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, 20022003

Commission File Number 0-16471

FIRST CITIZENS BANCSHARES, INC.

(Exact name of Registrant as specified in the charter)

3128 Smoketree Court

Raleigh, North Carolina 27604

(Address of Principal Executive Offices, Zip Code)

(919) 716-7000

(Registrant’s Telephone Number, including Area Code)

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

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

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

Yesx     No¨

The aggregate market value of the Registrant’s common equity held by nonaffiliates computed by reference to the price at which the common equity was last sold as of the last business day of the Registrant’s most recently completed second fiscal quarter was $673,916,280.$611,442,296.

On March 13, 2003,12, 2004, there were 8,793,2338,758,670 outstanding shares of the Registrant’s Class A Common Stock and 1,677,675 outstanding shares of the Registrant’s Class B Common Stock.

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

CROSS REFERENCE INDEX

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Description of Business

First Citizens BancShares, Inc. (BancShares) was incorporated under the laws of Delaware on August 7, 1986, to become the holding company of First-Citizens Bank & Trust Company (First Citizens Bank or FCB), its banking subsidiary. On October 21, 1986 BancShares became the sole shareholder of First Citizens Bank. FCB was chartered on March 4, 1893, as the Bank of Smithfield, Smithfield, North Carolina, and through a series of mergers and name changes, it later became First-Citizens Bank & Trust Company. As of December 31, 2002,2003, FCB operated 342330 offices in North Carolina, Virginia and West Virginia.

On April 28, 1997, BancShares launched Atlantic States Bank (ASB), a federally chartered thrift institution. ASB branches were initially concentrated within the metropolitan Atlanta, Georgia market. In 1999, ASB expanded its presence into Florida, focusing initially on selected markets in southwest Florida. The targeted market areas within Florida have grown to now include Jacksonville and Fort Lauderdale. Except for the acquisition of several grocery store locations, all of ASB’s growth in Georgia and Florida has been on a de novo basis. During 2002, ASB continued its expansion into high-growth markets by opening three offices in Austin, Texas, operating under the name of IronStone Bank, a division of ASB (ISB). At December 31, 2002, ASB had 41 offices with total assets of $1.04 billion.

During early 2003, ISB opened an initial officeoffices in Scottsdale, Arizona. ISB has also announced plans to open branch offices inArizona, the San Diego and LaJolla communities in Southern California, and Newport Beach and Sacramento in Northern California.California and plans further expansion in Oregon and Washington. These markets have been selected based on their strong anticipated economic growth rates and the desire to bring a bank with a focus on customer service to the retail and business customers in these communities.

During 2000, BancShares became a financial holding company, a designation that allows BancShares to offer products and services that a bank holding company may not provide. As a first step to exercising the broader powers available to a financial holding company, during 2000, American Guaranty Insurance Company (“AGI”), formerly a wholly-owned subsidiary of FCB, became a wholly-owned subsidiary of BancShares. As a direct subsidiary of BancShares, AGI has more flexibility in its product offering than it did as a subsidiary of FCB. At December 31, 2003, ASB had 44 offices.

BancShares’ executive offices are located at 3128 Smoketree Court, Raleigh, North Carolina 27604, and its telephone number is (919) 716-7000. Although BancShares does not maintain a dedicated website, information regarding BancShares is available at FCB’s website, firstcitizens.com.www.firstcitizens.com. At December 31, 2002,2003, BancShares and its subsidiaries employed a full-time staff of 4,1664,223 and a part-time staff of 775742 for a total of 4,9414,965 employees.

BancShares’ principal assets are its investment in and receivables from its banking subsidiaries and its investment securities portfolio. Its primary sources of income are dividends from FCB and interest income on its investment securities portfolio. Certain legal restrictions exist regarding the ability of FCB and ASB to transfer funds to BancShares in the form of cash dividends or loans. For information regarding these restrictions, see Note Q of BancShares’ consolidated financial statements, contained in this report.

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

As a registered financial holding company,The business and operations of BancShares isand its subsidiary banks are subject to the jurisdiction of the Board of Governors of the Federal Reserve System.significant federal and state governmental regulation and supervision. BancShares also is registered as 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 andBanks. ASB is subject to regulations promulgateda federally-chartered thrift institution supervised by the Commissioner. The internal affairsOffice of BancShares, including the rights of its shareholders, are governed by Delaware law and by its Certificate of Incorporation

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and Bylaws. BancShares files periodic reportsThrift Supervision. FCB-NA operates under the Securities Exchange Act of 1934 and is subject to the jurisdiction of the Securities and Exchange Commission.

FCB is also regulated by the North Carolina Commissioner of Banks as well as the Federal Deposit Insurance Corporation. ASBa national charter, is regulated by the Office of Thrift Supervision. the Comptroller of the Currency and is also a member of the Federal Reserve System. Deposit obligations of FCB and ASB are insured by the FDIC.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Properties

Through its subsidiary financial institutions, as of December 31, 2002,2003, BancShares operated branch offices at 383374 locations in North Carolina, Virginia, West Virginia, Florida, Georgia, Texas, Arizona and Texas.California. BancShares owns many of the buildings and leases other facilities from third parties.

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

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

BancShares’ Class A and Class B common stock is traded in the over-the-counter market, and the Class A common stock is quoted on the Nasdaq National Market System under the symbol FCNCA. The Class B common stock is quoted on the OTC Bulletin Board. As of December 31, 2002,2003, there were 2,7342,633 holders of record of the Class A common stock, and 515488 holders of record of the Class B common stock.

The per share cash dividends paid by BancShares and the high and low sales prices for each quarterly period during 20022003 and 20012002 are set forth in Table 18 under the caption ‘Per Share of Stock’ of this report. A cash dividend of 27.5 cents per share was declared by the Board of Directors on January 27, 2003,26, 2004, payable April 7, 2003,5, 2004, to holders of record as of March 17, 2003.15, 2004. Payment of dividends is made at the discretion of the Board of Directors and is contingent upon satisfactory earnings as well as projected future capital needs. Subject to the foregoing, it is currently management’s expectation that comparable cash dividends will continue to be paid in the future.

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

Controls and Procedures

In conjunction with this filing and their certifications of the disclosures contained within this filing,BancShares’ Chief Executive Officer Lewis R. Holding and Chief Financial Officer Kenneth A. Blackhave evaluated the effectiveness of Registrant’s disclosure controlsthe design and procedures. This review, which occurred within 90 daysoperation of this report’s filing, found theBancShares’ disclosure controls and procedures in accordance with Rule 13a-14 of the Securities Exchange Act of 1934 (Exchange Act). Based on their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, BancShares’ disclosure controls and procedures were effective in enabling it to record, process, summarize and report in a timely manner the information required to be effective.disclosed in reports it files under the Exchange Act.

There were no significant changesNo change in Registrant’sBancShares internal controlscontrol over financial reporting occurred during our fourth quarter of 2003 that has materially affected, or in other factors that could significantlyis reasonably likely to materially affect, these controls subsequent to the evaluation by Mr. Holding and Mr. Black.BancShares’ internal control over financial reporting.

Code of Ethics

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

Available Information

BancShares does not have its own separate Internet website. However, BancShares will provide a hyperlink from FCB’s Internet website (http://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 ishttp://www.sec.gov. BancShares will provide paper copies of its filings free of charge upon request to Kenneth A. Black, Chief Financial Officer.

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

INTRODUCTION

Management’s discussion and analysis of earnings and related financial data are presented to assist in understanding the financial condition and results of operations of First Citizens BancShares, Inc. (“BancShares”), for the years 2003, 2002 2001 and 2000.2001. BancShares is a financial holding company with two wholly-owned banking subsidiaries: First-Citizens Bank & Trust Company (FCB), a North Carolina-chartered bank, and Atlantic States Bank (ASB), a federally charteredfederally-chartered thrift institution. FCB operates branches in North Carolina, West Virginia, and Virginia. ASB operates branches in Georgia, Florida, Texas, Arizona, and Arizona.California.

This discussion and related financial data should be read in conjunction with our audited consolidated financial statements and related footnotes, presented on pages 3439 through 6067 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 2002,2003, the reclassifications have no effect on shareholders’ equity or net income as previously reported.

CRITICAL ACCOUNTING POLICIES

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

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

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

Management considers the established reserve adequate to absorb losses that relate to loans outstanding at December 31, 2002,2003, although future additions to the reserve may be necessary based on changes in economic conditions and other factors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the reserve for loan losses. Such agencies may require the recognition of additions to the reserve based on their judgments of information available to them at the time of their examination. If the financial condition of our borrowers were to deteriorate, resulting in an impairment of their ability to make payments, our estimates would be updated, and additional reserves may be required.

Other than temporary impairment of investment securities.    Our policy regarding other than temporary impairment of investment securities requires a continuous monitoring of our investment securities. Individual investment securities with a fair value that is less than 80% of original cost over a continuous period that spans two quarter-ends are evaluated for impairment during the subsequent quarter. That evaluation includes an assessment of both qualitative and quantitative measures to determine whether, in management’s judgment, the investment is likely to recover its original value. When that evaluation concludes that no such recovery is likely, the unrealized loss is reported as an other than temporary

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impairment, and the loss is recorded as a securities transaction on the consolidated statementsConsolidated Statements of income.Income. If our analysis suggests that a loss of asset value has occurred, management may elect to record an other than temporary impairment, even if the prescribed period of time has not lapsed.

Pension plan assumptions.    Although the assets and liabilities associated with the defined benefit pension plan maintained for our associates are not included within the audited consolidated financial statements, the selection of key assumptions used to determine the value of the pension obligation and the plan’s assets can have a direct impact on the pension expense that we report within employee benefit expense in our consolidated statement of income. The discount rate is used to determine the present value of the benefits that the pension plan will pay to the plan participants. The discount rate reflects the interest rate that could be obtained by a suitable investment used to fund the obligation being considered.pension obligation. Given the reductions in market interest rates during the past two years, the discount rate used to determine the pension obligation has declined from 7.25 percent at December 31, 2000, to 7.00 percent at December 31, 2001, and to 6.50 percent at December 31, 2002.2002 and to 6.00 percent at December 31, 2003. Assuming other variables remain unchanged, a reduction in the discount rate would resultresults in higher pension expense.

The estimated long-term rate of return on plan assets is used to calculate the value of plan assets over time. The long-term rate ofestimated return on plan assets was 8.50 percent8.50% at December 31, 2002,2000, 2001 and 2000.2002. Due to the significant reductions in actual plan returns from historical averages and in the projected investment ratesrate of returns on plan assets, the rate of return was adjusted to 8.00% for 2003.

Based on robust asset returns during 2003 and more optimistic market conditions and forecasts for future market performance, we have adjusted the long-term rate of return on plan assets to 8.008.50 percent and our pension expense for 2003 will be based on that assumption. If market rates and investment returns remain at current levels for a prolonged period of time, this rate would be further reduced.2004. Assuming other variables remain unchanged, a reduction inincreasing the long-term rate of return on plan assets would result in higherto 8.50 percent reduces pension expense.expense.

The assumed rate of future compensation increases allows the pension obligations, which are dependent on compensation over a period of time prior to retirement, to be estimated. This amount, which is reviewed annually based on actual experience and has remained at 4.75 percent for 2003, 2002 2001 and 2000.2001. Assuming other variables remain unchanged, a reduction in the rate of future compensation increases would result in lower pension expense.

Goodwill and Intangible Assets.  Goodwill, which represents the excess of the purchase price over the fair value of net assets acquired in a business combination, is tested at least annually for impairment. The impairment test is a two-step process that begins with an estimation of the fair value of each reporting unit and a comparison of that fair value to the carrying value of the reporting unit. If the initial evaluation suggests that an impairment of the asset value exists, the second step would determine the amount of the impairment, if any. If the test concludes that goodwill is impaired, the carrying value would be adjusted, and an impairment loss would be recorded.

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

SUMMARY

BancShares’ earnings and cash flows are primarily derived from the commercial banking activities conducted by its banking subsidiaries, which include commercial and consumer lending, deposit and cash management products, cardholder, merchant, trust and retail broker-dealer services as well as various other products and services typically associated with commercial banking. FCB and ASB gather interest-bearing and noninterest-bearing deposits from retail and commercial customers, although BancShares reported net incomeand its subsidiaries provide supplemental short-term and long-term funding through various non-deposit sources. The liquidity generated from these funding sources is primarily used to invest in interest-earning assets consisting of $92.8 million duringvarious types of loans, investment securities and overnight investments. In addition, funds are invested in bank premises as well as furniture and equipment used in the conduct of the subsidiaries’ commercial banking business.

Various external factors influence customer demand for our deposit and loan products. During 2003 and 2002, compared to $86.9 millioneconomic uncertainty in 2001 and $98.3 million in 2000. Net income for 2002 represented a 6.7 percent increase when compared to 2001. The $5.8 million increase was the result of higher net interest income and noninterest income, partially offset by increased levels of noninterest expense and provisionour primary market areas restrained customer demand for loan losses. products. However, during these same years, demand for long-term interest rate commitments on both new loans and refinance transactions has been strong. Additionally, during 2003 and 2002, the low level of interest rates affected the composition of our deposit base, as customers avoided investing in time deposits carrying low interest rates, and chose to allow liquidity to reside in transaction, savings and money market accounts.

The $11.4 million reduction in net income during 2001 from 2000 resulted from increasedgeneral strength of the economy also influences the quality and collectibility of the loan portfolio, as consumer bankruptcy rates and business debt service levels tend to reflect the general economic cycle. Utilizing various asset–liability management and asset quality tools, we strive to minimize the potentially adverse impact of noninterest expenseunforeseen and provision for loan losses, partially offsetunfavorable economic trends and to take advantage of favorable economic conditions where appropriate.

Financial institutions frequently focus their strategic and operating emphasis on maximizing profitability, and therefore gauge their relative success by improved levels of noninterest income and marginally higher net interest income. Net income per share for 2002 totaled $8.85, comparedreference to $8.27 and $9.32 for 2001 and 2000, respectively. Returnprofitability measures such as return on average assets was 0.78 percent during 2002, 0.77 percent during 2001or return on average shareholders’ equity. BancShares’ return on average assets and 0.98 percent during 2000. return on average equity have historically compared unfavorably to the returns of similarly sized financial holding companies. BancShares has historically placed significant emphasis upon asset quality, balance sheet liquidity and capital conservation, even when those priorities may be detrimental to current period earnings.

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

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

Detailed information regarding the components of net income over the five years from 19981999 through 20022003 is provided in the following discussion. Tablesaccompanying tables. Table 1 provides a summary of key financial data. Table 5 and 8 provideprovides information on net interest income. Table 13 provides details related to the provision for loan losses. Tables 15 and 16 present information regarding the components of noninterest income and expense, respectively.

An analysis of BancShares’ financial condition and growth can be made by examining the changes and trends in interest-earning assets and interest-bearing liabilities, and a discussion of these changes and trends follows. The information presented in Table 5 is useful in making such an analysis. Table 2 details acquisitions and divestitures during 2003, 2002 2001 and 2000.2001. All of the acquisitions were accounted for as purchases, with the results of operations included with BancShares’ consolidated statementsConsolidated Statements of incomeIncome since the respective acquisition dates.date.

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

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

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

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

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

Table 1

FINANCIAL SUMMARY AND SELECTED AVERAGE BALANCES AND RATIOS

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Table 2

ACQUISITIONS AND DIVESTITURES

INTEREST-EARNING ASSETS

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

Interest-earning assets averaged $10.55$10.93 billion during 2002,2003, an increase of $379.3 million or 3.6 percent over 2002 levels, compared to a $515.5 million or 5.1 percent increase in 2002 over 2001 levels, compared to a $1.05 billion or 11.7 percent increaselevels. Increase among interest-earning assets during 2003 resulted from loan growth, partially offset by declines in 2001 over 2000 levels.investment securities and overnight investments. Growth among interest-earning assets during 2002 and 2001primarily resulted from increasesgrowth in the investment securities portfolio andaccompanied by moderate loan growth.

Loans.    As of December 31, 2002,2003, gross loans outstanding were $7.62$8.33 billion, a 5.99.3 percent increase over the December 31, 20012002 balance of $7.20$7.62 billion. In general, loan demand during 2003 was sluggish in the markets serviced by FCB, but strong in ASB market areas. Loan balances for the last five years are presented in Table 3. The $424.1$706.3 million increase in loans during 20022003 was primarily due to growth ofamong commercial mortgage loans, revolving loans secured by real estate, commercial mortgage loans and consumer loans. The $305.9 million increase in revolving loans

Loans secured by real estate reflects robust demand for the retail EquityLine product. The $226.4totaled $5.87 billion at December 31, 2003, compared to $5.38 billion at December 31, 2002 and $5.05 billion at December 31, 2001. Loans secured by mortgages on commercial property totaled $2.35 billion at December 31, 2003, a $312.1 million or 15.3 percent increase from December 31, 2002. We continue strong growth in commercial mortgage loanslending, having reported growth rates of 12.5 percent in 2002 and 17.3 percent in 2001. The growth trend reflects the continuing demand for these loans among business customers. ConsumerAs a percentage of total loans, which totaled $1.15 billionloans secured by commercial mortgages represent 28.2 percent at December 31, 2003, compared to 26.7 percent and 25.1 percent at December 31, 2002 increased 7.4 percent during 2002,and 2001, respectively. A large percentage of our commercial mortgage portfolio is secured by owner-occupied facilities, rather than investment property. These loans are underwritten based primarily upon the resultcash flow from the operation of growth among credit card loans and indirect automobile loans originated through our sales finance unit.the business rather than the value of the real estate collateral.

Table 3

LOANS

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

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

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

Commercial and industrial loans totaled $926.3$929.0 million at December 31, 2002,2003, an increase of 1.20.3 percent over 2001,2002. Despite significant growth among other loan types, we view the sluggish commercial and industrial loan demand as evidence of sluggish loan demand for this type of financing among business customers, duecontinuing economic weakness in turn to generally weak economic conditions in BancSharesBancShares’ key market areas. areas and our desire to secure commercial loans with real estate.

Loans secured by 1-4 family residential mortgages declined $197.0$154.0 million or 14.6 percent during 2002, primarily the result of refinance activity among portfolio loans and the popularity of the Equityline product.2003. Since 2001,mid-2002, substantially all of the residential mortgage loans offeredoriginated by BancShares have been originated throughsold to correspondents, resulting in a gradual decline in 1-4 family residential mortgage loan balances as outstanding loans amortize or are refinanced.

During 2001,Our recent growth through ASB has allowed us to mitigate our historic exposure to geographic concentration in North Carolina and Virginia. Although these markets have endured economic instability in the $86.5 million increase in loans was primarily duepast, we are pleased with the diversification that we are beginning to realize by the growth of ASB. We are aware however that, in the absence of

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

We expect continued growth in commercial mortgage loans and revolving real estate loans secured by real estate. Commercial mortgage loans increased $238.4 millionin 2004, and revolving loans increased $172.4 million during 2001, both resulting from customer demand for these products. Partially offsetting these increases was a continuing reduction of $211.4 million in 1-4 family residential mortgage loans and $143.9 millionas existing loan balances amortize or are refinanced. Recent improvements in consumer loans. The reductiongeneral economic conditions in residential mortgage loans during 2001 resulted from sales and refinancingcertain of existing portfolio loans, while the reduction in consumer loans resulted primarily from reductions in automobile sales finance activity.

Despite the current low levelour markets may translate into higher levels of interest rates, which would normally stimulate loan demand andamong our business growth, current economic conditions and geopolitical risks contributecustomers during 2004, although consumer loan demand may continue to general uncertainty among business and retail customers. Management anticipates general weakness in demand for business loan products during 2003be constrained due to continued sluggish economic prospects. However, for both business and retail customers, we expect revolving loans secured by real estate will continue to grow during 2003. Management projects consumer loans will exhibit modest growth rates due to stable levels of automobile purchases.soft labor markets. All growth projections however, are subject to change as a result of further economic deterioration or improvement.improvement and other external factors.

Investment Securities.Securities.    At December 31, 2002,2003, and 2001,2002, the investment securities portfolio totaled $2.54$2.47 billion and $2.79$2.54 billion, respectively. Investment securities held to maturity totaled $2.42$1.23 billion and $2.66$2.42 billion, respectively, at December 31, 20022003 and 2001.2002. The $1.19 billion reduction in investment securities held to maturity during 2003 resulted from our decision to reinvest a portion of the proceeds from maturing held-to-maturity securities in securities classified as available-for-sale. This change enhances the overall liquidity and flexibility of the balance sheet. In each period, U.S. Treasury and government agency securities represented substantially the entire balance of the held-to-maturity portfolio. The average maturity of the held-to-maturity portfolio was eleven months at December 31, 2003, unchanged from December 31, 2002. Securities that are classified as held-to-maturity reflect BancShares’ ability and positive intent to hold those investments until maturity.

Investment securities available for sale at December 31, 2003 and 2002 totaled $1.24 billion and 2001 totaled $121.7 million, and $132.4 million, respectively. This $1.12 billion increase from December 31, 2002 to December 31, 2003 results from the decision to invest proceeds from maturing securities in available-for-sale securities. Available-for-sale securities are reported at their aggregate fair value. Investment securities available for sale include U.S. Treasury obligations, government agency securities and a small equity securities.securities portfolio. Unrealized gains and losses on available-for-sale securities are included as a component of shareholders’ equity, net of deferred taxes.

Investment securities averaged $2.59 billion during 2003, $2.61 billion during 2002 and $2.20 billion during 2001 and $1.62 billion during 2000.2001. As a percentage of average interest-earning assets, investment securities represented 23.6 percent, 24.7 percent and 21.9 percent during 2003, 2002 and 18.0 percent during 2002, 2001, and 2000, respectively. Table 4 presents detailed information relating to the investment securities portfolio.

Overnight Investments.Investments.    At December 31, 20022003 and 2001,2002, overnight investments, which include federal funds sold and interest-bearing deposits in other financial institutions, totaled $623.6$294.4 million and $501.9$623.6 million, respectively. These investments averaged $460.5 million, $563.3 million $735.7 million and $410.5$735.7 million, respectively, during 2003, 2002 2001 and 2000.2001. During 2002,2003, average overnight securities decreased $172.3$102.8 million or 23.418.3 percent due to growth in the result of interest-earning asset and liquidity management decisions.loan portfolio. The increasedecrease in 20012002 resulted from increaseddecisions to direct excess liquidity from deposit growth.into the investment securities portfolio.

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Table 4

INVESTMENT SECURITIES