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 March 31, 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 ¨ No ¨

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


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

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

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

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

(Number of shares outstanding, by class, as of May 10, 2010)

INDEX


		Page(s)
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets at March 31, 2010, December 31, 2009 and March 31, 2009	3

	Consolidated Statements of Income for the three month periods ended March 31, 2010, and March 31, 2009	4

	Consolidated Statements of Changes in Shareholders’ Equity for the three month periods ended March 31, 2010, and March 31, 2009	5

	Consolidated Statements of Cash Flows for the three month periods ended March 31, 2010, and March 31, 2009	6

	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	49

Item 4.	Controls and Procedures	49

PART II. OTHER INFORMATION		50

Item 1A.	Risk Factors	50

Item 6.	Exhibits	53

PART I

Item 1.

Financial Statements (Unaudited)

First Citizens BancShares, Inc. and Subsidiaries

Consolidated Balance Sheets


	March 31* 2010			December 31# 2009			March 31* 2009
	(thousands, except share data)
Assets
Cash and due from banks	$	745,180		$	480,242		$	471,799
Overnight investments		866,562			723,260			760,628
Investment securities available for sale		3,375,158			2,929,162			3,319,025
Investment securities held to maturity		3,324			3,603			5,745
Loans held for sale		59,530			67,381			124,246
Loans and leases:
Covered under loss share agreements		2,602,261			1,173,020			—
Not covered under loss share agreements		11,640,041			11,644,999			11,497,088
Less allowance for loan and lease losses		176,273			172,282			161,572

Net loans and leases		14,066,029			12,645,737			11,335,516
Premises and equipment		839,960			837,082			811,872
Other real estate owned:
Covered under loss share agreements		109,783			93,774			—
Not covered under loss share agreements		48,368			40,607			32,787
Income earned not collected		73,368			60,684			69,199
FDIC receivable for loss share agreements		687,455			249,842			—
Goodwill		102,625			102,625			102,625
Other intangible assets		14,522			6,361			3,423
Other assets		223,827			225,703			177,400

Total assets	$	21,215,691		$	18,466,063		$	17,214,265

Liabilities
Deposits:
Noninterest-bearing	$	3,762,622		$	3,215,414		$	2,777,067
Interest-bearing		14,081,205			12,122,153			11,452,481

Total deposits		17,843,827			15,337,567			14,229,548
Short-term borrowings		594,121			642,405			641,912
Long-term obligations		922,207			797,366			733,056
Other liabilities		186,943			129,610			173,472

Total liabilities		19,547,098			16,906,948			15,777,988
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		1,539,251			1,429,863			1,331,587
Accumulated other comprehensive loss		(24,859	)		(24,949	)		(49,511	)

Total shareholders’ equity		1,668,593			1,559,115			1,436,277

Total liabilities and shareholders’ equity	$	21,215,691		$	18,466,063		$	17,214,265

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 March 31
	2010		2009
	(thousands, except share and per share data)
Interest income
Loans and leases	$	187,074	$	156,584
Investment securities:
U. S. Government		9,350		21,159
Residential mortgage backed securities		1,564		1,148
Corporate bonds		2,135		278
State, county and municipal		33		51
Other		70		207

Total investment securities interest and dividend income		13,152		22,843
Overnight investments		474		225

Total interest income		200,700		179,652
Interest expense
Deposits		38,116		52,946
Short-term borrowings		756		1,321
Long-term obligations		10,792		9,580

Total interest expense		49,664		63,847

Net interest income		151,036		115,805
Provision for loan and lease losses		16,930		17,976

Net interest income after provision for loan and lease losses		134,106		97,829
Noninterest income
Gain on acquisitions		137,649		—
Cardholder and merchant services		23,788		21,492
Service charges on deposit accounts		18,827		17,851
Wealth management services		11,734		10,772
Fees from processing services		7,223		7,552
Securities gains		1,131		—
Other service charges and fees		4,648		4,349
Mortgage income		1,411		3,452
Insurance commissions		2,806		2,470
ATM income		1,655		1,729
Other		2,726		25

Total noninterest income		213,598		69,692
Noninterest expense
Salaries and wages		72,160		65,546
Employee benefits		18,311		17,319
Occupancy expense		17,836		15,406
Equipment expense		15,815		14,723
FDIC insurance expense		4,060		3,324
Foreclosure-related expenses		3,206		104
Other		41,562		38,818

Total noninterest expense		172,950		155,240

Income before income taxes		174,754		12,281
Income taxes		67,140		3,618

Net income	$	107,614	$	8,663

Average shares outstanding		10,434,453		10,434,453
Net income per share	$	10.31	$	0.83

See accompanying Notes to Consolidated Financial Statements.

First Citizens BancShares, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity


	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 loss:
Net income		—		—		—		8,663			—			8,663
Change in unrealized securities gains arising during period, net of $8,430 deferred tax benefit		—		—		—		—			(13,013	)		(13,013	)
Change in unrecognized loss on cash flow hedge, net of $249 deferred tax		—		—		—		—			382			382

Total comprehensive loss														(3,968	)

Cash dividends of $0.30 per share		—		—		—		(3,130	)		—			(3,130	)

Balance at March 31, 2009	$	8,757	$	1,678	$	143,766	$	1,331,587		$	(49,511	)	$	1,436,277

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		—		—		—		4,904			—			4,904
Comprehensive income:
Net income		—		—		—		107,614			—			107,614
Change in unrealized securities gains arising during period, net of $726 deferred tax benefit		—		—		—		—			966			966
Change in unrecognized loss on cash flow hedge, net of $572 deferred tax benefit		—		—		—		—			(876	)		(876	)

Total comprehensive income														107,704

Cash dividends of $0.30 per share		—		—		—		(3,130	)		—			(3,130	)

Balance at March 31, 2010	$	8,757	$	1,678	$	143,766	$	1,539,251		$	(24,859	)	$	1,668,593

At March 31, 2010, Accumulated Other Comprehensive Loss includes on an after-tax basis $22,396 in unrealized gains on investment securities available for sale, $43,131 resulting from the funded status of the defined benefit plan and an unrealized loss of $4,124 on cash flow hedges.

At March 31, 2009, Accumulated Other Comprehensive Income includes on an after-tax basis $32,378 in unrealized gains on investment securities available for sale, $75,815 resulting from the funded status of the defined benefit plan and an unrealized loss of $6,074 on a cash flow hedge.

See accompanying Notes to Consolidated Financial Statements.

First Citizens BancShares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows


	For the three months ended
	2010			2009
OPERATING ACTIVITIES
Net income	$	107,614		$	8,663
Adjustments to reconcile net income to cash provided (used) by operating activities:
Amortization of intangibles		1,578			481
Provision for loan and lease losses		16,930			17,976
Deferred tax (benefit) expense		(15,802	)		6,985
Change in current taxes payable		24,399			(2,465	)
Depreciation		15,299			13,634
Change in accrued interest payable		(4,761	)		1,962
Change in income earned not collected		(5,024	)		2,830
Gain on acquisitions		(137,649	)		—
Securities gains		(1,131	)		—
Origination of loans held for sale		(114,974	)		(232,086	)
Proceeds from sale of loans held for sale		124,196			177,480
Gain on sale of loans held for sale		(1,371	)		(250	)
Net amortization of premiums and discounts		10,991			7,763
FDIC receivable for loss share agreements		19,917			—
Net change in other assets		78,684			3,644
Net change in other liabilities		46,520			(33,759	)

Net cash provided (used) by operating activities		165,416			(27,142	)

INVESTING ACTIVITIES
Net change in loans and leases outstanding		200,380			138,834
Purchases of investment securities available for sale		(672,023	)		(479,176	)
Proceeds from maturities of investment securities held to maturity		279			130
Proceeds from maturities of investment securities available for sale		261,201			350,924
Proceeds from sales of investment securities available for sale		24,137			—
Net change in overnight investments		(143,302	)		(586,012	)
Additions to premises and equipment		(18,177	)		(26,597	)
Net cash received from acquisitions		106,489			—

Net cash used by investing activities		(241,016	)		(601,897	)

FINANCING ACTIVITIES
Net change in time deposits		85,986			134,249
Net change in demand and other interest-bearing deposits		712,543			381,536
Net change in short-term borrowings		(454,861	)		(5,192	)
Cash dividends paid		(3,130	)		(3,130	)

Net cash provided by financing activities		340,538			507,463

Change in cash and due from banks		264,938			(121,576	)
Cash and due from banks at beginning of period		480,242			593,375

Cash and due from banks at end of period	$	745,180		$	471,799

CASH PAYMENTS FOR:
Interest	$	54,425		$	61,885
Income taxes		130			98

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Unrealized securities (losses) gains	$	240		$	(21,443	)
Unrealized gain (loss) on cash flow hedge		(1,448	)		631
Transfers of loans to other real estate		23,770			2,831
FDIC-assisted transactions:
Assets acquired and cash received from FDIC		2,293,308			—
Liabilities assumed		2,155,861			—
Net assets acquired		137,447			—

On January 1, 2010, BancShares adopted changes in accounting for QSPEs and controlling financial interests. This non-cash transaction resulted in a $1,287 reduction in investment securities available for sale, a $97,291 increase in loans not covered under loss share agreements, a $681 increase in allowance for loan and lease losses, a $304 reduction in capitalized servicing reported in other assets, an $86,926 increase in long-term obligations, a $3,189 increase in deferred tax liabilities reported in other liabilities, and a $4,901 adjustment to the beginning balance of retained earnings.

See accompanying Notes to Consolidated Financial Statements.

First Citizens BancShares, Inc. and Subsidiaries

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 (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 acquired investment securities and assumed short-term borrowings and long-term obligations.

First Citizens BancShares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Dollars in thousands, except per share amounts)

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 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 the expected cash flows will generally result in a provision for credit losses. Subsequent increases in expected cash flows result in either 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 regarding the amount and timing of such cash flows. BancShares did not make such an estimate for impaired loans acquired from TVB and VB, but cash flow analyses were performed on all loans deemed impaired that were acquired from First Regional and SAB in order to determine the cash flows expected to be collected.

Receivable from FDIC for Loss Share Agreements

The FDIC receivable 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 with the assets 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 will be reviewed and updated prospectively as loss estimates related to covered loans and other real estate owned change and as reimbursements are received from the FDIC.

Other Real Estate Owned Covered under Loss Share Agreements

Other real estate owned (OREO) covered under loss share agreements with the FDIC are reported exclusive of expected reimbursement cash flows from the FDIC. Subsequent adjustments to the estimated recoverable value of covered OREO result in a reduction of covered OREO, 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 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. Further changes required evaluation of variable interests to determine whether a controlling financial interest exists. 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. 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.

First Citizens BancShares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Dollars in thousands, except per share amounts)

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 $67,656 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. The initial reports of losses under the First Regional loss share agreements are due in the third quarter of 2010.

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. The initial reports of losses under the SAB loss share agreements are due in the third quarter of 2010.

First Citizens BancShares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Dollars in thousands, except per share amounts)

The acquisitions of First Regional and SAB were accounted for using the acquisition method of accounting. The statement of net assets acquired 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 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 become available.

Noninterest income includes a bargain purchase gain of $137,447 that resulted from the 2010 Acquisitions. The gain resulted from the difference between the estimated fair values of acquired assets and assumed liabilities.

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 FDIC-assisted transaction, the fair value adjustments recorded and the resulting fair values recorded by FCB.


	January 29, 2010
	As recorded by First Regional		Fair value adjustments			As recorded by FCB
Assets
Cash and due from banks	$	37,508	$	—		$	37,508
Investment securities available for sale		3,250		—			3,250
Loans and leases		1,853,325		(576,171	) a		1,277,154
Other real estate owned		61,488		(20,353	) b		41,135
Income earned not collected		6,048		—			6,048
FDIC receivable for loss share agreements		—		365,170	c		365,170
Intangible assets		—		9,110	d		9,110
Other assets		23,782		(500	) e		23,282

Total assets acquired	$	1,985,401	$	(222,744	)	$	1,762,657

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	)

Gain on acquisition of First Regional						$	110,327

First Citizens BancShares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Dollars in thousands, except per share amounts)


	March 5, 2010
	As recorded by SAB		Fair value adjustments			As recorded by FCB
	($ in thousands)
Assets
Cash and due from banks	$	37,016	$	—		$	37,016
Investment securities available for sale		66,968		—			66,968
Loans and leases		411,315		(123,707	) a		287,608
Other real estate owned		15,220		(7,200	) b		8,020
Income earned not collected		1,612		—			1,612
FDIC receivable for loss share agreements		—		92,360	c		92,360
Intangible assets		—		629	d		629
Other assets		4,473		—			4,473

Total assets acquired	$	536,604	$	(37,918	)	$	498,686

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	)

Cash received from the FDIC						$	31,965

Gain on acquisition of Sun American						$	27,120

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 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.

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.

First Citizens BancShares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Dollars in thousands, except per share amounts)

Note C

Investments

The aggregate values of investment securities at March 31, 2010 and 2009, along with unrealized 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
March 31, 2010
U. S. Government	$	2,681,265	$	11,367	$	1,119	$	2,691,513
Corporate bonds		480,576		6,054		—		486,630
Residential mortgage-backed securities		174,519		3,281		436		177,364
Equity securities		1,544		16,836		—		18,380
State, county and municipal		1,244		30		3		1,271

Total investment securities available for sale	$	3,339,148	$	37,568	$	1,558	$	3,375,158

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

March 31, 2009
U. S. Government	$	2,959,707	$	39,863	$	208	$	2,999,362
Corporate bonds		204,478		670		—		205,148
Residential mortgage-backed securities		91,852		2,869		100		94,621
Equity securities		3,949		8,128		—		12,077
State, county and municipal		2,793		29		13		2,809
Other		3,006		2,002		—		5,008

Total investment securities available for sale	$	3,265,785	$	53,561	$	321	$	3,319,025

Investment securities held to maturity
March 31, 2010
Residential mortgage-backed securities	$	3,173	$	275	$	26	$	3,422
State, county and municipal		151		—		—		151

Total investment securities held to maturity	$	3,324	$	275	$	26	$	3,573

December 31, 2009
Residential mortgage-backed securities	$	3,452	$	230	$	—	$	3,682
State, county and municipal		151		1		—		152

Total investment securities held to maturity	$	3,603	$	231	$	—	$	3,834

March 31, 2009
Residential mortgage-backed securities	$	4,153	$	249	$	27	$	4,375
State, county and municipal		1,592		74		—		1,666

Total investment securities held to maturity	$	5,745	$	323	$	27	$	6,041

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.

First Citizens BancShares, Inc. and Subsidiaries

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.


	March 31, 2010				December 31, 2009				March 31, 2009
	Cost		Fair Value		Cost		Fair Value		Cost		Fair Value
Investment securities available for sale
Maturing in:
One year or less	$	2,004,230	$	2,013,062	$	1,544,063	$	1,554,657	$	1,315,063	$	1,331,883
One through five years		1,159,558		1,167,353		1,226,202		1,233,604		1,852,695		1,876,221
Five through 10 years		9,403		9,422		1,943		2,201		3,006		5,008
Over 10 years		164,413		166,941		118,808		122,078		91,072		93,836
Equity securities		1,544		18,380		2,377		16,622		3,949		12,077

Total investment securities available for sale	$	3,339,148	$	3,375,158	$	2,893,393	$	2,929,162	$	3,265,785	$	3,319,025

Investment securities held to maturity
Maturing in:
One year or less	$	—	$	—	$	—	$	—	$	—	$	—
One through five years		151		151		151		152		151		151
Five through 10 years		3,032		3,240		3,306		3,497		3,992		4,179
Over 10 years		141		182		146		185		1,602		1,711

Total investment securities held to maturity	$	3,324	$	3,573	$	3,603	$	3,834	$	5,745	$	6,041

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


	Less than 12 months				12 months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
March 31, 2010
Investment securities available for sale:
U.S. Government	$	644,407	$	1,119	$	—	$	—	$	644,407	$	1,119
Residential mortgage-backed securities		33,651		352		2,332		84		35,983		436
State, county and municipal		—		—		438		3		438		3

Total	$	678,058	$	1,471	$	2,770	$	87	$	680,828	$	1,558

Investment securities held to maturity:
Mortgage-backed securities	$	—	$	—	$	29	$	26	$	29	$	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

March 31, 2009
Investment securities available for sale:
U.S. Government	$	205,180	$	208	$	—	$	—	$	205,180	$	208
Residential mortgage-backed securities		3,043		34		2,781		66		5,824		100
State, county and municipal		121		4		426		9		547		13

Total	$	208,344	$	246	$	3,207	$	75	$	211,551	$	321

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

First Citizens BancShares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Dollars in thousands, except per share amounts)

Investment securities with an aggregate fair value of $2,799 have had continuous unrealized losses for more than twelve months as of March 31, 2010 with an aggregate unrealized loss of $113. These 25 investments include residential mortgage-backed and state, county and municipal securities. None of the unrealized losses identified as of March 31, 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.

At March 31, 2010, 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.

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


	Three months ended March 31,
	2010			2009
Gross gains on sales of investment securities available for sale	$	2,860		$	—
Gross losses on sales of investment securities available for sale		(1,729	)		—
Other than temporary impairment loss on an equity investment		—			—

Total securities gains (losses)	$	1,131		$	—

Investment securities having an aggregate carrying value of $1,720,227 at March 31, 2010, $2,121,783 at December 31, 2009 and $1,933,113 at March 31, 2009, were pledged as collateral to secure public funds on deposit, to secure certain short-term borrowings and for other purposes as required by law.

First Citizens BancShares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Dollars in thousands, except per share amounts)

Note D

Loans and Leases

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


	March 31, 2010		December 31, 2009		March 31, 2009
Loans covered by loss share agreements	$	2,602,261	$	1,173,020	$	—

Loans and leases not covered by loss share agreements
Real estate:
Construction and land development		644,031		622,354		735,619
Commercial mortgage		4,589,291		4,552,078		4,336,382
Residential mortgage		912,955		864,704		862,646
Revolving mortgage		2,159,581		2,147,223		1,984,249
Other mortgage		161,770		158,187		152,561

Total real estate loans		8,467,628		8,344,546		8,071,457
Commercial and industrial		1,793,195		1,832,670		1,857,092
Consumer		864,238		941,986		1,132,059
Lease financing		316,912		330,713		344,054
Other		198,068		195,084		92,426

Total loans and leases not covered by loss share agreements		11,640,041		11,644,999		11,497,088

Total loans and leases		14,242,302		12,818,019		11,497,088
Less allowance for loan and lease losses		176,273		172,282		161,572

Net loans and leases	$	14,066,029	$	12,645,737	$	11,335,516


	March 31, 2010
	Impaired at acquisition date		All other acquired loans		Total
Loans covered by loss share agreements:
Real estate:
Construction and land development	$	183,009	$	621,676	$	804,685
Commercial mortgage		192,190		987,334		1,179,524
Residential mortgage		41,102		250,191		291,293
Revolving mortgage		4,945		16,720		21,665
Other mortgage		20,865		54,306		75,171

Total real estate loans		442,111		1,930,227		2,372,338
Commercial and industrial		35,895		166,579		202,474
Consumer		1,478		8,224		9,702
Other		5,066		12,681		17,747

Total loans covered by loss share agreements	$	484,550	$	2,117,711	$	2,602,261

First Citizens BancShares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Dollars in thousands, except per share amounts)

Contractually required payments receivable, estimated cash flows to be collected, nonaccretable difference, accretable yield and the resulting fair values of acquired impaired and nonimpaired loans at the date of acquisition from First Regional and SAB are provided in the following table:


Contractually required payments receivable at acquisition:
Commercial	$	975,208
Consumer		16,022

Subtotal		991,230
Nonaccretable difference		(533,080	)

Cash flows expected to be collected at acquisition		458,150
Accretable yield		(45,523	)

Fair value of impaired loans acquired at acquisition	$	412,627

Nonimpaired loans receivable	$	1,446,534
Discount to reflect fair value		(294,399	)

Fair value of nonimpaired loans acquired at acquisition	$	1,152,135

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.


	March 31, 2010		December 31, 2009
Impaired loans:
Covered under loss share agreements	$	484,550	$	116,446
Not covered under loss share agreements		49,050		50,797

Total	$	533,600	$	167,243

Allowances related to noncovered impaired loans	$	3,150	$	9,611
Noncovered impaired loans with no allowances	$	5,392		9,902

Acquired loans covered under loss share agreements with the FDIC (Covered Loans) deemed 100 percent impaired as of date of acquisition are placed on nonaccrual status. Interest previously accrued on Covered Loans placed on nonaccrual status is charged against interest income, and the FDIC receivable is adjusted by the amount of any estimated reimbursement. Payments received are applied against the principal balance of the fully impaired 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 uncertainty regarding the timing of future cash flows, no accretable yield is being recorded for loans deemed impaired at acquisition from TVB and VB. Loans acquired from TVB and VB deemed impaired at date of acquisition are being accounted for using the cost recovery method due to the uncertainty regarding the timing of future cash flows. Cash flow analyses were completed for loans deemed impaired at acquisition from First Regional and SAB and therefore the accretion method is being applied with respect to recognition of accretable yield on those loans.

The following table documents changes in the carrying value of acquired impaired loans during the three month period ended March 31, 2010:


Balance, December 31, 2009	$	75,368
Fair value of acquired impaired loans covered under loss share agreements		412,627
Reductions for repayments, foreclosures and decreases in fair value		(3,445	)

Balance, March 31, 2010	$	484,550

First Citizens BancShares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Dollars in thousands, except per share amounts)

Information regarding the March 31, 2010 carrying amount of acquired loans that were identified as impaired at acquisition follows:

The cash flow analyses prepared for loans originated by First Regional and SAB are being used to determine the amount of accretable yield recognized on those loans identified as impaired at acquisition.


	Accretable Yield
Balance at December 31, 2009	$	—
Additions		45,523
Accretion		(2,105	)
Reclassifications from (to) nonaccretable difference		—
Disposals		—

Balance at March 31, 2010	$	43,418

Note E

Allowance for Loan and Lease Losses

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


	2010			2009
Balance, January 1	$	172,282		$	157,569
Adjustment resulting from change in accounting for QSPEs and controlling financial interests		681			—
Provision for loan and lease losses		16,930			17,976
Loans and leases charged off		(14,858	)		(14,976	)
Loans and leases recovered		1,238			1,003

Net charge-offs		(13,620	)		(13,973	)

Balance, March 31	$	176,273		$	161,572


	March 31, 2010		December 31, 2009		March 31, 2009
Allowance for loan and lease losses allocated to:
Loans covered under loss share agreements	$	6,810	$	3,500	$	—
Loans not covered under loss share agreements		169,463		168,782		161,572

Total	$	176,273	$	172,282	$	161,572

First Citizens BancShares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Dollars in thousands, except per share amounts)

Note F

FDIC Receivable for Loss Share Agreements

The following table provides changes in the FDIC receivable during the first three months of 2010:


Balance at December 31, 2009	$	249,842
Additional receivable from 2010 acquisitions		457,530
Accretion of premium and discount, net		749
Receipt of payment from FDIC		(22,504	)
Post-acquisition adjustments		1,838

Balance at March 31, 2010	$	687,455

Post-acquisition adjustments include changes in loss estimates related to covered loans and other real estate owned.

The FDIC receivable 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.

For loans covered under 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 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 loan and lease 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 loan and lease losses had been recorded.

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 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.

First Citizens BancShares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Dollars in thousands, except per share amounts)


	March 31, 2010				December 31, 2009				March 31, 2009
	Carrying Value		Fair Value		Carrying Value		Fair Value		Carrying Value		Fair Value
Cash and due from banks	$	745,180	$	745,180	$	480,242	$	480,242	$	471,799	$	471,799
Overnight investments		866,562		866,562		723,260		723,260		760,628		760,628
Investment securities available for sale		3,375,158		3,375,158		2,929,162		2,929,162		3,319,025		3,319,025
Investment securities held to maturity		3,324		3,574		3,603		3,834		5,745		6,041
Loans held for sale		59,530		59,530		67,381		67,381		124,246		124,246
Loans covered under loss share agreements, net of allowance for loan and lease losses		2,595,451		2,595,451		1,169,520		1,169,520		—		—
Loans and leases not covered under loss share agreements, net of allowance for loan and lease losses		11,470,578		10,873,747		11,476,217		11,060,532		11,335,516		11,259,829
FDIC receivable for loss share agreements		687,455		687,455		249,842		249,842		—		—
Income earned not collected		73,368		73,368		60,684		60,684		69,199		69,199
Stock issued by:
Federal Home Loan Bank of Atlanta		50,688		50,688		47,361		47,361		47,336		47,336
Federal Home Loan Bank of San Francisco		17,429		17,429		5,592		5,592		—		—
Federal Home Loan Bank of Seattle		4,490		4,490		4,490		4,490		—		—
Deposits		17,843,827		17,907,687		15,337,567		15,396,423		14,229,548		14,469,307
Short-term borrowings		594,121		594,121		642,405		642,405		641,912		641,912
Long-term obligations		922,207		923,632		797,366		788,004		733,056		725,448
Accrued interest payable		33,119		33,119		37,881		37,881		52,885		52,885

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.

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.

First Citizens BancShares, Inc. and Subsidiaries

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 March 31, 2010 and December 31, 2009:


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 non-observable inputs (Level 3 inputs)
March 31, 2010
Assets measured at fair value
Investment securities available for sale
U.S. Government	$	2,691,513	$	2,691,513	$	—	$	—
Corporate bonds		486,630		486,630		—		—
Residential mortgage-backed securities		177,364		—		177,364		—
Equity securities		18,380		18,380		—		—
State, county, municipal		1,271		—		1,271		—
Other		—		—		—		—

Total	$	3,375,158	$	3,196,523	$	178,635	$	—

Liabilities measured at fair value
Interest rate swaps accounted for as cash flow hedges	$	6,815	$	—	$	6,815	$	—
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	$	—

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 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. At December 31, 2009, the fair value for the retained interest in a 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 asset transfers 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 quarter ended March 31, 2010.

At March 31, 2010, other assets includes $72,607 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 March 31, 2010.

First Citizens BancShares, Inc. and Subsidiaries

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 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 three 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		$	6,086
Total gains (losses), realized or unrealized:
Included in earnings		—			—
Included in other comprehensive income		—			266
Purchases, sales, issuances and settlements, net		—			(1,344	)
Transfers in/out of Level 3		(1,287	)		—

Ending balance, March 31	$	—		$	5,008

No gains or losses were reported for the three month periods ended March 31, 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 March 31, 2010 and December 31, 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)
March 31, 2010
Loans held for sale	$	59,530	$	—	$	59,530	$	—
Impaired loans:
Covered under loss share agreements		484,550		—		—		484,550
Not covered under loss share agreements		43,658		—		—		43,658
December 31, 2009
Loans held for sale		67,381		—		67,381		—
Impaired loans:
Covered under loss share agreements		112,946		—		—		112,946
Not covered under loss share agreements		40,895		—		—		40,895

First Citizens BancShares, Inc. and Subsidiaries

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 as of March 31, 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 three month period ended March 31, 2010, foreclosures of other real estate not covered under loss share agreements totaled $11,652, all of which were valued using Level 3 inputs. In connection with the measurement and initial recognition of noncovered OREO, BancShares recognized charge-offs totaling $4,405. Based on updates to Level 3 inputs, noncovered OREO with a fair value of $2,048 as of March 31, 2010 incurred write-downs that totaled $316 during the three month period ended March 31, 2010.

Note H

Employee Benefit Plans

Pension expense is a component of employee benefits expense. For the three month periods ended March 31, 2010 and 2009, the components of pension expense are as follows:


	Three month periods ended March 31,
	2010			2009
Service cost	$	3,004		$	2,613
Interest cost		5,229			4,283
Expected return on assets		(6,521	)		(5,167	)
Amortization of prior service cost		47			41
Amortization of net actuarial loss		925			713

Total pension expense	$	2,684		$	2,483

For the three month periods ended March 31, 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, respectively.

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 March 31, 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 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 March 31, 2010, collateral with a fair value of $9,469 was pledged to secure the existing obligation under the interest rate swaps. For both swaps, settlement occurs quarterly.

First Citizens BancShares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Dollars in thousands, except per share amounts)


	March 31, 2010				December 31, 2009
	Notional amount		Estimated fair value of liability		Notional amount		Estimated fair value of (asset) liability
2006 interest rate swap hedging variable rate exposure on trust preferred capital securities 2006-2011	$	115,000	$	6,708	$	115,000	$	7,424
2009 interest rate swap hedging variable rate exposure on trust preferred capital securities 2011-2016		115,000		107		115,000		(2,057	)

			$	6,815			$	5,367

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 three month periods ended March 31, 2010 and 2009, BancShares recognized interest expense of $1,473 and $1,126, respectively, resulting from the interest rate swaps, 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 three month periods ended March 31, 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 comprehensive (loss) income recognized during three month period ended March 31, net of tax		(876	)		382

Accumulated other comprehensive loss resulting from interest rate swaps as of March 31, net of tax	$	(4,124	)	$	(6,074	)

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

First Citizens BancShares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Dollars in thousands, except per share amounts)

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.

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 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 March 31, 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
March 31, 2010
Total assets	$	2,770,343	$	18,485,698	$	2,181,898	$	23,437,939	$	(2,222,248	)	$	21,215,691
Loans and leases:
Covered under loss share agreements				2,602,261		—		2,602,261		—			2,602,261
Not covered under loss share agreements		2,193,197		9,446,844		—		11,640,041		—			11,640,041
Allowance for loan and lease losses		41,175		135,098		—		176,273		—			176,273
Goodwill		793		101,832		—		102,625		—			102,625
Nonperforming assets:
Covered under loss share agreements		—		602,766		—		602,766		—			602,766
Not covered under loss share agreements		61,435		82,258		15,888		159,581		—			159,581
Deposits		2,154,941		15,723,922		—		17,878,863		(35,036	)		17,843,827

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 under loss share agreements		—		1,173,020		—		1,173,020		—			1,173,020
Not covered under 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
Nonperforming assets:
Covered under loss share agreements		—		220,233		—		220,233		—			220,233
Not covered under 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

March 31, 2009
Total assets	$	2,644,538	$	14,406,955	$	2,243,432	$	19,294,925	$	(2,080,660	)	$	17,214,265
Loans and leases		2,172,640		9,324,448		—		11,497,088		—			11,497,088
Allowance for loan and lease losses		39,840		121,732		—		161,572		—			161,572
Goodwill		793		101,832		—		102,625		—			102,625
Nonperforming assets		63,957		34,833		—		98,790		—			98,790
Deposits		2,044,261		12,215,539		—		14,259,800		(30,252	)		14,229,548

First Citizens BancShares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Dollars in thousands, except per share amounts)


	For the three months ended March 31, 2010
	ISB			FCB		Other			Total		Adjustments			Consolidated
Interest income	$	32,643		$	167,753	$	503		$	200,899	$	(199	)	$	200,700
Interest expense		10,881			33,334		5,648			49,863		(199	)		49,664

Net interest income		21,762			134,419		(5,145	)		151,036		—			151,036
Provision for loan and lease losses		3,857			13,073		—			16,930		—			16,930

Net interest income after provision for loan and lease losses		17,905			121,346		(5,145	)		134,106		—			134,106
Noninterest income		3,333			212,312		18			215,663		(2,065	)		213,598
Noninterest expense		22,397			152,310		308			175,015		(2,065	)		172,950

Income (loss) before income taxes		(1,159	)		181,348		(5,435	)		174,754		—			174,754
Income taxes		(393	)		69,441		(1,908	)		67,140		—			67,140

Net income (loss)	$	(766	)	$	111,907	$	(3,527	)	$	107,614	$	—		$	107,614


	For the three months ended March 31, 2009
	ISB			FCB		Other			Total		Adjustments			Consolidated
Interest income	$	32,664		$	144,980	$	2,176		$	179,820	$	(168	)	$	179,652
Interest expense		15,136			43,139		5,740			64,015		(168	)		63,847

Net interest income		17,528			101,841		(3,564	)		115,805		—			115,805
Provision for loan and lease losses		9,077			8,899		—			17,976		—			17,976

Net interest income after provision for loan and lease losses		8,451			92,942		(3,564	)		97,829		—			97,829
Noninterest income		3,219			69,071		(1	)		72,289		(2,597	)		69,692
Noninterest expense		22,126			135,251		460			157,837		(2,597	)		155,240

Income (loss) before income taxes		(10,456	)		26,762		(4,025	)		12,281		—			12,281
Income taxes		(3,768	)		8,799		(1,413	)		3,618		—			3,618

Net income (loss)	$	(6,688	)	$	17,963	$	(2,612	)	$	8,663	$	—		$	8,663

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 2010, the reclassifications have no effect on shareholders’ equity or net income as previously reported. Unless otherwise noted, the terms we, us and BancShares refer to the consolidated financial position and consolidated results of operations for BancShares.

FDIC-ASSISTED TRANSACTIONS

First Regional Bank. On January 29, 2010, FCB entered into an agreement with the FDIC to purchase substantially all the assets and assume the majority of the liabilities of First Regional Bank (First Regional) of Los Angeles, California. Immediately prior to the effectiveness of the acquisition, the FDIC had been appointed Receiver of First Regional 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.


First Regional Bank		Table 1


	January 29, 2010
	As recorded by First Regional		Fair value adjustments			As recorded by FCB
	($ in thousands)
Assets
Cash and due from banks	$	37,508	$	—		$	37,508
Investment securities available for sale		3,250		—			3,250
Loans and leases		1,853,325		(576,171	)		1,277,154
Other real estate owned		61,488		(20,353	)		41,135
Income earned not collected		6,048		—			6,048
FDIC receivable for loss share agreements		—		365,170			365,170
Intangible assets		—		9,110			9,110
Other assets		23,782		(500	)		23,282

Total assets acquired	$	1,985,401	$	(222,744	)	$	1,762,657

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			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	)

Gain on acquisition of First Regional						$	110,327

The loans and other real estate acquired through foreclosure are covered by loss share agreements that provide for the FDIC to absorb 80 percent of losses incurred on covered loans and other real estate in excess of $41.8 million. The 80 percent coverage ratio applies to losses up to $1.0 billion with losses in excess of $1.0 billion covered by the FDIC at a rate of 95 percent. FCB recorded a receivable from the FDIC equal to $365.2 million as an estimate of the fair value of the amount that will be reimbursed by the FDIC from the loss share agreements. The Purchase and Assumption Agreement between FCB and the FDIC 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.

The $110.3 million gain is included within noninterest income in the Consolidated Statements of Income. Our operating results for the period ended March 31, 2010 include the results of the acquired assets and liabilities for the period from January 29, 2010 through March 31, 2010. Accretion and amortization of various purchase accounting discounts and premiums were recorded in the first quarter of 2010.

Sun American Bank. On March 5, 2010, FCB entered into an agreement with the FDIC to purchase substantially all the assets and assume the majority of the liabilities of Sun American Bank (SAB) of Boca Raton, Florida. Immediately prior to the effectiveness of the acquisition, the FDIC had been appointed Receiver of SAB by the Florida Office of Financial Regulation.

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.


Sun American Bank		Table 2


	March 5, 2010
	As recorded by SAB		Fair value adjustments			As recorded by FCB
	($ in thousands)
Assets
Cash and due from banks	$	37,016	$	—		$	37,016
Investment securities available for sale		66,968		—			66,968
Loans and leases		411,315		(123,707	)		287,608
Other real estate owned		15,220		(7,200	)		8,020
Income earned not collected		1,612		—			1,612
FDIC receivable for loss share agreements		—		92,360			92,360
Intangible assets		—		629			629
Other assets		4,473		—			4,473

Total assets acquired	$	536,604	$	(37,918	)	$	498,686

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			42,533
Long-term obligations		37,000		3,082			40,082
Other liabilities		853		51			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	)

Cash received from the FDIC						$	31,965

Gain on acquisition of Sun American						$	27,120

The loans and other real estate acquired through foreclosure are covered by loss share agreements that provide for the FDIC to absorb 80 percent of all losses incurred on covered loans and other real estate up to $99.0 million. Losses in excess of $99.0 million are covered by the FDIC at a rate of 95 percent. FCB recorded a receivable from the FDIC equal to $92.4 million as an estimate of the fair value of the amount that will be reimbursed by the FDIC from the loss share agreements. The Purchase and Assumption Agreement between FCB and the FDIC 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.

The $27.1 million gain is included within noninterest income in the Consolidated Statements of Income. Our operating results for the period ended March 31, 2010 include the results of the acquired assets and liabilities for the period from March 5, 2010 through March 31, 2010. Accretion and amortization of various purchase accounting discounts and premiums were recorded in the first quarter.

The 2010 transactions involving First Regional and SAB represented the third and fourth transactions involving BancShares since July 17, 2009. Table 3 provides information regarding the four entities from which we have acquired assets and assumed liabilities in FDIC-assisted transactions during 2010 and 2009.


FDIC-Assisted Transactions		Table 3


			Fair value of
Entity	Date of transaction	# branches	Loans acquired		Deposits assumed		Short-term borrowings assumed		Long-term obligations assumed		Gain on acquisition
				(thousands)
Sun American Bank	March 5, 2010	12	$	287,608	$	420,012	$	42,533	$	40,082	$	27,120
First Regional Bank	January 29, 2010	8		1,277,154		1,287,719		361,876		—		110,327
Venture Bank	September 11, 2009	18		456,995		709,091		—		55,618		46,242
Temecula Valley Bank	July 17, 2009	11		855,583		965,431		79,096		—		58,728

Total all FDIC assisted transactions		49	$	2,877,340	$	3,382,253	$	483,505	$	95,700	$	242,417

EXECUTIVE OVERVIEW AND PERFORMANCE SUMMARY

BancShares is a financial holding company headquartered in Raleigh, North Carolina that offers full-service banking through two wholly-owned banking subsidiaries, First-Citizens Bank & Trust Company (FCB), a North Carolina-chartered bank, and IronStone Bank (ISB), a federally-chartered thrift institution. FCB operates branches in seven states and the District of Columbia. ISB operates branches in urban areas of twelve states. Beyond the traditional branch network, we offer customer sales and service through telephone, online banking and an extensive ATM network.

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

Various external factors influence the focus of our business efforts. Due to unprecedented asset quality challenges, capital shortages and the onset of a global economic recession, the U.S. banking industry experienced serious financial challenges during 2008, 2009 and early 2010. During this time of industry-wide turmoil, while maintaining our long-standing attention to prudent banking practices, we have modified our growth focus to benefit from the opportunities that currently exist through participation in FDIC-assisted transactions involving distressed financial institutions. BancShares’ ability to participate in FDIC-assisted transactions creates opportunities to significantly increase our business volumes in markets in which we presently operate and to expand our banking presence to additional markets which we deem demographically attractive. Additionally, due to purchase discounts and loss share agreements that protect us from a substantial portion of the asset quality risk that we would otherwise incur, we are able to create a substantial portion of the equity required to fund the acquisition transactions through significant acquisition gains.

Despite the significant gain recognition we have enjoyed during 2010 and 2009, recessionary economic conditions, high rates of unemployment, and a growing inability for some businesses and consumers to meet their debt service obligations continue to exert pressure on our core earnings and profitability.

In addition, real estate demand in many of our markets remains weak, resulting in a decline in real estate values that has adversely affected collateral values for many borrowers. In particular, the stressed residential real estate markets in Georgia and Florida had a material negative impact on the profitability of ISB during 2009 and will likely continue to adversely impact credit costs in 2010.

The demand for our deposit and treasury services products has been influenced by extraordinarily low interest rates and instability in alternative investment markets. Our balance sheet liquidity position remains strong, but our continuing participation in FDIC-assisted transactions creates pressure on liquidity management due to the uncertainty regarding retention of assumed deposit liabilities at a reasonable cost.

Ongoing economic weakness continues to have a significant impact on virtually all financial institutions in the United States, including BancShares. In addition to the various actions previously enacted by governmental agencies and the likelihood of sweeping reform of financial institution regulation, it is likely that further changes will occur as the Federal government attempts to restore stability to the financial services sector.

We operate in diverse geographic markets and can increase our business volumes and profitability by offering competitive products and superior customer service. In addition to our focus on retaining customers of the four banks involved in the FDIC-assisted transactions, we continue to concentrate our marketing efforts on business owners, medical and other professionals and financially active individuals. We seek to increase fee income in areas such as wealth management, cardholder and merchant services and insurance and treasury services. Leveraging on our investments in technology, we also focus on opportunities to generate income by providing various processing services to other banks.

BancShares’ consolidated net income during the first quarter of 2010 equaled $107.6 million, an increase of $99.0 million over the $8.7 million earned during the corresponding period of 2009. The FDIC-assisted transactions involving First Regional and SAB generated after-tax gains that totaled $83.7 million. The annualized return on average assets amounted to 2.19 percent during the first quarter of 2010, compared to 0.21 percent during the same period of 2009. The annualized return on average equity was 27.40 percent during 2010, up from 2.44 percent in 2009. Net income per share during the first quarter of 2010 totaled $10.31, compared to $0.83 during the first quarter of 2009.

Net interest income increased $35.2 million from $115.8 million in the first quarter of 2009 to $151.0 million in 2010, an increase of 30.4 percent resulting from balance sheet growth and a significant improvement in the net yield on interest-earning assets. The net yield on interest-earning assets improved by 43 basis points from 3.09 in the first quarter 2009 to 3.52 percent in 2010 due to favorable changes in deposit costs and the positive impact of yields and rates on acquired loans and assumed deposits.

Noninterest income increased $143.9 million, including the $137.6 million pre-tax acquisition gains and increases in cardholder and merchant services income. Noninterest expense increased $17.7 million or 11.4 percent from 2009 to 2010 on acquisition related activities, primarily the result of operating costs for acquired branches and expenses related to the operation and disposition of other real estate.


Financial Summary		Table 4


	2010			2009
	First Quarter			Fourth Quarter			Third Quarter			Second Quarter			First Quarter
				(thousands, except share data and ratios)
Summary of Operations
Interest income	$	200,700		$	191,976		$	189,690		$	176,841		$	179,652
Interest expense		49,664			49,575			54,413			59,809			63,847

Net interest income		151,036			142,401			135,277			117,032			115,805
Provision for loan and lease losses		16,930			21,617			18,265			20,759			17,976

Net interest income after provision for loan and lease losses		134,106			120,784			117,012			96,273			97,829
Gain on acquisitions		137,649			(536	)		104,970			—			—
Other noninterest income		75,949			82,800			77,661			73,164			69,692
Noninterest expense		172,950			174,165			166,277			160,868			155,240

Income before income taxes		174,754			28,883			133,366			8,569			12,281
Income taxes		67,140			9,883			50,898			2,369			3,618

Net income	$	107,614		$	19,000		$	82,468		$	6,200		$	8,663

Net interest income, taxable equivalent	$	151,870		$	143,446		$	136,426		$	118,350		$	117,225

Per Share Data
Net income	$	10.31		$	1.82		$	7.90		$	0.59		$	0.83
Cash dividends		0.300			0.300			0.300			0.300			0.300
Market price at period end (Class A)		198.76			164.01			159.10			133.65			131.80
Book value at period end		159.91			149.42			145.16			137.45			137.65
Tangible book value at period end		148.68			138.98			134.66			127.32			127.48

Selected Quarterly Averages
Total assets	$	19,957,379		$	18,386,775		$	17,892,599		$	17,309,656		$	16,945,383
Investment securities		3,060,237			3,134,971			3,596,422			3,578,604			3,246,898
Loans and leases (covered and not covered)		13,789,081			12,877,150			12,078,390			11,621,450			11,659,874
Interest-earning assets		17,507,787			16,319,611			15,862,964			15,725,319			15,373,383
Deposits		16,576,039			15,291,720			14,792,449			14,316,103			13,897,701
Interest-bearing liabilities		14,681,127			13,467,532			13,137,412			12,840,612			12,596,452
Long-term obligations		964,944			795,646			810,049			734,042			733,087
Shareholders’ equity	$	1,593,072		$	1,535,828		$	1,457,599		$	1,433,427		$	1,438,109
Shares outstanding		10,434,453			10,434,453			10,434,453			10,434,453			10,434,453

Selected Quarter-End Balances
Total assets	$	21,215,691		$	18,466,063		$	18,512,878		$	17,317,880		$	17,214,265
Investment securities		3,378,482			2,932,765			3,287,309			3,749,525			3,324,770
Loans and leases (covered and not covered)		14,242,302			12,818,019			12,778,161			11,638,965			11,497,088
Deposits		17,843,827			15,337,567			15,348,955			14,358,149			14,229,548
Shareholders’ equity		1,668,593			1,559,115			1,514,684			1,434,213			1,436,277

Selected Ratios and Other Data
Rate of return on average assets (annualized)		2.19	%		0.41	%		1.83	%		0.14	%		0.21	%
Rate of return on average shareholders’ equity (annualized)		27.40			4.92			22.45			1.73			2.44
Net yield on interest-earning assets (taxable equivalent)		3.52			3.49			3.41			3.01			3.09
Allowance for loan and lease losses to noncovered loans and leases at period end		1.49			1.45			1.43			1.41			1.41
Nonperforming assets to total loans and leases plus other real estate at period end:
Covered under loss share agreements		22.23			17.39			15.08			—			—
Not covered under loss share agreements		1.37			1.32			0.92			0.89			0.86
Tier 1 risk-based capital ratio		13.83			13.34			13.33			13.30			13.29
Total risk-based capital ratio		16.07			15.59			15.58			15.59			15.57
Leverage capital ratio		9.36			9.54			9.73			9.68			9.83
Dividend payout ratio		2.91			16.48			3.80			50.85			36.14
Average loans and leases to average deposits		83.19			84.21			81.65			81.18			83.90

Average loans and leases includes nonaccrual loans and loans held for sale.

INTEREST-EARNING ASSETS

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

We have historically focused on maintaining high asset quality, which results in a loan and lease portfolio subjected to strenuous underwriting and monitoring procedures. That focus on asset quality also influences the composition of our investment securities portfolio. At March 31, 2010, United States Treasury and government agency securities represent 79.7 percent of our investment securities portfolio; corporate bonds issued under the FDIC’s Treasury Liquidity Guaranty Program represent 14.4 percent; and residential mortgage-backed securities represent 5.3 percent of the total portfolio. Overnight investments are selectively made with other financial institutions that are within our risk tolerance.

During 2010, changes in our interest-earning assets primarily reflect the impact of assets acquired in the FDIC-assisted transactions. The investment securities portfolio changes are primarily based on trends among loans and leases, deposits and short-term borrowings. When inflows arising from deposit and treasury services products exceed loan and lease demand, we invest excess funds in the securities portfolio. Conversely, when loan demand exceeds growth in deposits and short-term borrowings, we allow overnight investments to decline and use proceeds from maturing securities to fund loan demand.

During the first quarter of 2010, interest-earning assets averaged $17.51 billion, an increase of $1.19 billion or 7.3 percent since December 31, 2009 and $2.13 billion or 13.9 percent from the first quarter of 2009. This increase primarily results from assets acquired in the FDIC-assisted transactions.

Loans and leases. At March 31, 2010, December 31, 2009 and March 31,2009, loans and leases totaled $14.24 billion, $12.82 billion and $11.50 billion, respectively. Loans covered under loss share agreements with the FDIC totaled $2.60 billion at March 31, 2010 compared to $1.17 billion at December 31, 2009. There were no covered loans outstanding at March 31, 2009. Loans not covered under loss share agreements equaled $11.64 billion at March 31, 2010, a decrease of $5.0 million from December 31, 2009 and an increase of $143.0 million over March 31, 2009.

Commercial real estate loans not covered under loss share agreements totaled $4.59 billion at March 31, 2010, representing 39.4 percent of noncovered loans and leases. This balance represents an increase of $37.2 million or .8 percent since December 31, 2009 and $252.9 million or 5.8 percent since March 31, 2009. Demand for loans secured by owner-occupied medical and professional facilities remained reasonably strong through December 31, 2009, but weakened during the first quarter of 2010. These loans are underwritten based primarily upon the cash flow from the operation of the business rather than the value of the real estate collateral.

At March 31, 2010, revolving mortgage loans not covered under loss share agreements totaled $2.16 billion, representing 18.6 percent of total noncovered loans outstanding, an increase of $12.4 million or .6 percent since December 31, 2009 and $175.3 million or 8.8 percent compared to March 31, 2009. Although BancShares experienced robust origination of new credit lines and improved line utilization during 2009, most of the increase results from changes to accounting for QSPEs and controlling financial interests that became effective on January 1, 2010. As a result of the accounting change, $97.3 million of revolving mortgage loans that were previously securitized, sold and removed from the consolidated balance sheet were returned to the balance sheet upon adoption of the new accounting guidance.

Commercial and industrial loans not covered under loss share agreements equaled $1.79 billion or 15.4 percent of total noncovered loans and leases. These loans decreased $39.5 million or 2.2 percent since December 31, 2009 and $63.9 million or 3.4 percent since March 31, 2009 due to a decline in customer demand driven by recessionary economic conditions during 2009 and early 2010.


Loans and Leases		Table 5

	2010		2009
	First Quarter		Fourth Quarter		Third Quarter		Second Quarter		First Quarter
	(thousands)
Loans covered under loss share agreements	$	2,602,261	$	1,173,020	$	1,257,478	$	—	$	—

Loans and leases not covered under loss share agreements:
Real estate:
Construction and land development		644,031		622,354		621,176		677,884		735,619
Commercial mortgage		4,589,291		4,552,078		4,514,554		4,397,247		4,336,382
Residential mortgage		912,955		864,704		876,001		858,036		862,646
Revolving mortgage		2,159,581		2,147,223		2,114,018		2,052,941		1,984,249
Other mortgage		161,770		158,187		101,802		155,483		152,561

Total real estate loans		8,467,628		8,344,546		8,227,551		8,141,591		8,071,457
Commercial and industrial		1,793,195		1,832,670		1,822,526		1,858,910		1,857,092
Consumer		864,238		941,986		998,007		1,070,290		1,132,059
Lease financing		316,912		330,713		335,515		332,644		344,054
Other		198,068		195,084		137,084		119,610		92,426

Total loans and leases not covered under loss share agreements		11,640,041		11,644,999		11,520,683		11,523,045		11,497,088

Total loans and leases		14,242,302		12,818,019		12,778,161		11,523,045		11,497,088
Less allowance for loan and lease losses		176,273		172,282		165,282		162,282		161,572

Net loans and leases	$	14,066,029	$	12,645,737	$	12,612,879	$	11,360,763	$	11,335,516


	March 31, 2010
	Impaired at acquisition date		All other acquired loans		Total
	(thousands)
Loans covered under loss share agreements:
Real estate:
Construction and land development	$	183,009	$	621,676	$	804,685
Commercial mortgage		192,190		987,334		1,179,524
Residential mortgage		41,102		250,191		291,293
Revolving mortgage		4,945		16,720		21,665
Other mortgage		20,865		54,306		75,171

Total real estate loans		442,111		1,930,227		2,372,338
Commercial and industrial		35,895		166,579		202,474
Consumer		1,478		8,224		9,702
Other		5,066		12,681		17,747

Total loans covered under loss share agreements	$	484,550	$	2,117,711	$	2,602,261

Construction and land development loans not covered under loss share agreements totaled $644.0 million or 5.5 percent of total loans at March 31, 2010, an increase of $21.7 million or 3.5 percent since December 31, 2009 and a decrease of $91.6 million or 12.5 percent since March 31, 2009. Of the $644.0 million of noncovered construction loans outstanding as of March 31, 2010, $59.1 million was in the Atlanta, Georgia and southwest Florida markets. Both of these market areas experienced significant reductions in real estate values during 2009. The majority of the remaining $684.3 million of noncovered construction and land development loans are in North Carolina and Virginia where real estate values have declined more modestly.

Consumer loans not covered under loss share agreements totaled $864.2 million at March 31, 2010, down $77.7 million or 8.3 percent since December 31, 2009 and $267.8 million or 23.7 percent from March 31, 2009. This decline results from our decision during 2008 to discontinue originations of sales finance loans through our dealer network and the general decline in consumer borrowing in 2009 and early 2010 due to recessionary economic conditions.

Among loans covered under loss share agreements, commercial real estate loans totaled $1.18 billion at March 31, 2010, representing 45.3 percent of the total covered portfolio compared to $590.4 million or 50.3 percent of total covered loans as of December 31, 2009. Construction and land development loans totaled $804.7 million, or 30.9 percent of total covered loans at March 31, 2010, an increase of $498.6 million from the December 31, 2009 total of $306.0 million, which represented 26.1 percent of the total covered loans. Commercial and industrial loans totaled $202.5 million or 7.8 percent of total covered loans at March 31, 2010, an increase of $107.2 million from the December 31, 2009 total of $95.2 million, which represented 8.1 percent of total covered loans. Residential mortgage loans covered by the FDIC totaled $291.3 million or 11.2 percent of the covered portfolio as of March 31, 2010 compared to $152.3 million or 13.0 percent of total covered loans at December 31, 2009.

We expect non-acquisition loan growth for 2010 to be extremely limited due to the generally weak demand for loans and widespread customer desire to deleverage. Loan projections are subject to change due to further economic deterioration or improvement and other external factors.

Investment securities. Investment securities available for sale equaled $3.38 billion at March 31, 2010, compared to $2.93 billion at December 31, 2009 and $3.32 billion at March 31, 2009. Available for sale securities are reported at their aggregate fair value, and unrealized gains and losses are included as a component of other comprehensive income, net of deferred taxes. Investment securities held to maturity totaled $3.3 million at March 31, 2010, compared to $3.6 million at December 31, 2009 and $5.7 million at March 31, 2009. Securities that are classified as held to maturity reflect BancShares’ ability and positive intent to hold those investments until maturity.


Investment Securities		Table 6


	March 31, 2010							March 31, 2009
	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	$	1,978,911	$	1,987,650	0/6	1.65	%	$	1,313,362	$	1,330,179	0/6	3.79	%
One to five years		690,508		692,017	1/5	0.84			1,646,345		1,669,183	1/7	1.65
Five to ten years		7,846		7,846	8/9	4.38			—		—	—	—
Over ten years		4,000		4,000	14/7	4.25			—		—	—	—

Total		2,681,265		2,691,513	0/9	1.45			2,959,707		2,999,362	1/1	2.60
Residential mortgage-backed securities
Within one year		6		5	0/12	5.91			—		—	—	—
One to five years		12,553		12,852	2/8	1.24			29		26	2/4	5.39
Five to ten years		1,557		1,576	8/5	4.88			761		769	9/0	4.55
Over ten years		160,403		162,931	27/1	5.01			91,062		93,826	27/8	5.23

Total		174,519		177,364	25/2	4.73			91,852		94,621	27/1	5.22
State, county and municipal:
Within one year		128		128	0/11	5.75			1,672		1,678	0/4	4.12
One to five years		1,106		1,133	2/1	4.64			1,111		1,121	3/1	4.65
Five to ten years		—		—	—	—			—		—	—	—
Over ten years		10		10	10/8	4.97			10		10	11/8	4.97

Total		1,244		1,271	2/1	4.76			2,793		2,809	1/6	4.33
Corporate bonds (2)
Within one year		25,185		25,279	0/12	1.07			—		—	—	—
One to five years		455,391		461,351	1/12	1.87			204,478		205,148	2/9	1.95

Total		480,576		486,630	1/11	1.83			204,478		205,148	2/9	1.95
Other
Five to ten years		—		—	—	—			3,006		5,008	9/5	11.05

Total		—		—	—	—			3,006		5,008	9/5	11.05
Equity securities		1,544		18,380					3,949		12,077

Total investment securities available for sale		3,339,148		3,375,158					3,265,785		3,319,025

Investment securities held to maturity:		—
Residential mortgage-backed securities
Five to ten years		3,032		3,240	7/0	5.54	%		3,992		4,179	8/0	5.54	%
Over ten years		141		182	17/12	6.49			161		196	18/7	6.45

Total		3,173		3,422	7/6	5.59			4,153		4,375	8/5	5.57
State, county and municipal:
Within one year		—		—	—	—			151		151

March 31, 2010

December 31, 2009

Outstanding balance

Carrying amount