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, 2010

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

Commission File Number: 001-16715

First Citizens BancShares, Inc.

(Exact name of Registrant as specified in its charter)

Delaware

56-1528994

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)


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

(919) 716-7000

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the Registrant was required to submit and post such files) Yes x 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 8, 2010)

INDEX


		Page(s)
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets at September 30, 2010, December 31, 2009 and September 30, 2009		3

	Consolidated Statements of Income for the three and nine month periods ended September 30, 2010 and September 30, 2009		4

	Consolidated Statements of Changes in Shareholders’ Equity for the nine month periods ended September 30, 2010 and September 30, 2009		5

	Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2010 and September 30, 2009		6

	Notes to Consolidated Financial Statements		7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		28

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		54

Item 4.	Controls and Procedures		54

PART II.	OTHER INFORMATION

Item 1A.	Risk Factors		55

Item 6.	Exhibits		58

Part 1

Item 1. Financial Statements (Unaudited)

First Citizens BancShares, Inc. and Subsidiaries

Consolidated Balance Sheets

Unaudited


	September 30* 2010			December 31# 2009			September 30* 2009
	(thousands, except share data)
Assets
Cash and due from banks	$	493,786		$	480,242		$	723,031
Overnight investments		1,049,158			723,260			219,886
Investment securities available for sale		3,786,841			2,929,162			3,283,521
Investment securities held to maturity		2,645			3,603			3,788
Loans held for sale		79,853			67,381			78,485
Loans and leases:
Covered by loss share agreements		2,222,660			1,173,020			1,257,478
Not covered by loss share agreements		11,545,309			11,644,999			11,520,683
Less allowance for loan and lease losses		218,046			172,282			165,282

Net loans and leases		13,549,923			12,645,737			12,612,879
Premises and equipment		845,478			837,082			836,456
Other real estate owned:
Covered by loss share agreements		99,843			93,774			102,600
Not covered by loss share agreements		47,523			40,607			44,703
Income earned not collected		83,204			60,684			68,845
Receivable from FDIC for loss share agreements		651,844			249,842			243,000
Goodwill		102,625			102,625			102,625
Other intangible assets		11,373			6,361			6,976
Other assets		245,195			225,703			186,083

Total assets	$	21,049,291		$	18,466,063		$	18,512,878


Liabilities
Deposits:
Noninterest-bearing	$	3,859,389		$	3,215,414		$	3,261,987
Interest-bearing		13,883,639			12,122,153			12,086,968

Total deposits		17,743,028			15,337,567			15,348,955
Short-term borrowings		652,716			642,405			576,609
Long-term obligations		819,145			797,366			879,758
Other liabilities		116,198			129,610			192,872

Total liabilities		19,331,087			16,906,948			16,998,194
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		1,588,336			1,429,863			1,413,993
Accumulated other comprehensive loss		(24,333	)		(24,949	)		(53,510	)

Total shareholders’ equity		1,718,204			1,559,115			1,514,684

Total liabilities and shareholders’ equity	$	21,049,291		$	18,466,063		$	18,512,878

Unaudited

#	Derived from the 2009 Annual Report on Form 10-K.

See accompanying Notes to Consolidated Financial Statements.

First Citizens BancShares, Inc. and Subsidiaries

Consolidated Statements of Income


	Three Months Ended September 30						Nine Months Ended September 30
	2010			2009			2010			2009
	(thousands, except share and per share data)
Interest income
Loans and leases	$	264,819		$	170,690		$	654,434		$	482,723
Investment securities:
U. S. Government		9,406			15,076			29,007			54,353
Residential mortgage backed securities		1,544			1,329			4,981			3,711
Corporate bonds		2,196			2,205			6,529			4,063
State, county and municipal		14			32			62			187
Other		77			242			159			613

Total investment securities interest and dividend income		13,237			18,884			40,738			62,927
Overnight investments		572			116			1,591			533

Total interest income		278,628			189,690			696,763			546,183
Interest expense
Deposits		37,087			43,574			116,294			145,410
Short-term borrowings		742			980			2,138			3,582
Long-term obligations		10,859			9,859			32,493			29,077

Total interest expense		48,688			54,413			150,925			178,069

Net interest income		229,940			135,277			545,838			368,114
Provision for loan and lease losses		59,873			18,265			108,629			57,747

Net interest income after provision for loan and lease losses		170,067			117,012			437,209			310,367
Noninterest income
Gain on acquisitions		0			104,434			136,000			104,434
Cardholder and merchant services		27,982			25,306			80,276			70,905
Service charges on deposit accounts		18,063			20,336			56,403			57,350
Wealth management services		12,826			12,071			38,782			34,324
Fees from processing services		7,485			7,619			21,934			22,307
Securities (losses) gains		940			(177	)		1,885			(316	)
Other service charges and fees		4,734			4,078			14,492			12,495
Mortgage income		3,013			2,844			6,347			8,665
Insurance commissions		1,980			1,926			6,580			6,221
ATM income		1,730			1,710			5,084			5,211
Adjustments to FDIC receivable for loss share agreements		(28,505	)		0			(13,053	)		0
Other		(279	)		706			(190	)		365

Total noninterest income		49,969			180,853			354,540			321,961
Noninterest expense
Salaries and wages		74,727			66,131			221,362			195,428
Employee benefits		14,455			15,390			48,605			48,482
Occupancy expense		18,353			17,282			54,706			48,658
Equipment expense		17,251			14,990			49,670			44,462
FDIC deposit insurance		5,842			5,497			17,338			23,446
Foreclosure-related expenses (income)		(1,271	)		3,869			6,804			7,291
Other		47,494			41,340			133,092			110,345

Total noninterest expense		176,851			164,499			531,577			478,112

Income before income taxes		43,185			133,366			260,172			154,216
Income taxes		15,439			50,898			97,213			56,885

Net income	$	27,746		$	82,468		$	162,959		$	97,331

Average shares outstanding		10,434,453			10,434,453			10,434,453			10,434,453
Net income per share	$	2.66		$	7.90		$	15.62		$	9.33

See accompanying Notes to Consolidated Financial Statements.

First Citizens BancShares, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

Unaudited


	Class A Common Stock		Class B Common Stock		Surplus		Retained Earnings			Accumulated Other Comprehensive Income (loss)			Total Shareholders’ Equity
	(thousands, except share and per share data)
Balance at December 31, 2008	$	8,757	$	1,678	$	143,766	$	1,326,054		$	(36,880	)	$	1,443,375
Comprehensive income:
Net income		0		0		0		97,331			0			97,331
Change in unrealized securities gains arising during period, net of $12,086 deferred tax benefit		0		0		0		0			(17,908	)		(17,908	)
Change in unrecognized loss on cash flow hedge, net of $834 deferred tax		0		0		0		0			1,278			1,278

Total comprehensive income														80,701

Cash dividends of $0.90 per share		0		0		0		(9,392	)		0			(9,392	)

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


Balance at December 31, 2009	$	8,757	$	1,678	$	143,766	$	1,429,863		$	(24,949	)	$	1,559,115
Adjustment resulting from adoption of change in accounting for QSPEs and controlling financial interests effective January 1, 2010		0		0		0		4,904			0			4,904
Comprehensive income:
Net income		0		0		0		162,959			0			162,959
Change in unrealized securities gains arising during period, net of $3,632 deferred tax		0		0		0		0			5,567			5,567
Less: reclassification adjustment for gains included in net income, net of $900 deferred tax		0		0		0		0			(1,398	)		(1,398	)
Change in pension liability, net of $1,178 tax benefit		0		0		0		0			1,830			1,830
Change in unrecognized loss on cash flow hedge, net of $3,513 deferred tax benefit		0		0		0		0			(5,383	)		(5,383	)

Total comprehensive income														163,575

Cash dividends of $0.90 per share		0		0		0		(9,390	)		0			(9,390	)

Balance at September 30, 2010	$	8,757	$	1,678	$	143,766	$	1,588,336		$	(24,333	)	$	1,718,204

At September 30, 2010, Accumulated Other Comprehensive Loss includes on an after-tax basis $25,599 in unrealized gains on investment securities available for sale, $41,301 in unrealized losses resulting from the funded status of the defined benefit plan and an unrealized loss of $8,631 on cash flow hedges.

At September 30, 2009, Accumulated Other Comprehensive Income includes on an after-tax basis $27,483 in unrealized gains on investment securities available for sale, $75,815 in unrealized losses resulting from the funded status of the defined benefit plan and an unrealized loss of $5,178 on cash flow hedges.

See accompanying Notes to Consolidated Financial Statements.

First Citizens BancShares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows


	Nine months ended September 30
	2010			2009

OPERATING ACTIVITIES
Net income	$	162,959		$	97,331
Adjustments to reconcile net income to cash provided by operating activities:
Amortization of intangibles		4,727			1,324
Provision for loan and lease losses		108,629			57,747
Deferred tax (benefit) expense		(82,228	)		30,148
Change in current taxes payable		2,260			5,743
Depreciation		46,565			42,453
Change in accrued interest payable		(4,348	)		(8,399	)
Change in income earned not collected		(14,860	)		8,922
Gain on acquisitions		(136,000	)		(104,434	)
Securities losses (gains)		(1,885	)		316
Origination of loans held for sale		(420,346	)		(614,857	)
Proceeds from sale of loans held for sale		413,958			612,916
Gain on sale of loans held for sale		(6,084	)		(7,145	)
Loss on sale of other real estate		1,005			2,808
Net amortization of premiums and discounts		(29,506	)		31,295
Receivable from FDIC for loss share agreements		66,427			0
Net change in other assets		67,944			3,634
Net change in other liabilities		41,399			(21,233	)

Net cash provided by operating activities		220,616			138,569

INVESTING ACTIVITIES
Net change in loans and leases outstanding		526,380			95,736
Purchases of investment securities available for sale		(2,536,499	)		(1,643,560	)
Proceeds from maturities of investment securities held to maturity		956			2,159
Proceeds from maturities of investment securities available for sale		1,686,400			1,414,910
Proceeds from sales of investment securities available for sale		38,384			151,556
Net change in overnight investments		(325,898	)		86,002
Additions to premises and equipment		(54,961	)		(79,980	)
Proceeds from sale of other real estate		75,738			20,112
Net cash received from acquisitions		106,489			51,381

Net cash provided (used) by investing activities		(483,011	)		98,316

FINANCING ACTIVITIES
Net change in time deposits		(323,859	)		249,592
Net change in demand and other interest-bearing deposits		1,021,589			(288,922	)
Net change in short-term borrowings		(481,098	)		(149,515	)
Origination of long-term obligations		68,697			91,008
Cash dividends paid		(9,390	)		(9,392	)

Net cash provided (used) by financing activities		275,939			(107,229	)

Change in cash and due from banks		13,544			129,656
Cash and due from banks at beginning of period		480,242			593,375

Cash and due from banks at end of period	$	493,786		$	723,031

CASH PAYMENTS FOR:
Interest	$	155,273		$	186,468
Income taxes		126,964			17,705

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Unrealized securities gains (losses)	$	5,259		$	(29,994	)
Unrealized (loss) gain on cash flow hedge		(8,896	)		2,112
Change in pension liability		3,008			0
Acquisitions:
Assets acquired		2,291,659			1,924,715
Liabilities assumed		2,155,861			1,819,745
Net assets acquired		135,798			104,970

See accompanying Notes to Consolidated Financial Statements

First Citizens BancShares, Inc. and Subsidiaries

Notes to Unaudited 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 (US GAAP) for interim financial information. Accordingly, they do not include all of the information and notes required by US GAAP 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. and Subsidiaries (BancShares) 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 US GAAP 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 income and expenses during the period. Actual results could differ from those estimates.

Management has evaluated subsequent events through the filing date of the Quarterly Report on Form 10-Q.

These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in BancShares’ 2009 Form 10-K. Certain amounts for prior periods have been reclassified to conform with statement presentations for 2010. However, the reclassifications have no effect on shareholders’ equity or net income as previously reported.

FDIC-Assisted Transactions

US GAAP requires that the acquisition method of accounting be used for all business combinations, including those resulting from FDIC-assisted transactions 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.

During 2010 and 2009, BancShares’ wholly-owned subsidiary, First-Citizens Bank & Trust Company (FCB), acquired assets and assumed liabilities of four entities as noted below (collectively referred to as “the Acquisitions”) with the assistance of the Federal Deposit Insurance Corporation (FDIC), which had been appointed Receiver of each entity by its respective state banking authority.


Name of entity	Headquarters location	Date of transaction
Sun American Bank (SAB)	Boca Raton, Florida	March 5, 2010
First Regional Bank (First Regional)	Los Angeles, California	January 29, 2010
Venture Bank (VB)	Lacey, Washington	September 11, 2009
Temecula Valley Bank (TVB)	Temecula, California	July 17, 2009

The acquired assets and assumed liabilities were measured at estimated fair value. Management made significant estimates and exercised significant judgment in accounting for the Acquisitions. Management judgmentally assigned risk ratings to loans based on credit quality, appraisals and estimated collateral values, estimated expected cash flows, and applied appropriate liquidity and coupon discounts 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. FCB also recorded identifiable intangible assets representing the estimated values of the assumed core deposits and other customer relationships. Management used quoted or current market prices to determine the fair value of investment securities, short-term borrowings and long-term obligations.

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 acquired loans with evidence of credit deterioration since origination (impaired loans) are recorded net of a nonaccretable 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 expected cash flows will generally result in recognition of an allowance by a charge to provision for loan and lease losses. Subsequent increases in expected cash flows result in either a reversal of the provision for loan and lease 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 regarding the amount and timing of such cash flows. BancShares did not initially estimate the amount and timing of cash flows for loans acquired from TVB and VB at the dates of the acquisitions, but cash flow analyses were performed on loans acquired from First Regional and SAB in order to determine the cash flows expected to be collected. BancShares is accounting for all acquired loans on a loan level basis since the majority of the portfolios acquired consist of large commercial loans.

Receivable from FDIC for Loss Share Agreements

The receivable from the FDIC for loss share agreements is measured separately from the related covered assets as it is not contractually embedded in the assets and is not transferable should the assets be sold. Fair value was estimated using projected cash flows related to the loss share agreements based on the expected reimbursements for losses using the applicable loss share percentages and the estimated true-up payment at the expiration of the loss share agreements, if applicable. These cash flows were discounted to reflect the estimated timing of the receipt of the loss share reimbursement from the FDIC and the true-up payment to the FDIC, when applicable. The FDIC receivable has been reviewed and updated prospectively as loss estimates related to covered loans and other real estate owned change, and as reimbursements are received or expected to be received from the FDIC. Post-acquisition adjustments to the FDIC receivable are offset by noninterest income.

Other Real Estate Owned Covered by Loss Share Agreements

Other real estate owned (OREO) covered by loss share agreements with the FDIC are reported exclusive of expected reimbursement cash flows from the FDIC. Subsequent downward adjustments to the estimated recoverable value of covered OREO result in a reduction of covered OREO, a charge to other noninterest expense and an increase in the FDIC receivable for the estimated amount to be reimbursed, with a corresponding amount recorded as other noninterest income. OREO is presented at the estimated present value that management expects to receive when the property is sold, net of related costs of disposal. Management used appraisals of properties to determine fair values and applied additional discounts where appropriate for passage of time or, in certain cases, for subsequent events occurring after the appraisal date.

Recently Adopted Accounting Policies and Other Regulatory Issues

Under revisions to US GAAP that became effective January 1, 2010, the concept of a qualifying special-purpose entity (QSPE) was removed, resulting in a change in the accounting for QSPEs that were previously exempt. Upon adoption, the off-balance sheet accounting treatment for the 2005 asset securitization of home equity loans was discontinued, and the loans that were sold in the securitization and the corresponding debt obligations were reported on the consolidated balance sheet in the first quarter of 2010. The adoption resulted in increases of $97,291 in noncovered revolving mortgage loans, $681 in allowance for loan and lease losses, $86,926 in long-term obligations, and $3,189 in deferred tax liabilities. The retained interest in the residual interest strip and the servicing asset were written off, resulting in reductions of $1,287 and $304 to investment securities available for sale and other assets, respectively. The adoption also resulted in an adjustment to the beginning balance of retained earnings in the amount of $4,904.

Note B

Federally Assisted Acquisitions of First Regional Bank and Sun American Bank

On January 29, 2010, FCB purchased substantially all the assets and assumed substantially all the liabilities of First Regional from the FDIC, as Receiver. First Regional operated through 8 offices in the state of California, primarily serving Southern California. The FDIC took First Regional under receivership upon its closure by the California Department of Financial Institutions. FCB’s bid to the FDIC included the purchase of substantially all of First Regional’s assets at a discount of $299,400 in exchange for assuming certain First Regional deposits and certain other liabilities. No cash, deposit premium or other consideration was paid by FCB. FCB and the FDIC entered into loss share 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 share agreements, there is no reimbursement by the FDIC until net losses reach $41,815. The FDIC will reimburse FCB for 80 percent of net losses incurred up to $1,017,000, and 95 percent of net losses exceeding $1,017,000.

The Purchase and Assumption Agreement between FCB and the FDIC also includes a true-up payment at the end of year 10. On March 17, 2020, the true-up measurement date, FCB is required to make a true-up payment to the FDIC equal to 50 percent of the excess, if any, of (i) 20 percent of the stated threshold, or $203.4 million, less (ii) the sum of (a) 25 percent of the asset discount, or $74.9 million, plus (b) 25 percent of the cumulative loss share payments plus (c) the cumulative servicing amount. The cumulative servicing amount is 1 percent of the average covered assets for each year during the terms of the loss share agreements. Current projections suggest a true-up payment of $67,219 will be payable under the First Regional loss share agreements. This estimate is subject to change over the term of the agreements.

The term for loss share on residential real estate loans is ten years, while the term for loss share 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 share agreements with the FDIC and considering an estimate of a contingent true-up payment to the FDIC, FCB recorded a receivable of $365,170 at the time of acquisition. During the second and third quarters of 2010, adjustments were made to the FDIC receivable based on changes in loss estimates related to covered loans and other real estate owned that affect the respective acquisition date fair values. These adjustments were made retroactive to the first quarter of 2010 and increased the receivable by $13,525.

On March 5, 2010, FCB purchased substantially all the assets and assumed substantially all the liabilities of SAB from the FDIC, as Receiver. SAB operated 12 offices in the state of Florida, primarily serving South Florida. The FDIC took SAB under receivership upon its closure by the Florida Office of Financial Regulation. FCB’s bid to the FDIC included the purchase of substantially all of SAB’s assets at a discount of $69,400 in exchange for assuming certain SAB deposits and certain other liabilities. The FDIC paid FCB $31,965 in additional cash consideration at closing. FCB and the FDIC entered into loss share 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 share agreements, the FDIC will reimburse FCB for 80 percent of net losses incurred up to $99,000 and 95 percent of net losses exceeding $99,000.

The Purchase and Assumption Agreement between FCB and the FDIC also includes a true-up payment at the end of year 10. On May 15, 2020, the true-up measurement date, FCB is required to make a true-up payment to the FDIC equal to 50 percent of the excess, if any, of (i) 20 percent of the stated threshold, or $19.8 million, less (ii) the sum of (a) 25 percent of the asset discount, or $17.5 million, plus (b) 25 percent of the cumulative loss share payments plus (c) the cumulative servicing amount. The cumulative servicing amount is 1 percent of the average covered assets for each year during the terms of the loss share agreements. Although no true-up payment is currently projected under the SAB loss share agreements, those projections are subject to change.

The term for loss share on residential real estate loans is ten years, while the term for loss share 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 share agreements with the FDIC, FCB recorded a receivable of $92,360 at the time of acquisition. During the second quarter of 2010, adjustments were made to the FDIC receivable based on changes in loss estimates related to covered loans and other real estate owned that affect the respective acquisition date fair values. These adjustments were made retroactive to the first quarter of 2010 and decreased the receivable by $2,626.

The acquisitions of First Regional and SAB were accounted for using the acquisition method of accounting. The statement of net assets acquired, adjustments to the acquisition date fair values made in the second and third quarters and the resulting bargain purchase gains are presented in the following tables. As indicated 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 estimated fair values. Fair values are subject to refinement for up to one year after the closing date of each merger as additional information regarding closing date fair values becomes available. Adjustments to the estimated fair values made in the second and third quarters were based on additional information regarding the acquisition date fair values, which included updated appraisals on several commercial properties on acquired impaired loans and updated financial statements for some borrowers which allowed for adjustments to expected cash flows that more closely reflect the borrowers’ ability to repay the debt.

First quarter noninterest income as originally reported included bargain purchase gains of $137,447 that resulted from the 2010 Acquisitions. The gains resulted from the difference between the estimated fair values of acquired assets and assumed liabilities. During the second and third quarters of 2010, adjustments were made to the gains based on additional information regarding the respective acquisition date fair values. These adjustments were made retroactive to the first quarter of 2010, the period the 2010 acquisitions were consummated, resulting in an adjusted gain of $136,000. FCB recorded a deferred tax liability for the gains totaling $53,258. To the extent there are additional adjustments to the respective acquisition date fair values up to one year following the respective acquisitions, there will be additional adjustments to the gains.

The following tables identify the assets acquired and liabilities assumed by FCB from First Regional and SAB. The tables provide the balances recorded by First Regional and SAB at the time of the respective FDIC-assisted transactions, the fair value adjustments recorded and the resulting adjusted fair values recorded by FCB for the acquisition date.

First Regional Bank

Acquisition date: January 29, 2010


	As recorded by First Regional		Fair value adjustments at date of acquisition			Subsequent acquisition-date adjustments			As recorded by FCB
	(thousands)
Assets
Cash and due from banks	$	37,508	$	—		$	—		$	37,508
Investment securities available for sale		3,250		—			—			3,250
Loans covered by loss share agreements		1,853,325		(576,171	) a		(16,905	) a		1,260,249
Other real estate owned covered by loss share agreements		61,488		(20,353	) b		791	b		41,926
Income earned not collected		6,048		—			—			6,048
Receivable from FDIC for loss share agreements		—		365,170	c		13,525	i		378,695
Intangible assets		—		9,110	d		—			9,110
Other assets		23,782		(500	) e		—			23,282

Total assets acquired	$	1,985,401	$	(222,744	)	$	(2,589	)	$	1,760,068

Liabilities
Deposits:
Noninterest-bearing	$	528,235	$	—		$	—		$	528,235
Interest-bearing		759,484		—			—			759,484

Total deposits		1,287,719		—			—			1,287,719
Short-term borrowings		361,876		—			—			361,876
Other liabilities		1,188		1,547	h		—			2,735

Total liabilities assumed		1,650,783		1,547			—			1,652,330

Excess of assets acquired over liabilities assumed	$	334,618

Aggregate fair value adjustments			$	(224,291	)	$	(2,589	)

Gain on acquisition of First Regional									$	107,738

Sun American Bank

Acquisition date: March 5, 2010


	As recorded by SAB		Fair value adjustments at acquisition date			Subsequent acquisition-date adjustments			As recorded by FCB
	(thousands)
Assets
Cash and due from banks	$	37,016	$	—		$	—		$	37,016
Investment securities available for sale		66,968		—			—			66,968
Loans covered by loss share agreements		411,315		(123,707	) a		3,283	a		290,891
Other real estate owned covered by loss share agreements		15,220		(7,200	) b		—			8,020
Income earned not collected		1,612		—			—			1,612
Receivable from FDIC for loss share agreements		—		92,360	c		(2,626	) i		89,734
Intangible assets		—		629	d		—			629
Other assets		4,473		—			—			4,473

Total assets acquired	$	536,604	$	(37,918	)	$	657		$	499,343

Liabilities
Deposits:
Noninterest-bearing	$	39,435	$	—		$	—		$	39,435
Interest-bearing		380,577		—			—			380,577

Total deposits		420,012		—			—			420,012
Short-term borrowings		42,485		48	f		—			42,533
Long-term obligations		37,000		3,082	g		—			40,082
Other liabilities		853		51	h		—			904

Total liabilities assumed		500,350		3,181			—			503,531

Excess of assets acquired over liabilities assumed	$	36,254

Aggregate fair value adjustments			$	(41,099	)	$	657

Cash received from the FDIC									$	31,965

Gain on acquisition of Sun American									$	27,777

Explanation of fair value adjustments

a - Adjustment reflects the fair value adjustments based on FCB’ sevaluation 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 share agreements.

d - Adjustment reflects the estimated value of intangible assets, which includes core deposit intangibles and when applicable, trust customer relationships.

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

f - Adjustment arises since the rates on short-term borrowings are higher than rates available on similar borrowings at date of acquisition.

g - Adjustment arises since the rates on long-term obligations are higher than rates available on similar borrowings at date of acquisition.

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

i - Adjustment to acquisition date fair value based on additional information received post-acquisition regarding acquisition date fair value.

Results of operations for First Regional and SAB prior to their respective acquisition dates are not included in the income statement.

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 share agreements, historical results of First Regional and SAB are not relevant to BancShares’ results of operations. Therefore, no pro forma information is presented.

Note C

Investments

The aggregate values of investment securities at September 30, 2010, December 31, 2009 and September 30, 2009, along with unrealized gains and losses determined on an individual security basis are as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Investment securities available for sale
September 30, 2010
U. S. Government	$	3,112,152	$	9,099	$	—	$	3,121,251
Corporate bonds		479,935		9,254		—		489,189
Residential mortgage-backed securities		151,355		4,891		110		156,136
Equity securities		1,132		17,865		—		18,997
State, county and municipal		1,241		27		—		1,268

Total investment securities available for sale	$	3,745,815	$	41,136	$	110	$	3,786,841

December 31, 2009
U. S. Government	$	2,274,084	$	14,005	$	666	$	2,287,423
Corporate bonds		481,341		4,326		—		485,667
Residential mortgage-backed securities		126,601		4,489		752		130,338
Equity securities		2,377		14,245		—		16,622
State, county and municipal		7,053		35		275		6,813
Other		1,937		362		—		2,299

Total investment securities available for sale	$	2,893,393	$	37,462	$	1,693	$	2,929,162

September 30, 2009
U. S. Government	$	2,611,698	$	23,183	$	178	$	2,634,703
Corporate bonds		482,705		4,459		74		487,090
Residential 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


Investment securities held to maturity
September 30, 2010
Residential mortgage-backed securities	$	2,645	$	245	$	26	$	2,864

Total investment securities held to maturity	$	2,645	$	245	$	26	$	2,864

December 31, 2009
Residential mortgage-backed securities	$	3,452	$	256	$	26	$	3,682
State, county and municipal		151		1		—		152

Total investment securities held to maturity	$	3,603	$	257	$	26	$	3,834

September 30, 2009
Residential 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

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

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


	September 30, 2010				December 31, 2009				September 30, 2009
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Investment securities available for sale
Maturing in:
One year or less	$	2,559,784	$	2,567,076	$	1,544,063	$	1,554,657	$	1,550,843	$	1,563,140
One through five years		1,044,757		1,056,170		1,226,202		1,233,604		1,585,364		1,600,964
Five through 10 years		1,815		1,841		1,943		2,201		2,323		2,683
Over 10 years		138,327		142,757		118,808		122,078		97,290		100,189
Equity securities		1,132		18,997		2,377		16,622		2,591		16,545

Total investment securities available for sale	$	3,745,815	$	3,786,841	$	2,893,393	$	2,929,162	$	3,238,411	$	3,283,521


Investment securities held to maturity
Maturing in:
One through five years	$	—	$	—	$	151	$	152	$	151	$	152
Five through 10 years		2,512		2,689		3,306		3,497		3,487		3,700
Over 10 years		133		175		146		185		150		189

Total investment securities held to maturity	$	2,645	$	2,864	$	3,603	$	3,834	$	3,788	$	4,041

The following table provides information regarding securities with unrealized losses as of September 30, 2010, December 31, 2009 and September 30, 2009:


	Less than 12 months				12 months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
September 30, 2010
Investment securities available for sale:
Residential mortgage-backed securities	$	10,364	$	88	$	535	$	22	$	10,899	$	110

Total	$	10,364	$	88	$	535	$	22	$	10,899	$	110

Investment securities held to maturity:
Residential mortgage-backed securities	$	—		—	$	27	$	26	$	27	$	26
December 31, 2009
Investment securities available for sale:
U.S. Government	$	250,600	$	666	$	—	$	—	$	250,600	$	666
Residential mortgage-backed securities		25,608		621		2,434		131		28,042		752
State, county and municipal		5,476		271		439		4		5,915		275

Total	$	281,684	$	1,558	$	2,873	$	135	$	284,557	$	1,693

Investment securities held to maturity:
Residential mortgage-backed securities	$	—	$	—	$	29	$	26	$	29	$	26
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
Residential 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:
Residential mortgage-backed securities	$	—	$	—	$	33	$	26	$	33	$	26

Investment securities with an aggregate fair value of $562 have had continuous unrealized losses for more than twelve months as of September 30, 2010 with an aggregate unrealized loss of $48. These 19 investments consist entirely of residential mortgage-backed securities. None of the unrealized losses identified as of September 30, 2010 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.

With respect to investment securities held to maturity, BancShares has the ability and intent to hold those securities until they mature.

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


	Three months ended September 30,						Nine months ended September 30,
	2010			2009			2010			2009
Gross gains on sales of investment securities available for sale	$	1,167		$	104		$	3,803		$	104
Gross losses on sales of investment securities available for sale		(1	)		—			(1,506	)		—
Other than temporary impairments of equity investments		(226	)		(281	)		(412	)		(420	)

Total securities gains (losses)	$	940		$	(177	)	$	1,885		$	(316	)

Investment securities having an aggregate carrying value of $2,015,500 at September 30, 2010, $2,121,783 at December 31, 2009 and $1,998,230 at September 30, 2009, were pledged as collateral to secure public funds on deposit, to secure certain short-term borrowings or collateral obligations and for other purposes as required by law.

Note D

Loans and Leases

Loans and leases outstanding include the following as of the dates indicated:


	September 30, 2010		December 31, 2009		September 30, 2009
Loans covered by loss share agreements	$	2,222,660	$	1,173,020	$	1,257,478

Loans and leases not covered by loss share agreements
Real estate:
Construction and land development		546,070		622,354		621,176
Commercial mortgage		4,696,183		4,552,078		4,514,554
Residential mortgage		917,415		864,704		876,001
Revolving mortgage		2,209,149		2,147,223		2,114,018
Other mortgage		155,509		158,187		101,802

Total real estate loans		8,524,326		8,344,546		8,227,551
Commercial and industrial		1,774,340		1,832,670		1,822,526
Consumer		766,586		941,986		998,007
Lease financing		294,825		330,713		335,515
Other		185,232		195,084		137,084

Total loans and leases not covered by loss share agreements	$	11,545,309	$	11,644,999	$	11,520,683


	September 30, 2010						December 31, 2009						September 30, 2009
	Impaired at acquisition date		All other acquired loans		Total		Impaired at acquisition date		All other acquired loans		Total		Impaired at acquisition date		All other acquired loans		Total
Loans covered by loss share agreements:
Real estate:
Construction and land development	$	173,964	$	397,027	$	570,991	$	22,700	$	283,342	$	306,042	$	34,793	$	392,642	$	427,435
Commercial mortgage		132,049		999,134		1,131,183		36,820		553,579		590,399		40,490		605,087		645,577
Residential mortgage		36,933		45,836		82,769		8,828		143,481		152,309		3,387		57,193		60,580
Revolving mortgage		114		23,025		23,139		—		—		—		451		8,264		8,715
Other mortgage		43,023		177,001		220,024		331		21,307		21,638		344		3,325		3,669

Total real estate loans		386,083		1,642,023		2,028,106		68,679		1,001,709		1,070,388		79,465		1,066,511		1,145,976
Commerical and industrial		14,400		168,505		182,905		5,958		89,273		95,231		3,361		97,550		100,911
Consumer		116		6,852		6,968		255		4,259		4,514		287		6,793		7,080
Other		147		4,534		4,681		476		2,411		2,887		329		3,182		3,511

Total loans covered by loss share agreements	$	400,746	$	1,821,914	$	2,222,660	$	75,368	$	1,097,652	$	1,173,020	$	83,442	$	1,174,036	$	1,257,478

Outstanding balance	$	742,010	$	2,535,003	$	3,277,013	$	200,310	$	1,418,375	$	1,618,685	$	297,077	$	1,566,084	$	1,863,161

Impaired loans are loans that have evidence of deterioration in credit quality since origination, suggesting it is probable that all contractually required payments will not be collected. The following table provides information on all impaired loans, exclusive of those loans evaluated collectively as a homogeneous group.


	September 30, 2010		December 31, 2009		September 30, 2009
Impaired loans:
Covered by loss share agreements	$	542,862	$	116,446	$	83,442
Not covered by loss share agreements		57,968		50,797		33,263

Total	$	600,830	$	167,243	$	116,705

Allowance for loan and lease losses related to:
Impaired loans covered by loss share agreements	$	40,046	$	3,500		—
Impaired loans and leases not covered by loss share agreements		9,648		9,611		4,873
Impaired loans with no allowance for loan and lease loss:
Loans covered by loss share agreements		374,535		106,498		—
Loans and leases not covered by loss share agreements		7,348		9,902		9,331

When the fair values of loans covered by loss share agreements with the FDIC (Covered Loans) were established, certain loans were identified as impaired. The following table provides changes in the carrying value of acquired impaired loans during the nine-month periods ended September 30, 2010 and 2009:


	2010			2009
Balance, January 1	$	75,368		$	—
Fair value of acquired impaired loans covered by loss share agreements		412,627			99,625
Reductions for repayments, foreclosures and decreases in fair value		(87,249	)		(16,183	)

Balance, September 30	$	400,746		$	83,442

Cash flow analyses were prepared for First Regional and SAB loans deemed impaired at acquisition and those analyses are used to determine the amount of accretable yield recognized on those loans. Due to initial uncertainty regarding the timing of future cash flows, no accretable yield was initially measured for loans deemed impaired at acquisition from TVB and VB, and the cost recovery method is used to account for these loans.

The following table documents changes to the amount of accretable yield. For First Regional and SAB loans, improved cash flow estimates and receipt of unscheduled loan payments resulted in the reclassification of nonaccretable yield to accretable yield. For TVB and VB loans, receipt of unscheduled loan payments and improvements in expected losses resulted in the reclassification of nonaccretable yield to accretable yield.


	Accretable Yield
Balance at December 31, 2009	$	—
Additions		63,908
Accretion		(100,299	)
Reclassifications from (to) nonaccretable difference		157,097
Disposals		(1,070	)

Balance at September 30, 2010	$	119,636

Nonperforming loans and other risk elements are summarized below:


	September 30, 2010		December 31, 2009		September 30, 2009
Nonaccrual loans and leases:
Covered under loss share agreements	$	264,653	$	116,446	$	102,473
Not covered under loss share agreements		84,753		58,417		56,628
Restructured loans:
Covered under loss share agreements		65,417		10,013		—
Not covered under loss share agreements		53,374		55,025		4,990

Nonperforming loans and leases	$	468,197	$	239,901	$	164,091

Loans and leases 90 days or more past due and still accruing:
Covered under loss share agreements	$	365,207	$	—	$	—
Not covered under loss share agreements		18,059		27,766		16,507
Other real estate owned:
Covered under loss share agreements	$	99,843	$	93,774	$	102,600
Not covered under loss share agreements		47,524		40,607		44,703

Accruing loans and leases 90 days or more past due covered by loss share agreements include impaired loans acquired from First Regional and SAB that are accounted for using the accretable yield method.

Note E

Allowance for Loan and Lease Losses

Activity in the allowance for loan and lease losses is summarized as follows:


	Nine months ended September 30,
	2010			2009
Balance, January 1	$	172,282		$	157,569
Adjustment resulting from adoption of change in accounting for QSPEs and controlling financial interests, effective January 1, 2010		681		$	—
Provision for loan and lease losses
Covered by loss share agreements		62,455			—
Not covered by loss share agreements		46,174			57,747
Loans and leases charged-off:
Covered by loss share agreements		(22,122	)		—
Not covered by loss share agreements		(45,652	)		(53,694	)
Loans and leases recovered:
Not covered by loss share agreements		4,228			3,660

Net charge-offs		(63,546	)		(50,034	)

Balance, September 30	$	218,046		$	165,282


	September 30, 2010		December 31, 2009		September 30, 2009
Allowance for loan and lease losses allocated to:
Loans covered by loss share agreements	$	43,839	$	3,500	$	—
Loans and leases not covered by loss share agreements		174,207		168,782		165,282

Total	$	218,046	$	172,282	$	165,282

Note F

Receivable from FDIC for Loss Share Agreements

The following table provides changes in the receivable from the FDIC during the first nine months of 2010 and 2009:


	Nine months ended September 30,
	2010			2009
Balance at January 1	$	249,842		$	—
Additional receivable from acquisitions		468,429			242,520
Accretion of discounts and premiums, net		3,638			480
Receipt of payments from FDIC		(52,422	)		—
Post-acquisition adjustments		(17,643	)		—

Balance at September 30	$	651,844		$	243,000

The receivable from the FDIC for loss share agreements is measured separately from the related covered assets and is recorded at fair value. The fair value was estimated using projected cash flows related to the loss share agreements based on the expected reimbursements for losses and the applicable loss share percentages.

Post-acquisition adjustments represent the net change in loss estimates related to covered loans and other real estate owned as a result of changes in estimated fair values and the allowance for loan and lease losses related to covered loans. For loans covered by loss share agreements, subsequent decreases in the amount expected to be collected from the borrower result in a provision for loan and lease losses, an increase in the allowance for loan and lease losses, and a proportional adjustment to the receivable from the FDIC for the estimated amount to be reimbursed. Subsequent increases in the amount expected to be collected from the borrower result in the reversal of any previously recorded provision for loan and lease losses and related allowance for loan and lease losses and adjustments to the receivable from the FDIC, or prospective adjustment to the accretable yield and the related receivable from the FDIC if no provision for loan and lease losses had been recorded. Adjustments related to acquisition date fair values, made within one year after the closing date of the respective acquisition, are reflected in the bargain purchase gain.

Second quarter 2010 loss share filings were completed in the third quarter of 2010 and forwarded to the FDIC for review. These filings request reimbursement of $54.5 million from the FDIC for losses and covered servicing expenses. Due to inaccuracies with regard to the filings, the FDIC is delaying payment pending correction of the filings. In the opinion of management, substantially all of the requested $54.5 million will be received. The FDIC has also indicated that reimbursement of amounts claimed on future loss share filings will be deferred pending remediation of certain of our loss share filing processes.

Note G

Estimated Fair Values

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 publicly 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 those 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 each period presented, the fair value for loans, net of allowance for loan and lease losses, included an adjustment 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.

Estimated fair values for certain financial assets and financial liabilities are provided in the following table:


	September 30, 2010				December 31, 2009				September 30, 2009
	Carrying Value		Fair Value		Carrying Value		Fair Value		Carrying Value		Fair Value
Cash and due from banks	$	493,786	$	493,786	$	480,242	$	480,242	$	723,031	$	723,031
Overnight investments		1,049,158		1,049,158		723,260		723,260		219,886		219,886
Investment securities available for sale		3,786,841		3,786,841		2,929,162		2,929,162		3,283,521		3,283,521
Investment securities held to maturity		2,645		2,864		3,603		3,834		3,788		4,041
Loans held for sale		79,853		79,853		67,381		67,381		78,485		78,485
Loans covered by loss share agreements, net of allowance for loan and lease losses		2,178,821		2,150,909		1,169,520		1,169,520		1,257,478		1,256,659
Loans and leases not covered by loss share agreements, net of allowance for loan and lease losses		11,371,102		10,995,807		11,476,217		11,060,532		11,355,401		10,748,074

Receivable from FDIC for loss share agreements		651,844		654,210		249,842		249,842		243,000		243,000
Income earned not collected		83,204		83,204		60,684		60,684		68,845		68,845
Stock issued by:
Federal Home Loan Bank of Atlanta		48,291		48,291		47,361		47,361		47,361		47,361
Federal Home Loan Bank of San Francisco		16,135		16,135		5,592		5,592		5,592		5,592
Federal Home Loan Bank of Seattle		4,490		4,490		4,490		4,490		4,490		4,490
Deposits		17,743,028		17,808,921		15,337,567		15,396,423		15,348,955		15,418,748
Short-term borrowings		652,716		652,716		642,405		642,405		576,609		576,609
Long-term obligations		819,145		851,107		797,366		788,004		879,758		901,180
Accrued interest payable		33,533		33,533		37,881		37,881		42,524		42,524

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 nonobservable. It is BancShares’ policy to recognize transfers between levels of the fair value hierarchy at the end of the respective reporting period.

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, OREO, 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.

For assets and liabilities carried at fair value on a recurring basis, the following table provides fair value information as of September 30, 2010, December 31, 2009 and 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, 2010
Assets measured at fair value
Investment securities available for sale
U.S. Government	$	3,121,251	$	3,121,251	$	—	$	—
Corporate bonds		489,189		489,189		—		—
Residential mortgage-backed securities		156,136		—		156,136		—
Equity securities		18,997		18,997		—		—
State, county, municipal		1,268		—		1,268		—

Total	$	3,786,841	$	3,629,437	$	157,404	$	—


Liabilities measured at fair value
Interest rate swaps accounted for as cash flow hedges	$	14,263	$	—	$	14,263	$	—

December 31, 2009
Assets measured at fair value
Investment securities available for sale
U.S. Government	$	2,287,423	$	2,287,423	$	—	$	—
Corporate bonds		485,667		485,667		—		—
Residential mortgage-backed securities		130,338		—		130,338		—
Equity securities		16,622		16,622		—		—
State, county, municipal		6,813		—		6,813		—
Other		2,299		1,012		—		1,287

Total	$	2,929,162	$	2,790,724	$	137,151	$	1,287


Liabilities measured at fair value
Interest rate swaps accounted for as cash flow hedges	$	5,367	$	—	$	5,367	$	—

September 30, 2009
Assets measured at fair value
Investment securities available for sale
U.S. Government	$	2,634,703	$	2,634,703	$	—	$	—
Corporate bonds		487,090		487,090		—		—
Residential mortgage-backed securities		115,351		—		115,351		—
Equity securities		16,545		16,545		—		—
State, county, municipal		7,376		—		7,376		—
Other		22,456				20,267		2,189

Total	$	3,283,521	$	3,138,338	$	142,994	$	2,189


Liabilities measured at fair value
Interest rate swaps accounted for as cash flow hedges	$	8,556	$	—	$	8,556	$	—

Prices for US Government securities, corporate bonds and equity securities 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 mortgage-backed securities and state, county and municipal securities are obtained using the fair values of similar assets and the resulting fair values are shown in the ‘Level 2 input’ column. At December 31, 2009, the fair value for the retained residual interest from a securitization transaction was determined based on Level 3 nonobservable inputs. Based on changes to US GAAP related to accounting for QSPEs and controlling financial interests that became effective January 1, 2010, the previously securitized loans were consolidated and the residual interest strip was removed from the consolidated balance sheet. There were no transfers between Level 1 and Level 2 inputs during the nine months ended September 30, 2010.

At September 30, 2010, other assets include $68,916 of stock in various Federal Home Loan Banks (FHLB). 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, 2010.

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 hedges are therefore based on projected LIBOR rates for the duration of the hedges, 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 nonobservable inputs, the following table identifies the factors causing the change in fair value during the first nine months of 2010 and 2009:


	Investment securities available for sale with fair values based on significant nonobservable inputs
Description	2010			2009
Beginning balance, January 1 ,	$	1,287		$	5,427
Total gains (losses), realized or unrealized:
Included in earnings		—			—
Included in other comprehensive income		—			(1,278	)
Purchases, sales , issuances and settlements, net		—			(1,960	)
Transfers in/out of Level 3		(1,287	)		—

Ending balance, September 30	$	—		$	2,189

No gains or losses were reported for the nine month periods ended September 30, 2010 and 2009 that relate to fair values estimated based on significant nonobservable inputs. The investment securities valued using level 3 inputs that were transferred out during the first quarter of 2010 result from changes in US GAAP adopted January 1, 2010 related to investments in the retained interest of a residual interest strip that resulted from an asset securitization.

Certain assets and 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 assets and liabilities carried at fair value on a nonrecurring basis, the following table provides fair value information as of September 30, 2010, December 31, 2009 and 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 nonobservable inputs (Level 3 inputs)
September 30, 2010
Loans held for sale	$	79,853	$	—	$	79,853	$	—
Impaired loans:
Covered by loss share agreements		542,862		—		—		542,862
Not covered by loss share agreements		48,320		—		—		48,320
December 31, 2009
Loans held for sale		67,381		—		67,381		—
Impaired loans:
Covered by loss share agreements		112,946		—		—		116,446
Not covered by loss share agreements		44,686		—		—		40,895
September 30, 2009
Loans held for sale		38,328		—		38,328		—
Impaired loans:
Covered by loss share agreements		83,442		—		—		83,442
Not covered by loss share		19,055		—		—		19,055

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 as of September 30, 2010 or December 31, 2009.

Certain non-financial assets and non-financial liabilities are measured at fair value on a nonrecurring basis. OREO is measured and reported at fair value using Level 2 inputs for observable market data or Level 3 inputs for valuations based on nonobservable criteria. During the nine month period ended September 30, 2010, foreclosures of other real estate not covered by loss share agreements totaled $24,241, all of which were valued using Level 3 inputs. In connection with the measurement and initial recognition of noncovered OREO, BancShares recognized loan charge-offs totaling $11,137. Based on updates to Level 3 inputs, noncovered OREO with a fair value of $8,025 as of September 30, 2010 incurred write-downs that totaled $2,344 during the nine month period ended September 30, 2010.

Note H

Employee Benefit Plans

Pension expense is a component of employee benefits expense. For the three and nine month periods ended September 30, 2010 and 2009, the components of pension expense are as follows:


	Three months ended September 30,						Nine month periods ended September 30,
	2010			2009			2010			2009
Service cost	$	2,760		$	3,190		$	9,431		$	9,472
Interest cost		5,192			5,517			17,738			16,384
Expected return on assets		(6,533	)		(6,982	)		(22,551	)		(20,733	)
Amortization of prior service cost		42			53			157			157
Amortization of net actuarial loss		771			908			2,851			2,696

Total pension expense	$	2,232		$	2,686		$	7,626		$	7,976

For the nine month periods ended September 30, 2010 and 2009 the assumed discount rate 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.

Note I

Contingencies

BancShares and various subsidiaries have been named as defendants in various 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 J

Derivatives

At September 30, 2010, 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 hedge 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, 2010, collateral with a fair value of $14,734 was pledged to secure the existing obligation under the interest rate swaps. For both swaps, settlement occurs quarterly.


			Estimated fair value of liability
	Notional amount for all periods		September 30, 2010		December 31, 2009			September 30, 2009
2006 interest rate swap hedging variable rate exposure on trust preferred capital securities 2006-2011	$	115,000	$	4,304	$	7,424		$	8,488
2009 interest rate swap hedging variable rate exposure on trust preferred capital securities 2011-2016		115,000		9,959		(2,057	)		68

			$	14,263	$	5,367		$	8,556

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, 2010 and 2009, BancShares recognized interest expense of $4,374 and $3,738, respectively, resulting from incremental interest paid to the interest rate swap counterparty, none of which related to ineffectiveness.

The following table discloses activity in accumulated other comprehensive income (loss) related to the interest rate swaps during the nine month periods ended September 30, 2010 and 2009.


	2010			2009
Accumulated other comprehensive loss resulting from interest rate swaps as of January 1, net of tax	$	(3,248	)	$	(6,456	)
Other comprensive (loss) income recognized during nine month period ended September 30, net of tax		(5,383	)		1,278

Accumulated other comprehensive loss resulting from interest rate swaps as of September 30, net of tax	$	(8,631	)	$	(5,178	)

Accumulated other comprehensive loss resulting from interest rate swaps as of July 1, net of tax	$	(6,844	)	$	(3,897	)
Other comprensive (loss) income recognized during three month period ended September 30, net of tax		(1,787	)		(1,281	)

Accumulated other comprehensive loss resulting from interest rate swaps as of September 30, net of tax	$	(8,631	)	$	(5,178	)

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

Note K

Segment Disclosures

BancShares conducts its banking operations through its two wholly-owned subsidiaries, FCB and ISB. Although FCB and ISB offer similar products and services to customers, each entity operates in distinct geographic markets, except California, Washington and Florida, and has separate management groups. Additionally, the financial results and trends of ISB reflect the de novo nature of its growth. During the third quarter of 2010, FCB filed applications with Federal and state banking regulators for permission to merge with ISB, with FCB being the surviving entity. Pending regulatory approval and the expiration of any applicable waiting periods, the merger of FCB and ISB is expected to occur during early 2011. Following the merger and for the immediate future, all ISB branches will continue to operate under the name IronStone Bank, which will then be a division of FCB. Management has currently made no decisions with respect to any prospective changes in segment reporting assuming the merger is approved by regulatory authorities.

FCB operates from a single charter from its branch network in North Carolina, Virginia, West Virginia, Maryland, Tennessee, California, Washington, Florida and Washington, DC. FCB’s entrance into California, Washington and Florida during 2009 and 2010 resulted from participation in FDIC-assisted transactions. ISB began operations in 1997 and operates from a thrift charter in Florida, Georgia, Texas, New Mexico, Arizona, California, Oregon, Washington, Colorado, Oklahoma, Missouri and Kansas.

Management has determined that FCB and ISB are reportable business segments. 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. The ‘Other’ category in the accompanying table includes activities of the parent company and Neuse, Incorporated (Neuse), a subsidiary that owns real property used in the banking operation and owns other real estate. The other real estate owned (non-performing assets) by Neuse relates to loans originated by ISB. During 2009, Neuse purchased some of ISB’s OREO to reduce ISB’s nonperforming assets. To facilitate the potential purchase of additional OREO in the future, ISB has agreed to lend Neuse up to $15,000 under a revolving line of credit. No amount was owed by Neuse to ISB as of September 30, 2010 under the revolving line of credit.

The adjustments in the accompanying tables represent the elimination of the impact of certain intercompany transactions. The adjustments for interest income and interest expense neutralize the earnings and cost of intercompany borrowings. The adjustments to noninterest income and noninterest expense reflect the elimination of management fees and other service fees paid from one company to another within BancShares’ consolidated group.


	ISB		FCB		Other		Total		Adjustments			Consolidated
September 30, 2010
Total assets	$	2,802,818	$	18,107,427	$	2,298,026	$	23,208,271	$	(2,158,980	)	$	21,049,291
Loans and leases:
Covered by loss share agreements		—		2,222,660		—		2,222,660		—			2,222,660
Not covered by loss share agreements		2,259,999		9,285,310		—		11,545,309		—			11,545,309
Allowance for loan and lease losses		42,675		175,371		—		218,046		—			218,046
Goodwill		793		60,593		41,239		102,625		—			102,625
Nonperforming assets:
Covered by loss share agreements		—		429,913		—		429,913		—			429,913
Not covered by loss share agreements		77,220		91,912		16,519		185,651		—			185,651
Deposits		2,167,350		15,633,900		—		17,801,250		(58,222	)		17,743,028

December 31, 2009
Total assets	$	2,573,605	$	15,791,475	$	2,181,898	$	20,546,978	$	(2,080,915	)	$	18,466,063
Loans and leases:
Covered by loss share agreements		—		1,173,020		—		1,173,020		—			1,173,020
Not covered by loss share agreements		2,194,659		9,450,340		—		11,644,999		—			11,644,999
Allowance for loan and lease losses		41,675		130,607		—		172,282		—			172,282
Goodwill		793		101,832		—		102,625		—			102,625
Non performing assets:
Covered by loss share agreements		—		220,233		—		220,233		—			220,233
Not covered by loss share agreements		62,881		76,622		14,546		154,049		—			154,049
Deposits		1,967,824		13,406,484		—		15,374,308		(36,741	)		15,337,567

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 by loss share agreements		—		1,257,478		—		1,257,478		—			1,257,478
Not covered by loss share agreements		2,176,504		9,344,179		—		11,520,683		—			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 by loss share agreements		—		205,073		—		205,073		—			205,073
Not covered by loss share 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


	As of and for the quarter ended September 30, 2010
	ISB			FCB		Other			Total		Adjustments			Consolidated
Interest income	$	34,225		$	244,281	$	333		$	278,839	$	(211	)	$	278,628
Interest expense		9,946			33,295		5,658			48,899		(211	)		48,688

Net interest income		24,279			210,986		(5,325	)		229,940		—			229,940
Provision for credit losses		5,540			54,333		—			59,873		—			59,873

Net interest income after provision for credit losses		18,739			156,653		(5,325	)		170,067		—			170,067
Noninterest income		4,943			47,159		(263	)		51,839		(1,870	)		49,969
Noninterest expense		22,228			155,614		879			178,721		(1,870	)		176,851

Income (loss) before income taxes		1,454			48,198		(6,467	)		43,185		—			43,185
Income taxes		591			20,414		(5,566	)		15,439		—			15,439

Net income (loss)	$	863		$	27,784	$	(901	)	$	27,746	$	—		$	27,746


	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			180,064		(282	)		183,286		(2,433	)		180,853
Noninterest expense		22,701			143,701		530			166,932		(2,433	)		164,499

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 nine months ended September 30, 2010
	ISB			FCB		Other			Total		Adjustments			Consolidated
Interest income	$	100,700		$	595,398	$	1,249		$	697,347	$	(584	)	$	696,763
Interest expense		31,242			103,304		16,963			151,509		(584	)		150,925

Net interest income		69,458			492,094		(15,714	)		545,838		—			545,838
Provision for credit losses		14,286			94,343		—			108,629		—			108,629

Net interest income after provision for credit losses		55,172			397,751		(15,714	)		437,209		—			437,209
Noninterest income		12,132			348,642		(385	)		360,389		(5,849	)		354,540
Noninterest expense		67,249			468,636		1,541			537,426		(5,849	)		531,577

Income (loss) before income taxes		55			277,757		(17,640	)		260,172		—			260,172
Income taxes		156			103,240		(6,183	)		97,213		—			97,213

Net income (loss)	$	(101	)	$	174,517	$	(11,457	)	$	162,959	$	—		$	162,959


	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			320,278		(828	)		329,491		(7,530	)		321,961
Noninterest expense		68,008			416,132		1,502			485,642		(7,530	)		478,112

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company