UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2010

or

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

Commission File Number: 001-16715

First Citizens BancShares, Inc.

(Exact name of Registrant as specified in its charter)

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

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

(919) 716-7000

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

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

(Number of shares outstanding, by class, as of August 6, 2010)

INDEX

		Page(s)
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets at June 30, 2010, December 31, 2009 and June 30, 2009	3
	Consolidated Statements of Income for the three and six month periods ended June 30, 2010 and June 30, 2009	4
	Consolidated Statements of Changes in Shareholders’ Equity for the six month periods ended June 30, 2010 and June 30, 2009	5
	Consolidated Statements of Cash Flows for the six month periods ended June 30, 2010 and June 30, 2009	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	50
Item 4.	Controls and Procedures	50
PART II.	OTHER INFORMATION
Item 1A.	Risk Factors	51
Item 6.	Exhibits	54

2

Part 1

Item 1. Financial Statements (Unaudited)

First Citizens BancShares, Inc. and Subsidiaries

Consolidated Balance Sheets

Unaudited

	June 30* 2010			December 31# 2009			June 30* 2009
	(thousands, except share data)
Assets
Cash and due from banks	$	625,857		$	480,242		$	637,896
Overnight investments		736,896			723,260			229,668
Investment securities available for sale		3,768,777			2,929,162			3,745,385
Investment securities held to maturity		3,084			3,603			4,140
Loans held for sale		91,076			67,381			115,920
Loans and leases:
Covered by loss share agreements		2,367,090			1,173,020			0
Not covered by loss share agreements		11,622,494			11,644,999			11,523,045
Less allowance for loan and lease losses		188,169			172,282			162,282
Net loans and leases		13,801,415			12,645,737			11,360,763
Premises and equipment		846,702			837,082			821,219
Other real estate owned:
Covered by loss share agreements		98,416			93,774			0
Not covered by loss share agreements		46,763			40,607			33,301
Income earned not collected		77,186			60,684			66,226
Receivable from FDIC for loss share agreements		692,242			249,842			0
Goodwill		102,625			102,625			102,625
Other intangible assets		12,936			6,361			3,035
Other assets		201,794			225,703			197,702
Total assets	$	21,105,769		$	18,466,063		$	17,317,880
Liabilities
Deposits:
Noninterest-bearing	$	3,730,321		$	3,215,414		$	2,974,494
Interest-bearing		14,056,920			12,122,153			11,383,655
Total deposits		17,787,241			15,337,567			14,358,149
Short-term borrowings		541,709			642,405			599,853
Long-term obligations		918,930			797,366			735,803
Other liabilities		164,580			129,610			189,862
Total liabilities		19,412,460			16,906,948			15,883,667
Shareholders’ Equity
Common stock:
Class A - $1 par value (8,756,778 shares issued for all periods)		8,757			8,757			8,757
Class B - $1 par value (1,677,675 shares issued for all periods)		1,678			1,678			1,678
Surplus		143,766			143,766			143,766
Retained earnings		1,561,665			1,429,863			1,334,655
Accumulated other comprehensive income (loss)		(22,557	)		(24,949	)		(54,643	)
Total shareholders’ equity		1,693,309			1,559,115			1,434,213
Total liabilities and shareholders’ equity	$	21,105,769		$	18,466,063		$	17,317,880

* Unaudited

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

See accompanying Notes to Consolidated Financial Statements.

3

First Citizens BancShares, Inc. and Subsidiaries

Consolidated Statements of Income

Unaudited

	Three Months Ended June 30						Six Months Ended June 30
	2010			2009			2010		2009
	(thousands, except share and per share data)
Interest income
Loans and leases	$	202,541		$	155,449		$	389,615	$	312,033
Investment securities:
U. S. Government		10,250			18,118			19,601		39,277
Residential mortgage backed securities		1,873			1,234			3,437		2,382
Corporate bonds		2,198			1,580			4,333		1,858
State, county and municipal		15			104			48		155
Other		12			164			82		371
Total investment securities interest and dividend income		14,348			21,200			27,501		44,043
Overnight investments		546			192			1,019		417
Total interest income		217,435			176,841			418,135		356,493
Interest expense
Deposits		41,091			48,890			79,207		101,836
Short-term borrowings		640			1,281			1,396		2,602
Long-term obligations		10,842			9,638			21,634		19,218
Total interest expense		52,573			59,809			102,237		123,656
Net interest income		164,862			117,032			315,898		232,837
Provision for loan and lease losses		31,826			20,759			48,756		39,482
Net interest income after provision for loan and lease losses		133,036			96,273			267,142		193,355
Noninterest income
Gain on acquisitions		0			0			132,623		0
Cardholder and merchant services		28,505			24,107			52,294		45,599
Service charges on deposit accounts		19,513			19,163			38,340		37,014
Wealth management services		14,222			11,481			25,956		22,253
Fees from processing services		7,226			7,136			14,449		14,688
Securities (losses) gains		(186	)		(139	)		945		(139	)
Other service charges and fees		5,110			4,068			9,758		8,417
Mortgage income		1,924			2,369			3,334		5,821
Insurance commissions		1,794			1,825			4,600		4,295
ATM income		1,699			1,772			3,354		3,501
Adjustments to FDIC receivable for loss share agreements		12,713			0			15,452		0
Other		102			(366	)		89		(341	)
Total noninterest income		92,622			71,416			301,194		141,108
Noninterest expense
Salaries and wages		74,475			63,751			146,635		129,297
Employee benefits		15,839			15,773			34,150		33,092
Occupancy expense		18,517			15,970			36,353		31,376
Equipment expense		16,604			14,749			32,419		29,472
FDIC deposit insurance		6,609			13,763			11,496		17,949
Foreclosure-related expenses		4,014			1,785			8,075		3,422
Other		45,718			33,329			85,598		69,005
Total noninterest expense		181,776			159,120			354,726		313,613
Income before income taxes		43,882			8,569			213,610		20,850
Income taxes		15,280			2,369			80,452		5,987
Net income	$	28,602		$	6,200		$	133,158	$	14,863
Average shares outstanding		10,434,453			10,434,453			10,434,453		10,434,453
Net income per share	$	2.74		$	0.59		$	12.76	$	1.42

4

First Citizens BancShares, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

Unaudited

	Class A Common Stock		Class B Common Stock		Surplus		Retained Earnings			Accumulated Other Comprehensive Income (loss)			Total Shareholders’ Equity
	(thousands, except share and per share data)
Balance at December 31, 2008	$	8,757	$	1,678	$	143,766	$	1,326,054		$	(36,880	)	$	1,443,375
Comprehensive loss:
Net income		0		0		0		14,863			0			14,863
Change in unrealized securities gains arising during period, net of $13,108 deferred tax benefit		0		0		0		0			(20,322	)		(20,322	)
Change in unrecognized loss on cash flow hedge, net of $1,670 deferred tax		0		0		0		0			2,559			2,559
Total comprehensive loss														(2,900	)
Cash dividends of $0.60 per share		0		0		0		(6,262	)		0			(6,262	)
Balance at June 30, 2009	$	8,757	$	1,678	$	143,766	$	1,334,655		$	(54,643	)	$	1,434,213
Balance at December 31, 2009	$	8,757	$	1,678	$	143,766	$	1,429,863		$	(24,949	)	$	1,559,115
Adjustment resulting from adoption of change in accounting for QSPEs and controlling financial interests effective January 1, 2010								4,904					$	4,904
Comprehensive income:
Net income		0		0		0		133,158			0			133,158
Change in unrealized securities gains arising during period, net of $2,238 deferred tax		0		0		0		0			5,988			5,988
Change in unrecognized loss on cash flow hedge, net of $2,346 deferred tax benefit		0		0		0		0			(3,596	)		(3,596	)
Total comprehensive income														135,550
Cash dividends of $0.60 per share		0		0		0		(6,260	)		0			(6,260	)
Balance at June 30, 2010	$	8,757	$	1,678	$	143,766	$	1,561,665		$	(22,557	)	$	1,693,309

At June 30, 2010, Accumulated Other Comprehensive Loss includes on an after-tax basis $27,418 in unrealized gains on investment securities available for sale, $43,131 in unrealized losses resulting from the funded status of the defined benefit plan and an unrealized loss of $6,844 on cash flow hedges.

At June 30, 2009, Accumulated Other Comprehensive Income includes on an after-tax basis $25,069 in unrealized gains on investment securities available for sale, $75,815 in unrealized losses resulting from the funded status of the defined benefit plan and an unrealized loss of $3,897 on cash flow hedges.

See accompanying Notes to Consolidated Financial Statements.

5

Consolidated Statements of Cash Flows

First Citizens BancShares, Inc. and Subsidiaries

	For the six months ended June 30
	2010			2009
OPERATING ACTIVITIES
Net income	$	133,158		$	14,863
Adjustments to reconcile net income to cash provided by operating activities:
Amortization of intangibles		3,164			869
Provision for loan and lease losses		48,756			39,482
Deferred tax (benefit) expense		(35,427	)		8,589
Change in current taxes payable		13,899			(3,825	)
Depreciation		30,296			27,816
Change in accrued interest payable		2,771			8,884
Change in income earned not collected		(8,842	)		5,803
Gain on acquisitions		(132,623	)		0
Securities losses (gains)		(945	)		139
Origination of loans held for sale		(255,495	)		(483,656	)
Proceeds from sale of loans held for sale		235,171			442,659
Gain on sale of loans held for sale		(3,371	)		(5,524	)
Proceeds from sale of other real estate		40,943			14,836
Loss on sale of other real estate		720			2,126
Net amortization of premiums and discounts		21,550			19,507
Receivable from FDIC for loss share agreements		67,552			0
Net change in other assets		46,361			(12,174	)
Net change in other liabilities		46,492			(19,332	)
Net cash provided by operating activities		254,130			61,062
INVESTING ACTIVITIES
Net change in loans and leases outstanding		307,745			71,765
Purchases of investment securities available for sale		(1,603,861	)		(1,293,856	)
Proceeds from maturities of investment securities held to maturity		518			1,808
Proceeds from maturities of investment securities available for sale		797,949			715,300
Proceeds from sales of investment securities available for sale		24,137			0
Net change in overnight investments		(13,636	)		(55,052	)
Additions to premises and equipment		(39,916	)		(50,126	)
Net cash received from acquisitions		106,489			0
Net cash used by investing activities		(420,575	)		(610,161	)
FINANCING ACTIVITIES
Net change in time deposits		86,680			(53,721	)
Net change in demand and other interest-bearing deposits		655,263			698,107
Net change in short-term borrowings		(505,105	)		(47,501	)
Origination of long-term obligations		81,482			2,997
Cash dividends paid		(6,260	)		(6,262	)
Net cash provided by financing activities		312,060			593,620
Change in cash and due from banks		145,615			44,521
Cash and due from banks at beginning of period		480,242			593,375
Cash and due from banks at end of period	$	625,857		$	637,896
CASH PAYMENTS FOR:
Interest	$	99,466		$	114,772
Income taxes		46,041			17,516
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Unrealized securities gains (losses)	$	8,226		$	(33,430	)
Unrealized (loss) gain on cash flow hedge		(5,942	)		4,229
Transfers of loans to other real estate		55,559			20,307
Acquisitions:
Assets acquired		2,288,282			0
Liabilities assumed		(2,155,861	)		0
Net assets acquired		132,421			0

See accompanying Notes to Consolidated Financial Statements

6

First Citizens BancShares, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

Note A

Accounting Policies and Other Matters

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

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

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

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

FDIC-Assisted Transactions

US GAAP requires that the acquisition method of accounting be used for all business combinations, including those resulting from FDIC-assisted transactions and that an acquirer be identified for each business combination. Under US GAAP, the acquirer is the entity that obtains control of one or more businesses in the business combination, and the acquisition date is the date the acquirer achieves control. US GAAP requires that the acquirer recognize the fair value of assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date. In addition, acquisition-related costs and restructuring costs are recognized as period expenses as incurred.

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

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

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

7

Loans and Leases

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

Acquired loans are recorded at fair value at the date of acquisition. The fair values of acquired loans with evidence of credit deterioration since origination (impaired loans) are recorded net of a nonaccretable difference and, if appropriate, an accretable yield. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is the nonaccretable difference, which is included in the carrying amount of acquired loans. Subsequent decreases to the expected cash flows will generally result in a provision for credit losses. Subsequent increases in expected cash flows result in either a reversal of the provision for credit losses to the extent of prior charges, or a reclassification of the difference from nonaccretable to accretable with a positive impact on the accretable yield. Any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan when there is a reasonable expectation regarding the amount and timing of such cash flows. BancShares did not estimate the amount and timing of cash flows for impaired loans acquired from TVB and VB, but cash flow analyses were performed on all loans deemed impaired that were acquired from First Regional and SAB in order to determine the cash flows expected to be collected.

Receivable from FDIC for Loss Share Agreements

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

Other Real Estate Owned Covered by Loss Share Agreements

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

Recently Adopted Accounting Policies and Other Regulatory Issues

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

8

Note B

Federally Assisted Acquisitions of First Regional Bank and Sun American Bank

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

The Purchase and Assumption Agreement between FCB and the FDIC also includes a true-up payment at the end of year 10. On March 17, 2020, the true-up measurement date, FCB is required to make a true-up payment to the FDIC equal to 50 percent of the excess, if any, of (i) 20 percent of the stated threshold, or $203.4 million, less (ii) the sum of (a) 25 percent of the asset discount, or $74.9 million, plus (b) 25 percent of the cumulative loss share payments plus (c) the cumulative servicing amount. The cumulative servicing amount is 1 percent of the average covered assets for each year during the terms of the loss share agreements. Current projections suggest a true-up payment of $65,919 will be payable under the First Regional loss share agreements. This estimate is subject to change over the term of the agreements.

The term for loss share on residential real estate loans is ten years, while the term for loss share on non-residential real estate loans is five years in respect to losses and eight years in respect to loss recoveries. As a result of the loss share agreements with the FDIC and considering an estimate of a contingent true-up payment to the FDIC, FCB recorded a receivable of $365,170 at the time of acquisition. During the second quarter of 2010, adjustments were made to the FDIC receivable based on changes in loss estimates related to covered loans and other real estate owned that affect the respective acquisition date fair values. These adjustments were made retroactive to the first quarter of 2010 and increased the receivable by $24,391.

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

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

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

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

9

First quarter noninterest income included bargain purchase gains of $137,447 that resulted from the 2010 Acquisitions. The gains resulted from the difference between the estimated fair values of acquired assets and assumed liabilities. During the second quarter of 2010, adjustments were made to the gains based on additional information regarding the respective acquisition date fair values, which reduced the gains by a net of $5,026. These adjustments were made retroactive to the first quarter of 2010, the period the 2010 acquisitions were consummated, resulting in an adjusted gain of $132,421. FCB recorded a deferred tax liability for the gains totaling $51,856. To the extent there are additional adjustments to the respective acquisition date fair values up to one year following the respective acquisitions, there will be additional adjustments to the gains.

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

First Regional Bank

Acquisition date: January 29, 2010

	As recorded by First Regional		Fair value adjustments at acquisition date			Subsequent acquisition-date adjustments			As recorded by FCB
	(thousands)
Assets
Cash and due from banks	$	37,508	$	—		$	—		$	37,508
Investment securities available for sale		3,250		—			—			3,250
Loans covered by loss share agreements		1,853,325		(576,171	) a		(30,488	) a		1,246,666
Other real estate owned covered by loss share agreements		61,488		(20,353	) b		414	b		41,549
Income earned not collected		6,048		—			—			6,048
Receivable from FDIC for loss share agreements		—		365,170	c		24,391	c		389,561
Intangible assets		—		9,110	d		—			9,110
Other assets		23,782		(500	) e		—			23,282
Total assets acquired	$	1,985,401	$	(222,744	)	$	(5,683	)	$	1,756,974
Liabilities
Deposits:
Noninterest-bearing	$	528,235	$	—		$	—		$	528,235
Interest-bearing		759,484		—			—			759,484
Total deposits		1,287,719		—			—			1,287,719
Short-term borrowings		361,876		—			—			361,876
Other liabilities		1,188		1,547	h		—			2,735
Total liabilities assumed		1,650,783		1,547			—			1,652,330
Excess of assets acquired over liabilities assumed	$	334,618
Aggregate fair value adjustments			$	(224,291	)	$	(5,683	)
Gain on acquisition of First Regional									$	104,644

10

Sun American Bank

Acquisition date: March 5, 2010

	As recorded by SAB		Fair value adjustments at acquisition date			Subsequent acquisition-date adjustments			As recorded by FCB
	(thousands)
Assets
Cash and due from banks	$	37,016	$	—		$	—		$	37,016
Investment securities available for sale		66,968		—			—			66,968
Loans covered by loss share agreements		411,315		(123,707	) a		3,283	a		290,891
Other real estate owned covered by loss share agreements		15,220		(7,200	) b		—			8,020
Income earned not collected		1,612		—			—			1,612
Receivable from FDIC for loss share agreements		—		92,360	c		(2,626	) c		89,734
Intangible assets		—		629	d		—			629
Other assets		4,473		—			—			4,473
Total assets acquired	$	536,604	$	(37,918	)	$	657		$	499,343
Liabilities
Deposits:
Noninterest-bearing	$	39,435	$	—		$	—		$	39,435
Interest-bearing		380,577		—			—			380,577
Total deposits		420,012		—			—			420,012
Short-term borrowings		42,485		48	f		—			42,533
Long-term obligations		37,000		3,082	g		—			40,082
Other liabilities		853		51	h		—			904
Total liabilities assumed		500,350		3,181			—			503,531
Excess of assets acquired over liabilities assumed	$	36,254
Aggregate fair value adjustments			$	(41,099	)	$	657
Cash received from the FDIC									$	31,965
Gain on acquisition of Sun American									$	27,777

Explanation of fair value adjustments

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

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

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

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

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

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

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

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

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

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

11

Note C

Investments

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

	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Investment securities available for sale
June 30, 2010
U. S. Government	$	3,073,134	$	11,606	$	23	$	3,084,717
Corporate bonds		480,738		8,845		—		489,583
Residential mortgage-backed securities		168,307		6,313		104		174,516
Equity securities		1,358		17,333		—		18,691
State, county and municipal		1,242		30		2		1,270
Total investment securities available for sale	$	3,724,779	$	44,127	$	129	$	3,768,777
December 31, 2009
U. S. Government	$	2,274,084	$	14,005	$	666	$	2,287,423
Corporate bonds		481,341		4,326		—		485,667
Residential mortgage-backed securities		126,601		4,489		752		130,338
Equity securities		2,377		14,245		—		16,622
State, county and municipal		7,053		35		275		6,813
Other		1,937		362		—		2,299
Total investment securities available for sale	$	2,893,393	$	37,462	$	1,693	$	2,929,162
June 30, 2009
U. S. Government	$	3,144,025	$	27,447	$	1,589	$	3,169,883
Corporate bonds		457,572		1,410		1,240		457,742
Residential mortgage-backed securities		95,181		2,052		512		96,721
Equity securities		2,862		12,071		336		14,597
State, county and municipal		1,600		26		9		1,617
Other		2,894		1,931		—		4,825
Total investment securities available for sale	$	3,704,134	$	44,937	$	3,686	$	3,745,385
Investment securities held to maturity
June 30, 2010
Residential mortgage-backed securities	$	2,933	$	276	$	26	$	3,183
State, county and municipal		151		—		—		151
Total investment securities held to maturity	$	3,084	$	276	$	26	$	3,334
December 31, 2009
Residential mortgage-backed securities	$	3,452	$	230	$	—	$	3,682
State, county and municipal		151		1		—		152
Total investment securities held to maturity	$	3,603	$	231	$	—	$	3,834
June 30, 2009
Residential mortgage-backed securities	$	3,988	$	266	$	27	$	4,227
State, county and municipal		152		—		—		152
Total investment securities held to maturity	$	4,140	$	266	$	27	$	4,379

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

12

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

	June 30, 2010				December 31, 2009				June 30, 2009
	Cost		Fair Value		Cost		Fair Value		Cost		Fair Value
Investment securities available for sale
Maturing in:
One year or less	$	2,342,011	$	2,351,171	$	1,544,063	$	1,554,657	$	1,616,772	$	1,630,131
One through five years		1,220,914		1,232,535		1,226,202		1,233,604		1,986,438		1,999,122
Five through 10 years		1,912		1,946		1,943		2,201		3,623		5,561
Over 10 years		158,584		164,434		118,808		122,078		94,439		95,974
Equity securities		1,358		18,691		2,377		16,622		2,862		14,597
Total investment securities available for sale	$	3,724,779	$	3,768,777	$	2,893,393	$	2,929,162	$	3,704,134	$	3,745,385
Investment securities held to maturity
Maturing in:
One through five years	$	151	$	151	$	151	$	152	$	152	$	152
Five through 10 years		2,797		3,005		3,306		3,497		3,834		4,035
Over 10 years		136		178		146		185		154		192
Total investment securities held to maturity	$	3,084	$	3,334	$	3,603	$	3,834	$	4,140	$	4,379

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

	Less than 12 months				12 months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
June 30, 2010
Investment securities available for sale:
U.S. Government	$	4,005	$	23	$	—	$	—	$	4,005	$	23
Residential mortgage-backed securities		5,151		81		1,152		23		6,303		104
State, county and municipal		—		—		439		2		439		2
Total	$	9,156	$	104	$	1,591	$	25	$	10,747	$	129
Investment securities held to maturity:
Residential mortgage-backed securities	$	151		—	$	28	$	26	$	179	$	26
December 31, 2009
Investment securities available for sale:
U.S. Government	$	250,600	$	666	$	—	$	—	$	250,600	$	666
Residential mortgage-backed securities		25,608		621		2,434		131		28,042		752
State, county and municipal		5,476		271		439		4		5,915		275
Total	$	281,684	$	1,558	$	2,873	$	135	$	284,557	$	1,693
June 30, 2009
Investment securities available for sale:
U.S. Government	$	622,984	$	1,589	$	—	$	—	$	622,984	$	1,589
Corporate Bonds		177,515		1,240		—		—		177,515		1,240
Residential mortgage-backed securities		21,298		450		1,411		62		22,709		512
Equity securities		485		336		—		—		485		336
State, county and municipal		113		2		437		7		550		9
Total	$	822,395	$	3,617	$	1,848	$	69	$	824,243	$	3,686
Investment securities held to maturity:
Residential mortgage-backed securities	$	—	$	—	$	33	$	27	$	33	$	27

13

Investment securities with an aggregate fair value of $1,619 have had continuous unrealized losses for more than twelve months as of June 30, 2010 with an aggregate unrealized loss of $51. These 21 investments include residential mortgage-backed and state, county and municipal securities. None of the unrealized losses identified as of June 30, 2010 related to the marketability of the securities or the issuer’s ability to honor redemption obligations. Consequently, the securities were not deemed to be other than temporarily impaired.

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

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

	Six months ended June 30,
	2010			2009
Gross gains on sales of investment securities available for sale	$	2,636		$	—
Gross losses on sales of investment securities available for sale		(1,505	)		—
Other than temporary impairment loss on equity investments		(186	)		(139	)
Total securities gains (losses)	$	945		$	(139	)

Investment securities having an aggregate carrying value of $1,694,084 at June 30, 2010, $2,121,783 at December 31, 2009 and $2,012,080 at June 30, 2009, were pledged as collateral to secure public funds on deposit, to secure certain short-term borrowings and for other purposes as required by law.

14

Note D

Loans and Leases

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

	June 30, 2010		December 31, 2009		June 30, 2009
Loans covered by loss share agreements	$	2,367,090	$	1,173,020	$	—
Loans and leases not covered by loss share agreements
Real estate:
Construction and land development		627,899		622,354		677,884
Commercial mortgage		4,625,351		4,552,078		4,397,247
Residential mortgage		921,346		864,704		858,036
Revolving mortgage		2,187,978		2,147,223		2,052,941
Other mortgage		157,333		158,187		155,483
Total real estate loans		8,519,907		8,344,546		8,141,591
Commercial and industrial		1,801,465		1,832,670		1,858,910
Consumer		815,008		941,986		1,070,290
Lease financing		300,047		330,713		332,644
Other		186,067		195,084		119,610
Total loans and leases not covered by loss share agreements		11,622,494		11,644,999		11,523,045
Total loans and leases		13,989,584		12,818,019		11,523,045
Less allowance for loan and lease losses		188,169		172,282		162,282
Net loans and leases	$	13,801,415	$	12,645,737	$	11,360,763
	June 30, 2010
	Impaired at acquisition date		All other acquired loans		Total
Loans covered by loss share agreements
Real estate:
Construction and land development	$	172,256	$	561,002	$	733,258
Commercial mortgage		121,134		947,197		1,068,331
Residential mortgage		33,853		40,144		73,997
Revolving mortgage		128		25,041		25,169
Other mortgage		35,346		197,740		233,086
Total real estate loans		362,717		1,771,124		2,133,841
Commercial and industrial		9,195		211,669		220,864
Consumer		133		7,441		7,574
Other		72		4,739		4,811
Total loans covered by loss share agreements	$	372,117	$	1,994,973	$	2,367,090

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

	June 30, 2010		December 31, 2009		June 30, 2009
Impaired loans:
Covered by loss share agreements	$	372,117	$	116,446	$	—
Not covered by loss share agreements		54,457		50,797		35,098
Total	$	426,574	$	167,243	$	35,098
Allowance for loan and lease losses related to:
Impaired loans covered by loss share agreements	$	16,006	$	3,500	$	—
Impaired loans and leases not covered by loss share agreements		3,781		9,611		5,689
Impaired loans with no allowance for loan and lease loss:
Loans covered by loss share agreements		323,319		106,498		—
Loans and leases not covered by loss share agreements		2,039		9,902		10,807

Interest previously accrued on acquired loans covered by loss share agreements with the FDIC (Covered Loans) placed on nonaccrual status is charged against interest income. Payments received are applied against the principal balance of the fully impaired loans until such time as full collection of the remaining recorded balance is expected. Additional interest payments received after that time are recorded as interest income on a cash basis.

15

When the fair values of Covered Loans were established, certain loans were identified as impaired. Due to uncertainty regarding the timing of future cash flows, no accretable yield is being recorded for loans deemed impaired at acquisition from TVB and VB, and these loans are being accounted for using the cost recovery method. Cash flow analyses were completed for loans deemed impaired at acquisition from First Regional and SAB and therefore the accretion method is being applied with respect to recognition of accretable yield on those loans.

The following table provides changes in the carrying value of acquired impaired loans during the six-month period ended June 30, 2010:

Balance, December 31, 2009	$	75,368
Fair value of acquired impaired loans covered by loss share agreements		412,627
Reductions for repayments, foreclosures and decreases in fair value		(115,878	)
Balance, June 30, 2010	$	372,117

16

Information regarding the June 30, 2010 and December 31, 2009 carrying amount of acquired loans that were identified as impaired at acquisition follows:

	June 30, 2010		December 31, 2009
Outstanding balance	$	807,288	$	200,310
Carrying amount		372,117		75,368

The cash flow analyses prepared for loans originated by First Regional and SAB are being used to determine the amount of accretable yield recognized on those loans identified as impaired at acquisition. Improvements in fair values subsequent to acquisition on several loans for TVB and VB resulted in the reclassification of nonaccretable yield to accretable yield.

	Accretable Yield
Balance at December 31, 2009	$	—
Additions		45,523
Accretion		(12,170	)
Reclassifications from (to) nonaccretable difference		2,795
Disposals		(1,070	)
Balance at June 30, 2010	$	35,078

Note E

Allowance for Loan and Lease Losses

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

	Six months ended June 30,
	2010			2009
Balance, January 1	$	172,282		$	157,569
Adjustment resulting from adoption of change in accounting for QSPEs and controlling financial interests, effective January 1, 21010		681			—
Provision for loan and lease losses		48,756			39,482
Loans and leases charged-off:
Covered by loss share agreements		(7,358	)		—
Not covered by loss share agreements		(29,244	)		(37,024	)
Loans and leases recovered:
Covered by loss share agreements		—			—
Not covered by loss share agreements		3,052			2,255
Net charge-offs		(33,550	)		(34,769	)
Balance, June 30	$	188,169		$	162,282

	June 30, 2010		December 31, 2009		June 30, 2009
Allowance for loan and lease losses allocated to:
Loans covered by loss share agreements	$	16,006	$	3,500	$	—
Loans and leases not covered by loss share agreements		172,163		168,782		162,282
Total	$	188,169	$	172,282	$	162,282

17

Note F

Receivable from FDIC for Loss Share Agreements

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

	June 30, 2010
Balance at December 31, 2009	$	249,842
Additional receivable from 2010 acquisitions		479,295
Accretion of premium and discount, net		2,386
Receipt of payments from FDIC		(52,422	)
Post-acquisition adjustments		13,141
Balance at June 30, 2010	$	692,242

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

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

Note G

Estimated Fair Values

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

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

18

	June 30, 2010				December 31, 2009				June 30, 2009
	Carrying Value		Fair Value		Carrying Value		Fair Value		Carrying Value		Fair Value
Cash and due from banks	$	625,857	$	625,857	$	480,242	$	480,242	$	637,896	$	637,896
Overnight investments		736,896		736,896		723,260		723,260		229,668		229,668
Investment securities available for sale		3,768,777		3,768,777		2,929,162		2,929,162		3,745,385		3,745,385
Investment securities held to maturity		3,084		3,334		3,603		3,834		4,140		4,379
Loans held for sale		91,076		91,076		67,381		67,381		115,920		115,920
Loans covered by loss share agreements, net of allowance for loan and lease losses		2,351,084		2,296,345		1,169,520		1,169,520		—		—
Loans and leases not covered by loss share agreements, net of allowance for loan and lease losses		11,450,331		10,952,196		11,476,217		11,060,532		11,360,763		10,921,038
Receivable from FDIC for loss share agreements		692,242		692,242		249,842		249,842		—		—
Income earned not collected		77,186		77,186		60,684		60,684		66,226		66,226
Stock issued by:
Federal Home Loan Bank of Atlanta		50,688		50,688		47,361		47,361		46,677		46,677
Federal Home Loan Bank of San Francisco		16,781		16,781		5,592		5,592		—		—
Federal Home Loan Bank of Seattle		4,490		4,490		4,490		4,490		—		—
Deposits		17,787,241		17,855,490		15,337,567		15,396,423		14,358,149		14,435,457
Short-term borrowings		541,709		541,709		642,405		642,405		599,853		599,853
Long-term obligations		918,930		933,064		797,366		788,004		735,803		702,920
Accrued interest payable		40,652		40,652		37,881		37,881		59,807		59,807

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

Fair value represents the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, BancShares considers the principal or most advantageous market in which those assets or liabilities are sold and considers assumptions that market participants would use when pricing those assets or liabilities. As required under US GAAP, individual fair value estimates are ranked based on the relative reliability of the inputs used in the valuation. Fair values determined using level 1 inputs rely on active and observable markets to price identical assets or liabilities. In situations where identical assets and liabilities are not traded in active markets, fair values may be determined based on level 2 inputs, which exist when observable data exists for similar assets and liabilities. Fair values for assets and liabilities that are not actively traded in observable markets are based on level 3 inputs, which are considered to be nonobservable.

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

19

For assets and liabilities carried at fair value on a recurring basis, the following table provides fair value information as of June 30, 2010, December 31, 2009 and June 30, 2009:

			Fair value measurements using:
Description	Fair value		Quoted prices in active markets for identical assets  and liabilities (Level 1 inputs)		Quoted prices for similar assets  and liabilities (Level 2 inputs)		Significant unobservable inputs (Level 3 inputs)
June 30, 2010
Assets measured at fair value
Investment securities available for sale
U.S. Government	$	3,084,717	$	3,084,717	$	—	$	—
Corporate bonds		489,583		489,583		—		—
Residential mortgage-backed securities		174,516		—		174,516		—
Equity securities		18,691		18,691		—		—
State, county, municipal		1,270		—		1,270		—
Total	$	3,768,777	$	3,592,991	$	175,786	$	—
Liabilities measured at fair value
Interest rate swaps accounted for as cash flow hedges	$	11,309	$	—	$	11,309	$	—
December 31, 2009
Assets measured at fair value
Investment securities available for sale
U.S. Government	$	2,287,423	$	2,287,423	$	—	$	—
Corporate bonds		485,667		485,667		—		—
Residential mortgage-backed securities		130,338		—		130,338		—
Equity securities		16,622		16,622		—		—
State, county, municipal		6,813		—		6,813		—
Other		2,299		1,012		—		1,287
Total	$	2,929,162	$	2,790,724	$	137,151	$	1,287
Liabilities measured at fair value
Interest rate swaps accounted for as cash flow hedges	$	5,367	$	—	$	5,367	$	—
June 30, 2009
Assets measured at fair value
Investment securities available for sale
U.S. Government	$	3,169,883	$	3,169,883	$	—	$	—
Corporate bonds		457,742		457,742		—		—
Residential mortgage-backed securities		96,721		—		96,721		—
Equity securities		14,597		14,597		—		—
State, county, municipal		1,617		—		1,617		—
Other		4,825		—		—		4,825
Total	$	3,745,385	$	3,642,222	$	98,338	$	4,825
Liabilities measured at fair value
Interest rate swaps accounted for as cash flow hedges	$	6,440	$	—	$	6,440	$	—

Prices for US Government securities and corporate bonds are readily available in the active markets in which those securities are traded and the resulting fair values are shown in the ‘Level 1 input’ column. Prices for mortgage-backed securities, state, county and municipal securities are obtained using the fair values of similar assets and the resulting fair values are shown in the ‘Level 2 input’ column. At December 31, 2009, the fair value for the retained residual interest from a securitization transaction was determined

20

based on Level 3 nonobservable inputs. Based on changes to US GAAP related to accounting for QSPEs and controlling financial interests that became effective January 1, 2010, the previously securitized loans were consolidated and the residual interest strip was removed from the consolidated balance sheet. There were no transfers between Level 1 and Level 2 inputs during the six months ended June 30, 2010.

At June 30, 2010, other assets include $71,959 of stock in various Federal Home Loan Banks (FHLB). The FHLB stock, which is redeemable only through the issuer, is carried at its par value. The investment in the FHLB stock is considered a long-term investment and its value is based on the ultimate recoverability of par value. Management has concluded that the investment in FHLB stock was not other-than-temporarily impaired as of June 30, 2010.

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

For those investment securities available for sale with fair values that are determined by reliance on significant nonobservable inputs, the following table identifies the factors causing the change in fair value during the first six months of 2010 and 2009:

	Investment securities available for sale with fair values based  on significant nonobservable inputs
Description	2010			2009
Beginning balance, January 1,	$	1,287		$	5,427
Total gains (losses), realized or unrealized:
Included in earnings		—			—
Included in other comprehensive income		—			195
Purchases, sales, issuances and settlements, net		—			(797	)
Transfers in/out of Level 3		(1,287	)		—
Ending balance, June 30	$	—		$	4,825

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

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Certain assets and liabilities are carried at fair value on a nonrecurring basis. Loans held for sale are carried at the lower of aggregate cost or fair value and are therefore carried at fair value only when fair value is less than the asset cost. Certain impaired loans are also carried at fair value. For assets and liabilities carried at fair value on a nonrecurring basis, the following table provides fair value information as of June 30, 2010, December 31, 2009 and June 30, 2009:

			Fair value measurements using:
Description	Fair value		Quoted prices in active markets for identical assets and liabilities (Level 1 inputs)		Quoted prices for similar assets and liabilities (Level 2 inputs)		Significant nonobservable inputs (Level 3 inputs)
June 30, 2010
Loans held for sale	$	91,076	$	—	$	91,076	$	—
Impaired loans:
Covered by loss share agreements		356,111		—		—		356,111
Not covered by loss share agreements		50,676		—		—		50,676
December 31, 2009
Loans held for sale		67,381		—		67,381		—
Impaired loans:
Covered by loss share agreements		112,946		—		—		112,946
Not covered by loss share agreements		40,895		—		—		40,895
June 30, 2009
Loans held for sale		39,997		—		39,997		—
Impaired loans:
Covered by loss share		—		—		—		—
agreements
Not covered by loss share		18,624		—		—		18,624

The values of loans held for sale are based on prices observed for similar pools of loans. The values of impaired loans are determined by either the collateral value or by the discounted present value of the expected cash flows. No financial liabilities were carried at fair value on a nonrecurring basis as of June 30, 2010 or December 31, 2009.

Certain non-financial assets and non-financial liabilities are measured at fair value on a nonrecurring basis. OREO is measured and reported at fair value using Level 2 inputs for observable market data or Level 3 inputs for valuations based on nonobservable criteria. During the six month period ended June 30, 2010, foreclosures of other real estate not covered by loss share agreements totaled $16,217, all of which were valued using Level 3 inputs. In connection with the measurement and initial recognition of noncovered OREO, BancShares recognized loan charge-offs totaling $8,497. Based on updates to Level 3 inputs, noncovered OREO with a fair value of $6,006 as of June 30, 2010 incurred write-downs that totaled $1,160 during the six month period ended June 30, 2010.

Note H

Employee Benefit Plans

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

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	Three months ended June 30,						Six month periods ended June 30,
	2010			2009			2010			2009
Service cost	$	3,667		$	3,669		$	6,671		$	6,282
Interest cost		7,317			6,584			12,546			10,867
Expected return on assets		(9,497	)		(8,584	)		(16,018	)		(13,751	)
Amortization of prior service cost		68			63			115			104
Amortization of net actuarial loss		1,155			1,075			2,080			1,788
Total pension expense	$	2,710		$	2,807		$	5,394		$	5,290

For the six month periods ended June 30, 2010 and 2009 the assumed discount rate is 6.00 percent, the expected long-term rate of return on plan assets is 8.00 percent and the assumed rate of salary increases is 4.50 percent.

Note I

Contingencies

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

Note J

Derivatives

At June 30, 2010, BancShares had two interest rate swaps that qualify as cash flow hedges under US GAAP. The fair values of these derivatives are included in other liabilities in the consolidated balance sheets and in the net change in other liabilities in the consolidated statements of cash flows.

The interest rate swaps are used for interest rate risk management purposes and convert variable-rate exposure on outstanding debt to a fixed rate. The interest rate swaps each have a notional amount of $115,000, representing the amount of variable-rate trust preferred capital securities issued during 2006. The 2006 interest rate swap hedges interest payments through June 2011 and requires fixed-rate payments by BancShares at 7.125 percent in exchange for variable-rate payments of 175 basis points above 3-month LIBOR, which is equal to the interest paid to the holders of the trust preferred capital securities. The 2009 interest rate swap hedge interest payments from July 2011 through June 2016 and requires fixed-rate payments by BancShares at 5.50 percent in exchange for variable-rate payments of 175 basis points above 3-month LIBOR. As of June 30, 2010, collateral with a fair value of $10,366 was pledged to secure the existing obligation under the interest rate swaps. For both swaps, settlement occurs quarterly.

	June 30, 2010				December 31, 2009
	Notional amount		Estimated fair value of liability		Notional amount		Estimated fair value of (asset) liability
2006 interest rate swap hedging variable rate exposure on trust preferred capital securities 2006-2011	$	115,000	$	5,384	$	115,000	$	7,424
2009 interest rate swap hedging variable rate exposure on trust preferred capital securities 2011-2016		115,000		5,925		115,000		(2,057	)
			$	11,309			$	5,367

For cash flow hedges, the effective portion of the gain or loss due to changes in the fair value of the derivative hedging instrument is included in other comprehensive income, while the ineffective portion, representing the excess of the cumulative change in the fair value of the derivative over the cumulative change in expected future discounted cash flows on the hedged transaction, is recorded in the consolidated income statement. BancShares’ interest rate swaps have been fully effective since inception. Therefore, changes in the fair value of the interest rate swaps have had no impact on net income. For the six month periods ended June 30, 2010 and 2009, BancShares recognized interest expense of $2,951 and $2,238, respectively, resulting from the interest rate swaps, none of which related to ineffectiveness.

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

	2010			2009
Accumulated other comprehensive loss resulting from interest rate swaps as of January 1, net of tax	$	(3,248	)	$	(6,456	)
Other comprehensive (loss) income recognized during six month period ended June 30, net of tax		(3,596	)		2,559
Accumulated other comprehensive loss resulting from interest rate swaps as of June 30, net of tax	$	(6,844	)	$	(3,897	)

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

Note K

Segment Disclosures

BancShares conducts its banking operations through its two wholly-owned subsidiaries, FCB and ISB. Although FCB and ISB offer similar products and services to customers, each entity operates in distinct geographic markets, except California, Washington and Florida, and has separate management groups. Additionally, the financial results and trends of ISB reflect the de novo nature of its growth.

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

Management has determined that FCB and ISB are reportable business segments. In the aggregate, FCB and its consolidated subsidiaries, which are integral to its branch operation, and ISB account for more than 90 percent of consolidated assets, revenues and net income. The ‘Other’ category in the accompanying table includes activities of the parent company and Neuse, Incorporated (Neuse), a subsidiary that owns real property used in the banking operation and owns other real estate. The other real estate owned (non-performing assets) by Neuse relates to loans originated by ISB. During 2009, Neuse purchased some of ISB’s OREO to reduce ISB’s nonperforming assets. To facilitate the potential purchase of additional OREO in the future, ISB has agreed to lend Neuse up to $15,000 under a revolving line of credit. No amount was owed by Neuse to ISB as of June 30, 2010 under the revolving line of credit.

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

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	ISB		FCB		Other		Total		Adjustments			Consolidated
June 30, 2010
Total assets	$	2,807,642	$	18,155,558	$	2,181,898	$	23,145,098	$	(2,039,329	)	$	21,105,769
Loans and leases:
Covered by loss share agreements		—		2,367,090		—		2,367,090		—			2,367,090
Not covered by loss share agreements		2,255,885		9,457,684		—		11,713,569		(91,075	)		11,622,494
Allowance for loan and lease losses		41,875		146,294		—		188,169		—			188,169
Goodwill		793		60,593		—		61,386		41,239			102,625
Nonperforming assets:
Covered by loss share agreements		—		362,578		—		362,578		—			362,578
Not covered by loss share agreements		63,731		77,524		15,331		156,586		—			156,586
Deposits		2,187,421		15,633,900		—		17,821,321		(34,080	)		17,787,241
December 31, 2009
Total assets	$	2,573,605	$	15,791,475	$	2,181,898	$	20,546,978	$	(2,080,915	)	$	18,466,063
Loans and leases:
Covered by loss share agreements		—		1,173,020		—		1,173,020		—			1,173,020
Not covered by loss share agreements		2,194,659		9,450,340		—		11,644,999		—			11,644,999
Allowance for loan and lease losses		41,675		130,607		—		172,282		—			172,282
Goodwill		793		101,832		—		102,625		—			102,625
Nonperforming assets:
Covered by loss share agreements		—		220,233		—		220,233		—			220,233
Not covered by loss share agreements		62,881		76,622		14,546		154,049		—			154,049
Deposits		1,967,824		13,406,484		—		15,374,308		(36,741	)		15,337,567
June 30, 2009
Total assets	$	2,654,534	$	14,601,756	$	2,181,110	$	19,437,400	$	(2,119,520	)	$	17,317,880
Loans and leases not covered by loss share agreements		2,154,136		9,368,909		—		11,523,045		—			11,523,045
Allowance for loan and lease losses		38,425		123,857		—		162,282		—			162,282
Goodwill		793		101,832		—		102,625		—			102,625
Nonperforming assets		61,246		33,364		7,801		102,411		—			102,411
Deposits		2,050,384		12,334,886		—		14,385,270		(27,121	)		14,358,149

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	As of and for the quarter ended June 30, 2010
	ISB			FCB		Other			Total		Adjustments			Consolidated
Interest income	$	33,832		$	183,364	$	413		$	217,609	$	(174	)	$	217,435
Interest expense		10,415			36,675		5,657			52,747		(174	)		52,573
Net interest income		23,417			146,689		(5,244	)		164,862		—			164,862
Provision for credit losses		4,889			26,937		—			31,826		—			31,826
Net interest income after		18,528			119,752		(5,244	)		133,036		—			133,036
provision for credit losses
Noninterest income		3,856			90,820		(140	)		94,536		(1,914	)		92,622
Noninterest expense		22,624			160,712		354			183,690		(1,914	)		181,776
Income (loss) before income taxes		(240	)		49,860		(5,738	)		43,882		—			43,882
Income taxes		(42	)		17,321		(1,999	)		15,280		—			15,280
Net income (loss)	$	(198	)	$	32,539	$	(3,739	)	$	28,602	$	—		$	28,602
	As of and for the quarter ended June 30, 2009
	ISB			FCB		Other			Total		Adjustments			Consolidated
Interest income	$	32,461		$	143,061	$	1,454		$	176,976	$	(135	)	$	176,841
Interest expense		13,484			40,844		5,616			59,944		(135	)		59,809
Net interest income		18,977			102,217		(4,162	)		117,032		—			117,032
Provision for credit losses		10,064			10,695		—			20,759		—			20,759
Net interest income after		8,913			91,522		(4,162	)		96,273		—			96,273
provision for credit losses
Noninterest income		3,318			71,143		(545	)		73,916		(2,500	)		71,416
Noninterest expense		23,181			137,927		512			161,620		(2,500	)		159,120
Income (loss) before income taxes		(10,950	)		24,738		(5,219	)		8,569		—			8,569
Income taxes		(3,886	)		8,078		(1,823	)		2,369		—			2,369
Net income (loss)	$	(7,064	)	$	16,660	$	(3,396	)	$	6,200	$	—		$	6,200

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	As of and for the six months ended June 30, 2010
	ISB			FCB		Other			Total		Adjustments			Consolidated
Interest income	$	66,475		$	351,117	$	916		$	418,508	$	(373	)	$	418,135
Interest expense		21,296			70,009		11,305			102,610		(373	)		102,237
Net interest income		45,179			281,108		(10,389	)		315,898		—			315,898
Provision for credit losses		8,746			40,010		—			48,756		—			48,756
Net interest income after provision for credit losses		36,433			241,098		(10,389	)		267,142		—			267,142
Noninterest income		7,189			298,106		(122	)		305,173		(3,979	)		301,194
Noninterest expense		45,021			313,022		662			358,705		(3,979	)		354,726
Income (loss) before income taxes		(1,399	)		226,182		(11,173	)		213,610		—			213,610
Income taxes		(435	)		84,794		(3,907	)		80,452		—			80,452
Net income (loss)	$	(964	)	$	141,388	$	(7,266	)	$	133,158	$	—		$	133,158
	As of and for the six months ended June 30, 2009
	ISB			FCB		Other			Total		Adjustments			Consolidated
Interest income	$	65,125		$	288,041	$	3,630		$	356,796	$	(303	)	$	356,493
Interest expense		28,620			83,983		11,356			123,959		(303	)		123,656
Net interest income		36,505			204,058		(7,726	)		232,837		—			232,837
Provision for credit losses		19,141			20,341		—			39,482		—			39,482
Net interest income after provision for credit losses		17,364			183,717		(7,726	)		193,355		—			193,355
Noninterest income		6,537			140,214		(546	)		146,205		(5,097	)		141,108
Noninterest expense		45,308			272,430		972			318,710		(5,097	)		313,613
Income (loss) before income taxes		(21,407	)		51,501		(9,244	)		20,850		—			20,850
Income taxes		(7,655	)		16,878		(3,236	)		5,987		—			5,987
Net income (loss)	$	(13,752	)	$	34,623	$	(6,008	)	$	14,863	$	—		$	14,863

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

INTRODUCTION

Management’s discussion and analysis of earnings and related financial data are presented to assist in understanding the financial condition and results of operations of First Citizens BancShares, Inc. and Subsidiaries (BancShares). This discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and related notes presented within this report. Intercompany accounts and transactions have been eliminated. Although certain amounts for prior years have been reclassified to conform to statement presentations for 2010, the reclassifications have no effect on shareholders’ equity or net income as previously reported. Unless otherwise noted, the terms we, us and BancShares refer to the consolidated financial position and consolidated results of operations for BancShares.

FDIC-ASSISTED TRANSACTIONS

First Regional Bank. On January 29, 2010, First-Citizens Bank & Trust Company (FCB) entered into an agreement with the FDIC to purchase substantially all the assets and assume the majority of the liabilities of First Regional Bank (First Regional) of Los Angeles, California. Immediately prior to the effectiveness of the transaction, the FDIC had been appointed Receiver of First Regional by the California Department of Financial Institutions.

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

First Regional Bank	Table 1
Acquisition date: January 29, 2010

	As recorded by First Regional		Fair value adjustments at acquisition date			Subsequent acquisition-date adjustments			As recorded by FCB
	(thousands)
Assets
Cash and due from banks	$	37,508	$	—		$	—		$	37,508
Investment securities available for sale		3,250		—			—			3,250
Loans covered by loss share agreements		1,853,325		(576,171	)		(30,488	)		1,246,666
Other real estate owned covered by loss share agreements		61,488		(20,353	)		414			41,549
Income earned not collected		6,048		—			—			6,048
Receivable from FDIC for loss share agreements		—		365,170			24,391			389,561
Intangible assets		—		9,110			—			9,110
Other assets		23,782		(500	)		—			23,282
Total assets acquired	$	1,985,401	$	(222,744	)	$	(5,683	)	$	1,756,974
Liabilities
Deposits:
Noninterest-bearing	$	528,235	$	—		$	—		$	528,235
Interest-bearing		759,484		—			—			759,484
Total deposits		1,287,719		—			—			1,287,719
Short-term borrowings		361,876		—			—			361,876
Other liabilities		1,188		1,547			—			2,735
Total liabilities assumed		1,650,783		1,547			—			1,652,330
Excess of assets acquired over liabilities assumed	$	334,618
Aggregate fair value adjustments			$	(224,291	)	$	(5,683	)
Gain on acquisition of First Regional									$	104,644

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The loans and other real estate acquired through foreclosure are covered by loss share agreements that provide for the FDIC to absorb 80 percent of losses incurred on covered loans and other real estate in excess of $41.8 million. The 80 percent coverage ratio applies to losses up to $1.0 billion with losses in excess of $1.0 billion covered by the FDIC at a rate of 95 percent. FCB recorded a receivable from the FDIC equal to $389.6 million as an estimate of the fair value of the amount that will be reimbursed by the FDIC from the loss share agreements. The Purchase and Assumption Agreement between FCB and the FDIC includes a true-up payment at the end of year 10. On March 17, 2020, the true-up measurement date, FCB is required to make a true-up payment to the FDIC equal to 50 percent of the excess, if any, of (i) 20 percent of the stated threshold, or $203.4 million, less (ii) the sum of (a) 25 percent of the asset discount, or $74.9 million, plus (b) 25 percent of the cumulative loss share payments plus (c) the cumulative servicing amount. The cumulative servicing amount is 1 percent of the average covered assets for each year during the terms of the loss share agreements.

First quarter noninterest income included a bargain purchase gain of $110.3 million that resulted from the FDIC-assisted acquisition of First Regional. During the second quarter of 2010, adjustments were made to the initial gain based on additional information regarding the respective acquisition date fair values, which reduced the gain by $5.7 million. These adjustments were made retroactive to the first quarter of 2010 resulting in an adjusted gain of $104.6 million. Our operating results for the period ended June 30, 2010 include the results of the acquired assets and liabilities for the period from January 29, 2010 through June 30, 2010. Accretion and amortization of various purchase accounting discounts and premiums were recorded in the first and second quarters of 2010.

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

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

Sun American Bank	Table 2
Acquisition date: March 5, 2010

	As recorded by SAB		Fair value adjustments at acquisition date			Subsequent acquisition-date adjustments			As recorded by FCB
	(thousands)
Assets
Cash and due from banks	$	37,016	$	—		$	—		$	37,016
Investment securities available for sale		66,968		—			—			66,968
Loans covered by loss share agreements		411,315		(123,707	)		3,283			290,891
Other real estate owned covered by loss share agreements		15,220		(7,200	)		—			8,020
Income earned not collected		1,612		—			—			1,612
Receivable from FDIC for loss share agreements		—		92,360			(2,626	)		89,734
Intangible assets		—		629			—			629
Other assets		4,473		—			—			4,473
Total assets acquired	$	536,604	$	(37,918	)	$	657		$	499,343
Liabilities
Deposits:
Noninterest-bearing	$	39,435	$	—		$	—		$	39,435
Interest-bearing		380,577		—			—			380,577
Total deposits		420,012		—			—			420,012
Short-term borrowings		42,485		48			—			42,533
Long-term obligations		37,000		3,082			—			40,082
Other liabilities		853		51			—			904
Total liabilities assumed		500,350		3,181			—			503,531
Excess of assets acquired over liabilities assumed	$	36,254
Aggregate fair value adjustments			$	(41,099	)	$	657
Cash received from the FDIC									$	31,965
Gain on acquisition of Sun American									$	27,777

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The loans and other real estate acquired through foreclosure are covered by loss share agreements that provide for the FDIC to absorb 80 percent of all losses incurred on covered loans and other real estate up to $99.0 million. Losses in excess of $99.0 million are covered by the FDIC at a rate of 95 percent. FCB recorded a receivable from the FDIC equal to $92.4 million as an estimate of the fair value of the amount that will be reimbursed by the FDIC from the loss share agreements. The Purchase and Assumption Agreement between FCB and the FDIC includes a true-up payment at the end of year 10. On May 15, 2020, the true-up measurement date, FCB is required to make a true-up payment to the FDIC equal to 50 percent of the excess, if any, of (i) 20 percent of the stated threshold, or $19.8 million, less (ii) the sum of (a) 25 percent of the asset discount, or $17.5 million, plus (b) 25 percent of the cumulative loss share payments plus (c) the cumulative servicing amount. The cumulative servicing amount is 1 percent of the average covered assets for each year during the terms of the loss share agreements.

First quarter noninterest income included a bargain purchase gain of $27.1 million that resulted from the FDIC-assisted acquisition of SAB. During the second quarter of 2010, adjustments were made to the initial gain based on additional information regarding the respective acquisition date fair values, which increased the gain by $656,000. These adjustments were made retroactive to the first quarter of 2010 resulting in an adjusted gain of $27.8 million. Our operating results for the period ended June 30, 2010 include the results of the acquired assets and liabilities for the period from March 5, 2010 through June 30, 2010. Accretion and amortization of various purchase accounting discounts and premiums were recorded in the first and second quarters of 2010.

The 2010 transactions involving First Regional and SAB represented the third and fourth transactions involving BancShares since July 17, 2009. Table 3 provides information regarding the four entities from which we have acquired assets and assumed liabilities in FDIC-assisted transactions during 2010 and 2009. Adjustments to acquisition date fair values are subject to change for one year following the closing date of each respective acquisition.

FDIC-Assisted Transactions

Table 3

			Fair value of
Entity	Date of transaction	# branches	Loans acquired		Deposits assumed		Short-term borrowings assumed		Long-term obligations assumed
					(thousands)
Sun American Bank	March 5, 2010	12	$	290,892	$	420,012	$	42,533	$	40,082
First Regional Bank	January 29, 2010	8		1,246,666		1,287,719		361,876		—
Venture Bank	September 11, 2009	18		456,995		709,091		—		55,618
Temecula Valley Bank	July 17, 2009	11		855,583		965,431		79,096		—
Total		49	$	2,850,136	$	3,382,253	$	483,505	$	95,700

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EXECUTIVE OVERVIEW AND PERFORMANCE SUMMARY

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

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

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

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

In addition, real estate demand in many of our markets remains weak, resulting in continued depressed real estate prices that have adversely affected collateral values for many borrowers. In particular, the stressed residential real estate markets in Georgia and Florida had a material negative impact on the profitability of ISB during 2009. The financial impact of depressed real estate markets continues to affect earnings during 2010 at a more modest rate.

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

Ongoing economic weakness continues to have a significant impact on virtually all financial institutions in the United States, including BancShares. In addition to the various actions previously enacted by governmental agencies and the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act, it is likely that further changes will occur as the Federal government attempts to restore stability to the financial services sector.

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

BancShares’ consolidated net income during the second quarter of 2010 equaled $28.6 million, an increase of $22.4 million over the $6.2 million earned during the corresponding period of 2009. The annualized return on average assets and equity amounted to 0.54 percent and 6.83 percent respectively during the second quarter of 2010, compared to 0.14 and 1.73 percent during the same period of 2009. Net income per share during the second quarter of 2010 totaled $2.74, compared to $0.59 during the second quarter of 2009. The increase in net income during 2010 resulted from higher net interest income and noninterest income offset in part by increased provision for loan and lease losses and noninterest expenses.

For the six-month period ending June 30, 2010, net income equaled $133.2 million compared to $14.9 million earned during the same period of 2009. Return on assets and equity during 2010 equaled 1.31 percent and 16.46 percent respectively, up from 0.18 percent and 2.09 percent during the six-month period ended June 30, 2009. Net income per share equaled $12.76 during the first six months of 2010 compared to $1.42 in the first six months of 2009. The increase in net income during 2010 was attributable primarily to gains arising from FDIC-assisted transactions completed during the first quarter of 2010.

Net interest income increased $47.8 million from $117.0 million in the second quarter of 2009 to $164.9 million in 2010, an increase of 40.9 percent resulting from balance sheet growth caused primarily by acquisitions and a significant improvement in the net yield on interest-earning assets. The net yield on interest-earning assets improved by 52 basis points from 3.02 in the second quarter 2009 to 3.54 percent in 2010 due to favorable changes in deposit costs and the positive impact of yields and rates on acquired loans and assumed deposits. Year-to-date net interest income increased $83.1 million, or 35.7 percent during 2010. The net yield on interest-earning assets increased 47 basis points to 3.54 percent during the six-month period ended June 30, 2010.

The provision for loan and lease losses recorded during the second quarter of 2010 equaled $31.8 million, compared to $20.8 million during the second quarter of 2009. During the first six months of 2010, the provision for loan and lease losses equaled $48.8 million, an increase of $9.3 million or 23.5 percent from the same period of 2009. The current year increase was caused primarily by post-acquisition deterioration of acquired loans from TVB and VB covered by loss share agreements with the FDIC.

Noninterest income increased $21.2 million or 29.7 percent in the second quarter of 2010 and $160.1 million or 113.4 percent in the first six months of 2010 when compared to the same period of 2009. The significant increase during the six-month period ended June 30, 2010 is primarily due to gains on acquisitions totaling $132.6 million. Noninterest expense increased $22.7 million or 14.2 percent in the second quarter of 2010 and $41.1 million or 13.1 percent in the first six months of 2010 when compared to the same period in 2009. The increase in noninterest expense is due to acquisition related activities, including operating costs for acquired branches and expenses related to the operation and disposition of other real estate.

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Financial Summary Table 4

	2010				2009								Six months ended June 30
	Second		First		Fourth			Third		Second
	Quarter		Quarter		Quarter			Quarter		Quarter			2010		2009
	(thousands, except share data and ratios)
Summary of Operations
Interest income	$	217,435	$	200,700	$	191,976		$	189,690	$	176,841		$	418,135	$	356,493
Interest expense		52,573		49,664		49,575			54,413		59,809			102,237		123,656
Net interest income		164,862		151,036		142,401			135,277		117,032			315,898		232,837
Provision for loan and lease losses		31,826		16,930		21,617			18,265		20,759			48,756		39,482
Net interest income after provision for loan and lease losses		133,036		134,106		120,784			117,012		96,273			267,142		193,355
Gains on acquisitions		—		132,623		(536	)		104,970		—			132,623		—
Other noninterest income		92,622		75,949		82,800			77,661		71,416			168,571		141,108
Noninterest expense		181,776		172,950		174,165			166,277		159,120			354,726		313,613
Income before income taxes		43,882		169,728		28,883			133,366		8,569			213,610		20,850
Income taxes		15,280		65,172		9,883			50,898		2,369			80,452		5,987
Net income	$	28,602	$	104,556	$	19,000		$	82,468	$	6,200		$	133,158	$	14,863
Net interest income, taxable equivalent	$	165,937	$	151,870	$	143,446		$	136,426	$	118,350		$	318,013	$	235,575
Per Share Data
Net income	$	2.74	$	10.02	$	1.82		$	7.90	$	0.59		$	12.76	$	1.42
Cash dividends		0.300		0.300		0.300			0.300		0.300			0.600		0.600
Market price at period end (Class A)		192.33		198.76		164.01			159.10		133.65			192.33		133.65
Book value at period end		162.28		159.91		149.42			145.16		137.45			162.28		137.45
Tangible book value at period end		151.21		148.68		138.98			134.66		127.32			151.21		127.32
Selected Quarterly Averages
Total assets	$	21,222,673	$	19,957,379	$	18,386,775		$	17,892,599	$	17,309,656		$	20,550,439	$	17,128,427
Investment securities		3,732,320		3,060,237		3,134,971			3,596,422		3,578,604			3,398,135		3,413,655
Loans and leases (covered and not covered)		14,202,809		13,789,081		12,877,150			12,078,390		11,621,450			13,953,897		11,640,555
Interest-earning assets		18,778,108		17,507,787		16,319,611			15,862,964		15,725,319			18,103,265		15,550,310
Deposits		17,881,444		16,576,039		15,291,720			14,792,449		14,316,103			17,232,348		14,107,973
Interest-bearing liabilities		15,598,726		14,681,127		13,467,532			13,137,412		12,840,612	<