Edgar Filing: FIRST CITIZENS BANCSHARES INC /DE/

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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 September 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 ¨ No x

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:

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

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

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

(Number of shares outstanding, by class, as of November 9, 2009)

INDEX


		Page(s)
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

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

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

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

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

	Notes to Consolidated Financial Statements	7-23

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24-43

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	44

Item 4.	Controls and Procedures	44

	PART II. OTHER INFORMATION

Item 1A.	Risk Factors	45-47

Item 5.	Other Information	48

Item 6.	Exhibits	48

PART I

Item 1.

Financial Statements (Unaudited)

Consolidated Balance Sheets

First Citizens BancShares, Inc. and Subsidiaries


	September 30 2009 *			December 31 2008 #			September 30 2008 *
	(thousands, except share data)
Assets
Cash and due from banks	$	723,031		$	593,375		$	724,216
Overnight investments		219,886			174,616			328,706
Investment securities available for sale		3,283,521			3,219,980			2,928,625
Investment securities held to maturity		3,788			5,873			6,309
Loans held for sale		78,485			69,399			63,924
Loans and leases:
Covered under FDIC loss sharing agreements		1,257,478			—			—
Not covered under FDIC loss sharing agreements		11,520,683			11,649,886			11,563,711
Less allowance for loan and lease losses		165,282			157,569			152,946

Net loans and leases		12,612,879			11,492,317			11,410,765
Premises and equipment		836,456			798,909			788,106
Other real estate owned:
Covered under FDIC loss sharing agreements		102,600			—			—
Not covered under FDIC loss sharing agreements		44,703			29,956			21,580
Income earned not collected		68,845			72,029			74,549
FDIC receivable for loss sharing agreements		243,000			—			—
Goodwill		102,625			102,625			102,625
Other intangible assets		6,976			3,810			4,320
Other assets		186,083			182,773			211,880

Total assets	$	18,512,878		$	16,745,662		$	16,665,605

Liabilities
Deposits:
Noninterest-bearing	$	3,261,987		$	2,652,898		$	2,652,620
Interest-bearing		12,086,968			11,060,865			10,719,848

Total deposits		15,348,955			13,713,763			13,372,468
Short-term borrowings		576,609			647,028			1,014,388
Long-term obligations		879,758			733,132			649,214
Other liabilities		192,872			208,364			125,201
Total liabilities		16,998,194			15,302,287			15,161,271

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		1,413,993			1,326,054			1,316,030
Accumulated other comprehensive income (loss)		(53,510	)		(36,880	)		34,103

Total shareholders’ equity		1,514,684			1,443,375			1,504,334

Total liabilities and shareholders’ equity	$	18,512,878		$	16,745,662		$	16,665,605

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 September 30					Nine months ended September 30
	2009			2008		2009			2008
	(thousands, except share and per share data)
Interest income
Loans and leases	$	170,690		$	168,927	$	482,723		$	513,236
Investment securities:
U. S. Government		15,076			27,028		54,353			92,464
FNMA, GNMA and FHLMC mortgage-backed securities		1,329			1,038		3,711			3,201
Corporate bonds		2,205			—		4,063			—
State, county and municipal		32			52		187			158
Other		242			238		613			763

Total investment securities interest and dividend income		18,884			28,356		62,927			96,586
Overnight investments		116			1,797		533			8,163

Total interest income		189,690			199,080		546,183			617,985
Interest expense
Deposits		43,574			59,559		145,410			203,675
Short-term borrowings		980			3,724		3,582			15,764
Long-term obligations		9,859			8,478		29,077			24,295

Total interest expense		54,413			71,761		178,069			243,734

Net interest income		135,277			127,319		368,114			374,251
Provision for credit losses		18,265			20,008		57,747			43,286

Net interest income after provision for credit losses		117,012			107,311		310,367			330,965
Noninterest income
Gain on acquisitions		104,970			—		104,970			—
Cardholder and merchant services		25,306			25,645		70,905			74,388
Service charges on deposit accounts		20,336			21,099		57,350			62,114
Wealth management services		12,071			12,210		34,324			38,138
Fees from processing services		9,397			8,589		27,682			26,343
Securities (losses) gains		(177	)		338		(316	)		8,389
Other service charges and fees		4,078			5,040		12,495			13,512
Mortgage income		2,844			1,053		8,665			4,793
Insurance commissions		1,926			1,991		6,221			6,206
Other		1,880			1,571		5,040			7,419

Total noninterest income		182,631			77,536		327,336			241,302
Noninterest expense
Salaries and wages		66,131			66,447		195,428			192,859
Employee benefits		15,390			13,761		48,482			44,960
Occupancy expense		17,282			15,356		48,658			45,404
Equipment expense		14,990			14,613		44,462			42,715
FDIC deposit insurance expense		5,497			972		23,446			2,274
Foreclosure related expenses		3,869			45		7,291			533
Other		43,118			44,552		115,720			122,313

Total noninterest expense		166,277			155,746		483,487			451,058

Income before income taxes		133,366			29,101		154,216			121,209
Income taxes		50,898			9,547		56,885			43,044

Net income	$	82,468		$	19,554	$	97,331		$	78,165

Average shares outstanding		10,434,453			10,434,453		10,434,453			10,434,453
Net income per share	$	7.90		$	1.87	$	9.33		$	7.49

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		—		—		—		78,165			—			78,165
Unrealized securities losses arising during period, net of $4,185 deferred tax benefit		—		—		—		—			(6,509	)		(6,509	)
Change in unrecognized loss on cash flow hedge, net of $51 deferred tax		—		—		—		—			78			78

Total comprehensive income														71,734

Cash dividends		—		—		—		(8,608	)		—			(8,608	)

Balance at September 30, 2008	$	8,757	$	1,678	$	143,766	$	1,316,030		$	34,103		$	1,504,334

Balance at December 31, 2008	$	8,757	$	1,678	$	143,766	$	1,326,054		$	(36,880	)	$	1,443,375
Comprehensive income:
Net income		—		—		—		97,331			—			97,331
Unrealized securities losses arising during period, net of $12,086 deferred tax benefit		—		—		—		—			(17,908	)		(17,908	)
Change in unrecognized loss on cash flow hedges, net of $834 deferred tax		—		—		—		—			1,278			1,278

Total comprehensive income														80,701

Cash dividends		—		—		—		(9,392	)		—			(9,392	)

Balance at September 30, 2009	$	8,757	$	1,678	$	143,766	$	1,413,993		$	(53,510	)	$	1,514,684

At September 30, 2009, Accumulated Other Comprehensive Loss includes $27,483 in unrealized gains on investment securities available for sale, $75,815 in pension obligations, and an unrealized loss of $5,178 on cash flow hedges.

See accompanying Notes to Consolidated Financial Statements.

Consolidated Statements of Cash Flows

First Citizens BancShares, Inc. and Subsidiaries


	Nine months ended September 30
	2009			2008
OPERATING ACTIVITIES
Net income	$	97,331		$	78,165
Adjustments to reconcile net income to cash provided by operating activities:
Amortization of intangibles		1,324			1,538
Provision for credit losses		57,747			43,663
Deferred tax (benefit) expense		30,148			(9,000	)
Change in current taxes payable		5,743			3,891
Depreciation		42,453			40,274
Change in accrued interest payable		(8,399	)		(20,233	)
Change in income earned not collected		8,922			4,794
Gain on acquisitions		(104,970	)		—
Securities losses (gains)		316			(8,389	)
Origination of loans held for sale		(614,857	)		(375,358	)
Proceeds from sale of loans		612,916			386,594
Loss (gain) on sale of loans		(7,145	)		661
Net amortization of premiums and discounts		31,295			3,837
Net change in other assets		26,554			(5,890	)
Net change in other liabilities		(21,233	)		8,320

Net cash provided by operating activities		158,145			152,867

INVESTING ACTIVITIES
Net change in loans outstanding		96,272			(731,623	)
Purchases of investment securities held to maturity		(74	)		—
Purchases of investment securities available for sale		(1,340,374	)		(1,116,613	)
Proceeds from maturities of investment securities held to maturity		2,159			1,287
Proceeds from maturities of investment securities available for sale		1,414,910			1,368,454
Proceeds from sales of securities available for sale		(151,556	)		—
Net change in overnight investments		86,002			(62,497	)
Additions to premises and equipment		(79,980	)		(70,686	)
Net cash received from acquisitions		51,381			—

Net cash provided (used) by investing activities		78,740			(611,678	)

FINANCING ACTIVITIES
Net change in time deposits		249,592			(15,519	)
Net change in demand and other interest-bearing deposits		(288,922	)		459,443
Net change in short-term borrowings		(149,515	)		(291,077	)
Origination of long-term obligations		91,008			245,000
Cash dividends paid		(9,392	)		(8,608	)

Net cash (used) provided by financing activities		(107,229	)		389,239

Change in cash and due from banks		129,656			(69,572	)
Cash and due from banks at beginning of period		593,375			793,788

Cash and due from banks at end of period	$	723,031		$	724,216

CASH PAYMENTS FOR:
Interest	$	186,468		$	263,967
Income taxes		17,705			57,130

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Unrealized securities losses	$	(29,994	)	$	(10,694	)
Unrealized gain on cash flow hedge		2,112			129
Transfers of loans to other real estate		37,667			28,681
Acquisitions:
Assets acquired		1,924,715			—
Liabilities assumed		1,819,745			—

Net gain recognized	$	104,970		$	—

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.

Acquisitions

Accounting principles generally accepted in the United States (US GAAP), requires that the acquisition method of accounting, formerly referred to as purchase method, be used for all business combinations and that an acquirer be identified for each business combination. Under US GAAP, the acquirer is the entity that obtains control of one or more businesses in the business combination, and the acquisition date is the date the acquirer achieves control. US GAAP requires that the acquirer recognize the fair value of assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date. In addition, acquisition-related costs and restructuring costs are recognized as period expenses as incurred.

BancShares’ wholly-owned subsidiary First-Citizens Bank & Trust Company (FCB) acquired Temecula Valley Bank (TVB) headquartered in Temecula, California on July 17, 2009 and Venture Bank (VB) headquartered in Lacey, Washington on September 11, 2009. The acquisitions of TVB and VB were completed with the assistance of the Federal Deposit Insurance Corporation (FDIC), which had been appointed Receiver of each entity by its respective state banking authority immediately prior to FCB’s acquisition. The acquired assets and assumed liabilities of TVB and VB were measured at estimated fair value. Management made significant estimates and exercised significant judgment in accounting for the acquisitions of TVB and VB. Management judgmentally assigned risk ratings to loans based on appraisals and estimated collateral values, expected cash flows, and statistically derived loss factors to measure fair values for loans. Other real estate acquired through foreclosure was valued based upon pending sales contracts and appraised values, adjusted for current market conditions. TVB’s servicing asset related to its servicing of SBA loans sold was recorded at its estimated fair value based on an independent valuation. FCB also recorded an identifiable intangible asset representing the estimated value of the core deposits at TVB and VB. Management used quoted or current market prices to determine the fair value of investment securities, short term borrowings and long-term obligations that were assumed from TVB and VB.

Loans and Leases

Loans and leases that are held for investment purposes are carried at the principal amount outstanding. Loans that are classified as held for sale are carried at the lower of aggregate cost or fair value. Interest on substantially all loans is accrued and credited to interest income on a constant yield basis based upon the daily principal amount outstanding.

Acquired loans are recorded at fair value at the date of acquisition. The fair values of loans with evidence of credit deterioration (impaired loans) are recorded net of a non-accretable difference and, if appropriate, an accretable yield. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is the nonaccretable difference, which is included in the carrying amount of acquired loans. Subsequent decreases to the expected cash flows will generally result in a provision for credit losses. Subsequent increases in cash flows result in a reversal of the provision for credit losses to the extent of prior charges, or a reclassification of the difference from nonaccretable to accretable with a positive impact on the accretable yield. Any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows. BancShares was unable to make such an estimate for acquired impaired loans.

Notes to Consolidated Financial Statements—(Continued)

(Dollars in thousands, except per share amounts)

Receivable from FDIC for Loss Sharing Agreements

Under loss sharing agreements with the FDIC, FCB recorded a receivable from the FDIC equal to 80 percent of the estimated losses in the covered loans and other real estate acquired from TVB and VB. The receivable was recorded at the present value of the estimated cash flows at the date of the respective acquisition and will be reviewed and updated prospectively as loss estimates related to covered loans and other real estate acquired through foreclosure change.

Other Real Estate Owned Covered under Loss Sharing Agreements

Other real estate acquired through foreclosure covered under loss sharing agreements with the FDIC is reported exclusive of expected reimbursement cash flows from the FDIC. Subsequent adjustments to the estimated recoverable value of covered other real estate result in a reduction of covered other real estate, and a charge to other expense, and an increase in the FDIC receivable for the estimated amount to be reimbursed, with a corresponding amount recorded as other income.

Servicing Asset

Other assets includes an estimate of the fair value of servicing rights on SBA loans that had been originated and subsequently sold by TVB. The asset value is updated each quarter based on valuations performed by an independent third party. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, prepayment speeds, and other factors typical in such a valuation. SBA loan originations have been discontinued.

Recently Adopted Accounting Policies and Other Regulatory Issues

Various changes to US GAAP became effective during 2009. Except for the changes related to business combinations, none of these changes, which are summarized below, had a material impact on our financial condition, results of operations or liquidity.

•

Beginning January 1, 2009, changes to accounting for business combinations became effective. The new guidance established the acquisition method of accounting for all business combinations and required that an acquirer be identified for each business combination. The acquirer is required to recognize the fair value of assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date. The fair value established for loans includes any estimated losses; therefore, no allowance for loan losses is established at acquisition. The new guidance required that acquisition-related costs and restructuring costs be recognized as period expenses as incurred.

•

On January 1, 2009, enhanced disclosure requirements related to derivative financial instruments became effective. Subsequent to adoption, financial statements should explain why derivative instruments are used, how derivative instruments and related hedged items are accounted for under US GAAP and how derivative instruments and related hedged items affect the balance sheet, income statement and statement of cash flows.

•

Beginning June 30, 2009, entities were required to provide 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.

•

Beginning June 30, 2009, entities were required to adopt new guidelines to evaluate other than temporary impairment (OTTI) for debt securities. The new guidance for OTTI 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.

•

Beginning June 30, 2009, when providing fair value disclosures, entities must 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.

•

Companies must consider events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. For the financial statements and footnotes included in this Form 10-Q, subsequent events occurring prior to November 9, 2009 have been considered.

Under revisions to US GAAP that will become effective during 2010, the concept of a qualifying special-purpose entity (QSPE) is removed, resulting in a change in the accounting for QSPEs that were previously exempt. Further, proposed changes will require evaluation of variable interests to determine whether a controlling financial interest exists. Once adopted, 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 $98,940 as of September 30, 2009. BancShares continues to evaluate the impact of this accounting change on the acquired entities.

Notes to Consolidated Financial Statements—(Continued)

(Dollars in thousands, except per share amounts)

Note B

Federally Assisted Acquisitions of Temecula Valley Bank and Venture Bank

On July 17, 2009, FCB purchased substantially all the assets and assumed substantially all the liabilities of TVB from the FDIC, as Receiver of TVB. TVB operated eleven commercial banking branches primarily within the San Diego, CA area and the Temecula Valley area east of San Diego. The FDIC took TVB under receivership upon its closure by the California Department of Financial Institutions. FCB’s bid to purchase TVB included the purchase of substantially all TVB’s assets at a discount of $135,000 in exchange for assuming certain TVB deposits and certain other liabilities. No cash, deposit premium or other consideration was paid by FCB. FCB and the FDIC entered into loss sharing agreements regarding future losses incurred on loans and other real estate acquired through foreclosure existing at the acquisition date. Under the terms of the loss sharing agreements, there is no reimbursement by the FDIC until net losses reach $193,262. The FDIC will reimburse FCB for 80 percent of net losses incurred between $193,262 and $464,000, and 95 percent of net losses exceeding $464,000. The term for loss sharing on residential real estate loans is ten years, while the term for loss sharing on non-residential real estate loans is five years in respect to losses and eight years in respect to loss recoveries. As a result of the loss sharing agreements with the FDIC, FCB recorded a receivable of $103,558 at the time of acquisition. FCB has identified $31,714 in net losses to submit to the FDIC under such loss-sharing agreements during the period from the acquisition date through September 30, 2009.

On September 11, 2009, FCB purchased substantially all the assets and assumed substantially all the liabilities of VB from the FDIC, as Receiver of VB. VB operated 18 commercial banking branches in the Seattle/Olympia, Washington vicinity. The FDIC took VB under receivership upon its closure by the Washington Department of Financial Institutions. FCB’s bid to purchase VB included the purchase of substantially all VB’s assets at a discount of $110,000 in exchange for assuming certain VB deposits and certain other liabilities. The FDIC paid FCB $19,406 in additional cash consideration at closing. FCB and the FDIC entered into loss sharing agreements regarding future losses incurred on loans and other real estate acquired through foreclosure existing at the acquisition date. Under the terms of the loss sharing agreements, the FDIC will reimburse FCB for 80 percent of net losses incurred up to $235,000, and 95 percent of net losses exceeding $235,000. The term for loss sharing on residential real estate loans is ten years, while the term for loss sharing on non-residential real estate loans is five years in respect to losses and eight years in respect to loss recoveries. As a result of the loss sharing agreements with the FDIC, FCB recorded a receivable of $138,963 at the time of acquisition. The initial reports of losses under the VB loss sharing agreements are not due until the first quarter of 2010. However, FCB has identified $8,407 in net losses incurred between the acquisition date and September 30, 2009 that will be included in the report that will be filed during the first quarter of 2010.

The acquisitions of TVB and VB were accounted for under the acquisition method of accounting. The statement of net assets acquired and the resulting bargain purchase gains are presented in the following tables. As explained in the explanatory notes that accompany the following tables, the purchased assets, assumed liabilities and identifiable intangible assets were recorded at their respective acquisition date fair values. Fair values are preliminary and subject to refinement for up to one year after the closing date of each merger as additional information regarding the closing date fair values becomes available.

Noninterest income includes a bargain purchase gain of $104,970 that resulted from the acquisitions. The amount of the gain is equal to the excess of the fair value of the recorded assets over the fair value of liabilities assumed.

Notes to Consolidated Financial Statements—(Continued)

(Dollars in thousands, except per share amounts)


	As recorded by TVB		Fair value adjustments			As recorded by FCB
Assets
Cash and due from banks	$	19,299	$	—		$	19,299
Overnight investments		27,040		—			27,040
Investment securities		20,931		—			20,931
Loans and leases		1,215,986		(360,214	) a		855,772
Premises and equipment		17		—			17
Other real estate owned		66,117		(6,682	) b		59,435
Income earned not collected		3,153					3,153
FDIC receivable for loss sharing agreements		—		103,558	c		103,558
SBA servicing asset		5,783		—			5,783
Other assets		18,658		(1,714	) d		16,944

Total assets	$	1,376,984	$	(265,052	)	$	1,111,932

Liabilities
Deposits:
Noninterest-bearing	$	147,786	$	—		$	147,786
Interest-bearing		817,645		—			817,645

Total deposits		965,431		—			965,431
Short-term borrowings		78,542		554	e		79,096
Other liabilities		4,749		3,928	g		8,677

Total liabilities		1,048,722		4,482			1,053,204

Excess of assets acquired over liabilities assumed	$	328,262

Aggregate fair value adjustments			$	(269,534	)

Gain on acquisition of TVB						$	58,728

Notes to Consolidated Financial Statements—(Continued)

(Dollars in thousands, except per share amounts)


	As recorded by VB		Fair value adjustments			As recorded by FCB
Assets
Cash and due from banks	$	12,676	$	—		$	12,676
Overnight investments		104,232		—			104,232
Investment securities		27,193		—			27,193
Loans and leases		647,175		(190,699	) a		456,476
Premises and equipment		3		—			3
Other real estate owned		51,862		(8,868	) b		42,994
Income earned not collected		2,585		—			2,585
FDIC receivable for loss sharing agreements		—		138,963	c		138,963
Other assets		5,417		2,838	d		8,255

Total assets	$	851,143	$	(57,766	)	$	793,377

Liabilities
Deposits:
Noninterest-bearing	$	305,317	$	—		$	305,317
Interest-bearing		403,774		—			403,774

Total deposits		709,091		—			709,091
Long-term obligations		50,078		5,540	f		55,618
Other liabilities		1,379		453	g		1,832

Total liabilities		760,548		5,993			766,541

Net assets acquired	$	90,595	$	(63,759	)	$	26,836

Excess of assets acquired over liabilities assumed	$	90,595

Aggregate fair value adjustments			$	(63,759	)

Cash received from the FDIC						$	19,406
Gain on acquisition of VB						$	46,242

Explanation of fair value adjustments

a - Adjustment reflects the fair value adjustments based on FCB's evaluation of the acquired loan portfolio.

b - Adjustment reflects the estimated OREO losses based on FCB's evaluation of the acquired OREO portfolio.

c - Adjustment reflects the estimated fair value of payments FCB will receive from the FDIC under the loss sharing agreements.

d - Adjustment reflects amount needed to adjust the carrying value of other assets to estimated fair value.

e - Adjustment arises since the rates on short-term borrowings are higher than rates available on similar borrowings as of the acquistion date.

f - Adjustment arises since the rates on long-term obligations are higher than rates available on similar borrowings as of the acquistion date.

g - Adjustment reflects amount needed to adjust the carrying value of other liabilities to estimated fair value.

Results of operations for TVB and VB prior to their respective acquisition dates are not included in the income statement. The post-acquisition operations of TVB and VB did not have a significant impact on the results of operations of BancShares for the three and nine month periods ended September 30, 2009, except for the gain recognized on the transactions.

Due to the significant amount of fair value adjustments, the resulting accretion of those fair value adjustments and the protection resulting from the FDIC loss sharing agreements, historical results of TVB and VB are not relevant to BancShares’ results of operations. Therefore, no pro forma information is presented.

Notes to Consolidated Financial Statements—(Continued)

(Dollars in thousands, except per share amounts)

Note C

Investments

The aggregate values of investment securities at September 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
September 30, 2009
U. S. Government	$	2,611,698	$	23,183	$	178	$	2,634,703
Corporate bonds		482,705		4,459		74		487,090
FNMA, GNMA and FHLMC mortgage-backed securities		112,235		3,117		1		115,351
Equity securities		2,591		13,985		31		16,545
State, county and municipal		7,185		193		2		7,376
Other		21,997		459		—		22,456

Total investment securities available for sale	$	3,238,411	$	45,396	$	286	$	3,283,521

September 30, 2008
U. S. Government	$	2,794,159	$	24,946	$	1,079	$	2,818,026
FNMA, GNMA and FHLMC mortgage-backed securities		79,511		124		1,040		78,595
Equity securities		3,442		19,465		170		22,737
State, county and municipal		3,165		10		48		3,127
Other		4,306		1,834		—		6,140

Total investment securities available for sale	$	2,884,583	$	46,379	$	2,337	$	2,928,625

Investment securities held to maturity
September 30, 2009
FNMA, GNMA and FHLMC mortgage-backed securities	$	3,637	$	278	$	26	$	3,889
State, county and municipal		151		1		—		152

Total investment securities held to maturity	$	3,788	$	279	$	26	$	4,041

September 30, 2008
FNMA, GNMA and FHLMC mortgage-backed securities	$	4,720	$	157	$	26	$	4,851
State, county and municipal		1,589		78		—		1,667
Other		—		—		—		—

Total investment securities held to maturity	$	6,309	$	235	$	26	$	6,518

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.

Notes to Consolidated Financial Statements—(Continued)

(Dollars in thousands, except per share amounts)

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.


	September 30, 2009				December 31, 2008				September 30, 2008
	Cost		Fair Value		Cost		Fair Value		Cost		Fair Value
Investment securities available for sale
Maturing in:
One year or less	$	1,550,843	$	1,563,140	$	1,350,796	$	1,375,709	$	1,419,437	$	1,435,572
One through five years		1,585,364		1,600,964		1,705,774		1,739,791		1,377,272		1,385,264
Five through 10 years		2,323		2,683		789		791		1,053		1,027
Over 10 years		97,290		100,189		83,989		87,569		83,379		84,025
Equity securities		2,591		16,545		3,950		16,120		3,442		22,737

Total investment securities available for sale	$	3,238,411	$	3,283,521	$	3,145,298	$	3,219,980	$	2,884,583	$	2,928,625

Investment securities held to maturity
Maturing in:
One year or less	$	—	$	—	$	151	$	151	$	151	$	152
One through five years		151		152		—		—		—		—
Five through 10 years		3,487		3,700		5,557		5,761		5,988		6,162
Over 10 years		150		189		165		198		170		204

Total investment securities held to maturity	$	3,788	$	4,041	$	5,873	$	6,110	$	6,309	$	6,518

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


	Less than 12 months				12 months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
September 30, 2009
Investment securities available for sale:
U.S. Government	$	17,060	$	108	$	1,368	$	70	$	18,428	$	178
Corporate bonds		76,909		74		—		—		76,909		74
FNMA, GNMA and FHLMC mortgage-backed securities		—		—		16		1		16		1
Equity securities		34		31		—		—		34		31
State, county and municipal		—		—		441		2		441		2

Total	$	94,003	$	213	$	1,825	$	73	$	95,828	$	286

Investment securities held to maturity:
Mortgage-backed securities	$	—	$	—	$	33	$	26	$	33	$	26
September 30, 2008
Investment securities available for sale:
U.S. Government	$	449,805	$	1,079	$	—	$	—	$	449,805	$	1,079
FNMA, GNMA and FHLMC mortgage-backed securities		47,123		607		13,689		433		60,812		1,040
Equity securities		512		170		—		—		512		170
State, county and municipal		320		6		446		42		766		48

Total	$	497,760	$	1,862	$	14,135	$	475	$	511,895	$	2,337

Investment securities held to maturity:
FNMA, GNMA and FHLMC mortgage-backed securities	$	17	$	—	$	38	$	26	$	55	$	26

Notes to Consolidated Financial Statements—(Continued)

(Dollars in thousands, except per share amounts)

Investment securities with an aggregate fair value of $1,858 have had continuous unrealized losses for more than twelve months as of September 30, 2009 with an aggregate unrealized loss of $99. These 48 investments include residential mortgage-backed and state, county and municipal securities. None of the unrealized losses identified as of September 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 September 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 September 30, 2009, other assets includes $57,443 of stock in various Federal Home Loan Banks (FHLB) compared to $45,797 at December 31, 2008 and $40,179 at September 30, 2008. The FHLB stock, which is redeemable only through the issuer, is carried at its par value. The investment in the FHLB 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 stock was not other-than-temporarily impaired as of September 30, 2009.

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


	Nine months ended September 30,
	2009			2008
Gross gains on sales of investment securities available for sale	$	104		$	8,389
Other than temporary impairment loss on an equity investment		(420	)		—

Total securities gains (losses)	$	(316	)	$	8,389

During 2009, BancShares recorded a $420 other than temporary impairment loss on an equity security once it was determined that recovery of the original purchase price was unlikely. 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 $1,998,230 at September 30, 2009 and $2,027,592 at September 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.

Notes to Consolidated Financial Statements—(Continued)

(Dollars in thousands, except per share amounts)

Note D

Loans and Leases

The following tables identify loans and leases outstanding at September 30, 2009, December 31, 2008 and September 30, 2008.


	September 30, 2009		December 31, 2008		September 30, 2008
	(thousands)
Loans covered by loss sharing agreements	$	1,257,478	$	—	$	—
Loans and leases not covered by loss sharing agreements Real estate:
Construction and land development		621,176		778,315		803,935
Commercial mortgage		4,514,554		4,343,809		4,265,501
Residential mortgage		876,001		894,802		897,181
Revolving mortgage		2,114,018		1,911,852		1,793,178
Other mortgage		101,802		149,478		152,764

Total real estate loans		8,227,551		8,078,256		7,912,559
Commercial and industrial		1,822,526		1,885,358		1,886,847
Consumer		998,007		1,233,075		1,317,421
Lease financing		335,515		353,933		346,757
Other		137,084		99,264		100,127

Total loans and leases not covered by loss sharing agreements		11,520,683		11,649,886		11,563,711

Total loans and leases		12,778,161		11,649,886		11,563,711
Less allowance for loan and lease losses		165,282		157,569		152,946

Net loans and leases	$	12,612,879	$	11,492,317	$	11,410,765


	September 30, 2009
	Impaired		Nonimpaired		Total
	(thousands)
Loans covered by loss sharing agreements
Real estate:
Construction and land development	$	34,793	$	392,642	$	427,435
Commercial mortgage		40,490		605,087		645,577
Residential mortgage		3,387		57,193		60,580
Revolving mortgage		451		8,264		8,715
Other mortgage		344		3,325		3,669

Total real estate loans		79,465		1,066,511		1,145,976
Commercial and industrial		3,361		97,550		100,911
Consumer		287		6,793		7,080
Other		329		3,182		3,511

Total loans covered by loss sharing agreements	$	83,442	$	1,174,036	$	1,257,478

Loans covered under loss sharing agreements with the FDIC (Covered Loans) are reported in loans exclusive of the expected reimbursement from the FDIC. Covered Loans are initially recorded at fair value at the acquisition date. Prospective losses incurred on Covered Loans are eligible for partial reimbursement by the FDIC once any first loss tranches have been satisfied. Subsequent decreases in the amount expected to be collected result in a provision for credit losses, an increase in the allowance for loan and lease losses, and a proportional adjustment to the FDIC receivable for the estimated amount to be reimbursed. Subsequent increases in the amount expected to be collected result in the reversal of any previously-recorded provision for credit losses and related allowance for loan and lease losses and adjustments to the FDIC receivable, or prospective adjustment to the accretable yield if no provision for credit losses had been recorded. Interest is accrued daily on the outstanding principal balances. Accretable yields related to certain fair value adjustments are accreted into income over the estimated lives of the loans on a level yield basis.

Notes to Consolidated Financial Statements—(Continued)

(Dollars in thousands, except per share amounts)

Covered Loans which are more than 90 days past due with respect to interest or principal, unless they are well secured and in the process of collection, and other covered loans on which full recovery of principal or interest is in doubt, are placed on nonaccrual status. Interest previously accrued on Covered Loans placed on nonaccrual status is charged against interest income, and the FDIC receivable would be adjusted by the amount of any estimated reimbursement. Payments received are applied against the principal balance of the loans until such time as full collection of the remaining recorded balance is expected. Additional interest payments received after that time are recorded as interest income on a cash basis.

When the fair values of Covered Loans were established, certain loans were identified as impaired due to the credit grade assigned to the acquired loan or other objective criteria. The designation of impaired or nonimpaired affects the ability to accrete discounts or amortize premiums into earnings over the loan’s life. Due to uncertainty regarding the timing of future cash flows, no accretable yield is recorded for loans that are deemed to be impaired at acquisition.

Contractual loan payments receivable, estimates of amounts not expected to be collected, other fair value adjustments and the resulting fair values of acquired impaired loans and acquired nonimpaired loans as of the acquisition dates are provided in the following table:


Impaired loans:
Contractual principal payments receivable	$	297,077
Non-accretable estimate of contractual principal payments not expected to be collected		202,591

Carrying value	$	94,486

Nonimpaired loans:
Contractual principal payments receivable	$	1,566,084
Fair value discount on loans		348,322

Carrying value	$	1,217,762

The following table documents changes in the carrying value of acquired impaired loans during the quarter ended September 30, 2009:


Balance, June 30, 2009	$	—
Fair value of acquired impaired loans covered under loss sharing agreements		94,486
Reductions since acquisition date resulting from repayments, write-offs and foreclosures		(11,044	)

Balance, September 30, 2009	$	83,442

The following table provides information on impaired loans, exclusive of those loans evaluated collectively as a homogeneous group. For each period presented, all impaired loans were classified as nonaccrual.


	September 30, 2009		December 31, 2008		September 30, 2008
Impaired loans:
Covered under loss sharing agreements	$	83,442	$	—	$	—
Not covered under loss sharing agreements		33,263		38,882		17,819

Total	$	116,705	$	38,882	$	17,819

Allowances related to impaired loans	$	4,873	$	6,747	$	5,550
Non-covered impaired loans with no allowances		9,331		—		—

Notes to Consolidated Financial Statements—(Continued)

(Dollars in thousands, except per share amounts)

Note E

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 September 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.


	September 30, 2009				December 31, 2008				September 30, 2008
	Carrying Value		Fair Value		Carrying Value		Fair Value		Carrying Value		Fair Value
Cash and due from banks	$	723,031	$	723,031	$	593,375	$	593,375	$	724,216	$	724,216
Overnight investments		219,886		219,886		174,616		174,616		328,706		328,706
Investment securities available for sale		3,283,521		3,283,521		3,219,980		3,219,980		2,928,625		2,928,625
Investment securities held to maturity		3,788		3,284		5,873		6,110		6,309		6,518
Loans held for sale		78,485		78,485		69,399		69,399		63,924		63,924
Loans covered under loss sharing agreements		1,257,478		1,256,659		—		—		—		—
Loans not covered under loss sharing agreements, net of allowance for loan and lease losses		11,355,401		10,748,074		11,492,317		12,001,307		11,474,689		11,306,087
FDIC receivable for loss sharing agreements		243,000		243,000		—		—		—		—
Income earned not collected		68,845		68,845		72,029		72,029		74,549		74,549
SBA servicing asset		5,783		5,783		—		—		—		—
Deposits		15,348,955		15,418,748		13,713,763		13,810,690		13,372,468		13,444,114
Short-term borrowings		576,609		576,609		647,028		647,028		1,014,388		1,014,388
Long-term obligations		879,758		901,180		733,132		735,098		649,214		635,179
Accrued interest payable		42,524		42,524		50,923		50,923		42,055		42,055

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.

Fair value represents 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. As required under US GAAP, individual fair value estimates are ranked based on the relative reliability of the inputs used in the valuation. 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. BancShares did not elect to voluntarily report any assets or liabilities at fair value.

Notes to Consolidated Financial Statements—(Continued)

(Dollars in thousands, except per share amounts)

For assets and liabilities carried at fair value on a recurring basis, the following table provides fair value information as of September 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)
September 30, 2009
Assets measured at fair value
Investment securities available for sale
U.S. Government	$	2,633,878	$	2,633,878	$	—	$	—
Corporate bonds		488,027		488,027		—		—
FNMA, GNMA and FHLMC mortgage-backed securities		135,506		—		135,506		—
Equity securities		16,545		16,545		—		—
State, county, municipal		7,376		—		7,376		—
Other		2,189		—		—		2,189

Total	$	3,283,521	$	3,138,450	$	142,882	$	2,189

SBA servicing asset	$	5,783	$	—	$	5,783	$	—
Liabilities measured at fair value
Interest rate swaps accounted for as cash flow hedges		8,556		—		8,556		—
December 31, 2008
Assets measured at fair value
Investment securities available for sale
U.S. Government	$	3,112,428	$	3,112,428	$	—	$	—
FNMA, GNMA and FHLMC 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, state, county and municipal securities, and the SBA servicing asset are obtained using the fair values of similar assets, 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.

Notes to Consolidated Financial Statements—(Continued)

(Dollars in thousands, except per share amounts)

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 nine 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		(1,277	)		192
Purchases, sales, issuances and settlements, net		(1,961	)		(3,986	)
Transfers in/out of Level 3		—			—

Ending balance, September 30	$	2,189		$	6,130

No gains or losses were reported for the nine-month periods ended September 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 September 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)
September 30, 2009
Loans held for sale	$	38,328	$	—	$	—	$	38,328
Impaired loans not covered under loss sharing agreeements		19,055		—		—		19,055
Impaired loans covered under loss sharing agreeements		83,442		—		—		83,442
December 31, 2008
Loans held for sale		69,399		—		—		69,399
Impaired loans		27,858		—		—		27,858

Notes to Consolidated Financial Statements—(Continued)

(Dollars in thousands, except per share amounts)

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. No financial liabilities were carried at fair value on a nonrecurring basis at September 30, 2009 or December 31, 2008.

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 nine month period ended September 30, 2009, foreclosures of other real estate not covered under loss sharing agreements totaled $37,667, 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 $15,175. Based on updates to Level 3 inputs, foreclosed property with a fair value of $5,188 as of September 30, 2009 incurred write-downs that totaled $792 during the nine-month period ended September 30, 2009.

At September 30, 2009, impaired loans not covered under loss sharing agreements, which include commercial purpose nonaccrual loans and troubled debt restructurings, totaled $33,263. 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 September 30, 2009, $18,941 of impaired loans required allowances of $4,873 to adjust the loans to their fair value of $14,068. The remaining $14,322 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 September 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 F

Employee Benefit Plans

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


	Three month periods ended September 30,						Nine month periods ended September 30,
	2009			2008			2009			2008
Service cost	$	3,190		$	2,830		$	9,472		$	8,917
Interest cost		5,517			4,910			16,384			15,470
Expected return on assets		(6,982	)		(6,648	)		(20,733	)		(20,950	)
Amortization of prior service cost		53			50			157			159
Amortization of net actuarial loss		908			233			2,696			736

Total pension expense	$	2,686		$	1,375		$	7,976		$	4,332

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.

Notes to Consolidated Financial Statements—(Continued)

(Dollars in thousands, except per share amounts)

Note G

Contingencies

As previously disclosed, 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 and eight promissory notes. 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 tortious 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. FCB filed a motion to set aside the judgment or, in the alternative, for a new trial, but the Court denied FCB’s motions. FCB filed a Petition for Review of the Circuit Court’s action to the West Virginia Supreme Court of Appeals. On September 3, 2009, the Supreme Court of Appeals denied FCB’s request. As a result, FCB paid a total of $5,252 to the customer, which represented the jury award plus $1,127 in interest and other costs. Noninterest expense during the third quarter of 2009 included $4,549 related to the resolution of this matter.

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 H

Derivatives

At September 30, 2009, BancShares had two interest rate swaps that qualify as cash flow hedges under US GAAP. 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 September 30, 2009, collateral with a fair value of $8,311 was pledged to secure the existing obligation under the interest rate swaps. For both swaps, settlement occurs quarterly.


	September 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	$	8,488	$	115,000	$	10,668
2009 interest rate swap hedging fixed rate exposure on trust preferred capital securities 2011-2016		115,000		68		—		—

			$	8,556			$	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 nine-month periods ended September 30, 2009 and 2008, BancShares recognized interest expense of $3,738 and $1,694 respectively, resulting from the interest rate swaps, none of which relates to ineffectiveness.

Notes to Consolidated Financial Statements—(Continued)

(Dollars in thousands, except per share amounts)

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


	2009			2008
Accumulated other comprehensive loss resulting from interest rate swaps as of January 1, net of tax	$	(6,456	)	$	(3,240	)
Other comprensive income recognized during nine-month period ended September 30, net of tax		1,278			78

Accumulated other comprehensive loss resulting from interest rate swaps as of September 30, net of tax	$	(5,178	)	$	(3,162	)

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

Note I

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 2009 Neuse purchased from ISB foreclosed properties that had a carrying value of $14,418. 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.


	ISB		FCB		Other		Total		Adjustments			Consolidated
September 30, 2009
Total assets	$	2,637,409	$	15,822,497	$	2,156,373	$	20,616,279	$	(2,103,401	)	$	18,512,878
Loans and leases:
Covered under loss sharing agreements		—		1,257,478		—		1,257,478		—			1,257,478
Not covered under loss sharing agreements		2,176,504		9,422,663		—		11,599,167		(78,484	)		11,520,683
Allowance for loan and lease losses		39,425		125,857		—		165,282		—			165,282
Goodwill		793		101,832		—		102,625		—			102,625
Nonperforming assets:
Covered under loss sharing agreements		—		205,073		—		205,073		—			205,073
Not covered under loss sharing agreements		51,678		40,308		14,335		106,321		—			106,321
Deposits		2,024,574		13,353,069		—		15,377,643		(28,688	)		15,348,955
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
September 30, 2008
Total assets	$	2,637,604	$	13,712,700	$	2,463,064	$	18,813,368	$	(2,147,763	)	$	16,665,605
Loans and leases		2,229,976		9,397,659		—		11,627,635		(63,924	)		11,563,711
Allowance for loan and lease losses		34,235		118,701		—		152,936		10			152,946
Goodwill		793		101,832		—		102,625		—			102,625
Nonperforming assets		45,804		16,362		—		62,166		—			62,166
Deposits		2,047,220		11,366,930		—		13,414,150		(41,682	)		13,372,468

Notes to Consolidated Financial Statements—(Continued)

(Dollars in thousands, except per share amounts)


	As of and for the nine months ended September 30, 2009
	ISB			FCB		Other			Total		Adjustments			Consolidated
Interest income	$	98,076		$	443,979	$	4,612		$	546,667	$	(484	)	$	546,183
Interest expense		40,905			120,672		16,976			178,553		(484	)		178,069

Net interest income		57,171			323,307		(12,364	)		368,114		—			368,114
Provision for credit losses		26,686			31,061		—			57,747		—			57,747

Net interest income after provision for credit losses		30,485			292,246		(12,364	)		310,367		—			310,367
Noninterest income		10,041			325,653		(828	)		334,866		(7,530	)		327,336
Noninterest expense		68,008			421,507		1,502			491,017		(7,530	)		483,487

Income (loss) before income taxes		(27,482	)		196,392		(14,694	)		154,216		—			154,216
Income taxes		(9,828	)		71,852		(5,139	)		56,885		—			56,885

Net income (loss)	$	(17,654	)	$	124,540	$	(9,555	)	$	97,331	$	—		$	97,331


	As of and for the nine months ended September 30, 2008
	ISB			FCB		Other			Total		Adjustments			Consolidated
Interest income	$	106,210		$	504,320	$	20,025		$	630,555	$	(12,570	)	$	617,985
Interest expense		56,410			173,092		26,802			256,304		(12,570	)		243,734

Net interest income		49,800			331,228		(6,777	)		374,251		—			374,251
Provision for credit losses		23,824			19,462		—			43,286		—			43,286

Net interest income after provision for credit losses		25,976			311,766		(6,777	)		330,965		—			330,965
Noninterest income		8,941			239,609		872			249,422		(8,120	)		241,302
Noninterest expense		64,596			393,014		1,568			459,178		(8,120	)		451,058

Income (loss) before income taxes		(29,679	)		158,361		(7,473	)		121,209		—			121,209
Income taxes		(10,133	)		55,779		(2,602	)		43,044		—			43,044

Net income (loss)	$	(19,546	)	$	102,582	$	(4,871	)	$	78,165	$	—		$	78,165


	As of and for the quarter ended September 30, 2009
	ISB			FCB		Other			Total		Adjustments			Consolidated
Interest income	$	32,951		$	155,938	$	982		$	189,871	$	(181	)	$	189,690
Interest expense		12,285			36,689		5,620			54,594		(181	)		54,413

Net interest income		20,666			119,249		(4,638	)		135,277		—			135,277
Provision for credit losses		7,545			10,720		—			18,265		—			18,265

Net interest income after provision for credit losses		13,121			108,529		(4,638	)		117,012		—			117,012
Noninterest income		3,504			181,842		(282	)		185,064		(2,433	)		182,631
Noninterest expense		22,701			145,479		530			168,710		(2,433	)		166,277

Income (loss) before income taxes		(6,076	)		144,892		(5,450	)		133,366		—			133,366
Income taxes		(2,174	)		54,975		(1,903	)		50,898		—			50,898

Net income (loss)	$	(3,902	)	$	89,917	$	(3,547	)	$	82,468	$	—		$	82,468


	As of and for the quarter ended September 30, 2008
	ISB			FCB		Other			Total		Adjustments			Consolidated
Interest income	$	36,004		$	160,470	$	5,677		$	202,151	$	(3,071	)	$	199,080
Interest expense		17,703			49,311		7,818			74,832		(3,071	)		71,761

Net interest income		18,301			111,159		(2,141	)		127,319		—			127,319
Provision for credit losses		12,352			7,656		—			20,008		—			20,008

Net interest income after		5,949			103,503		(2,141	)		107,311		—			107,311
Noninterest income		2,389			77,506		364			80,259		(2,723	)		77,536
Noninterest expense		22,483			135,605		381			158,469		(2,723	)		155,746

Income (loss) before income taxes		(14,145	)		45,404		(2,158	)		29,101		—			29,101
Income taxes		(5,145	)		15,440		(748	)		9,547		—			9,547

Net income (loss)	$	(9,000	)	$	29,964	$	(1,410	)	$	19,554	$	—		$	19,554

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, Washington, California, and Washington, DC. 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, with the exception of the states of California and Washington where ISB and FCB both operate. 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.

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 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 measure their relative success by reference to profitability measures such as return on average assets or return on average shareholders’ equity. Historically, we have placed primary emphasis upon asset quality, balance sheet liquidity and capital conservation, even when those priorities may be detrimental to short-term profitability.

In recent years, our growth has resulted through de novo expansion. However, during 2009, the increase in the number of bank failures has led the FDIC to offer significant loss protection to acquirers. We believe that expansion opportunities exist and continue to evaluate potential acquisition targets. Our expansion considerations focus on geographic markets with long-term growth potential.

We also continue to focus on organic growth. We believe that through competitive products and superior customer service, we can increase our business volumes and profitability. While offering products and services appropriate for customers with varying needs, we generally focus 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.

As a result of costs arising from recent and projected failures of insured banks, the reserve level of the FDIC’s 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 2009. Additional special assessments and further increases in FDIC insurance premiums could have a material negative impact upon our earnings.

ACQUISITIONS

Temecula Valley Bank. On July 17, 2009, FCB entered into an agreement with the 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 acquisition, the FDIC had been appointed Receiver of TVB by the California Department of Financial Institutions.

Table 1 identifies the assets acquired and liabilities assumed, the fair value adjustments, the amounts recorded by FCB, and the calculation of the gain recognized on the acquisition.


*Acquisition of Temecula Valley Bank*		Table 1


July 17, 2009	As recorded by TVB		Fair value adjustment			As recorded by FCB
	(thousands)
Cash and due from banks	$	19,299	$	—		$	19,299
Overnight investments		27,040		—			27,040
Investment securities		20,931		—			20,931
Loans and leases		1,215,986		(360,214	)		855,772
Other real estate owned		66,117		(6,682	)		59,435
FDIC receivable for loss sharing agreements		—		103,558			103,558
Core deposit intangible		—		1,376			1,376
Other assets		27,611		(3,090	)		24,521

Total assets	$	1,376,984	$	(265,052	)	$	1,111,932

Deposits	$	965,431	$	—		$	965,431
Short-term borrowings		78,542		554			79,096
Other liabilities		4,749		3,928			8,677

Total liabilities	$	1,048,722	$	4,482		$	1,053,204

Excess of assets acquired over liabilities assumed	$	328,262
Aggregate fair value adjustments			$	(269,534	)
Gain on acquisition of TVB						$	58,728

The loans and other real estate acquired through foreclosure are covered by loss sharing agreements that provide for the FDIC to absorb 80 percent of losses incurred on covered loans and other real estate in excess of $193.3 million. The 80 percent coverage ratio applies to losses up to $464.0 million with losses in excess of $464.0 million covered by the FDIC at a rate of 95 percent. FCB recorded a receivable from the FDIC equal to $103.6 million as an estimate of the fair value of the amount that will be reimbursed by the FDIC from the loss sharing agreements.

The $58.7 million gain is included within noninterest income in the Consolidated Statements of Income. Our operating results for the period ended September 30, 2009 include the results of the acquired assets and liabilities for the period from July 18, 2009 through September 30, 2009. Accretion and amortization of various purchase accounting discounts and premiums were recorded in the third quarter.

Venture Bank. On September 11, 2009, FCB entered into an agreement with the FDIC to purchase substantially all the assets and assume the majority of the liabilities of Venture Bank (VB) of Lacey, Washington. Immediately prior to the effectiveness of the acquisition, the FDIC had been appointed Receiver of VB by the Washington Department of Financial Institutions.

Table 2 identifies the assets acquired and liabilities assumed, the fair value adjustments, the amounts recorded by FCB, and the calculation of the gain recognized on the acquisition.


*Acquisition of Venture Bank*		Table 2


September 11, 2009	As recorded by Venture		Fair value adjustment			As recorded by FCB
	(thousands)
Cash and due from banks	$	12,676	$	—		$	12,676
Overnight investments		104,232		—			104,232
Investment securities		27,193		—			27,193
Loans and leases		647,175		(190,699	)		456,476
Other real estate owned		51,862		(8,868	)		42,994
Receivable from FDIC for loss sharing agreements		—		138,963			138,963
Core deposit intangible		—		3,021			3,021
Other assets		8,005		(183	)		7,822

Total assets	$	851,143	$	(57,766	)	$	793,377

Deposits	$	709,091	$	—		$	709,091
Long-term obligations		50,078		5,540			55,618
Other liabilities		1,379		453			1,832

Total liabilities	$	760,548	$	5,993		$	766,541

Excess of assets acquired over liabilities assumed	$	90,595
Aggregate fair value adjustments			$	(63,759	)
Cash received from the FDIC						$	19,406
Gain on acquisition of VB						$	46,242

The loans and other real estate acquired through foreclosure are covered by loss sharing agreements that provide for the FDIC to absorb 80 percent of all losses incurred on covered loans and other real estate up to $235.0 million. Losses in excess of $235.0 million are covered by the FDIC at a rate of 95 percent. FCB recorded a receivable from the FDIC equal to $139.0 million as an estimate of the fair value of the amount that will be reimbursed by the FDIC from the loss sharing agreements.

The $46.2 million gain is included within noninterest income in the Consolidated Statements of Income. Our operating results for the period ended September 30, 2009 include the results of the acquired assets and liabilities for the period from September 11, 2009 through September 30, 2009. Accretion and amortization of various purchase accounting discounts and premiums were recorded in the third quarter.

PERFORMANCE SUMMARY

Weak economic conditions in our principal market areas continue to have an adverse impact on our financial condition and results of operations through soft demand for our loan products, reduced noninterest income, a low net yield on interest-earning assets and high provisions for credit losses. In many of our markets, 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 and our operating results.

BancShares’ earnings increased significantly during the third quarter of 2009 compared to the third quarter of 2008 due to $105.0 million of gain on the acquisitions of TVB and VB. The after-tax impact of the gains totaled $63.9 million or $6.12 per share. Consolidated net income during the third quarter of 2009 equaled $82.5 million, compared to $19.6 million earned during the corresponding period of 2008. The annualized return on average assets was 1.83 percent during the third quarter of 2009, compared to 0.47 percent during the same period of 2008. The annualized return on average equity was 22.45 percent during the third quarter of 2009, compared to 5.20 percent during the same period of 2008. Net income per share during the third quarter of 2009 totaled $7.90, compared to $1.87 during the third quarter of 2008.

For the first nine months of 2009, BancShares recorded net income of $97.3 million, compared to $78.2 million earned during the first nine months of 2008. The $19.2 million or 24.5 percent increase was the result of gains associated with bank acquisitions. Net income per share for the first nine months of 2009 amounted to $9.33, compared to $7.49 during the same period of 2008. On an annualized basis, BancShares returned 0.75 percent on average assets during the first nine months of 2009, compared to 0.64 percent from the corresponding period of 2008. Annualized return on average equity for the first nine months of 2009 was 9.01 percent, compared to 7.05 percent during the same period of 2008.

Excluding nonperforming assets covered by FDIC loss sharing agreements, asset quality measurements were favorable during the third quarter. The provision for credit losses for the third quarter of 2009 equaled $18.3 million, down $2.5 million from the second quarter of 2009 and $1.7 million from the third quarter of 2008. Net charge-offs decreased to $15.3 million, down $5.5 million compared to the previous quarter. As a percentage of average loans not covered by loss sharing agreements, net charge-offs for the third quarter of 2009 equaled 0.50 percent, down from 0.72 percent in the second quarter of 2009. Nonperforming assets not covered by loss sharing agreements amounted to $106.3 million at September 30, 2009, 0.92 percent of loans not covered by loss sharing agreements, up $7.5 million from June 30, 2009 and $44.2 million from September 30, 2008. In addition, there are $205.1 million of nonperforming assets covered by loss sharing agreements. Net charge-offs for the nine month period ended September 30, 2009 amounted to $50.0 million or 0.57 percent of average loans not covered by loss sharing agreements, up $22.7 million for the comparable period in 2008. The provision for credit losses increased $14.5 million from the prior year to $57.7 million.

Net interest income for the third quarter 2009 increased $8.0 million from the comparable period of 2008 caused by a significant growth in interest-earning assets. The net yield on interest-earning assets for the third quarter of 2009 increased by 39 basis points from last quarter. Net interest income for the nine month period ended September 30, 2009 declined $6.1 million from the prior years due to a contraction in the net yield on interest-earning assets.

Noninterest income excluding the $105.0 million gain on acquisitions was $77.7 million during the third quarter of 2009, unchanged from the comparable period of 2008. For the nine month period ended September 30, 2009, noninterest income excluding the gain on acquisitions equaled $222.4 million, down $18.9 million from the nine month period ended September 30, 2008. The unfavorable trends in 2009 are due to lower levels of service charge income, wealth management services, securities gains, and cardholder and merchant services.

Noninterest expenses increased $10.5 million and $32.4 million in the third quarter and nine month period ended September 30, 2009 versus the comparable periods of 2008. Higher FDIC insurance, employee benefits costs, occupancy costs and expenses related to the maintenance, writedown and resolution of other real estate caused the higher current year expenses.


*Financial Summary*		Table 3


	2009									2008						Nine months ended September 30
	Third Quarter			Second Quarter			First Quarter			Fourth Quarter			Third Quarter			2009			2008
	(thousands, except share data and ratios)
Summary of Operations
Interest income	$	189,690		$	176,841		$	179,652		$	195,366		$	199,080		$	546,183		$	617,985
Interest expense		54,413			59,809			63,847			71,211			71,761			178,069			243,734

Net interest income		135,277			117,032			115,805			124,155			127,319			368,114			374,251
Provision for credit losses		18,265			20,759			18,723			22,142			20,008			57,747			43,286

Net interest income after provision for credit losses		117,012			96,273			97,082			102,013			107,311			310,367			330,965
Noninterest income		182,631			73,164			71,541			72,182			77,536			327,336			241,302
Noninterest expense		166,277			160,868			156,342			155,800			155,746			483,487			451,058

Income before income taxes		133,366			8,569			12,281			18,395			29,101			154,216			121,209
Income taxes		50,898			2,369			3,618			5,502			9,547			56,885			43,044

Net income	$	82,468		$	6,200		$	8,663		$	12,893		$	19,554		$	97,331		$	78,165

Net interest income-taxable equivalent	$	136,426		$	118,350		$	117,225		$	125,779		$	128,872		$	372,001		$	379,372

Per Share of Stock
Net income	$	7.90		$	0.59		$	0.83		$	1.24		$	1.87		$	9.33		$	7.49
Cash dividends		0.300			0.300			0.300			0.275			0.275			0.900			0.825
At period-end:
Market price (Class A)		159.10			133.65			131.80			152.80			179.00			159.10			179.00
Book value		145.16			137.45			137.65			138.33			144.17			145.16			144.17
Tangible book value		134.66			127.32			127.48			128.13			133.92			134.66			133.92

Selected Quarterly Averages
Total assets	$	17,892,599		$	17,309,656		$	16,945,383		$	16,741,696		$	16,377,570		$	17,385,950		$	16,362,573
Investment securities		3,596,422			3,578,604			3,246,898			3,147,906			2,957,353			3,506,187			3,105,268
Loans and leases (covered and not covered)		12,078,390			11,621,450			11,659,873			11,665,522			11,440,563			11,788,104			11,186,487
Interest-earning assets		15,862,964			15,725,319			15,373,383			15,247,645			14,773,446			15,686,614			14,748,235
Deposits		14,792,449			14,316,103			13,897,701			13,544,762			13,003,821			14,338,639			12,961,679
Interest-bearing liabilities		13,137,412			12,840,612			12,596,452			12,471,757			12,187,085			12,860,140			12,259,025
Long-term obligations		810,049			734,042			733,087			730,360			613,046			759,341			566,198
Shareholders’ equity	$	1,457,599		$	1,433,427		$	1,438,109		$	1,497,619		$	1,496,573		$	1,444,605		$	1,481,519
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	$	18,512,878		$	17,317,880		$	17,214,265		$	16,745,662		$	16,665,605		$	18,512,878		$	16,665,605
Investment securities		3,287,309			3,749,525			3,324,770			3,225,853			2,934,934			3,287,309			2,934,934
Loans and leases (covered and not covered)		12,778,161			11,638,965			11,497,079			11,649,886			11,563,711			12,778,161			11,563,711
Deposits		15,348,955			14,358,149			14,229,548			13,713,763			13,372,468			15,348,955			13,372,468
Shareholders’ equity		1,514,684			1,434,213			1,436,277			1,443,375			1,504,334			1,514,684			1,504,334

Selected Ratios and other data
Rate of return on average assets (annualized)		1.83	%		0.14	%		0.21	%		0.31	%		0.47	%		0.75	%		0.64
Rate of return on average shareholders’ equity (annualized)		22.45			1.73			2.44			3.43			5.20			9.01			7.05
Net yield on interest-earning assets (taxable equivalent)		3.41			3.02			3.09			3.28			3.47			3.17			3.44
Tier 1 risk-based capital ratio		13.33			13.30			13.29			13.20			13.02			13.33			13.02
Total risk-based capital ratio		15.58			15.59			15.57			15.49			15.34			15.58			15.34
Leverage capital ratio		9.73			9.68			9.83			9.88			10.02			9.73			10.02
Dividend payout ratio		3.80			50.85			36.14			22.18			14.71			9.65			11.01
Average loans and leases to average deposits		81.65	%		81.18	%		83.90	%		86.13	%		87.98	%		82.21	%		86.30

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 strong 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 80.1 percent of our investment securities portfolio. Debt obligations guaranteed by the Temporary Liquidity Guarantee Program represent 14.8 percent of the investment securities portfolio. Residential mortgage-backed securities designated as available for sale and carried at fair value represent only 3.6 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 not covered by loss sharing agreements. At September 30, 2009 and 2008, loans and leases not covered by loss sharing agreements totaled $11.52 billion and $11.56 billion, respectively. The $43.0 million or 0.4 percent reduction from September 30, 2008 to September 30, 2009 resulted from declines within the construction and land development and consumer portfolios, partially offset by growth in the commercial and revolving mortgage portfolios.

Commercial mortgage loans totaled $4.51 billion at September 30, 2009, 39.2 percent of the noncovered loan and lease portfolio. This represents an increase of $249.1 million or 5.8 percent since September 30, 2008 and $117.3 million since June 30, 2009. Competition for high-quality loans secured by owner-occupied medical and professional facilities remains intense. Our commercial mortgage loans, the majority of which are owner occupied, are underwritten based primarily upon the cash flow from the operation of the business rather than the value of the real estate collateral.

At September 30, 2009, revolving mortgage loans totaled $2.11 billion, 18.3 percent of noncovered loans and leases outstanding, an increase of $320.8 million or 17.9 percent since September 30, 2008. Revolving mortgage loans increased $61.1 million from June 30, 2009. Attractive interest rates have stimulated line utilization during 2009.

Commercial and industrial loans equaled $1.82 billion or 15.8 percent of total loans and leases outstanding, down $64.3 million or 3.4 percent since September 30, 2008. Commercial and industrial loans declined $36.4 million from June 30, 2009, the result of customer efforts to deleverage.

Residential mortgage loans totaled $876.0 million or 7.6 percent of total loans and leases at September 30, 2009, down $21.2 million or 2.4 percent from September 30, 2008. Substantially all of our production of residential mortgage loans is sold on a servicing released basis.

Consumer loans totaled $998.0 million or 8.7 percent of total loans and leases at September 30, 2009, compared to $1.32 billion or 11.4 percent of covered loans and leases at September 30, 2008 and $1.07 billion at June 30, 2009. The decline in consumer loan balances results from the discontinuation of indirect lending through our sales finance division in late 2008.

Construction and land development loans equaled $621.2 million or 5.4 percent of covered loans at September 30, 2009, a decrease of $182.8 million or 22.7 percent since September 30, 2008 and $56.7 million from June 30, 2009. Given the continuing soft residential real estate markets, we have substantially reduced lending within this product line particularly in the Atlanta, Georgia and southwest Florida markets.

Loans covered by loss sharing agreements. At September 30, 2009 loans covered by loss sharing agreements arising from our purchases of TVB and VB loans equaled $1.26 billion, net of fair value adjustments. The majority of the loans covered by loss sharing agreements are construction and land development and commercial mortgage loans, with balances of $427.4 million and $645.6 million respectively as of September 30, 2009. Significant reductions are expected in the balance of loans covered by loss sharing agreements over the next year due to charge-offs and write-downs of uncollectible loans as well as the collection of outstanding balances.


*Loans and Leases*		Table 4


	2009						2008
	Third Quarter		Second Quarter		First Quarter		Fourth Quarter		Third Quarter
	(thousands)
Loans covered under loss sharing agreements	$	1,257,478	$	—	$	—	$	—	$	—
Loans and leases not covered under loss sharing agreements:
Real estate:
Construction and land development		621,176		677,884		735,619		778,315		803,935
Commercial mortgage		4,514,554		4,397,247		4,336,382		4,343,809		4,265,501
Residential mortgage		876,001		858,036		862,637		894,802		897,181
Revolving mortgage		2,114,018		2,052,941		1,984,249		1,911,852		1,793,178
Other mortgage		101,802		155,483		152,561		149,478		152,764

Total real estate loans		8,227,551		8,141,591		8,071,448		8,078,256		7,912,559
Commercial and industrial		1,822,526		1,858,910		1,857,092		1,885,358		1,886,847
Consumer		998,007		1,070,290		1,132,059		1,233,075		1,317,421
Lease financing		335,515		332,644		344,054		353,933		346,757
Other		137,084		119,610		92,426		99,264		100,127

Total loans and leases not covered under loss sharing agreements		11,520,683		11,523,045		11,497,079		11,649,886		11,563,711

Total loans		12,778,161		11,523,045		11,497,079		11,649,886		11,563,711
Less allowance for loan and lease losses		165,282		162,282		161,572		157,569		152,946

Net loans and leases	$	12,612,879	$	11,360,763	$	11,335,507	$	11,492,317	$	11,410,765


	September 30, 2009
	Impaired		Non impaired		Total
	(thousands)
Loans covered under loss sharing agreements
Real estate:
Construction and land development	$	34,793	$	392,642	$	427,435
Commercial mortgage		40,490		605,087		645,577
Residential mortgage		3,387		57,193		60,580
Revolving mortgage		451		8,264		8,715
Other mortgage		344		3,325		3,669

Total real estate loans		79,465		1,066,511		1,145,976
Commercial and industrial		3,361		97,550		100,911
Consumer		287		6,793		7,080
Other		329		3,182		3,511

Total loans covered under loss sharing agreements	$	83,442	$	1,174,036	$	1,257,478

Investment securities. Investment securities available for sale totaled $3.28 billion at September 30, 2009, compared to $2.93 billion at September 30, 2008 and $3.75 billion at June 30, 2009. The $354.9 million or 12.1 percent increase from September 30, 2008 results from improved liquidity arising from deposit growth offset in part by lower demand for treasury services products by commercial customers. The $461.9 million decline from June 30, 2009 resulted from liquidity needs arising due to deposit outflows at TVB and VB. Available-for-sale securities are reported at aggregate fair value and unrealized gains and losses are included as a component of other comprehensive income, net of deferred taxes. Table 5 presents detailed information relating to the investment securities portfolio.

Investment Securities

Table 5


	September 30, 2009							September 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	$	1,548,345	$	1,560,605	0/6	3.79	%	$	1,418,041	$	1,433,874	0/6	4.67	%
One to five years		1,063,353		1,074,098	1/5	1.65			1,375,818		1,383,852	1/7	2.56
Five to ten years		—		—					300		300	5/5	5.09
Over ten years		—		—					—		—

Total		2,611,698		2,634,703	0/11	2.92			2,794,159		2,818,026	1/0	3.99
FNMA, GNMA and FHLMC mortgage-backed securities
Within one year		2,019		2,053	0/11	1.29			—		—
One to five years		12,343		12,625	1/11	1.21			36		33	3/10	5.39
Five to ten years		593		494	8/6	4.60			753		727	9/5	4.46
Over ten years		97,280		100,179	27/6	5.13			79,022		77,835	27/8	5.38

Total		112,235		115,351	23/9	4.63			79,511		78,595	27/0	5.36
State, county and municipal:
Within one year		479		482	0/5	4.82			1,696		1,698	0/7	3.93
One to five years		6,696		6,884	2/1	4.64			1,418		1,379	3/2	4.69
Five to ten years		—		—	—	—			—		—
Over ten years		10		10	11/8	4.97			51		50	20/2	4.64

Total		7,185		7,376	2/0	2.38			3,165		3,127	2/0	4.26
Corporate bonds (2)
One to five years		482,705		487,090	2/9	1.83			—		—	—	—

Total		482,705		487,090	2/5	1.83			—		—	—	—
Other
One to five years		20,267		20,267	4/0	3.12
Five to ten years		1,730		2,189	8/8	11.03			—		—	—	—
Over ten years		—		—	—	—			4,306

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company