UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

Commission File Number 0-16471

FIRST CITIZENS BANCSHARES, INC.

(Exact name of Registrant as specified in the charter)

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

3128 Smoketree Court

Raleigh, North Carolina 27604

(Address of Principal Executive Offices, Zip Code)

(919) 716-7000

(Registrant’s Telephone Number, including Area Code)

Securities registered pursuant to:
Section 12(b) of the Act:	8.40% Preferred Securities of FCB/NC Capital Trust II
Section 12(g) of the Act:	Class A Common Stock, Par Value $1
	Class B Common Stock, Par Value $1
	(Title of Class)

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

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes x     No ¨

The aggregate market value of the Registrant’s common equity held by nonaffiliates computed by reference to the price at which the common equity was last sold as of the last business day of the Registrant’s most recently completed second fiscal quarter was $611,442,296.

On March 12, 2004, there were 8,758,670 outstanding shares of the Registrant’s Class A Common Stock and 1,677,675 outstanding shares of the Registrant’s Class B Common Stock.

Portions of the Registrant’s definitive Proxy Statement dated March 24, 2003 are incorporated in Part III of this report.

CROSS REFERENCE INDEX

			Page
PART 1	Item 1	Business	3
	Item 2	Properties	5
	Item 3	Legal Proceedings	36
	Item 4	Submission of Matters to a Vote of Security Holders	None
PART II	Item 5	Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	5
	Item 6	Selected Financial Data	10
	Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	6-38
	Item 7A	Quantitative and Qualitative Disclosures about Market Risk	22-23
	Item 8	Financial Statements and Supplementary Data
		Independent Auditors’ Report	39
		Consolidated Balance Sheets at December 31, 2003 and 2002	40
		Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2003	41
		Consolidated Statements of Changes in Shareholders’ Equity for each of the years in the three-year period ended December 31, 2003	42
		Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2003	43
		Notes to Consolidated Financial Statements	44-67
		Quarterly Financial Summary for 2003 and 2002	34
	Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	None
	Item 9A	Controls and Procedures	6
PART III	Item 10	Directors and Executive Officers of the Registrant	6	*
	Item 11	Executive Compensation	*
	Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	*
	Item 13	Certain Relationships and Related Transactions	*
	Item 14	Principal Accountant Fees and Services	*
PART IV	Item 15	Exhibits, Financial Statement Schedules and Reports on Form 8-K
	(a)  (1)	Financial Statements (see Item 8 for reference)
	(2)	Financial Statement Schedules normally required on Form 10-K are omitted since they are not applicable, except as referred to in Item 8.
	(3)	The Exhibits listed on the Exhibit Index contained in this Form 10-K have been filed separately with the Commission and are available upon written request.
	(b)	During the quarter ended December 31, 2003, no reports on Form 8-K were filed.

* Information required by Item 10 is incorporated herein by reference to the information that appears under the headings ‘Section 16(a) Beneficial Ownership Reporting Compliance’ on page 4, ‘Proposal 1: Election of Directors’ on pages 4-6, ‘Audit Committee—Function’ and ‘Audit Committee—Members’ on page 7 and ‘Executive Officers’ on page 9 of the Registrant’s Proxy Statement for the 2004 Annual Meeting of Shareholders (2004 Proxy Statement).

Information required by Item 11 is incorporated herein by reference to the information that appears under the heading ‘Director Compensation’ on page 6 and under the heading ‘Executive Compensation’ on pages 10-11 of the 2004 Proxy Statement.

Information required by Item 12 is incorporated herein by reference to the information that appears under the headings ‘Beneficial Ownership of Voting Securities’ on pages 2-4 of the 2004 Proxy Statement.

Information required by Item 13 is incorporated herein by reference to the information that appears under the heading ‘Compensation Committee’ on pages 8-9 and under the heading ‘Transactions with Related Parties’ on pages 12-13 of 2004 Proxy Statement.

Information required by Item 14 is incorporated by reference to the information that appears under the heading ‘Independent Accountants’ on page 13 of the 2004 Proxy Statement.

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Business

First Citizens BancShares, Inc. (BancShares) was incorporated under the laws of Delaware on August 7, 1986, to become the holding company of First-Citizens Bank & Trust Company (First Citizens Bank or FCB), its banking subsidiary. On October 21, 1986 BancShares became the sole shareholder of First Citizens Bank. FCB was chartered on March 4, 1893, as the Bank of Smithfield, Smithfield, North Carolina, and through a series of mergers and name changes, it later became First-Citizens Bank & Trust Company. As of December 31, 2003, FCB operated 330 offices in North Carolina, Virginia and West Virginia.

On April 28, 1997, BancShares launched Atlantic States Bank (ASB), a federally chartered thrift institution. ASB branches were initially concentrated within the metropolitan Atlanta, Georgia market. In 1999, ASB expanded its presence into Florida, focusing initially on selected markets in southwest Florida. The targeted market areas within Florida have grown to now include Jacksonville and Fort Lauderdale. During 2002, ASB continued its expansion into high-growth markets by opening three offices in Austin, Texas, operating under the name of IronStone Bank, a division of ASB (ISB).

During 2003, ISB opened offices in Scottsdale, Arizona, the San Diego and LaJolla communities in Southern California, and Newport Beach and Sacramento in Northern California and plans further expansion in Oregon and Washington. These markets have been selected based on their strong anticipated economic growth rates and the desire to bring a bank with a focus on customer service to the retail and business customers in these communities. At December 31, 2003, ASB had 44 offices.

BancShares’ executive offices are located at 3128 Smoketree Court, Raleigh, North Carolina 27604, and its telephone number is (919) 716-7000. Although BancShares does not maintain a dedicated website, information regarding BancShares is available at FCB’s website, www.firstcitizens.com. At December 31, 2003, BancShares and its subsidiaries employed a full-time staff of 4,223 and a part-time staff of 742 for a total of 4,965 employees.

BancShares’ subsidiary banks seek to meet the needs of both consumers and commercial entities in their respective market areas. These services, offered at most offices, include normal taking of deposits, cashing of checks, and providing for individual and commercial cash needs; numerous checking and savings plans; commercial, business and consumer lending; a full-service trust department; and other activities incidental to commercial banking. Triangle Life Insurance Company underwrites and sells credit-related life insurance products. Nantahala, Inc. owns loans originated by FCB. First Citizens Investor Services, Inc. (FCIS) provides various investment products, including annuities, discount brokerage services and third-party mutual funds to customers. First Citizens Bank, National Association (FCB-NA) is the issuing and processing bank for BancShares’ retail credit cards. Pisgah, Inc., a wholly-owned subsidiary of FCB-NA, owns credit card receivables. Various other subsidiaries are not material to BancShares’ consolidated financial position or to consolidated net income.

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

FCB is a state-chartered bank, subject to supervision and examination by, and the regulations and reporting requirements of, the Federal Deposit Insurance Corporation (FDIC) and the North Carolina Commissioner of Banks. ASB is a federally-chartered thrift institution supervised by the Office of Thrift Supervision. FCB-NA operates under a national charter, is regulated by the Office of the Comptroller of the Currency and is also a member of the Federal Reserve System. Deposit obligations of FCB and ASB are insured by the FDIC.

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

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

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

The Gramm-Leach-Bliley Act (GLB Act) adopted by Congress during 1999 expanded opportunities for banks and bank holding companies to provide services and engage in other revenue-generating activities that previously were prohibited to them. The GLB Act permits bank holding companies to become “financial holding companies” and expands activities in which banks and bank holding companies may participate, including opportunities to affiliate with securities firms and insurance companies. During 2000, BancShares became a financial holding company and American Guaranty Insurance Company (AGI), formerly a wholly-owned subsidiary of FCB, became a wholly-owned subsidiary of BancShares. As a direct subsidiary of BancShares, AGI has more flexibility in its product offering than it did as a subsidiary of FCB. The GLB Act also contains extensive customer privacy protection provisions which require banks to adopt and implement policies and procedures for the protection of the financial privacy of their customers, including procedures that allow customers to elect that certain financial information not be disclosed to certain persons.

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

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

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

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

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

The FDIC currently uses a risk-based assessment system that takes into account the risks attributable to different categories and concentrations of assets and liabilities for purposes of calculating deposit insurance assessments to be paid by insured banks. The risk-based assessment system uses three capital categories and three supervisory subgroups within each capital group to establish nine assessment risk classifications, each of which has a specified deposit insurance rate.

The FDIC is charged with the responsibility of maintaining the adequacy of the Bank Insurance Fund and the Savings Association Insurance Fund, and the amounts paid by banks for deposit insurance is influenced not only by the bank’s capital category and supervisory subgroup but also by the adequacy of the insurance funds at any time. FDIC insurance assessments could be increased substantially in the future if the FDIC finds such an increase to be necessary in order to adequately maintain the insurance funds.

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

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affiliates, to 20% of the banking subsidiary’s capital and surplus. Each of the transactions among affiliates must also meet specified collateral requirements and must comply with other provisions of Section 23A designed to avoid the taking of low-quality assets from an affiliate.

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

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

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

The Sarbanes-Oxley Act of 2002 (the “SOX Act”) represents a comprehensive revision of laws affecting corporate governance, accounting obligations and corporate reporting. Among other requirements, the SOX Act established: (1) new requirements for audit committees of listed companies, including independence, expertise, and responsibilities; (2) additional responsibilities regarding financial statements for the chief executive officers and chief financial officers of reporting companies; (3) new standards for auditors and regulation of audits; (4) increased disclosure and reporting obligations for reporting companies regarding various matters relating to corporate governance, and (5) new and increased civil and criminal penalties for violation of the securities laws.

FCIS is a registered broker-dealer and investment adviser. FCIS’ broker-dealer activities are subject to regulation by the National Association of Securities Dealers (NASD), a self-regulatory organization to which the Securities and Exchange Commission (SEC) has delegated regulatory authority for broker-dealers, as well as by the state securities authorities of the various states in which FCIS operates. FCIS’ investment advisory activities are subject to direct regulation by the SEC, and FCIS’ investment advisory representatives must register with the state securities authorities of the various states in which it operates.

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

AGI and Triangle Life Insurance Company are regulated by the North Carolina Department of Insurance.

Properties

Through its subsidiary financial institutions, as of December 31, 2003, BancShares operated branch offices at 374 locations in North Carolina, Virginia, West Virginia, Florida, Georgia, Texas, Arizona and California. BancShares owns many of the buildings and leases other facilities from third parties.

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

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

BancShares’ Class A and Class B common stock is traded in the over-the-counter market, and the Class A common stock is quoted on the Nasdaq National Market System under the symbol FCNCA. The Class B common stock is quoted on the OTC Bulletin Board. As of December 31, 2003, there were 2,633 holders of record of the Class A common stock, and 488 holders of record of the Class B common stock.

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The per share cash dividends paid by BancShares and the high and low sales prices for each quarterly period during 2003 and 2002 are set forth in Table 18 under the caption ‘Per Share of Stock’ of this report. A cash dividend of 27.5 cents per share was declared by the Board of Directors on January 26, 2004, payable April 5, 2004, to holders of record as of March 15, 2004. Payment of dividends is made at the discretion of the Board of Directors and is contingent upon satisfactory earnings as well as projected future capital needs. Subject to the foregoing, it is currently management’s expectation that comparable cash dividends will continue to be paid in the future.

During the fourth quarter of 2003, BancShares did not repurchase any of its outstanding capital stock.

Controls and Procedures

BancShares’ Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of BancShares’ disclosure controls and procedures in accordance with Rule 13a-14 of the Securities Exchange Act of 1934 (Exchange Act). Based on their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, BancShares’ disclosure controls and procedures were effective in enabling it to record, process, summarize and report in a timely manner the information required to be disclosed in reports it files under the Exchange Act.

No change in BancShares internal control over financial reporting occurred during our fourth quarter of 2003 that has materially affected, or is reasonably likely to materially affect, BancShares’ internal control over financial reporting.

Code of Ethics

BancShares has adopted a code of ethics that applies to all its executive officers, including its principal executive and principal financial and accounting officers. A copy of the code of ethics will be provided without charge upon request. Requests for copies should be directed to Alex G. MacFadyen, Secretary, First Citizens BancShares, Inc., Post Office Box 27131, Raleigh, North Carolina 27611-7131 or by e-mail to fcbdirectors@firstcitizens.com.

Available Information

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

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

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. (“BancShares”), for the years 2003, 2002 and 2001. BancShares is a financial holding company with two wholly-owned banking subsidiaries: First-Citizens Bank & Trust Company (FCB), a North Carolina-chartered bank, and Atlantic States Bank (ASB), a federally-chartered thrift institution. FCB operates branches in North Carolina, West Virginia, and Virginia. ASB operates branches in Georgia, Florida, Texas, Arizona, and California.

This discussion and related financial data should be read in conjunction with our audited consolidated financial statements and related footnotes, presented on pages 39 through 67 of this report. Intercompany accounts and transactions have been eliminated. Although certain amounts for prior years have been reclassified to conform to statement presentations for 2003, the reclassifications have no effect on shareholders’ equity or net income as previously reported.

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CRITICAL ACCOUNTING POLICIES

The preparation of our audited consolidated financial statements and the information included in management’s discussion and analysis is governed by policies that are based on accounting principles generally accepted in the United States of America and general practices within the banking industry. Among the more significant policies are those that govern accounting for loans and reserve for loan losses, investment securities and pension plan assumptions.

Estimates and judgments are integral to our accounting for certain items, and those estimates and judgments affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. BancShares periodically evaluates its estimates, including those related to the reserve for loan losses, impairment of investment securities, pension plan assumptions and contingencies. While we base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, actual results may differ from these estimates under different assumptions or outcomes.

Reserve for loan losses.    The reserve for loan losses reflects the estimated losses that will result from the inability of our customers to make required payments. The reserve for loan losses results from management’s evaluation of the risk characteristics of the loan portfolio under current economic conditions and considers such factors as the financial condition of the borrower, fair market value of collateral and other items that, in our opinion, deserve current recognition in estimating possible credit losses. Our evaluation process is based on historical evidence and current trends among delinquencies, defaults and nonperforming assets. Our estimate of the reserve for loan losses does not include the impact of events that might occur in the future.

Management considers the established reserve adequate to absorb losses that relate to loans outstanding at December 31, 2003, although future additions to the reserve may be necessary based on changes in economic conditions and other factors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the reserve for loan losses. Such agencies may require the recognition of additions to the reserve based on their judgments of information available to them at the time of their examination. If the financial condition of our borrowers were to deteriorate, resulting in an impairment of their ability to make payments, our estimates would be updated, and additional reserves may be required.

Other than temporary impairment of investment securities.    Our policy regarding other than temporary impairment of investment securities requires a continuous monitoring of our investment securities. Individual investment securities with a fair value that is less than 80% of original cost over a continuous period that spans two quarter-ends are evaluated for impairment during the subsequent quarter. That evaluation includes an assessment of both qualitative and quantitative measures to determine whether, in management’s judgment, the investment is likely to recover its original value. When that evaluation concludes that no such recovery is likely, the unrealized loss is reported as an other than temporary impairment, and the loss is recorded as a securities transaction on the Consolidated Statements of Income. If our analysis suggests that a loss of asset value has occurred, management may elect to record an other than temporary impairment, even if the prescribed period of time has not lapsed.

Pension plan assumptions.    Although the assets and liabilities associated with the defined benefit pension plan maintained for our associates are not included within the audited consolidated financial statements, the selection of key assumptions used to determine the value of the pension obligation and the plan’s assets can have a direct impact on the pension expense that we report within employee benefit expense in our consolidated statement of income. The discount rate is used to determine the present value of the benefits that the pension plan will pay to the plan participants. The discount rate reflects the interest rate that could be obtained by a suitable investment used to fund the pension obligation. Given the reductions in market interest rates during the past two years, the discount rate used to determine the pension obligation has declined from 7.00 percent at December 31, 2001, to 6.50 percent at December 31, 2002 and to 6.00 percent at December 31, 2003. Assuming other variables remain unchanged, a reduction in the discount rate results in higher pension expense.

The estimated long-term rate of return on plan assets is used to calculate the value of plan assets over time. The estimated return on plan assets was 8.50% at December 31, 2000, 2001 and 2002. Due to reductions in actual plan returns from historical averages and in the projected rate of returns on plan assets, the rate of return was adjusted to 8.00% for 2003.

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Based on robust asset returns during 2003 and more optimistic market conditions and forecasts for future market performance, we adjusted the long-term rate of return on plan assets to 8.50 percent for 2004. Assuming other variables remain unchanged, increasing the long-term rate of return on plan assets to 8.50 percent reduces pension expense.

The assumed rate of future compensation is reviewed annually based on actual experience and has remained at 4.75 percent for 2003, 2002 and 2001. Assuming other variables remain unchanged, a reduction in the rate of future compensation increases would result in lower pension expense.

SUMMARY

BancShares’ earnings and cash flows are primarily derived from the commercial banking activities conducted by its banking subsidiaries, which include commercial and consumer lending, deposit and cash management products, cardholder, merchant, trust and retail broker-dealer services as well as various other products and services typically associated with commercial banking. FCB and ASB gather interest-bearing and noninterest-bearing deposits from retail and commercial customers, although BancShares and its subsidiaries provide supplemental short-term and long-term funding through various non-deposit sources. The liquidity generated from these funding sources is primarily used to invest in interest-earning assets consisting of various types of loans, investment securities and overnight investments. In addition, funds are invested in bank premises as well as furniture and equipment used in the conduct of the subsidiaries’ commercial banking business.

Various external factors influence customer demand for our deposit and loan products. During 2003 and 2002, economic uncertainty in our primary market areas restrained customer demand for loan products. However, during these same years, demand for long-term interest rate commitments on both new loans and refinance transactions has been strong. Additionally, during 2003 and 2002, the low level of interest rates affected the composition of our deposit base, as customers avoided investing in time deposits carrying low interest rates, and chose to allow liquidity to reside in transaction, savings and money market accounts.

The general strength of the economy also influences the quality and collectibility of the loan portfolio, as consumer bankruptcy rates and business debt service levels tend to reflect the general economic cycle. Utilizing various asset–liability management and asset quality tools, we strive to minimize the potentially adverse impact of unforeseen and unfavorable economic trends and to take advantage of favorable economic conditions where appropriate.

Financial institutions frequently focus their strategic and operating emphasis on maximizing profitability, and therefore gauge their relative success by reference to profitability measures such as return on average assets or return on average shareholders’ equity. BancShares’ return on average assets and return on average equity have historically compared unfavorably to the returns of similarly sized financial holding companies. BancShares has historically placed significant emphasis upon asset quality, balance sheet liquidity and capital conservation, even when those priorities may be detrimental to current period earnings.

Our strategic analysis of corporate strengths and the competitive position of BancShares within the financial services industry indicate opportunities for significant growth and expansion. We operate in diverse and growing geographic markets. We believe that through superior customer service, opportunities exist to increase earnings by attracting customers of larger competitors and customers of banks that have focused on merger transactions. We seek to take advantage of market opportunities to increase fee income in areas such as merchant processing, client bank services, factoring, insurance, cash management, wealth management and private banking services.

Our attention is also focused on attempting to mitigate where possible the risks which can endanger our profitability and growth prospects. These risks may be categorized as economic, industry systemic, competitive and regulatory. Due to the lack of control and the potential to result in a material impact upon our financial results, the risk area that is typically of greatest concern is economic. Specific economic risks include recession, rapid movements in interest rates and significant increases in inflation expectations. Compared to our larger competitors, due to our smaller asset size and more limited capital resources, economic risk requires significant and constant management attention.

Detailed information regarding the components of net income over the five years from 1999 through 2003 is provided in the accompanying tables. Table 1 provides a summary of key financial data. Table 5 provides information on net interest income. Table 13 provides details related to the provision for loan losses. Tables 15 and 16 present information regarding the components of noninterest income and expense, respectively.

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An analysis of BancShares’ financial condition and growth can be made by examining the changes and trends in interest-earning assets and interest-bearing liabilities, and a discussion of these changes and trends follows. The information presented in Table 5 is useful in making such an analysis. Table 2 details acquisitions and divestitures during 2003, 2002 and 2001. All of the acquisitions were accounted for as purchases, with the results of operations included with BancShares’ Consolidated Statements of Income since the respective acquisition date.

BancShares reported net income of $75.2 million during 2003, compared to $92.8 million in 2002 and $86.9 million in 2001. Net income for 2003 represented an 18.9 percent decrease when compared to 2002. The $17.6 million decrease was the result of lower net interest income and higher noninterest expense, partially offset by increased levels of noninterest income and lower provision for loan losses. The $5.8 million or 6.7 percent increase in net income in 2002 when compared to 2001 resulted from higher net interest income and noninterest income, partially offset by higher noninterest expense and provision for loan losses. Net income per share for 2003 totaled $7.19, compared to $8.85 and $8.27 for 2002 and 2001, respectively.

Caused largely by the negative impact of declining interest rates as well as the depth to which rates fell, net interest income declined by $20.2 million or 5.3 percent during 2003. The taxable-equivalent net yield on interest-earning assets declined by 31 basis points during 2003 to 3.32 percent. During 2002, net interest income increased by $13.2 million or 3.6 percent as balance sheet growth was sufficient to offset the unfavorable effects of the declining interest rate environment.

Noninterest expenses increased $33.1 million or 7.6 percent in 2003 with significant increases noted in salaries and employee benefits, equipment expense and occupancy expense. During 2002, noninterest expenses increased $10.9 million or 2.6 percent. In both years, franchise growth and expansion coupled with technology investments were largely accountable for the noninterest expense increases.

The continued do novo growth and expansion of ASB has required BancShares to infuse significant amounts of capital into ASB to support its rapidly expanding balance sheet. Infusions totaled $30 million in 2003, $70 million in 2002 and $20 million in 2001 bringing aggregate capital contributions since the 1997 formation of ASB to $200 million. ASB has adversely impacted our financial results during 2003, 2002 and 2001 with net losses reported each year in the amount of $2.0 million, $1.3 million and $7.6 million, respectively. ASB’s net losses since inception equal $23.4 million. Based upon our plans for further expansion of ASB, net losses will likely extend into the foreseeable future.

Noninterest income increased $24.0 million or 10.8 percent in 2003 over 2002 while 2002’s noninterest income increased $5.8 million or 2.7 percent over 2001. The improved noninterest income during 2003 resulted from higher cardholder and merchant services income, mortgage income and a nonrecurring gain on the sale of branch offices.

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Table 1

FINANCIAL SUMMARY AND SELECTED AVERAGE BALANCES AND RATIOS

	2003			2002			2001			2000			1999
	(thousands, except share data and ratios)
SUMMARY OF OPERATIONS
Interest income	$	510,477		$	596,169		$	715,427		$	708,170		$	633,891
Interest expense		148,537			214,018			346,510			342,828			281,542
Net interest income		361,940			382,151			368,917			365,342			352,349
Provision for loan losses		24,187			26,550			24,134			15,488			11,672
Net interest income after provision for loan losses		337,753			355,601			344,783			349,854			340,677
Noninterest income		243,936			220,295			214,643			201,815			164,549
Noninterest expense		465,088			432,353			421,685			394,409			374,830
Income before income taxes		116,601			143,543			137,741			157,260			130,396
Income taxes		41,414			50,787			50,805			58,949			48,596
Net income	$	75,187		$	92,756		$	86,936		$	98,311		$	81,800
Net interest income, taxable equivalent	$	362,991		$	383,494		$	370,857		$	368,190		$	354,566
SELECTED AVERAGE BALANCES
Total assets	$	12,245,840		$	11,843,239		$	11,235,859		$	10,005,597		$	9,622,774
Investment securities		2,585,376			2,610,622			2,196,473			1,618,584			1,908,300
Loans		7,886,948			7,379,607			7,105,915			6,955,772			6,399,114
Interest-earning assets		10,932,853			10,553,574			10,038,074			8,984,878			8,638,698
Deposits		10,433,781			10,007,398			9,405,328			8,390,920			8,105,443
Interest-bearing liabilities		9,163,960			9,129,168			8,798,893			7,772,889			7,517,483
Long-term obligations		255,379			263,291			186,636			154,634			157,897
Shareholders’ equity	$	996,578		$	924,877		$	847,374		$	763,386		$	693,559
Shares outstanding		10,452,523			10,478,843			10,507,289			10,551,607			10,625,457
SELECTED PERIOD-END BALANCES
Total assets	$	12,559,908		$	12,231,890		$	11,864,991		$	10,691,617		$	9,717,099
Investment securities		2,469,447			2,539,236			2,791,296			1,816,720			1,371,894
Loans		8,326,598			7,620,263			7,196,177			7,109,692			6,751,039
Interest-earning assets		11,090,450			10,783,069			10,489,382			9,357,794			8,596,326
Deposits		10,711,332			10,439,620			9,961,605			8,971,868			8,173,598
Interest-bearing liabilities		9,251,903			9,298,080			9,206,903			8,384,692			7,554,229
Long-term obligations		289,277			253,409			284,009			154,332			155,683
Shareholders’ equity	$	1,029,305		$	967,291		$	885,043		$	810,728		$	728,757
Shares outstanding		10,436,345			10,473,294			10,483,456			10,522,836			10,610,399
PROFITABILITY RATIOS (averages)
Rate of return on:
Total assets		0.61	%		0.78	%		0.77	%		0.98	%		0.85	%
Shareholders’ equity		7.54			10.03			10.26			12.88			11.79
Dividend payout ratio		15.30			11.30			12.09			10.73			12.99
LIQUIDITY AND CAPITAL RATIOS (averages)
Loans to deposits		75.59	%		73.74	%		75.55	%		82.90	%		78.95	%
Shareholders’ equity to total assets		8.14			7.81			7.54			7.63			7.21
Time certificates of $100,000 or more to total deposits		10.33			10.87			11.43			9.46			9.02
PER SHARE OF STOCK
Net income	$	7.19		$	8.85		$	8.27		$	9.32		$	7.70
Cash dividends		1.10			1.00			1.00			1.00			1.00
Market price at December 31 (Class A)		120.50			96.60			97.75			80.75			69.75
Book value at December 31		98.63			92.36			84.42			77.04			68.68
Tangible book value at December 31		87.56			81.73			73.78			65.76			58.13

10

Table 2

ACQUISITIONS AND DIVESTITURES

Year	Institution and Location	Total Loans			Total Deposits
		(thousands)
2003	Acquisition of two branches by First Citizens Bank	$	18,523		$	67,887
2003	Sale of four branches by First Citizens Bank		(31,380	)		(114,727	)
2002	Acquisition of two branches by First Citizens Bank		4,201			24,285
2001	Acquisition of two branches by First Citizens Bank		11,187			50,493

INTEREST-EARNING ASSETS

Interest-earning assets include loans, investment securities and overnight investments, all of which reflect varying interest rates based on the risk level and maturity of the underlying asset. Accordingly, riskier investments typically carry a higher interest rate, but expose the investor to potentially higher levels of default. We have historically focused on maintaining high asset quality, which results in a loan portfolio subjected to strenuous underwriting and monitoring procedures. Our investment securities portfolio includes high-quality assets, primarily United States Treasury and government agency securities. Generally, the investment securities portfolio grows and shrinks based on loan and deposit trends. When deposit growth exceeds loan demand, we invest excess funds in the securities portfolio. Conversely, when loan demand exceeds deposit growth, we use proceeds from maturing securities to fund loan demand. Overnight investments are selectively made with other financial institutions that are within our risk tolerance.

Interest-earning assets averaged $10.93 billion during 2003, an increase of $379.3 million or 3.6 percent over 2002 levels, compared to a $515.5 million or 5.1 percent increase in 2002 over 2001 levels. Increase among interest-earning assets during 2003 resulted from loan growth, partially offset by declines in investment securities and overnight investments. Growth among interest-earning assets during 2002 primarily resulted from growth in investment securities accompanied by moderate loan growth.

Loans.    As of December 31, 2003, gross loans outstanding were $8.33 billion, a 9.3 percent increase over the December 31, 2002 balance of $7.62 billion. In general, loan demand during 2003 was sluggish in the markets serviced by FCB, but strong in ASB market areas. Loan balances for the last five years are presented in Table 3. The $706.3 million increase in loans during 2003 was primarily due to growth among commercial mortgage loans, revolving loans secured by real estate, and consumer loans.

Loans secured by real estate totaled $5.87 billion at December 31, 2003, compared to $5.38 billion at December 31, 2002 and $5.05 billion at December 31, 2001. Loans secured by mortgages on commercial property totaled $2.35 billion at December 31, 2003, a $312.1 million or 15.3 percent increase from December 31, 2002. We continue strong growth in commercial mortgage lending, having reported growth rates of 12.5 percent in 2002 and 17.3 percent in 2001. The growth trend reflects the continuing demand for these loans among business customers. As a percentage of total loans, loans secured by commercial mortgages represent 28.2 percent at December 31, 2003, compared to 26.7 percent and 25.1 percent at December 31, 2002 and 2001, respectively. A large percentage of our commercial mortgage portfolio is secured by owner-occupied facilities, rather than investment property. These loans are underwritten based primarily upon the cash flow from the operation of the business rather than the value of the real estate collateral.

11

Table 3

LOANS

	December 31
	2003		2002		2001		2000		1999
	(thousands)
Real estate:
Construction and land development	$	854,660	$	799,278	$	801,354	$	748,941	$	637,982
Mortgage:
Commercial		2,347,792		2,035,646		1,809,260		1,542,832		1,406,498
1-4 family residential		904,082		1,058,082		1,260,010		1,485,691		1,298,998
Revolving		1,598,603		1,335,024		1,024,181		851,810		755,342
Other		160,043		150,226		151,332		173,825		148,584
Total real estate loans		5,865,180		5,378,256		5,046,137		4,803,099		4,247,404
Commercial and industrial		929,039		925,775		915,596		928,592		979,242
Consumer		1,303,718		1,154,280		1,073,954		1,217,850		1,392,978
Lease financing		160,390		141,372		139,966		134,483		123,908
Other		68,271		20,580		20,524		25,668		7,507
Total gross loans		8,326,598		7,620,263		7,196,177		7,109,692		6,751,039
Less reserve for loan losses		119,357		112,533		107,087		102,655		98,690
Net loans	$	8,207,241	$	7,507,730	$	7,089,090	$	7,007,037	$	6,652,349

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

Revolving loans secured by real estate totaled $1.60 billion at December 31, 2003, compared to $1.34 billion and $1.02 billion at December 31, 2002 and 2001, respectively. The 19.7 percent and 30.4 percent growth rates in 2003 and 2002 reflect continuing demand for the retail EquityLine product. At December 31, 2003, these loans represent 19.2 percent of gross loans, compared to 17.5 percent and 14.2 percent, respectively, at December 31, 2002 and 2001.

Consumer loans totaled $1.30 billion at December 31, 2003, an increase of $149.4 million or 12.9 percent during 2003, the result of growth among indirect automobile loans originated through our sales finance unit and credit card loans. During 2002, consumer loans increased 7.5 percent, reversing a three-year decline that occurred as revolving loans secured by real estate replaced direct installment lending and the volume of automobile dealer loans purchased was moderate. At December 31, 2003, 2002 and 2001, consumer loans represented 15.7 percent, 15.1 percent and 14.9 percent, respectively.

Construction and land development loans totaled $854.7 million at December 31, 2003, an increase of $55.4 million or 6.9 percent. Although we have continued to see demand for development lending, these loans represent a diminishing percentage of total loans outstanding. Construction and land development loans represent 10.3 percent of gross loans at December 31, 2003, compared to 10.5 percent at December 31, 2002 and 11.1 percent at December 31, 2001.

Commercial and industrial loans totaled $929.0 million at December 31, 2003, an increase of 0.3 percent over 2002. Despite significant growth among other loan types, we view the sluggish commercial and industrial loan demand as evidence of continuing economic weakness in BancShares’ key market areas and our desire to secure commercial loans with real estate.

Loans secured by 1-4 family residential mortgages declined $154.0 million or 14.6 percent during 2003. Since mid-2002, substantially all of the residential mortgage loans originated by BancShares have been sold to correspondents, resulting in a gradual decline in 1-4 family residential mortgage loan balances as outstanding loans amortize or are refinanced.

Our recent growth through ASB has allowed us to mitigate our historic exposure to geographic concentration in North Carolina and Virginia. Although these markets have endured economic instability in the past, we are pleased with the diversification that we are beginning to realize by the growth of ASB. We are aware however that, in the absence of

12

rigorous underwriting and monitoring controls, rapid loan growth in new markets may present incremental lending risks. During the expansion of ASB into new markets, we have endeavored to ensure that such controls are functioning effectively and will continue to place emphasis upon maintaining strong lending standards in new markets. With respect to industry concentration, our loan portfolio remains very well diversified, with no single industry accounting for more than 10 percent of total loans outstanding at December 31, 2003.

We expect continued growth in commercial mortgage and revolving real estate loans in 2004, and a continuing reduction in 1-4 family residential mortgage loans as existing loan balances amortize or are refinanced. Recent improvements in general economic conditions in certain of our markets may translate into higher levels of loan demand among our business customers during 2004, although consumer loan demand may continue to be constrained due to soft labor markets. All growth projections are subject to change as a result of further economic deterioration or improvement and other external factors.

Investment Securities.    At December 31, 2003, and 2002, the investment securities portfolio totaled $2.47 billion and $2.54 billion, respectively. Investment securities held to maturity totaled $1.23 billion and $2.42 billion, respectively, at December 31, 2003 and 2002. The $1.19 billion reduction in investment securities held to maturity during 2003 resulted from our decision to reinvest a portion of the proceeds from maturing held-to-maturity securities in securities classified as available-for-sale. This change enhances the overall liquidity and flexibility of the balance sheet. In each period, U.S. Treasury and government agency securities represented substantially the entire balance of the held-to-maturity portfolio. The average maturity of the held-to-maturity portfolio was eleven months at December 31, 2003, unchanged from December 31, 2002. Securities that are classified as held-to-maturity reflect BancShares’ ability and positive intent to hold those investments until maturity.

Investment securities available for sale at December 31, 2003 and 2002 totaled $1.24 billion and $121.7 million, respectively. This $1.12 billion increase from December 31, 2002 to December 31, 2003 results from the decision to invest proceeds from maturing securities in available-for-sale securities. Available-for-sale securities are reported at their aggregate fair value. Investment securities available for sale include U.S. Treasury obligations, government agency securities and a small equity securities portfolio. Unrealized gains and losses on available-for-sale securities are included as a component of shareholders’ equity, net of deferred taxes.

Investment securities averaged $2.59 billion during 2003, $2.61 billion during 2002 and $2.20 billion during 2001. As a percentage of average interest-earning assets, investment securities represented 23.6 percent, 24.7 percent and 21.9 percent during 2003, 2002 and 2001, respectively. Table 4 presents detailed information relating to the investment securities portfolio.

Overnight Investments.    At December 31, 2003 and 2002, overnight investments, which include federal funds sold and interest-bearing deposits in other financial institutions, totaled $294.4 million and $623.6 million, respectively. These investments averaged $460.5 million, $563.3 million and $735.7 million, respectively, during 2003, 2002 and 2001. During 2003, average overnight securities decreased $102.8 million or 18.3 percent due to growth in the loan portfolio. The decrease in 2002 resulted from decisions to direct excess liquidity into the investment securities portfolio.

13

Table 4

INVESTMENT SECURITIES

	December 31
	2003							2002				2001
	Cost		Fair Value		Average Maturity (Yrs./Mos.)	Taxable Equivalent Yield		Cost		Fair Value		Cost		Fair Value
	(thousands, except maturity and yield information)
Investment securities held to maturity:
U. S. Government:
Within one year	$	972,621	$	976,638	0/7	1.91	%	$	1,643,877	$	1,652,014	$	2,452,587	$	2,474,155
One to five years		234,640		236,429	1/4	2.14			744,938		755,010		197,174		197,169
Five to ten years		58		62	5/11	8.00			91		97		148		155
Over ten years		17,229		17,913	14/4	5.62			26,378		27,517		5,348		5,475
Total		1,224,548		1,231,042	0/11	2.01			2,415,284		2,434,638		2,655,257		2,676,954
State, county and municipal:
Within one year		—		—	—	—			—		—		1,254		1,278
One to five years		355		355	2/3	5.55			480		502		500		517
Five to ten years		145		155	6/1	5.88			144		154		143		149
Over ten years		1,419		1,586	15/1	6.02			1,415		1,551		1,412		1,517
Total		1,919		2,096	12/1	5.92			2,039		2,207		3,309		3,461
Other
Within one year		—		—	—	—			10		10		25		25
One to five years		250		250	5/4	7.75			—		—		10		10
Five to ten years		—		—	—	—			250		250		250		250
Total		250		250	5/4	7.75			260		260		285		285
Total investment securities held to maturity		1,226,717		1,233,388	0/11	2.01			2,417,583		2,437,105		2,658,851		2,680,700
Investment securities available for sale
U. S. Government:
Within one year		878,667		875,337	0/3	2.92	%		45,245		45,353		51,560		51,563
One to five years		291,787		290,774	1/8	1.66			20,196		20,356		25,695		25,664
Five to ten years		721		723	8/11	5.41			—		—		—		—
Over ten years		11,048		11,027	14/3	5.21			—		—		—		—
Total		1,182,223		1,177,861	0/10	2.63			65,441		65,709		77,255		77,227
State, county and municipal:
Within one year		1,139		1,138	0/3	2.29			—		—		—		—
One to five years		3,635		3,642	2/10	2.28			282		281		—		—
Five to ten years		2,673		2,689	6/8	4.21			165		163		—		—
Over ten years		145		145	28/11	1.15			145		145		1,263		1,281
Total		7,592		7,614	4/3	2.94			592		589		1,263		1,281
Equity securities		35,318		57,255					41,316		55,355		41,279		53,937
Total investment securities available for sale		1,225,133		1,242,730					107,349		121,653		119,797		132,445
Total investment securities	$	2,451,850	$	2,476,118				$	2,524,932	$	2,558,758	$	2,778,648	$	2,813,145

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

Income on Interest-Earning Assets.    Interest income amounted to $510.5 million during 2003, an $85.7 million or 14.4 percent decrease from 2002, compared to a $119.3 million or 16.7 percent decrease from 2001 to 2002. The decline in interest income during 2003 and 2002 reflected the net impact of lower yields on interest-earning assets, partially offset by higher average assets.

14

The taxable-equivalent yield on interest-earning assets was 4.68 percent during 2003, a 98 basis point decrease from the 5.66 percent reported in 2002. Although the reduction in market interest rates was significant to the yield reduction, also affecting the yield on interest-earning assets is a change in our asset mix. As a percentage of average interest-earning assets, loans represented 72.1 percent, 69.9 percent and 70.8 percent during 2003, 2002 and 2001, respectively. Since the loan portfolio represents the highest-yielding asset, the increase in the ratio of loans to interest-earning assets during 2003 prevented an even larger reduction in interest income.

Table 5 analyzes interest-earning assets and interest-bearing liabilities for the five years ending December 31, 2003. To help assess the impact of the tax-exempt status of income earned on certain loans, leases and municipal securities, Table 5 is prepared on a taxable-equivalent basis.

The taxable-equivalent yield on the loan portfolio decreased from 6.66 percent in 2002 to 5.65 percent in 2003. As a result of that reduction, loan interest income decreased $45.9 million or 9.4 percent from 2002. This followed a decrease of $76.1 million or 13.4 percent in loan interest income in 2002 over 2001, the net result of decreased loan yields and higher average loans outstanding. The lower loan yields during 2003 and 2002 reflect continued declines in market interest rates triggered by reductions in the discount and federal funds rates by the Federal Reserve Bank. The lower key index rates led to reductions in the prime interest rate, resulting in lower yields on prime-based loans as well as rate-induced refinance activity among fixed-rate loans.

Although we anticipate modest reductions in interest-earning asset yields during early 2004 as variable rate loans continue to reprice, we believe that economic indicators will continue to show signs of strengthening and that interest rates will begin to increase after mid-year. We continue to encourage variable rate lending to allow interest-sensitive assets to reprice as interest rates increase, thereby reducing the interest rate risk imbedded in the balance sheet.

Interest income earned on the investment securities portfolio amounted to $60.9 million, $96.7 million and $120.2 million during 2003, 2002 and 2001, respectively. The taxable-equivalent yield on the investment securities portfolio was 2.36 percent, 3.71 percent and 5.48 percent, respectively, for 2003, 2002 and 2001. The $35.8 million decrease in investment interest income during 2003 reflected lower yields and slightly lower average securities. The $23.5 million decrease in investment interest income from 2001 to 2002 was the result of lower yields, partially offset by higher average securities. The short average maturity of our investment securities portfolio combined with redemption of significant amounts of callable securities caused the rapid downward repricing of the portfolio during 2003. If interest rates begin to increase in 2004, the frequency of callable securities being redeemed by issuers prior to maturity will decline significantly from 2003, which will result in the actual maturity of those securities lengthening.

Approximately $900 million of investment securities held to maturity have call features prior to the stated maturity. Interest earned on overnight investments was $5.0 million during 2003, compared to $9.0 million during 2002 and $28.7 million during 2001. The $4.0 million reduction during 2003 resulted from a 51 basis point yield reduction and a reduction in average overnight investments. During 2002, interest income earned from overnight investments decreased $19.7 million over 2001, the net result of the declines in average overnight investments and a 231 basis point yield reduction.

INTEREST-BEARING LIABILITIES

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

At December 31, 2003, and 2002 interest-bearing liabilities totaled $9.25 billion and $9.30 billion, respectively, a decrease of $46.2 million or 0.5 percent. The slight decrease during 2003 results from lower levels of interest-bearing deposits and short-term borrowings, partially offset by higher long-term obligations. Interest-bearing liabilities averaged $9.16 billion during 2003, an increase of $34.8 million or 0.4 percent over 2002 levels. During 2002, interest-bearing liabilities averaged $9.13 billion, an increase of $330.3 million or 3.8 percent over 2001, due to moderately higher levels of interest-bearing deposits.

15

Table 5

AVERAGE BALANCE SHEETS

	2003							2002
	Average Balance			Interest Income/Expense		Yield/ Rate		Average Balance			Interest Income/Expense		Yield/ Rate
	(thousands, taxable equivalent)
Assets
Loans	$	7,886,948		$	445,639	5.65	%	$	7,379,607		$	491,770	6.66	%
Investment securities:
U. S. Government		2,525,007			59,350	2.35			2,550,835			94,794	3.72
State, county and municipal		5,151			235	4.56			3,699			301	8.14
Other		55,218			1,345	2.44			56,088			1,673	2.98
Total investment securities		2,585,376			60,930	2.36			2,610,622			96,768	3.71
Overnight investments		460,529			4,959	1.08			563,345			8,974	1.59
Total interest-earning assets		10,932,853		$	511,528	4.68	%		10,553,574		$	597,512	5.66	%
Cash and due from banks		667,979							669,770
Premises and equipment		522,548							494,534
Other assets		238,197							235,484
Reserve for loan losses		(115,737	)						(110,123	)
Total assets	$	12,245,840						$	11,843,239
Liabilities and shareholders’ equity
Interest-bearing deposits:
Checking With Interest	$	1,379,479		$	1,923	0.14	%	$	1,266,185		$	3,450	0.27	%
Savings		690,705			2,151	0.31			642,764			3,435	0.53
Money market accounts		2,563,589			22,208	0.87			2,305,486			35,743	1.55
Time deposits		3,811,476			98,507	2.58			4,121,474			145,278	3.52
Total interest-bearing deposits		8,445,249			124,789	1.48			8,335,909			187,906	2.25
Short-term borrowings		463,332			2,795	0.60			529,968			4,528	0.85
Long-term obligations		255,379			20,953	8.21			263,291			21,584	8.20
Total interest-bearing liabilities		9,163,960		$	148,537	1.62	%		9,129,168		$	214,018	2.34	%
Demand deposits		1,988,532							1,671,489
Other liabilities		96,770							117,705
Shareholders’ equity		996,578							924,877
Total liabilities and shareholders’ equity	$	12,245,840						$	11,843,239
Interest rate spread						3.06	%						3.32	%
Net interest income and net yield on interest-earning assets				$	362,991	3.32	%				$	383,494	3.63	%

Average loan balances include nonaccrual loans. Yields related to loans and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only, are stated on a taxable-equivalent basis, which is customary for financial institutions. The yield/rate assumes a statutory federal income tax rate of 35% for all periods, and state income tax rates of 6.90% for 2003, 2002 and 2001, and 7.00% for 2000 and 1999.

Deposits.    At December 31, 2003, deposits totaled $10.71 billion, an increase of $271.7 million or 2.6 percent from the $10.44 billion in deposits recorded as of December 31, 2002. Branch purchases during 2003 contributed $67.9 million in total deposits, while branch sales yielded a reduction of $114.7 million, a net reduction of $46.8 million in total deposits. Total deposits averaged $10.43 billion in 2003, an increase of $426.4 million or 4.3 percent over 2002. The general improvement in the equity markets in 2003 as compared to 2002 and 2001 caused customers to begin to divert portions of

16

Table 5

AVERAGE BALANCE SHEETS (continued)

2001							2000							1999
Average Balance			Interest Income/Expense		Yield/ Rate		Average Balance			Interest Income/Expense		Yield/ Rate		Average Balance			Interest Income/Expense		Yield/ Rate
(thousands, taxable equivalent)
	$7,105,915		$	568,379	8.00	%	$	6,955,772		$	587,192	8.44	%	$	6,399,114		$	512,419	8.01	%
	2,147,697			117,608	5.48			1,588,930			96,576	6.08			1,881,591			106,435	5.66
	4,804			416	8.66			4,212			357	8.48			2,893			217	7.50
	43,972			2,288	5.20			25,442			764	3.00			23,816			548	2.30
	2,196,473			120,312	5.48			1,618,584			97,697	6.04			1,908,300			107,200	5.62
	735,686			28,676	3.90			410,522			26,129	6.36			331,284			16,489	4.98
	10,038,074		$	717,367	7.15	%		8,984,878		$	711,018	7.91	%		8,638,698		$	636,108	7.36	%
	592,270							476,929							459,202
	466,549							418,388							382,092
	243,841							225,861							239,833
	(104,875	)						(100,459	)						(97,051	)
$	11,235,859						$	10,005,597						$	9,622,774
	$1,145,115		$	6,060	0.53	%	$	1,068,545		$	6,338	0.59	%	$	1,074,885		$	6,858	0.64	%
	608,882			6,680	1.10			633,666			9,436	1.49			687,191			10,730	1.56
	1,744,389			54,309	3.11			1,477,248			63,386	4.29			1,359,433			47,881	3.52
	4,453,109			243,703	5.47			3,859,946			219,796	5.69			3,680,867			179,452	4.88
	7,951,495			310,752	3.91			7,039,405			298,956	4.25			6,802,376			244,921	3.60
	660,762			20,643	3.12			578,850			31,219	5.39			557,210			23,921	4.29
	186,636			15,115	8.10			154,634			12,653	8.18			157,897			12,700	8.04
	8,798,893		$	346,510	3.94	%		7,772,889		$	342,828	4.41	%		7,517,483		$	281,542	3.75	%
	1,453,833							1,351,515							1,303,067
	135,759							117,807							108,665
	847,374							763,386							693,559
$	11,235,859						$	10,005,597						$	9,622,774
					3.21	%						3.50	%						3.61	%
			$	370,857	3.69	%				$	368,190	4.10	%				$	354,566	4.10	%

their available liquidity out of our banks. This movement of funds caused net deposit growth during 2003 to decline from 2002’s growth rate of 6.4 percent. Contributing significantly to the increase in 2003 average total deposits was a $317.0 million, or 18.9 percent, increase in average demand deposits over 2002.

Average interest-bearing deposits were $8.45 billion during 2003, an increase of only $109.3 million or 1.3 percent. Although average interest-bearing deposits increased only slightly, there were significant changes in the composition of our deposit base. Money market deposits averaged $2.56 billion, an increase of $258.1 million or 11.2 percent over 2002.

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Checking With Interest deposits averaged $1.38 billion in 2003 and $1.27 billion in 2002. This represented an increase of $113.3 million or 8.9 percent. Due to very low market interest rates, customers have been reluctant to invest in time deposit products, leaving significant amounts of liquidity in demand deposit, Checking With Interest and money market accounts. As a result, average time deposits decreased $310.0 million or 7.5 percent during 2003. These deposits averaged $3.81 billion during 2003, compared to $4.12 billion during 2002. We expect that time deposit balances will continue to erode until market interest rates increase significantly.

During 2002, total deposits averaged $10.00 billion, an increase of $602.1 million or 6.4 percent over 2001. Average interest-bearing deposits were $8.34 billion during 2002, an increase of $384.4 million or 4.8 percent, although, as in 2003, the mix of deposit types changed significantly. Average money market accounts were $2.31 billion during 2002, an increase of $561.1 million or 32.2 percent. Time deposits averaged $4.12 billion during 2002, a decrease of $331.6 million or 7.4 percent over 2001. We attribute the deposit growth in 2002 primarily to funds leaving more volatile equity markets.

Table 6

MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE

	December 31, 2003
	(thousands)
Less than three months	$	317,976
Three to six months		235,606
Six to 12 months		301,601
More than 12 months		235,619
Total	$	1,090,802

Short-Term Borrowings.    At December 31, 2003, short-term borrowings totaled $430.2 million, compared to $462.6 million one year earlier, a 7.0 percent reduction. For the year ended December 31, 2003, short-term borrowings averaged $463.3 million, compared to $530.0 million during 2002 and $660.8 million during 2001. The $66.6 million or 12.6 percent decrease from 2002 to 2003 resulted from lower master note and repurchase obligations. The $130.8 million or 19.8 percent decrease from 2001 to 2002 resulted from lower levels of master notes and repurchase obligations. For both 2003 and 2002, customer interest in these commercial cash management products has diminished due to the very low market rates of interest currently available. Partially offsetting these reductions is a $50 million increase in other short-term borrowings resulting from Federal Home Loan Bank of Atlanta advances during 2003. BancShares continues to have access to various short-term borrowings, including the purchase of federal funds, overnight repurchase obligations and credit lines with various correspondent banks. Management anticipates continued use of these credit sources as needed in 2004. Table 7 provides additional information regarding short-term borrowed funds.

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Table 7

SHORT-TERM BORROWINGS

	2003				2002				2001
	Amount		Rate		Amount		Rate		Amount		Rate
	(thousands)
Master notes
At December 31	$	190,978	0.40	%	$	239,718	0.40	%	$	305,537	0.85	%
Average during year		216,591	0.63			272,736	0.91			329,941	3.16
Maximum month-end balance during year		221,346	—			290,574	—			343,886
Repurchase agreements
At December 31		136,756	0.20			166,201	0.25			201,763	0.60
Average during year		156,406	0.32			194,704	0.52			213,830	2.50
Maximum month-end balance during year		164,899	—			203,456	—			231,353
Federal funds purchased
At December 31		38,300	0.70			30,980	0.98			41,700	1.21
Average during year		45,226	0.96			41,044	1.52			63,115	3.97
Maximum month-end balance during year		60,535	—			53,000	—			92,850
Other
At December 31		64,157	0.98			25,728	1.12			62,390	2.25
Average during year		45,109	1.12			21,484	1.85			53,876	4.39
Maximum month-end balance during year		71,450	—			61,371	—			63,408

Long-Term Obligations.    At December 31, 2003 and 2002, long-term obligations totaled $289.3 million and $253.4 million, respectively, an increase of $35.9 million or 14.2 percent. The increase during 2003 includes the impact of a $25.0 million borrowing from the Federal Home Loan Bank of Atlanta and a $7.8 million increase in notes payable resulting from the adoption of a new accounting standard during the fourth quarter of 2003. As a result of the change in accounting treatment, for 2003, long-term obligations include $257.8 million in junior subordinated debentures. This compares to $250.0 million in capital trust securities reported for 2002. The change relates to the treatment of the issuers of the capital trust securities. For 2002, the issuing entities were included within our consolidated financial statements. The accounting change caused us to discontinue the consolidation of those entities in our financial statements as of December 31, 2003. However, for 2003 and 2002, under current regulatory standards, these obligations qualify as capital for BancShares and have also allowed the holding company to provide capital to FCB and ASB.

Expense of Interest-Bearing Liabilities.    Interest expense amounted to $148.5 million in 2003, a $65.5 million or 30.6 percent decrease from 2002. This followed a $132.5 million or 38.2 percent decrease in interest expense during 2002 compared to 2001. The decrease in interest expense during 2003 was the result of lower rates, partially offset by higher average volume. The decrease in interest expense during 2002 was the net result of lower market interest rates and higher average interest-bearing liabilities. The blended rate on all interest-bearing liabilities was 1.62 percent during 2003, compared to 2.34 percent in 2002 and 3.94 percent in 2001. The reductions during 2003 and 2002 resulted from actions by the Federal Reserve Bank to lower the discount and federal funds rates. The reductions in these key index rates pushed deposit and other borrowing costs lower during 2002 and 2003.

The aggregate rate on interest-bearing deposits was 1.48 percent during 2003, compared to 2.25 percent during 2002 and 3.91 percent during 2001. Interest expense on interest-bearing deposits amounted to $124.8 million during 2003, a 33.6 percent decrease from the $187.9 million recorded during 2002, which was a 39.5 percent decrease over the $310.8 million recorded during 2001. The decline in interest expense from 2002 to 2003 was the net result of lower interest rates and higher average interest-bearing deposits. From 2001 to 2002, the decrease in interest expense was the result of lower average interest rates partially offset by higher average deposit balances.

Interest expense for time deposits was $98.5 million during 2003, a $46.8 million or 32.2 percent decrease from 2002, the combined result of lower interest rates and a reduction in average time deposit balances. The $145.3 million in interest expense recorded during 2002 represents a $98.4 million or 40.4 percent decrease from 2001, the result of interest rate reductions, partially offset by the growth in average time deposits.

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Interest expense on short-term borrowings amounted to $2.8 million in 2003, a decrease of $1.7 million or 38.3 percent from 2002. Interest expense related to short-term borrowings totaled $4.5 million and $20.6 million, respectively, in 2002 and 2001. The decrease during 2003 was attributable to lower interest rates and decreases in average short-term borrowings. During 2002, the decline in interest expense resulted from a 227 basis point rate reduction and lower average short-term borrowings when compared to 2001.

Interest expense associated with long-term obligations decreased $630,000 or 2.9 percent during 2003 to $21.0 million. The decrease resulted from lower average volume. Due to the fixed-rate nature of the $250 million in trust preferred capital securities, the reductions in market interest rates during 2002 and 2003 did not reduce the cost of these borrowings.

NET INTEREST INCOME

Net interest income was $361.9 million during 2003, a $20.2 million or 5.3 percent decrease from 2002. The $20.2 million reduction in net interest income was the primary factor contributing to the 18.9 percent decrease reported in our 2003 net income. During 2002, net interest income was $382.2 million, a $13.2 million or 3.6 percent increase over 2001. Table 8 presents the annual changes in net interest income due to changes in volume, yields and rates. This table is presented on a taxable-equivalent basis to adjust for the tax-exempt status of income earned on certain loans, leases and municipal securities. Despite a favorable volume variance resulting from loan growth, the adverse impact of falling market interest rates caused net interest income to decline.

Table 8

CHANGES IN CONSOLIDATED TAXABLE EQUIVALENT NET INTEREST INCOME

	2003									2002
	Change from previous year due to:									Change from previous year due to:
	Volume			Yield/ Rate			Total Change			Volume			Yield/ Rate			Total Change
	(thousands)
Assets
Loans	$	31,095		$	(77,226	)	$	(46,131	)	$	20,065		$	(96,674	)	$	(76,609	)
Investment securities:
U. S. Government		(985	)		(34,459	)		(35,444	)		18,528			(41,342	)		(22,814	)
State, county and municipal		92			(158	)		(66	)		(93	)		(22	)		(115	)
Other		190			(518	)		(328	)		495			(1,110	)		(615	)
Total investment securities		(703	)		(35,135	)		(35,838	)		18,930			(42,474	)		(23,544	)
Overnight investments		(1,389	)		(2,626	)		(4,015	)		(4,715	)		(14,987	)		(19,702	)
Total interest-earning assets	$	29,003		$	(114,987	)	$	(85,984	)	$	34,280		$	(154,135	)	$	(119,855	)
Liabilities
Interest-bearing deposits:
Checking With Interest	$	212		$	(1,739	)	$	(1,527	)	$	485		$	(3,095	)	$	(2,610	)
Savings		192			(1,476	)		(1,284	)		276			(3,521	)		(3,245	)
Money market accounts		3,071			(16,606	)		(13,535	)		13,083			(31,649	)		(18,566	)
Time deposits		(9,471	)		(37,300	)		(46,771	)		(14,920	)		(83,505	)		(98,425	)
Total interest-bearing deposits		(5,996	)		(57,121	)		(63,117	)		(1,076	)		(121,770	)		(122,846	)
Short-term borrowings		(488	)		(1,245	)		(1,733	)		(2,602	)		(13,513	)		(16,115	)
Long-term obligations		(654	)		23			(631	)		6,246			223			6,469
Total interest-bearing liabilities	$	(7,138	)	$	(58,343	)	$	(65,481	)	$	2,568		$	(135,060	)	$	(132,492	)
Change in net interest income	$	36,141		$	(56,644	)	$	(20,503	)	$	31,712		$	(19,075	)	$	12,637

Changes in income relating to certain loans and investment securities are stated on a fully tax-equivalent basis at a rate that approximates BancShares’ marginal tax rate. The taxable equivalent adjustment was $1,051, $1,343 and $1,940 for the years 2003, 2002 and 2001 respectively. Table 5 provides detailed information on average balances, income/expense, yield/rate by category and the relevant income tax rates. The rate/volume variance is allocated equally between the changes in volume and rate.

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The combination of rapidly falling interest rates and the extremely low level to which such interest rates fell caused net interest income to decline $20.2 million during 2003. During 2002, the impact of balance sheet growth was adequate to more than offset the unfavorable impact of lower interest rates. The impact on both periods of declining interest rates was exacerbated due to the depth to which rates fell inasmuch as we were unable to adjust the interest rate paid on certain deposit products consistently with the movement in general market interest rates. As a result, asset yields continued to decline, but deposit rates were unable to adjust in an offsetting amount. Consequently, our net yield on interest-earning assets was compressed, and, ultimately, net interest income declined. The taxable-equivalent net yield on interest-earning assets declined from 3.69 percent in 2001 and 3.63 percent in 2002 to 3.32 percent in 2003.

Table 9

INTEREST-SENSITIVITY ANALYSIS

December 31, 2003	1-30 Days Sensitive		31-90 Days Sensitive			91-180 Days Sensitive			181-365 Days Sensitive			Total One Year Sensitive		Total Nonsensitive		Total
	(thousands)
Assets:
Loans	$	4,907,397	$	142,630		$	202,722		$	406,672		$	5,659,421	$	2,667,177	$	8,326,598
Investment securities held to maturity		87,682		152,005			224,631			508,303			972,621		254,096		1,226,717
Investment securities available for sale		213,770		323,804			309,495			32,737			879,806		362,924		1,242,730
Overnight investments		294,405		—			—			—			294,405		—		294,405
Total interest-earning assets	$	5,503,254	$	618,439		$	736,848		$	947,712		$	7,806,253	$	3,284,197	$	11,090,450
Liabilities:
Interest-bearing deposits	$	4,622,856	$	586,865		$	784,583		$	965,920		$	6,960,224	$	1,572,211	$	8,532,435
Short-term borrowings		379,891		50,000			—			300			430,191		—		430,191
Long-term obligations		—		—			—			—			—		289,277		289,277
Total interest-bearing liabilities	$	5,002,747	$	636,865		$	784,583		$	966,220		$	7,390,415	$	1,861,488	$	9,251,903
Interest-sensitivity gap	$	500,507	$	(18,426	)	$	(47,735	)	$	(18,508	)	$	415,838	$	1,422,709	$	1,838,547

Assets and liabilities with maturities of one year or less and those that may be adjusted within this period are considered interest sensitive. The interest-sensitivity position has meaning only as of the date for which it was prepared.

Rate Sensitivity.    A principal objective of BancShares’ asset/liability function is to manage interest rate risk or the exposure to changes in interest rates. Management maintains portfolios of interest-earning assets and interest-bearing liabilities with maturities or repricing opportunities that will protect against extreme interest rate fluctuations, thereby limiting to the extent possible, the ultimate interest rate exposure. However, we do not utilize interest rate swaps, floors, collars or other derivative financial instruments to attempt to hedge our rate sensitivity and interest rate risk. Table 9 provides BancShares’ interest-sensitivity position as of December 31, 2003, which reflected a one-year positive interest-sensitivity gap of $415.8 million. Theoretically, as a result of this asset-sensitive position, we expect that increases in interest rates will have a favorable impact on net interest income, and that any further reductions in interest rates will have an unfavorable impact on net interest income. Based on current economic indicators, we believe that interest rates have reached their lowest point in the current economic cycle, and we do not anticipate further intervention by the Federal Reserve to stimulate the economy through reductions in market interest rates. We anticipate that rates may begin to increase after mid-2004. If interest rates do rise, BancShares will be in a positive position to take advantage of higher interest rates, and likely see an increase in net interest income.

To minimize the potential adverse impact of interest rate fluctuations, management monitors the maturity and repricing distribution of the loan portfolio and interest-bearing liabilities to reduce its interest rate risk. Additionally, virtually all of the residential mortgage loan production is originated through correspondents, protecting BancShares from the interest rate exposure that is typical in such lending. Table 10 details the maturity and repricing distribution as of

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December 31, 2003. Of the gross loans outstanding on December 31, 2003, 50.4 percent have scheduled maturities within one year, 30.2 percent have scheduled maturities between one and five years, while the remaining 19.4 percent have scheduled maturities extending beyond five years. We continue to offer competitive variable rate lending options to lessen our interest rate exposure resulting from fixed-rate loans.

Table 10

LOAN MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY

	December 31, 2003
	Within One Year		One to Five Years		After Five Years		Total
	(thousands)
Real estate:
Construction and land development	$	650,786	$	165,499	$	38,375	$	854,660
Mortgage:
Commercial		1,615,290		589,118		143,384		2,347,792
1-4 family residential		435,022		225,055		244,005		904,082
Revolving		223,014		382,309		993,280		1,598,603
Other		109,944		40,682		9,417		160,043
Total real estate loans		3,034,056		1,402,663		1,428,461		5,865,180
Commercial and industrial		571,130		234,184		123,725		929,039
Consumer		500,640		746,925		56,153		1,303,718
Lease financing		40,975		119,415		—		160,390
Other		50,566		13,390		4,315		68,271
Total	$	4,197,367	$	2,516,577	$	1,612,654	$	8,326,598
Loans maturing after one year with:
Fixed interest rates			$	1,763,917	$	528,551	$	2,292,468
Floating or adjustable rates				752,660		1,084,103		1,836,763
Total			$	2,516,577	$	1,612,654	$	4,129,231

Market risk disclosures.    Table 11 provides information regarding the market risk profile of BancShares at December 31, 2003. Market risk is the potential economic loss resulting from changes in market prices and interest rates. This risk can result in diminished current fair values or reduced net interest income or both in future periods. The more significant changes in our market risk profile from December 31, 2002 to December 31, 2003 include:

• the fair value of investment securities held to maturity has declined $1.21 billion or 49.8 percent; all of the decrease relates to reductions in fixed-rate securities;

• the fair value of investment securities available for sale has increased $1.12 billion excluding the marketable equity securities, all of the decrease relates to growth in fixed-rate securities;

• the fair value of fixed rate loans has increased $144.9 million or 4.1 percent;

• the fair value of variable rate loans has increased $826.0 million or 20.2 percent;

• the fair value of savings and interest-bearing checking deposits increased $250.0 million or 5.4 percent, the result of general volume increases;

• the fair value of fixed rate time deposits decreased $402.3 million or 9.9 percent; the decrease results from reductions in short-term time deposits;

• the fair value of short-term borrowings declined $32.4 million;

• the fair value of long-term obligations, all of which are fixed-rate, increased $48.6 million or 18.8 percent due to newly-originated borrowings;

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Table 11

MARKET RISK DISCLOSURES

	Maturing in Years ended December 31,																					Fair Value
	2004			2005			2006			2007			2008			Thereafter			Total
	(thousands)
Assets
Investment securities held to maturity
Fixed rate	$	972,621		$	218,536		$	15,509		$	950		$	250		$	18,851		$	1,226,717		$	1,233,388
Average rate (%)		1.91	%		2.13	%		2.29	%		3.09	%		7.75	%		5.66	%		2.01	%
Investment securities available for sale
Fixed rate		876,475			243,644			26,838			22,830			1,104			14,584			1,185,475			1,185,475
Average rate (%)		2.92	%		1.54	%		1.94	%		2.59	%		4.57	%		4.89	%		2.63	%
Equity securities		—			—			—			—			—			57,255			57,255			57,255
Loans
Fixed rate		701,010			577,297			591,589			503,676			427,565			608,627			3,409,764			3,645,692
Average rate (%)		6.69	%		6.47	%		6.24	%		6.03	%		5.87	%		6.27	%		6.30	%
Variable rate		1,073,728			622,354			651,867			631,337			568,309			1,369,239			4,916,834			4,916,834
Average rate (%)		4.93	%		5.37	%		5.11	%		4.90	%		4.38	%		6.26	%		5.31	%
Liabilities
Savings and interest-bearing checking
Fixed rate		4,861,670			—			—			—			—			—			4,861,670			4,861,670
Average rate (%)		0.43	%																	0.43	%
Time deposits
Fixed rate		2,762,311			403,029			175,672			119,150			159,689			88			3,619,939			3,670,166
Average rate (%)		1.84	%		3.15	%		3.43	%		3.95	%		2.95	%		5.21	%		2.21	%
Variable rate		43,094			7,732			—			—			—			—			50,826			50,826
Average rate (%)		0.70	%		1.00	%														0.76	%
Short-term borrowings
Fixed rate		430,191			—			—			—			—			—			430,191			430,191
Average rate (%)		0.77	%																	0.77	%
Long-term obligations
Fixed rate		861			3,364			1,041			25,147			160			258,704			289,277			306,836
Average rate (%)		6.25	%		7.46	%		6.54	%		3.46	%		6.00	%		8.18	%		7.75	%

ASSET QUALITY

The maintenance of excellent asset quality is one of our primary areas of focus. We have historically dedicated significant resources to ensuring we are prudent in our lending practices. Accordingly, we have focused on asset quality as a key performance measure.

Nonperforming Assets.    Nonperforming assets include nonaccrual loans and other real estate. With the exception of certain residential mortgage loans, the accrual of interest on loans is discontinued when we deem that collection of additional principal or interest is doubtful. Loans are returned to an accrual status when both principal and interest are current and the loan is determined to be performing in accordance with the applicable loan terms. The accrual of interest on certain residential mortgage loans is discontinued when a loan is more than three monthly payments past due, and the accrual of interest resumes when the loan is less than three monthly payments past due.

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Other real estate includes foreclosed property as well as branch facilities that we have closed but not sold. Nonperforming assets balances for the past five years are presented in Table 12.

Table 12

RISK ELEMENTS

	December 31,
	2003			2002			2001			2000			1999
	(thousands, except ratios)
Nonaccrual loans	$	18,190		$	15,521		$	13,983		$	15,933		$	10,720
Other real estate		5,949			7,330			6,263			1,880			1,600
Total nonperforming assets	$	24,139		$	22,851		$	20,246		$	17,813		$	12,320
Accruing loans 90 days or more past due	$	11,492		$	9,566		$	12,981		$	6,731		$	3,576
Loans at December 31	$	8,326,598		$	7,620,263		$	7,196,177		$	7,109,692		$	6,751,039
Ratio of nonperforming assets to total loans plus other real estate		0.29	%		0.30	%		0.28	%		0.25	%		0.18	%
Interest income that would have been earned on nonperforming loans had they been performing	$	1,182		$	1,190		$	1,060		$	1,209		$	894
Interest income earned on nonperforming loans		356			753			333			587			287

There are no loan concentrations to any multiple number of borrowers engaged in similar activities or industries in excess of 10 percent of total loans at December 31, 2003. There were no foreign loans outstanding in any period.

BancShares’ nonperforming assets at December 31, 2003 totaled $24.1 million, compared to $22.9 million at December 31, 2002 and $20.2 million at December 31, 2001. As a percentage of total loans and other real estate, nonperforming assets represented 0.29 percent, 0.30 percent and 0.28 percent as of December 31, 2003, 2002 and 2001. These ratios are low by industry standards, evidence of our strong focus on asset quality.

Nonperforming assets included nonaccrual loans totaling $18.2 million at December 31, 2003, compared to $15.5 million at December 31, 2002 and $14.0 million at December 31, 2001. At December 31, 2003, nonaccrual loans included $12.7 million in balances classified as impaired. At December 31, 2002, impaired loans totaled $9.3 million. The moderate increase in loan balances classified as nonaccrual and impaired during 2003 resulted from the weak economy as well as our ongoing efforts to identify and successfully resolve credit exposures. Other real estate totaled $5.9 million, $7.3 million and $6.3 million at December 31, 2003, 2002 and 2001, respectively. Accruing loans 90 days or more past due totaled $11.5 million at December 31, 2003, compared to $9.6 million at December 31, 2002.

While we are concerned that nonaccrual loans and impaired loans have increased, our asset quality remains high. Should economic conditions worsen, we would expect to see higher levels of nonperforming assets. Management continues to closely monitor past due accounts to identify any loans that should be classified as impaired or non-accrual.

Reserve for Loan Losses.    At December 31, 2003, BancShares’ reserve for loan losses was $119.4 million or 1.43 percent of loans outstanding. This compares to $112.5 million or 1.48 percent at December 31, 2002, and $107.1 million or 1.49 percent at December 31, 2001.

The provision for loan losses charged to operations was $24.2 million during 2003 compared to $26.6 million during 2002 and $24.1 million during 2001. The $2.4 million or 8.9 percent decrease in provision for loan losses from 2002 to 2003 resulted from lower charge-offs, partially offset by higher loss estimates during 2003.

Net charge-offs for 2003 totaled $17.8 million, compared to $21.1 million during 2002, and $18.9 million during 2001. The ratio of net charge-offs to average loans outstanding equaled 0.23 percent during 2003, 0.29 percent during 2002 and 0.27 percent during 2001. These low loss ratios reflect the quality of BancShares’ loan portfolio and are a key indicator that we closely monitor to evaluate our financial performance. Table 13 provides details concerning the reserve for loan losses and provision for loan losses for the past five years.

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Table 13

SUMMARY OF LOAN LOSS EXPERIENCE

	2003			2002			2001			2000			1999
	(thousands, except ratios)
Balance at beginning of year	$	112,533		$	107,087		$	102,655		$	98,690		$	96,115
Adjustment for sale of loans		—			—			(777	)		—			—
Acquired reserve		409			—			—			—			—
Provision for loan losses		24,187			26,550			24,134			15,488			11,672
Charge-offs:
Real estate:
Construction and land development		(16	)		(580	)		(205	)		—			(7	)
Mortgage:
Commercial		(318	)		(1,186	)		(2,758	)		(280	)		(111	)
1-4 family residential		(1,594	)		(2,916	)		(1,171	)		(898	)		(966	)
Revolving		(1,392	)		(902	)		(899	)		(805	)		(23	)
Other		—			—			—			—			—
Total real estate loans		(3,320	)		(5,584	)		(5,033	)		(1,983	)		(1,107	)
Commercial and industrial		(7,101	)		(7,654	)		(6,736	)		(5,678	)		(1,800	)
Consumer		(10,481	)		(10,117	)		(10,101	)		(8,199	)		(10,748	)
Lease financing		(756	)		(1,585	)		(422	)		(46	)		(32	)
Total charge-offs		(21,658	)		(24,940	)		(22,292	)		(15,906	)		(13,687	)
Recoveries:
Real estate:
Construction and land development		10			—			—			8			42
Mortgage:
Commercial		164			954			504			688			1,262
1-4 family residential		631			239			260			347			368
Revolving		63			15			58			33			13
Other		—			—			—			—			—
Total real estate loans		868			1,208			822			1,076			1,685
Commercial and industrial		1,428			1,212			755			1,581			835
Consumer		1,590			1,413			1,787			1,726			2,070
Lease financing		—			3			3			—			—
Total recoveries		3,886			3,836			3,367			4,383			4,590
Net charge-offs		(17,772	)		(21,104	)		(18,925	)		(11,523	)		(9,097	)
Balance at end of year	$	119,357		$	112,533		$	107,087		$	102,655		$	98,690
Historical Statistics
Balances
Average total loans	$	7,886,948		$	7,379,607		$	7,105,915		$	6,955,772		$	6,399,114
Total loans at year-end		8,326,598			7,620,263			7,196,177			7,109,692			6,751,039
Ratios
Net charge-offs to average total loans		0.23	%		0.29	%		0.27	%		0.17	%		0.14	%
Reserve for loan losses to total loans at year-end		1.43			1.48			1.49			1.44			1.46

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

Gross charge-offs for 2003 were $21.7 million, compared to $24.9 million in 2002, a decrease of $3.3 million or 13.2 percent. Gross charge-offs in 2002 represented a $2.6 million or 11.9 percent increase over the $22.3 million recorded in 2001. During 2003, BancShares experienced decreases of $1.3 million in charge-offs of residential mortgage loans and $868,000 among commercial mortgage loans.

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Table 14

ALLOCATION OF RESERVE FOR LOAN LOSSES

	December 31
	2003				2002				2001				2000				1999
	Reserve		Percent of Loans to Total Loans		Reserve		Percent of Loans to Total Loans		Reserve		Percent of Loans to Total Loans		Reserve		Percent of Loans to Total Loans		Reserve		Percent of Loans to Total Loans
	(thousands)
Real estate:
Construction and land development	$	7,806	10.26	%	$	7,911	10.49	%	$	7,099	11.14	%	$	5,411	10.53	%	$	4,653	9.45	%
Mortgage:
Commercial		33,054	28.20			31,380	26.71			32,875	25.14			31,786	21.71			32,198	20.83
1-4 family residential		5,577	10.86			5,581	13.89			6,498	17.51			6,416	20.90			5,721	19.24
Revolving		9,725	19.20			7,519	17.52			5,349	14.23			4,600	11.98			4,098	11.19
Other		2,113	1.92			1,863	1.97			2,290	2.10			2,860	2.44			3,232	2.20
Total real estate		58,275	70.44			54,254	70.58			54,111	70.12			51,073	67.56			49,902	62.91
Commercial and industrial		26,921	11.16			23,705	12.15			19,833	12.72			19,951	13.06			20,084	14.51
Consumer		24,564	15.65			25,326	15.14			23,754	14.92			24,523	17.13			26,279	20.63
Lease financing		2,518	1.93			2,036	1.86			1,624	1.95			1,560	1.89			1,572	1.84
Other		901	0.82			255	0.27			151	0.29			254	0.36			190	0.11
Unallocated		6,178				6,957				7,614				5,294				663
Total	$	119,357	100.00	%	$	112,533	100.00	%	$	107,087	100.00	%	$	102,655	100.00	%	$	98,690	100.00	%

Table 14 details management’s allocation of the reserve among the various loan types. The process used to allocate the loan loss reserve considers, among other factors, whether the borrower is a retail or commercial customer, whether the loan is secured or unsecured, and whether the loan is an open or closed-end agreement. Generally, loans to commercial customers are evaluated individually and assigned a credit grade, while loans to retail customers are evaluated among groups of loans with similar characteristics. Loans evaluated individually are assigned a credit grade using such factors as the borrower’s cash flow, the value of any underlying collateral and the value of any guarantee. The rating becomes the basis for the reserve allocation for that individual loan. Groups of loans are aggregated over their remaining estimated behavioral lives and probable loss projections for each period become the basis for the reserve allocation. The loss projections are based on historical loss patterns and current economic conditions. The amount of the reserve for loan losses not allocated through these loss models represents the unallocated reserve. The decrease in the unallocated reserve during 2003 and 2002 results from growth in the loan portfolio, offset by changes in our charge-off estimates.

NONINTEREST INCOME

The growth of noninterest income is essential to our ability to sustain adequate levels of profitability. The primary sources of noninterest income are service charges on deposit accounts, cardholder and merchant service income, various types of commission-based income such as from the sale of investments by our broker-dealer subsidiary, fees from processing services for client banks, mortgage income and various types of revenues derived from wealth management services. Total noninterest income was $243.9 million during 2003, an increase of $23.6 million or 10.7 percent. Noninterest income during 2002 was $220.3 million, a $5.7 million or 2.6 percent increase over the $214.6 million recorded during 2001. Table 15 presents the major components of noninterest income for the past five years.

Excluding the impact of nonrecurring items, core noninterest income totaled $239.4 million in 2003, an increase of $16.9 million or 7.6 percent over 2002. The $222.5 million in core noninterest income recorded during 2002 represented a $14.4 million or 6.9 percent increase over 2001. Much of the increase in core noninterest income during 2003 can be attributed to increases in cardholder and merchant services income, mortgage income, service charge income and commission-based income. Cardholder and merchant services income was $55.3 million in 2003, compared to $49.4 million in 2002 and $44.4 million in 2001 and we view this source of noninterest income as a key growth area. The $5.9 million or 12.0 percent increase in cardholder and merchant services income was the result of higher credit card merchant

26

discount and higher interchange fees for debit and credit card transactions. Cardholder and merchant services income includes the interchange income that we earn from debit cards issued to our customers. As a result of a recent out-of-court settlement involving the two major credit card associations, the interchange rate we earn on signature-based debit card transactions decreased 24.1 percent effective August 1, 2003. Although the volume of transactions processed through our debit card products continues to grow, the reduction in the interchange rate has adversely affected interchange income.

Table 15

NONINTEREST INCOME

	Year ended December 31
	2003		2002			2001		2000		1999
	(thousands)
Core noninterest income
Service charges on deposit accounts	$	78,273	$	75,870		$	70,066	$	59,384	$	55,169
Cardholder and merchant services		55,321		49,387			44,399		38,622		32,801
Commission-based income:
Investments		15,387		14,000			12,585		12,974		10,700
Insurance		6,180		5,930			5,220		3,718		3,072
Other		2,380		2,037			1,969		603		—
Total commission-based income		23,947		21,967			19,774		17,295		13,772
Fees from processing services		20,590		18,929			17,452		14,556		12,987
Trust income		15,005		14,897			15,114		14,814		13,848
Mortgage income		15,469		11,605			11,645		4,797		5,650
ATM income		9,005		9,205			9,552		9,059		8,674
Other service charges and fees		14,463		14,744			13,896		12,077		9,935
Other		5,844		4,772			5,256		5,129		4,944
Total core noninterest income		237,917		221,376			207,154		175,733		157,780
Non-core items
Securities transactions		309		(1,081	)		7,189		1,810		1,706
Gain on sale of mortgage servicing rights		—		—			300		20,187		—
Gain on sale of branches		5,710		—			—		4,085		5,063
Total non-core items		6,019		(1,081	)		7,489		26,082		6,769
Total	$	243,936	$	220,295		$	214,643	$	201,815	$	164,549

Mortgage income was $15.5 million, an increase of $3.9 million or 33.3 percent from the $11.6 million recorded in 2002. Prompted by lower market interest rates, the increase in refinance activity resulted in higher origination fee and commitment fee income, accounting for much of the growth during 2003. Mortgage income was $11.6 million in 2001. Since the middle of 2002, substantially all of our residential mortgage loan production has been originated through correspondents, resulting in immediate recognition of any origination fees collected as well as servicing release premiums. Due to the probability of stable or increased market interest rates, it is likely that our mortgage income will decline during 2004 from the level achieved in 2003.

Service charge income was $78.3 million during 2003, compared to $75.9 million in 2002 and $70.1 million in 2001. The $2.4 million or 3.2 percent increase in service charge income during 2003 results primarily from higher bad check fees.

Commission-based income increased $2.0 million to $23.9 million in 2003 from $22.0 million in 2002. In 2001, commission-based income was $19.8 million. The 9.0 percent increase in 2003 primarily resulted from growth within our factoring division. The increase during 2002 resulted from fees generated by our broker-dealer and our insurance agency.

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During 2003, fees from processing services totaled $20.6 million, an increase of $1.7 million or 8.8 percent over 2002. During 2002, BancShares recognized $18.9 million in fees from processing services, an increase of $1.5 million or 8.5 percent over the $17.5 million recognized during 2001. Increases during 2003 and 2002 result from growth in the number of transactions processed. In each period, a substantial portion of the income resulted from services provided to related parties.

During 2003, trust income totaled $15.0 million, virtually unchanged from the amounts recorded during 2002 and 2001. Generally weak asset returns on trust assets under management during the period 2001 through mid-2003 have contributed to the lack of growth in this noninterest income category. We expect that trust income will increase in 2004 due to improved asset values in late-2003, upon which most trust fees are assessed, and higher sales activity.

During 2003, BancShares recognized $14.5 million in other service charges and fees, a decrease of 1.9 percent over the $14.7 million recognized during 2002, which represented an $848,000 or 6.1 percent increase over 2001. For 2003, fees attributable to debit cards declined by $803,0000 after we discontinued debit card fees to stimulate usage and improve interchange income. In addition, customer fees earned from certain cash management sweep products declined by $200,000 as the very low interest rates paid on these products caused customers to close accounts. Offsetting a portion of the unfavorable variances was an $899,000 increase in modification and extension fees on commercial loans as commercial customers sought to modify existing credit lines to take advantage of the falling interest rate environment. For 2002, the increase resulted primarily from higher fees generated from loan modifications.

Non-core components of noninterest income in 2003 totaled $6.0 million, consisting of a $5.7 million gain on the sale of branches and a net gain of $309,000 resulting from securities transactions. During 2002, we recorded $1.1 million in securities losses. During 2001, $7.2 million in securities gains combined with gains recognized on the sale of mortgage servicing rights contributed $7.5 million to total noninterest income. During 2003, 2002 and 2001, securities transactions relate to available for sale securities.

Management anticipates continued growth during 2004 among service charges on deposit accounts, cardholder and merchant services income, processing services, and selected commission-based income sources. We anticipate continued growth among transactions processed through our credit and debit cards, which, despite the reduction in the interchange rate previously discussed, will result in higher interchange income. Many of our client bank customers, most of which are related parties, are seeing continued expansion. As their transaction-based fees paid to us continue to grow, we anticipate improved income from processing services.

NONINTEREST EXPENSE

The primary components of noninterest expense are salaries and related employee benefits cost, equipment costs related to branch offices and technology software and hardware and occupancy costs related to branch offices and support facilities. Noninterest expense for 2003 amounted to $465.1 million, a $32.7 million or 7.6 percent increase over 2002. Noninterest expense in 2002 was $432.4 million, a $10.7 million or 2.5 percent increase over 2001. Table 16 presents the major components of noninterest expense for the past five years. For 2003 and 2002, $8.1 million and $6.1 million of the respective increase in total noninterest expenses is attributable to the continued growth and expansion of ASB.

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Table 16

NONINTEREST EXPENSE

	Year ended December 31
	2003		2002		2001		2000		1999
	(thousands)
Salaries and wages	$	199,703	$	186,756	$	180,288	$	168,478	$	159,808
Employee benefits		45,958		42,199		35,715		32,061		30,297
Equipment expense		50,436		45,406		40,861		38,153		37,745
Occupancy expense		42,430		38,316		35,584		33,835		30,041
Cardholder and merchant services		24,119		22,123		19,514		16,870		14,712
Telecommunication expense		11,455		10,753		11,052		10,799		10,052
Postage expense		8,826		8,242		8,055		7,062		7,096
Advertising expense		7,566		7,520		6,928		7,277		7,313
Legal expense		5,851		5,063		3,713		3,412		4,609
Consultant expense		3,747		2,543		3,470		5,273		5,840
Amortization of intangibles		2,583		2,803		11,585		10,637		10,963
Other		62,414		60,629		64,920		60,552		56,354
Total	$	465,088	$	432,353	$	421,685	$	394,409	$	374,830

Salary expense was $199.7 million during 2003, compared to $186.8 million during 2002, an increase of $12.9 million or 6.9 percent, following a $6.5 million or 3.6 percent increase in 2002 over 2001. Increases during 2003 resulted from higher incentive-based compensation, merit increases and a $4.6 million increase in salary expense at ASB. Higher salary levels in 2002 resulted from merit increases and higher incentive-based compensation. We expect that additional staff arising from ASB’s continuing expansion will cause 2004’s salary expense to increase at a rate well above that attributable to merit increase levels. We project reduced mortgage-based incentives will partially mitigate the rate of increase.

Employee benefits expense equaled $46.0 million during 2003, an increase of $3.8 million or 8.9 percent from 2002. The $42.2 million in benefits expense recorded during 2002 represented an increase of $6.5 million or 18.2 percent over 2001. During 2003 pension expense increased $3.6 million or 54.0 percent over 2002 due to reductions in the discount rate and the long-term return on plan assets. In addition, costs related to our employee health insurance coverage increased $1.6 million due to unfavorable conditions in the medical services and prescription drug markets. During 2002, we also recognized higher pension expense and health insurance expense when compared to 2001. We project that 2004 pension expense will remain essentially unchanged from 2003. The favorable impact of improved investment performance and an increase in the long-term rate of return on plan assets will be largely offset by a reduction in the assumed discount rate. We expect health care costs will continue to increase during 2004.

Equipment expense for 2003 was $50.4 million, an increase of $5.0 million or 11.1 percent over 2002, when total equipment expenses were $45.4 million. The increase during 2003 resulted primarily from higher levels of depreciation and maintenance expense related to software and hardware. During 2002, equipment expense was $4.5 million or 11.1 percent above the amount recorded during 2001, also the result of higher levels of depreciation and software maintenance. As we continue to build platform systems and delivery channels required to meet our customers’ needs, we anticipate equipment costs will continue to escalate.

BancShares recorded occupancy expense of $42.4 million during 2003, an increase of $4.1 million or 10.7 percent over 2002. Occupancy expense during 2002 was $38.3 million, an increase of $2.7 million or 7.7 percent over 2001. The increase in occupancy expense in each period resulted from higher depreciation expense attributable to newly constructed branches. ASB’s occupancy expense increased $1.9 million during 2003 due to its rapid expansion into new market areas. Our branch expansion plans for 2004 will result in continued increases in occupancy costs. Additionally, FCB has announced its plan to purchase a 163,000 square foot office building in Raleigh, North Carolina. This purchase, scheduled to close during the second quarter of 2004, may result in increases to BancShares occupancy expense in future periods.

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Expenses related to credit card processing were $24.1 million in 2003 and $22.2 million in 2002. This increase of $1.9 million or 8.8 percent is primarily due to growth in credit and debit card transactions and higher levels of merchant volume. In 2002, credit card processing expense increased $2.6 million or 13.4 percent from 2001, likewise due primarily to volume increases. We anticipate this volume-based expense will continue to increase during 2004.

Legal expense was $5.9 million during 2003, an increase of $788,000 or 15.6 percent over 2002 due to higher defense costs associated with various litigation matters and legal fees incurred related to ASB’s expansion into new states. The $5.1 million in legal expense reported during 2002 represented an increase of $1.4 million or 36.4 percent over 2001, also resulting from higher defense costs.

Consultant expense during 2003 was $3.7 million, a $1.2 million or 47.3 percent increase due primarily to third party support for our internal audit department. The $2.5 million in consultant expense recorded during 2002 represented a reduction of $927,000 or 26.7 percent from 2001.

INCOME TAXES

During 2003, BancShares recorded total income tax expense of $41.4 million, compared to $50.8 million during 2002 and 2001. BancShares’ effective tax rate was 35.5 percent in 2003, 35.4 in 2002 and 36.9 percent in 2001. During 2003, the reduction in income tax expense resulted from lower pretax income and a reduction to the valuation reserve for deferred state tax assets, partially offset by an increase in current state taxes. During 2002, the reduction in the effective tax rate resulted from the adoption of Statement of Financial Accounting Standards No. 142 (Statement 142) on January 1, 2002. Upon the adoption of Statement 142, we discontinued the amortization of goodwill. Since this amortization expense was non-deductible for income tax purposes, the expense reduction resulting from the change did not generate additional income tax expense and therefore caused a reduction in our effective tax rate.

LIQUIDITY

BancShares has historically maintained a strong focus on liquidity, and our deposit base represents our primary liquidity source. The rate of growth in average deposits was 4.3 percent during 2003, 6.4 percent during 2002, and 12.1 percent during 2001. Additionally, through our deposit pricing strategies, we have the ability to stimulate or curtail deposit growth. In addition to deposits, BancShares maintains additional sources for borrowed funds through federal funds lines of credit and other borrowing facilities. At December 31, 2003, BancShares had access to $475.0 million in unfunded borrowings through its correspondent bank network.

Once we have generated the needed liquidity and have satisfied our loan demand, residual liquidity is invested in overnight and longer-term investment products. We maintain a highly liquid investment portfolio with varying maturities to provide needed cash flows to meet anticipated liquidity requirements. At December 31, 2003, investment securities available for sale totaled $1.24 billion compared to $121.7 million at December 31, 2002. Investment securities held to maturity totaled $1.23 billion at December 31, 2003 and $2.42 billion at December 31, 2002. Total investment securities represent 19.7 percent and 20.8 percent of total assets at December 31, 2003 and 2002, respectively. Based on the assumption that all securities are called at their earliest call date, the weighted-average maturity of investment securities held to maturity was 11 months at December 31, 2003. The combination of the securities designated as available for sale and the short average maturity duration of the held-to-maturity portfolio provides a significant source of liquidity.

SHAREHOLDERS’ EQUITY AND CAPITAL ADEQUACY

BancShares maintains an adequate capital position and exceeds all minimum regulatory capital requirements. BancShares’ total risk-based capital ratios were 14.2 percent, 14.8 percent and 14.4 percent, respectively, at December 31, 2003, 2002 and 2001. BancShares’ Tier 1 capital ratios for December 31, 2003, 2002 and 2001 were 12.9 percent, 13.5 percent and 13.1 percent, respectively. The minimum capital ratios established by Federal Reserve guidelines are 8 percent for total capital and 4 percent for Tier 1 capital. At December 31, 2003, BancShares’ leverage capital ratio was 9.3 percent compared to 9.2 percent and 8.8 percent at December 31, 2002 and 2001, respectively. The minimum leverage ratio is 3 percent. Failure to meet certain capital requirements may result in actions by regulatory agencies that could have a direct material effect on the consolidated financial statements.

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FCB’s total risk-based capital ratios were 12.20 percent, 12.90 percent and 12.68 percent, respectively at December 31, 2003, 2002 and 2001. Dividends from FCB to BancShares provide the source for capital infusions into ASB to fund the continuing growth and expansion of ASB as well as allow for BancShares’ payment of shareholder dividends and interest payments on long-term obligations. During 2003, FCB declared dividends to BancShares in the amount of $67.4 million. BancShares infused $30 million into ASB during 2003, and we expect BancShares will contribute an additional $35 million during 2004 and $5 million during 2005 to support planned expansion.

While FCB’s total risk-based capital ratio is currently well in excess of the minimum prescribed by banking regulators, until the profitability of FCB improves, the ability of FCB to declare dividends at levels near that of 2003 is doubtful. It is therefore possible that capital infusions by BancShares into ASB in periods after 2004 may be reduced, which could limit ASB’s expansion plans.

Table 17

ANALYSIS OF BANCSHARES’ CAPITAL ADEQUACY

	December 31									Regulatory Minimum
	2003			2002			2001
	(thousands)
Tier 1 capital	$	1,152,309		$	1,096,537		$	1,015,804
Tier 2 capital		121,348			107,605			102,444
Total capital	$	1,273,657		$	1,204,142		$	1,118,248
Risk-adjusted assets	$	8,951,402		$	8,123,321		$	7,771,031
Risk-based capital ratios
Tier 1 capital		12.87	%		13.50	%		13.07	%	4.00	%
Total capital		14.23	%		14.82	%		14.39	%	8.00	%
Tier 1 leverage ratio		9.34	%		9.17	%		8.78	%	3.00	%

During the fourth quarter of 2003 the Board of Directors of BancShares reauthorized the purchase of its Class A and Class B common stock. Management views the purchase of its stock as a good investment and will purchase shares when market conditions are favorable for such transactions and excess capital exists to fund those purchases.

SEGMENT REPORTING

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

Although FCB has grown through acquisition in certain of its markets, throughout its history much of its expansion has been accomplished on a de novo basis. However, because of FCB’s size, market share and maturity as well as the current modest expansion of its branch network, the costs associated with de novo branching are not material to FCB’s financial performance. Since it first opened in 1997, ASB has followed a similar business model for growth and expansion. Yet, due to the magnitude of the number of immature branch offices that have yet to attain sufficient size for profitability, the financial results and trends of ASB are significantly affected by its current and continuing growth. Each new market ASB enters creates additional operating costs that are not fully offset by operating revenues until typically the third year after initial opening. ASB’s rapid growth in new markets in recent years has continued to adversely impact its financial performance.

Atlantic States Bank.    At December 31, 2003, ASB operated 44 branches in Florida, Georgia, Texas, Arizona and California. ASB established banking facilities in Texas and Arizona during 2002 and began conducting business in California in 2003. Substantially all of ASB’s growth has been on a de novo basis, and ASB continues efforts to build a customer base in demographically superior markets. Our business model and our growth expectations are contingent on two fundamental operating criteria. First, we are recruiting and hiring experienced bankers who are established in the markets we are entering and who are focused on strong asset quality and delivering high quality customer service. Second, we are occupying attractive and accessible branch facilities. Both of these are costly goals, but we believe that they are critical to establishing a solid foundation for future success in these new markets.

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ASB’s total assets increased from $1.04 billion at December 31, 2002 to $1.21 billion at December 31, 2003, an increase of $171.1 million or 16.5 percent. ASB’s net interest income increased $6.6 million or 20.1 percent during 2003, the result of balance sheet growth. Average interest-earning assets increased $167.3 million during 2003, primarily due to an increase in average loans outstanding. Partially offsetting the impact of this asset growth were yield reductions among interest-earning assets. The taxable-equivalent yield on interest-earning assets declined 105 basis points, from 7.56 percent during 2002 to 6.51 percent during 2003.

ASB’s noninterest income increased $587,000 or 11.8 percent during 2003, primarily the result of higher service charge income. Noninterest expense increased $8.1 million or 22.1 percent during 2003, the result of higher personnel and occupancy costs incurred in conjunction with the initial opening of new branch offices.

ASB recorded a net loss of $2.0 million during 2003 compared to a net loss of $1.3 million during 2002. This represents an increase of $701,000 or 54.6 percent in the net loss.

In Texas, Arizona and California, ASB branches operate under the name IronStone Bank. In March 2004, ASB will change its name to IronStone Bank, and all ASB branches will begin to operate under the name IronStone Bank. ASB has requested regulatory approval to open new facilities in New Mexico, Colorado and Oregon and has plans for further expansion in selected markets. As this growth continues, ASB will continue to incur incremental operating costs, particularly in the areas of personnel, occupancy and equipment. As a result of the de novo status of much of the ASB franchise and plans for continued expansion, ASB’s net losses will likely extend into the foreseeable future.

First Citizens Bank.    At December 31, 2003, FCB operated 330 branches in North Carolina, Virginia and West Virginia, compared to 342 branches at December 31, 2002 and 348 branches at December 31, 2001. The reduction in branches from 2001 to 2002 and from 2002 to 2003 has resulted primarily from decisions to consolidate branches in established North Carolina markets.

FCB’s total assets increased from $11.08 billion at December 31, 2002 to $11.28 billion at December 31, 2003, an increase of $199.3 million or 1.8 percent, the result of loan growth. FCB’s net interest income decreased $23.8 million or 6.5 percent during 2003, the result of the adverse impact of significant market interest rate reductions. Provision for loan losses decreased $2.4 million or 10.0 percent during 2003 due to lower net charge-offs.

FCB’s noninterest income increased $20.6 million or 9.3 percent during 2003, primarily the result of higher service charge, cardholder and merchant services, and commission-based income as well as gain resulting from the sale of branches. Noninterest expense increased $21.8 million or 5.4 percent during 2003, due to higher personnel and occupancy costs. FCB recorded net income of $90.4 million during 2003 compared to $105.0 million during 2002. This represents a $14.6 million or 13.9 percent decrease in net income.

FOURTH QUARTER ANALYSIS

We reported net income of $16.6 million for the quarter ending December 31, 2003, compared to $19.3 million for the corresponding period of 2002, a reduction of 14.3 percent. Per share income for the fourth quarter 2003 totaled $1.59 compared to $1.85 for the same period a year ago. Our results generated an annualized return on average assets of 0.53 percent for the fourth quarter of 2003, compared to 0.64 percent for the same period of 2002. The annualized return on average equity equaled 6.45 percent during the fourth quarter of 2003, compared to 8.05 percent for the same period of 2002. In the fourth quarter, higher noninterest expenses exceeded the favorable impact of improved noninterest income, lower provision for loan losses and a slight improvement in net interest income.

BancShares reported an increase in net interest income in the fourth quarter of 2003, compared to the prior year’s same quarter. Net interest income increased $246,000 or 0.3 percent in the fourth quarter, compared to the same period of 2002. The improvement in net interest income resulted from loan growth and the collection of interest income on nonaccrual loans. These enhancements to net interest income more than offset the unfavorable impact of lower yields on interest-earning assets. The taxable-equivalent net yield on interest-earning assets fell from 3.43 percent in the fourth quarter of 2002 to 3.33 percent for the fourth quarter of 2003.

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Interest income decreased $15.2 million or 10.8 percent in the fourth quarter of 2003 when compared to the same period of 2002. The yield on average interest-earning assets decreased 70 basis points from 5.19 percent in 2002 to 4.49 percent in 2003. The yield on average loans declined 97 basis points to 5.36 percent while the yield on average investment securities decreased 54 basis points to 2.27 percent. Average interest-earning assets increased $329.3 million or 3.1 percent during the fourth quarter of 2003, compared to the same period of 2002. Average loans outstanding during the fourth quarter of 2003 were $8.14 billion, an increase of $597.2 million or 7.9 percent of 2002.

Interest expense decreased $15.4 million from $47.7 million in the fourth quarter of 2002 to $32.3 million in the fourth quarter of 2003 due to lower rates and lower average volume. The rate on average interest-bearing liabilities decreased 65 basis points to 1.40 percent in 2003. The rate on average time deposits declined 86 basis points to 2.27 and the rate on average money market accounts decreased 65 basis points to 0.66 percent. Average interest-bearing liabilities decreased $55.5 million to $9.18 billion. Average time deposits declined $304.2 million or 7.6 percent to $3.71 billion.

The provision for loan losses decreased $2.1 million or 29.0 percent in the fourth quarter of 2003, compared to the same period of 2002 due to lower net charge-offs. Net charge-offs were $3.9 million during the fourth quarter of 2003, compared to $6.2 million during the same period of 2002, a 37.5 percent reduction.

Noninterest income increased $2.3 million or 4.1 percent during the fourth quarter. Cardholder and merchant services income increased $1.0 million or 7.5 percent due to favorable volume growth, while service-charge income increased $957,000 or 5.0 percent. Growth was also noted in trust income and commission-based income. These increases were partially offset by a $1.4 million reduction in mortgage income.

Noninterest expense increased $7.9 million or 7.1 percent during the fourth quarter of 2003, when compared to the same period of 2002. Salary expense increased $3.3 million or 7.0 percent during 2003 due to the continued growth and expansion of Atlantic States Bank’s franchise and higher incentive-based compensation. Occupancy expense increased $1.2 million or 12.9 percent, the result of higher depreciation costs and rent expense resulting from new branch facilities.

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Table 18

SELECTED QUARTERLY DATA

	2003								2002
	Fourth Quarter		Third Quarter		Second Quarter		First Quarter		Fourth Quarter		Third Quarter		Second Quarter		First Quarter
	(thousands, except per share data and ratios)
SUMMARY OF OPERATIONS
Interest income	$	125,343	$	124,887	$	129,173	$	131,074	$	140,508	$	147,742	$	151,771	$	156,148
Interest expense		32,301		34,573		39,505		42,158		47,712		52,127		55,042		59,137
Net interest income		93,042		90,314		89,668		88,916		92,796		95,615		96,729		97,011
Provision for loan losses		5,079		6,353		7,192		5,563		7,156		5,592		7,822		5,980
Net interest income after provision for loan losses		87,963		83,961		82,476		83,353		85,640		90,023		88,907		91,031
Noninterest income		58,601		62,736		66,550		56,049		56,298		55,046		55,045		53,891
Noninterest expense		120,089		118,478		115,577		110,944		112,176		108,089		105,491		106,582
Income before income taxes		26,475		28,219		33,449		28,458		29,762		36,980		38,461		38,340
Income taxes		9,901		8,672		12,677		10,164		10,422		13,190		13,659		13,516
Net income	$	16,574	$	19,547	$	20,772	$	18,294	$	19,340	$	23,790	$	24,802	$	24,824
Net interest income—taxable equivalent	$	93,297	$	90,568	$	89,926	$	89,200	$	93,106	$	95,932	$	97,074	$	97,382
SELECTED QUARTERLY AVERAGES
Total assets	$	12,449,537	$	12,287,273	$	12,203,618	$	12,054,717	$	12,076,262	$	11,871,334	$	11,756,150	$	11,664,376
Investment securities		2,602,630		2,665,203		2,594,983		2,476,426		2,544,930		2,553,957		2,641,898		2,704,077
Loans		8,140,751		7,946,501		7,811,739		7,642,673		7,543,548		7,450,271		7,312,384		7,207,757
Interest-earning assets		11,100,897		10,994,308		10,890,420		10,741,160		10,771,571		10,592,386		10,491,811		10,353,509
Deposits		10,612,173		10,441,989		10,394,829		10,283,143		10,251,693		10,060,785		9,934,615		9,776,690
Interest-bearing liabilities		9,178,628		9,126,076		9,177,931		9,173,567		9,234,127		9,131,569		9,075,549		9,073,637
Long-term obligations		261,333		253,351		253,379		253,389		253,412		253,973		262,224