			41,752
Overnight investments		770			496			1,266			991			10,704			11,695

Total interest-earning assets	$	42,154		$	32,915		$	75,069		$	58,323		$	104,503		$	162,826

Liabilities
Interest-bearing deposits:
Checking With Interest	$	(120	)	$	216		$	96		$	(53	)	$	5		$	(48	)
Savings		(164	)		17			(147	)		(163	)		24			(139	)
Money market accounts		4,527			10,492			15,019			1,253			28,098			29,351
Time deposits		13,567			32,523			46,090			26,149			48,234			74,383

Total interest-bearing deposits		17,810			43,248			61,058			27,186			76,361			103,547
Short-term borrowings		15,468			(1,773	)		13,695			12,859			13,606			26,465
Long-term obligations		(3,077	)		(1,699	)		(4,776	)		7,038			(1,464	)		5,574

Total interest-bearing liabilities	$	30,201		$	39,776		$	69,977		$	47,083		$	88,503		$	135,586

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

Changes in income relating to certain loans, leases and investment securities are stated on a fully tax-equivalent basis at a rate that approximates BancShares’ marginal tax rate. The taxable equivalent adjustment was $7,677, $6,349 and $4,298 for the years 2007, 2006 and 2005 respectively. Table 5 provides detailed information on average balances, income/expense, yield/rate by category and the relevant income tax rates. The rate/volume variance is allocated equally between the changes in volume and rate.

The aggregate rate on interest-bearing deposits was 3.37 percent during 2007, compared to 2.85 percent during 2006. Coupled with the impact of growth in interest-bearing deposits, the higher rates caused interest expense on interest-bearing deposits to reach $341.2 million during 2007, a 21.8 percent increase from the $280.2 million recorded during 2006. During both 2007 and 2006, increased rates and higher balances of time deposits and money market deposits caused the growth in interest expense on interest-bearing deposits. The rate increases during 2007 and 2006 were the result of higher market interest rates due to intense competition among banks for interest-bearing deposits combined with adjustments to index rates established by the Federal Reserve.

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

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

NET INTEREST INCOME

Net interest income amounted to $480.3 million during 2007, a $3.8 million or 0.8 percent increase over 2006. The marginal increase from 2006 resulted from balance sheet growth, the favorable impact of which offset the unfavorable influence of a lower net yield on interest-earning assets. The taxable-equivalent net yield on interest-earning assets

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

During 2006, net interest income equaled $476.6 million, a $25.2 million or 5.6 percent increase over 2005. Higher interest rates favorably impacted net interest income during 2006, as the rate-influenced growth in interest income exceeded the growth in interest expense. Strong growth in 2006 among deposits and short-term borrowings resulted in a reduction in our net short-term asset sensitivity which caused the net yield on interest-earning assets to decline by 10 basis points.

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

Table 9

NONINTEREST INCOME


	Year ended December 31
	2007		2006			2005			2004		2003
	(thousands)
Cardholder and merchant services	$	97,070	$	86,103		$	75,298		$	65,903	$	56,432
Service charges on deposit accounts		77,827		72,561			77,376			81,478		78,273
Wealth management services
Trust and asset management fees		25,262		21,586			18,588			16,913		15,005
Broker-dealer activities		24,043		20,627			16,138			15,541		15,387

Total wealth advisory services		49,305		42,213			34,726			32,454		30,392
Fees from processing services		32,531		29,631			25,598			23,888		20,590
Insurance commissions		7,735		6,942			6,390			6,186		6,180
Mortgage income		6,305		5,494			5,361			5,861		11,398
ATM income		6,515		6,803			7,843			8,416		7,894
Other service charges and fees		15,318		15,996			16,902			13,926		14,463
Securities gains (losses)		1,376		(659	)		(492	)		1,852		309
Gain on sale of branches		—		826			—			426		5,710
Other		1,488		5,457			8,664			5,494		6,084

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

NONINTEREST INCOME

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

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

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

During 2007, fees from processing services totaled $32.5 million, an increase of $2.9 million or 9.8 percent over 2006. During 2006, BancShares recognized $29.6 million in fees from processing services, an increase of $4.0 million or 15.8 percent over the $25.6 million recognized during 2005. Growth in the number of transactions and the addition of new clients and services led to the favorable trend.

Table 10

NONINTEREST EXPENSE


	Year ended December 31
	2007		2006		2005		2004		2003
	(thousands)
Salaries and wages	$	243,871	$	228,472	$	212,997	$	204,597	$	195,632
Employee benefits		52,733		50,445		51,517		48,624		45,958
Equipment		56,404		52,490		50,291		50,125		50,436
Occupancy		56,922		52,153		46,912		43,997		42,430
Cardholder and merchant services:
Cardholder and merchant processing		41,882		37,286		32,067		28,290		24,119
Cardholder reward programs		12,529		9,228		5,878		5,763		5,458
Telecommunications		10,501		9,844		9,873		10,461		11,455
Postage		9,614		8,926		8,045		8,639		8,826
Processing fees paid to third parties		7,004		5,845		4,332		3,826		2,295
Advertising		7,499		7,212		7,206		7,981		7,566
Legal		6,410		5,244		4,124		5,978		5,851
Consultant		3,324		2,254		3,362		2,980		3,747
Amortization of intangibles		2,142		2,318		2,453		2,360		2,583
Other		63,829		59,360		57,814		53,565		54,471

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

NONINTEREST EXPENSE

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

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

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

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

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

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

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

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

INCOME TAXES

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

SHAREHOLDERS’ EQUITY

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

Table 11

ANALYSIS OF CAPITAL ADEQUACY


	December 31									Regulatory Minimum
	2007			2006			2005			Regulatory Minimum
	(dollars in thousands)
First Citizens BancShares, Inc.
Tier 1 capital	$	1,557,190		$	1,456,947		$	1,320,152
Tier 2 capital		279,573			275,079			267,989

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

Risk-adjusted assets	$	11,961,124		$	11,266,342		$	10,510,254
Average total assets		16,168,165			15,518,209			14,403,567
Risk-based capital ratios
Tier 1 capital		13.02	%		12.93	%		12.56	%	4.00	%
Total capital		15.36	%		15.37	%		15.11	%	8.00	%
Tier 1 leverage ratio		9.63	%		9.39	%		9.17	%	3.00	%

First-Citizens Bank & Trust Company
Tier 1 capital	$	1,188,599		$	1,104,132		$	998,152
Tier 2 capital		244,470			240,070			234,311

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

Risk-adjusted assets	$	9,716,423		$	9,238,512		$	8,739,531
Average total assets		13,497,638			13,250,610			12,523,144
Risk-based capital ratios
Tier 1 capital		12.23	%		11.95	%		11.42	%	4.00	%
Total capital		14.75	%		14.55	%		14.10	%	8.00	%
Tier 1 leverage ratio		8.81	%		8.33	%		7.97	%	3.00	%

IronStone Bank
Tier 1 capital	$	261,500		$	245,402		$	215,263
Tier 2 capital		24,801			23,576			21,101

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

Risk-adjusted assets	$	2,190,348		$	1,953,178		$	1,821,048
Adjusted total assets		2,333,717			2,130,770			1,849,828
Risk-based capital ratios
Tier 1 capital		11.94	%		12.56	%		11.82	%	4.00	%
Total capital		13.07	%		13.77	%		12.98	%	8.00	%
Tangible equity ratio		11.21	%		11.52	%		11.64	%	3.00	%

BancShares continues to exceed minimum capital standards and the banking subsidiaries remain well-capitalized. The sustained growth of ISB has required BancShares to infuse significant amounts of capital into ISB to support its rapidly expanding balance sheet. Infusions totaled $24.0 million in 2007, $30.0 million in 2006 and $20.0 million in 2005. Since ISB was formed in 1997, BancShares has provided $304.0 million in capital. BancShares’ prospective capacity to provide capital to support the future growth and expansion of ISB is highly dependent upon FCB’s ability to return capital through dividends to BancShares.

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

RISK MANAGEMENT

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

Our most prominent risk exposures are credit, interest rate and liquidity risk. Credit risk is the risk of not collecting the amount of a loan or investment when it is contractually due. Interest rate risk is the potential reduction of net interest income as a result of changes in market interest rates. Liquidity risk is the possible inability to fund obligations to depositors, creditors, investors or borrowers.

Table 12

NONPERFORMING ASSETS


	December 31,
	2007			2006			2005			2004			2003
	(thousands, except ratios)
Nonaccrual loans and leases	$	13,021		$	14,882		$	18,969		$	14,266		$	18,190
Other real estate		6,893			6,028			6,753			9,020			5,949

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

Accruing loans and leases 90 days or more past due	$	7,124		$	5,185		$	9,180		$	12,192		$	11,492
Loans and leases at December 31	$	10,963,904		$	10,273,043		$	9,656,230		$	9,364,822		$	8,333,073
Ratio of nonperforming assets to total loans and leases plus other real estate		0.18	%		0.20	%		0.27	%		0.25	%		0.29	%

Interest income that would have been earned on nonperforming loans and leases had they been performing	$	1,200		$	1,271		$	551		$	773		$	1,182
Interest income earned on nonperforming loans and leases		465			226			821			281			356

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

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

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

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

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

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

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

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

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

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

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

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

Table 13

ALLOWANCE FOR CREDIT LOSSES


	2007			2006			2005			2004			2003
	(thousands, except ratios)
Allowance for credit losses at beginning of period	$	138,646		$	135,770		$	130,832		$	119,357		$	112,533
Adjustment for sale of loans		—			—			(1,585	)		—			—
Acquired allowance for credit loss		—			—			—			—			409
Provision for credit losses		33,594			20,922			33,514			34,690			24,617
Charge-offs:
Real estate:
Construction and land development		(631	)		—			(1	)		(13	)		(16	)
Commercial mortgage		(49	)		(124	)		(551	)		(804	)		(318	)
Residential mortgage		(1,246	)		(1,717	)		(1,912	)		(2,351	)		(1,594	)
Revolving mortgage		(1,363	)		(1,475	)		(951	)		(1,384	)		(1,392	)
Other mortgage loans		—			—			—			—			—

Total real estate loans		(3,289	)		(3,316	)		(3,415	)		(4,552	)		(3,320	)
Commercial and industrial		(13,106	)		(10,378	)		(18,724	)		(9,800	)		(7,531	)
Consumer		(13,203	)		(9,171	)		(10,425	)		(12,238	)		(10,481	)
Lease financing		(3,092	)		(1,488	)		(347	)		(173	)		(756	)

Total charge-offs		(32,690	)		(24,353	)		(32,911	)		(26,763	)		(22,088	)

Recoveries:
Real estate:
Construction and land development		21			—			—			34			10
Commercial mortgage		8			182			409			236			164
Residential mortgage		261			290			432			244			631
Revolving mortgage		96			182			155			103			63
Other mortgage loans		—			—			—			—			—

Total real estate loans		386			654			996			617			868
Commercial and industrial		1,282			1,358			2,164			1,084			1,428
Consumer		2,883			4,140			2,672			1,761			1,590
Lease financing		170			155			88			86			—

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

Net charge-offs		(27,969	)		(18,046	)		(26,991	)		(23,215	)		(18,202	)

Allowance for credit losses at end of period	$	144,271		$	138,646		$	135,770		$	130,832		$	119,357

Allowance for credit losses includes:
Allowance for loan and lease losses	$	136,974		$	132,004		$	128,847		$	123,861		$	112,304
Reserve for unfunded commitments		7,297			6,642			6,923			6,971			7,053

Allowance for credit losses at end of period	$	144,271		$	138,646		$	135,770		$	130,832		$	119,357

Average loans and leases	$	10,513,599		$	9,989,757		$	9,375,249		$	8,901,628		$	7,893,621
Loans and leases at year-end		10,963,904			10,273,043			9,656,230			9,364,822			8,333,073
Ratios
Net charge-offs to average loans and leases		0.27	%		0.18	%		0.29	%		0.26	%		0.23	%
Percent of total loans and leases at period-end:
Allowance for loan and lease losses		1.25			1.28			1.33			1.32			1.35
Reserve for unfunded commitments		0.07			0.06			0.07			0.07			0.08
Allowance for credit losses		1.32			1.35			1.41			1.40			1.43

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

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

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

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

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

Table 14

ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES


	December 31
	2007				2006				2005				2004				2003
	Allowance for Credit Losses		Percent of Loans to Total Loans		Allowance for Credit Losses		Percent of Loans to Total Loans		Allowance for Credit Losses		Percent of Loans to Total Loans		Allowance for Credit Losses		Percent of Loans to Total Loans		Allowance for Credit Losses		Percent of Loans to Total Loans
	(dollars in thousands)
Allowance for loan and lease losses:
Real estate:
Construction and land development	$	9,918	7.40	%	$	9,351	7.63	%	$	8,985	7.94	%	$	7,704	6.28	%	$	7,806	6.12	%
Commercial mortgage		35,760	36.31			38,463	36.27			37,185	36.44			35,373	35.03			31,161	31.85
Residential mortgage		7,011	9.39			6,954	9.98			6,822	10.53			6,387	10.46			5,577	11.15
Revolving mortgage		5,735	13.63			8,425	12.91			8,712	14.17			11,587	18.30			9,334	19.18
Other mortgage		2,323	1.33			2,145	1.61			2,242	1.79			2,249	1.83			2,113	2.08

Total real estate		60,747	68.06			65,338	68.40			63,946	70.87			63,300	71.90			55,991	70.38
Commercial and industrial		32,743	15.57			34,846	14.86			30,663	12.50			26,794	10.47			25,028	11.23
Consumer		26,925	12.48			22,396	13.24			22,695	13.66			24,072	14.92			21,688	15.65
Lease financing		4,649	3.11			3,562	2.87			2,389	2.42			2,229	2.05			2,518	1.92
Other		412	0.78			723	0.63			576	0.55			743	0.66			901	0.82
Unallocated		11,498				5,139				8,578				6,723				6,178
Reserve for unfunded commitments		7,297				6,642				6,923				6,971				7,053

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

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

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

Table 15

INTEREST RATE RISK ANALYSIS


	Favorable (unfavorable) impact on net interest income compared to stable rate scenario over the 12-month period following:
Assumed rate change	December 31, 2007		December 31, 2006
Most likely	(0.52	%)	(0.04	%)
Immediate 200 basis point increase	(5.65	%)	(0.54	%)
Gradual 200 basis point increase	(2.22	%)	(1.16	%)
Gradual 200 basis point decrease	3.05	%	1.86	%
Immediate 200 basis point decrease	2.45	%	0.65	%

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

The maturity distribution and repricing opportunities of interest-earning assets have a significant impact on our interest rate risk. Table 16 provides a loan maturity distribution and information regarding the sensitivity of loans and leases to changes in interest rates. Table 4 includes maturity information for our investment securities.

We do not typically utilize interest rate swaps, floors, collars or other derivative financial instruments to attempt to hedge our rate sensitivity and interest rate risk. However, during the second quarter of 2006, in conjunction with the issuance of $115.0 million in trust preferred securities, we entered into an interest rate swap to synthetically convert the variable rate coupon on the securities to a fixed rate of 7.125 percent for a period of five years. The interest rate swap is a cash flow derivative under Statement of Financial Accounting Standards No. 133. The derivative is valued each quarter, and changes in the fair value are recorded on the consolidated balance sheet with an offset to other comprehensive income for the effective portion and an offset to the consolidated statements of income for any ineffective portion. The determination of effectiveness is made under the long-haul method.

Table 16

LOAN MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY


	December 31, 2007
	Within One Year		One to Five Years		After Five Years		Total
	(thousands)
Real estate:
Construction and land development	$	392,185	$	270,710	$	147,923	$	810,818
Commercial mortgage		1,263,329		1,734,938		984,229		3,982,496
Residential mortgage		271,865		396,486		360,679		1,029,030
Revolving mortgage		487,144		932,562		74,725		1,494,431
Other mortgage		45,592		64,475		35,485		145,552

Total real estate loans		2,460,115		3,399,171		1,603,041		7,462,327
Commercial and industrial		524,745		682,820		499,829		1,707,394
Consumer		299,382		898,673		170,173		1,368,228
Lease financing		85,150		255,451		—		340,601
Other		29,105		34,563		21,686		85,354

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

Loans maturing after one year with:
Fixed interest rates			$	3,554,545	$	1,923,236	$	5,477,781
Floating or adjustable rates				1,716,133		371,493		2,087,626

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

Liquidity Risk. Liquidity risk results from the mismatching of asset and liability cash flows. BancShares manages this risk by structuring its balance sheet prudently and by maintaining various borrowing resources to fund potential cash needs. BancShares has historically maintained a strong focus on liquidity, and our deposit base represents our primary liquidity source.

The rate of growth in average deposits was 1.7 percent during 2007, 6.3 percent during 2006 and 6.9 percent during 2005. Short-term borrowings also experienced significant growth during both 2007 and 2006 due to strong customer demand for our cash management products. Through our deposit and cash management product pricing strategies, we have the ability to stimulate or curtail liability growth. Due to its primary focus on commercial customers, ISB has continued to face liquidity challenges caused by rapid loan growth. As a result, ISB has utilized both borrowings from the Federal Home Loan Bank of Atlanta and brokered deposits to augment the liquidity generated from its deposit customers.

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

Once we have satisfied our loan demand and other funding needs, residual liquidity is held in cash or invested in overnight and longer-term investment products. At December 31, 2007, these highly-liquid assets totaled $4.29 billion or 26.5 percent of total assets, compared to $4.36 billion or 27.7 percent of total assets at December 31, 2006.

SEGMENT REPORTING

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

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

IronStone Bank. At December 31, 2007, ISB operated 56 facilities in Florida, Georgia, Texas, New Mexico, Arizona, California, Colorado, Oregon, Washington and Missouri. ISB will continue its expansion during 2008, establishing facilities in Kansas and Oklahoma. ISB continues to focus on markets with favorable growth prospects. Our business model for new markets has two requirements. First, we hire experienced bankers who are established in the markets we are entering and who are focused on delivering high quality customer service while maintaining strong asset quality. Second, we occupy attractive and accessible branch facilities. Both of these are costly goals, but we believe that they are critical to establishing a solid foundation for future success in new markets.

ISB’s total assets increased from $2.14 billion at December 31, 2006 to $2.34 billion at December 31, 2007, an increase of $204.5 million or 9.6 percent. ISB’s total assets represented 14.4 percent of consolidated assets at December 31, 2007 compared to 13.6 percent at December 31, 2006.

ISB recorded a net loss of $7.7 million during 2007 compared to net income of $2.2 million during 2006 and a net loss of $2.9 million in 2005. The $9.9 million reduction in net income resulted from significantly higher provision for credit losses, higher noninterest expense and lower net interest income. ISB’s net interest income decreased $2.5 million or 3.8 percent during 2007, the result of a significant reduction in the net yield on interest-earning assets. Loans and leases increased $201.8 million or 10.8 percent from $1.87 billion at December 31, 2006 to $2.07 billion at December 31, 2007.

Provision for credit losses increased $5.5 million or 154.6 percent during 2007, due to higher net charge offs and loan growth. Net charge-offs amounted to $6.7 million during 2007, compared to $1.0 million in 2006. This $5.7 million increase includes $4.2 million in losses on working capital finance loans.

ISB’s noninterest income increased $2.1 million or 18.7 percent during 2007, primarily the result of higher cardholder and merchant services income and referral fees generated through working capital finance.

Noninterest expense increased $8.4 million or 11.8 percent during 2007, the result of costs incurred in conjunction with the opening of new branch offices and higher cardholder processing expenses.

Primarily as a result of continued pressure on net interest income and continued growth in noninterest expenses, ISB will likely continue to be unprofitable during 2008.

First-Citizens Bank & Trust Company. At December 31, 2007, FCB operated 340 branches in North Carolina, Virginia, West Virginia, Maryland and Tennessee. During 2007, FCB continued to expand into high-growth areas throughout its footprint with expansion continuing in 2008.

FCB’s total assets increased from $13.33 billion at December 31, 2006 to $13.58 billion at December 31, 2007, an increase of $252.7 million or 1.9 percent. FCB’s total assets represented 83.8 percent and 84.7 percent of consolidated assets at December 31, 2007 and 2006, respectively.

FCB recorded net income of $125.2 million during 2007 compared to $139.1 million during 2006. This represents a $14.0 million or 10.0 percent decrease in net income, the net impact of higher noninterest expense and provision for credit losses and slightly reduced levels of net interest income offset in part by strong growth in noninterest income.

Table 17

SELECTED QUARTERLY DATA


	2007												2006
	Fourth Quarter			Third Quarter			Second Quarter			First Quarter			Fourth Quarter			Third Quarter			Second Quarter			First Quarter
	(thousands, except share data and ratios)
SUMMARY OF OPERATIONS
Interest income	$	230,826		$	232,120		$	223,473		$	217,637		$	219,493		$	216,170		$	203,784		$	190,868
Interest expense		109,197			111,185			103,884			99,448			101,215			96,773			83,567			72,182

Net interest income		121,629			120,935			119,589			118,189			118,278			119,397			120,217			118,686
Provision for credit losses		11,795			17,333			934			3,532			7,462			3,758			2,936			6,766

Net interest income after provision for credit losses		109,834			103,602			118,655			114,657			110,816			115,639			117,281			111,920
Noninterest income		76,534			77,285			72,620			69,031			67,873			70,288			68,326			64,880
Noninterest expense		146,285			146,906			142,878			138,595			130,026			134,123			135,246			131,682

Income before income taxes		40,083			33,981			48,397			45,093			48,663			51,804			50,361			45,118
Income taxes		13,920			11,362			17,546			16,109			15,468			18,877			18,649			16,461

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

Net interest income, taxable equivalent	$	123,666		$	122,980		$	121,409		$	119,964		$	120,110		$	121,082		$	120,636		$	119,093

SELECTED QUARTERLY AVERAGE BALANCES
Total assets	$	16,276,649		$	16,092,009		$	15,725,976		$	15,572,613		$	15,628,835		$	15,477,992		$	15,322,373		$	14,699,290
Investment securities		3,272,015			3,162,011			3,047,753			3,092,261			3,176,845			3,072,113			2,964,308			2,896,711
Loans and leases		10,831,571			10,623,247			10,360,913			10,230,858			10,167,157			10,106,194			9,943,057			9,736,606
Interest-earning assets		14,655,309			14,476,247			14,118,884			13,908,622			13,984,789			13,851,788			13,541,084			13,160,476
Deposits		12,876,549			12,728,527			12,524,786			12,502,206			12,601,708			12,571,525			12,440,125			12,192,664
Interest-bearing liabilities		12,216,067			12,052,307			11,698,285			11,557,940			11,601,752			11,485,378			11,156,821			10,794,420
Long-term obligations		404,367			405,101			405,339			408,277			424,597			500,564			466,259			408,946
Shareholders’ equity	$	1,420,348		$	1,385,284		$	1,353,739		$	1,323,327		$	1,292,771		$	1,254,551		$	1,219,835		$	1,196,174
Shares outstanding		10,434,453			10,434,453			10,434,453			10,434,453			10,434,453			10,434,453			10,434,453			10,434,453

SELECTED QUARTER-END BALANCES
Total assets	$	16,212,107		$	16,311,870		$	16,008,605		$	15,853,778		$	15,729,697		$	15,633,597		$	15,530,846		$	15,099,564
Investment securities		3,236,835			3,266,150			3,023,799			3,031,798			3,221,048			3,118,025			3,024,780			2,896,962
Loans and leases		10,963,904			10,763,158			10,513,041			10,262,356			10,273,043			10,160,661			10,059,723			9,822,674
Interest-earning assets		14,466,948			14,542,241			14,232,802			14,094,002			13,842,688			13,849,766			13,716,208			13,468,554
Deposits		12,928,544			12,980,447			12,772,322			12,722,532			12,743,324			12,681,150			12,717,247			12,512,557
Interest-bearing liabilities		12,118,967			12,170,559			11,830,904			11,671,127			11,612,372			11,510,073			11,395,473			11,038,192
Long-term obligations		404,392			404,266			405,314			405,356			401,198			424,351			527,478			408,954
Shareholders’ equity	$	1,441,208		$	1,401,575		$	1,367,980		$	1,342,327		$	1,310,819		$	1,276,608		$	1,232,933		$	1,207,720
Shares outstanding		10,434,453			10,434,453			10,434,453			10,434,453			10,434,453			10,434,453			10,434,453			10,434,453

PROFITABILITY RATIOS (averages)
Rate of return (annualized) on:
Total assets		0.64	%		0.56	%		0.79	%		0.75	%		0.84	%		0.84	%		0.84	%		0.79	%
Shareholders’ equity		7.31			6.48			9.14			8.88			10.19			10.41			10.43			9.72
Dividend payout ratio		10.96			12.67			9.29			9.89			8.65			8.70			9.05			10.00

LIQUIDITY AND CAPITAL RATIOS (averages)
Loans and leases to deposits		84.12	%		83.46	%		82.72	%		81.83	%		80.68	%		80.39	%		79.93	%		79.86	%
Shareholders’ equity to total assets		8.73			8.61			8.61			8.50			8.27			8.11			7.96			8.14
Time certificates of $100,000 or more to total deposits		18.04			17.67			16.95			16.60			16.17			15.74			15.04			14.44

PER SHARE OF STOCK
Net income	$	2.51		$	2.17		$	2.96		$	2.78		$	3.18		$	3.16		$	3.04		$	2.75
Cash dividends		0.275			0.275			0.275			0.275			0.275			0.275			0.275			0.275
Class A sales price
High		181.91			195.66			209.01			214.59			202.64			217.79			201.92			201.78
Low		143.00			152.47			182.10			199.41			183.57			191.00			175.76			174.72
Class B sales price
High		205.00			211.50			213.00			214.95			205.00			214.00			198.50			191.00
Low		200.00			204.00			207.50			205.50			196.50			198.00			184.00			180.00

Average loan and lease balances include nonaccrual loans and leases. Yields related to loans, leases and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only, are stated on a taxable-equivalent basis assuming a federal income tax rate of 35% and a state income tax rate of 6.9% for all periods. Stock information related to Class A common stock reflects the sales price, as reported on the NASDAQ Global Select Market. Stock information related to Class B common stock reflects the sales price as reported on the OTC Bulletin Board. As of December 31, 2007, there were 2,122 holders of record of Class A common stock and 391 holders or record of Class B common stock.

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

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

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

FOURTH QUARTER ANALYSIS

BancShares reported net income of $26.2 million for the quarter ended December 31, 2007, compared to $33.2 million for the corresponding period of 2006, a decrease of 21.2 percent. Per share income for the fourth quarter 2007 totaled $2.51 compared to $3.18 for the same period of 2006. BancShares’ results generated an annualized return on average assets of 0.64 percent for the fourth quarter of 2007, compared to 0.84 percent for the same period of 2006. The annualized return on average equity equaled 7.31 percent during the fourth quarter of 2007, compared to 10.19 percent for the same period of 2006. In the fourth quarter, higher noninterest expense and higher provision for credit losses contributed to the decline in net income. These added costs were partially offset by higher net interest and noninterest income.

Net interest income increased $3.4 million or 2.8 percent in the fourth quarter of 2007, compared to the same period of 2006. The taxable-equivalent net yield on interest-earning assets decreased from 3.41 percent in the fourth quarter of 2006 to 3.35 percent for the fourth quarter of 2007.

Average interest-earning assets increased $670.5 million to $14.66 billion from the fourth quarter of 2006 to the fourth quarter of 2007. Average loans and leases outstanding during the fourth quarter of 2007 equaled $10.83 billion, an increase of $664.4 million or 6.5 percent over 2006. The yield on interest-earning assets increased 5 basis points from 6.26 percent in 2006 to 6.31 percent in 2007.

Average interest-bearing liabilities increased $614.3 million to $12.22 billion. Average time deposits increased $350.9 million or 6.8 percent to $5.48 billion while average short-term borrowings increased $257.4 million or 21.8 percent to $1.44 billion due to strong growth among master note borrowings and repurchase obligations. The rate on average interest-bearing liabilities increased 9 basis points to 3.55 percent in 2007.

The provision for credit losses increased $4.3 million or 58.1 percent in the fourth quarter of 2007, compared to the same period of 2006 due to higher net charge-offs and loan growth. Net charge-offs were $8.4 million during the fourth quarter of 2007, compared to $7.0 million during the same period of 2006.

Noninterest income increased $8.7 million or 12.8 percent during the fourth quarter. Deposit service charges increased $3.1 million or 17.3 percent in the quarter while cardholder and merchant services income increased $2.4 million or 11.0 percent due to favorable volume growth. Fees from wealthy management services increased $1.4 million or 27.6 percent for the fourth quarter of 2007, the result of our expanded focus on trust and broker-dealer services.

Noninterest expense increased $16.3 million or 12.5 percent during the fourth quarter of 2007, when compared to the same period of 2006. Salaries increased $4.6 million or 7.9 percent from the fourth quarter of 2006 to the fourth quarter of 2007. Occupancy costs increased $1.2 million or 8.8 percent from $17.1 million during the fourth quarter of 2006 to $18.5 million during the fourth quarter of 2007. Higher personnel and occupancy costs are primarily related to the continued expansion of the branch network. Among other expense, credit card processing fees increased $1.5 million or 17.3 percent due to higher transaction volume in the fourth quarter of 2007 when compared to the fourth quarter of 2006. Legal costs increased $1.3 million during the fourth quarter of 2007 due to heightened loan collection activities.

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

Table 18

CONSOLIDATED TAXABLE EQUIVALENT RATE/VOLUME VARIANCE ANALYSIS—FOURTH QUARTER


	2007						2006						Increase (decrease) due to:
	Average Balance		Interest Income/ Expense		Yield/ Rate		Average Balance		Interest Income/ Expense		Yield/ Rate		Volume			Yield/ Rate			Total Change
	(dollars in thousands)
Assets
Loans and leases	$	10,831,571	$	186,426	6.83	%	$	10,167,157	$	178,565	6.97	%	$	11,561		$	(3,700	)	$	7,861
Investment securities:
U. S. Government		3,197,797		39,178	4.89			3,098,167		33,262	4.28			1,139			4,777			5,916
State, county and municipal		4,949		83	6.65			5,847		122	8.28			(17	)		(22	)		(39	)
Other		69,269		773	4.43			72,831		844	4.60			(41	)		(30	)		(71	)

Total investment securities		3,272,015		40,034	4.88			3,176,845		34,228	4.30			1,081			4,725			5,806
Overnight investments		551,723		6,403	4.60			640,787		8,532	5.28			(1,108	)		(1,021	)		(2,129	)

Total interest-earning assets	$	14,655,309	$	232,863	6.31	%	$	13,984,789	$	221,325	6.26	%	$	11,534		$	4		$	11,538

Liabilities
Deposits:
Checking With Interest	$	1,384,226	$	536	0.15	%	$	1,477,601	$	464	0.12	%	$	(34	)	$	106		$	72
Savings		546,410		299	0.22			606,635		326	0.21			(37	)		10			(27	)
Money market accounts		2,964,472		24,181	3.24			2,784,676		23,125	3.29			1,449			(393	)		1,056
Time deposits		5,476,849		63,973	4.63			5,125,904		56,664	4.39			4,046			3,263			7,309

Total interest-bearing deposits		10,371,957		88,989	3.40			9,994,816		80,579	3.20			5,424			2,986			8,410
Short-term borrowings		1,439,743		13,362	3.68			1,182,339		13,461	4.52			2,668			(2,767	)		(99	)
Long-term obligations		404,367		6,846	6.72			424,597		7,175	6.70			(346	)		17			(329	)

Total interest-bearing liabilities	$	12,216,067	$	109,197	3.55	%	$	11,601,752	$	101,215	3.46	%	$	7,746		$	236		$	7,982
																			&nb

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents