Edgar Filing: FIRST CITIZENS BANCSHARES INC /DE/

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2009

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

Commission File Number: 001-16715

First Citizens BancShares, Inc.

(Exact name of Registrant as specified in its charter)

Delaware

56-1528994

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)


4300 Six Forks Road, Raleigh, North Carolina		27609
(Address of principle executive offices)		(Zip code)

(919) 716-7000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. Yes x No ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the Registrant was required to submit and post such files) Yes ¨ No ¨

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 ‘accelerated filer’ and ‘large accelerated filer’ 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

Class A Common Stock—$1 Par Value—8,756,778 shares

Class B Common Stock—$1 Par Value—1,677,675 shares

(Number of shares outstanding, by class, as of August 7, 2009)

INDEX


		Page(s)
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets at June 30, 2009, December 31, 2008 and June 30, 2008	3

	Consolidated Statements of Income for the three and six-month periods ended June 30, 2009, and June 30, 2008	4

	Consolidated Statements of Changes in Shareholders’ Equity for the six-month periods ended June 30, 2009, and June 30, 2008	5

	Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2009, and June 30, 2008	6

	Notes to Consolidated Financial Statements	7-18

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19-37

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	38

Item 4.	Controls and Procedures	38

PART II. OTHER INFORMATION

Item 1A.	Risk Factors	39-41

Item 4.	Submission of Matters to a Vote of Security Holders	42

Item 6.	Exhibits.	42

PART I

Item 1.

Financial Statements (Unaudited)

Consolidated Balance Sheets

First Citizens BancShares, Inc. and Subsidiaries


	June 30 2009*			December 31# 2008			June 30 2008*
	(thousands, except share data)
Assets
Cash and due from banks	$	637,896		$	593,375		$	711,651
Overnight investments		229,668			174,616			395,450
Investment securities available for sale		3,745,385			3,219,980			2,966,296
Investment securities held to maturity		4,140			5,873			6,957
Loans held for sale		115,920			69,399			88,879
Loans and leases		11,523,045			11,649,886			11,224,276
Less allowance for loan and lease losses		162,282			157,569			144,533

Net loans and leases		11,360,763			11,492,317			11,079,743
Premises and equipment		821,219			798,909			780,762
Other real estate owned		33,301			29,956			12,750
Income earned not collected		66,226			72,029			71,107
Goodwill		102,625			102,625			102,625
Other intangible assets		3,035			3,810			5,315
Other assets		197,702			182,773			201,139

Total assets	$	17,317,880		$	16,745,662		$	16,422,674


Liabilities
Deposits:
Noninterest-bearing	$	2,974,494		$	2,652,898		$	2,668,207
Interest-bearing		11,383,655			11,060,865			10,407,204

Total deposits		14,358,149			13,713,763			13,075,411
Short-term borrowings		599,853			647,028			1,130,788
Long-term obligations		735,803			733,132			609,277
Other liabilities		189,862			208,364			119,916

Total liabilities		15,883,667			15,302,287			14,935,392

Shareholders’ Equity

Common stock:

Class A - $1 par value (8,756,778 shares issued for all periods)		8,757			8,757			8,757

Class B - $1 par value (1,677,675 shares issued for all periods)		1,678			1,678			1,678
Surplus		143,766			143,766			143,766
Retained earnings		1,334,655			1,326,054			1,299,346
Accumulated other comprehensive income (loss)		(54,643	)		(36,880	)		33,735

Total shareholders’ equity		1,434,213			1,443,375			1,487,282

Total liabilities and shareholders’ equity	$	17,317,880		$	16,745,662		$	16,422,674

Unaudited

#	Derived from the 2008 Annual Report on Form 10-K.

See accompanying Notes to Consolidated Financial Statements.

Consolidated Statements of Income

First Citizens BancShares, Inc. and Subsidiaries


	Three months ended June 30					Six months ended June 30
	2009			2008		2009			2008
	(thousands, except share and per share data)
Interest income
Loans and leases	$	155,449		$	167,145	$	312,033		$	344,309
Investment securities:
U. S. Government		18,118			31,251		39,277			65,436
Mortgage-backed securities		1,234			1,015		2,382			2,163
Corporate bonds		1,580			—		1,858			—
State, county and municipal		104			53		155			106
Other		164			251		371			525

Total investment securities interest and dividend income		21,200			32,570		44,043			68,230
Overnight investments		192			2,285		417			6,366

Total interest income		176,841			202,000		356,493			418,905
Interest expense
Deposits		48,890			64,857		101,836			144,116
Short-term borrowings		1,281			3,859		2,602			12,040
Long-term obligations		9,638			8,431		19,218			15,817

Total interest expense		59,809			77,147		123,656			171,973

Net interest income		117,032			124,853		232,837			246,932
Provision for credit losses		20,759			13,363		39,482			23,278

Net interest income after provision for credit losses		96,273			111,490		193,355			223,654
Noninterest income
Cardholder and merchant services		24,107			25,693		45,599			48,743
Service charges on deposit accounts		19,163			21,034		37,014			41,015
Wealth management services		11,481			12,746		22,253			25,928
Fees from processing services		8,884			8,950		18,285			17,754
Securities (losses) gains		(139	)		—		(139	)		8,051
Other service charges and fees		4,068			4,382		8,417			8,472
Mortgage income		2,369			1,750		5,821			3,740
Insurance commissions		1,825			1,734		4,295			4,215
ATM income		1,772			1,774		3,501			3,433
Other		(366	)		1,537		(341	)		2,415

Total noninterest income		73,164			79,600		144,705			163,766
Noninterest expense
Salaries and wages		63,751			63,627		129,297			126,412
Employee benefits		15,773			13,016		33,092			31,199
Occupancy expense		15,970			14,699		31,376			30,048
Equipment expense		14,749			14,142		29,472			28,102
FDIC deposit insurance expense		13,763			632		17,949			1,302
Foreclosure related expenses		1,715			187		3,422			488
Other		35,147			43,165		72,602			77,761

Total noninterest expense		160,868			149,468		317,210			295,312

Income before income taxes		8,569			41,622		20,850			92,108
Income taxes		2,369			15,396		5,987			33,497

Net income	$	6,200		$	26,226	$	14,863		$	58,611

Average shares outstanding		10,434,453			10,434,453		10,434,453			10,434,453
Net income per share	$	0.59		$	2.51	$	1.42		$	5.62

See accompanying Notes to Consolidated Financial Statements.

Consolidated Statements of Changes in Shareholders’ Equity

First Citizens BancShares, Inc. and Subsidiaries


	Class A Common Stock		Class B Common Stock		Surplus		Retained Earnings			Accumulated Other Comprehensive Income (loss)			Total Shareholders’ Equity
	(thousands, except share data)
Balance at December 31, 2007	$	8,757	$	1,678	$	143,766	$	1,246,473		$	40,534		$	1,441,208
Comprehensive income:
Net income		—		—		—		58,611			—			58,611
Change in unrealized gains/losses on investment securities available for sale, net of $4,513 deferred tax benefit		—		—		—		—			(6,998	)		(6,998	)
Unrealized gain on interest rate swap arising during period, net of $500 tax		—		—		—		—			766			766
Less reclassification adjustment for interest expense on interest rate swap included in net income, net of $370 tax		—		—		—		—			(567	)		(567	)

Change in unrecognized loss on cash flow hedge, net of deferred tax		—		—		—		—			199			199

Total comprehensive income														51,812

Cash dividends		—		—		—		(5,738	)		—			(5,738	)

Balance at June 30, 2008	$	8,757	$	1,678	$	143,766	$	1,299,346		$	33,735		$	1,487,282


Balance at December 31, 2008	$	8,757	$	1,678	$	143,766	$	1,326,054		$	(36,880	)	$	1,443,375
Comprehensive loss:
Net income		—		—		—		14,863			—			14,863
Change in unrealized gains/losses on investment securities available for sale, net of $13,108 deferred tax benefit		—		—		—		—			(20,322	)		(20,322	)
Unrealized gain on interest rate swap arising during period, net of $2,591 tax		—		—		—		—			3,971			3,971
Less reclassification adjustment for interest expense on interest rate swap included in net income, net of $921 tax		—		—		—		—			(1,412	)		(1,412	)

Change in unrecognized loss on cash flow hedges, net of deferred tax		—		—		—		—			2,559			2,559

Total comprehensive loss														(2,900	)

Cash dividends		—		—		—		(6,262	)		—			(6,262	)

Balance at June 30, 2009	$	8,757	$	1,678	$	143,766	$	1,334,655		$	(54,643	)	$	1,434,213

See accompanying Notes to Consolidated Financial Statements.

At June 30, 2009, Accumulated Other Comprehensive Loss includes $25,069 in unrealized gains on investment securities available for sale, $75,815 in pension obligations recognized under FASB Statement No. 158, and an unrealized loss of $3,897 on cash flow hedges.

Consolidated Statements of Cash Flows

First Citizens BancShares, Inc. and Subsidiaries


	Six months ended June 30,
	2009			2008
	(thousands)
OPERATING ACTIVITIES
Net income	$	14,863		$	58,611
Adjustments to reconcile net income to cash provided by operating activities:
Amortization of intangibles		869			1,027
Provision for loan and lease losses		39,482			23,278
Deferred tax (benefit) expense		8,589			(5,460	)
Change in current taxes payable		(3,825	)		1,953
Depreciation		27,816			26,669
Change in accrued interest payable		8,884			(16,991	)
Change in income earned not collected		5,803			8,236
Securities losses (gains)		139			(8,051	)
Origination of loans held for sale		(483,656	)		(296,568	)
Proceeds from sale of loans		442,659			286,238
Gain on sale of loans		(5,524	)		(3,366	)
Net amortization of premiums and discounts		19,507			(1,164	)
Net change in other assets		4,788			(10,103	)
Net change in pension and other liabilities		(19,332	)		2,417

Net cash provided by operating activities		61,062			66,726

INVESTING ACTIVITIES
Net (increase) decrease in loans outstanding		71,765			(362,508	)
Purchases of investment securities available for sale		(1,293,856	)		(745,977	)
Proceeds from maturities of investment securities held to maturity		1,808			637
Proceeds from maturities of investment securities available for sale		715,300			966,448
Net change in overnight investments		(55,052	)		(129,241	)
Additions to premises and equipment		(50,126	)		(49,737	)

Net cash used by investing activities		(610,161	)		(320,378	)

FINANCING ACTIVITIES
Net change in time deposits		(53,721	)		(221,195	)
Net change in demand and other interest-bearing deposits		698,107			368,062
Net change in short-term borrowings		(47,501	)		(174,614	)
Origination of long-term obligations		2,997			205,000
Cash dividends paid		(6,262	)		(5,738	)

Net cash provided by financing activities		593,620			171,515

Change in cash and due from banks		44,521			(82,137	)
Cash and due from banks at beginning of period		593,375			793,788

Cash and due from banks at end of period	$	637,896		$	711,651

CASH PAYMENTS FOR:
Interest	$	114,772		$	188,964
Income taxes		17,516			46,981

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Unrealized securities losses	$	(33,430	)	$	(11,510	)
Unrealized gain on cash flow hedges		4,229			329
Transfers of loans to other real estate		20,307			11,424

See accompanying Notes to Consolidated Financial Statements.

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

Note A

Accounting Policies and Other Matters

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements.

In the opinion of management, the consolidated financial statements contain all material adjustments necessary to present fairly the financial position of First Citizens BancShares, Inc. as of and for each of the periods presented, and all such adjustments are of a normal recurring nature. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.

These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the 2008 First Citizens BancShares, Inc. Form 10-K. Certain amounts for prior periods have been reclassified to conform with statement presentations for 2009. However, the reclassifications have no effect on shareholders’ equity or net income as previously reported.

Current Accounting and Regulatory Issues

In March 2008, the FASB issued SFAS No. 161 Disclosures about Derivative Instruments and Hedging Activities (Statement 161). Statement 161 requires enhanced disclosures about how and why derivative instruments are used, how derivative instruments and related hedged items are accounted for under Statement 133 and how derivative instruments and related hedged items affect the balance sheet, income statement and statement of cash flows. Statement 161, which we adopted on January 1, 2009, resulted in expanded disclosures but had no material impact on financial condition, results of operations or liquidity.

Three FASB Staff Positions (FSPs) were effective June 30, 2009 for BancShares. FSP FAS 107-1 and APB 28-1 Interim Disclosures about Fair Value of Financial Instruments requires fair value disclosures about financial instruments in interim financial statements as well as disclosures about estimation methods and disclosure of changes in method from prior periods. FSP FAS 115-2 and FAS 124-2 Recognition and Presentation of Other-Than-Temporary Impairments (OTTI FSP) creates a new model for evaluating OTTI in debt securities. The OTTI FSP requires an entity to record an OTTI charge if it intends to sell a debt instrument or if it can not assert it is more likely than not that it will not have to sell the security before recovery. If the entity does not intend to sell the security but does not expect to recover the amortized cost basis, the amount of the impairment that results from issuer credit will be reported in earnings and the remaining impairment related to liquidity will be reflected in other comprehensive income. FSP FAS 157-4 Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly requires companies, as they are estimating fair values for assets and liabilities that are subject to fair value measurement, to consider various factors to determine whether there has been a significant decrease in the volume and level of activity compared to normal market activity and to consider whether an observed transaction was not orderly based on the weight of available evidence. Implementation of the three FSPs did not have a material impact on the consolidated financial statements but did result in expanded disclosures.

In May 2009, the FASB issued SFAS No. 165 Subsequent Events (Statement 165). Statement 165 addresses consideration of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. Statement 165 does not change the recording or recognition of subsequent events under generally accepted accounting principles but requires issuers to disclose the date through which subsequent events have been evaluated. For the financial statements and footnotes included in this Form 10-Q, subsequent events occurring prior to August 7, 2009 have been considered.

In June 2009, the FASB issued SFAS No. 166 Accounting for Transfers of Financial Assets (Statement 166) and SFAS No. 167 Amendments to FASB Interpretation No. 46(R) (Statement 167). Statement 166 removes the concept of a qualifying special-purpose entity and thereby compels the application of FASB Interpretation 46(R) by entities that were previously exempt due to their status as a qualified special-purpose entity. Statement 167 requires the evaluation of variable interests to determine whether a controlling financial interest exists. Upon the adoption of Statements 166 and 167 in 2010, the off balance sheet accounting treatment for the 2005 asset securitization of home equity loans will be discontinued, and the loans will be included on the consolidated balance sheet. The securitized loans totaled $98,043 as of June 30, 2009.

In response to the challenges facing the financial services sector, several regulatory and governmental actions have been enacted including The Emergency Economic Stabilization Act, the TARP Capital Purchase Program and the Temporary Liquidity Guarantee Program (TLGP). Based on the expectation that our current capital levels will be adequate to sustain our growth for the foreseeable future, we did not apply to participate in the TARP Capital Purchase Program. Further, we waived the right to participate in the TLGP guarantee of unsecured debt. However, we did elect to participate in the TLGP’s enhanced deposit insurance program.

Although it is possible that further regulatory actions will arise as the Federal government continues to address the economic situation, management is not aware of any further recommendations by regulatory authorities that, if implemented, would have or would be reasonably likely to have a material effect on liquidity, capital ratios or results of operations.

Note B

Investments

The aggregate values of investment securities at June 30 along with gains and losses determined on an individual security basis are as follows:


	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Investment securities available for sale
June 30, 2009
U. S. Government	$	3,144,025	$	27,447	$	1,589	$	3,169,883
Corporate bonds		457,572		1,410		1,240		457,742
Residential mortgage-backed securities		95,181		2,052		512		96,721
Equity securities		2,862		12,071		336		14,597
State, county and municipal		1,600		26		9		1,617
Other		2,894		1,931		—		4,825

Total investment securities available for sale	$	3,704,134	$	44,937	$	3,686	$	3,745,385

June 30, 2008
U. S. Government	$	2,836,558	$	29,329	$	7,808	$	2,858,079
Residential mortgage-backed securities		73,715		90		1,168		72,637
Equity securities		3,558		21,678		41		25,195
State, county and municipal		3,187		17		15		3,189
Other		5,385		1,811				7,196

Total investment securities available for sale	$	2,922,403	$	52,925	$	9,032	$	2,966,296


Investment securities held to maturity
June 30, 2009
Residential mortgage-backed securities	$	3,988	$	266	$	27	$	4,227
State, county and municipal		152		—		—		152

Total investment securities held to maturity	$	4,140	$	266	$	27	$	4,379

June 30, 2008
Residential mortgage-backed securities	$	5,120	$	128	$	26	$	5,222
State, county and municipal		1,587		84		—		1,671
Other		250		—		—		250

Total investment securities held to maturity	$	6,957	$	212	$	26	$	7,143

Investments in corporate bonds represent debt securities that were issued by various financial institutions under the Temporary Liquidity Guarantee Program. These debt obligations were issued with the full faith and credit of the United States of America. The guarantee for these securities is triggered when an issuer defaults on a scheduled payment.

The following table provides maturity information for investment securities as of the dates indicated. Callable securities are assumed to mature on their earliest call date.


	June 30, 2009				December 31, 2008				June 30, 2008
	Cost		Fair Value		Cost		Fair Value		Cost		Fair Value
Investment securities available for sale
Maturing in:
One year or less	$	1,616,772	$	1,630,131	$	1,350,796	$	1,375,709	$	1,454,634	$	1,470,675
One through five years		1,986,438		1,999,122		1,705,774		1,739,791		1,382,535		1,388,018
Five through 10 years		3,623		5,561		789		791		3,362		3,329
Over 10 years		94,439		95,974		83,989		87,569		78,314		79,079
Equity securities		2,862		14,597		3,950		16,120		3,558		25,195

Total investment securities available for sale	$	3,704,134	$	3,745,385	$	3,145,298	$	3,219,980	$	2,922,403	$	2,966,296


Investment securities held to maturity
Maturing in:
One year or less	$	—	$	—	$	151	$	151	$	150	$	152
One through five years		152		152		—		—		250		250
Five through 10 years		3,834		4,035		5,557		5,761		6,381		6,531
Over 10 years		154		192		165		198		176		210

Total investment securities held to maturity	$	4,140	$	4,379	$	5,873	$	6,110	$	6,957	$	7,143

The following table provides information regarding securities with unrealized losses as of June 30:


	Less than 12 months				12 months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
June 30, 2009
Investment securities available for sale:
U.S. Government	$	622,984	$	1,589	$	—	$	—	$	622,984	$	1,589
Corporate bonds		177,515		1,240		—		—		177,515		1,240
Residential mortgage-backed securities		21,298		450		1,411		62		22,709		512
Equity securities		485		336		—		—		485		336
State, county and municipal		113		2		437		7		550		9

Total	$	822,395	$	3,617	$	1,848	$	69	$	824,243	$	3,686

Investment securities held to maturity:
Mortgage-backed securities	$	—	$	—	$	33	$	27	$	33	$	27

June 30, 2008
Investment securities available for sale:
U.S. Government	$	704,076	$	7,808	$	—	$	—	$	704,076	$	7,808
Equity securities		643		41		—		—		643		41
Residential mortgage-backed securities		45,132		646		13,927		522		59,059		1,168
State, county and municipal		140		—		473		15		613		15

Total	$	749,991	$	8,495	$	14,400	$	537	$	764,391	$	9,032

Investment securities held to maturity:
Mortgage-backed securities	$	—	$	—	$	40	$	26	$	40	$	26

Investment securities with an aggregate fair value of $1,914 have had continuous unrealized losses for more than twelve months as of June 30, 2009 with an aggregate unrealized loss of $123. These 26 investments include residential mortgage-backed and state, county and municipal securities. None of the unrealized losses identified as of June 30, 2009 related to the marketability of the securities or the issuer’s ability to honor redemption obligations. Consequently, the securities were not deemed to be other than temporarily impaired.

At June 30, 2009, there was no intent to sell any of the securities classified as available for sale. Furthermore, it is not more likely than not that BancShares will have to sell any such securities before a recovery of the carrying value. With respect to investment securities held to maturity, BancShares has the ability and intent to hold those securities until they mature.

At June 30, 2009, other assets includes $46,677 of Federal Home Loan Bank of Atlanta (FHLB Atlanta) stock compared to $45,797 at December 31, 2008 and $40,179 at June 30, 2008. The FHLB Atlanta stock, which is redeemable only through the issuer, is carried at its par value. The FHLB Atlanta discontinued payment of dividends in the fourth quarter of 2008 in response to concerns over continued volatility in the financial markets. The investment in the FHLB Atlanta stock is considered a long-term investment, and its value is based on the ultimate recoverability of par value. Management has concluded that the investment in FHLB Atlanta stock was not other-than-temporarily impaired as of June 30, 2009.

For each period presented, securities gains (losses) include the following:


	Six months ended June 30,
	2009			2008
Gross gains on sales of investment securities available for sale	$	—		$	8,051
Other than temporary impairment loss on an equity investment		(139	)		—

Total securities gains (losses)	$	(139	)	$	8,051

During 2008, following the completion of Visa Inc.’s initial public offering, FCB’s former member-bank investment was converted into 486,905 shares of Class B common stock. Immediately thereafter, 188,238 shares of Visa Inc. Class B common stock were redeemed resulting in a gain of $8,051. The remaining 298,667 shares of Class B common stock are restricted and are carried at a fair value of $0.

Investment securities having an aggregate carrying value of $2,012,080 at June 30, 2009 and $2,282,908 at June 30, 2008, were pledged as collateral to secure public funds on deposit, to secure certain short-term borrowings and for other purposes as required by law.

Note C

Fair Value Disclosures

Fair value estimates are made at a specific point in time based on relevant market information and information about each financial instrument. Where information regarding the fair value of a financial instrument is available, those values are used, as is the case with investment securities, residential mortgage loans and certain long-term obligations. In these cases, an open market exists in which those financial instruments are actively traded.

Because no market exists for many financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. For these financial instruments with a fixed interest rate, an analysis of the related cash flows was the basis for estimating fair values. The expected cash flows were then discounted to the valuation date using an appropriate discount rate. The discount rates used represent the rates under which similar transactions would be currently negotiated. For June 30, 2009, the fair value for loans, net of allowance for loan and lease losses included an adjustment of approximately 5 percent of gross loans to reflect the unfavorable liquidity conditions that existed in various financial markets. Generally, the fair value of variable rate financial instruments equals the book value.


	June 30, 2009				December 31, 2008				June 30, 2008
	Carrying Value		Fair Value		Carrying Value		Fair Value		Carrying Value		Fair Value
Cash and due from banks	$	637,896	$	637,896	$	593,375	$	593,375	$	711,651	$	711,651
Overnight investments		229,668		229,668		174,616		174,616		395,450		395,450
Investment securities available for sale		3,745,385		3,745,385		3,219,980		3,219,980		2,966,296		2,966,296
Investment securities held to maturity		4,140		4,379		5,873		6,110		6,957		7,143
Loans held for sale		115,920		115,920		69,399		69,399		88,879		88,879
Loans, net of allowance for loan and lease losses		11,360,763		10,921,038		11,492,317		12,001,307		11,079,743		11,423,239
Income earned not collected		66,226		66,226		72,029		72,029		71,107		71,107

Deposits		14,358,149		14,435,457		13,713,763		13,810,690		13,075,411		13,135,698
Short-term borrowings		599,853		599,853		647,028		647,028		1,130,788		1,130,788
Long-term obligations		735,803		702,920		733,132		735,098		609,277		598,263
Accrued interest payable		59,807		59,807		50,923		50,923		45,297		45,297

For off-balance sheet commitments and contingencies, carrying amounts are reasonable estimates of the fair values for such financial instruments. Carrying amounts include unamortized fee income and, in some cases, reserves for any credit losses from those financial instruments. These amounts are not material to BancShares’ financial position.

BancShares adopted the provisions of SFAS No. 157 Fair Value Measurements (Statement 157) and SFAS No. 159 The Fair Value Option for Financial Assets and Liabilities (Statement 159) on January 1, 2008. Statement 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Statement 157 does not require any new fair value measurements, but clarifies and standardizes some divergent practices that have emerged since prior guidance was issued. Statement 157 creates a three-level hierarchy under which individual fair value estimates are to be ranked based on the relative reliability of the inputs used in the valuation. Statement 159 allows an entity to elect to measure certain financial assets and liabilities at fair value with changes in fair value recognized in the income statement each period. The statement also requires additional disclosures to identify the effects of an entity’s fair value election on its earnings. Upon the adoption of Statement 159, BancShares did not elect to report any assets and liabilities at fair value.

Statement 157 defines fair value as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, BancShares considers the principal or most advantageous market in which those assets or liabilities are sold and considers assumptions that market participants would use when pricing those assets or liabilities. Fair values determined using level 1 inputs rely on active and observable markets to price identical assets or liabilities. In situations where identical assets and liabilities are not traded in active markets, fair values may be determined based on level 2 inputs, which exist when observable data exists for similar assets and liabilities. Fair values for assets and liabilities that are not actively traded in observable markets are based on level 3 inputs, which are considered to be unobservable.

Among BancShares’ assets and liabilities, investment securities available for sale and interest rate swaps accounted for as cash flow hedges are reported at their fair values on a recurring basis. Certain other assets are adjusted to their fair value on a nonrecurring basis, including loans held for sale, which are carried at the lower of cost or market. Impaired loans, other real estate, goodwill and other intangible assets are periodically tested for impairment. Loans held for investment, deposits, short-term borrowings and long-term obligations are not reported at fair value.

For assets and liabilities carried at fair value on a recurring basis, the following table provides fair value information as of June 30, 2009:


			Fair value measurements using:
Description	Fair value		Quoted prices in active markets for identical assets and liabilities (Level 1 inputs)		Quoted prices for similar assets and liabilities (Level 2 inputs)		Significant unobservable inputs (Level 3 inputs)
June 30, 2009
Assets measured at fair value
Investment securities available for sale
U.S. Government	$	3,169,883	$	3,169,883	$	—	$	—
Corporate bonds		457,742		457,742		—		—

Residential mortgage-backed securities		96,721		—		96,721		—
Equity securities		14,597		14,597		—		—
State, county, municipal		1,617		—		1,617		—
Other		4,825		—		—		4,825

Total	$	3,745,385	$	3,642,222	$	98,338	$	4,825

Liabilities measured at fair value
Interest rate swaps accounted for as cash flow hedges		6,440		—		6,440		—

December 31, 2008
Assets measured at fair value
Investment securities available for sale
U.S. Government	$	3,112,428	$	3,112,428	$	—	$	—

Residential mortgage-backed securities		82,952		—		82,952		—
Equity securities		16,120		16,120		—		—
State, county, municipal		3,053		—		3,053		—
Other		5,427		—		—		5,427

Total	$	3,219,980	$	3,128,548	$	86,005	$	5,427

Liabilities measured at fair value
Interest rate swap accounted for as cash flow hedges		10,668		—		10,668		—

Prices for US Government securities and corporate bonds are readily available in the active markets in which those securities are traded, and the resulting fair values are shown in the ‘Level 1 input’ column. Prices for residential mortgage-backed securities and for state, county and municipal securities are obtained using the fair values of similar securities, and the resulting fair values are shown in the ‘Level 2 input’ column. Prices for all other securities, which include a residual interest that was retained from a securitization transaction, are determined based on various assumptions that are not observable. The fair values for these investment securities are shown in the ‘Level 3 input’ column. With respect to the residual interest in the asset securitization, the assumed prepayment speed, discount rate and credit spread are not observable in the market due to illiquidity and the uniqueness of the underlying assets.

Under the terms of the existing cash flow hedges, BancShares pays a fixed payment to the counterparty in exchange for receipt of a variable payment that is determined based on the 3-month LIBOR rate. The fair value of the cash flow hedge is therefore based on projected LIBOR rates for the duration of the hedge, values that, while observable in the market, are subject to adjustment due to pricing considerations for the specific instrument.

For those investment securities available for sale with fair values that are determined by reliance on significant unobservable inputs, the following table identifies the factors causing the change in fair value during the first six months of 2009 and 2008:


	Investment securities available for sale with fair values based on significant unobservable inputs
Description	2009			2008
Beginning balance, January 1,	$	5,427		$	9,924
Total gains (losses), realized or unrealized:
Included in earnings		—			—
Included in other comprehensive income		195			192
Purchases, sales, issuances and settlements, net		(797	)		(2,920	)
Transfers in/out of Level 3		—			—

Ending balance, June 30	$	4,825		$	7,196

No gains or losses were reported for the six-month periods ended June 30, 2009 and 2008 that relate to fair values estimated based on unobservable inputs.

Certain financial assets and financial liabilities are carried at fair value on a nonrecurring basis. Loans held for sale are carried at the lower of aggregate cost or fair value and are therefore carried at fair value only when fair value is less than the asset cost. Certain impaired loans are also carried at fair value. For financial assets and financial liabilities carried at fair value on a nonrecurring basis, the following table provides fair value information as of June 30, 2009:


	Fair value		Fair value measurements using:
Description	Fair value		Quoted prices in active markets for identical assets and liabilities (Level 1 inputs)		Quoted prices for similar assets and liabilities (Level 2 inputs)		Significant unobservable inputs (Level 3 inputs)
June 30, 2009
Loans held for sale	$	39,997	$	—	$	—	$	39,997
Impaired loans		18,624		—		—		18,624

December 31, 2008
Loans held for sale		69,399		—		—		69,399
Impaired loans		27,858		—		—		27,858

The values of loans held for sale are based on prices observed for similar pools of loans. The values of impaired loans are determined by either the collateral value or by the discounted present value of the expected cash flows.

Certain non-financial assets and non-financial liabilities are measured at fair value on a nonrecurring basis. Other assets includes certain foreclosed assets that are measured and reported at fair value using Level 2 inputs for observable market data or, if needed, Level 3 inputs for valuations based on non-observable criteria. During the six month period ended June 30, 2009, foreclosures of other real estate totaled $20,307, all of which was valued using Level 3 inputs. In connection with the measurement and initial recognition of foreclosed assets, BancShares recognized charge-offs totaling $8,294. Based on updates to Level 3 inputs, foreclosed property with a fair value of $5,188 as of June 30, 2009 incurred write-downs that totaled $729 during the six-month period ended June 30, 2009.

At June 30, 2009, impaired loans, which include commercial purpose nonaccrual loans and troubled debt restructurings, totaled $35.1 million. Allowances for impaired loans represent the difference between the impaired loans’ carrying value and the estimated collateral value or the present value of anticipated cash flows. At June 30, 2009, $24.3 million of impaired loans required allowances of $5.7 million to adjust the loans to their fair value of $18.6 million. The remaining $10.8 million of impaired loans did not require allowances based on underlying collateral values. The calculation of allowance for impaired loans is highly dependent on collateral valuations. Since all impaired loans at June 30, 2009 are secured by real estate, fair values are based on appraised values with adjustments for various factors including estimated holding costs. Given the significant instability in real estate markets, particularly in the Atlanta, Georgia area and in Southwest Florida, the valuations are subject to significant variation based on further reductions or recoveries of property values.

Note D

Employee Benefit Plans

Pension expense is a component of employee benefits expense. For the three and six month periods ended June 30, the components of pension expense are as follows:


	Three month periods ended June 30,						Six month periods ended June 30,
	2009			2008			2009			2008
Service cost	$	3,669		$	630		$	6,282		$	6,087
Interest cost		6,584			1,473			10,867			10,560
Expected return on assets		(8,584	)		(1,327	)		(13,751	)		(14,302	)
Amortization of prior service cost		63			12			104			109
Amortization of net actuarial loss		1,075			503			1,788			503

Total pension expense	$	2,807		$	1,291		$	5,290		$	2,957

The increase in pension expense during 2009 resulted from a change in the assumed discount rate used to estimate benefit obligations, a reduction in the expected rate of return on plan assets and an increase in the estimated future rate of salary increases. The assumed discount rate for 2009 is 6.00 percent, the expected long-term rate of return on plan assets is 8.00 percent and the assumed rate of salary increases is 4.50 percent.

During the first quarter of 2009, BancShares contributed $35,000 to the defined benefit plan.

Note E

Contingencies

On May 24, 2004, FCB filed a lawsuit in the Circuit Court of Greenbrier County, West Virginia against a customer alleging default under a master lease on a piece of equipment, eight promissory notes and two leases. The borrower asserted a counterclaim against FCB alleging breach of lease, breach of fiduciary duty, breach of duty of good faith and fair dealing, and tortuous interference with contractual relations. At trial, a jury returned a verdict against FCB and awarded a $4,125 judgment in favor of FCB’s customer. If the jury verdict stands, the customer will be entitled to pre-judgment interest of approximately $1,000 and post-judgment interest at a rate of 8.25 percent. FCB filed a motion to set aside the judgment or, in the alternative, for a new trial, but the Court denied FCB’s motion. FCB is appealing the Court’s action to the West Virginia Supreme Court of Appeals. FCB has posted an acceptable bond and execution of the judgment is stayed pending the outcome of the appeal. FCB strenuously denies liability and is vigorously pursuing appeal of the jury’s award.

BancShares and various subsidiaries have been named as defendants in various other legal actions arising from their normal business activities in which damages in various amounts are claimed. Although the amount of any ultimate liability with respect to those other matters cannot be determined, in the opinion of management, any such liability will not have a material effect on BancShares’ consolidated financial statements.

Note F

Derivatives

At June 30, 2009, BancShares had two interest rate swaps that qualify as cash flow hedges under Statement of Financial Accounting Standards No. 133 Accounting for Derivative Instruments and Hedging Activities and Statement of Financial Accounting Standards No. 161 Disclosures about Derivative Instruments and Hedging Activities – an Amendment of FASB Statement No. 133. The fair values of these derivatives are included in other liabilities in the consolidated balance sheets and in the net change in other liabilities in the consolidated statements of cash flows.

The interest rate swaps are used for interest rate risk management purposes and convert variable-rate exposure on outstanding debt to a fixed rate. The interest rate swaps each have a notional amount of $115,000, representing the amount of variable-rate trust preferred capital securities issued during 2006. The 2006 interest rate swap hedges interest payments through June 2011 and requires fixed-rate payments by BancShares at 7.125 percent in exchange for variable-rate payments of 175 basis points above 3-month LIBOR, which is equal to the interest paid to the holders of the trust preferred capital securities. The 2009 interest rate swap hedges interest payments from July 2011 through June 2016 and requires fixed-rate payments by BancShares at 5.50 percent in exchange for variable-rate payments of 175 basis points above 3-month LIBOR. As of June 30, 2009, collateral with a fair value of $9,211 was pledged to secure the existing obligation under the interest rate swaps. For both swaps, settlement occurs quarterly.


	June 30, 2009					December 31, 2008
	Notional amount		Estimated fair value of (asset) liability			Notional amount		Estimated fair value of liability
2006 interest rate swap hedging fixed rate exposure on trust preferred capital securities 2006-2011	$	115,000	$	8,792		$	115,000	$	10,668
2009 interest rate swap hedging fixed rate exposure on trust preferred capital securities 2011-2016		115,000		(2,352	)		—		—

			$	6,440				$	10,668

For cash flow hedges, the effective portion of the gain or loss due to changes in the fair value of the derivative hedging instrument is included in other comprehensive income, while the ineffective portion, representing the excess of the cumulative change in the fair value of the derivative over the cumulative change in expected future discounted cash flows on the hedged transaction, is recorded in the consolidated income statement. BancShares’ interest rate swaps have been fully effective since inception. Therefore, changes in the fair value of the interest rate swaps have had no impact on net income. For the six-month periods ended June 30, 2009 and 2008, BancShares recognized interest expense of $2,338 and $937, respectively, resulting from the interest rate swaps, none of which relates to ineffectiveness.

The following table discloses activity in accumulated other comprehensive income related to the interest rate swaps during the six-month periods ended June 30, 2009 and 2008.


	2009			2008
Accumulated other comprehensive loss resulting from interest rate swaps as of January 1	$	(6,456	)	$	(3,240	)
Other comprehensive income recognized during six-month period ended June 30		2,559			199

Accumulated other comprehensive loss resulting from interest rate swaps as of June 30	$	(3,897	)	$	(3,041	)

BancShares monitors the credit risk of the interest rate swap counterparty.

Note G

Segment Disclosures

BancShares conducts its banking operations through its two wholly-owned subsidiaries, FCB and ISB. FCB and ISB offer similar products and services to customers through operations conducted under separate charters. A substantial portion of our revenue is derived from our operations in North Carolina, Virginia, Georgia, Florida, California and Texas. The financial results and trends of ISB reflect the impact of the de novo nature of its growth.

In the aggregate, FCB and its consolidated subsidiaries, which are integral to its branch operation, and ISB account for more than 90 percent of consolidated assets, revenues and net income. Other includes activities of the parent company and Neuse, Incorporated (Neuse), a subsidiary that owns real property. During the second quarter of 2009 Neuse purchased from ISB foreclosed properties that had a carrying value of $7,801. This transaction will benefit ISB by reducing problem assets and improving certain operating ratios. To facilitate the potential purchase of additional foreclosed property in the future, ISB has agreed to lend Neuse up to $20,000 under a revolving line of credit.

The adjustments in the accompanying tables represent the elimination of the impact of certain inter-company transactions. The adjustments to interest income and interest expense neutralize the earnings and cost of inter-company borrowings. The adjustments to noninterest income and noninterest expense reflect the elimination of certain fees paid by one company to another within BancShares’ consolidated group. The adjustments to noninterest income and noninterest expense for six-month periods ended June 30, 2009 and 2008, include $4,570 and $4,770, respectively, paid by ISB to FCB for management fees and various other services including data and check processing.


	ISB		FCB		Other		Total		Adjustments			Consolidated
June 30, 2009
Total assets	$	2,654,534	$	14,601,756	$	2,181,110	$	19,437,400	$	(2,119,520	)	$	17,317,880
Loans and leases		2,154,136		9,368,909		—		11,523,045		—			11,523,045
Allowance for loan and lease losses		38,425		123,857		—		162,282		—			162,282
Goodwill		793		101,832		—		102,625		—			102,625
Nonperforming assets		61,246		33,364		7,801		102,411		—			102,411
Deposits		2,050,384		12,334,886		—		14,385,270		(27,121	)		14,358,149

December 31, 2008
Total assets	$	2,563,950	$	13,879,815	$	2,174,079	$	18,617,844	$	(1,872,182	)	$	16,745,662
Loans and leases		2,208,024		9,441,862		—		11,649,886		—			11,649,886
Allowance for loan and lease losses		37,335		120,234		—		157,569		—			157,569
Goodwill		793		101,832		—		102,625		—			102,625
Nonperforming assets		46,755		24,911		—		71,666		—			71,666
Deposits		1,970,795		11,782,062		—		13,752,857		(39,094	)		13,713,763

June 30, 2008
Total assets	$	2,651,340	$	13,535,501	$	2,605,523	$	18,792,364	$	(2,369,690	)	$	16,422,674
Loans and leases		2,160,843		9,063,433		—		11,224,276		—			11,224,276
Allowance for loan and lease losses		28,341		116,192		—		144,533		—			144,533
Goodwill		793		101,832		—		102,625		—			102,625
Nonperforming assets		36,005		11,279		—		47,284		—			47,284
Deposits		2,065,989		11,059,080		—		13,125,069		(49,658	)		13,075,411


	ISB			FCB		Other			Total		Adjustments			Consolidated
Three months ended June 30, 2009
Interest income	$	32,461		$	143,061	$	1,454		$	176,976	$	(135	)	$	176,841
Interest expense		13,484			40,844		5,616			59,944		(135	)		59,809

Net interest income		18,977			102,217		(4,162	)		117,032		—			117,032
Provision for loan and lease losses		10,064			10,695		—			20,759		—			20,759

Net interest income after provision for loan and lease losses		8,913			91,522		(4,162	)		96,273		—			96,273
Noninterest income		3,318			72,891		(545	)		75,664		(2,500	)		73,164
Noninterest expense		23,181			139,675		512			163,368		(2,500	)		160,868

Income (loss) before income taxes		(10,950	)		24,738		(5,219	)		8,569		—			8,569
Income taxes		(3,886	)		8,078		(1,823	)		2,369		—			2,369

Net income (loss)	$	(7,064	)	$	16,660	$	(3,396	)	$	6,200	$	—		$	6,200

Three months ended June 30, 2008
Interest income	$	34,446		$	165,261	$	5,938		$	205,645	$	(3,645	)	$	202,000
Interest expense		18,705			54,194		7,893			80,792		(3,645	)		77,147

Net interest income		15,741			111,067		(1,955	)		124,853		—			124,853
Provision for loan and lease losses		5,959			7,404		—			13,363		—			13,363

Net interest income after provision for loan and lease losses		9,782			103,663		(1,955	)		111,490		—			111,490
Noninterest income		3,280			78,555		509			82,344		(2,744	)		79,600
Noninterest expense		21,252			130,397		563			152,212		(2,744	)		149,468

Income (loss) before income taxes		(8,190	)		51,821		(2,009	)		41,622		—			41,622
Income taxes		(2,225	)		18,321		(700	)		15,396		—			15,396

Net income (loss)	$	(5,965	)	$	33,500	$	(1,309	)	$	26,226	$	—		$	26,226


	ISB			FCB		Other			Total		Adjustments			Consolidated
Six months ended June 30, 2009
Interest income	$	65,125		$	288,041	$	3,630		$	356,796	$	(303	)	$	356,493
Interest expense		28,620			83,983		11,356			123,959		(303	)		123,656

Net interest income		36,505			204,058		(7,726	)		232,837		—			232,837
Provision for loan and lease losses		19,141			20,341		—			39,482		—			39,482

Net interest income after provision for loan and lease losses		17,364			183,717		(7,726	)		193,355		—			193,355
Noninterest income		6,537			143,811		(546	)		149,802		(5,097	)		144,705
Noninterest expense		45,308			276,027		972			322,307		(5,097	)		317,210

Income (loss) before income taxes		(21,407	)		51,501		(9,244	)		20,850		—			20,850
Income taxes		(7,655	)		16,878		(3,236	)		5,987		—			5,987

Net income (loss)	$	(13,752	)	$	34,623	$	(6,008	)	$	14,863	$	—		$	14,863

Six months ended June 30, 2008
Interest income	$	70,206		$	343,850	$	14,348		$	428,404	$	(9,499	)	$	418,905
Interest expense		38,707			123,781		18,984			181,472		(9,499	)		171,973

Net interest income		31,499			220,069		(4,636	)		246,932		—			246,932
Provision for loan and lease losses		11,472			11,806		—			23,278		—			23,278

Net interest income after provision for loan and lease losses		20,027			208,263		(4,636	)		223,654		—			223,654
Noninterest income		6,552			162,103		508			169,163		(5,397	)		163,766
Noninterest expense		42,113			257,409		1,187			300,709		(5,397	)		295,312

Income (loss) before income taxes		(15,534	)		112,957		(5,315	)		92,108		—			92,108
Income taxes		(4,988	)		40,339		(1,854	)		33,497		—			33,497

Net income (loss)	$	(10,546	)	$	72,618	$	(3,461	)	$	58,611	$	—		$	58,611

Note H

Subsequent Events

In its call report dated March 31, 2009, TVB reported:


Total assets	$	1,492,407
Loans and leases		1,100,434
Deposits (includes $237,298 of brokered deposits)		1,333,053
Nonaccrual loans		146,628
Other real estate		35,660

During the third quarter of 2009, FCB will record the purchased assets and assumed liabilities at fair value. Under the terms of the TVB Agreement, FCB has the option to purchase any owned bank premises or to assume the leases on any or all of the banking offices. Except for brokered deposits that were retained by the FDIC, FCB assumed all of the deposit liabilities of TVB.

Loans, other real estate owned by TVB and purchased by FCB, and reimbursable expenses incurred by FCB are subject to loss share agreements that allocate prospective losses between FCB and the FDIC.

The following table provides additional information regarding the loss share agreements:


Range of losses incurred on loans, other real estate and reimbursable expenses	FDIC absorbs		FCB absorbs
< $193,000	—		100	%
$193,000 - $464,000	80	%	20	%
> $464,000	95	%	5	%

Due to substantial effort required to estimate the fair values of the assets purchased and liabilities assumed, the contingencies resulting from the acquisition, and various other calculations, the accounting for the TVB acquisition is not complete at the time the accompanying financial statements are filed. Until the fair values are established, any gain to be recognized during the third quarter of 2009 resulting from the TVB acquisition can not be calculated.

The TVB Agreement only covers the assets and liabilities of TVB. Neither the assets, liabilities nor the common stock of TVB’s former parent company, Temecula Valley Bancorp Inc., were purchased or assumed by FCB.

For the financial statements and footnotes included in this Form 10-Q, subsequent events occurring prior to August 7, 2009 have been considered.

Item 2.

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

INTRODUCTION

Management’s discussion and analysis of earnings and related financial data are presented to assist in understanding the financial condition and results of operations of First Citizens BancShares, Inc. and Subsidiaries (BancShares). This discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and related notes presented within this report. Intercompany accounts and transactions have been eliminated. Although certain amounts for prior years have been reclassified to conform to statement presentations for 2009, the reclassifications have no effect on shareholders’ equity or net income as previously reported.

OVERVIEW

BancShares is a financial holding company with two wholly owned banking subsidiaries: First-Citizens Bank & Trust Company (FCB), a North Carolina-chartered bank, and IronStone Bank (ISB), a federally-chartered thrift institution. FCB operates branches in North Carolina, Virginia, West Virginia, Maryland, Tennessee and California. ISB operates in Georgia, Florida, Texas, New Mexico, Arizona, California, Oregon, Washington, Colorado, Oklahoma, Missouri and Kansas. FCB and ISB offer similar banking products and services to customers through branch operations under separate charters. Each entity operates in different geographic markets, except in southern California, where ISB and FCB both operate since FCB’s third quarter 2009 acquisition discussed below. ISB has maintained a focus on providing products and services to commercial and business customers, while FCB has a broader customer base, including commercial and retail relationships. FCB offers a wide array of wealth management services through its trust department and a wholly-owned broker-dealer subsidiary. The financial results and trends of ISB reflect the impact of the de-novo nature of its growth.

On July 17, 2009, FCB entered into a Purchase and Assumption Agreement (TVB Agreement) with the Federal Deposit Insurance Corporation (FDIC) to purchase substantially all the assets and assume the majority of the liabilities of Temecula Valley Bank (TVB) of Temecula, California. Immediately prior to the effectiveness of the TVB Agreement, the FDIC had seized TVB. At March 31, 2009, TVB reported total assets of $1.5 billion, loans of $1.1 billion and deposits of $1.3 billion. TVB also reported nonaccrual loans totaling $146.6 million and other real estate owned totaling $35.7 million.

During the third quarter of 2009, the purchased assets and assumed liabilities will be recorded at fair value. Loans and other real estate owned by TVB and purchased by FCB are subject to a loss share agreement that allocates prospective losses between FCB and the FDIC. Under the terms of the TVB Agreement, FCB has the option to purchase any owned bank premises or to assume the leases on any or all of the banking offices. Except for brokered deposits that were retained by the FDIC, FCB assumed all of the deposit liabilities of TVB.

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

Various external factors influence customer demand for our loan, lease and deposit products. In an effort to stimulate and control the rate of growth of economic activity, monetary actions by the Federal Reserve are significant to the interest rate environment in which we operate. At any point in time, both the existing level and anticipated movement of interest rates have a material impact on customer demand for our products, our pricing of those products and on our profitability.

In addition to the interest rate environment, the general strength of the economy influences the demand for as well as the quality and collectibility of our loan and lease portfolio. External economic indicators such as consumer bankruptcy rates and business debt service capacity closely follow trends in the economic cycle.

Although we are unable to control the external factors that influence our business, through the utilization of various liquidity, interest rate and credit risk management tools, we seek to minimize the potentially adverse risks of unforeseen and potentially unfavorable economic trends and take advantage of favorable economic conditions when appropriate.

Financial institutions frequently focus their strategic and operating emphasis on maximizing profitability and therefore measure their relative success by reference to profitability measures such as return on average assets or return on average shareholders’ equity. BancShares’ profitability measures have historically compared unfavorably to the returns of similar-sized financial holding companies. Instead, we place 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 organization’s strengths and competitive position within the financial services industry, we believe opportunities for significant growth and expansion exist. We operate in diverse and growing geographic markets and believe that through competitive products and superior customer service, we can increase our business volumes and profitability. In recent years, we have focused our efforts on businesses owners, medical and other professionals and financially active individuals.

We seek to increase fee income within our key business units including cardholder and merchant services, insurance, treasury services, wealth management and other private banking services. We also remain focused 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 factors are uniquely problematic due to the lack of control and the potential material impact upon our financial results. Specific economic risks include recession, rapid movements in interest rates, changes in the yield curve and significant shifts in inflation expectations.

As a result of costs arising from recent and projected failures of insured banks, the reserve level of the Federal Deposit Insurance Corporation’s (FDIC) Deposit Insurance Fund (DIF) has declined to less than the amount mandated by the Federal Deposit Insurance Reform Act of 2005. The FDIC has a legally-imposed duty to adopt a plan to restore the DIF to a specific level, and as a result increased deposit insurance rates and imposed a special assessment on all insured banks during the second quarter of 2009. The special assessment for BancShares totaled $7.8 million. Additional special assessments and further increases in FDIC insurance premiums could have a material negative impact upon our earnings.

PERFORMANCE SUMMARY

Weak economic conditions in our principal market areas have continued to have an adverse impact on our financial condition and results of operations through soft demand for our loan products, reduced noninterest income, a tighter net yield on interest-earning assets and provisions for credit costs. In various markets and throughout the country, unfavorable measures such as increased unemployment, falling real estate prices and increased default and bankruptcy rates demonstrate the difficult business conditions affecting the general economy.

BancShares’ earnings declined during the second quarter of 2009 compared to the second quarter of 2008. Consolidated net income during the second quarter of 2009 equaled $6.2 million, compared to $26.2 million earned during the corresponding period of 2008. The annualized return on average assets was 0.14 percent during the second quarter of 2009, compared to 0.64 percent during the same period of 2008. The annualized return on average equity was 1.73 percent during 2009, compared to 7.11 percent during the same period of 2008. Net income per share during the second quarter of 2009 totaled $0.59, compared to $2.51 during the second quarter of 2008. The $20.0 million or 76.4 percent earnings decrease resulted from a significant increase in noninterest expense, higher provision for loan and lease losses and lower revenues.


Financial Summary		Table 1


	2009					2008									Six Months Ended June 30
	Second Quarter		First Quarter			Fourth Quarter			Third Quarter			Second Quarter			2009			2008
	(thousands, except share data and ratios)
Summary of Operations
Interest income	$	176,841	$	179,652		$	195,366		$	199,080		$	202,000		$	356,493		$	418,905
Interest expense		59,809		63,847			71,211			71,761			77,147			123,656			171,973

Net interest income		117,032		115,805			124,155			127,319			124,853			232,837			246,932
Provision for credit losses		20,759		18,723			22,142			20,195			13,350			39,482			23,278

Net interest income after provision for credit losses		96,273		97,082			102,013			107,124			111,503			193,355			223,654
Noninterest income		73,164		71,541			72,182			77,536			79,600			144,705			163,766
Noninterest expense		160,868		156,342			155,800			155,559			149,481			317,210			295,312

Income before income taxes		8,569		12,281			18,395			29,101			41,622			20,850			92,108
Income taxes		2,369		3,618			5,502			9,547			15,396			5,987			33,497

Net income	$	6,200	$	8,663		$	12,893		$	19,554		$	26,226		$	14,863		$	58,611

Net interest income-taxable equivalent	$	118,350	$	117,225		$	125,779		$	128,872		$	126,568		$	235,575		$	251,573

Per Share of Stock
Net income	$	0.59	$	0.83		$	1.24		$	1.87		$	2.51		$	1.42		$	5.62
Cash dividends		0.300		0.300			0.275			0.275			0.275			0.600			0.550
Market price at period end (Class A)		133.65		131.80			152.80			179.00			139.49			133.65			139.49
Book value at period end		137.45		137.65			138.33			144.17			142.54			137.45			142.54
Tangible book value at period end		127.32		127.48			128.13			133.92			132.24			127.32			132.24

Selected Quarterly Averages
Total assets	$	17,309,656	$	16,945,383		$	16,741,696		$	16,377,570		$	16,396,288		$	17,128,427		$	16,354,991
Investment securities		3,578,604		3,246,899			3,147,906			2,956,398			3,197,849			3,413,655			3,171,148
Loans and leases		11,621,450		11,659,873			11,665,522			11,440,563			11,154,400			11,640,555			11,058,053
Interest-earning assets		15,725,319		15,373,383			15,247,645			14,772,491			14,801,252			15,550,310			14,726,602
Deposits		14,316,103		13,897,701			13,544,762			13,003,821			12,969,423			14,107,973			12,940,377
Interest-bearing liabilities		12,840,612		12,596,452			12,471,757			12,187,085			12,281,649			12,719,207			12,295,390
Long-term obligations		734,042		733,087			730,360			613,046			609,301			733,567			542,516
Shareholders’ equity	$	1,433,427	$	1,438,109		$	1,497,619		$	1,496,573		$	1,484,143		$	1,435,695		$	1,473,741
Shares outstanding		10,434,453		10,434,453			10,434,453			10,434,453			10,434,453			10,434,453			10,434,453

Selected Quarter-End Balances
Total assets	$	17,317,880	$	17,214,265		$	16,745,662		$	16,665,605		$	16,422,674		$	17,317,880		$	16,422,674
Investment securities		3,749,525		3,324,770			3,225,853			2,935,593			2,973,253			3,749,525			2,973,253
Loans and leases		11,638,965		11,497,079			11,649,886			11,563,711			11,224,276			11,638,965			11,224,276
Interest-earning assets		15,618,157		15,706,732			15,119,754			14,891,934			14,681,858			15,618,157			14,681,858
Deposits		14,358,149		14,229,548			13,713,763			13,372,468			13,075,411			14,358,149			13,075,411
Interest-bearing liabilities		12,719,311		12,827,449			12,441,025			12,383,450			12,147,269			12,719,311			12,147,269
Long-term obligations		735,803		733,056			733,132			649,214			609,277			735,803			609,277
Shareholders’ equity	$	1,434,213	$	1,436,277		$	1,443,375		$	1,504,334		$	1,487,282		$	1,434,213		$	1,487,282
Shares outstanding		10,434,453		10,434,453			10,434,453			10,434,453			10,434,453			10,434,453			10,434,453

Selected Ratios and other data
Rate of return on average assets		0.14		%0.21	%		0.31	%		0.64	%		0.64	%		0.18	%		0.72	%
Rate of return on average shareholders’ equity		1.73		2.44			3.43			7.11			7.11			2.09			8.00
Net yield on interest-earning assets
(taxable equivalent)		3.01		3.09			3.28			3.47			3.44			3.05			3.43
Allowance for loan and lease losses to to total loans and leases at period end		1.41		1.39			1.35			1.32			1.28			1.41			1.28
Nonperforming assets to total loans and leases plus other real estate at period end		0.89		0.86			0.61			0.53			0.42			0.89			0.42
Tier 1 risk-based capital ratio		13.30		13.29			13.20			13.01			13.14			13.30			13.14
Total risk-based capital ratio		15.59		15.57			15.49			15.33			15.48			15.59			15.48
Leverage capital ratio		9.68		9.83			9.88			10.01			9.89			9.68			9.89
Dividend payout ratio		50.85		36.14			22.18			14.71			10.96			42.25			9.79
Average loans and leases to average deposits		81.18		83.90	%		86.13	%		87.98	%		86.01	%		82.51	%		85.45	%

For the first six months of 2009, BancShares recorded net income of $14.9 million, compared to $58.6 million earned during the first six months of 2008. The $43.7 million or 74.6 percent decrease was attributable to higher provision for loan and lease losses and noninterest expense and reduced revenues. Net income per share for the first six months of 2009 amounted to $1.42, compared to $5.62 during the same period of 2008. On an annualized basis, BancShares returned 0.18 percent on average assets during the first six months of 2009, compared to 0.72 percent from the corresponding period of 2008. Annualized return on average equity for the first six months of 2009 was 2.09 percent, down from 8.00 percent during the same period of 2008.

FDIC insurance expense has increased materially compared to the comparable periods of 2008, up $13.1 million during the second quarter of 2009 versus the second quarter of 2008 and $16.6 million on a year-to-date basis.

When compared to the first quarter of 2009, average loans and leases declined slightly during the second quarter due to soft economic conditions and customer desire to reduce outstanding debt obligations. Average deposits increased at a healthy pace during the second quarter, up $418.4 million or 3.0 percent. The strong deposit growth allowed the investment securities portfolio to increase by $331.7 million, or 10.2 percent, providing additional balance sheet liquidity.

Asset quality measurements weakened during the second quarter as net charge-offs increased to $20.8 million compared to $14.0 million the previous quarter. Net charge-offs as a percentage of average loans for the second quarter of 2009 equaled 0.73 percent. The allowance for loan and lease losses was up slightly from March 31, 2009 to $162.3 million, representing 1.41 percent of total loans and leases as of June 30, 2009. Nonperforming assets equaled $102.4 million at June 30, 2009, up $3.6 million or 3.6 percent from March 31, 2009. Continuing weakness in residential real estate markets, primarily in our Atlanta and southwest Florida markets, account for the majority of the increase in our net-charge offs and nonperforming assets.

The decline in residential real estate prices has adversely affected our financial results, primarily due to higher losses and costs arising from residential construction loans in the Atlanta, Georgia and southwest Florida markets. We have also observed higher delinquencies and losses in our revolving mortgage loan portfolio in North Carolina, Georgia and Florida. Because the majority of our commercial real estate loans are owner occupied, the decline in market values for commercial real estate has not had a material adverse impact on our delinquencies and losses. Because a substantial majority of our investment securities portfolio consists of U.S. Government securities and corporate bonds issued by financial institutions which are guaranteed by the full faith and credit of the United States of America, the carrying amount of our investment securities portfolio is generally not impacted by uncertainties in the credit markets.

INTEREST-EARNING ASSETS

Interest-earning assets include loans and leases, investment securities and overnight investments, all of which reflect varying interest rates based on the risk level and maturity of the underlying asset. Riskier investments typically carry a higher interest rate, but expose the investor to potentially higher levels of default. We have historically focused on maintaining exceptional asset quality, which results in a loan and lease portfolio subjected to strenuous underwriting and monitoring procedures. United States Treasury and U.S. government agency securities represent 84.5 percent of our investment securities portfolio. Debt obligations guaranteed by the Temporary Liquidity Guarantee Program represent 12.2 percent of the investment securities portfolio. Residential mortgage-backed securities designated as available for sale and carried at fair value represent 2.6 percent of total investment securities.

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

Loans and leases. At June 30, 2009 and 2008, loans and leases totaled $11.52 billion and $11.22 billion, respectively. The $298.8 million or 2.7 percent growth from June 30, 2008 to June 30, 2009 resulted from growth within the commercial and revolving mortgage portfolios and commercial and industrial loans, partially offset by reductions in consumer and construction loans.

Commercial mortgage loans totaled $4.40 billion at June 30, 2009, representing 38.2 percent of the total loan and lease portfolio. This represents an increase of $232.7 million or 5.6 percent since June 30, 2008. Demand for loans secured by owner-occupied medical and professional facilities remained strong during the second quarter, particularly in expansion markets. 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.


Loans and Leases		Table 2


	2009				2008
	Second Quarter		First Quarter		Fourth Quarter		Third Quarter		Second Quarter
					(thousands)
Real estate:
Construction and land development	$	677,884	$	735,619	$	778,315	$	803,935	$	815,005
Commercial mortgage		4,397,247		4,336,382		4,343,809		4,265,501		4,164,592
Residential mortgage		858,036		862,637		894,802		897,181		896,634
Revolving mortgage		2,052,941		1,984,249		1,911,852		1,793,178		1,638,049
Other mortgage		155,483		152,561		149,478		152,764		147,424

Total real estate loans		8,141,591		8,071,448		8,078,256		7,912,559		7,661,704
Commercial and industrial		1,858,910		1,857,092		1,885,358		1,886,847		1,797,042
Consumer		1,070,290		1,132,059		1,233,075		1,317,421		1,337,820
Lease financing		332,644		344,054		353,933		346,757		335,877
Other		119,610		92,426		99,264		100,127		91,833

Total loans and leases		11,523,045		11,497,079		11,649,886		11,563,711		11,224,276
Less allowance for loan and lease losses		162,282		161,572		157,569		152,946		144,533

Net loans and leases	$	11,360,763	$	11,335,507	$	11,492,317	$	11,410,765	$	11,079,743

At June 30, 2009, revolving mortgage loans totaled $2.05 billion, representing 17.8 percent of total loans and leases outstanding, an increase of $414.9 million or 25.3 percent since June 30, 2008. Attractive rates have stimulated line utilization during 2009.

Commercial and industrial loans totaled $1.86 billion or 16.1 percent of total loans and leases outstanding. These loans increased $61.9 million or 3.4 percent since June 30, 2008, the result of moderate customer demand and sales efforts in expansion markets.

Residential mortgage loans totaled $858.0 million or 7.4 percent of total loans and leases at June 30, 2009, down $38.6 million or 4.3 percent from June 30, 2008. We continue to sell on a servicing released basis substantially all of our current production of residential mortgage loans.

Consumer loans totaled $1.07 billion or 9.3 percent of total loans and leases at June 30, 2009, compared to $1.34 billion or 11.9 percent of loans and leases at June 30, 2008. The continuing reduction in consumer loans results from the discontinuation of indirect lending through our sales finance division in late 2008.

Construction and land development loans totaled $677.9 million or 5.9 percent of total loans at June 30, 2009, a decrease of $137.1 million or 16.8 percent since June 30, 2008. Given the continuing soft residential real estate markets, we have reduced our emphasis on this area of lending, particularly in the Atlanta, Georgia and southwest Florida markets.

At March 31, 2009, TVB reported loans and leases with a carrying value of $1.10 billion. During the third quarter, these loans will be recorded at their fair value. Aside from the loans acquired from TVB, we anticipate modest increases in commercial mortgage and commercial and industrial loans in the second half of 2009, as we continue to build our customer base in new markets. We expect revolving mortgage loans will continue to grow due to sustained demand. All growth projections are subject to change as a result of economic deterioration or improvement, competitive forces and other external factors.


Investment Securities		Table 3


	June 30, 2009							June 30, 2008
	Cost		Fair Value		Average Maturity (1) (Yrs./Mos.)	Taxable Equivalent Yield		Cost		Fair Value		Average Maturity (1) (Yrs./Mos.)	Taxable Equivalent Yield
	(thousands)
Investment securities available for sale:
U. S. Government:
Within one year	$	1,616,292	$	1,629,648	0/6	2.80	%	$	1,452,932	$	1,468,966	0/6	4.87	%
One to five years		1,527,733		1,540,235	1/6	1.45			1,381,076		1,386,566	1/7	3.08
Five to ten years		—		—	—	—			2,550		2,547	5/0	4.90
Over ten years		—		—	—	—			—		—

Total		3,144,025		3,169,883	1/1	2.14			2,836,558		2,858,079	1/0	3.99
Residential mortgage-backed securities
Within one year		—		—	—	—			—		—
One to five years		23		21	2/1	5.38			40		37	3/1	5.40
Five to ten years		729		736	8/9	4.55			812		782	9/9	4.43
Over ten years		94,429		95,964	27/7	5.15			72,863		71,818	26/6	5.47

Total		95,181		96,721	27/1	5.15			73,715		72,637	26/10	5.46
State, county and municipal:
Within one year		480		483	0/8	4.82			1,702		1,709	0/10	3.90
One to five years		1,110		1,124	2/10	4.64			1,419		1,415	3/5	4.69
Five to ten years		—		—	—	—			—		—
Over ten years		10		10	11/5	4.97			66		65	20/5	4.44

Total		1,600		1,617	2/3	4.70			3,187		3,189	2/4	4.26
Corporate bonds (2)
One to five years		457,572		457,742	2/8	1.87			—		—	—	—

Total		457,572		457,742	2/9	1.95			—		—	—	—
Other
Five to ten years		2,894		4,825	8/11	11.03			—		—	—	—
Over ten years		—		—	—	—			5,385		7,196	12/1	11.13

Total		2,894		4,825	9/5	11.05			5,385		7,196	12/1	11.13
Equity securities		2,862		14,597					3,558		25,195

Total investment securities available for sale		3,704,134		3,745,385					2,922,403		2,966,296

Investment securities held to maturity:
Residential mortgage-backed securities
Five to ten years		3,834		4,035	7/9	5.54	%		4,944		5,012	8/10	5.53	%
Over ten years		154		192	18/2	6.45			176		210	19/8	6.41

Total		3,988		4,227	8/2	5.58			5,120		5,222	9/2	5.72
State, county and municipal:
Within one year		—		—					150		152	0/10	5.88
One to five years		152		152	4/4	5.55			—		—
Five to ten years		—		—					1,437		1,519	9/10	6.02

Total		152		152	4/4	5.55			1,587		1,671	9/3	6.01
Other
One to five years		—		—					250		250	0/4	3.25

Total		—		—	—	—			250		250	0/4	3.25

Total investment securities held to maturity		4,140		4,379	8/1	5.58			6,957		7,143	8/9	5.50

Total investment securities	$	3,708,274	$	3,749,764				$	2,929,360	$	2,973,439

(1)

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 35.0% for federal income tax purposes and 6.9% for state income taxes for all periods.

(2)	Guaranteed debt securities issued pursuant to the Transitional Liquidity Guarantee Program.

Investment securities. Investment securities available for sale totaled $3.75 billion at June 30, 2009, compared to $2.97 billion at June 30, 2008. The $779.1 million or 26.3 percent increase results from improved liquidity resulting from deposit growth offset in part by lower demand for treasury services products by commercial customers. Available-for-sale securities are reported at their aggregate fair value and unrealized gains and losses are included as a component of other comprehensive income, net of deferred taxes. Table 3 presents detailed information relating to the investment securities portfolio.

Income on interest-earning assets. Interest income amounted to $176.8 million during the second quarter of 2009, a $25.2 million or 12.5 percent decrease from the second quarter of 2008. The impact of falling asset yields more than offset the impact of growth in interest-earning assets. The taxable-equivalent yield on interest-earning assets for the second quarter of 2009 equaled 4.59 percent, compared to 5.53 percent for the corresponding period of 2008. Average interest-earning assets increased $924.1 million, the result of growth in average loans and investment securities.

Loan and lease interest income for the second quarter of 2009 equaled $155.4 million, a reduction of $11.7 million or 7.0 percent from the second quarter of 2008. The taxable-equivalent yield on the loan and lease portfolio equaled 5.45 percent during the second quarter of 2009, down 59 basis points from the same period of 2008. The lower yield resulted from origination of new loans and leases and adjustments of variable rate loans to current market rates. The impact of the declining loan yields more than offset the impact of the $467.1 million or 4.2 percent increase in average loans and leases during the second quarter of 2009.

Interest income earned on the investment securities portfolio amounted to $21.2 million during the second quarter of 2009 versus $32.6 million during the same period of 2008, a decrease of $11.4 million or 34.9 percent. This decrease is the net result of lower yields and higher average volume. The taxable-equivalent yield decreased 178 basis points from 4.24 percent in the second quarter of 2008 to 2.46 percent in the second quarter of 2009 due to the reinvestment of maturing securities at lower yields. Average investment securities increased $380.8 million or 11.9 percent from $3.20 billion during the second quarter of 2008 to $3.58 billion during the second quarter of 2009.

Interest income amounted to $356.5 million during the first six months of 2009, a $62.4 million or 14.9 percent decrease from the same period of 2008, the net result of lower yields and growth in interest-earning assets. The taxable-equivalent yield declined 111 basis points from 5.76 percent for the first six months of 2008 to 4.65 percent during the same period of 2009, caused by lower market interest rates during 2009.

For the six months ended June 30, 2009, loan and lease interest income equaled $312.0 million, a decrease of $32.3 million or 9.4 percent from the same period of 2008. The deterioration in interest income reflects the unfavorable effect of an 85 basis point decrease in loan and lease yields, the impact of which more than offset the benefit of a $582.5 million or 5.3 percent increase in average loans and leases.

For the six months ended June 30, 2009, income earned on the investment securities portfolio amounted to $44.0 million, compared to $68.2 million during the same period of 2008, a decrease of $24.2 million or 35.4 percent. This decrease was the result of lower interest rates, which more than offset the impact of liquidity-influenced portfolio growth. The yield on average investment securities declined 179 basis points resulting from the reinvestment of proceeds arising from maturing securities to current market rates. Average investment securities increased $242.5 million or 7.6 percent from $3.17 billion in 2008 to $3.41 billion in 2009.

Interest earned on overnight investments totaled $417,000 during the first six months of 2009 compared to $6.4 million during the same period of 2008, a $5.9 million decrease. Average balances declined by $1.3 million while the yield fell by 240 basis points.

Consolidated Taxable Equivalent Rate/Volume Variance Analysis - Second Quarter

Table 4


	2009						2008						Increase (decrease) due to:
	Average Balance		Interest Income/ Expense		Yield/ Rate		Average Balance		Interest Income/ Expense		Yield/ Rate		Volume			Yield/ Rate			Total Change
(thousands)							(thousands)
Assets
Loans and leases	$	11,621,450	$	156,001	5.45	%	$	11,154,400	$	167,624	6.04	%	$	5,909		$	(17,532	)	$	(11,623	)
Investment securities:
U. S. Government		3,123,823		18,826	2.42			3,077,879		32,416	4.22			384			(13,974	)		(13,590	)
Residential mortgage-backed securities		100,399		1,234	4.93			79,778		1,057	5.33			265			(88	)		177
Corporate bonds		335,417		1,580	1.88			—		—				790			790			1,580
State, county and municipal		2,878		162	22.58			4,915		82	6.71			(74	)		154			80
Other		16,087		164	4.09			35,277		251	2.86			(166	)		79			(87	)

Total investment securities		3,578,604		21,966	2.46			3,197,849		33,806	4.24			1,199			(13,039	)		(11,840	)
Overnight investments		525,265		192	0.15			449,003		2,285	2.05			212			(2,305	)		(2,093	)

Total interest-earning assets	$	15,725,319	$	178,159	4.59	%	$	14,801,252	$	203,715	5.53	%	$	7,320		$	(32,876	)	$	(25,556	)


Liabilities

Interest-bearing deposits:
Checking With Interest	$	1,523,306	$	357	0.09	%	$	1,468,617	$	294	0.08	%	$	19		$	44		$	63
Savings		573,955		147	0.10			552,040		279	0.20			8			(140	)		(132	)
Money market accounts		3,816,462		6,570	0.69			3,097,573		13,637	1.77			2,223			(9,290	)		(7,067	)
Time deposits		5,561,474		41,816	3.02			5,365,159		50,647	3.80			1,731			(10,562	)		(8,831	)

Total interest-bearing deposits		11,475,197		48,890	1.71			10,483,389		64,857	2.49			3,981			(19,948	)		(15,967	)
Short-term borrowings		631,373		1,281	0.81			1,188,959		3,859	1.31			(1,458	)		(1,120	)		(2,578	)
Long-term obligations		734,042		9,638	5.25			609,301		8,431	5.53			1,676			(469	)		1,207

Total interest-bearing liabilities	$	12,840,612	$	59,809	1.87	%	$	12,281,649	$	77,147	2.53	%	$	4,199		$	(21,537	)	$	(17,338	)

Interest rate spread					2.72	%					3.00	%

Net interest income and net yield on interest-earning assets			$	118,350	3.02	%			$	126,568	3.44	%	$	3,121		$	(11,339	)	$	(8,218	)

Average loan and lease balances include nonaccrual loans and leases and loans held for sale. Yields related to loans, leases and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only are stated on a taxable-equivalent basis assuming a statutory federal income tax rate of 35% and state income tax rate of 6.90% for each period. The taxable-equivalent adjustment was $1,318 for 2009 and $1,140 for 2008.

INTEREST-BEARING LIABILITIES

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

Deposits. At June 30, 2009, deposits totaled $14.36 billion, an increase of $1.28 billion or 9.8 percent over June 30, 2008 caused by a surge in customer savings, continued demand for high-quality bank deposits and a desire by customers to seek safety from uncertain investment instruments. We continue to focus on deposit attraction and retention as a key business objective.

Consolidated Taxable Equivalent Rate/Volume Variance Analysis - Six Months


																			Table 5

	2009						2008						Increase (decrease) due to:
(thousands)	Average Balance		Interest Income/ Expense		Yield/ Rate		Average Balance		Interest Income/ Expense		Yield/ Rate		Volume			Yield/ Rate			Total Change
Assets
Loans and leases	$	11,640,555	$	313,146	5.42	%	$	11,058,053	$	345,288	6.27	%	$	16,380		$	(48,522	)	$	(32,142	)
Investment securities:
U. S. Government		3,098,389		40,816	2.65			3,051,737		67,968	4.46			718			(27,870	)		(27,152	)
Residential mortgage-backed securities		95,493		2,382	5.03			81,474		2,163	5.34			358			(139	)		219
Corporate bonds		197,882		1,858	1.88			—		—	—			929			929			1,858
State, county and municipal		3,649		241	13.32			4,939		163	6.64			(64	)		142			78
Other		18,242		371	4.10			32,998		525	3.20			(268	)		114			(154	)

Total investment securities		3,413,655		45,668	2.69			3,171,148		70,819	4.48			1,673			(26,824	)		(25,151	)
Overnight investments		496,100		417	0.17			497,401		6,366	2.57			(15	)		(5,934	)		(5,949	)

Total interest-earning assets	$	15,550,310	$	359,231	4.65	%	$	14,726,602	$	422,473	5.76	%	$	18,038		$	(81,280	)	$	(63,242	)

Liabilities
Interest-bearing deposits:
Checking With Interest	$	1,494,396	$	779	0.11	%	$	1,444,009	$	664	0.09	%	$	(3	)	$	118		$	115
Savings		559,812		315	0.11			546,082		561	0.21			20			(266	)		(246	)
Money market accounts		3,732,736		14,964	0.81			3,077,735		33,303	2.18			4,864			(23,203	)		(18,339	)
Time deposits		5,554,801		85,778	3.11			5,430,347		109,588	4.06			2,178			(25,988	)		(23,810	)

Total interest-bearing deposits		11,341,745		101,836	1.81			10,498,173		144,116	2.76			7,059			(49,339	)		(42,280	)
Short-term borrowings		643,895		2,602	0.81			1,254,701		12,040	1.93			(4,156	)		(5,282	)		(9,438	)
Long-term obligations		733,567		19,218	5.24			542,516		15,817	5.83			5,266			(1,865	)		3,401

Total interest-bearing liabilities	$	12,719,207	$	123,656	1.96	%	$	12,295,390	$	171,973	2.81	%	$	8,169		$	(56,486	)	$	(48,317	)

Interest rate spread					2.69	%					2.95	%

Net interest income and net yield on interest-earning assets			$	235,575	3.05	%			$	250,500	3.42	%	$	9,869		$	(24,794	)	$	(14,925	)

Average loan and lease balances include nonaccrual loans and leases and loans held for sale. Yields related to loans, leases and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only are stated on a taxable-equivalent basis assuming a statutory federal income tax rate of 35% and a state income tax rate of 6.90% for each period. The taxable-equivalent adjustment was $2,738 and $2,495 for 2009 and 2008, respectively.

At March 31, 2009, TVB reported deposits of $1.33 billion, $237.3 million of which were brokered deposits that were not assumed by FCB. However, we expect deposits resulting from the TVB acquisition to decline during the third and fourth quarters of 2009 as we apply less aggressive pricing strategies.

Short-term borrowings. At June 30, 2009, short-term borrowings totaled $599.9 million compared to $1.13 billion at June 30, 2008, a $530.9 million reduction. The 47.0 percent decline resulted from reduced demand for treasury service products caused by falling interest rates.

Long-term obligations. Long-term obligations equaled $735.8 million at June 30, 2009, up $126.5 million from June 30, 2008 due to borrowings from the Federal Home Loan Bank of Atlanta (FHLB) during the third and fourth quarters of 2008.

Expense on interest-bearing liabilities. Interest expense amounted to $59.8 million during the second quarter of 2009, a $17.3 million or 22.5 percent decrease from the second quarter of 2008. Significantly lower rates more than offset the impact of the growth in interest-bearing liabilities. The rate on average interest-bearing liabilities equaled 1.87 percent during the second quarter of 2009, a 66 basis point decrease in the aggregate blended rate on interest-bearing liabilities as compared to the second quarter of 2008. Average interest-bearing liabilities increased $559.0 million or 4.6 percent from the second quarter of 2008 to the second quarter of 2009, the net result of growth among interest-bearing deposits and a decline in short-term borrowings.

Year-to-date interest expense equaled $123.7 million, compared to $172.0 million for the same period of 2008. The $48.3 million or 28.1 percent decrease results from lower interest rates, partially offset by the impact of growth in deposits and long-term borrowings. The rate on interest-bearing liabilities decreased from 2.81 percent during the first six months of 2008 to 1.96 percent for the same period of 2009, an 85 basis point drop. For the first six months of 2009, average interest-bearing liabilities increased $423.8 million or 3.4 percent from $12.30 billion to $12.72 billion. Average money market accounts increased $655.0 million or 21.3 percent to $3.73 billion while average time deposits increased $124.5 million or 2.3 percent to $5.55 billion, both of which we attribute in part to customers seeking to place deposits with high-quality banks. Average short-term borrowings decreased $610.8 million or 48.7 percent during 2009, due to rate-induced declines in treasury services balances. Average long-term obligations increased $191.1 million from $542.5 million to $733.6 million due to additional FHLB borrowings.

NET INTEREST INCOME

Net interest income totaled $117.0 million during the second quarter of 2009, a decrease of $7.8 million or 6.3 percent from the second quarter of 2008. The taxable-equivalent net yield on interest-earning assets equaled 3.02 percent for the second quarter of 2009, down 42 basis points from the second quarter 2008 net yield of 3.44 percent, and 7 basis points from the first quarter of 2009. For the six-month period ended June 30, 2009, net interest income decreased by $14.1 million or 5.7 percent from the same period of 2008 due to a 37 basis point contraction in the net yield on interest-earning assets. For both the second quarter and the first six months of 2009, the reduction in net interest income was due to the extremely low interest rate environment, the impact of which more than offset the benefit of balance sheet growth.

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, revenues derived from wealth management services and fees from processing services. During 2008, we also recorded a significant securities gain.

During the first half of 2009, noninterest income amounted to $144.7 million, compared to $163.8 million during the same period of 2008. Of the $19.1 million or 11.6 percent decrease in noninterest income, $8.1 million resulted from a 2008 securities gain recognized in conjunction with our investment in Visa, Inc. In addition to the impact of the Visa gain, due to weak economic conditions we experienced reductions in service charge income, wealth management services and cardholder and merchant services income during 2009.

Service charges on deposit accounts generated $37.0 million for the first six months of 2009, a decrease of $4.0 million or 9.8 percent from 2008. Reductions in transaction activity and lower interest rates caused service change and overdraft charges to decline during 2009.

Wealth management services generated $22.3 million in the first half of 2009 compared to revenues of $25.9 million in 2008. The $3.7 million or 14.2 percent decrease resulted from lower trust and brokerage income.

Cardholder and merchant services generated $45.6 million during the first six months of 2009, a decrease of $3.1 million or 6.5 percent compared to 2008. This decrease resulted primarily from lower interchange income, the result of reduced transaction volumes generated by both debit and credit cardholders.

Noninterest income benefited from improvements in fees from processing services and mortgage income. Mortgage income increased $2.1 million or 55.6 percent from $3.7 million in 2008 to $5.8 million in 2009. Servicing income and loan origination fees were up for the first six month period of 2009 caused by favorable impacts from higher refinance activity. Fees from processing services added $531,000 or 3.0 percent in 2009 caused by higher transaction volumes and the addition of new clients.

For the second quarter of 2009, noninterest income decreased $6.4 million or 8.1 percent from 2008. Consistent with the six month period, cardholder and merchant services income, service charges on deposit accounts and wealth management services all declined due to poor economic conditions. We anticipate that the trend of lower noninterest income will continue through the rest of 2009.

NONINTEREST EXPENSE

The primary components of noninterest expense are salaries and employee benefit costs, occupancy expenses related to branch offices and support facilities, and equipment costs for branch offices and our technology infrastructure. During 2009, FDIC deposit insurance costs have emerged as a significant component of noninterest expense. Noninterest expense equaled $317.2 million for the first six months of 2009, a $21.9 million or 7.4 percent increase over the $295.3 million recorded during the same period of 2008.

Salaries and wages totaled $129.3 million for the first six months of 2009, an increase of $2.9 million or 2.3 percent when compared to the same period of 2008. The increase resulted from new branch offices, headcount additions in support functions during 2008 and the effect of mid-year 2008 merit increases. Employee benefits expense totaled $33.1 million for the first six months of 2009, an increase of $1.9 million or 6.1 percent. Pension expense increased $2.3 million while employee health costs increased $2.0 million during 2009. These increases were partially offset by lower executive retirement costs in 2009.

Occupancy expense amounted to $31.4 million during the first half of 2009 compared to $30.0 million during the same period of 2008. The $1.3 million or 4.4 percent increase resulted from higher expansion-related building costs. Furniture and equipment expense equaled $29.5 million in 2009, an increase of $1.4 million or 4.9 percent over the $28.1 million in 2008, primarily due to higher hardware and software costs.

FDIC deposit insurance expense increased $16.6 million from $1.3 million in the first six months of 2008 to $17.9 million in 2009, inclusive of a special assessment of $7.8 million. Expenses related to the maintenance, writedowns and resolution of other real estate increased $2.9 million during 2009 due to a significant increase in other real estate acquired through foreclosure in the Atlanta, Georgia and southwest Florida markets. Other expenses decreased $5.2 million or 6.6 percent from the first six months of 2008 to the same period of 2009 primarily due to a contingency accrual recorded during the second quarter of 2008 for a litigation exposure that has since been resolved.

For the second quarter of 2009, noninterest expense totaled $160.9 million, an $11.4 million or 7.6 percent increase over the same period of 2008. Employee benefits increased $2.8 million or 21.2 percent due to higher health insurance and pension costs. FDIC insurance expense increased $13.1 million in 2009 due to higher quarterly rates and the $7.8 million special assessment. Occupancy expense increased $1.3 million or 8.6 percent due from expansion of the branch network. Other expense decreased $8.0 million during the second quarter primarily due to the 2008 contingency accrual.

INCOME TAXES

BancShares continually monitors and evaluates the potential impact of current events on the estimates used to establish income tax expenses and income tax liabilities. On a periodic basis, we evaluate our income tax positions based on current tax law, positions taken by various tax auditors within the jurisdictions that BancShares is required to file income tax returns as well as potential or pending audits or assessments by such tax auditors.

Income tax expense amounted to $6.0 million during the six months ended June 30, 2009, compared to $33.5 million during the same period of 2008. The 82.1 percent decrease in income tax expense was primarily the result of lower pretax earnings. The effective tax rates for these periods were 28.7 percent and 36.4 percent, respectively. For both the three and six-month periods ended June 30, 2009, the favorable impact of various permanent differences remained largely unchanged while pretax income declined, resulting in a lower effective tax rate.

SHAREHOLDERS’ EQUITY AND CAPITAL ADEQUACY

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 projection 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 6 provides information on capital adequacy for BancShares as of June 30, 2009 and 2008.

We believe that the TVB acquisition by FCB will result in an increase in risk-weighted assets of approximately $850.0 million. This increase will thereby reduce leverage ratios for both BancShares and FCB by 60 basis points and risk-based capital ratios by 90 basis points for BancShares and FCB. Both BancShares and FCB remain well-capitalized on a proforma basis.

BancShares continues to exceed minimum capital standards and the banking subsidiaries remain well-capitalized. Due to the adequacy of our capital levels, we did not apply for TARP funding under the TARP Capital Purchase Program.


Capital Adequacy											Table 6

	Actual				Minimum requirement				Well-capitalized requirement
	Amount		Ratio		Amount		Ratio		Amount		Ratio
					(dollars in thousands)
June 30, 2009
Tier 1 risk-based capital	$	1,659,778	13.30	%	$	499,310	4.00	%	$	624,138	5.00	%
Total risk-based capital		1,945,751	15.59	%		998,621	8.00	%		1,248,276	10.00	%
Tier 1 leverage capital		1,659,778	9.68	%		514,363	3.00	%		1,028,726	6.00	%

June 30, 2008
Tier 1 risk-based capital		1,611,089	13.14	%		490,286	4.00	%		612,858	5.00	%
Total risk-based capital		1,897,038	15.48	%		980,572	8.00	%		1,225,716	10.00	%
Tier 1 leverage capital		1,611,089	9.89	%		488,665	3.00	%		977,330	6.00	%

The sustained growth and operating losses of ISB has required BancShares to infuse significant amounts of capital into ISB to support its expanding balance sheet. Since ISB was formed in 1997, BancShares has provided $366.3 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. These dividends also fund BancShares’ payment of shareholder dividends and interest payments on a portion of its long-term obligations.

During 2009, our board of directors authorized the repurchase of up to 100,000 shares of Class A common stock and up to 25,000 shares of Class B common stock. The authorization does not require repurchase of any particular number of shares. Any shares of stock that are repurchased will be cancelled. No shares have been purchased as of June 30, 2009.

RISK MANAGEMENT

In the normal course of its 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 critical 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 and thus earnings as a result of unfavorable changes in market interest rates. Liquidity risk is the possible inability to fund obligations to depositors, creditors, investors or borrowers.

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 much of our credit approval process is centralized. We maintain a credit review function that conducts independent risk reviews and analyses for the purpose of ensuring compliance with credit policies and to monitor asset quality trends. The independent risk reviews include portfolio analysis by geographic location and horizontal reviews across industry sectors within the banking subsidiaries. We strive 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. Our continuing expansion has allowed us to mitigate our historic exposure to geographic risk concentration in North Carolina and Virginia. However, as we have entered new markets, we have endeavored to ensure that rigorous centralized underwriting and monitoring controls are functioning effectively. We will continue to place emphasis upon maintaining strong lending standards in new markets.

In recent years, we have aggressively sought opportunities to provide financial services to businesses associated with and professionals within the medical community. Due to strong growth within this segment of our loan and lease portfolio, our loans and leases to borrowers in medical, dental or related fields totaled $2.80 billion as of June 30, 2009, which represents 24.3 percent of total loans and leases outstanding, compared to $2.45 billion or 21.8 percent at June 30, 2008. Except for this single concentration, no other industry represented more than 10 percent of total loans and leases outstanding at June 30, 2009.

Nonperforming assets include nonaccrual loans and leases and other real estate owned, which includes foreclosed property and closed branch facilities. At June 30, 2009, BancShares’ nonperforming assets amounted to $102.4 million or 0.89 percent of loans and leases plus foreclosed properties, compared to $71.7 million at December 31, 2008 and $47.3 million at June 30, 2008. Nonaccrual loans totaled $63.8 million at June 30, 2009 compared to $39.4 million at December 31, 2008 and $34.5 million at June 30, 2008. Other real estate equaled $33.3 million, $30.0 million and $12.8 million as of the respective dates. The increases in nonaccrual loans and other real estate primarily result from residential construction loans secured by properties located in the Atlanta, Georgia and southwest Florida markets, areas that have suffered from significant excess housing capacity and falling property values. Our borrowers, who are dependent on proceeds from sales to fund their obligations to us, face significant liquidity challenges. As real estate markets remain soft, we will continue to closely monitor nonperforming assets, taking necessary actions to minimize potential exposure.

Residential construction loans in the Atlanta, Georgia and southwest Florida markets as of June 30, 2009 equaled $91.0 million, compared to $105.1 million at December 31, 2008. As of June 30, 2009, $30.1 million of the residential construction loans were classified as nonperforming, and $27.7 million were identified as potential problem loans due to concerns about borrowers’ abilities to comply with existing loan repayment terms. We continue to closely monitor past due and problem accounts to identify any loans and leases that should be classified as impaired or non-accrual.

At March 31, 2009, TVB reported nonaccrual loans with a carrying value of $146.6 million and other real estate owned with a carrying value of $35.7 million. Nonaccrual loans and other real estate will be recorded at fair value as of the acquisition date, which will result in significant increases in FCB’s nonperforming assets during the third quarter. Prospective losses realized on other real estate owned by TVB will be shared between the FDIC and FCB.

At June 30, 2009, the allowance for credit losses totaled $169.5 million or 1.46 percent of total loans and leases, up $20.4 million from June 30, 2008 when the coverage ratio equaled 1.35 percent. The allowance for credit losses includes the allowance for loan and lease losses and the reserve for unfunded commitments. We continuously analyze the growth and risk characteristics of the loan and lease portfolio under current economic conditions in order to evaluate the adequacy of the allowance. Such factors as the financial condition of borrowers, fair market value of collateral and other considerations are recognized in estimating probable credit losses.

Our exposure to subprime loans is limited to programs we initiated to provide financing for affordable housing in connection with our ongoing efforts to comply with the Community Reinvestment Act. The carrying value of these loans as of June 30, 2009 was $3.5 million.


Summary of Loan and Lease Loss Experience and Risk Elements		Table 7


	2009						2008									Six Months Ended June 30
	Second Quarter			First Quarter			Fourth Quarter			Third Quarter			Second Quarter			2009			2008
	(thousands, except ratios)
Allowance for loan and lease losses at beginning of period	$	161,572		$	157,569		$	152,946		$	144,533		$	141,591		$	157,569		$	136,974
Provision for credit losses		21,506			17,976			22,640			20,008			13,363			39,482			23,278
Net charge-offs:
Charge-offs		(22,048	)		(14,976	)		(19,119	)		(12,790	)		(11,566	)		(37,024	)		(18,172	)
Recoveries		1,252			1,003			1,102			1,195			1,145			2,255			2,453

Net charge-offs		(20,796	)		(13,973	)		(18,017	)		(11,595	)		(10,421	)		(34,769	)		(15,719	)

Allowance for loan and lease losses at end of period	$	162,282		$	161,572		$	157,569	&nbs

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