Edgar Filing: FIRST CITIZENS BANCSHARES INC /DE/

Form 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2008

Commission File Number 0-16471

FIRST CITIZENS BANCSHARES, INC.

(Exact name of Registrant as specified in the charter)


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

4300 Six Forks Road

Raleigh, North Carolina 27609

(Address of Principal Executive Offices, Zip Code)

(919) 716-7000

(Registrant’s Telephone Number, including Area Code)


		Securities registered pursuant to:
		Section 12(b) of the Act:		Class A Common Stock, Par Value $1
		Section 12(g) of the Act:		Class B Common Stock, Par Value $1
				(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” and “smaller reporting company” 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

The aggregate market value of the Registrant’s common equity held by nonaffiliates computed by reference to the price at which the common equity was last sold as of the last business day of the Registrant’s most recently completed second fiscal quarter was $718,318,286.

On February 27, 2009, there were 8,756,778 outstanding shares of the Registrant’s Class A Common Stock and 1,677,675 outstanding shares of the Registrant’s Class B Common Stock.

Portions of the Registrant’s definitive Proxy Statement for the 2009 Annual Meeting of Shareholders are incorporated in Part III of this report.

CROSS REFERENCE INDEX


			Page
PART 1	Item 1	Business	3
	Item 1A	Risk Factors	6
	Item 1B	Unresolved Staff Comments	None
	Item 2	Properties	6
	Item 3	Legal Proceedings	36
	Item 4	Submission of Matters to a Vote of Security Holders	None
PART II	Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	6-7
	Item 6	Selected Financial Data	12
	Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	8-38
	Item 7A	Quantitative and Qualitative Disclosures about Market Risk	29-30
	Item 8	Financial Statements and Supplementary Data
		Report of Independent Registered Public Accounting Firm	39
		Management’s Annual Report on Internal Control over Financial Reporting	40
		Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting	41
		Consolidated Balance Sheets at December 31, 2008 and 2007	42
		Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2008	43
		Consolidated Statements of Changes in Shareholders’ Equity for each of the years in the three-year period ended December 31, 2008	44
		Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2008	45
		Notes to Consolidated Financial Statements	46-71
		Quarterly Financial Summary for 2008 and 2007	33
	Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	None
	Item 9A	Controls and Procedures	7
	Item 9B	Other Information	None
PART III	Item 10	Directors and Executive Officers and Corporate Governance	*
	Item 11	Executive Compensation	*
	Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	*
	Item 13	Certain Relationships and Related Transactions and Director Independence	*
	Item 14	Principal Accounting Fees and Services	*
PART IV	Item 15	Exhibits, Financial Statement Schedules
	(1)	Financial Statements (see Item 8 for reference)
	(2)	All Financial Statement Schedules normally required on Form 10-K are omitted since they are not applicable, except as referred to in Item 8.
	(3)	The Exhibits listed on the Exhibit Index contained in this Form 10-K are filed with or furnished to the Commission or incorporated by reference into this report and are available upon written request.

Information required by Item 10 is incorporated herein by reference to the information that appears under the headings or captions ‘Proposal 1: Election of Directors,’ ‘Code of Ethics,’ ‘Committees of our Board—General,’ and ‘—Audit and Compliance Committee’, ‘Executive Officers’ and ‘Section 16(a) Beneficial Ownership Reporting Compliance’ from the Registrant’s Proxy Statement for the 2009 Annual Meeting of Shareholders (2009 Proxy Statement) .

Information required by Item 11 is incorporated herein by reference to the information that appears under the headings or captions ‘Compensation Discussion and Analysis,’ ‘Compensation Committee Report,’ ‘Executive Compensation,’ and ‘Director Compensation,’ of the 2009 Proxy Statement.

Information required by Item 12 is incorporated herein by reference to the information that appears under the heading ‘Beneficial Ownership of Our Common Stock’ of the 2009 Proxy Statement.

Information required by Item 13 is incorporated herein by reference to the information that appears under the headings or captions ‘Corporate Governance—Director Independence’ and ‘Transactions with Related Persons’ of the 2009 Proxy Statement.

Information required by Item 14 is incorporated by reference to the information that appears under the caption ‘Services and Fees During 2008 and 2007 of the 2009 Proxy Statement.

Business

First Citizens BancShares, Inc. (BancShares) was incorporated under the laws of Delaware on August 7, 1986, to become the holding company of First-Citizens Bank & Trust Company (First Citizens Bank or FCB), its banking subsidiary. FCB opened in 1898 as the Bank of Smithfield, Smithfield, North Carolina, and through a series of mergers and name changes, it later became First-Citizens Bank & Trust Company. As of December 31, 2008, FCB operated 343 offices in North Carolina, Virginia, West Virginia, Maryland and Tennessee. During 2008, FCB announced plans to establish a new branch office in Washington, D.C.

On April 28, 1997, BancShares launched IronStone Bank (ISB), a federally-chartered thrift institution that originally operated under the name Atlantic States Bank. Initially, ISB operated in the counties surrounding Atlanta, Georgia, but gradually expanded into other high-growth markets in urban areas. At December 31, 2008, ISB had 58 offices in Georgia, Florida, Texas, Arizona, New Mexico, California, Oregon, Washington, Colorado, Oklahoma, Kansas and Missouri.

BancShares’ executive offices are located at 4300 Six Forks Road, Raleigh, North Carolina 27609, and its telephone number is (919) 716-7000. At December 31, 2008, BancShares and its subsidiaries employed a full-time staff of 4,044 and a part-time staff of 799 for a total of 4,843 employees.

BancShares’ subsidiary banks seek to meet the needs of both consumers and commercial entities in their respective market areas. These services, offered at most offices, include taking of deposits, cashing of checks, and providing for individual and commercial cash needs; numerous checking and savings plans; commercial, business and consumer lending; a full-service trust department; and other activities incidental to commercial banking. First Citizens Investor Services, Inc. (FCIS) and IronStone Securities (ISS) provide various investment products, including annuities, discount brokerage services and third-party mutual funds to customers. Various other subsidiaries are not material to BancShares’ consolidated financial position or to consolidated net income.

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

FCB is a state-chartered bank, subject to supervision and examination by, and the regulations and reporting requirements of, the Federal Deposit Insurance Corporation (FDIC) and the North Carolina Commissioner of Banks. ISB is a federally-chartered thrift institution supervised by the Office of Thrift Supervision. Deposit obligations of FCB and ISB are insured by the FDIC to the maximum legal limits.

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

There are many statutes and regulations that apply to and restrict the activities of the banking subsidiaries, including limitations on the ability to pay dividends, capital requirements, reserve requirements, deposit insurance requirements and restrictions on transactions with related parties. The impact of these statutes and regulations is discussed below and in the accompanying audited consolidated financial statements.

The Gramm-Leach-Bliley Act (GLB Act) adopted by Congress during 1999 expanded opportunities for banks and bank holding companies to provide services and engage in other revenue-generating activities that previously were prohibited to them. The GLB Act permits bank holding companies to become “financial holding companies” and expands activities in which banks and bank holding companies may participate, including opportunities to affiliate with securities firms and insurance companies. During 2000, BancShares became a financial holding company. The GLB Act also contains extensive customer privacy protection provisions which require banks to adopt and implement policies and procedures for the protection of the financial privacy of their customers, including procedures that allow customers to elect that certain financial information not be disclosed to certain persons.

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

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

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

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

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

Under the Federal Deposit Insurance Reform Act of 2005 (FDIRA), the FDIC uses a risk-based assessment system to determine the amount of a bank’s deposit insurance assessment based on an evaluation of the probability that the deposit insurance fund (DIF) will incur a loss with respect to that bank. The evaluation considers risks attributable to different categories and concentrations of the bank’s assets and liabilities and other factors the FDIC considers to be relevant, including information obtained from the bank’s federal and state banking regulators.

The FDIC is responsible for maintaining the adequacy of the DIF, and the amount paid by a bank for deposit insurance is influenced not only by the assessment of the risk it poses to the DIF, but also by the adequacy of the insurance fund to cover the risk posed by all insured institutions. FDIC insurance assessments could be increased substantially in the future if the FDIC finds such an increase to be necessary in order to adequately maintain the DIF. Additionally, under the FDIA, the FDIC may terminate a bank’s deposit insurance if it finds that the bank has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated applicable laws, regulations, rules, or orders.

Each of the banking subsidiaries is subject to the provisions of Section 23A of the Federal Reserve Act. Section 23A places limits on the amount of certain transactions with affiliate entities. The total amount of the transactions by any of the banking subsidiaries with a single affiliate is limited to 10% of the banking subsidiary’s capital and surplus and, for all affiliates, to 20% of the banking subsidiary’s capital and surplus. Each of the transactions among affiliates must also meet specified collateral requirements and must comply with other provisions of Section 23A designed to avoid transfers of low-quality assets between affiliates. The banking subsidiaries are also subject to the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibits the above transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the banking subsidiary or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.

The USA Patriot Act of 2001 (Patriot Act) is intended to strengthen the ability of U.S. law enforcement and the intelligence community to work cohesively to combat terrorism on a variety of fronts. The Patriot Act contains sweeping anti-money laundering and financial transparency laws which require various new regulations, including standards for verifying

customer identification at account opening, and rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering. The Patriot Act has required financial institutions to adopt new policies and procedures to combat money laundering, and it grants the Secretary of the Treasury broad authority to establish regulations and impose requirements and restrictions on financial institutions’ operations.

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

The Sarbanes-Oxley Act of 2002 (SOX Act) mandated important new corporate governance, financial reporting and disclosure requirements intended to enhance the accuracy and transparency of public companies’ reported financial results. It established new responsibilities for corporate chief executive officers, chief financial officers and audit committees in the financial reporting process, and it created a new regulatory body to oversee auditors of public companies. The SOX Act also mandated new enforcement tools, increased criminal penalties for federal mail, wire and securities fraud, and created new criminal penalties for document and record destruction in connection with federal investigations. Additionally, the SOX Act increased the opportunity for private litigation by lengthening the statute of limitations for securities fraud claims and providing new federal corporate whistleblower protection.

The SOX Act requires various securities exchanges, including The Nasdaq Stock Market, to prohibit the listing of the stock of an issuer unless that issuer maintains an independent audit committee. In addition, the securities exchanges have imposed various corporate governance requirements, including the requirement that various corporate matters (including executive compensation and board nominations) be approved, or recommended for approval by the issuer’s full board of directors, by directors of the issuer who are “independent” as defined by the exchanges’ rules or by committees made up of “independent” directors. Since BancShares’ Class A common stock is a listed stock, BancShares is subject to those provisions of the Act and to corporate governance requirements of The Nasdaq Stock Market. The economic and operational effects of the SOX Act on public companies, including BancShares, have been and will continue to be significant in terms of the time, resources and costs required to achieve compliance.

During 2008, in response to the widespread consumer concern about weakness within the banking industry, the Emergency Economic Stabilization Act was enacted, providing expanded insurance protection to depositors. In addition, the U.S. Treasury created the TARP Capital Purchase Program to provide qualifying banks with additional capital. The FDIC created the Temporary Liquidity Guarantee Program (TLGP), which allowed banks to purchase a guarantee for newly-issued senior unsecured debt and provided expanded deposit insurance benefits to certain noninterest bearing accounts. Due to our strong capital ratios, we did not apply for additional capital under the TARP Capital Purchase Program. We did not participate in the TLGP debt guarantee program but did elect to participate in the TLGP expansion of deposit insurance.

FCIS and ISS are registered broker-dealers and investment advisers. Broker-dealer activities are subject to regulation by the Financial Industry Regulatory Authority (FINRA), a self-regulatory organization to which the Securities and Exchange Commission (SEC) has delegated regulatory authority for broker-dealers, as well as by the state securities authorities of the various states in which FCIS and ISS operate. Investment advisory activities are subject to direct regulation by the SEC, and investment advisory representatives must register with the state securities authorities of the various states in which they operate.

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

Statistical information regarding our business activities is found in Management’s Discussion and Analysis.

Risk Factors

Certain risk factors that we believe apply to our business and to an investment in our common stock are described below. In addition to those risk factors and investment risks that apply to any financial institution, our business, financial condition and operating results could be harmed by other risks, including risks we have not yet identified or that we may currently believe are immaterial or unlikely.

As a publicly-traded security, the value of our stock moves up and down based on trends or market expectations that may affect a broad range of equity investments, specific industries, or individual securities. These movements may result from external disclosures about various topics such as economic growth, interest rates, employment or inflation. During 2008, economic pressures have adversely affected bank stocks, including BancShares.

Movements in our stock price may also result from our own activities, by our earnings or by changes in strategies or management. In conjunction with our investment in ISB, we have entered new markets that are not adjacent to our existing footprint. Losses generated by ISB as it continues its de novo growth have adversely impacted net income. In addition to the impact on net income, the geographic dispersion of these markets represents additional shareholder risk.

In addition to the capital requirements mandated by regulatory authorities, our ability to grow is limited by the amount of capital we generate. In recent years, we have focused on earnings retention and have used non-equity capital sources to support our growth. We have not traditionally issued capital stock to support balance sheet growth. Capital adequacy is therefore a significant risk factor.

To the extent that we are dependent on our banking subsidiaries’ lending and deposit gathering functions to generate income, shareholders are also exposed to credit risk, interest rate risk and liquidity risk.

Properties

As of December 31, 2008, BancShares’ subsidiary financial institutions operated branch offices at 401 locations in North Carolina, Virginia, West Virginia, Maryland, Tennessee, Florida, Georgia, Texas, Arizona, California, New Mexico, Colorado, Oregon, Washington, Oklahoma, Kansas and Missouri. BancShares owns many of the buildings and leases other facilities from third parties.

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

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

BancShares has two classes of common stock – Class A common and Class B common. Shares of Class A common have one vote per share, while shares of Class B common have 16 votes per share. BancShares’ Class A and Class B common stock is traded in the over-the-counter market, and the Class A common stock is listed on the NASDAQ Global Select Market under the symbol FCNCA. The Class B common stock is quoted on the OTC Bulletin Board under the symbol FCNCB. As of December 31, 2008, there were 2,044 holders of record of the Class A common stock, and 372 holders of record of the Class B common stock.

The per share cash dividends declared by BancShares and the high and low sales prices for each quarterly period during 2008 and 2007 are set forth in the following table.


	2008								2007
	Fourth Quarter		Third Quarter		Second Quarter		First Quarter		Fourth Quarter		Third Quarter		Second Quarter		First Quarter
Cash dividends	$	0.275	$	0.275	$	0.275	$	0.275	$	0.275	$	0.275	$	0.275	$	0.275

Class A sales price
High		179.09		198.44		164.63		153.48		181.91		195.66		209.01		214.59
Low		124.09		125.79		131.00		117.75		143.00		152.47		182.10		199.41
Class B sales price
High		174.00		177.00		192.00		204.75		205.00		211.50		213.00		214.95
Low		146.00		172.00		166.00		181.00		200.00		204.00		207.50		205.50

Sales prices for Class A common were obtained from the NASDAQ Global Select Market. Sales prices for Class B common were obtained from the OTC Bulletin Board.

A cash dividend of 30.0 cents per share was declared by the Board of Directors on January 26, 2009, payable April 6, 2009, to holders of record as of March 16, 2009. Payment of dividends is made at the discretion of the Board of Directors and is contingent upon satisfactory earnings as well as projected future capital needs. BancShares’ principal source of liquidity for payment of shareholder dividends is the dividend it receives from FCB. FCB is subject to various requirements under federal and state banking laws that restrict the payment of dividends and its ability to lend to BancShares. Subject to the foregoing, it is currently management’s expectation that comparable cash dividends will continue to be paid in the future.

During the fourth quarter of 2008, BancShares did not issue, sell or repurchase any Class A or Class B common stock.

The following graph compares the cumulative total shareholder return (CTSR) of our Class A common stock during the previous five years with the CTSR over the same measurement period of the Nasdaq-U.S. index and the Nasdaq Banks index. Each trend line assumes that $100 was invested on December 31, 2003, and that dividends were reinvested for additional shares.

LOGO

Controls and Procedures

BancShares’ management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of BancShares’ disclosure controls and procedures in accordance with Rule 13a-15 of the Securities Exchange Act of 1934 (Exchange Act). Based on their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, BancShares’ disclosure controls and procedures were effective to provide reasonable assurance that it is able to record, process, summarize and report in a timely manner the information required to be disclosed in reports it files under the Exchange Act.

Management’s Annual Report on Internal Control Over Financial Reporting is included on page 41 of this Report. The report of BancShares’ independent accountants regarding BancShares’ internal control over financial reporting is included on page 42 of this Report.

No change in BancShares’ internal control over financial reporting was identified during the evaluation that occurred during the fourth quarter of 2008 that has materially affected, or is reasonably likely to materially affect, BancShares’ internal control over financial reporting.

Available Information

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

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

This discussion and related financial data should be read in conjunction with the audited consolidated financial statements and related footnotes of First Citizens BancShares, Inc. (BancShares), presented on pages 40 through 72 of this report. Intercompany accounts and transactions have been eliminated. Although certain amounts for prior years have been reclassified to conform to statement presentations for 2008, the reclassifications have no effect on shareholders' equity or net income as previously reported.

OVERVIEW

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 five states and has announced plans to open an office in Washington, D.C. 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 our 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 customer demand for our loan, lease and deposit products and ultimately affect the quality of our assets and our profitability. Recessionary economic conditions have caused higher rates of unemployment, and a growing inability for some businesses and consumers to meet their debt service obligations. In addition, real estate demand in many of our markets remains weak, resulting in a decline in real estate values that has adversely affected collateral values for certain of our loans. Further, the current and anticipated instability in alternative investment markets has influenced demand for our deposit and cash management products.

Economic conditions during 2008 have had a significant impact on virtually all financial institutions in the United States, including BancShares. The widespread non-availability of capital has created significant disruptions, causing financial institutions to curtail growth and in some cases to seek merger partners under distressed conditions. As a result of the inter-connectivity of the global financial markets, the failure and acquisition of troubled entities have created challenges throughout the industry.

In response to the challenges facing the financial services sector, several regulatory and governmental actions were taken during 2008, including:

•

The Emergency Economic Stabilization Act, approved by Congress and signed by President Bush on October 3, 2008, which, among other provisions, allowed the U.S. Treasury to purchase troubled assets from banks, authorized the Securities and Exchange Commission to suspend the application of mark-to-market accounting, and temporarily raised the limit of FDIC deposit insurance from $100,000 to $250,000; as currently written, the deposit insurance limit will return to $100,000 after December 31, 2009;

•

On October 7, 2008, the FDIC approved a restoration plan to increase the rates banks pay for deposit insurance;

•

On October 14, 2008, the U.S. Treasury announced the creation of a new program, the TARP Capital Purchase Program that encourages and allows financial institutions to build capital through the sale of senior preferred shares to the U.S. Treasury on terms that are non-negotiable; due to the adequacy of our existing capital, we did not apply for TARP funding;

•

On October 14, 2008, the FDIC announced the creation of the Temporary Liquidity Guarantee Program (TLGP), which seeks to strengthen confidence and encourage liquidity in the banking system; the TLGP has two primary components that are available on a voluntary basis to financial institutions:

•

Guarantee of newly-issued senior unsecured debt; the guarantee would apply to new debt issued on or before June 30, 2009 and would provide protection until June 30, 2012; issuers electing to participate pay a 75 basis point fee for the guarantee; we did not participate in the debt guarantee program;

•

Unlimited deposit insurance for non-interest bearing deposit transaction accounts; financial institutions electing to participate pay a 10 basis point premium in addition to the insurance premiums paid for standard deposit insurance; we elected to participate in the expanded deposit insurance program;

It is likely that further regulatory actions will arise as the Federal government attempts to provide liquidity and capital to strengthen the financial service sector.

In addition to the various regulatory efforts to stabilize the economic turbulence during 2008, ongoing management of monetary policy and interest rates by the Federal Reserve has significantly impacted the pricing of and demand for loan, deposit and treasury services products. During the fourth quarter of 2008, the Federal Reserve dropped the federal funds rate to near zero percent.

Although we are unable to control the external factors that influence our business, by maintaining high levels of balance sheet liquidity, managing our interest rate exposures and by actively monitoring asset quality, we seek to minimize the potentially adverse risks of unforeseen and unfavorable economic trends and take advantage of favorable economic conditions when appropriate.

Financial institutions have typically focused their strategic and operating emphasis on maximizing profitability, and therefore have measured their success by reference to profitability measures such as return on average assets or return on average shareholders’ equity. BancShares’ return on average assets and return on average equity have historically compared unfavorably to the returns of similar-sized financial holding companies. We have consistently placed primary strategic emphasis upon balance sheet liquidity, asset quality and capital conservation, even when those priorities may be detrimental to short-term profitability. While we have not been immune from adverse influences arising from economic weaknesses, our long-standing focus on balance sheet strength served us well during 2008.

Once economic conditions begin to improve, we will be well-positioned to resume favorable growth and profitability trends. We operate in diverse geographic markets and can increase our business volumes and profitability by offering competitive products and superior customer service. 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, 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.

PERFORMANCE SUMMARY

BancShares reported net income of $91.1 million during 2008, compared to $108.6 million in 2007. Net income for 2008 declined 16.2 percent when compared to 2007. Return on average assets was 0.56 percent for 2008 compared to 0.68 percent for 2007. Return on average shareholders’ equity equaled 6.13 percent and 7.92 percent for 2008 and 2007, respectively. Net income per share for 2008 totaled $8.73, compared to $10.41 for 2007.

Contributing to the $17.6 million decrease in net income during 2008 were significantly higher levels of provision for credit losses and increased noninterest expense, partially offset by improved net interest and noninterest income. Net interest income during 2008 increased $19.4 million, or 4.0 percent versus 2007 due to the favorable impact of growth in

interest-earning assets. Despite weak economic conditions, loans grew $755.4 million or 6.9 percent. The taxable-equivalent net yield on interest-earning assets equaled 3.40 percent during 2008, down only one basis point from 2007. However, after showing marginal improvements during the first three quarters of 2008, the fourth quarter taxable-equivalent net yield on interest-earning assets declined 20 basis points from the third quarter.

The provision for credit losses increased $32.2 million or 95.9 percent during 2008, primarily the result of significant deterioration in the residential construction loan portfolio. Net charge-offs for 2008 totaled $45.3 million, compared to $28.0 million recorded during 2007. The ratio of net charge-offs to average loans and leases in 2008 equaled 0.40 percent, compared to 0.27 percent for the prior year. Nonperforming assets totaled $71.7 million or 0.61 percent of loans plus other real estate owned as of December 31, 2008, compared to $19.9 million or 0.18 percent as of December 31, 2007. The increase in nonperforming assets is primarily attributable to the residential construction loan portfolio.

Noninterest income increased $16.6 million or 5.6 percent during 2008, with favorable variances in service charges on deposit accounts, fees from processing services and other service charges and fees. In addition, securities gains increased $6.8 million due to gains recognized on the redemption of Visa stock. Wealth management services income declined.

Noninterest expense increased $31.8 million or 5.5 percent during 2008. Salaries and benefits accounted for $21.5 million of the added expense due to costs from new branch locations, merit increases and higher health and executive retirement costs. Occupancy costs grew $3.9 million or 6.9 percent due to new branches and expenses related to the new headquarters building.

CRITICAL ACCOUNTING POLICIES

Information included in our audited financial statements and management’s discussion and analysis is derived from our accounting records, which are maintained in accordance with accounting principles generally accepted in the United States of America and general practices within the banking industry. While much of the information is definitive, certain accounting issues are highly dependent upon estimates and assumptions made by management. An understanding of these estimates and assumptions is vital to understanding BancShares’ financial statements. Critical accounting policies are those policies that are most important to the determination of our financial condition and results of operations or that require management to make assumptions and estimates that are subjective or complex.

We periodically evaluate our critical accounting policies, including those related to the allowance for credit losses, pension plan assumptions and income taxes. While we base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, actual results may differ from these estimates under different assumptions or outcomes.

Allowance for credit losses. The allowance for credit losses, which consists of the allowance for loan and lease losses and the reserve for unfunded commitments, reflects the estimated losses resulting from the inability of our customers to make required loan and lease payments. The allowance for credit losses reflects management’s evaluation of the risk characteristics of the loan and lease portfolio under current economic conditions and considers such factors as the financial condition of the borrower, fair market value of collateral and other items that, in our opinion, deserve current recognition in estimating possible loan and lease losses. Our evaluation process is based on historical evidence and current trends among delinquencies, defaults and nonperforming assets.

Management considers the established allowance adequate to absorb losses that relate to loans and leases as well as unfunded loan commitments outstanding at December 31, 2008, although future additions may be necessary based on changes in economic conditions and other factors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for credit losses. These agencies may require the recognition of additions to the allowance based on their judgments of information available to them at the time of their examination. If the financial condition of our borrowers were to deteriorate, resulting in an impairment of their ability to make payments, our estimates would be updated, and additions to the allowance may be required.

Pension plan assumptions. BancShares offers a defined benefit pension plan to qualifying employees. The calculation of the benefit obligation, the future value of plan assets, funded status and related pension expense under the

pension plan requires the use of actuarial valuation methods and assumptions. The valuations and assumptions used to determine the future value of plan assets and liabilities are subject to management judgment and may differ significantly depending upon the assumption used. The discount rate used to estimate the present value of the benefits to be paid under the pension plan reflects the interest rate that could be obtained for a suitable investment used to fund the benefit obligations. The assumed discount rate equaled 6.00 percent at December 31, 2008, compared to 6.25 percent at December 31, 2007 due to declines in relevant market interest rates. Assuming other variables remain unchanged, a reduction in the assumed discount rate would increase the calculated benefit obligations, which would result in higher pension expense. Conversely, an increase in the assumed discount rate would cause a reduction in obligations, thereby resulting in lower pension expense.

We also estimate a long-term rate of return on pension plan assets that is used to calculate the value of plan assets over time. We consider such factors as the actual return earned on plan assets, historical returns on the various asset classes in the plan and projections of future returns on various asset classes. We used an assumed long-term rate of return on pension assets of 8.00 percent to calculate the funded status of the pension plan as of December 31, 2008 compared to 8.50 percent at December 31, 2007. The calculation of pension expense during 2008 and 2007 was based on an assumed expected long-term return on plan assets of 8.50 percent. Assuming other variables remain unchanged, a reduction in the long-term rate of return on plan assets increases pension expense.

The assumed rate of future compensation increases is reviewed annually based on actual experience and future salary expectations. We used an assumed rate of compensation increase of 4.50 percent to calculate the funded status of the pension plan as of December 31, 2008 compared to 4.25 percent at December 31, 2007. The compensation increase assumption used to calculate pension expense was 4.25 percent during 2008 and 2007. Assuming other variables remain unchanged, an increase in the rate of future compensation increases results in higher pension expense.

Income taxes. Management estimates income tax expense using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the amount of assets and liabilities reported in the consolidated financial statements and their respective tax bases. In estimating the liabilities and corresponding expense related to income taxes, management assesses the relative merits and risks of various tax positions considering statutory, judicial and regulatory guidance. Because of the complexity of tax laws and regulations, interpretation is difficult and subject to differing judgments.

Changes in the estimate of income tax liabilities occur periodically due to changes in actual or estimated future tax rates and projections of taxable income, interpretations of tax laws, the complexities of multi-state income tax reporting, the status of examinations being conducted by various taxing authorities and the impact of newly enacted legislation or guidance as well as income tax accounting pronouncements.

Table 1

FINANCIAL SUMMARY AND SELECTED AVERAGE BALANCES AND RATIOS


	2008			2007			2006			2005			2004
	(thousands, except share data and ratios)
SUMMARY OF OPERATIONS
Interest income	$	814,716		$	904,056		$	830,315		$	669,540		$	524,013
Interest expense		314,945			423,714			353,737			218,151			133,826

Net interest income		499,771			480,342			476,578			451,389			390,187
Provision for credit losses		65,805			33,594			20,922			33,514			34,690

Net interest income after provision for credit losses		433,966			446,748			455,656			417,875			355,497
Noninterest income		312,119			295,470			271,367			257,666			245,884
Noninterest expense		606,481			574,664			531,077			496,871			477,186

Income before income taxes		139,604			167,554			195,946			178,670			124,195
Income taxes		48,546			58,937			69,455			65,808			49,352

Net income	$	91,058		$	108,617		$	126,491		$	112,862		$	74,843

Net interest income, taxable equivalent	$	506,516		$	488,019		$	482,927		$	455,687		$	392,242

PER SHARE DATA
Net income	$	8.73		$	10.41		$	12.12		$	10.82		$	7.17
Cash dividends		1.10			1.10			1.10			1.10			1.10
Market price at December 31 (Class A)		152.80			145.85			202.64			174.42			148.25
Book value at December 31		138.33			138.12			125.62			113.19			104.11
Tangible book value at December 31		128.13			127.72			115.02			102.35			93.12

SELECTED AVERAGE BALANCES
Total assets	$	16,403,717		$	15,919,222		$	15,240,327		$	13,905,260		$	12,856,102
Investment securities		3,153,121			3,144,052			3,028,384			2,533,161			2,157,367
Loans and leases		11,306,900			10,513,599			9,989,757			9,375,249			8,901,628
Interest-earning assets		14,910,905			14,292,322			13,637,388			12,503,877			11,493,005
Deposits		13,108,246			12,659,236			12,452,955			11,714,569			10,961,380
Interest-bearing liabilities		12,312,499			11,883,421			11,262,423			10,113,999			9,327,436
Long-term obligations		607,463			405,758			450,272			353,885			287,333
Shareholders’ equity	$	1,484,605		$	1,370,617		$	1,241,254		$	1,131,066		$	1,053,860
Shares outstanding		10,434,453			10,434,453			10,434,453			10,434,453			10,435,247

SELECTED PERIOD-END BALANCES
Total assets	$	16,745,662		$	16,212,107		$	15,729,697		$	14,639,392		$	13,265,711
Investment securities		3,271,650			3,236,835			3,221,048			2,929,516			2,125,524
Loans and leases		11,719,285			10,963,904			10,273,043			9,656,230			9,364,822
Interest-earning assets		15,165,551			14,466,948			13,842,688			13,066,758			11,874,089
Deposits		13,713,763			12,928,544			12,743,324			12,173,858			11,350,798
Interest-bearing liabilities		12,441,025			12,118,967			11,612,372			10,745,696			9,641,368
Long-term obligations		733,132			404,392			401,198			408,987			285,943
Shareholders’ equity	$	1,443,375		$	1,441,208		$	1,310,819		$	1,181,059		$	1,086,310
Shares outstanding		10,434,453			10,434,453			10,434,453			10,434,453			10,434,453

SELECTED RATIOS AND OTHER DATA
Rate of return on average assets		0.56	%		0.68	%		0.83	%		0.81	%		0.58	%
Rate of return on average shareholders’ equity		6.13			7.92			10.19			9.98			7.10
Net yield on interest-earning assets (taxable equivalent)		3.40			3.41			3.54			3.64			3.41
Allowance for loan and lease losses to total loans and leases at year-end		1.34			1.25			1.28			1.33			1.32
Nonperforming assets to total loans and leases plus other real estate at year-end		0.61			0.18			0.20			0.27			0.25
Tier 1 risk-based capital ratio		13.20			13.02			12.93			12.56			12.14
Total risk-based capital ratio		15.49			15.36			15.37			15.11			13.48
Leverage capital ratio		9.88			9.63			9.39			9.17			9.26
Dividend payout ratio		12.60			10.57			9.08			10.17			15.34
Average loans and leases to average deposits		86.26			83.05			80.22			80.03			81.21

Table 2

BUSINESS COMBINATIONS


Year	Description of transaction	Total Loans			Total Deposits
		(thousands)
2007	Sale of American Guaranty Insurance Company, a property and casualty insurance company	$	—		$	—
2007	Sale of Triangle Life Insurance Company, an accident and life insurance company		—			—
2006	Sale of T-TECH, Inc., a check processing company		—			—
2006	Sale of one branch by First Citizens Bank		(36	)		(20,553	)

INTEREST-EARNING ASSETS

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

We have historically focused on maintaining high asset quality, which results in a loan and lease portfolio subjected to strenuous underwriting and monitoring procedures. That focus on asset quality also influences the composition of our investment securities portfolio. At December 31, 2008, United States Treasury and government agency securities represented 95.0 percent of our investment securities portfolio. Mortgage-backed securities comprise only 2.6 percent of the total portfolio. Overnight investments are selectively made with other financial institutions that are within our risk tolerance.

Changes in our interest-earning assets reflect the impact of liquidity generated by deposits and short-term borrowings, the majority of which arises from various treasury services products. The size of the investment securities portfolio changes principally based on trends among loans, deposits and short-term borrowings. When inflows arising from deposit and treasury services products exceed loan and lease demand, we invest excess funds in the securities portfolio. Conversely, when loan demand exceeds growth in deposits and short-term borrowings, we allow overnight investments to decline and use proceeds from maturing securities to fund loan demand.

Table 3

LOANS AND LEASES


	December 31
	2008		2007		2006		2005		2004
	(thousands)
Real estate:
Construction and land development	$	778,315	$	810,818	$	783,680	$	766,945	$	588,092
Commercial mortgage		4,343,809		3,982,496		3,725,752		3,518,563		3,279,729
Residential mortgage		964,201		1,029,030		1,025,235		1,016,677		979,663
Revolving mortgage		1,911,852		1,494,431		1,326,403		1,368,729		1,714,032
Other mortgage		149,478		145,552		165,223		172,712		171,700

Total real estate loans		8,147,655		7,462,327		7,026,293		6,843,626		6,733,216
Commercial and industrial		1,885,358		1,707,394		1,526,818		1,206,585		980,164
Consumer		1,233,075		1,368,228		1,360,524		1,318,971		1,397,820
Lease financing		353,933		340,601		294,366		233,499		192,164
Other		99,264		85,354		65,042		53,549		61,458

Total loans and leases		11,719,285		10,963,904		10,273,043		9,656,230		9,364,822
Less allowance for loan and lease losses		157,569		136,974		132,004		128,847		123,861

Net loans and leases	$	11,561,716	$	10,826,930	$	10,141,039	$	9,527,383	$	9,240,961

There were no foreign loans or leases in any period.

Loans and leases. As of December 31, 2008, loans and leases outstanding equaled $11.72 billion, a 6.9 percent increase over the December 31, 2007 balance of $10.96 billion. The $755.4 million increase in loans and leases during 2008 resulted from growth among revolving mortgage, commercial mortgage and commercial and industrial loans. Loan balances for the last five years are presented in Table 3.

Loans secured by commercial mortgages totaled $4.34 billion at December 31, 2008, a $361.3 million or 9.1 percent increase from December 31, 2007. In 2007 commercial mortgage loans increased 6.9 percent over 2006. The sustained growth reflects our continued focus on small business customers, particularly among medical-related and other professional customers targeted by our banking subsidiaries. As a percentage of total loans and leases, commercial mortgage loans represent 37.1 percent at December 31, 2008 and 36.3 percent at December 31, 2007. At December 31, 2008, among construction and land development and commercial mortgage loans, 76.9 percent of the outstanding balance was secured by owner-occupied facilities. These loans are underwritten based primarily upon the cash flow from the operation of the business rather than the value of the real estate collateral.

At December 31, 2008, revolving loans secured by real estate totaled $1.91 billion, compared to $1.49 billion at December 31, 2007. The $417.4 million or 27.9 percent increase in revolving mortgage loans in 2008 resulted from robust origination of new credit lines and attractive rates stimulating line utilization. At December 31, 2008, revolving mortgage loans represented 16.3 percent of gross loans and leases, compared to 13.6 percent at December 31, 2007.

Commercial and industrial loans equaled $1.89 billion at December 31, 2008, compared to $1.71 billion at December 31, 2007. Commercial and industrial loans realized growth of $178.0 million or 10.4 percent during 2008 following an increase of $180.6 million or 11.8 percent from 2006 to 2007. Growth among these loans in 2008 and 2007 results from continuing focus on business owners and medical professionals and new opportunities arising from our geographic expansion. Commercial and industrial loans represented 16.1 percent and 15.6 percent of loans and leases, respectively, as of December 31, 2008 and 2007.

Consumer loans totaled $1.23 billion at December 31, 2008, a decrease of $135.2 million from the prior year. This decline results from our decision during 2008 to discontinue originations of sales finance loans through our dealer network. At December 31, 2008 and 2007, consumer loans represented 10.5 percent and 12.5 percent of the total portfolio, respectively.

Construction and land development loans equaled $778.3 million at December 31, 2008, a reduction of $32.5 million or 4.0 percent from December 31, 2007. Of the $778.3 million outstanding as of December 31, 2008, $105.1 million was in the Atlanta, Georgia and southwest Florida markets. Both of these market areas experienced significant reductions in real estate values during 2008. The majority of the remaining $673.2 million of construction and land development loans are in North Carolina and Virginia.

Due to the generally weak demand for loans in our market areas and our ongoing challenge to provide liquidity to fund loan growth, our projections for 2009 anticipate a modest increase in our loan portfolio. Commercial and industrial and real estate secured loans will continue to grow, but at a much reduced rate. However, projected economic instability could constrain customer demand for loans and lender support for increased debt levels. All growth projections are subject to change due to further economic deterioration or improvement and other external factors.

Investment securities. Investment securities available for sale at December 31, 2008 and 2007 totaled $3.27 billion and $3.23 billion, respectively, a $36.5 million or 1.1 percent increase. Available-for-sale securities are reported at their aggregate fair value, and unrealized gains and losses are included as a component of other comprehensive income, net of deferred taxes.

Investment securities held to maturity equaled $5.9 million and $7.6 million, respectively, at December 31, 2008 and 2007. Securities that are classified as held-to-maturity reflect BancShares’ ability and positive intent to hold those investments until maturity.

Table 4 presents detailed information relating to the investment securities portfolio.

Income on interest-earning assets. Interest income amounted to $814.7 million during 2008, an $89.3 million or 9.9 percent decrease from 2007, compared to a $73.7 million or 8.9 percent increase from 2006 to 2007. The decrease in interest income during 2008 resulted from lower yields, partially offset by growth in interest-earning assets.

Table 4

INVESTMENT SECURITIES


	December 31
	2008							2007				2006
	Cost		Fair Value		Average Maturity (Yrs./Mos.)	Taxable Equivalent Yield		Cost		Fair Value		Cost		Fair Value
	(thousands, except maturity and yield information)
Investment securities available for sale:
U. S. Government:
Within one year	$	1,349,114	$	1,374,022	0/6	4.41	%	$	1,667,530	$	1,675,309	$	1,514,138	$	1,503,915
One to five years		1,704,326		1,738,406	1/8	1.86			1,377,715		1,399,434		1,366,945		1,363,491
Five to ten years		—		—					6,300		6,287		6,269		6,059

Total		3,053,440		3,112,428	1/10	2.98			3,051,545		3,081,030		2,887,352		2,873,465

Mortgage-backed securities:
Within one year		—		—					—		—		56		55
One to five years		32		30	2/7	5.39			51		48		84		80
Five to ten years		789		791	9/3	4.55			135		132		68		36
Over ten years		80,288		82,131	27/6	5.36			78,012		77,632		53,250		52,054

Total		81,109		82,952	26/10	5.35			78,198		77,812		53,458		52,225

State, county and municipal:
Within one year		1,682		1,687	0/4	3.90			709		708		875		873
One to five years		1,416		1,356	2/11	4.69			2,246		2,236		2,734		2,696
Five to ten years		—		—	—	—			356		363		470		477
Over ten years		10		10	11/11	4.97			66		65		211		211

Total		3,108		3,053	1/6	4.26			3,377		3,372		4,290		4,257

Other:
Over ten years		3,691		5,427	9/5	11.05			7,771		9,390		10,173		10,240

Equity securities		49,747		61,917					33,614		57,637		35,171		61,703

Total investment securities available for sale		3,191,095		3,265,777					3,174,505		3,229,241		2,990,444		3,001,890

Investment securities held to maturity:
U. S. Government:
Within one year		—		—	—	—			—		—		210,232		209,296

Mortgage-backed securities:
One to five years		—		—	—	—			—		—		3		3
Five to ten years		4,117		4,289	8/3	5.54			5,563		5,612		46		46
Over ten years		165		198	18/10	6.43			197		231		7,049		7,031

Total		4,282		4,487	8/8	5.57			5,760		5,843		7,098		7,080

State, county and municipal:
Within one year		151		151	0/4	5.88			—		—		—		—
One to five years		—		—					149		153		148		154
Five to ten years		1,440		1,472	9/4	6.02			—		—		—		—
Over ten years		—		—					1,435		1,530		1,430		1,553

Total		1,591		1,623	8/6	6.01			1,584		1,683		1,578		1,707

Other:
Within one year		—		—		—			250		250		—		—
One to five years		—		—		—			—		—		250		250

Total		—		—		—			250		250		250		250

Total investment securities held to maturity		5,873		6,110	8/8	5.69			7,594		7,776		219,158		218,333

Total investment securities	$	3,196,968	$	3,271,887				$	3,182,099	$	3,237,017	$	3,209,602	$	3,220,223

The average maturity assumes callable securities mature on their earliest call date; yields are based on amortized cost; yields related to securities that are exempt from federal and/or state income taxes are stated on a taxable-equivalent basis assuming statutory rates of 35.0 percent for federal income taxes and 6.9 percent for state income taxes for all periods.

Table 5

AVERAGE BALANCE SHEETS


	2008							2007
	Average Balance			Interest Income/Expense		Yield/ Rate		Average Balance			Interest Income Expense		Yield/ Rate
	(dollars in thousands, taxable equivalent)
Assets
Loans and leases	$	11,306,900		$	683,943	6.05	%	$	10,513,599		$	729,635	6.94	%
Investment securities:
U. S. Government		3,075,049			126,114	4.10			3,068,477			146,483	4.77
State, county and municipal		4,828			322	6.67			5,321			346	6.50
Other		73,244			2,327	3.18			70,254			3,100	4.41

Total investment securities		3,153,121			128,763	4.08			3,144,052			149,929	4.77
Overnight investments		450,884			8,755	1.94			634,671			32,169	5.07

Total interest-earning assets		14,910,905		$	821,461	5.51	%		14,292,322		$	911,733	6.38	%
Cash and due from banks		591,032							705,864
Premises and equipment		781,149							735,465
Allowance for loan and lease losses		(145,523	)						(132,530	)
Other assets		266,154							318,101

Total assets	$	16,403,717						$	15,919,222

Liabilities and shareholders’ equity
Interest-bearing deposits:
Checking With Interest	$	1,440,908		$	1,414	0.10	%	$	1,431,085		$	1,971	0.14	%
Savings		545,048			1,103	0.20			573,286			1,235	0.22
Money market accounts		3,187,012			59,298	1.86			2,835,255			94,541	3.33
Time deposits		5,402,505			201,723	3.73			5,283,782			243,489	4.61

Total interest-bearing deposits		10,575,473			263,538	2.49			10,123,408			341,236	3.37
Short-term borrowings		1,129,563			17,502	1.55			1,354,255			55,126	4.07
Long-term obligations		607,463			33,905	5.58			405,758			27,352	6.74

Total interest-bearing liabilities		12,312,499		$	314,945	2.56	%		11,883,421		$	423,714	3.57	%
Demand deposits		2,532,773							2,535,828
Other liabilities		73,840							129,356
Shareholders’ equity		1,484,605							1,370,617

Total liabilities and shareholders’ equity	$	16,403,717						$	15,919,222

Interest rate spread						2.95	%						2.81	%
Net interest income and net yield on interest-earning assets				$	506,516	3.40	%				$	488,019	3.41	%

Loans and leases include nonaccrual loans. Yields related to loans, leases and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only, are stated on a taxable-equivalent basis assuming a statutory federal income tax rate of 35.0% and a state income tax rate of 6.9% for all periods. Loan fees, which are not material for any period shown, are included in the yield calculation.

Table 5 analyzes taxable-equivalent yields and rates on interest-earning assets and interest-bearing liabilities for the five years ended December 31, 2008. The taxable-equivalent yield on interest-earning assets was 5.51 percent during 2008, an 87 basis point drop from the 6.38 percent reported in 2007 caused primarily by significant reductions in market interest rates during the course of 2008. The taxable-equivalent yield on interest-earning assets equaled 6.14 percent in 2006.

Table 5

AVERAGE BALANCE SHEETS (continued)


2006							2005							2004
Average Balance			Interest Income/Expense		Yield/ Rate		Average Balance			Interest Income/Expense		Yield/ Rate		Average Balance			Interest Income/Expense		Yield/ Rate
(dollars in thousands, taxable equivalent)
$	9,989,757		$	685,114	6.86	%	$	9,375,249		$	575,735	6.14	%	$	8,901,628		$	470,325	5.28	%

	2,949,201			116,969	3.97			2,463,545			76,267	3.10			2,096,869			48,304	2.30
	6,174			374	6.06			7,238			404	5.58			8,667			424	4.89
	73,009			3,304	4.53			62,378			2,224	3.57			51,831			1,137	2.19

	3,028,384			120,647	3.98			2,533,161			78,895	3.11			2,157,367			49,865	2.31
	619,247			30,903	4.99			595,467			19,208	3.23			434,010			5,878	1.35

	13,637,388		$	836,664	6.14	%		12,503,877		$	673,838	5.39	%		11,493,005		$	526,068	4.58	%
	757,428							654,821							679,955
	669,748							608,668							554,480
	(131,077	)						(127,968	)						(124,834	)
	306,840							265,862							253,496

$	15,240,327						$	13,905,260						$	12,856,102


$	1,522,439		$	1,875	0.12	%	$	1,570,010		$	1,923	0.12	%	$	1,500,638		$	1,796	0.12	%
	649,619			1,382	0.21			737,830			1,521	0.21			743,629			1,492	0.20
	2,691,292			79,522	2.95			2,643,330			50,171	1.90			2,571,468			21,594	0.84
	4,967,591			197,399	3.97			4,209,996			123,016	2.92			3,778,048			83,557	2.21

	9,830,941			280,178	2.85			9,161,166			176,631	1.93			8,593,783			108,439	1.26
	981,210			41,431	4.22			598,948			14,966	2.50			446,320			3,611	0.81
	450,272			32,128	7.14			353,885			26,554	7.50			287,333			21,776	7.58

	11,262,423		$	353,737	3.14	%		10,113,999		$	218,151	2.16	%		9,327,436		$	133,826	1.43	%
	2,622,014							2,553,403							2,367,597
	114,636							106,792							107,209
	1,241,254							1,131,066							1,053,860

$	15,240,327						$	13,905,260						$	12,856,102

					3.00	%						3.23	%						3.15	%

			$	482,927	3.54	%				$	455,687	3.64	%				$	392,242	3.41	%

The taxable-equivalent yield on the loan and lease portfolio decreased from 6.94 percent in 2007 to 6.05 percent in 2008. The combination of the 89 basis point yield drop, and the $793.3 million or 7.5 percent growth in average loans and leases contributed to a decrease in loan interest income of $45.7 million or 6.3 percent over 2007. This followed an increase of $44.2 million or 6.5 percent in loan interest income in 2007 over 2006, the combined result of a $523.8 million increase in average loans and leases and an 8 basis point yield increase.

Interest income earned on the investment securities portfolio amounted to $124.1 million and $144.3 million during 2008 and 2007. The taxable-equivalent yield on the investment securities portfolio was 4.08 percent and 4.77 percent, respectively, for 2008 and 2007. The $20.2 million decrease in investment interest income during 2008 reflected the 69 basis points decrease in the taxable-equivalent yield. The $28.3 million increase in interest income earned on investment securities during 2007 resulted from a 79 basis point increase in the taxable-equivalent yield and a $115.7 million increase in average investment securities.

Interest earned on overnight investments equaled $8.8 million during 2008, compared to $32.2 million during 2007. The $23.4 million decrease during 2008 resulted from the 313 basis point yield decline and a $183.8 million decrease in average overnight investments. The decline in the yield on overnight investments resulted from actions by the Federal Reserve to significantly reduce short-term interest rates. During 2007, interest income earned from overnight investments increased marginally as compared to 2006.

INTEREST-BEARING LIABILITIES

Interest-bearing liabilities include interest-bearing deposits as well as short-term borrowings and long-term obligations. Deposits are our primary funding source, although we also utilize non-deposit borrowings to stabilize our liquidity base and to fulfill commercial customer demand for treasury services. Certain of our long-term borrowings also currently qualify as capital under guidelines established by the Federal Reserve and other banking regulators.

Deposits. At December 31, 2008, deposits totaled $13.71 billion, an increase of $785.2 million or 6.1 percent from the $12.93 billion in deposits recorded as of December 31, 2007. Money market accounts increased $584.9 million or 19.7 percent from December 31, 2007 to December 31, 2008, while demand deposits increased $133.6 million or 5.3 percent. Time deposits increased marginally, up $37.9 million or 0.7 percent. As a result of the substantial decline in interest rates during 2008, depositors elected to place available liquidity in money market and transaction accounts rather than time deposits.

During 2008, competition and pricing for deposit business in our market areas remained intense, particularly from larger bank competitors confronting funding and other financial challenges. During the third and fourth quarters of 2008, we experienced a surge in deposit growth directly attributable to business acquired from competitor institutions.

Due to the ongoing industry-wide liquidity challenges that intensified during 2008 and our historic commitment to maintaining a liquid balance sheet, we are focused on deposit attraction and retention as a key business objective for 2009. Our ability to satisfy customer loan demand could potentially be constrained unless we are able to continue to generate new deposits at a reasonable cost.

Table 6

MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE


	December 31, 2008
	(thousands)
Less than three months	$	530,767
Three to six months		417,814
Six to 12 months		948,406
More than 12 months		572,846

Total	$	2,469,833

Short-term borrowings. At December 31, 2008, short-term borrowings totaled $647.0 million, compared to $1.31 billion one year earlier, a 50.4 percent decrease. The $658.3 million reduction resulted from a $450.9 million decline in outstanding obligations under our commercial master note program and a $182.2 million reduction in repurchase obligations during 2008. Both of these commercial treasury products are highly rate-sensitive, and the sharp reduction in interest rates during 2008 triggered a significant runoff in these funding sources. A portion of the decline in short-term borrowings was invested by customers in money market accounts and other deposit instruments.

We continue to maintain access to various short-term borrowings, including the purchase of federal funds, overnight repurchase obligations and credit arrangements with various correspondent banks. At December 31, 2008, we had immediate access of up to $500.0 million on an unsecured basis. At December 31, 2008, we also had access to $1.22 billion under secured borrowing agreements with the Federal Home Loan Bank of Atlanta. Table 7 provides additional information regarding short-term borrowings.

Table7

SHORT-TERM BORROWINGS


	2008				2007				2006
	Amount		Rate		Amount		Rate		Amount		Rate
	(dollars in thousands)
Master notes
At December 31	$	472,573	0.25	%	$	923,424	3.02	%	$	741,029	4.18	%
Average during year		819,209	1.52			910,389	4.19			643,926	4.28
Maximum month-end balance during year		929,613	—			1,035,278	—			776,734	—

Repurchase agreements
At December 31		103,878	0.15			286,090	2.27			251,135	3.68
Average during year		211,853	0.82			303,862	3.38			213,730	3.47
Maximum month-end balance during year		293,703	—			325,790	—			272,807	—

Federal funds purchased
At December 31		10,551	0.10			23,893	3.60			66,066	5.04
Average during year		40,079	1.69			59,050	5.07			47,662	4.84
Maximum month-end balance during year		96,551	—			101,753	—			68,620	—

Other
At December 31		60,026	4.13			71,880	4.54			92,617	4.56
Average during year		58,422	4.53			80,954	4.57			75,892	5.45
Maximum month-end balance during year		71,286	—			96,785	—			169,305	—

Long-term obligations. At December 31, 2008 and 2007, long-term obligations totaled $733.1 million and $404.4 million, respectively, an increase of $328.7 million or 81.3 percent. The increase during 2008 results from $330.0 million borrowed from the Federal Home Loan Bank of Atlanta under varying terms and at varying rates. The additional borrowings were funded to augment balance sheet liquidity at rates that management believes are attractive given the terms of the individual obligations.

Table 8

CHANGES IN CONSOLIDATED TAXABLE EQUIVALENT NET INTEREST INCOME


	2008									2007
	Change from previous year due to:									Change from previous year due to:
	Volume			Yield/ Rate			Total Change			Volume			Yield/ Rate			Total Change
	(thousands)
Assets
Loans and leases	$	51,467		$	(97,159	)	$	(45,692	)	$	36,232		$	8,289		$	44,521
Investment securities:
U. S. Government		251			(20,620	)		(20,369	)		5,327			24,187			29,514
State, county and municipal		(33	)		9			(24	)		(54	)		26			(28	)
Other		111			(884	)		(773	)		(121	)		(83	)		(204	)

Total investment securities		329			(21,495	)		(21,166	)		5,152			24,130			29,282
Overnight investments		(6,434	)		(16,980	)		(23,414	)		770			496			1,266

Total interest-earning assets	$	45,362		$	(135,634	)	$	(90,272	)	$	42,154		$	32,915		$	75,069

Liabilities
Interest-bearing deposits:
Checking With Interest	$	11		$	(568	)	$	(557	)	$	(120	)	$	216		$	96
Savings		(59	)		(73	)		(132	)		(164	)		17			(147	)
Money market accounts		9,137			(44,380	)		(35,243	)		4,527			10,492			15,019
Time deposits		4,952			(46,718	)		(41,766	)		13,567			32,523			46,090

Total interest-bearing deposits		14,041			(91,739	)		(77,698	)		17,810			43,248			61,058
Short-term borrowings		(6,314	)		(31,310	)		(37,624	)		15,468			(1,773	)		13,695
Long-term obligations		12,427			(5,874	)		6,553			(3,077	)		(1,699	)		(4,776	)

Total interest-bearing liabilities	$	20,154		$	(128,923	)	$	(108,769	)	$	30,201		$	39,776		$	69,977

Change in net interest income	$	25,208		$	(6,711	)	$	18,497		$	11,953		$	(6,861	)	$	5,092

Changes in income relating to certain loans, leases and investment securities are stated on a fully tax-equivalent basis at a rate that approximates BancShares’ marginal tax rate. The taxable equivalent adjustment was $6,745, $7,677 and $6,349 for the years 2008, 2007 and 2006 respectively. Table 5 provides detailed information on average balances, income/expense, yield/rate by category and the relevant income tax rates. The rate/volume variance is allocated equally between the changes in volume and rate.

For 2008 and 2007, long-term obligations included $273.2 million in junior subordinated debentures representing obligations to two special purpose entities, FCB/NC Capital Trust I and FCB/NC Capital Trust III (the Capital Trusts). The Capital Trusts are the grantor trusts for $265.0 million of trust preferred capital securities outstanding as of December 31, 2008. The proceeds from the trust preferred capital securities were used to purchase the junior subordinated debentures issued by BancShares. Under current regulatory standards, these trust preferred capital securities qualify as capital for BancShares. The $150.0 million in trust preferred capital securities issued by FCB/NC Capital Trust I mature in 2028 and may be redeemed in whole or in part on or after March 1, 2008 at a premium that declines until 2018, when the redemption price equals the par value of the securities. The $115.0 million in trust preferred capital securities issued by FCB/NC Capital Trust III mature in 2036 and may be redeemed at par in whole or in part on or after June 30, 2011. BancShares has guaranteed all obligations of the Capital Trusts.

Expense of interest-bearing liabilities. Interest expense amounted to $314.9 million in 2008, a $108.8 million or 25.7 percent decrease from 2007. This followed a $70.0 million or 19.8 percent increase in interest expense during 2007 compared to 2006. For 2008, the decrease in interest expense was the net result of lower interest rates offset in part by increased levels of interest-bearing liabilities. In 2007, both average interest-bearing liabilities and rates increased from the prior year. The blended rate on total interest-bearing liabilities equaled 2.56 percent during 2008, compared to 3.57 percent in 2007 and 3.14 percent in 2006. Interest-bearing liabilities averaged $12.31 billion during 2008, an increase of $429.1 million or 3.6 percent over 2007 levels. During 2007, interest-bearing liabilities averaged $11.88 billion, an increase of $621.0 million or 5.5 percent over 2006.

Interest expense on interest-bearing deposits equaled $263.5 million during 2008, down $77.7 million or 22.8 percent from 2007. The impact of lower interest rates more than offset added expense from higher deposit balances. Lower market interest rates caused the aggregate rate on interest-bearing deposits to decline to 2.49 percent during 2008, down 88 basis points from 2007. Interest-bearing deposits averaged $10.58 billion during 2008, an increase of $452.1 million or 4.5 percent. Average money market balances increased $351.8 million or 12.4 percent while average time deposits increased $118.7 million or 2.2 percent. During 2007, average time deposits increased $316.2 million or 6.4 percent.

Interest expense on short-term borrowings decreased $37.6 million or 68.3 percent during 2008, the result of decreases in the balances of both master note and repurchase obligations as well as lower rates. The rate on average short-term borrowings decreased 252 basis points from 4.07 percent in 2007 to 1.55 percent in 2008 due to reductions in the federal funds rate during 2008. During 2007, interest expense increased $13.7 million over 2006, the result of growth in average short-term borrowings partially offset by a 15 basis point rate reduction.

Interest expense on long-term obligations increased $6.6 million or 24.0 percent during 2008 due to new borrowings from the Federal Home Loan Bank of Atlanta. The rate on average long-term obligations decreased 116 basis points from 6.74 percent in 2007 to 5.58 percent in 2008.

NET INTEREST INCOME

Net interest income amounted to $499.8 million during 2008, a $19.4 million or 4.0 percent increase over 2007. The increase from 2008 resulted from balance sheet growth as the taxable-equivalent net yield on interest-earning assets declined by only one basis point from the prior year to 3.40 percent during 2008.

During 2007, net interest income equaled $480.3 million, a $3.8 million or 0.8 percent increase over 2006. The marginal increase from 2006 resulted from balance sheet growth, the impact of which offset the unfavorable influence of a lower net yield on interest-earning assets. The taxable-equivalent net yield on interest-earning assets declined 13 basis points from 3.54 percent during 2006. This reduction resulted from the impact of a flat yield curve and extremely competitive pricing for both loan and deposit products.

A net short-term liability-sensitive balance sheet such as that maintained by BancShares would typically provide improved net interest income following reductions in interest rates such as those implemented by the Federal Reserve during 2007 and 2008. However, intense competition for deposits by institutions struggling to overcome liquidity challenges caused interest rates on these products to remain artificially high through much of 2008 while asset yields continued to decline. Table 8 isolates the changes in taxable-equivalent net interest income due to changes in volume and interest rates for 2008 and 2007.

Table 9

NONINTEREST INCOME


	Year ended December 31
	2008		2007		2006			2005			2004
	(thousands)
Cardholder and merchant services	$	97,577	$	97,070	$	86,103		$	75,298		$	65,903
Service charges on deposit accounts		82,349		77,827		72,561			77,376			81,478
Wealth management services
Trust and asset management fees		23,216		25,262		21,586			18,588			16,913
Broker-dealer activities		24,982		24,043		20,627			16,138			15,541

Total wealth management services		48,198		49,305		42,213			34,726			32,454
Fees from processing services		35,585		32,531		29,631			25,598			23,888
Insurance commissions		8,277		7,735		6,942			6,390			6,186
Mortgage income		6,564		6,305		5,494			5,361			5,861
ATM income		7,003		6,515		6,803			7,843			8,416
Other service charges and fees		17,598		15,318		15,996			16,902			13,926
Securities gains (losses)		8,128		1,376		(659	)		(492	)		1,852
Other		840		1,488		6,283			8,664			5,920

Total	$	312,119	$	295,470	$	271,367		$	257,666		$	245,884

NONINTEREST INCOME

Growth of noninterest income is essential to our ability to sustain adequate levels of profitability. The primary sources of noninterest income are cardholder and merchant services income, service charges on deposit accounts, revenues derived from wealth management services and fees from processing services. Noninterest income totaled $312.1 million during 2008, an increase of $16.6 million or 5.6 percent. Noninterest income during 2007 equaled $295.5 million, a $24.1 million or 8.9 percent increase over 2006. Table 9 presents the major components of noninterest income for the past five years.

The increase in noninterest income during 2008 can be primarily attributed to gains in securities transaction, improvements in service charges on deposits accounts, fees from processing services and other service charges and fees.

Gains on securities transactions amounted to $8.1 million in 2008, compared to the $1.4 million earned in 2007. During 2008, Visa completed its initial public offering resulting in a conversion of our former member-bank equity investment to a new class of restricted stock. Immediately thereafter, a portion of our new Visa stock was redeemed for cash, an event that triggered the recognition of an $8.1 million gain.

Service charges on deposit accounts equaled $82.3 million during 2008, compared to $77.8 million in 2007, a $4.5 million or 5.8 percent increase. Commercial service charge income benefited from lower interest rates during 2008, which generated reduced earnings credit for commercial customers. Individual service charge income declined due to continued growth in free checking products. Insufficient funds and overdraft income improved due to refinements in the methodology used to process customer transactions.

During 2008, fees from processing services totaled $35.6 million, an increase of $3.1 million or 9.4 percent over 2007. During 2007, BancShares recognized $32.5 million in fees from processing services, an increase of $2.9 million or 9.8 percent over the $29.6 million recognized during 2006. Growth in the number of processed banks and transaction volumes led to the favorable trend.

Cardholder and merchant services income amounted to $97.6 million in 2008 up slightly over 2007. Interchange income earned on debit and credit card transactions increased during 2008, although transaction volumes softened during the last quarter. Merchant income declined during 2008 due to weaker sales activity by merchant customers.

Fees from wealth management services decreased $1.1 million to $48.2 million in 2008 from $49.3 million in 2007. The 2.2 percent decrease in 2008 resulted from lower trust and asset management fees caused by significant market declines in assets under management. Despite the general weakness in the economy, fees generated through the broker-dealer subsidiaries increased during 2008.

Insurance commissions totaled $8.3 million during 2008, a 7.0 percent increase over 2007, primarily a result of higher bonus commissions. Mortgage income during 2008 equaled $6.6 million, a 4.1 percent improvement over 2007 with most of the income resulting from sales of newly-originated residential mortgage loans and the related servicing rights to various investors.

Other service charges and fees totaled $17.6 million during 2008, an increase of $2.3 million or 14.9 percent over 2007 due to higher international fees and processing fees for commercial loan modifications.

Table 10

NONINTEREST EXPENSE


	Year ended December 31
	2008		2007		2006		2005		2004
	(thousands)
Salaries and wages	$	259,250	$	243,871	$	228,472	$	212,997	$	204,597
Employee benefits		58,899		52,733		50,445		51,517		48,624
Equipment expense		57,715		56,404		52,490		50,291		50,125
Occupancy expense		60,839		56,922		52,153		46,912		43,997
Cardholder and merchant processing		42,071		41,882		37,286		32,067		28,290
Cardholder reward programs		9,323		12,529		9,228		5,878		5,763
Telecommunications		12,061		10,501		9,844		9,873		10,461
Postage		10,427		9,614		8,926		8,045		8,639
Processing fees paid to third parties		8,985		7,004		5,845		4,332		3,826
Advertising		8,098		7,499		7,212		7,206		7,981
Legal		6,308		6,410		5,244		4,124		5,978
Consultant		2,514		3,324		2,254		3,362		2,980
Amortization of intangibles		2,048		2,142		2,318		2,453		2,360
Other		67,943		63,829		59,360		57,814		53,565

Total	$	606,481	$	574,664	$	531,077	$	496,871	$	477,186

NONINTEREST EXPENSE

The primary components of noninterest expense are salaries and related employee benefits, occupancy costs for branch offices and support facilities and equipment and software costs related to branch offices and technology. Noninterest expense for 2008 amounted to $606.5 million, a $31.8 million or 5.5 percent increase over 2007. Noninterest expense in 2007 was $574.7 million, a $43.6 million or 8.2 percent increase over 2006. Table 10 presents the major components of noninterest expense for the past five years. For 2008 and 2007, $7.7 million and $8.4 million of the respective increases in total noninterest expense are attributable to the continued growth and expansion of ISB.

Salary expense totaled $259.3 million during 2008, compared to $243.9 million during 2007, an increase of $15.4 million or 6.3 percent, following a $15.4 million or 6.7 percent increase in 2007 over 2006. The increase in 2008 is attributable to staff costs for new branch offices, headcount additions in support functions and merit increases.

Employee benefits expense equaled $58.9 million during 2008, an increase of $6.2 million or 11.7 percent from 2007. The 2008 increase results from a $2.8 million increase in health care expense and a $2.7 million increase in executive retirement costs. The aggregate cost of all qualified retirement plans declined $516,000 or 3.1 percent during 2008, the net result of lower pension expense and higher employer contributions to 401(k) benefit plans.

As a result of earnings and funding volatility associated with providing a defined benefit plan, BancShares discontinued offering traditional pension benefits to newly-hired employees during 2007. Instead, employees hired after March 31, 2007 may elect to participate in an enhanced 401(k) benefit plan. Employees hired on or before March 31, 2007 were allowed the option of continued participation in the defined benefit plan and the existing 401(k) plan or enrollment in an enhanced 401(k) benefit plan. Employees who elected to enroll in the enhanced 401(k) benefit plan discontinued the accrual of future years of service benefit under the defined benefit plan. Based on the elections made by participants, a curtailment charge of $763,000 was included in employee benefit expense during 2007.

BancShares recorded occupancy expense of $60.8 million during 2008, an increase of $3.9 million or 6.9 percent during 2008. Occupancy expense during 2007 equaled $56.9 million, an increase of $4.8 million or 9.1 percent over 2006. The increase in occupancy expense in each period resulted from higher depreciation and rent expense attributable to newly constructed branches and our corporate headquarters building and significant increases in building repairs.

Equipment expense was $57.7 million for 2008 and $56.4 million in 2007. The $1.3 million increase during 2008 resulted primarily from increased software and hardware costs and additional depreciation expense from the corporate headquarters building and new branch offices.

Costs associated with various cardholder reward programs totaled $9.3 million during 2008 compared to $12.5 million during 2007. The $3.2 million reduction resulted from the termination of a program for debit cardholders. Processing fees paid to third parties increased $2.0 million or 28.3 percent during 2008, the result of greater utilization of outsourced technology.

Telecommunications expense totaled $12.1 million during 2008, an increase of $1.6 million or 14.9 percent over 2007 related to network upgrades to our branch offices. Losses sustained on the disposition of assets increased $1.6 million during 2008, primarily due to losses realized on sales of foreclosed property.

Other expense increased $4.1 million or 6.4 percent during 2008, primarily due to current litigation accruals, partially offset by the reversal of a $3.3 million accrual established in 2007 for litigation matters resulting from our Visa member bank status. The 2007 accrual related to two separate claims against Visa, the exposure for which was shared by member banks. Upon completion of its initial public offering in early 2008, Visa retained proceeds to fund the anticipated litigation claims, and the previously-estimated member claims were relieved.

INCOME TAXES

During 2008, BancShares recorded income tax expense of $48.5 million, compared to $58.9 million during 2007 and $69.5 million in 2006. BancShares' effective tax rate equaled 34.8 percent in 2008, 35.2 percent in 2007 and 35.4 percent in 2006.

Table 11

ANALYSIS OF CAPITAL ADEQUACY


	December 31									Regulatory Minimum
	2008			2007			2006			Regulatory Minimum
	(dollars in thousands)
First Citizens BancShares, Inc.
Tier 1 capital	$	1,649,675		$	1,557,190		$	1,456,947
Tier 2 capital		286,318			279,573			275,079

Total capital	$	1,935,993		$	1,836,763		$	1,732,026

Risk-adjusted assets	$	12,499,545		$	11,961,124		$	11,266,342
Risk-based capital ratios
Tier 1 capital		13.20	%		13.02	%		12.93	%	4.00	%
Total capital		15.49	%		15.36	%		15.37	%	8.00	%
Tier 1 leverage ratio		9.88	%		9.63	%		9.39	%	3.00	%

First-Citizens Bank & Trust Company
Tier 1 capital	$	1,262,950		$	1,188,599		$	1,104,132
Tier 2 capital		250,095			244,470			240,070

Total capital	$	1,513,045		$	1,433,069		$	1,344,202

Risk-adjusted assets	$	10,006,171		$	9,716,423		$	9,238,512
Risk-based capital ratios
Tier 1 capital		12.62	%		12.23	%		11.95	%	4.00	%
Total capital		15.12	%		14.75	%		14.55	%	8.00	%

Tier 1 leverage ratio		9.17	%		8.81	%		8.33	%	3.00	%

IronStone Bank
Tier 1 capital	$	273,637		$	261,500		$	245,402
Tier 2 capital		38,250			24,801			23,576

Total capital	$	311,887		$	286,301		$	268,978

Risk-adjusted assets	$	2,369,415		$	2,190,348		$	1,953,178
Risk-based capital ratios
Tier 1 capital		11.55	%		11.94	%		12.56	%	4.00	%
Total capital		13.16	%		13.07	%		13.77	%	8.00	%
Tangible equity ratio		10.71	%		11.21	%		11.52	%	3.00	%

SHAREHOLDERS’ EQUITY

We continually monitor the capital levels and ratios for BancShares and the subsidiary banks to ensure that they comfortably exceed the minimum requirements imposed by their respective regulatory authorities and to ensure that the subsidiary banks’ capital is appropriate given each bank’s growth projection and risk profile. Failure to meet certain capital requirements may result in actions by regulatory agencies that could have a material effect on the financial statements. Table 11 provides information on capital adequacy for BancShares, FCB and ISB as of December 31, 2008, 2007 and 2006.

BancShares continues to exceed minimum capital standards and the banking subsidiaries remain well-capitalized. The sustained growth of ISB has required BancShares to infuse significant amounts of capital into ISB to support its expanding balance sheet and continuing operating losses. Infusions totaled $45.8 million in 2008, $24.0 million in 2007 and $30.0 million in 2006. Since ISB was formed in 1997, BancShares has provided $349.8 million in capital. BancShares’ prospective capacity to provide capital to support the future growth and expansion of ISB is highly dependent upon FCB’s ability to return capital through dividends to BancShares.

Dividends from FCB to BancShares provide the sole source for capital infusions into ISB to fund its growth and expansion. These dividends also fund BancShares’ payment of shareholder dividends and interest payments on a portion

of its long-term obligations. During 2008, FCB declared dividends to BancShares in the amount of $54.8 million, compared to $43.8 million in 2007 and $40.0 million in 2006. At December 31, 2008, based on limitations imposed by North Carolina General Statutes, FCB had the ability to declare dividends totaling $1.03 billion. However, any dividends declared in excess of $512.4 million would have caused FCB to lose its well-capitalized designation.

RISK MANAGEMENT

In the normal course of business, BancShares is exposed to various risks. To manage the major risks that are inherent in the operation of a financial holding company and to provide reasonable assurance that our long-term business objectives will be attained, various policies and risk management processes identify, monitor and manage risk within acceptable tolerances. Management continually refines and enhances its risk management policies and procedures to maintain effective risk management programs and processes.

Our most prominent risk exposures are credit, interest rate and liquidity risk. Credit risk is the risk of not collecting the amount of a loan or investment when it is contractually due. Interest rate risk is the potential reduction of net interest income as a result of changes in market interest rates. Liquidity risk is the possible inability to fund obligations to depositors, creditors, investors or borrowers.

Credit Risk. BancShares manages and monitors extensions of credit and the quality of the loan and lease portfolio through rigorous initial underwriting processes and periodic ongoing reviews. Underwriting standards reflect credit policies and procedures administered through our highly centralized credit decision process. We maintain a credit review function that conducts independent risk reviews and analyses for the purpose of ensuring compliance with credit policies and to monitor asset quality trends. The independent risk reviews include portfolio analysis by geographic location and horizontal reviews across industry and collateral sectors within the banking subsidiaries. We strive to identify potential credit problems as early as possible, to take charge-offs or write-downs as appropriate and to maintain adequate allowances for credit losses that are inherent in the loan and lease portfolio. The maintenance of excellent asset quality is one of our key performance measures.

We maintain a well-diversified loan and lease portfolio, and seek to avoid the risk associated with large concentrations within specific geographic areas or industries. The ongoing expansion of our branch network has allowed us to mitigate our historic exposure to geographic risk concentration in North Carolina and Virginia.

We have historically carried a significant concentration of real estate-secured loans, although our underwriting policies principally rely on adequate borrower cash flow rather than underlying collateral values. When we do rely on underlying real property values, we favor financing secured by owner-occupied real property and as a result a large percentage of our real estate secured loans are owner-occupied. At December 31, 2008, loans secured by real estate totaled $8.15 billion or 69.5 percent of total loans compared to $7.46 billion or 68.1 percent at December 31, 2007.

Table 12

NONPERFORMING ASSETS


	December 31,
	2008			2007			2006			2005			2004
	(thousands, except ratios)
Nonaccrual loans and leases	$	39,361		$	13,021		$	14,882		$	18,969		$	14,266
Other real estate		29,956			6,893			6,028			6,753			9,020
Restructured loans		2,349			—			—			—			—

Total nonperforming assets	$	71,666		$	19,914		$	20,910		$	25,722		$	23,286

Accruing loans and leases 90 days or more past due and in process of collection	$	22,459		$	7,124		$	5,185		$	9,180		$	12,192
Loans and leases at December 31	$	11,719,285		$	10,963,904		$	10,273,043		$	9,656,230		$	9,364,822
Ratio of nonperforming assets to total loans and leases plus other real estate		0.61	%		0.18	%		0.20	%		0.27	%		0.25	%

Interest income that would have been earned on nonperforming loans and leases had they been performing	$	1,275		$	1,200		$	1,271		$	551		$	773
Interest income earned on nonperforming loans and leases		797			465			226			821			281

There were no foreign loans or leases outstanding in any period.

In recent years, we have sought opportunities to provide financial services to businesses associated with and professionals within the medical community. Due to strong loan growth within this industry, our loans to borrowers in medical, dental or related fields totaled $2.74 billion as of December 31, 2008 and $2.26 billion as of December 31, 2007, representing 23.4 percent and 20.6 percent of total loans and leases as of the respective dates. Except for this single concentration, no other industry represented more than 10 percent of total loans and leases outstanding at December 31, 2008.

In addition to geographic and industry concentrations, we monitor our loan and lease portfolio for other risk characteristics. Among the key indicators of credit risk are loan-to-value ratios, which measure a lender’s exposure as compared to the value of the underlying collateral. Regulatory agencies have established guidelines that define high loan-to-value loans as those real estate loans that exceed 65 percent to 85 percent of the collateral value depending upon the type of collateral. At December 31, 2008, we had $919.2 million or 7.8 percent of loans and leases that exceeded the loan-to-value ratios recommended by the guidelines compared to $969.1 million or 8.8 percent at December 31, 2007. While we continuously strive to limit our high loan-to-value loans, we believe that the inherent risk within these loans is lessened by mitigating factors, such as our strict underwriting criteria and the high rate of owner-occupied properties.

Nonperforming assets include nonaccrual loans and leases, other real estate and restructured loans. With the exception of certain residential mortgage loans, the accrual of interest on loans and leases is discontinued when we deem that collection of additional principal or interest is doubtful. Loans and leases are returned to accrual status when both principal and interest are current and the asset is determined to be performing in accordance with the terms of the loan instrument. The accrual of interest on certain residential mortgage loans is discontinued when a loan is more than three monthly payments past due, and the accrual of interest resumes when the loan is less than three monthly payments past due. Other real estate includes foreclosed property, branch facilities that we have closed but not sold and land that we have elected to sell that was originally acquired for future branches. Restructured loans include accruing loans that we have modified in order to enable a financially-distressed borrower an opportunity to continue making payments under terms more favorable than we would normally extend. Nonperforming asset balances for the past five years are presented in Table 12.

BancShares’ nonperforming assets at December 31, 2008 totaled $71.7 million, compared to $19.9 million at December 31, 2007 and $20.9 million at December 31, 2006. As a percentage of total loans, leases and other real estate, nonperforming assets represented 0.61 percent, 0.18 percent and 0.20 percent as of December 31, 2008, 2007 and 2006.

The $51.8 million surge in nonperforming assets during 2008 was primarily due to deterioration of our residential construction loans located in the counties surrounding Atlanta, Georgia, and in southwest Florida. Both markets have experienced significant over-development that has resulted in extremely weak sales of new residential units and significant declines in property values. As of December 31, 2008, $21.9 million and $18.1 million of other real estate and nonaccrual loans respectively relate to the Atlanta, Georgia and southwest Florida markets. All of the $2.3 million of restructured loans relate to these markets. Thus, $42.3 million of the $71.7 million total nonperforming assets arose from the residential construction loan portfolio in Atlanta, Georgia and southwest Florida. Total nonperforming assets in these markets as of December 31, 2007 amounted to $1.1 million.

Residential construction loans in these markets equaled $105.1 million as of December 31, 2008. Of that total, $24.2 million was already classified as nonperforming, and $67.4 million were identified as potential problem loans due to concerns about borrowers’ abilities to comply with existing loan repayment terms. It is likely that additional residential construction loans will be placed on nonaccrual during 2009. We continue to closely monitor past due and problem accounts to identify any loans and leases that should be classified as impaired or nonaccrual.

The allowance for credit losses reflects the estimated losses resulting from the inability of our customers to make required payments. In calculating the allowance, we employ a variety of modeling and estimation tools for measuring credit risk. Generally, loans and leases to commercial customers are evaluated individually and assigned a credit grade, while consumer loans are evaluated collectively. The individual credit grades for commercial loans are assigned based upon factors such as the borrower’s cash flow, the value of any underlying collateral and the strength of any guarantee. Relying on historical data of credit grade losses and migration patterns among credit grades, we calculate a loss estimate for each credit grade. As loans to borrowers experiencing financial stress are moved to higher-risk credit grades, increased allowances are assigned to that exposure.

Groups of consumer loans are aggregated over their remaining estimated behavioral lives and probable loss projections for each period become the basis for the allowance amount. The loss projections are based on historical losses, delinquency patterns and various other credit risk indicators. During 2008, based on deepening economic weaknesses indicated by higher unemployment and personal bankruptcy rates, we increased loss estimates for the affected retail loans types.

When needed, we also establish specific allowances for impaired loans. Commercial purpose loans are considered to be impaired if they are classified as nonaccrual. The allowance for impaired loans in excess of $1.0 million is the difference between its carrying value and the estimated collateral value or the present value of anticipated cash flows. For smaller impaired loans, the allowance is calculated based on the credit grade.

At December 31, 2008, impaired loans total $38.9 million compared to $10.6 million at December 31, 2007. Allowances established for impaired loans totaled $6.7 million and $2.1 million, respectively. The calculation of allowances for impaired loans is highly dependent on collateral valuations. Since all of our impaired loans are secured by real estate, we are relying on appraisals. However, given the significant instability in real estate markets, particularly in the Atlanta, Georgia area and in Southwest Florida, the valuations are subject to significant variation based on further reductions or recoveries of property values.

The allowance for credit losses also includes an amount that is not specifically allocated to individual loan types. This unallocated allowance is based upon factors such as changes in business and economic conditions, recent loss, delinquency and asset quality issues both within BancShares and the banking industry, exposures resulting from loan concentrations or specific industry risks and other judgmental factors. As of December 31, 2008, the unallocated portion of the allowance equaled $11.7 million or 7.1 percent of the total allowance for credit losses. This compares to $11.5 million or 8.0 percent as of December 31, 2007.

Table 13

ALLOWANCE FOR CREDIT LOSSES


	2008			2007			2006			2005			2004
	(thousands, except ratios)
Allowance for credit losses at beginning of period	$	144,271		$	138,646		$	135,770		$	130,832		$	119,357
Adjustment for sale of loans		—			—			—			(1,585	)		—
Provision for credit losses		65,805			33,594			20,922			33,514			34,690
Charge-offs:
Real estate:
Construction and land development		(17,559	)		(1,683	)		—			(1	)		(13	)
Commercial mortgage		(696	)		(49	)		(124	)		(551	)		(804	)
Residential mortgage		(1,165	)		(194	)		(1,717	)		(1,912	)		(2,351	)
Revolving mortgage		(3,249	)		(1,363	)		(1,475	)		(951	)		(1,384	)
Other mortgage loans		—			—			—			—			—

Total real estate loans		(22,669	)		(3,289	)		(3,316	)		(3,415	)		(4,552	)
Commercial and industrial		(13,593	)		(13,106	)		(10,378	)		(18,724	)		(9,800	)
Consumer		(12,695	)		(13,203	)		(9,171	)		(10,425	)		(12,238	)
Lease financing		(1,124	)		(3,092	)		(1,488	)		(347	)		(173	)

Total charge-offs		(50,081	)		(32,690	)		(24,353	)		(32,911	)		(26,763	)

Recoveries:
Real estate:
Construction and land development		227			21			—			—			34
Commercial mortgage		55			8			182			409			236
Residential mortgage		121			261			290			432			244
Revolving mortgage		215			96			182			155			103
Other mortgage loans		—			—			—			—			—

Total real estate loans		618			386			654			996			617
Commercial and industrial		1,645			1,282			1,358			2,164			1,084
Consumer		2,173			2,883			4,140			2,672			1,761
Lease financing		314			170			155			88			86

Total recoveries		4,750			4,721			6,307			5,920			3,548

Net charge-offs		(45,331	)		(27,969	)		(18,046	)		(26,991	)		(23,215	)

Allowance for credit losses at end of period	$	164,745		$	144,271		$	138,646		$	135,770		$	130,832

Allowance for credit losses includes:
Allowance for loan and lease losses	$	157,569		$	136,974		$	132,004		$	128,847		$	123,861
Reserve for unfunded commitments		7,176			7,297			6,642			6,923			6,971

Allowance for credit losses at end of period	$	164,745		$	144,271		$	138,646		$	135,770		$	130,832

Average loans and leases	$	11,306,900		$	10,513,599		$	9,989,757		$	9,375,249		$	8,901,628
Loans and leases at year-end		11,719,285			10,963,904			10,273,043			9,656,230			9,364,822
Ratios
Net charge-offs to average loans and leases		0.40	%		0.27	%		0.18	%		0.29	%		0.26	%
Percent of total loans and leases at period-end:
Allowance for loan and lease losses		1.34			1.25			1.28			1.33			1.32
Reserve for unfunded commitments		0.06			0.07			0.06			0.07			0.07
Allowance for credit losses		1.41			1.32			1.35			1.41			1.40

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

At December 31, 2008, BancShares' allowance for credit losses totaled $164.7 million or 1.41 percent of loans and leases outstanding, compared to $144.3 million or 1.32 percent at December 31, 2007. The allowance equaled $138.6 million or 1.35 percent at December 31, 2006. The $20.4 million increase during 2008 was primarily due to higher anticipated losses within the residential construction loan portfolio and in consumer loans.

The provision for credit losses equaled $65.8 million during 2008 compared to $33.6 million during 2007 and $20.9 million during 2006. The $32.2 million or 95.9 percent increase in provision for credit losses from 2007 to 2008 resulted primarily from losses and provisions in the residential construction loan portfolio as well as certain consumer loan portfolios.

Net charge-offs for 2008 totaled $45.3 million, compared to $28.0 million during 2007, and $18.0 million during 2006. The ratio of net charge-offs to average loans and leases outstanding equaled 0.40 percent during 2008, 0.27 percent during 2007 and 0.18 percent during 2006. Despite the increase in the 2008 loss ratio, these net charge-off rates remain low when compared to industry data. Table 13 provides details concerning the allowance for credit losses and provision for credit losses for the past five years.

Table 14 details the allocation of the allowance for credit losses among the various loan types. The process used to allocate the allowance considers, among other factors, whether the borrower is a retail or commercial customer, whether the loan is secured or unsecured, and whether the loan is an open or closed-end agreement.

Table 14

ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES


	December 31
	2008				2007				2006				2005				2004
	Allowance for Credit Losses		Percent of Loans to Total Loans		Allowance for Credit Losses		Percent of Loans to Total Loans		Allowance for Credit Losses		Percent of Loans to Total Loans		Allowance for Credit Losses		Percent of Loans to Total Loans		Allowance for Credit Losses		Percent of Loans to Total Loans
	(dollars in thousands)
Allowance for loan and lease losses:
Real estate:
Construction and land development	$	13,948	6.64	%	$	9,918	7.40	%	$	9,351	7.63	%	$	8,985	7.94	%	$	7,704	6.28	%
Commercial mortgage		43,222	37.06			35,760	36.31			38,463	36.27			37,185	36.44			35,373	35.03
Residential mortgage		8,006	8.23			7,011	9.39			6,954	9.98			6,822	10.53			6,387	10.46
Revolving mortgage		6,821	16.31			5,735	13.63			8,425	12.91			8,712	14.17			11,587	18.30
Other mortgage		5,231	1.28			2,323	1.33			2,145	1.61			2,242	1.79			2,249	1.83

Total real estate		77,228	69.52			60,747	68.06			65,338	68.40			63,946	70.87			63,300	71.90
Commercial and industrial		35,896	16.09			32,743	15.57			34,846	14.86			30,663	12.50			26,794	10.47
Consumer		27,045	10.52			26,925	12.48			22,396	13.24			22,695	13.66			24,072	14.92
Lease financing		5,091	3.02			4,649	3.11			3,562	2.87			2,389	2.42			2,229	2.05
Other		632	0.85			412	0.78			723	0.63			576	0.55			743	0.66
Unallocated		11,677				11,498				5,139				8,578				6,723

Total allowance for loan and lease losses		157,569				136,974				132,004				128,847				123,861
Reserve for unfunded commitments		7,176				7,297				6,642				6,923				6,971

Total allowance for credit losses	$	164,745	100.00	%	$	144,271	100.00	%	$	138,646	100.00	%	$	135,770	100.00	%	$	130,832	100.00	%

Interest Rate Risk. Interest rate risk results principally from assets and liabilities maturing or repricing at different points in time, from assets and liabilities repricing at the same point in time but in different amounts and from short-term and long-term interest rates changing in different magnitudes, an event frequently described by the resulting impact on the shape of the yield curve. Market interest rates also have an impact on the interest rate and repricing characteristics of loans and leases that are originated as well as the rate characteristics of our interest-bearing liabilities.

We assess our interest rate risk by simulating future amounts of net interest income using various interest rate scenarios and comparing those results to forecasted net interest income assuming stable rates. The December 31, 2008

simulations project very modest changes in net interest income in all scenarios, the result of limited ability to adjust rates on many interest-earning assets and interest-bearing liabilities, due to the presence of contractual or effective rate floors. Certain deposit and short-term borrowing liabilities can price down only marginally from current interest rate levels, and it is anticipated that the prime interest rate cannot move below the 3.25% rate as of December 31, 2008. Table 15 provides the impact on net interest income resulting from various interest rate scenarios as of December 31, 2008 and 2007.

Table 15

INTEREST RATE RISK ANALYSIS


	Favorable (unfavorable) impact on net interest income compared to stable rate scenario over the 12-month period following:
Assumed rate change	December 31, 2008		December 31, 2007
Most likely	-0.37	%	-0.52	%
Immediate 200 basis point increase	2.06	%	-5.65	%
Gradual 200 basis point increase	0.19	%	-2.22	%
Immediate 200 basis point decrease	-0.58	%	2.45	%
Gradual 200 basis point decrease	1.29	%	3.05	%

We also utilize the market value of equity as a tool to measure and manage interest rate risk. The market value of equity measures the degree to which the market values of our assets and liabilities will change given a specific degree of movement in interest rates. Our calculation methodology for the market value of equity utilizes a 200-basis point parallel rate shock. As of December 31, 2008, the market value of equity calculated with a 200-basis point immediate decrease in interest rates equals 8.08 percent of assets, up from 7.40 percent when calculated with stable rates. The market value of equity calculated with a 200-basis point immediate increase in interest rates equals 6.14 percent of assets. The estimated amounts for the market value of equity are highly influenced by the relatively longer maturity of the commercial loan component of interest-earning assets when compared to the maturity characteristics of interest-bearing liabilities.

The maturity distribution and repricing opportunities of interest-earning assets and interest-bearing liabilities have a significant impact on our interest rate risk. Our strategy is to reduce overall interest rate risk by maintaining relatively short maturities. Table 16 provides a loan maturity distribution and information regarding the sensitivity of loans and leases to changes in interest rates. Table 4 includes maturity information for our investment securities. Table 6 displays maturity information for time deposits with balances in excess of $100,000.

Table 16

LOAN MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY


	December 31, 2008
	Within One Year		One to Five Years		After Five Years		Total
	(thousands)
Real estate	$	2,428,898	$	3,832,926	$	1,885,831	$	8,147,655
Commercial and industrial		486,258		779,066		620,034		1,885,358
Other		408,857		1,104,970		172,445		1,686,272

Total	$	3,324,013	$	5,716,962	$	2,678,310	$	11,719,285

Loans maturing after one year with:
Fixed interest rates			$	3,579,124	$	2,324,689	$	5,903,813
Floating or adjustable rates				2,137,838		353,621		2,491,459

Total			$	5,716,962	$	2,678,310	$	8,395,272

We do not typically utilize interest rate swaps, floors, collars or other derivative financial instruments to attempt to hedge our rate sensitivity and interest rate risk. However, during the second quarter of 2006, in conjunction with the

issuance of $115.0 million in trust preferred securities, we entered into an interest rate swap to synthetically convert the variable rate coupon on the securities to a fixed rate of 7.125 percent for a period of five years. The interest rate swap is a cash flow derivative under Statement of Financial Accounting Standards No. 133. The derivative is valued each quarter, and changes in the fair value are recorded on the consolidated balance sheet with an offset to other comprehensive income for the effective portion and an offset to the consolidated statements of income for any ineffective portion. The determination of effectiveness is made under the long-haul method.

Liquidity Risk. Liquidity risk results from the mismatching of asset and liability cash flows and the potential inability to secure adequate amounts of funding from traditional sources of liquidity. BancShares manages this risk by structuring its balance sheet prudently and by maintaining various borrowing resources to fund potential cash needs. BancShares has historically maintained a strong focus on liquidity, and we have traditionally relied on our deposit base as our primary liquidity source. Short-term borrowings resulting from commercial treasury customers have also emerged as an important source of liquidity in recent years, although some of those borrowings must be collateralized thereby potentially restricting the use of the resulting liquidity. Through our deposit and treasury product pricing strategies, we have the ability to stimulate or curtail liability growth.

During 2008, economic conditions created significant disruptions to the normal availability of liquidity to lenders, a trend that was amplified in some institutions by deposit withdrawals. We achieved growth in average deposits of 3.5 percent during 2008, compared to 1.7 percent during 2007 and 6.3 percent during 2006. The majority of the 2008 growth was achieved in the fourth quarter, as financial conditions within the banking industry deteriorated. We attribute this growth to recognition of the safety and financial strength of our company. This growth in deposits occurred despite falling interest rates. Lower interest rates did significantly impact the balances of short-term borrowings during 2008. Master notes and overnight repurchase obligations experienced a $633.1 million reduction due to lower interest rates.

We utilize borrowings from the Federal Home Loan Bank of Atlanta as an alternative source of liquidity, and to assist in matching the maturities of longer dated interest-earning assets. At December 31, 2008, we had sufficient collateral pledged to provide access to $1.22 billion of additional borrowings. Additionally, we maintain federal funds lines of credit and other borrowing facilities. At December 31, 2008, BancShares had access to $500.0 million in unsecured borrowings through its various sources.

Once we have satisfied our loan demand and other funding needs, residual liquidity is held in cash or invested in overnight investment and investment securities available for sale. At December 31, 2008, these highly-liquid assets totaled $4.03 billion or 24.1 percent of total assets, compared to $4.29 billion or 26.5 percent of total assets at December 31, 2007.

SEGMENT REPORTING

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 and has separate management groups. We monitor growth and financial results in these institutions separately and, within each institution, by further geographic segregation.

Although FCB has grown through acquisition in certain of its markets, throughout its history the majority of its expansion has been accomplished on a de novo basis. Because of its size, the costs associated with FCB’s current rate of expansion are not material to its financial performance. Since ISB began operations in 1997, it has followed a similar business model for growth and expansion. However, due to the rapid pace of its growth and the number of branch offices that have not attained sufficient size to achieve profitability, the financial results and trends of ISB are significantly affected by its current and continuing growth. Each new market ISB enters creates additional operating costs that are typically not fully offset by operating revenues until three to four years of operation. Losses incurred since ISB’s inception total $63.7 million.

IronStone Bank. At December 31, 2008, ISB operated 61 facilities in twelve states, with a focus on markets with favorable growth prospects. ISB continued its expansion during 2008, establishing facilities in Kansas, Oklahoma and Dallas, Texas. Our business model for new markets has two requirements. First, we hire experienced bankers who are established in the markets we are entering and who are focused on delivering high quality customer service while maintaining strong asset quality. Second, we occupy attractive and accessible branch facilities. While these are costly goals, we believe that they are critical to establishing a solid foundation for future success in new markets.

ISB’s total assets increased from $2.34 billion at December 31, 2007 to $2.56 billion at December 31, 2008, an increase of $222.7 million or 9.5 percent. ISB’s total assets represented 15.3 percent of consolidated assets at December 31, 2008 compared to 14.4 percent at December 31, 2007.

ISB recorded a net loss of $28.9 million during 2008 compared to a net loss of $7.7 million during 2007 and net income of $2.2 million in 2006. The $21.2 million increase in the net loss resulted from significantly higher provision for credit losses on residential construction loans and higher noninterest expense. While we believe that the provision for credit losses will decline when compared to 2008, we project that ISB will operate at a loss at least through 2009.

ISB’s net interest income increased $3.7 million or 5.8 percent during 2008 due to asset growth and lower funding costs. Loans and leases increased $148.8 million or 7.2 percent from $2.07 billion at December 31, 2007 to $2.22 billion at December 31, 2008.

Provision for credit losses increased $27.2 million during 2008, due to higher net charge offs and deterioration of the residential construction loan portfolio. Net charge-offs amounted to $23.1 million or 1.06 percent of loans and leases during 2008, compared to $6.7 million or 0.34 percent of loans and leases in 2007. During 2008, $16.8 million or 72.7 percent of net charge-offs relate to residential construction loans. Nonperforming assets totaled $32.6 million at December 31, 2008, compared to $6.2 million at December 31, 2007.

ISB’s noninterest income fell $1.3 million or 9.7 percent during 2008, primarily the result of lower working capital finance fees and mortgage income. Deposit service charges increased $668,000 or 24.3 percent due to higher commercial service charges. Cardholder and merchant service fees increased $1.0 million from $6.4 million in 2007 to $7.5 million in 2008 as merchant discount and Visa interchange income were both higher.

Noninterest expense increased $7.7 million or 9.6 percent during 2008, the result of costs incurred in conjunction with the opening of new branch offices and higher cardholder processing expenses.

First-Citizens Bank & Trust Company. At December 31, 2008, FCB operated 343 branches in five states. During 2009, FCB plans to establish a new office in Washington, DC.

FCB’s total assets increased from $13.58 billion at December 31, 2007 to $13.88 billion at December 31, 2008, an increase of $297.6 million or 2.2 percent. FCB’s total assets represented 82.9 percent and 83.8 percent of consolidated assets at December 31, 2008 and 2007, respectively.

FCB recorded net income of $127.1 million during 2008 compared to $125.2 million during 2007, an increase of $1.9 million or 1.5 percent. The favorable variance in net income is attributable to improved net interest income and noninterest income, partially offset by higher noninterest expense and provision for credit losses.

FCB’s net interest income increased $11.9 million or 2.8 percent during 2008 due to higher average assets. Total FCB loans increased $606.6 million in 2008 from $8.89 billion to $9.50 billion. Provision for credit losses increased $5.0 million or 20.5 percent during 2008 caused by higher net charge-offs on consumer loans and continued loan growth. Net charge-offs increased $961,000 or 4.5 percent from $21.3 million in 2007 to $22.2 million in 2008.

FCB’s noninterest income increased $18.5 million or 6.4 percent during 2008, the result of higher securities gains, service charge income and fees from processing services. Noninterest expense increased $23.4 million or 4.6 percent during 2008, due to higher personnel, occupancy and telecommunications expense.

FOURTH QUARTER ANALYSIS

BancShares reported net income of $12.9 million for the quarter ended December 31, 2008, compared to $26.2 million for the corresponding period of 2007, a decrease of 50.7 percent. Per share income for the fourth quarter 2008 totaled $1.24 compared to $2.51 for the same period of 2007. BancShares’ results generated an annualized return on average assets of 0.31 percent for the fourth quarter of 2008, compared to 0.64 percent for the same period of 2007. The annualized return on average equity equaled 3.43 percent during the fourth quarter of 2008, compared to 7.31 percent for the same period of 2007. In the fourth quarter, higher noninterest expense and higher provision for credit losses contributed to the decline in net income. These added costs were partially offset by higher net interest income.

Table 17

SELECTED QUARTERLY DATA


	2008												2007
	Fourth Quarter			Third Quarter			Second Quarter			First Quarter			Fourth Quarter			Third Quarter			Second Quarter			First Quarter
	(thousands, except share data and ratios)
SUMMARY OF OPERATIONS
Interest income	$	195,366		$	199,372		$	202,575		$	217,403		$	230,826		$	232,120		$	223,473		$	217,637
Interest expense		71,211			71,761			77,147			94,826			109,197			111,185			103,884			99,448

Net interest income		124,155			127,611			125,428			122,577			121,629			120,935			119,589			118,189
Provision for credit losses		22,142			20,195			13,350			10,118			11,795			17,333			934			3,532

Net interest income after provision for credit losses		102,013			107,416			112,078			112,459			109,834			103,602			118,655			114,657
Noninterest income		72,182			77,244			79,025			83,668			76,534			77,285			72,620			69,031
Noninterest expense		155,800			155,559			149,481			145,641			146,285			146,906			142,878			138,595

Income before income taxes		18,395			29,101			41,622			50,486			40,083			33,981			48,397			45,093
Income taxes		5,502			9,547			15,396			18,101			13,920			11,362			17,546			16,109

Net income	$	12,893		$	19,554		$	26,226		$	32,385		$	26,163		$	22,619		$	30,851		$	28,984

Net interest income, taxable equivalent	$	125,779		$	129,164		$	127,143		$	124,430		$	123,666		$	122,980		$	121,409		$	119,964

PER SHARE DATA
Net income	$	1.24		$	1.87		$	2.51		$	3.10		$	2.51		$	2.17		$	2.96		$	2.78
Cash dividends		0.275			0.275			0.275			0.275			0.275			0.275			0.275			0.275
Market price at period end (Class A)		152.80			179.00			139.49			139.35			145.85			174.40			194.40			201.00
Book value at period end		138.33			144.17			142.54			142.42			138.12			134.32			131.10			128.64
Tangible book value at period end		128.13			133.92			132.24			132.07			127.72			123.88			120.61			118.10

SELECTED QUARTERLY AVERAGE BALANCES
Total assets	$	16,741,696		$	16,377,570		$	16,396,288		$	16,302,994		$	16,276,649		$	16,092,009		$	15,725,976		$	15,572,613
Investment securities		3,193,703			2,998,370			3,238,028			3,183,636			3,272,015			3,162,011			3,047,753			3,092,261
Loans and leases		11,665,522			11,440,563			11,154,400			10,961,706			10,831,571			10,623,247			10,360,913			10,230,858
Interest-earning assets		15,293,442			14,814,463			14,841,431			14,691,141			14,655,309			14,476,247			14,118,884			13,908,622
Deposits		13,544,762			13,003,821			12,969,423			12,905,651			12,876,549			12,728,527			12,524,786			12,502,206
Interest-bearing liabilities		12,471,757			12,187,085			12,281,649			12,309,132			12,216,067			12,052,307			11,698,285			11,557,940
Long-term obligations		730,360			613,046			609,301			475,732			404,367			405,101			405,339			408,277
Shareholders’ equity	$	1,497,619		$	1,496,573		$	1,484,143		$	1,466,411		$	1,420,348		$	1,385,284		$	1,353,739		$	1,323,327
Shares outstanding		10,434,453			10,434,453			10,434,453			10,434,453			10,434,453			10,434,453			10,434,453			10,434,453

SELECTED QUARTER-END BALANCES
Total assets	$	16,745,662		$	16,665,605		$	16,422,674		$	16,746,518		$	16,212,107		$	16,311,870		$	16,008,605		$	15,853,778
Investment securities		3,271,650			2,977,565			3,013,432			3,206,137			3,236,835			3,266,150			3,023,799			3,031,798
Loans and leases		11,719,285			11,627,635			11,313,155			11,029,937			10,963,904			10,763,158			10,513,041			10,262,356
Interest-earning assets		15,165,551			14,933,906			14,722,037			15,039,574			14,466,948			14,542,241			14,232,802			14,094,002
Deposits		13,713,763			13,372,468			13,075,411			13,226,991			12,928,544			12,980,447			12,772,322			12,722,532
Interest-bearing liabilities		12,441,025			12,383,450			12,147,269			12,566,799			12,118,967			12,170,559			11,830,904			11,671,127
Long-term obligations		733,132			649,214			609,277			609,335			404,392			404,266			405,314			405,356
Shareholders’ equity		1,443,375			1,504,334		$	1,487,282		$	1,486,034		$	1,441,208		$	1,401,575		$	1,367,980		$	1,342,327
Shares outstanding		10,434,453			10,434,453			10,434,453			10,434,453			10,434,453			10,434,453			10,434,453			10,434,453

SELECTED RATIOS AND OTHER DATA
Rate of return on average assets		0.31	%		0.64	%		0.64	%		0.80	%		0.64	%		0.56	%		0.79	%		0.75	%
Rate of return on average shareholders’ equity		3.43			7.11			7.11			8.88			7.31			6.48			9.14			8.88
Net yield on interest-earning assets (taxable equivalent)		3.27			3.47			3.45			3.41			3.35			3.37			3.45			3.50
Allowance for loan and lease losses to total loans and leases at period end		1.34			1.32			1.28			1.28			1.25			1.24			1.23			1.29
Nonperforming assets to total loans and leases plus other real estate at period end		0.61			0.53			0.42			0.39			0.18			0.22			0.18			0.21
Tier 1 risk-based capital ratio		13.20			13.01			13.14			13.12			13.02			12.96			13.05			13.09
Total risk-based capital ratio		15.49			15.33			15.48			15.47			15.36			15.30			15.40			15.52
Leverage capital ratio		9.88			10.01			9.89			9.80			9.63			9.59			9.75			9.60
Dividend payout ratio		22.18			14.71			10.96			8.87			10.96			12.67			9.29			9.89
Average loans and leases to average deposits		86.13			87.98			86.01			84.94			84.12			83.46			82.72			81.83

Average loan and lease balances include nonaccrual loans and leases.

Net interest income increased $2.5 million or 2.1 percent in the fourth quarter of 2008, compared to the same period of 2007. The taxable-equivalent net yield on interest-earning assets decreased from 3.35 percent in the fourth quarter of 2007 to 3.27 percent for the fourth quarter of 2008.

Average interest-earning assets increased $638.1 million to $15.29 billion from the fourth quarter of 2007 to the fourth quarter of 2008. Average loans and leases outstanding during the fourth quarter of 2008 equaled $11.67 billion, an increase of $834.0 million or 7.7 percent over 2007. The yield on interest-earning assets decreased 119 basis points from 6.31 percent in 2007 to 5.12 percent in 2008.

Average interest-bearing liabilities increased $255.7 million to $12.47 billion. Average money market deposits increased $439.5 million or 14.8 percent to $3.40 billion while average short-term borrowings decreased $561.0 million or 39.0 percent due to reductions in master note borrowings and repurchase obligations. The rate on average interest-bearing liabilities decreased 128 basis points from 3.55 percent in 2007 to 2.27 percent in 2008.

The provision for credit losses increased $10.3 million or 87.7 percent in the fourth quarter of 2008, compared to the same period of 2007 due to higher net charge-offs and loan growth. Net charge-offs were $18.0 million during the fourth quarter of 2008, compared to $8.4 million during the same period of 2007.

Noninterest income decreased $4.4 million or 5.7 percent during the fourth quarter. Fees from wealth management services decreased $3.0 million or 23.0 percent for the fourth quarter of 2008, due to the lower value of assets under management. Cardholder and merchant services income decreased $1.5 million or 6.0 percent due to lower merchant and interchange fees. Deposit service charges declined $931,000 or 4.4 percent in the quarter.

Noninterest expense increased $9.5 million or 6.5 percent during the fourth quarter of 2008, when compared to the same period of 2007. Salaries increased $3.4 million or 5.5 percent from the fourth quarter of 2007 to the fourth quarter of 2008. Benefits were up $2.5 million or 21.9 percent as life and health insurance costs continue to escalate. Occupancy costs increased $706,000 or 4.8 percent from $14.7 million during the fourth quarter of 2007 to $15.4 million during the fourth quarter of 2008. Higher personnel and occupancy costs are primarily related to the continued expansion of the branch network. FDIC insurance expense increased $2.2 million or 310.8 percent.

Losses resulting from the sales of assets increased $2.6 million or 521.2 percent from $503,000 in 2007 to $3.1 million in 2008 primarily due to losses on foreclosed property. Advertising costs increased $3.4 million in the fourth quarter of 2008.

Table 17 provides quarterly information for each of the quarters in 2008 and 2007. Table 18 analyzes the components of changes in net interest income between the fourth quarter of 2008 and 2007.

Table 18

CONSOLIDATED TAXABLE EQUIVALENT RATE/VOLUME VARIANCE ANALYSIS—FOURTH QUARTER


	2008						2007						Increase (decrease) due to:
	Average Balance		Interest Income/ Expense		Yield/ Rate		Average Balance		Interest Income/ Expense		Yield/ Rate		Volume			Yield/ Rate			Total Change
	(dollars in thousands)
Assets
Loans and leases	$	11,665,522	$	169,249	5.77	%	$	10,831,571	$	186,426	6.83	%	$	13,001		$	(30,178	)	$	(17,177	)
Investment securities:
U. S. Government		3,114,125		26,870	3.43			3,197,797		39,178	4.89			(836	)		(11,472	)		(12,308	)
State, county and municipal		4,675		79	6.72			4,949		83	6.65			(5	)		1			(4	)
Other		74,903		199	1.06			69,269		773	4.43			38			(612	)		(574	)

Total investment securities		3,193,703		27,148	3.38			3,272,015		40,034	4.88			(803	)		(12,083	)		(12,886	)
Overnight investments		434,217		592	0.54			551,723		6,403	4.60			(770	)		(5,041	)		(5,811	)

Total interest-earning assets	$	15,293,442	$	196,989	5.12	%	$	14,655,309	$	232,863	6.31	%	$	11,428		$	(47,302	)	$	(35,874	)

Liabilities
Deposits:
Checking With Interest	$	1,433,261	$	458	0.13	%	$	1,384,226	$	536	0.15	%	$	5		$	(83	)	$	(78	)
Savings		538,992		263	0.19			546,410		299	0.22			1			(37	)		(36	)
Money market accounts		3,403,985		12,239	1.43			2,964,472		24,181	3.24			2,563			(14,505	)		(11,942	)
Time deposits		5,486,405		46,903	3.40			5,476,849		63,973	4.63			(13	)		(17,057	)		(17,070	)

Total interest-bearing deposits		10,862,643		59,863	2.19			10,371,957		88,989	3.40			2,556			(31,682	)		(29,126	)
Short-term borrowings		878,754		1,738	0.79			1,439,743		13,362	3.68			(3,177	)		(8,447	)		(11,624	)
Long-term obligations		730,360		9,609	5.23			404,367		6,846	6.72			4,892			(2,129	)		2,763

Total interest-bearing liabilities	$	12,471,757	$	71,210	2.27	%	$	12,216,067	$	109,197	3.55	%	$	4,271		$	(42,258	)	$	(37,987	)

Interest rate spread					2.85	%					2.76	%

Net interest income and net yield on interest-earning assets			$	125,779	3.27	%			$	123,666	3.35	%	$	7,157		$	(5,044	)	$	2,113

Average loans and leases includes nonaccrual loans and leases. Yields related to loans, leases and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only, are stated on a taxable-equivalent basis assuming a statutory federal income tax rate of 35% and a state income tax rate of 6.9% for each period.

COMMITMENTS AND CONTRACTUAL OBLIGATIONS

As a normal part of its business, BancShares, FCB, ISB and other subsidiaries enter into various contractual obligations and commercial commitments. Table 19 identifies significant obligations and commitments as of December 31, 2008.

Table 19

COMMITMENTS AND CONTRACTUAL OBLIGATIONS


	Payments due by period
Type of obligation	Less than 1 year		1-3 years		4-5 years		Thereafter		Total
	(thousands)
Contractual obligations:
Deposits	$	12,573,054	$	999,528	$	129,361	$	11,820	$	13,713,763
Short-term borrowings		647,028		—		—		—		647,028
Long-term obligations		330		80,733		80,616		571,453		733,132
Operating leases		15,828		23,003		16,558		64,219		119,608

Total contractual obligations	$	13,236,240	$	1,103,264	$	226,535	$	647,492	$	15,213,531

Commitments:
Loan commitments	$	2,088,369	$	154,959	$	163,578	$	2,761,682	$	5,168,588
Standby letters of credit		57,483		9,836		10,156		—		77,475
Affordable housing partnerships		5,367		2,689		282		—		8,338

Total commitments	$	2,151,219	$	167,484	$	174,016	$	2,761,682	$	5,254,401

LEGAL PROCEEDINGS

As previously reported, on February 24, 2006, DataTreasury Corporation (“DataTreasury”) filed a lawsuit in the United States District Court for the Eastern District of Texas against 54 defendants, including BancShares and FCB and a number of other large financial institutions, alleging that the defendants were infringing six patents related to check processing that DataTreasury claimed to own. DataTreasury alleged that BancShares and FCB had infringed four of the six patents and sought to recover damages, including royalty payment for checks processed since February 2000 and in the future. The lawsuit was resolved on February 10, 2009, as between DataTreasury, BancShares and FCB through our acquisition of a license from DataTreasury.

On May 24, 2004, FCB filed a lawsuit in the Circuit Court of Greenbrier County, West Virginia against a customer alleging default under a master lease on a piece of equipment, eight promissory notes and two leases. The borrower asserted a counterclaim against FCB alleging breach of lease, breach of fiduciary duty, breach of duty of good faith and fair dealing, and tortuous interference with contractual relations. At trial, a jury returned a verdict against FCB and awarded a $4.1 million judgment in favor of FCB’s customer. If the jury verdict stands, the customer will be entitled to pre-judgment interest of approximately $1.0 million and post-judgment interest at a rate of 8.25 percent. FCB filed a motion to set aside the judgment or, in the alternative, for a new trial, but the Court denied FCB’s motion. FCB is appealing the Court’s action to the West Virginia Supreme Court of Appeals. Upon the posting of an acceptable bond, execution on the judgment will be stayed pending the outcome of the appeal. FCB strenuously denies liability and is vigorously pursuing appeal of the jury’s award.

BancShares and various subsidiaries have been named as defendants in various other legal actions arising from our 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.

TRANSACTIONS WITH RELATED PERSONS

BancShares’ related persons include our directors and officers, their immediate family members and any businesses or entities they control. There are several other financial institutions that, as a result of significant common ownership, are viewed as related persons. We routinely conduct business with these individuals and entities. Some of these relationships with related persons and the entities they control affect our consolidated statements of income. Fees from processing services included $31.8 million, $29.2 million and $26.1 million recorded during 2008, 2007 and 2006, for services we provided to related persons, and fee income recognized from the largest individual related institution totaled $19.6 million, $18.0 million and $16.9 million during the respective periods.

During 2008, 2007 and 2006, we recognized legal expense of $3.5 million, $3.8 million and $4.4 million to the law firm that serves as our General Counsel and employs a member of our board of directors.

Certain of these transactions with related persons also affect our consolidated balance sheets. At December 31, 2008 and 2007, loans and leases outstanding include $33.1 million and $38.2 million in loans to related persons. Investment securities available for sale include an equity investment in an entity controlled by related persons with a carrying value of $12.8 million and $23.8 million at December 31, 2008 and 2007, respectively. The carrying value of this equity investment is established based upon the quoted price per share as of December 31 in the over-the-counter market on the OTC Bulletin Board. Short-term borrowings include federal funds purchased from financial institutions controlled by related persons that totaled $0 and $13.7 million at December 31, 2008 and 2007. Additionally, BancShares had off balance sheet obligations for unfunded loan commitments to related persons that totaled $19.0 million and $20.5 million at December 31, 2008 and 2007, respectively.

CURRENT ACCOUNTING AND REGULATORY ISSUES

In September 2007, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157 “Fair Value Measurements” (Statement 157). Statement 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Statement 157 does not require any new fair value measurements, but clarifies and standardizes some divergent practices that have emerged since prior guidance was issued. We adopted Statement 157 on January 1, 2008, and the adoption did not have a material impact on our consolidated financial statements.

In September 2007, the FASB issued Summary of Statement No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (Statement 158). In addition to other provisions that have already been applied for all periods presented, Statement 158 requires sponsors of defined benefit and other post-retirement plans to measure the funded status of a plan as of the date of its year-end statement of financial position. For BancShares, that provision was effective December 31, 2008.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities” (Statement 159). Statement 159 allows an entity to elect to measure certain financial assets and liabilities at fair value with changes in fair value recognized in the income statement each period. The statement also requires additional disclosures to identify the effects of an entity’s fair value election on its earnings. We adopted Statement 159 on January 1, 2008, and the adoption did not have a material impact on financial condition, results of operations, or liquidity.

In March 2008, the FASB issued SFAS No. 161 ‘Disclosures about Derivative Instruments and Hedging Activities’ (Statement 161). Statement 161 requires enhanced disclosures about how and why derivative instruments are used, how derivative instruments and related hedged items are accounted for under Statement 133 and how derivative instruments and related hedged items affect the balance sheet, income statement and statement of cash flows. Statement 161 is effective for BancShares on January 1, 2009, will result in expanded disclosures, but will not have a material impact on financial condition, results of operations or liquidity.

In response to the challenges facing the financial services sector, several regulatory and governmental actions have been enacted including The Emergency Economic Stabilization Act, the TARP Capital Purchase Program and the Temporary Liquidity Guarantee Program (TLGP). Based on the expectation that our current capital levels will be adequate to sustain our growth for the foreseeable future, we did not apply to participate in the TARP Capital Purchase Program. Further, we waived the right to participate in the TLGP guarantee of unsecured debt. However, we did elect to participate in the TLGP’s enhanced deposit insurance program.

Although it is likely that further regulatory actions will arise as the Federal government attempts to address the economic situation, management is not aware of any further recommendations by regulatory authorities that, if implemented, would have or would be reasonably likely to have a material effect on liquidity, capital ratios or results of operations.

FORWARD-LOOKING STATEMENTS

Statements in this Report and exhibits relating to plans, strategies, economic performance and trends, projections of results of specific activities or investments, expectations or beliefs about future events or results, and other statements that are not descriptions of historical facts, may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed in our Annual Report on Form 10-K and in other documents filed by us with the Securities and Exchange Commission from time to time.

Forward-looking statements may be identified by terms such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “forecasts,” “projects,” “potential” or “continue,” or similar terms or the negative of these terms, or other statements concerning opinions or judgments of BancShares’ management about future events.

Factors that could influence the accuracy of those forward-looking statements include, but are not limited to, the financial success or changing strategies of our customers, customer acceptance of our services, products and fee structure, the competitive nature of the financial services industry, our ability to compete effectively against other financial institutions in our banking markets, actions of government regulators, the level of market interest rates and our ability to manage our interest rate risk, changes in general economic conditions that affect our loan portfolio, the abilities of our borrowers to repay their loans, the values of real estate and other loan collateral, and other developments or changes in our business that we do not expect.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We have no obligation to update these forward-looking statements.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

LOGO

Board of Directors and Shareholders

First Citizens BancShares, Inc.

We have audited the accompanying consolidated balance sheets of First Citizens BancShares, Inc. and subsidiaries (BancShares) as of December 31, 2008 and 2007, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2008. These consolidated financial statements are the responsibility of BancShares’ management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of BancShares as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note A to the consolidated financial statements, effective January 1, 2007, BancShares adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes, and effective December 31, 2006, BancShares adopted the recognition and disclosure provisions of Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of BancShares’ internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 27, 2009, expressed an unqualified opinion on the effectiveness of BancShares’ internal control over financial reporting.

LOGO

Raleigh, North Carolina

February 27, 2009

MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of First Citizens BancShares, Inc. (BancShares) is responsible for establishing and maintaining adequate internal control over financial reporting. BancShares’ internal control system was designed to provide reasonable assurance to the company’s management and board of directors regarding the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

BancShares’ management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2008. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on that assessment, we believe that, as of December 31, 2008, the company’s internal control over financial reporting is effective based on those criteria.

BancShares’ independent auditors have issued an audit report on the company’s internal control over financial reporting. This report appears on page 42.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

LOGO

Board of Directors and Shareholders

First Citizens BancShares, Inc.

We have audited First Citizens BancShares, Inc. and subsidiaries (BancShares)’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. BancShares’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on BancShares’ internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, BancShares maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of BancShares as of December 31, 2008 and 2007 and for each of the years in the three-year period ended December 31, 2008, and our report dated February 27, 2009, expressed an unqualified opinion on those consolidated financial statements. As discussed in Note A to the consolidated financial statements, effective January 1, 2007, BancShares adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes, and effective December 31, 2006, BancShares adopted the recognition and disclosure provisions of Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.

LOGO

Raleigh, North Carolina

February 27, 2009

CONSOLIDATED BALANCE SHEETS

First Citizens BancShares, Inc. and Subsidiaries


	December 31
	2008			2007
	(thousands, except share data)
ASSETS
Cash and due from banks	$	593,375		$	793,788
Overnight investments		174,616			266,209
Investment securities available for sale (cost of $3,191,095 in 2008 and $3,174,505 in 2007)		3,265,777			3,229,241
Investment securities held to maturity (fair value of $6,110 in 2008 and $7,776 in 2007)		5,873			7,594
Loans and leases		11,719,285			10,963,904
Less allowance for loan and lease losses		157,569			136,974

Net loans and leases		11,561,716			10,826,930
Premises and equipment		798,909			757,694
Income earned not collected		72,029			79,343
Goodwill		102,625			102,625
Other intangible assets		3,810			5,858
Other assets		166,932			142,825

Total assets	$	16,745,662		$	16,212,107

LIABILITIES
Deposits:
Noninterest-bearing	$	2,652,898		$	2,519,256
Interest-bearing		11,060,865			10,409,288

Total deposits		13,713,763			12,928,544
Short-term borrowings		647,028			1,305,287
Long-term obligations		733,132			404,392
Other liabilities		208,364			132,676

Total liabilities		15,302,287			14,770,899
SHAREHOLDERS’ EQUITY
Common stock:
Class A—$1 par value (11,000,000 shares authorized; 8,756,778 shares issued for each period)		8,757			8,757
Class B—$1 par value (2,000,000 shares authorized; 1,677,675 shares issued for each period)		1,678			1,678
Surplus		143,766			143,766
Retained earnings		1,326,054			1,246,473
Accumulated other comprehensive income (loss)		(36,880	)		40,534

Total shareholders’ equity		1,443,375			1,441,208

Total liabilities and shareholders' equity	$	16,745,662		$	16,212,107

See accompanying Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF INCOME

First Citizens BancShares, Inc. and Subsidiaries


	Year Ended December 31
	2008		2007		2006
	(thousands, except share and per share data)
INTEREST INCOME
Loans and leases	$	681,849	$	727,581	$	683,412
Investment securities:
U. S. Government		121,576		140,986		112,461
State, county and municipal		209		220		235
Other		2,327		3,100		3,304

Total investment securities interest and dividend income		124,112		144,306		116,000
Overnight investments		8,755		32,169		30,903

Total interest income		814,716		904,056		830,315

INTEREST EXPENSE
Deposits		263,538		341,236		280,178
Short-term borrowings		17,502		55,126		41,431
Long-term obligations		33,905		27,352		32,128

Total interest expense		314,945		423,714		353,737

Net interest income		499,771		480,342		476,578
Provision for credit losses		65,805		33,594		20,922

Net interest income after provision for credit losses		433,966		446,748		455,656

NONINTEREST INCOME
Cardholder and merchant services		97,577		97,070		86,103
Service charges on deposit accounts		82,349		77,827		72,561
Wealth management services		48,198		49,305		42,213
Fees from processing services		35,585		32,531		29,631
Insurance commissions		8,277		7,735		6,942
ATM income		7,003		6,515		6,803
Mortgage income		6,564		6,305		5,494
Other service charges and fees		17,598		15,318		15,996
Securities gains (losses)		8,128		1,376		(659	)
Other		840		1,488		6,283

Total noninterest income		312,119		295,470		271,367

NONINTEREST EXPENSE
Salaries and wages		259,250		243,871		228,472
Employee benefits		58,899		52,733		50,445
Occupancy expense		60,839		56,922		52,153
Equipment expense		57,715		56,404		52,490
Other		169,778		164,734		147,517

Total noninterest expense		606,481		574,664		531,077

Income before income taxes		139,604		167,554		195,946
Income taxes		48,546		58,937		69,455

Net income	$	91,058	$	108,617	$	126,491


PER SHARE INFORMATION
Net income per share	$	8.73	$	10.41	$	12.12
Average shares outstanding		10,434,453		10,434,453		10,434,453

See accompanying Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

First Citizens BancShares, Inc. and Subsidiaries


	Class A Common Stock		Class B Common Stock		Surplus		Retained Earnings			Accumulated Other Comprehensive Income (loss)			Total Shareholders’ Equity
	(thousands)
Balance at December 31, 2005	$	8,757	$	1,678	$	143,766	$	1,029,005		$	(2,147	)	$	1,181,059
Adjustment resulting from adoption of:
Staff Accounting Bulletin No. 108, net of $2,803 deferred tax		—		—		—		4,354			—			4,354
SFAS No. 158, net of $1,610 deferred tax		—		—		—		—			2,502			2,502
Comprehensive income:
Net income		—		—		—		126,491			—			126,491
Unrealized securities gains arising during period, net of $4,315 deferred tax		—		—		—		—			8,577			8,577
Less: reclassification adjustment for losses included in net income, net of $260 deferred tax benefit		—		—		—		—			(399	)		(399	)

Unrealized securities gains, net of deferred taxes		—		—		—		—			8,976			8,976
Change in unrecognized loss on cash flow hedge, net of $708 deferred tax benefit		—		—		—		—			(1,085	)		(1,085	)

Total comprehensive income														134,382

Cash dividends		—		—		—		(11,478	)		—			(11,478	)

Balance at December 31, 2006		8,757		1,678		143,766		1,148,372			8,246			1,310,819
Adjustment resulting from adoption of FASB Interpretation No. 48		—		—		—		962			—			962
Comprehensive income:
Net income		—		—		—		108,617			—			108,617
Unrealized securities gains arising during period, net of $17,453 deferred tax		—		—		—		—			27,213			27,213
Less: reclassification adjustment for gains included in net income, net of $543 deferred tax		—		—		—		—			833			833

Unrealized securities gains, net of deferred taxes		—		—		—		—			26,380			26,380
Change in unrecognized loss on cash flow hedge, net of $1,406 deferred tax benefit		—		—		—		—			(2,155	)		(2,155	)
Change in prepaid pension asset, net of $5,190 deferred tax		—		—		—		—			8,063			8,063

Total comprehensive income														140,905

Cash dividends		—		—		—		(11,478	)		—			(11,478	)

Balance at December 31, 2007		8,757		1,678		143,766		1,246,473			40,534			1,441,208
Comprehensive income:
Net income		—		—		—		91,058			—			91,058
Unrealized securities gains arising during period, net of $7,753 deferred tax		—		—		—		—			12,182			12,182
Change in unrecognized loss on cash flow hedge, net of $2,098 deferred tax benefit		—		—		—		—			(3,216	)		(3,216	)
Change in pension liability, net of $55,581 deferred tax		—		—		—		—			(86,380	)		(86,380	)

Total comprehensive income														13,644

Cash dividends		—		—		—		(11,477	)		—			(11,477	)

Balance at December 31, 2008	$	8,757	$	1,678	$	143,766	$	1,326,054		$	(36,880	)	$	1,443,375

At December 31, 2008, Accumulated Other Comprehensive Income includes $45,391 in unrealized gains on investment securities available for sale, $75,815 in pension obligations recognized under FASB Statement No. 158, and an unrealized loss of $6,456 on a cash flow hedge.

See accompanying Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS

First Citizens BancShares, Inc. and Subsidiaries


	Year Ended December 31,
	2008			2007			2006
	(thousands)
OPERATING ACTIVITIES
Net income	$	91,058		$	108,617		$	126,491
Adjustments to reconcile net income to cash provided by operating activities:
Amortization of intangibles		2,048			2,142			2,318
Provision for credit losses		65,805			33,594			20,922
Deferred tax (benefit) expense		(8,381	)		1,597			694
Change in current taxes payable		(2,673	)		497			5,394
Depreciation		53,945			51,822			48,286
Change in accrued interest payable		(11,365	)		(1,091	)		19,777
Change in income earned not collected		7,314			(7,781	)		(9,526	)
Securities (gains) losses		(8,128	)		(1,376	)		659
Origination of loans held for sale		(475,874	)		(509,655	)		(488,220	)
Proceeds from sale of loans		481,603			507,591			508,883
Proceeds from sale of other real estate		15,116			4,582			9,182
Loss (gain) on sale of other real estate		912			(575	)		(302	)
Loss (gain) on sale of loans		693			633			(1,246	)
Gain on sale of branches		—			—			(826	)
Loss on premises and equipment, net		—			1,886			272
Net amortization of premiums and discounts		9,702			(4,175	)		(5,307	)
Net change in other assets		(6,065	)		(32,422	)		(21,673	)
Net change in other liabilities		11,512			6,509			366

Net cash provided by operating activities		227,222			162,395			216,144

INVESTING ACTIVITIES
Net change in loans outstanding		(851,848	)		(717,401	)		(654,312	)
Purchases of investment securities held to maturity		—			—			(26,074	)
Purchases of investment securities available for sale		(1,748,963	)		(1,661,277	)		(1,265,212	)
Proceeds from maturities of investment securities held to maturity		1,727			211,816			444,807
Proceeds from maturities of investment securities available for sale		1,714,337			1,480,591			573,429
Proceeds from sales of securities		16,456			1,392			994
Net change in overnight investments		91,593			82,388			132,415
Dispositions of premises and equipment		—			2,164			6,438
Additions to premises and equipment		(95,160	)		(106,482	)		(118,694	)
Purchase and sale of branches, net of cash transferred		—			—			(19,450	)

Net cash used by investing activities		(871,858	)		(706,809	)		(925,659	)

FINANCING ACTIVITIES
Net change in time deposits		37,895			341,399			590,132
Net change in demand and other interest-bearing deposits		747,324			(156,179	)		(113	)
Net change in short-term borrowings		(659,519	)		154,440			345,715
Origination of long-term obligations		330,000			180			121,408
Redemption of long-term obligations		—			(1,144	)		(103,093	)
Cash dividends paid		(11,477	)		(11,478	)		(11,478	)

Net cash provided by financing activities		444,223			327,218			942,571

Change in cash and due from banks		(200,413	)		(217,196	)		233,056
Cash and due from banks at beginning of period		793,788			1,010,984			777,928

Cash and due from banks at end of period	$	593,375		$	793,788		$	1,010,984

CASH PAYMENTS FOR:
Interest	$	326,310		$	424,805		$	333,960
Income taxes		69,506			57,765			61,795
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Unrealized securities gains	$	19,946		$	43,290		$	11,446
Unrealized loss on cash flow hedge		(5,314	)		(3,561	)		(1,793	)
Prepaid pension benefit (pension liability)		(141,978	)		13,253			4,112
Transfers of loans to other real estate		44,714			4,779			4,338

See accompanying Notes to Consolidated Financial Statements.

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Consolidation

First Citizens BancShares, Inc. (BancShares) is a financial holding company with two banking subsidiaries: First-Citizens Bank & Trust Company, headquartered in Raleigh, North Carolina (FCB), which operates branches in North Carolina, Virginia, West Virginia, Maryland and Tennessee; and IronStone Bank (ISB), a federally-chartered thrift institution with branch offices in Florida, Georgia, Texas, Arizona, California, New Mexico, Colorado, Oregon, Washington, Missouri, Oklahoma and Kansas.

FCB and ISB offer full-service banking services designed to meet the needs of retail and commercial customers in the markets in which they operate. The services offered include transaction and savings deposit accounts, commercial and consumer lending, trust, asset management and broker-dealer services, insurance services and other activities incidental to commercial banking. BancShares is also the parent company of Neuse, Incorporated, which owns some of the real property from which ISB operates its branches.

FCB has other subsidiaries that support its full-service banking operation. First Citizens Investor Services and IronStone Securities are registered broker-dealers in securities that provide investment services, including sales of annuities and third party mutual funds. Neuse Financial Services, Inc. is a title insurance agency.

On January 1, 2007, American Guaranty Insurance Company (AGI), a property and casualty insurance company, and Triangle Life Insurance Company (TLI), a credit life and credit accident and health insurance company were sold to an unrelated party.

The accounting and reporting policies of BancShares and its subsidiaries are in accordance with accounting principles generally accepted in the United States of America and, with regard to the banking subsidiaries, conform to general industry practices. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates made by BancShares in the preparation of its consolidated financial statements are the determination of the allowance for credit losses, pension plan assumptions and income taxes.

Intercompany accounts and transactions have been eliminated. Certain amounts for prior years have been reclassified to conform to statement presentations for 2008. However, the reclassifications have no effect on shareholders' equity or net income as previously reported.

Investment Securities

Investment securities available for sale are carried at their fair value with unrealized gains and losses, net of deferred income taxes, recorded as a component of other comprehensive income within shareholders' equity. Gains and losses realized from the sales of securities available for sale are determined by specific identification and are included in noninterest income.

BancShares has the ability and the positive intent to hold investment securities held to maturity until the scheduled maturity date. These securities are stated at cost adjusted for amortization of premium and accretion of discount. Accreted discounts and amortized premiums are included in interest income on an effective yield basis.

Investment securities with a fair value less than 80 percent of cost for more than two consecutive quarters are evaluated to determine whether the investment is other than temporarily impaired. If an investment security is determined to be other than temporarily impaired, the security is written down to its fair value with an offsetting securities loss.

At December 31, 2008 and 2007, BancShares had no investment securities held for trading purposes.

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands)

Overnight Investments

Overnight investments include federal funds sold and interest-bearing demand deposit balances in other banks.

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.

Loan Fees

Fees collected and certain costs incurred related to loan originations are deferred and amortized as an adjustment to interest income over the life of the related loans. Deferred fees and costs are recorded as an adjustment to loans outstanding using a method that approximates a constant yield.

Allowance for Loan and Lease Losses and Reserve for Unfunded Commitments

The allowance for loan and lease losses (ALLL) represents management’s estimate of probable credit losses within the loan and lease portfolio. The reserve for unfunded commitments (RUC) represents the estimate of probable credit losses among off-balance sheet loan commitments. Adjustments to the ALLL and the RUC are established by charges to the provision for credit losses. To determine the appropriate amount of the ALLL and RUC, management evaluates the risk characteristics of the loan and lease portfolio and outstanding loan commitments under current economic conditions and considers such factors as the financial condition of the borrower, fair value of collateral and other items that, in management's opinion, deserve current recognition in estimating credit losses.

Management considers the established ALLL adequate to absorb probable losses that relate to loans and leases outstanding as of December 31, 2008. Management considers the established RUC adequate to absorb probable losses that relate to off-balance sheet loan commitments outstanding as of December 31, 2008. Future adjustments to the ALLL and the RUC may be necessary based on changes in economic and other conditions. Additionally, various regulatory agencies, as an integral part of their examination process, periodically review BancShares' ALLL and the RUC. Such agencies may require the recognition of adjustments to the ALLL and RUC based on their judgments of information available to them at the time of their examination.

Nonaccrual Loans, Impaired Loans and Other Real Estate

Accrual of interest on certain residential mortgage loans is discontinued when the loan is more than three payments past due. Accrual of interest on all other loans and leases is discontinued when management deems that collection of additional principal or interest is doubtful. Residential mortgage loans return to an accrual status when the loan balance is less than three payments past due. Other loans and leases are returned to an accrual status when both principal and interest are current and the loan is determined to be performing in accordance with the applicable terms.

Management considers a loan to be impaired when based on current information and events, it is probable that a borrower will be unable to pay all amounts due according to contractual terms of the loan agreement. Impaired loans are valued by either the discounted expected cash flow method using the loan's original effective interest rate or the collateral value. When the ultimate collectibility of an impaired loan's principal is doubtful, all cash receipts are applied to principal. Once the recorded principal balance has been reduced to zero, future cash receipts are applied to interest income, to the extent that any interest has been foregone.

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands)

Other real estate is valued at the lower of the loan balance at the time of foreclosure or estimated fair value net of selling costs and is included in other assets. Once acquired, other real estate is periodically reviewed to ensure that the fair value of the property supports the carrying value, with writedowns recorded when necessary. Gains and losses resulting from the sale or writedown of other real estate and income and expenses related to the operation of other real estate are recorded in other expense.

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation and amortization. For financial reporting purposes, depreciation and amortization are computed by the straight-line method and are expensed over the estimated useful lives of the assets, which range from 25 to 40 years for premises and three to 10 years for furniture, software and equipment. Leasehold improvements are amortized over the terms of the respective leases or the useful lives of the improvements, whichever is shorter. Gains and losses on dispositions are recorded in other expense. Maintenance and repairs are charged to occupancy expense or equipment expense as incurred.

Goodwill and Other Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. Goodwill is tested at least annually for impairment.

Other intangible assets with estimable lives are amortized on a straight-line basis over their estimated useful lives, which are periodically reviewed for reasonableness.

Income Taxes

Income tax expense is based on income before income taxes and generally differs from income taxes paid due to deferred income taxes and benefits arising from income and expenses being recognized in different periods for financial and income tax reporting purposes. BancShares uses the asset and liability method to account for deferred income taxes. The objective of the asset and liability method is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the income tax basis of BancShares' assets and liabilities at enacted rates expected to be in effect when such amounts are realized or settled.

BancShares continually monitors and evaluates the potential impact of current events on the estimates used to establish income tax expenses and income tax liabilities. On a periodic basis, BancShares evaluates its income tax positions based on current tax law, positions taken by various tax auditors within the jurisdictions that BancShares is required to file income tax returns, as well as potential or pending audits or assessments by such tax auditors.

BancShares and its subsidiaries file a consolidated federal income tax return. BancShares and its subsidiaries each file separate state income tax returns except where unitary filing is required.

Derivative Financial Instruments

Derivative financial instruments include interest rate swaps, caps, floors, collars, options or other financial instruments designed to hedge exposures to interest rate risk or for speculative purposes. During 2006, BancShares entered into an interest rate swap that is a cash flow derivative under Statement of Financial Accounting Standards No. 133. The derivative is valued each quarter, and changes in the fair value are recorded on the consolidated balance sheet with an offset to other comprehensive income for the effective portion and an offset to the consolidated statements of income for any ineffective portion. The assessment of effectiveness is performed using the long-haul method. There are no speculative derivative financial instruments in any period.

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands)

Per Share Data

Net income per share has been computed by dividing net income by the average number of both classes of common shares outstanding during each period. The average number of shares outstanding for 2008, 2007 and 2006 was 10,434,453. BancShares had no potential common stock outstanding in any period.

Cash dividends per share apply to both Class A and Class B common stock. Shares of Class A common stock carry one vote per share, while shares of Class B common stock carry 16 votes per share.

Current Accounting Matters

In June 2006, the FASB issued Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 clarifies uncertainty in income taxes recognized by establishing a recognition threshold and a measurement attribute for the financial statement treatment of a tax position taken or expected to be taken in a tax return. We adopted FIN 48 effective January 1, 2007. The adoption of FIN 48 resulted in a reduction in the liability for unrecognized tax benefits, resulting in a $962 increase to the beginning balance of retained earnings.

In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157 “Fair Value Measurements” (Statement 157). Statement 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Statement 157 does not require any new fair value measurements, but clarifies and standardizes some divergent practices that emerged since prior guidance was issued. Statement 157 creates a three-level hierarchy under which individual fair value estimates are to be ranked based on the relative reliability of the inputs used in the valuation. This hierarchy is the basis for the disclosure requirements, with fair value estimates based on the least reliable inputs requiring more extensive disclosures about the valuation method used and the gains and losses associated with those estimates. In February 2008, the FASB issued FASB Staff Position (FSP) No. 157-2, which delayed until the first quarter of 2009 the effective date of Statement 157 for nonfinancial assets and liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis. Except for those portions deferred by FSP No. 157-2, BancShares adopted Statement 157 on January 1, 2008, with no material impact on financial condition, results of operations, or liquidity.

In September 2006, the FASB issued Summary of Statement No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (Statement 158). Statement 158 requires sponsors of defined benefit and other post-retirement plans to recognize the overfunded or underfunded status of that plan as an asset or liability in the sponsor’s statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. Beginning in 2008, Statement 158 also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities” (Statement 159). Statement 159 allows an entity to elect to measure certain financial assets and liabilities at fair value with changes in fair value recognized in the income statement each period. The statement also requires additional disclosures to identify the effects of an entity’s fair value election on its earnings. BancShares adopted Statement 159 on January 1, 2008, and did not elect to measure any additional financial assets or liabilities at fair value.

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands)

NOTE B—INVESTMENT SECURITIES

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


	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Investment securities available for sale
2008
U. S. Government	$	3,053,440	$	60,004	$	1,016	$	3,112,428
Equity securities		49,747		12,365		195		61,917
Mortgage-backed securities		81,109		1,966		123		82,952
State, county and municipal		3,108		26		81		3,053
Other		3,691		1,736		—		5,427

Total investment securities available for sale	$	3,191,095	$	76,097	$	1,415	$	3,265,777

2007
U. S. Government	$	3,051,545	$	29,947	$	462	$	3,081,030
Equity securities		33,614		24,023		—		57,637
Mortgage-backed securities		78,198		262		648		77,812
State, county and municipal		3,377		11		16		3,372
Other		7,771		1,619		—		9,390

Total investment securities available for sale	$	3,174,505	$	55,862	$	1,126	$	3,229,241

Investment securities held to maturity
2008
Mortgage-backed securities	$	4,282	$	232	$	27	$	4,487
State, county and municipal		1,591		32		—		1,623
Other		—		—		—		—

Total investment securities held to maturity	$	5,873	$	264	$	27	$	6,110

2007
Mortgage-backed securities	$	5,760	$	109	$	26	$	5,843
State, county and municipal		1,584		99		—		1,683
Other		250		—		—		250

Total investment securities held to maturity	$	7,594	$	208	$	26	$	7,776

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands)

The following table provides maturity information for investment securities as of December 31. Callable securities are assumed to mature on their earliest call date.


	2008				2007
	Cost		Fair Value		Cost		Fair Value
Investment securities available for sale
Maturing in:
One year or less	$	1,350,796	$	1,375,709	$	1,668,239	$	1,676,017
One through five years		1,705,774		1,739,791		1,380,012		1,401,718
Five through 10 years		789		791		6,791		6,782
Over 10 years		83,989		87,569		85,849		87,087
Equity securities		49,747		61,917		33,614		57,637

Total investment securities available for sale	$	3,191,095	$	3,265,777	$	3,174,505	$	3,229,241

Investment securities held to maturity
Maturing in:
One year or less	$	151	$	151	$	250	$	250
One through five years		—		—		149		153
Five through 10 years		5,557		5,761		5,563		5,612
Over 10 years		165		198		1,632		1,761

Total investment securities held to maturity	$	5,873	$	6,110	$	7,594	$	7,776

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


	Year ended December 31,
	2008			2007		2006
Gross gains on sales of investment securities available for sale	$	8,390		$	1,376	$	328
Other than temporary impairment losses on interest-only strip		—			—		(987	)
Other than temporary impairment loss on equity investment		(262	)		—		—

Total securities gains (losses)	$	8,128		$	1,376	$	(659	)

During 2008, following the completion of Visa Inc.’s initial public offering, FCB’s former member-bank investment was converted into 486,905 shares of Class B common stock. Immediately thereafter, 188,238 shares of Visa Inc. Class B common stock were redeemed resulting in a gain of $8,051. The remaining 298,667 shares of Class B common stock are restricted and are carried at a fair value of $0.

In conjunction with the securitization and sale of revolving mortgage loans during 2005, BancShares retained a residual interest in the securitized assets in the form of an interest-only strip, which is included within investment securities available for sale and is carried at its estimated fair value. Quoted market prices are not readily available for residual interests, so the fair value was estimated based on various factors that may have an impact on the fair value of the residual interests. The assumed discount rate was 10 percent; the assumed rate of credit losses was 10 basis points; the estimated weighted average loan life was 3.3 years. Based on the assumptions used, the estimated fair value of the retained residual interest equaled $11,586 at the date of the securitization. Based on changes that occurred after the date of the securitization, an other than temporary impairment was recorded during 2006. The carrying value of the residual interest was $5,427 at December 31, 2008, $9,390 at December 31, 2007 and $10,240 at December 31, 2006.

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands)

The following table provides information regarding securities with unrealized losses as of December 31:


	Less than 12 months				12 months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
December 31, 2008
Investment securities available for sale:
U.S. Government	$	50,016	$	1,013	$	6	$	3	$	50,022	$	1,016
Equity securities		626		195		—		—		626		195
Mortgage-backed securities		270		2		4,948		121		5,218		123
State, county and municipal		267		9		364		72		631		81

Total	$	51,179	$	1,219	$	5,318	$	196	$	56,497	$	1,415

Investment securities held to maturity:
Mortgage-backed securities	$	16	$	—	$	35	$	27	$	51	$	27
State, county and municipal		—		—		—		—		—		—
Other		—		—		—		—		—		—

Total	$	16	$	—	$	35	$	27	$	51	$	27

December 31, 2007
Investment securities available for sale:
U.S. Government	$	135,228	$	204	$	177,723	$	258	$	312,951	$	462
Equity securities		—		—		—		—		—		—
Mortgage-backed securities		10,384		33		30,988		615		41,372		648
State, county and municipal		25		—		2,163		16		2,188		16

Total	$	145,637	$	237	$	210,874	$	889	$	356,511	$	1,126

Investment securities held to maturity:
Mortgage-backed securities	$	—	$	—	$	48	$	26	$	48	$	26
State, county and municipal		—		—		—		—		—		—
Other		—		—		—		—		—		—

Total	$	—	$	—	$	48	$	26	$	48	$	26

Investment securities with an aggregate fair value of $5,353 have had continuous unrealized losses for more than twelve months as of December 31, 2008. The aggregate amount of the unrealized losses among those 35 securities was $223 at December 31, 2008. These securities include U.S. Government, government agency, mortgage-backed and state, county and municipal securities. None of the unrealized losses identified as of December 31, 2008 or 2007 relate to the marketability of the securities or the issuer’s ability to honor redemption obligations. At December 31, 2008, BancShares had the ability and intent to retain these securities for a period of time sufficient to recover all unrealized losses. Therefore, none of the securities are deemed to be other than temporarily impaired.

Investment securities having an aggregate carrying value of $1,883,365 at December 31, 2008 and $2,402,221 at December 31, 2007, were pledged as collateral to secure public funds on deposit, to secure certain short-term borrowings and for other purposes as required by law.

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands)

NOTE C—LOANS AND LEASES

Loans and leases outstanding at December 31 include the following:


	2008		2007
Real estate:
Construction and land development	$	778,315	$	810,818
Commercial mortgage		4,343,809		3,982,496
Residential mortgage		964,201		1,029,030
Revolving mortgage		1,911,852		1,494,431
Other mortgage		149,478		145,552

Total real estate loans		8,147,655		7,462,327
Commercial and industrial		1,885,358		1,707,394
Consumer		1,233,075		1,368,228
Lease financing		353,933		340,601
Other		99,264		85,354

Total loans and leases	$	11,719,285	$	10,963,904

In conjunction with the securitization and sale of $256,232 of revolving mortgage loans during 2005, BancShares established a servicing asset that represented the estimated fair value of the right to service the loans that were securitized and sold. This asset is being amortized over the estimated servicing life of 149 months.


	2008		2007		2006
Carrying value of servicing asset at January 1	$	559	$	936	$	1,179
Amortization expense recognized during the year		142		187		243
Impairment recognized during the year		—		190		—

Carrying value of servicing asset at December 31	$	417	$	559	$	936

At December 31, 2008, 23.4 percent of total loans and leases represent loans to customers in medical-related fields, compared to 20.6 percent at December 31, 2007. There were no foreign loans or loans to finance highly leveraged transactions during 2008 or 2007. Substantially all loans and leases are to customers domiciled within BancShares’ principal market areas.

At December 31, 2008 loans totaling $3,301,903 were pledged to secure debt obligations, compared to $1,365,952 at December 31, 2007.

Nonperforming loans and other risk elements are summarized below:


	December 31,
	2008		2007
Nonaccrual loans and leases	$	39,361	$	13,021
Restructured loans		2,349		—

Nonperforming loans	$	41,710	$	13,021

Loans 90 days or more past due and still accruing	$	22,459	$	7,124
Other real estate		29,956		6,893

Interest income on nonperforming loans that would have been recorded had these loans been performing was $1,275, $1,200 and $1,271 respectively, during 2008, 2007 and 2006. Interest income recognized on nonperforming loans was $797, $465 and $226 during the respective periods.

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands)

In each period, BancShares originated much of its residential mortgage loan production through correspondent institutions. Loan sale activity for 2008, 2007 and 2006 is summarized below:


	2008			2007			2006
Loans held for sale at December 31	$	69,399		$	75,822		$	80,805
For the year ended December 31:
Loans sold		482,296			508,224			507,637
Net gain (loss) on sale of loans		(693	)		(633	)		1,246
Servicing release income from sale of loans		6,555			6,115			5,917

NOTE D—ALLOWANCE FOR CREDIT LOSSES

Activity in the allowance for credit losses, which includes the allowance for loan and lease losses and the reserve for unfunded commitments, is summarized as follows:


	Allowance for Loan and Lease Losses			Reserve for Unfunded Commitments			Allowance for Credit Losses
Balance at December 31, 2005	$	128,847		$	6,923		$	135,770
Provision for credit losses		21,203			(281	)		20,922
Loans and leases charged off		(24,353	)		—			(24,353	)
Loans and leases recovered		6,307			—			6,307

Net charge-offs		(18,046	)		—			(18,046	)

Balance at December 31, 2006		132,004			6,642			138,646

Provision for credit losses		32,939			655			33,594
Loans and leases charged off		(32,690	)		—			(32,690	)
Loans and leases recovered		4,721			—			4,721

Net charge-offs		(27,969	)		—			(27,969	)

Balance at December 31, 2007		136,974			7,297			144,271

Provision for credit losses		65,926			(121	)		65,805
Loans and leases charged off		(50,081	)		—			(50,081	)
Loans and leases recovered		4,750			—			4,750

Net charge-offs		(45,331	)		—			(45,331	)

Balance at December 31, 2008	$	157,569		$	7,176		$	164,745

At December 31, 2008 and 2007, impaired loans, exclusive of those loans evaluated collectively as a homogeneous group, totaled $38,882 and $10,621, respectively, all of which were classified as nonaccrual. Total allowances of $6,747 and $2,148 have been established for impaired loans outstanding as of December 31, 2008 and 2007, respectively. Allowances have been established for all impaired loans.

The average recorded investment in impaired loans during the years ended December 31, 2008, 2007 and 2006 was $30,920, $10,844 and $13,986, respectively. For the years ended December 31, 2008, 2007 and 2006, BancShares recognized cash basis interest income on those impaired loans of $619, $391 and $153, respectively.

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands)

NOTE E—PREMISES AND EQUIPMENT

Major classifications of premises and equipment at December 31 are summarized as follows:


	2008		2007
Land	$	177,446	$	163,314
Premises and leasehold improvements		704,766		656,640
Furniture and equipment		320,487		297,193

Total		1,202,699		1,117,147
Less accumulated depreciation and amortization		403,790		359,453

Total premises and equipment	$	798,909	$	757,694

There were no premises pledged to secure borrowings at December 31, 2008 and 2007.

BancShares leases certain premises and equipment under various lease agreements that provide for payment of property taxes, insurance and maintenance costs. Operating leases frequently provide for one or more renewal options on the same basis as current rental terms. However, certain leases require increased rentals under cost of living escalation clauses. Some leases also provide purchase options.

Future minimum rental commitments for noncancellable operating leases with initial or remaining terms of one or more years consisted of the following at December 31, 2008:


Year Ending December 31:
2009	$	15,828
2010		12,410
2011		10,593
2012		9,318
2013		7,240
Thereafter		64,219

Total minimum payments	$	119,608

Total rent expense for all operating leases amounted to $19,096 in 2008, $18,034 in 2007 and $15,207 in 2006, net of rent income, which totaled $1,524, $1,930 and $1,962 during 2008, 2007 and 2006, respectively.

NOTE F—DEPOSITS

Deposits at December 31 are summarized as follows:


	2008		2007
Demand	$	2,652,898	$	2,519,256
Checking With Interest		1,489,496		1,459,123
Money market accounts		3,546,649		2,961,794
Savings		535,387		536,933
Time		5,489,333		5,451,438

Total deposits	$	13,713,763	$	12,928,544

Time deposits with a minimum denomination of $100 totaled $2,469,833 and $2,323,768 at December 31, 2008 and 2007, respectively.

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands)

At December 31, 2008 the scheduled maturities of time deposits were:


2009	$	4,348,624
2010		810,862
2011		188,666
2012		77,467
2013		51,894
Thereafter		11,820

Total time deposits	$	5,489,333

NOTE G—SHORT-TERM BORROWINGS

Short-term borrowings at December 31 are as follows:


	2008		2007
Master notes	$	472,573	$	923,424
Repurchase agreements		103,878		286,090
Notes payable to Federal Home Loan Bank of Atlanta		50,000		50,000
Federal funds purchased		10,551		23,893
Other		10,026		21,880

Total short-term borrowings	$	647,028	$	1,305,287

At December 31, 2008, BancShares and its subsidiaries had unused credit lines allowing access to overnight borrowings of up to $500,000 on an unsecured basis. Additionally, under borrowing arrangements with the Federal Home Loan Bank of Atlanta, the banking subsidiaries have access to an aggregate of $1,223,266 on a secured basis.

NOTE H—LONG-TERM OBLIGATIONS

Long-term obligations at December 31 include:


	2008		2007
Junior subordinated debenture at 8.05 percent maturing March 5, 2028	$	154,640	$	154,640
Junior subordinated debenture at 3-month LIBOR plus 1.75 percent maturing June 30, 2036		118,557		118,557
Subordinated notes payable at 5.125 percent maturing June 1, 2015		125,000		125,000
Obligations under capitalized leases extending to July 2026		4,762		6,015
Notes payable to Federal Home Loan Bank of Atlanta with rates ranging from 2.85 percent to 4.12 percent and matutities ranging from October 2010 to September 2018;		330,000		—
Note payable at 7.50 percent maturing on October 17, 2022		173		180

Total long-term obligations	$	733,132	$	404,392

The 8.05 percent junior subordinated debenture issued in 1998 (the 1998 Debenture) is held by FCB/NC Capital Trust I. FCB/NC Capital Trust I purchased the 1998 Debenture with the proceeds from the $150,000 in 8.05 percent trust preferred capital securities issued in 1998 (the 1998 Preferred Securities). The 1998 Debenture is the sole asset of the trust. The 1998 Preferred Securities are redeemable in whole or in part after March 1, 2008 at a premium that declines until 2018, when the redemption price equals the par value.

The variable rate junior subordinated debenture issued in 2006 (the 2006 Debenture) is held by FCB/NC Capital Trust III. FCB/NC Capital Trust III purchased the 2006 Debenture with the proceeds from the $115,000 in adjustable rate trust preferred securities issued in 2006 (the 2006 Preferred Securities). The 2006 Debenture is the sole asset of the trust. The 2006 Preferred Securities are redeemable in whole or in part after June 30, 2011.

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands)

The 2006 Preferred Securities and the 2006 Debenture were issued with a variable rate of 175 basis points above the 3-month LIBOR. During the second quarter of 2006, BancShares entered into an interest rate swap to synthetically convert the variable rate coupon on the securities to a fixed rate of 7.125 percent for a period of five years.

FCB/NC Capital Trust I and FCB/NC Capital Trust III are grantor trusts established by BancShares for the purpose of issuing trust preferred capital securities.

The subordinated notes issued during 2005 are unsecured obligations of FCB and are junior to existing and future senior indebtedness and obligations to depositors and general or secured creditors.

Long-term obligations maturing in each of the five years subsequent to December 31, 2008 include:


2009	$	330
2010		55,354
2011		25,379
2012		25,406
2013		55,210
Thereafter		571,453

Total long-term obligations	$	733,132

NOTE I—ESTIMATED FAIR VALUES

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

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


	December 31, 2008				December 31, 2007
	Carrying Value		Fair Value		Carrying Value		Fair Value
Cash and due from banks	$	593,375	$	593,375	$	793,788	$	793,788
Overnight investments		174,616		174,616		266,209		266,209
Investment securities available for sale		3,265,777		3,265,777		3,229,241		3,229,241
Investment securities held to maturity		5,873		6,110		7,594		7,776
Loans, net of allowance for loan and lease losses		11,561,716		12,070,706		10,826,930		11,242,024
Income earned not collected		72,029		72,029		79,343		79,343
Deposits		13,713,763		13,810,690		12,928,544		12,989,047
Short-term borrowings		647,028		647,028		1,305,287		1,305,287
Long-term obligations		733,132		735,098		404,392		406,639
Accrued interest payable		50,923		50,923		62,288		62,288

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands)

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.

BancShares adopted the provisions of SFAS No. 157 Fair Value Measurements (Statement 157) and SFAS No. 159 The Fair Value Option for Financial Assets and Liabilities (Statement 159) on January 1, 2008.

Statement 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Statement 157 does not require any new fair value measurements, but clarifies and standardizes some divergent practices that emerged since prior guidance was issued. Statement 157 creates a three-level hierarchy under which individual fair value estimates are to be ranked based on the relative reliability of the inputs used in the valuation.

Statement 157 defines fair value as 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. Fair values determined using Level 1 inputs rely on active and observable markets to price identical assets or liabilities. In situations where identical assets and liabilities are not traded in active markets, fair values may be determined based on Level 2 inputs, which exist when observable data exists for similar assets and liabilities. Fair values for assets and liabilities that are not actively traded in observable markets are based on Level 3 inputs, which are considered to be unobservable.

Among BancShares’ assets and liabilities, investment securities available for sale and an interest rate swap accounted for as a cash flow hedge 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, and goodwill and other intangible assets, which are periodically tested for impairment. Loans held for investment, deposits, short-term borrowings and long-term obligations are not reported at fair value.

For assets and liabilities carried at fair value, the following table provides fair value information as of December 31, 2008:


			Fair value measurements at December 31, 2008 using:
Description	Fair value at December 31, 2008		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)
Assets measured at fair value
Investment securities available for sale	$	3,265,777	$	3,127,889	$	86,005	$	51,883

Liabilities measured at fair value
Cash flow hedge		10,668		—		10,668		—

Prices for US Treasury and Government agency securities are readily available in the active markets in which those securities are traded, and the resulting fair values are shown in the ‘Level 1 input’ column. Prices for mortgage-backed securities and for state, county and municipal securities are obtained for similar securities, and the resulting fair values are shown in the ‘Level 2 input’ column. Prices for all other securities, which include a residual interest that was retained from a securitization transaction and other non-marketable investments, are determined based on various assumptions that are not observable. The fair values for these investment securities are shown in the ‘Level 3 input’ column. With respect to the residual interest in the asset securitization, the assumed prepayment speed, discount rate and credit spread are not observable in the market due to illiquidity and the uniqueness of the underlying assets. Non-marketable investment securities, which are carried at their purchase price, include those that may only be redeemed by the issuer.

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands)

Under the terms of the existing cash flow hedge, BancShares pays a fixed payment to the counterparty in exchange for receipt of a variable payment that is determined based on the 3-month LIBOR rate. The fair value of the cash flow hedge is therefore based on projected LIBOR rates for the duration of the hedge, values that, while observable in the market, are subject to adjustment due to pricing considerations for the specific instrument. The fair value of the swap was $10,668 and $5,354 as of December 31, 2008 and 2007 and is included in other liabilities.

For those investment securities available for sale with fair values that are determined by reliance on significant unobservable inputs, the following table identifies the factors causing the change in fair value from January 1, 2008 to December 31, 2008:


Description	Investment securities available for sale with fair values based on significant unobservable inputs
Beginning balance, January 1, 2008	$	40,016
Total gains (losses), realized or unrealized:
Included in earnings		—
Included in other comprehensive income		118
Purchases, sales, issuances and settlements, net		11,749
Transfers in/out of Level 3		—

Ending balance, December 31, 2008	$	51,883

No gains or losses were reported for the year ended December 31, 2008 that relate to fair values estimated based on significant unobservable inputs.

Some 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 December 31, 2008:


			Fair value measurements at December 31, 2008 using:
Description	Fair value at December 31, 2008		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)
Loans held for sale	$	69,399	$	—	$	—	$	69,399
Impaired loans		27,858		—		—		27,858

The values of loans held for sale are based on prices observed for similar pools of loans, appraisals provided by third parties and prices determined based on terms of investor purchase commitments. The value of impaired loans is determined by either the collateral value or by the discounted present value of the expected cash flows.

Statement 159 allows an entity to elect to measure certain financial assets and liabilities at fair value with changes in fair value recognized in the income statement each period. The statement also requires additional disclosures to identify the effects of an entity’s fair value election on its earnings. Upon the adoption of Statement 159, BancShares did not elect to report any assets and liabilities at fair value.

NOTE J—EMPLOYEE BENEFIT PLANS

BancShares sponsors benefit plans for its qualifying employees including a noncontributory defined benefit pension plan, a 401(k) savings plan and an enhanced 401(k) savings plan. These plans are qualified under the Internal Revenue Code. BancShares also maintains agreements with certain executives that provide supplemental benefits that are paid upon death or separation from service at an agreed-upon age.

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands)

Defined Benefit Pension Plan

Employees who were hired prior to April 1, 2007 and who qualify under length of service and other requirements may participate in a noncontributory defined benefit pension plan. Under the plan, benefits are based on years of service and average earnings. The policy is to fund amounts approximating the maximum amount that is deductible for federal income tax purposes. BancShares contributed $20,000 to the plan in 2007 and, $25,000 in 2006. No contribution was made during 2008. The plan’s assets consist of investments in FCB’s common trust funds, which include listed common stocks and fixed income securities, as well as investments in mid-cap, REIT and international stocks as well as TIPS and other fixed income securities through unaffiliated money managers.

Benefit Obligations

The following table calculates the projected benefit obligation at December 31, 2008 and 2007:


	2008			2007
Benefit obligation at beginning of year	$	307,515		$	300,981
Service cost		11,750			14,428
Interest cost		20,384			18,388
Actuarial (gain)/loss		30,740			(16,571	)
Transfer to related parties		—			(8	)
Benefits paid		(10,368	)		(10,767	)
Plan amendments		—			1,064

Benefit obligation at end of year	$	360,021		$	307,515

The accumulated benefit obligation for the plan at December 31, 2008 and 2007 equaled $287,200 and $248,992, respectively. The plan uses a measurement date of December 31.

The assumptions used to determine the benefit obligations as of December 31 are as follows:


	2008		2007
Discount rate	6.00	%	6.25	%
Rate of compensation increase	4.50	%	4.25	%

Plan Assets

The following table describes the changes in plan assets during 2008 and 2007. Employer contributions and benefits paid include only those amounts contributed directly to or paid directly from plan assets.


	2008			2007
Fair value of plan assets at beginning of year	$	382,180		$	352,425
Actual return on plan assets		(84,794	)		20,531
Employer contributions		—			20,000
Transfer to related parties		—			(9	)
Benefits paid		(10,368	)		(10,767	)

Fair value of plan assets at end of year	$	287,018		$	382,180

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands)

The following table describes the actual allocation of plan assets as of December 31, 2008 and 2007 and the projected allocation for 2009.


			Actual, December 31,
	2009 Target		2008		2007
Equity securities	55-65	%	61	%	59	%
Debt securities	34-44	%	38	%	40	%
Cash and equivalents	1	%	1	%	1	%

Total	100	%	100	%	100	%

Investment decisions regarding the plan’s assets seek to achieve a favorable annual return through a diversified portfolio that will provide needed capital appreciation and cash flow to allow both current and future benefit obligations to be paid. The target asset mix may change if the objectives for the plan’s assets or risk tolerance change or if a major shift occurs in the expected long-term risk and reward characteristics of one or more asset classes.

Funded Status

The funded status of the plan, which equals the pension liability at December 31, 2008 and the prepaid pension asset as of December 31, 2007, is calculated as follows:


	December 31,
	2008			2007
Fair value of plan assets	$	287,018		$	382,180
Benefit obligation		360,021			307,515

Funded status		(73,003	)		74,665
Amounts not yet recognized:
Unrecognized net loss		—			—
Unrecognized prior service cost		—			—

Net (liability) asset recognized	$	(73,003	)	$	74,665

Prepaid benefit cost	$	—		$	74,665
Noncurrent liability		(73,003	)		—

Net (liability) asset recognized	$	(73,003	)	$	74,665

Accumulated other comprehensive income, excluding income taxes
Net loss (gain)	$	122,569		$	(19,602	)
Less prior service cost		2,027			2,237

Accumulated other comprehensive income, excluding income taxes	$	124,596		$	(17,365	)

As shown in the following table, at December 31, 2008, the projected benefit obligation and the accumulated benefit obligation exceeded the fair value of the plan assets:



Projected benefit obligation, end of year	$	360,021

Accumulated benefit obligation, end of year		287,200

Fair value of plan assets, end of year		287,018

At December 31, 2007, the fair value of plan assets exceeded both the projected benefit obligation and the accumulated benefit obligation.

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands)

Cash Flows

During 2009, BancShares anticipates making contributions to the pension plan totaling $25,000. Following are estimated payments to pension plan participants in the indicated periods:


	Projected Benefit payments
2009	$	11,939
2010		12,941
2011		14,139
2012		15,429
2013		16,663
2014-2018		107,700

Net Periodic Cost

The following table shows the components of periodic benefit cost related to the pension plan for the years ended December 31, 2008, 2007 and 2006.


	2008			2007			2006
Service cost	$	11,750		$	14,428		$	14,408
Interest cost		20,384			18,388			16,598
Expected return on assets		(27,606	)		(25,716	)		(22,776	)
Amortization of prior service cost		210			266			231
Amortization of net actuarial loss		970			1,902			2,924

Total net periodic benefit cost		5,708			9,268			11,385
Curtailment cost		—			763			—

Total net periodic benefit cost	$	5,708		$	10,031		$	11,385

The assumptions that will be used to determine the net periodic benefit cost for 2009 and the assumptions used to calculate net periodic benefit cost the years ended December 31, 2008, 2007 and 2006 are as follows:


	2009		2008		2007		2006
Discount rate	6.00	%	6.25	%	5.75	%	5.50	%
Rate of compensation increase	4.50	%	4.25	%	4.25	%	4.25	%
Expected return on plan assets	8.00	%	8.50	%	8.50	%	8.50	%

401(k) Savings Plans

Certain employees are also eligible to participate in a 401(k) savings plan after 31 days of service through deferral of portions of their salary. Based on the employee’s contribution, BancShares matches up to 75 percent of the employee contribution. BancShares made participating contributions of $8,229, $6,863 and $6,381 during 2008, 2007 and 2006, respectively.

At the end of 2007, current employees were given the option to participate in the defined benefit plan or elect to join an enhanced 401(k) savings plan. In addition to the employer match of the employee contributions, the enhanced 401(k) savings plan provides a guaranteed contribution to plan participants if they remain employed at the end of each calendar year. Employees electing to participate in the enhanced 401(k) savings plan and newly-hired employees were enrolled in the enhanced 401(k) savings plan beginning January 1, 2008. Employees who elected to enroll in the enhanced 401(k) savings plan discontinued the accrual of additional years of service under the defined benefit plan after January 1, 2008.

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands)

Additional Benefits for Executives and Directors and Officers of Acquired Entities

FCB and ISB have entered into contractual agreements with certain executives that provide payments for a period of ten years following separation from service at an agreed-upon age. These agreements also provide a death benefit in the event a participant dies before the term of the agreement ends. FCB has also assumed liability for contractual obligations to directors and officers of acquired entities.

The following table provides the accrued liability as of December 31, 2008 and 2007 and the changes in the accrued liability during the years then ended:


	Year Ended December 31,
	2008			2007
Present value of accrued liability as of January 1	$	17,928		$	17,358
Benefit expense		4,164			1,491
Benefits paid		(1,388	)		(725	)
Benefits forfeited		—			(213	)
Interest cost		1,410			17

Present value of accrued liability as of December 31	$	22,114		$	17,928

Discount rate at December 31		6.00	%		6.25	%

NOTE K—NONINTEREST EXPENSE

Other noninterest expense for the years ended December 31 included the following:


	2008		2007		2006
Cardholder and merchant processing	$	42,071	$	41,882	$	37,286
Telecommunications		12,061		10,501		9,844
Postage		10,427		9,614		8,926
Cardholder reward programs		9,323		12,529		9,228
Processing fees paid to third parties		8,985		7,004		5,845
Advertising		8,098		7,499		7,212
Legal		6,308		6,410		5,244
Courier service		5,562		5,401		6,624
Other		66,943		63,894		57,308

Total other noninterest expense	$	169,778	$	164,734	$	147,517

NOTE L—INCOME TAXES

At December 31, income tax expense consisted of the following:


	2008			2007		2006
Current tax expense
Federal	$	51,121		$	53,794	$	62,389
State		5,806			3,546		6,372

Total current tax expense		56,927			57,340		68,761

Deferred tax expense (benefit)
Federal		(8,111	)		941		(146	)
State		(270	)		656		840

Total deferred tax expense (benefit)		(8,381	)		1,597		694

Total income tax expense	$	48,546		$	58,937	$	69,455

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands)

Income tax expense differed from the amounts computed by applying the federal income tax rate of 35 percent to pretax income as a result of the following:


	2008			2007			2006
Income taxes at statutory rates	$	48,861		$	58,644		$	68,581
Increase (reduction) in income taxes resulting from:
Nontaxable income on loans, leases and investments, net of nondeductible expenses		(1,468	)		(1,419	)		(1,053	)
State and local income taxes, including change in valuation allowance, net of federal income tax benefit		3,598			2,731			4,688
Tax credits		(2,342	)		(1,771	)		(1,645	)
Other, net		(103	)		752			(1,116	)

Total income tax expense	$	48,546		$	58,937		$	69,455

The net deferred tax asset included the following components at December 31:


	2008		2007
Allowance for loan and lease losses	$	63,174	$	54,399
Executive separation from service agreements		8,721		7,064
Pension liability (asset)		28,395		(29,418	)
State operating loss carryforward		2,039		1,258
Unrealized loss on cash flow hedge		4,212		2,114
Other		10,176		8,654

Gross deferred tax asset		116,717		44,071
Less valuation allowance		2,594		776

Deferred tax asset		114,123		43,295

Accelerated depreciation		6,216		2,480
Lease financing activities		11,717		11,357
Net unrealized gains (losses) included in comprehensive income		29,108		21,378
Net deferred loan fees and costs		5,864		5,640
Intangible asset		10,878		9,460

Deferred tax liability		63,783		50,315

Net deferred tax (liability) asset	$	50,340	$	(7,020	)

The valuation allowance necessary to reduce BancShares’ gross state deferred tax asset to the amount that is more likely than not to be realized was $2,594 and $776 at December 31, 2008 and 2007, respectively.

With few exceptions, BancShares and its subsidiaries are no longer subject to U.S. federal, or state and local income tax examinations by tax authorities for years before 2005.

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands)

Pursuant to the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN48), the following table reconciles the beginning and ending amount of unrecognized income tax benefits. Unrecognized state tax benefits are not adjusted for the impact of federal taxes.


	2008			2007
Unrecognized tax benefits at beginning of year	$	11,340		$	10,068
Additions based on tax positions related to current year		2,456			2,586
Additions based on tax positions related to prior years		1,489			2,792
Reductions based on lapse of statute		(4,811	)		(4,106	)
Settlements		—			—

Unrecognized tax benefits at end of year	$	10,474		$	11,340

At December 31, 2008 and 2007, unrecognized tax benefits includes $8,775 and $9,761, respectively, of tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Additions based on tax positions related to prior years primarily relates to interest. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.

The total amount of unrecognized income tax benefits as of December 31, 2008 and December 31, 2007 that, if recognized, would affect the effective tax rate is $1,699 and $1,579 (net of the federal benefit on state tax issues) respectively.

BancShares recognizes accrued interest and penalties related to unrecognized tax benefits in tax expense. Accrued interest and penalties on unrecognized income tax benefits totaled $588 and $800 as of December 31, 2008 and December 31, 2007 respectively.

NOTE M—TRANSACTIONS WITH RELATED PERSONS

BancShares, FCB and ISB have had, and expect to have in the future, banking transactions in the ordinary course of business with directors, officers and their associates (Related Persons). An analysis of changes in the aggregate amounts of loans to Related Persons for the year ended December 31, 2008 is as follows:


Balance at beginning of year	$	38,180
New loans		8,682
Repayments		13,735

Balance at end of year	$	33,127

In addition to these outstanding loan balances there is $18,976 available to Related Persons in unfunded loan commitments.

BancShares provides processing and operational services to other financial institutions. Certain of these institutions are deemed to be Related Persons since significant shareholders of BancShares are also deemed to be significant shareholders of the other banks. During 2008, 2007 and 2006, BancShares received $31,763, $29,234 and $26,057, respectively, for services rendered to these Related Persons, substantially all of which is included in fees from processing services and relates to data processing services. The amount recorded from the largest individual institution totaled $19,564, $17,960 and $16,914 for 2008, 2007 and 2006, respectively.

Other expense includes $3,499, $3,773 and $4,376 in legal expense incurred during 2008, 2007 and 2006, respectively, for the firm that serves as BancShares’ general counsel. The senior attorney of that firm is a Related Person since he is member of BancShares’ board of directors.

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands)

Investment securities available for sale includes an investment in a financial institution controlled by Related Persons. This investment had a carrying value of $12,759 and $23,788 at December 31, 2008 and 2007, respectively. For each period, the investment had a cost of $508. Short-term borrowings include $0 and $13,700 in federal funds purchased from financial institutions controlled by Related Persons at December 31, 2008 and 2007.

NOTE N—BUSINESS COMBINATIONS

On January 1, 2007, BancShares completed the sale of American Guaranty Insurance Company and Triangle Life Insurance Company. During the fourth quarter of 2006, BancShares completed the sale of the principal assets of T-TECH, Inc. (T-TECH). T-TECH provided payment processing services to third parties. T-TECH was subsequently dissolved.

The following table provides information regarding the single branch sale that occurred during the three-year period ended December 31, 2008:


Year	Transaction	Assets¹			Deposits
2006	Sale of one branch by First Citizens Bank	$	(278	)	$	(20,553	)

Excludes the transfer of cash and recognition of goodwill and intangible assets

There were no branch purchases during the three-year period ended December 31, 2008.

The pro forma impact of the divestitures as though they had been made at the beginning of the periods presented is not material to BancShares’ consolidated financial statements.

NOTE O—GOODWILL AND INTANGIBLE ASSETS

There was no goodwill activity during 2008 and 2007. Goodwill totaled $102,625 at December 31, 2008 and 2007 with no impairment charges for the years ended December 31, 2008, 2007 and 2006.

The following information relates to other intangible assets, all of which are being amortized over their estimated useful lives:


	2008			2007
Balance, January 1	$	5,858		$	8,000
Amortization		(2,048	)		(2,142	)

Balance, December 31	$	3,810		$	5,858

Based on current estimated useful lives and current carrying values, BancShares anticipates amortization expense for intangible assets in subsequent periods will be:


2009		1,657
2010		1,534
2011		248
2012		202
2013		169

	$	3,810

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands)

NOTE P—REGULATORY REQUIREMENTS

Various regulatory agencies have established guidelines that evaluate capital adequacy based on risk-adjusted assets. An additional capital computation evaluates tangible capital based on tangible assets. Minimum capital requirements set forth by the regulatory agencies require a Tier 1 capital ratio of no less than 4 percent of risk-weighted assets, a total capital ratio of no less than 8 percent of risk-weighted assets, and a leverage capital ratio of no less than 3 percent of tangible assets. To meet the FDIC’s well-capitalized standards, the Tier 1 and total capital ratios must be at least 6 percent and 10 percent, respectively. Failure to meet minimum capital requirements may result in certain actions by regulators that could have a direct material effect on the consolidated financial statements.

Based on the most recent notifications from its regulators, FCB and ISB are well-capitalized under the regulatory framework for prompt corrective action. Management believes that as of December 31, 2008 BancShares, FCB and ISB met all capital adequacy requirements to which they are subject and was not aware of any conditions or events that would affect FCB’s and ISB’s well-capitalized status.

Following is an analysis of capital ratios for BancShares, FCB and ISB as of December 31, 2008 and 2007.


	December 31, 2008						December 31, 2007
	Amount		Ratio		Requirement for Well-Capitalized		Amount		Ratio		Requirement for Well-Capitalized
	Amount		Ratio		Requirement for Well-Capitalized		Amount		Ratio		Requirement for Well-Capitalized
BancShares
Tier 1 capital	$	1,649,675	13.20	%	6.00	%	$	1,557,190	13.02	%	6.00	%
Total capital		1,935,993	15.49		10.00			1,836,763	15.36		10.00
Leverage capital		1,649,675	9.88		5.00			1,557,190	9.63		5.00

FCB
Tier 1 capital		1,262,950	12.62		6.00			1,188,599	12.23		6.00
Total capital		1,513,045	15.12		10.00			1,433,069	14.75		10.00
Leverage capital		1,262,950	9.17		5.00			1,188,599	8.81		5.00

ISB
Tier 1 capital		273,637	11.55		6.00			261,500	11.94		6.00
Total capital		311,887	13.16		10.00			286,301	13.07		10.00
Leverage capital		273,637	10.71		5.00			261,500	11.21		5.00

The Board of Directors of FCB may declare a dividend on a portion of its undivided profits as it deems appropriate, subject to the requirements of the FDIC and the General Statutes of North Carolina, without prior regulatory approval. As of December 31, 2008, the amount was $1,028,310. However, to preserve its well-capitalized status, the maximum amount of the dividend was limited to $512,428. Dividends declared by FCB amounted to $54,788 in 2008, $43,830 in 2007 and $39,952 in 2006

BancShares and its banking subsidiaries are subject to various requirements imposed by state and federal banking statutes and regulations, including regulations requiring the maintenance of noninterest-bearing reserve balances at the Federal Reserve Bank. Banks are allowed to reduce the required balances by the amount of vault cash. For 2008 the requirements averaged $142,337 for FCB and $8,985 for ISB.

NOTE Q—COMMITMENTS AND CONTINGENCIES

In order to meet the financing needs of its customers, BancShares and its subsidiaries have financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve elements of credit, interest rate or liquidity risk.

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands)

Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. Established credit standards control the credit-risk exposure associated with these commitments. In some cases, BancShares requires that collateral be pledged to secure the commitment. At December 31, 2008 and 2007, BancShares had unused commitments totaling $5,168,588 and $4,972,515 respectively.

Standby letters of credit are commitments guaranteeing performance of a customer to a third party. Those guarantees are issued primarily to support public and private borrowing arrangements. In order to minimize its exposure, BancShares’ credit policies govern the issuance of standby letters of credit. At December 31, 2008 and 2007, BancShares had standby letters of credit amounting to $77,475 and $51,696, respectively.

On May 24, 2004, FCB filed a lawsuit in the Circuit Court of Greenbrier County, West Virginia against a customer alleging default under a master lease on a piece of equipment, eight promissory notes and two leases. The borrower asserted a counterclaim against FCB alleging breach of lease, breach of fiduciary duty, breach of duty of good faith and fair dealing, and tortuous interference with contractual relations. At trial, a jury returned a verdict against FCB and awarded a $4,125 judgment in favor of FCB’s customer. If the jury verdict stands, the customer will be entitled to pre-judgment interest of approximately $1,000 and post-judgment interest at a rate of 8.25 percent. FCB filed a motion to set aside the judgment or, in the alternative, for a new trial, but the Court denied FCB’s motion. FCB is appealing the Court’s action to the West Virginia Supreme Court of Appeals. Upon the posting of an acceptable bond, execution on the judgment will be stayed pending the outcome of the appeal. FCB strenuously denies liability and is vigorously pursuing appeal of the jury’s award.

BancShares and various subsidiaries have been named as defendants in various legal other 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 such matters cannot be determined, in the opinion of management, any such liability will not have a material effect on BancShares’ consolidated financial statements.

NOTE R—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 and has separate management groups. Additionally, the financial results and trends of ISB reflect the de novo nature of its growth.

FCB is a mature banking institution that operates from a single charter from its branch network in North Carolina, Virginia, West Virginia, Maryland and Tennessee. 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. ISB’s significance to BancShares’ consolidated financial results continues to grow.

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, a subsidiary that owns real property used in the banking operation.

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands)

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.

The following table provides selected financial information for BancShares’ reportable business segments:


	2008
	ISB			FCB		Other			Total		Adjustments			Consolidated
Interest income	$	141,061		$	663,612	$	23,214		$	827,887	$	(13,171	)	$	814,716
Interest expense		73,560			221,753		32,803			328,116		(13,171	)		314,945

Net interest income (expense)		67,501			441,859		(9,589	)		499,771		—			499,771
Provision for credit losses		36,208			29,597		—			65,805		—			65,805

Net interest income (expense) after provision for credit losses		31,293			412,262		(9,589	)		433,966		—			433,966
Noninterst income		12,197			310,012		610			322,819		(10,700	)		312,119
Noninterest expense		87,632			527,596		1,953			617,181		(10,700	)		606,481

Income (loss) before income taxes		(44,142	)		194,678		(10,932	)		139,604		—			139,604
Income taxes		(15,234	)		67,588		(3,808	)		48,546		—			48,546

Net income (loss)	$	(28,908	)	$	127,090	$	(7,124	)	$	91,058	$	—		$	91,058

At December 31, 2008
Total assets	$	2,563,950		$	13,879,815	$	2,174,079		$	18,617,844	$	(1,872,182	)	$	16,745,662
Loans and leases		2,220,507			9,498,778		—			11,719,285		—			11,719,285
Allowance for loan and lease losses		37,335			120,234		—			157,569		—			157,569
Deposits		1,970,795			11,782,062		—			13,752,857		(39,094	)		13,713,763



	2007
	ISB			FCB		Other			Total		Adjustments			Consolidated
Interest income	$	141,071		$	752,383	$	44,884		$	938,338	$	(34,282	)	$	904,056
Interest expense		77,257			322,374		58,365			457,996		(34,282	)		423,714

Net interest income (expense)		63,814			430,009		(13,481	)		480,342		—			480,342
Provision for credit losses		9,034			24,560		—			33,594		—			33,594

Net interest income (expense) after provision for credit losses		54,780			405,449		(13,481	)		446,748		—			446,748
Noninterst income		13,509			291,496		421			305,426		(9,956	)		295,470
Noninterest expense		79,933			504,173		514			584,620		(9,956	)		574,664

Income (loss) before income taxes		(11,644	)		192,772		(13,574	)		167,554		—			167,554
Income taxes		(3,935	)		67,579		(4,707	)		58,937		—			58,937

Net income (loss)	$	(7,709	)	$	125,193	$	(8,867	)	$	108,617	$	—		$	108,617

At December 31, 2007
Total assets	$	2,341,223		$	13,582,263	$	2,595,256		$	18,518,742	$	(2,306,635	)	$	16,212,107
Loans and leases		2,071,681			8,892,223		—			10,963,904		—			10,963,904
Allowance for loan and lease losses		23,648			113,326		—			136,974		—			136,974
Deposits		1,856,927			11,129,545		—			12,986,472		(57,928	)		12,928,544

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands)



	2006
	ISB		FCB		Other			Total		Adjustments			Consolidated
Interest income	$	124,895	$	702,596	$	31,345		$	858,836	$	(28,521	)	$	830,315
Interest expense		58,593		270,460		53,205			382,258		(28,521	)		353,737

Net interest income (expense)		66,302		432,136		(21,860	)		476,578		—			476,578
Provision for credit losses		3,548		17,374		—			20,922		—			20,922

Net interest income (expense) after provision for credit losses		62,754		414,762		(21,860	)		455,656		—			455,656
Noninterest income		11,383		267,340		1,177			279,900		(8,533	)		271,367
Noninterest expense		71,500		466,034		2,076			539,610		(8,533	)		531,077

Income (loss) before income taxes		2,637		216,068		(22,759	)		195,946		—			195,946
Income taxes		456		76,919		(7,920	)		69,455		—			69,455

Net income (loss)	$	2,181	$	139,149	$	(14,839	)	$	126,491	$	—		$	126,491

At December 31, 2006
Total assets	$	2,136,683	$	13,329,580	$	2,249,501		$	17,715,764	$	(1,986,067	)	$	15,729,697
Loans and leases		1,869,884		8,403,159		—			10,273,043		—			10,273,043
Allowance for loan and lease losses		22,446		109,558		—			132,004		—			132,004
Deposits		1,763,095		11,027,482		—			12,790,577		(47,253	)		12,743,324

NOTE S—FIRST CITIZENS BANCSHARES, INC. (PARENT COMPANY)

First Citizens BancShares, Inc.’s principal assets are its investments in and receivables from its subsidiaries. Its sources of income are dividends and interest income. The Parent Company’s condensed balance sheets as of December 31, 2008 and 2007, and the related condensed statements of income and cash flows for the years ended December 31, 2008, 2007 and 2006 are as follows:

CONDENSED BALANCE SHEETS


	December 31
	2008		2007
Assets
Cash	$	10,280	$	28,364
Investment securities		265,190		315,490
Investment in subsidiaries		1,648,360		1,625,072
Due from subsidiaries		227,200		641,643
Other assets		60,823		46,753

Total assets	$	2,211,853	$	2,657,322

Liabilities and Shareholders’ Equity
Short-term borrowings	$	472,573	$	923,424
Long-term obligations		273,197		273,197
Other liabilities		22,708		19,493
Shareholders’ equity		1,443,375		1,441,208

Total liabilities and shareholders’ equity	$	2,211,853	$	2,657,322

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands)

CONDENSED STATEMENTS OF INCOME


	Year Ended December 31
	2008			2007			2006
Interest income	$	23,214		$	44,884		$	31,109
Interest expense		32,908			58,610			53,679

Net interest expense		(9,694	)		(13,726	)		(22,570	)
Dividends from subsidiaries		54,788			43,830			44,952
Other income (loss)		610			421			(175	)
Other operating expense		3,422			2,084			1,670

Income before income tax benefit and equity in undistributed net income of subsidiaries		42,282			28,441			20,537
Income tax benefit		(4,420	)		(5,414	)		(8,570	)

Income before equity in undistributed net income of subsidiaries		46,702			33,855			29,107
Equity in undistributed net income of subsidiaries		44,356			74,762			97,384

Net income	$	91,058		$	108,617		$	126,491

CONDENSED STATEMENTS OF CASH FLOWS


	Year Ended December 31
	2008			2007			2006
OPERATING ACTIVITIES
Net income	$	91,058		$	108,617		$	126,491
Adjustments
Undistributed net income of subsidiaries		(44,356	)		(74,762	)		(97,384	)
Net amortization of premiums and discounts		(246	)		(247	)		308
Securities gains		(103	)		—			(328	)
Change in other assets		(12,830	)		11,149			5,762
Change in other liabilities		3,215			1,695			6,518

Net cash provided by operating activities		36,738			46,452			41,367

INVESTING ACTIVITIES
Net change in due from subsidiaries		414,443			(78,198	)		(132,618	)
Purchases of investment securities		(90,918	)		(149,906	)		(161,655	)
Maturities of investment securities		129,731			53,696			70,585
Investment in subsidiaries		(45,750	)		(24,000	)		(36,404	)

Net cash provided (used) by investing activities		407,506			(198,408	)		(260,092	)

FINANCING ACTIVITIES
Net change in short-term borrowings		(450,851	)		182,395			220,444
Origination of long-term obligations		—			—			118,557
Redemption of long-term obligations		—			—			(103,093	)
Cash dividends paid		(11,477	)		(11,478	)		(11,478	)

Net cash provided (used) by financing activities		(462,328	)		170,917			224,430

Net change in cash		(18,084	)		18,961			5,705
Cash balance at beginning of year		28,364			9,403			3,698

Cash balance at end of year	$	10,280		$	28,364		$	9,403

Cash payments for
Interest	$	32,457		$	58,159		$	54,214
Income taxes		69,506			57,765			61,795

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: February 27, 2009

FIRST CITIZENS BANCSHARES, INC. (Registrant)

/S/ FRANK B. HOLDING, JR.*

Frank B. Holding, Jr.

Chairman and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, on behalf of the Registrant and in the capacities indicated on February 27, 2009.


Signature	Title	Date

/s/ FRANK B. HOLDING, JR. * Frank B. Holding, Jr.	Chairman	February 27, 2009

/s/ FRANK B. HOLDING * Frank B. Holding	Executive Vice Chairman	February 27, 2009

/S/ KENNETH A. BLACK Kenneth A. Black	Vice President, Treasurer, and Chief Financial Officer (principal financial and accounting officer)	February 27, 2009

/s/ JOHN M. ALEXANDER, JR. * John M. Alexander, Jr.	Director	February 27, 2009

/s/ CARMEN HOLDING AMES * Carmen Holding Ames	Director	February 27, 2009

/s/ VICTOR E. BELL, III * Victor E. Bell, III	Director	February 27, 2009

/s/ GEORGE H. BROADRICK * George H. Broadrick	Director	February 27, 2009

/s/ HOPE HOLDING CONNELL * Hope Holding Connell	Director	February 27, 2009

/s/ HUBERT M. CRAIG, III * Hubert M. Craig, III	Director	February 27, 2009

/s/ H. LEE DURHAM, JR. * H. Lee Durham, Jr.	Director	February 27, 2009

/s/ LEWIS M. FETTERMAN * Lewis M. Fetterman	Director	February 27, 2009

/s/ DANIEL L. HEAVNER * Daniel L. Heavner	Director	February 27, 2009


/s/ LUCIUS S. JONES * Lucius S. Jones	Director	February 27, 2009

/s/ ROBERT E. MASON, IV * Robert E. Mason, IV	Director	February 27, 2009


Signature	Title	Date

/s/ ROBERT T. NEWCOMB * Robert T. Newcomb	Director	February 27, 2009

/s/ LEWIS T. NUNNELEE, II * Lewis T. Nunnelee, II	Director	February 27, 2009

/s/ JAMES M. PARKER * James M. Parker	Director	February 27, 2009

/s/ RALPH K. SHELTON * Ralph K. Shelton	Director	February 27, 2009

/s/ R. C. SOLES, JR. * R. C. Soles, Jr.	Director	February 27, 2009

/s/ DAVID L. WARD, JR * David L. Ward, Jr.	Director	February 27, 2009

Kenneth A. Black hereby signs this Annual Report on Form 10-K on February 27, 2009, on behalf of each of the indicated persons for whom he is attorney-in-fact pursuant to a Power of Attorney filed herewith.




By:		/S/ KENNETH A. BLACK
		Kenneth A. Black As Attorney-In-Fact

EXHIBIT INDEX


3.1		Certificate of Incorporation of the Registrant, as amended (incorporated by reference from Registrant’s Form 10-K for the year ended December 31, 1992)
3.2		Bylaws of the Registrant, as amended (incorporated by reference from Registrant’s Form 8-K dated January 25, 2008)
4.1		Specimen of Registrant’s Class A Common Stock certificate (filed herewith)
4.2		Specimen of Registrant’s Class B Common Stock certificate (filed herewith)
4.3		Amended and Restated Trust Agreement of FCB/NC Capital Trust I (incorporated by reference from Registration No. 333-59039)
4.4		Form of Guarantee Agreement (incorporated by reference from Registration No. 333-59039)
4.5		Junior Subordinated Indenture dated March 5, 1998 between Registrant and Bankers Trust Company, as Debenture Trustee (incorporated by reference from Registration No. 333-59039)
4.6		Indenture dated June 1, 2005 between Registrant’s subsidiary First-Citizens Bank & Trust Company and Deutsche Bank Trust Company Americas, as Trustee (incorporated by reference from Registrant’s 8-K dated June 1, 2005)
4.7		First Supplemental Indenture dated June 1, 2005 between Registrant’s subsidiary First-Citizens Bank & Trust Company and Deutsche Bank Trust Company Americas, as Trustee (incorporated by reference from Registrant’s Form 8-K dated June 1, 2005)
4.8		Amended and Restated Trust Agreement of FCB/NC Capital Trust III (incorporated by reference from Registrant’s Form 10-Q for the quarter ended June 30, 2006)
4.9		Guarantee Agreement relating to Registrant’s guarantee of the capital securities of FCB/NC Capital Trust III (incorporated by reference from Registrant’s Form 10-Q for the quarter ended June 30, 2006)
4.10		Junior Subordinated Debenture dated May 18, 2006 between Registrant and Wilmington Trust Company, as Debenture Trustee (incorporated by reference from Registrant’s Form 10-Q for the quarter ended June 30, 2006)
10.1		Executive Consultation, Separation from Service and Death Benefit Agreement dated September 17, 2007 between Registrant’s Subsidiary First-Citizens Bank & Trust Company and Lewis R. Holding (incorporated by reference from Registrant’s Form 8-K filed February 6, 2009 for an event on February 3, 2009)
10.2		Executive Consultation, Separation from Service and Death Benefit Agreement dated September 28, 2007 between Registrant’s Subsidiary First-Citizens Bank & Trust Company and Frank B. Holding (incorporated by reference from Registrant’s Form 8-K filed February 6, 2009 for an event on February 3, 2009)
10.3		Executive Consultation, Separation from Service and Death Benefit Agreement dated September 17, 2007 between Registrant’s Subsidiary First-Citizens Bank & Trust Company and James B. Hyler, Jr. (incorporated by reference from Registrant’s Form 10-Q for the quarter ended September 30, 2007)
10.4		Retirement Agreement and Release dated February 1, 2008 between Registrant’s subsidiary First-Citizens Bank & Trust Company and James B. Hyler, Jr. (incorporated by reference from Registrant’s Form 10-Q for the quarter ended March 31, 2008)
10.5		Offer of employment by Registrant’s Subsidiary First-Citizens Bank & Trust Company to Carol B. Yochem dated August 3, 2005 (incorporated by reference to Registrant’s 2006 Form 10-K)
10.6		Executive Consultation, Separation from Service and Death Benefit Agreement dated September 17, 2007, between Registrant’s Subsidiary First-Citizens Bank & Trust Company and Carol B. Yochem (incorporated by reference to Registrant’s Form 10-Q for the quarter ended September 30, 2007)
10.7		Executive Consultation, Separation from Service and Death Benefit Agreement dated September 17, 2007, between Registrant’s Subsidiary First-Citizens Bank & Trust Company and Kenneth A. Black (incorporated by reference to Registrant’s Form 10-Q for the quarter ended September 30, 2007)
10.8		Executive Consultation, Separation from Service and Death Benefit Agreement dated September 17, 2007 between Registrant’s Subsidiary First-Citizens Bank & Trust Company and Frank B. Holding, Jr. (incorporated by reference from Registrant’s Form 10-Q for the quarter ended September 30, 2007)


10.9		Executive Consultation, Separation from Service and Death Benefit Agreement dated September 17, 2007 between Registrant’s Subsidiary First-Citizens Bank & Trust Company and Hope Holding Connell (incorporated by reference to Registrant’s Form 10-Q for the quarter ended September 30, 2007)
10.10		Consultation Agreement dated July 24, 2006, between Registrant’s subsidiary, First-Citizens Bank & Trust Company, and George H. Broadrick (incorporated by reference to Registrant’s 2006 Form 10-K)
10.11		Executive Consultation, Separation from Service and Death Benefit Agreement dated September 17, 2007, between Registrant’s Subsidiary IronStone Bank and James M. Parker (incorporated by reference from Registrant’s Form 10-Q for the quarter ended September 30, 2007)
10.12		Executive Consultation, Separation from Service and Death Benefit Agreement between Registrant’s subsidiary IronStone Bank and James M. Parker (filed herewith)
10.13		Executive Consultation, Separation from Service and Death Benefit Agreement between Registrant’s subsidiary IronStone Bank and James M. Parker (incorporated by reference from Registrant’s Form 8-K filed February 6, 2009 for an event on February 4, 2009)
10.14		Article IV Section 4.1.d of the Agreement and Plan of Reorganization and Merger by and among First Investors Savings Bank, Inc., SSB, First-Citizens Bank & Trust Company and First Citizens BancShares, Inc., dated October 25, 1995, located at page II-38 of Registrant’s S-4 Registration Statement filed with the SEC on December 19, 1994 (Registration No. 33-84514)
21		Subsidiaries of the Registrant (filed herewith)
24		Power of Attorney (filed herewith)
31.1		Certification of Chief Executive Officer (filed herewith)
31.2		Certification of Chief Financial Officer (filed herewith)
32		Certification of Chief Executive Officer and Chief Financial Officer (filed herewith)
99.1		Proxy Statement for Registrant’s 2009 Annual Meeting (separately filed)

COPIES OF EXHIBITS ARE AVAILABLE UPON WRITTEN REQUEST TO

KENNETH A. BLACK, CHIEF FINANCIAL OFFICER OF FIRST CITIZENS BANCSHARES, INC.