10-K 1 fbspra1231201210-k.htm 10-K FBSPRA 12.31.2012 10-K


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission File Number – 0-20632
FIRST BANKS, INC.
(Exact name of registrant as specified in its charter)
MISSOURI
43-1175538
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

135 North Meramec, Clayton, Missouri 63105
(Address of principal executive offices) (Zip code)

(314) 854-4600
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
8.15% Cumulative Trust Preferred Securities
 
(issued by First Preferred Capital Trust IV and
New York Stock Exchange
guaranteed by First Banks, Inc.)
 
Securities registered pursuant to Section 12(g) of the Act: None
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 15(d) of the Act. [ X ] Yes [ ] No
     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 12 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 90 days. [ X ] Yes [ ] No
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [ X ] Yes [ ] No
     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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. [ X ]
     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” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
 Large accelerated filer [ ]
Accelerated filer [ ]
 Non-accelerated filer [ X ] (Do not check if a smaller reporting company)
Smaller reporting company [ ]
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  [   ] Yes [ X ] No
     None of the voting stock of the Company is held by non-affiliates. All of the voting stock of the Company is owned by various trusts, which were established by and for the benefit of Mr. James F. Dierberg, the Company’s Chairman of the Board of Directors, and members of his immediate family.
     At March 26, 2013, there were 23,661 shares of the registrant’s common stock outstanding. There is no public or private market for such common stock.



FIRST BANKS, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
 
 
Page
Part I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
 
Part II
Item 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
 
Part III
Item 10.
Directors, 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
 
Signatures



SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
AND FACTORS THAT COULD AFFECT FUTURE RESULTS

This Annual Report on Form 10-K contains certain forward-looking statements with respect to our financial condition, results of operations and business. Generally, forward-looking statements may be identified through the use of words such as: “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” or words of similar meaning or future or conditional terms such as: “will,” “would,” “should,” “could,” “may,” “likely,” “probably,” or “possibly.” Examples of forward-looking statements include, but are not limited to, estimates or projections with respect to our future financial condition and earnings, including the ability of the Company to remain profitable, and expected or anticipated revenues with respect to our results of operations and our business. These forward-looking statements are subject to certain risks and uncertainties, not all of which can be predicted or anticipated. Factors that may cause our actual results to differ materially from those contemplated by the forward-looking statements herein include market conditions as well as conditions affecting the banking industry generally and factors having a specific impact on us, including but not limited to, the following factors whose order is not indicative of likelihood or significance of impact:
•
Our ability to raise sufficient capital, absent the successful completion of all or a significant portion of our Capital Plan, as further discussed under “Item 1. Business —Recent Developments and Other Matters – Capital Plan;”
•
Our ability to maintain capital at levels necessary or desirable to support our operations;
•
The risks associated with implementing our business strategy, including our ability to preserve and access sufficient capital to continue to execute our strategy;
•
Regulatory actions that impact First Banks, Inc. and First Bank, including the regulatory agreements entered into among First Banks, Inc., First Bank, the Federal Reserve Bank of St. Louis and the State of Missouri Division of Finance, as further discussed under “Item 1. Business —Supervision and Regulation – Regulatory Agreements;”
•
Our ability to comply with the terms of an agreement with our regulators pursuant to which we have agreed to take certain corrective actions to improve our financial condition and results of operations;
•
The effects of and changes in trade and monetary and fiscal policies and laws, including, but not limited to, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the interest rate policies of the Federal Open Market Committee of the Federal Reserve Board of Governors and the U.S. Treasury’s Capital Purchase Program and Troubled Asset Relief Program authorized by the Emergency Economic Stabilization Act of 2008;
•
The risks associated with the high concentration of commercial real estate loans in our loan portfolio;
•
The decline in commercial and residential real estate sales volume and the likely potential for continuing lack of liquidity in the real estate markets;
•
The uncertainties in estimating the fair value of developed real estate and undeveloped land in light of declining demand for such assets and continuing lack of liquidity in the real estate markets;
•
Negative developments and disruptions in the credit and lending markets, including the impact of the ongoing credit crisis on our business and on the businesses of our customers as well as other banks and lending institutions with which we have commercial relationships;
•
The appropriateness of our allowance for loan losses to absorb the amount of actual losses inherent in our existing loan portfolio;
•
The accuracy of assumptions underlying the establishment of our allowance for loan losses and the estimation of values of collateral or cash flow projections and the potential resulting impact on the carrying value of various financial assets and liabilities;
•
Credit risks and risks from concentrations (by geographic area and by industry) within our loan portfolio including certain large individual loans;
•
Possible changes in the creditworthiness of customers and the possible impairment of collectability of loans;
•
Liquidity risks;
•
Inaccessibility of funding sources on the same or similar terms on which we have historically relied if we are unable to maintain sufficient capital ratios;
•
Implementation of the proposed Basel III regulatory capital reforms and changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act will include significant changes to bank capital, leverage and liquidity requirements, as further discussed under “Item 1. Business —Supervision and Regulation – Regulatory Capital Standards and Proposed Basel III Regulatory Capital Reforms;”
•
The ability to successfully acquire low cost deposits or alternative funding;
•
The effects of increased Federal Deposit Insurance Corporation deposit insurance assessments;
•
The effects of the expiration of unlimited Federal Deposit Insurance Corporations deposit insurance on noninterest-bearing transaction accounts over the $250,000 maximum available to depositors;
•
Changes in consumer spending, borrowings and savings habits;
•
The ability of First Bank to pay dividends to its parent holding company;



•
Our ability to pay cash dividends on our preferred stock and interest on our junior subordinated debentures;
•
High unemployment and the resulting impact on our customers’ savings rates and their ability to service debt obligations;
•
Possible changes in interest rates may increase our funding costs and reduce earning asset yields, thus reducing our margins;
•
The impact of possible future goodwill and other material impairment charges;
•
The ability to attract and retain senior management experienced in the banking and financial services industry;
•
Changes in the economic environment, competition, or other factors that may influence loan demand, deposit flows, the quality of our loan portfolio and loan and deposit pricing;
•
The impact on our financial condition of unknown and/or unforeseen liabilities arising from legal or administrative proceedings;
•
The threat of future terrorist activities, existing and potential wars and/or military actions related thereto, and domestic responses to terrorism or threats of terrorism;
•
Possible changes in general economic and business conditions in the United States in general and particularly in the communities and market segments we serve;
•
Volatility and disruption in national and international financial markets;
•
Government intervention in the U.S. financial system;
•
The impact of laws and regulations applicable to us and changes therein;
•
The impact of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and other accounting standard setters;
•
The impact of litigation generally and specifically arising out of our efforts to collect outstanding customer loans;
•
Competitive conditions in the markets in which we conduct our operations, including competition from banking and non-banking companies with substantially greater resources than us, some of which may offer and develop products and services not offered by us;
•
Our ability to control the composition of our loan portfolio without adversely affecting interest income and credit default risk;
•
The geographic dispersion of our offices;
•
The impact our hedging activities may have on our operating results;
•
The highly regulated environment in which we operate; and
•
Our ability to respond to changes in technology or an interruption or breach in security of our information systems.
Actual events or our actual future results may differ materially from any forward-looking statement due to these and other risks, uncertainties and significant factors. For a discussion of these and other risk factors that may impact these forward-looking statements, please refer to further discussion under “Item 1A. Risk Factors.” We wish to caution readers of this Annual Report on Form 10-K that the foregoing list of important factors may not be all-inclusive and we specifically decline to undertake any obligation to publicly revise any forward-looking statements that have been made to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. We do not have a duty to and will not update these forward-looking statements. Readers of this Annual Report on Form 10-K should therefore consider these risks and uncertainties in evaluating forward-looking statements and should not place undue reliance on these statements.



PART I
Item 1. Business
General. First Banks, Inc., or we, or the Company, is a registered bank holding company incorporated in Missouri in 1978 and headquartered in St. Louis, Missouri. We operate through our wholly owned subsidiary bank holding company, The San Francisco Company, or SFC, headquartered in St. Louis, Missouri, and SFC’s wholly owned subsidiary bank, First Bank, also headquartered in St. Louis, Missouri. A list of First Bank’s subsidiaries at December 31, 2012 is included as Exhibit 21.1 and incorporated herein by reference. First Bank’s subsidiaries are wholly owned, except FB Holdings, LLC, or FB Holdings, which is 53.23% owned by First Bank and 46.77% owned by First Capital America, Inc., or FCA, a corporation owned and operated by the Company’s Chairman of the Board and members of his immediate family, including Mr. Michael Dierberg, Vice Chairman of the Company, as further described in Note 20 to our consolidated financial statements. At December 31, 2012, we had assets of $6.51 billion, loans, net of net deferred loan fees, of $2.93 billion, deposits of $5.49 billion and stockholders’ equity of $300.0 million.
First Bank currently operates 144 branch offices in California, Florida, Illinois and Missouri, with 175 automated teller machines, or ATMs, across the four states. Through First Bank, we offer a broad range of financial services, including commercial and personal deposit products, commercial and consumer lending, and many other financial products and services. Commercial and personal deposit products include demand, savings, money market and time deposit accounts. In addition, we market combined basic services for various customer groups, including packaged accounts for more affluent customers, and sweep accounts, lock-box deposits and cash management products for commercial customers. Commercial lending includes commercial, financial and agricultural loans, real estate construction and development loans, commercial real estate loans and small business lending. Consumer lending includes residential real estate, home equity and installment lending. Other financial services include mortgage banking, debit cards, brokerage services, internet banking, remote deposit, ATMs, telephone banking, safe deposit boxes, and trust and private banking services. The revenues generated by First Bank and its subsidiaries consist primarily of interest income generated from our loan and investment security portfolios, service charges and fees generated from deposit products and services, and fees and commissions generated by our mortgage banking and trust and private banking business units. Our extensive line of products and services are offered to customers primarily within our geographic areas, which presently include eastern Missouri, southern Illinois, southern and northern California, and Florida, including Bradenton and the greater Tampa metropolitan area. Primary responsibility for managing our banking units rests with the officers and directors of each unit, but we centralize many of our overall corporate policies, procedures and administrative functions and provide centralized operational support functions for our subsidiaries. This practice allows us to achieve various operating efficiencies while allowing our banking units to focus on customer service.
Capital Structure.
Voting Stock. Various trusts, established by and administered by and for the benefit of Mr. James F. Dierberg and members of his immediate family, own all of our voting stock. Mr. Dierberg and his family, therefore, control our management and policies.
Trust Preferred Securities. We have formed numerous affiliated Delaware or Connecticut business or statutory trusts. These trusts operate as financing entities and were created for the sole purpose of issuing trust preferred securities, and the sole assets of the trusts are our junior subordinated debentures. In conjunction with the formation of our financing entities and their issuance of the trust preferred securities, we issued junior subordinated debentures to each of our financing entities in amounts equivalent to the respective trust preferred securities plus the amount of the common securities of the individual trusts. Prior to August 10, 2009, we paid interest on our junior subordinated debentures to our respective financing entities. In turn, our financing entities paid distributions to the holders of the trust preferred securities. The interest accrued and payable on our junior subordinated debentures is included in interest expense in our consolidated statements of operations. On August 10, 2009, we announced the deferral of our regularly scheduled interest payments on our outstanding junior subordinated debentures relating to our $345.0 million of trust preferred securities beginning with the regularly scheduled quarterly interest payments that would otherwise have been made in September and October 2009. The terms of the junior subordinated debentures and the related trust indentures allow the Company to defer such payments of interest for up to 20 consecutive quarterly periods without triggering a payment default or penalty. Such payment default or penalty would likely have a material adverse effect on the Company’s business, financial condition or results of operations. We have deferred such payments for 14 quarterly periods as of December 31, 2012. These deferred payments aggregated $47.7 million at December 31, 2012, as more fully described in Note 12 to our consolidated financial statements. The current 20 consecutive quarterly deferral period ends with the respective payment dates of the trust preferred securities in September and October 2014. The trust preferred securities issued by First Preferred Capital Trust IV are publicly held and traded on the New York Stock Exchange, or NYSE. The remaining trust preferred securities were issued in private placements. The trust preferred securities have no voting rights except in certain limited circumstances. See Note 12 to our consolidated financial statements for further discussion regarding our junior subordinated debentures relating to our trust preferred securities.
United States Department of the Treasury. On December 31, 2008, the Company entered into a Letter Agreement, including a Securities Purchase Agreement – Standard Terms, or Purchase Agreement, with the United States Department of the Treasury, or

1


the U.S. Treasury, pursuant to the Troubled Asset Relief Program’s Capital Purchase Program, or CPP. Under the terms of the Purchase Agreement, on December 31, 2008, we issued to the U.S. Treasury, 295,400 shares of senior preferred stock, or Class C Preferred Stock, and a warrant, or Warrant, to acquire up to 14,784.78478 shares of a separate series of senior preferred stock, or Class D Preferred Stock (at an exercise price of $1.00 per share), for an aggregate purchase price of $295.4 million, pursuant to the standard CPP terms and conditions for non-public companies as described and set forth in the Purchase Agreement and the Warrant. Pursuant to the terms of the Warrant, the U.S. Treasury exercised the Warrant on December 31, 2008 and paid the exercise price by having us withhold, from the shares of Class D Preferred Stock that would otherwise be delivered to the U.S. Treasury upon such exercise, shares of Class D Preferred Stock issuable upon exercise of the Warrant with an aggregate liquidation amount equal in value to the aggregate exercise price of $14,784.78. The senior preferred stock and the Warrant were issued in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. The Purchase Agreement contains limitations on certain actions of the Company, including, but not limited to, payment of dividends, redemptions and acquisitions of the Company’s equity securities, and compensation of senior executive officers. In addition, the U.S. Treasury has certain supervisory and oversight duties and responsibilities under the CPP and, pursuant to the terms of the Purchase Agreement, the U.S. Treasury is empowered to unilaterally amend any provision of the Purchase Agreement with the Company to the extent required to comply with any changes in applicable federal statutes. Furthermore, in the event the Company does not pay dividends on the preferred stock issued to the U.S. Treasury for an aggregate of six quarters, the U.S. Treasury has the right to elect two directors to our Board.
On August 10, 2009, we announced the deferral of the payment of cash dividends on our outstanding Class C Preferred Stock and Class D Preferred Stock beginning with the regularly scheduled quarterly dividend payments that would otherwise have been made in August 2009, however we continue to record the declaration of such dividends and the related additional cumulative dividends on our deferred dividend payments in our consolidated financial statements. We have deferred such payments for 14 quarterly periods as of December 31, 2012. These deferred payments aggregated $61.9 million at December 31, 2012, as more fully described in Note 13 to our consolidated financial statements. On July 13, 2011, the U.S. Treasury elected two members to our Board of Directors as a result of our deferral of dividends to the U.S. Treasury for six quarters.
See Note 13 to our consolidated financial statements for further discussion regarding our Class C Preferred Stock and Class D Preferred Stock.
Recent Developments and Other Matters.
Discontinued Operations. On November 21, 2012, we entered into a Branch Purchase and Assumption Agreement that provides for the sale of certain assets and the transfer of certain liabilities associated with eight of our retail branches located in Pinellas County, Florida to HomeBanc National Association (HomeBanc), headquartered in Lake Mary, Florida. Under the terms of the agreement, HomeBanc is to assume approximately $133.4 million of deposits, purchase the premises and equipment and assume the leases associated with these eight retail branches. The transaction, which is subject to certain closing conditions, is expected to be completed during the second quarter of 2013.
We intend to close our two retail branches in Hillsborough County and our single retail branch located in Pasco County, Florida. The closure of these three Northern Florida retail branches is also expected to be completed during the second quarter of 2013. The eight branches being sold and the three branches being closed are collectively defined as the Northern Florida Region. The assets and liabilities associated with the Northern Florida Region are reflected in assets and liabilities of discontinued operations in the consolidated balance sheets as of December 31, 2012 and 2011.
We intend to continue to hold and operate our remaining eight retail branches in Manatee County’s communities of Bradenton, Palmetto and Longboat Key, Florida. These eight branches were previously reported as discontinued operations but were reclassified to continuing operations during the fourth quarter of 2012. The related assets and liabilities associated with these eight retail branches were reclassified from assets and liabilities of discontinued operations to continuing operations in the consolidated balance sheets as of December 31, 2012 and 2011, as further discussed in Note 1 and Note 2 to our consolidated financial statements.
We have applied discontinued operations accounting in accordance with Accounting Standards Codification™, or ASC, Topic 205-20, “Presentation of Financial Statements – Discontinued Operations,” to the assets and liabilities associated with our Northern Florida Region as of December 31, 2012 and 2011 and to the operations of our Northern Florida Region, our 14 Northern Illinois retail branches, or Northern Illinois Region, our 24 Chicago retail branches, or Chicago Region, and our 19 Texas retail branches, or Texas Region, in addition to the operations of WIUS, Inc., and its wholly owned subsidiary, WIUS of California, Inc., collectively WIUS, Missouri Valley Partners, Inc., or MVP, and Adrian N. Baker & Company, or ANB, for the years ended December 31, 2012, 2011, 2010, 2009 and 2008, as applicable. All financial information in this Annual Report on Form 10-K is reported on a continuing operations basis, unless otherwise noted. See Note 2 to our consolidated financial statements for further discussion regarding discontinued operations.

2


Capital Plan. We have been working since the beginning of 2008 to strengthen our capital ratios and improve our financial performance. Additionally, on August 10, 2009, we announced the adoption of our Capital Optimization Plan, or Capital Plan, designed to improve our capital ratios and financial performance through certain divestiture activities, asset reductions and expense reductions. We adopted our Capital Plan in order to, among other things, preserve our regulatory capital. A summary of the primary initiatives completed as of December 31, 2012 is shown in the table below. See note 2 to our consolidated financial statements for a discussion of initiatives associated with our Capital Plan that were completed, or are in the process of completion, during the years ended December 31, 2012, 2011, 2010 and 2009.
 
Gain (Loss)
on Sale
 
Decrease in
Intangible
Assets
 
Decrease in
Risk-Weighted
Assets
 
Total Risk-
Based Capital
Benefit (1)
 
(dollars expressed in thousands)
Reduction in Other Risk-Weighted Assets
$
—

 
—

 
287,700

 
25,200

Total 2012 Capital Initiatives
$
—

 
—

 
287,700

 
25,200

 
 
 
 
 
 
 
 
Sale of Remaining Northern Illinois Region
$
425

 
1,558

 
33,800

 
4,900

Sale of Edwardsville Branch
263

 
500

 
1,400

 
900

Reduction in Other Risk-Weighted Assets
—

 
—

 
877,900

 
76,800

Total 2011 Capital Initiatives
$
688

 
2,058

 
913,100

 
82,600

 
 
 
 
 
 
 
 
Partial Sale of Northern Illinois Region
$
6,355

 
9,683

 
141,800

 
28,500

Sale of Texas Region
4,984

 
19,962

 
116,300

 
35,100

Sale of MVP
(156
)
 
—

 
800

 
(100
)
Sale of Chicago Region
8,414

 
26,273

 
342,600

 
64,700

Sale of Lawrenceville Branch
168

 
1,000

 
11,400

 
2,200

Reduction in Other Risk-Weighted Assets
—

 
—

 
2,111,400

 
184,700

Total 2010 Capital Initiatives
$
19,765

 
56,918

 
2,724,300

 
315,100

 
 
 
 
 
 
 
 
Sale of WIUS loans
$
(13,077
)
 
19,982

 
146,700

 
19,700

Sale of restaurant franchise loans
(1,149
)
 
—

 
64,400

 
4,500

Sale of asset-based lending loans
(6,147
)
 
—

 
119,300

 
4,300

Sale of Springfield Branch
309

 
1,000

 
900

 
1,400

Sale of ANB
120

 
13,013

 
1,300

 
13,200

Reduction in Other Risk-Weighted Assets
—

 
—

 
1,580,400

 
138,300

Total 2009 Capital Initiatives
$
(19,944
)
 
33,995

 
1,913,000

 
181,400

 
 
 
 
 
 
 
 
Total Completed Capital Initiatives
$
509

 
92,971

 
5,838,100

 
604,300

 
(1)
Calculated as the sum of the gain (loss) on sale plus the reduction in intangible assets plus 8.75% of the reduction in risk-weighted assets.
In addition to the action items identified above with respect to our Capital Plan, we are also focused on the following actions which, if consummated, would further improve our regulatory capital ratios and/or result in a reduction of our risk-weighted assets:
•
Successful implementation of the action items contained within our Profit Improvement Plan, as further discussed below;
•
Reduction in the overall level of our nonperforming assets and potential problem loans;
•
Sale, merger or closure of individual branches or selected branch groupings; and
•
Exploration of possible capital planning strategies to increase the overall level of Tier 1 regulatory capital at our holding company.
We believe the successful completion of our Capital Plan would substantially improve our capital position. However, no assurance can be made that we will be able to successfully complete all, or any portion, of our Capital Plan, or that our Capital Plan will not be materially modified in the future. Our decision to implement the Capital Plan reflects the adverse effect that the severe downturn in the commercial and residential real estate markets has had on our financial condition and results of operations. If we are not able to successfully complete substantially all of our Capital Plan, our business, financial condition, including regulatory capital ratios, and results of operations may be materially and adversely affected and our ability to withstand continued adverse economic uncertainty could be threatened.
Strategy. Our strategy emphasizes profitable growth within our market areas, aggressive management of asset quality and liquidity risks, and preservation and enhancement of regulatory capital. We have developed several plans around these actions, including the previously discussed Capital Plan, a Profit Improvement Plan, a Liquidity Plan and an Asset Quality Improvement Plan.
Our Profit Improvement Plan contains several action items regarding revenue enhancement and continued reduction of noninterest expenses including the following:
•
Accelerating the reduction of special mention, substandard and nonaccrual loans and other real estate to reduce future provisions for loan losses, increase our net interest income and reduce noninterest expenses associated with these assets,

3


including legal fees, other real estate write-downs and other real estate expenses related to property preservation, taxes, insurance and other items;
•
Developing new loan growth strategies, primarily within our commercial and industrial, commercial real estate and residential mortgage segments;
•
Re-pricing our deposits to current market interest rates while maintaining appropriate deposit portfolio diversification;
•
Utilizing low-yielding short-term investments to complete our divestitures associated with our Capital Plan, and increase our investment securities portfolio;
•
Pursuing opportunities to generate noninterest income through sales of other real estate properties, branch offices and other assets;
•
Increasing the volume of loans sold in the secondary market in our mortgage division through an expanded sales force and enhanced marketing initiatives; and
•
Evaluating opportunities to reduce noninterest expenses as a result of our smaller asset base and lower deposit volumes.
Our Liquidity Plan includes the following actions:
•
Maintaining and continuing to generate core deposits, including noninterest-bearing demand, interest-checking, money market and savings deposits;
•
Increasing our investment securities portfolio and maintaining appropriate levels of unpledged investment securities; and
•
Continuing to maximize potential borrowing relationships with the Federal Home Loan Bank, or FHLB, and the Federal Reserve Bank of St. Louis, or FRB, in the event utilization of these additional alternative funding sources becomes necessary in the future.
Our Asset Quality Improvement Plan includes the following actions intended to reduce the level of our nonperforming assets and loan charge-offs:
•
Developing written action plans for all credit relationships over $3.0 million with approval by the Regional President and Regional Credit Officer;
•
Actively pursuing troubled debt restructurings to position credits to return to performing status with sustained operating performance;
•
Eliminating or significantly reducing the potential exposure to our largest nonperforming credit relationships;
•
Pursuing opportunities to generate significant recoveries on previously charged-off loans;
•
Modifying one-to-four-family residential real estate loans under the Home Affordable Modification Program, or HAMP, where deemed economically advantageous to our borrowers and us;
•
Assessing our commercial real estate portfolio for early risk recognition and identification of potential areas for deteriorating commercial real estate loans, with increased emphasis on non-owner occupied loans;
•
Transferring certain nonperforming and potential problem credits to our special asset groups for further review, evaluation and development of appropriate strategies for exiting these relationships or significantly reducing our potential exposure; and
•
Further developing additional reporting mechanisms regarding asset quality related matters to assist management in further evaluating and assessing ongoing performance measurements and trends.
We believe the successful completion of the various components of these plans would substantially improve our financial performance and regulatory capital ratios. If we are not able to successfully complete a substantial portion of the action items contained within these plans, our business, financial condition, including our regulatory capital ratios, and results of operations may be materially and adversely affected and our ability to withstand continued adverse economic uncertainty could be threatened.
Lending Activities. As further discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Loans and Allowance for Loan Losses,” our business development efforts have historically been focused on the origination of the following general loan types: commercial, financial and agricultural loans; real estate construction and land development loans; commercial real estate mortgage loans and residential real estate mortgage loans. Our lending strategy emphasizes quality and diversification. Throughout our organization, we employ a common credit underwriting policy. In addition to underwriting based on estimates and projection of financial strength, collateral values and future cash flows, most loans to borrowing entities other than individuals require the guarantee of the parent company or entity sponsor, or in the case of smaller entities, the personal guarantees of the principals.
Commercial, Financial and Agricultural. Our commercial, financial and agricultural loan portfolio was $610.3 million, or 21.3% of total loans held for portfolio, at December 31, 2012, compared to $725.1 million, or 22.3% of total loans held for portfolio, at December 31, 2011. During recent years, we have attempted to further diversify our loan portfolio by increasing our commercial, financial and agricultural lending opportunities. However, certain transactions associated with our Capital Plan during the last four years, including loan sale transactions and reclassifications of loans to discontinued operations, have reduced the percentage

4


of commercial, financial and agricultural loans as a percentage of total loans. The primary component of commercial, financial and agricultural loans is commercial loans, which are made based on the borrowers’ general credit strength and ability to generate cash flows for repayment from income sources. Most of these loans are made on a secured basis, generally involving the use of company equipment, inventory and/or accounts receivable, and, from time to time, real estate, as collateral. Regardless of collateral, substantial emphasis is placed on the borrowers’ ability to generate cash flow sufficient to operate the business and provide coverage of debt servicing requirements. Commercial loans are frequently renewable annually, although some terms may be as long as five years. These loans typically require the borrower to satisfy certain operating covenants appropriate for the specific business, such as profitability, debt service coverage and current asset and leverage ratios, which are generally reported and monitored on a quarterly basis and subject to more detailed annual reviews. Commercial loans are made to customers primarily located in First Bank’s geographic trade areas of California, Missouri and Illinois that are engaged in manufacturing, retailing, wholesaling and service businesses. This portfolio is not concentrated in large specific industry segments that are characterized by sufficient homogeneity that would result in significant concentrations of credit exposure. Rather, it is a highly diversified portfolio that encompasses many industry segments. Within both our real estate and commercial lending portfolios, we strive for the highest degree of diversity that is practicable. We also emphasize the development of other service relationships, particularly deposit accounts, with our commercial borrowers.
Real Estate Construction and Development. Our real estate construction and land development loan portfolio was $175.0 million, or 6.1% of total loans held for portfolio, at December 31, 2012, compared to $250.0 million, or 7.7% of total loans held for portfolio, at December 31, 2011. Real estate construction and land development loans include commitments for construction of both residential and commercial properties. Commercial real estate projects often require commitments for permanent financing from other lenders upon completion of the project and, more typically, may include a short-term amortizing component of the initial financing. Commitments for construction of multi-tenant commercial and retail projects generally require lease commitments from a substantial primary tenant or tenants prior to commencement of construction. We typically engage in multi-phase, multi-tenant projects, as opposed to large vertical projects, that allow us to complete the financing for the projects in phases and limit the number of tenant building starts based upon successful lease and/or sale of the tenant units. We finance some projects for borrowers whose home office is located within our trade area but the particular project may be outside our normal trade area. Although we generally do not engage in developing commercial and residential construction lending business outside of our trade area, certain loans acquired in acquisitions from time to time and certain other loans have been related to projects outside of our trade area. Residential real estate construction and development loans are made based on the cost of land acquisition and development, as well as the construction of the residential units. Although we finance the cost of display units and units held for sale, a substantial portion of the loans for individual residential units have purchase commitments prior to funding. Residential condominium projects are funded as the building construction progresses, but funding of unit finishing is generally based on firm sales contracts.
Commercial Real Estate. Our commercial real estate loan portfolio was $969.7 million, or 33.9% of total loans held for portfolio, at December 31, 2012, compared to $1.23 billion, or 37.7% of total loans held for portfolio, at December 31, 2011. Commercial real estate loans include loans for which the intended source of repayment is rental and other income from the real estate. This includes commercial real estate developed for lease to third parties as well as the owner’s occupancy. The underwriting of owner-occupied commercial real estate loans generally follows the procedures for commercial lending described above, except that the collateral is real estate, and the loan term may be longer. The primary emphasis in underwriting loans for which the source of repayment is the performance of the collateral is the projected cash flow from the real estate and its adequacy to cover the operating costs of the project and the debt service requirements. Secondary emphasis is placed on the appraised value of the real estate, with the requirement that the appraised liquidation value of the collateral must be adequate to repay the debt and related interest in the event the cash flow becomes insufficient to service the debt. Generally, underwriting terms require the loan principal not to exceed 80% of the appraised value of the collateral and the loan maturity not to exceed ten years. Commercial real estate loans are made for commercial office space, retail properties, industrial and warehouse facilities and recreational properties. We typically only finance commercial real estate or rental properties that have lease commitments for a majority of the rentable space.
Residential Real Estate Mortgage. Our one-to-four-family residential real estate mortgage loan portfolio was $986.8 million, or 34.4% of total loans held for portfolio, at December 31, 2012, compared to $902.4 million, or 27.7% of total loans held for portfolio, at December 31, 2011. Residential real estate mortgage loans are primarily loans secured by single-family, owner-occupied properties. These loans include both adjustable rate and fixed rate mortgage loans. We typically originate residential real estate mortgage loans for sale in the secondary mortgage market in the form of a mortgage-backed security or to various private third-party investors, although from time-to-time, we may purchase and/or retain certain originated residential mortgage loans, including home equity loans, in our loan portfolio as directed by management’s business strategies. Our residential real estate mortgage loans are generated through our branch office network as well as our mortgage division and are underwritten in accordance with conforming terms that allow the loans to be sold into the secondary market. We discontinued the origination of Alt A and Sub-prime mortgage loan products in 2007 and do not presently offer these loan products. Servicing rights may either be retained or released with respect to conventional, FHA and VA conforming fixed-rate and conventional adjustable rate residential mortgage loans.

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Market Areas. As of December 31, 2012, First Bank’s 146 banking facilities were located in California, Florida, Illinois and Missouri. First Bank presently operates in the St. Louis metropolitan area, in eastern Missouri and throughout southern Illinois. First Bank also operates in southern California, including San Diego and the greater Los Angeles metropolitan area, including Ventura County, Riverside County and Orange County; in Santa Barbara County; in northern California, including the greater San Francisco and Sacramento metropolitan areas; and in Florida, including Bradenton and the greater Tampa metropolitan area.
The following table lists the geographic market areas in which First Bank operates, total deposits, deposits as a percentage of total deposits and the number of locations as of December 31, 2012:
Geographic Area
Total Deposits
(in millions)
 
Deposits as a
Percentage of
Total Deposits
 
Number of
Locations
Southern California
$
1,606.6

 
28.4
%
 
40

Northern California
1,278.5

 
22.6

 
19

St. Louis, Missouri metropolitan area
1,265.2

 
22.4

 
34

Southern Illinois
802.4

 
14.2

 
22

Missouri (excluding the St. Louis metropolitan area)
376.5

 
6.7

 
12

Florida (1)
318.7

 
5.6

 
19

Other
0.6

 
0.1

 
—

Total Deposits
$
5,648.5

 
100.0
%
 
146

 
(1)
Includes deposits of approximately $155.7 million associated with the sale and closure of branches in our Northern Florida Region, which are expected to be completed in the second quarter of 2013. See Note 2 to our consolidated financial statements for further discussion of discontinued operations.
Competition and Branch Banking. The activities in which First Bank engages are highly competitive. Those activities and the geographic markets served primarily involve competition with other banks, some of which are affiliated with large regional or national holding companies, and other financial services companies. Financial institutions compete based upon interest rates offered on deposit accounts and other credit and service charges, the types of products and quality of services rendered, the convenience of branch facilities, interest rates charged on loans and, in the case of loans to large commercial borrowers, relative lending limits.
Our principal competitors include other commercial banks, savings banks, savings and loan associations, and finance companies, including trust companies, credit unions, mortgage companies, leasing companies, private issuers of debt obligations and suppliers of other investment alternatives, such as securities firms and financial holding companies. Many of our non-bank competitors are not subject to the same degree of regulation as that imposed on bank holding companies, federally insured banks and national or state chartered banks. As a result, such non-bank competitors have advantages over us in providing certain services. We also compete with major multi-bank holding companies, which are significantly larger than us and have greater access to capital and other resources.
Employees. We employed approximately 1,177 full-time equivalent employees at December 31, 2012, exclusive of discontinued operations. None of the employees are subject to a collective bargaining agreement. We consider our relationships with our employees to be good.
Supervision and Regulation.
General. Along with First Bank, we are extensively regulated by federal and state laws and regulations which are designed to protect depositors of First Bank and the safety and soundness of the U.S. banking system, not our debt holders or stockholders. To the extent this discussion refers to statutory or regulatory provisions, it is not intended to summarize all such provisions and is qualified in its entirety by reference to the relevant statutory and regulatory provisions. Changes in applicable laws, regulations or regulatory policies may have a material effect on our business and prospects. We are unable to predict the nature or extent of the effects on our business and earnings that new federal and state legislation or regulation may have. The enactment of the legislation described below has significantly affected the banking industry generally and is likely to have ongoing effects on First Bank and us in the future.
As a registered bank holding company under the Bank Holding Company Act of 1956, as amended, we are subject to regulation and supervision of the Board of Governors of the Federal Reserve System, or Federal Reserve. We file annual reports with the Federal Reserve and provide to the Federal Reserve additional information as it may require. Many of our subsidiaries are also subject to the laws and regulations of both the federal government and the various states in which they conduct business. As an originator of small business loans, we are also regulated by the U.S. Small Business Administration, or SBA.
Regulatory Agreements. On March 24, 2010, the Company, SFC and First Bank entered into a Written Agreement, or Agreement, with the FRB requiring the Company and First Bank to take certain steps intended to improve their overall financial condition. Pursuant to the Agreement, the Company prepared and filed with the FRB a number of specific plans designed to strengthen and/

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or address the following matters: (i) board oversight over the management and operations of the Company and First Bank; (ii) credit risk management practices; (iii) lending and credit administration policies and procedures; (iv) asset improvement; (v) capital; (vi) earnings and overall financial condition; and (vii) liquidity and funds management.
The Agreement requires, among other things, that the Company and First Bank obtain prior approval from the FRB in order to pay dividends. In addition, the Company must obtain prior approval from the FRB to: (i) take any other form of payment from First Bank representing a reduction in capital of First Bank; (ii) make any distributions of interest, principal or other sums on junior subordinated debentures or trust preferred securities; (iii) incur, increase or guarantee any debt; or (iv) purchase or redeem any shares of the Company’s stock. Pursuant to the terms of the Agreement, the Company and First Bank submitted a written plan to the FRB to maintain sufficient capital at the Company, on a consolidated basis, and at First Bank, on a standalone basis. In addition, the Agreement also provides that the Company and First Bank must notify the FRB if the regulatory capital ratios of either entity fall below those set forth in the capital plans that were accepted by the FRB, and specifically if First Bank falls below the criteria for being well capitalized under the regulatory framework for prompt corrective action. The Company must also notify the FRB before appointing any new directors or senior executive officers or changing the responsibilities of any senior executive officer position. The Agreement also requires the Company and First Bank to comply with certain restrictions regarding indemnification and severance payments. The Agreement is specifically enforceable by the FRB in court.
The Company and First Bank must furnish periodic progress reports to the FRB regarding compliance with the Agreement. As of the date of this filing, the Company and First Bank have provided progress reports and other reports, as required under the Agreement. The Company and First Bank have received, and may receive in the future, additional requests from the FRB regarding compliance with the Agreement, which may include, but are not limited to, updates and modifications to the Company’s Asset Quality Improvement, Profit Improvement and Capital Plans. Management has responded promptly to any such requests and intends to do so in the future. The Agreement will remain in effect until stayed, modified, terminated or suspended by the FRB.
Prior to entering into the Agreement on March 24, 2010, the Company and First Bank had entered into a memorandum of understanding and an informal agreement, respectively, with the FRB and the State of Missouri Division of Finance, or the MDOF. Each of the agreements were characterized by regulatory authorities as informal actions that were neither published nor made publicly available by the agencies and are used when circumstances warrant a milder form of action than a formal supervisory action, such as a written agreement or cease and desist order. The informal agreement with the MDOF is still in place and there have not been any modifications thereto since its inception in September 2008.
Under the terms of the prior memorandum of understanding with the FRB, the Company agreed, among other things, to provide certain information to the FRB including, but not limited to, financial performance updates, notice of plans to materially change its fundamental business and notice to issue trust preferred securities or raise additional equity capital. In addition, the Company agreed not to pay any dividends on its common or preferred stock or make any distributions of interest or other sums on its trust preferred securities without the prior approval of the FRB.
First Bank, under its informal agreement with the MDOF and the FRB, agreed to, among other things, prepare and submit plans and reports to the agencies regarding certain matters including, but not limited to, the performance of First Bank’s loan portfolio. In addition, First Bank agreed not to declare or pay any dividends or make certain other payments without the prior consent of the MDOF and the FRB and to maintain a Tier 1 capital to total assets ratio of no less than 7.00%. As further described in Note 14 to our consolidated financial statements, First Bank’s Tier 1 capital to total assets ratio was 9.20% at December 31, 2012.
While the Company and First Bank intend to take such actions as may be necessary to comply with the requirements of the Agreement with the FRB and informal agreement with the MDOF, there can be no assurance that the Company and First Bank will be able to comply fully with the requirements of the Agreement or that First Bank will be able to comply fully with the provisions of the informal agreement, that compliance with the Agreement and the informal agreement will not be more time consuming or more expensive than anticipated, that compliance with the Agreement and the informal agreement will enable the Company and First Bank to maintain profitable operations, or that efforts to comply with the Agreement and the informal agreement will not have adverse effects on the operations and financial condition of the Company or First Bank. If the Company or First Bank is unable to comply with the terms of the Agreement or the informal agreement, respectively, the Company and First Bank could become subject to various requirements limiting our ability to develop new business lines, mandating additional capital, and/or requiring the sale of certain assets and liabilities. Failure of the Company or First Bank to meet these conditions could lead to further enforcement action by the regulatory agencies. The terms of any such additional regulatory actions, orders or agreements could have a materially adverse effect on our business, financial condition or results of operations.
Bank Holding Company Regulation. The activities of bank holding companies are generally limited to the business of banking, managing or controlling banks, and other activities that the Federal Reserve has determined to be so closely related to banking or managing or controlling banks as to the proper incident thereto. In addition, under the Gramm-Leach-Bliley Act, or GLB Act, which was enacted in November 1999 and is further discussed below, a bank holding company, whose control depository institutions are “well-capitalized” and “well-managed” (as defined in Federal Banking Regulations), and which obtains “satisfactory”

7


Community Reinvestment Act (discussed briefly below) ratings, may declare itself to be a “financial holding company” and engage in a broader range of activities. As of this date, we are not a “financial holding company.”
We are also subject to capital requirements applied on a consolidated basis, which are substantially similar to those required of First Bank (briefly summarized below). The Bank Holding Company Act also requires a bank holding company to obtain approval from the Federal Reserve before:
•
Acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or controls a majority of such shares);
•
Acquiring all or substantially all of the assets of another bank or bank holding company; or
•
Merging or consolidating with another bank holding company.
The Federal Reserve will not approve any acquisition, merger or consolidation that would have a substantially anticompetitive result, unless the anti-competitive effects of the proposed transaction are clearly outweighed by a greater public interest in meeting the convenience and needs of the community to be served. The Federal Reserve also considers capital adequacy and other financial and managerial factors in reviewing acquisitions and mergers.
Safety and Soundness and Similar Regulations. We are subject to various regulations and regulatory policies directed at the financial soundness of First Bank. These include, but are not limited to: the Federal Reserve’s source of strength policy, which obligates a bank holding company such as us to provide financial and managerial strength to its subsidiary banks; restrictions on the nature and size of certain affiliate transactions between a bank holding company and its subsidiary depository institutions; and restrictions on extensions of credit by its subsidiary banks to executive officers, directors, principal stockholders and the related interests of such persons.
Regulatory Capital Standards and Proposed Basel III Regulatory Capital Reforms. The federal bank regulatory agencies have adopted substantially similar risk-based and leverage capital guidelines for banking organizations. Regulatory capital ratios are determined by classifying assets and specified off-balance sheet obligations and financial instruments into weighted categories, with higher levels of capital being required for categories deemed to represent greater risk. Federal Reserve policy also provides that banking organizations generally, and particularly those that are experiencing internal growth or actively making acquisitions, are expected to maintain capital positions that are substantially above the minimum supervisory levels, without significant reliance on intangible assets.
Under the risk-based capital standard, the minimum consolidated ratio of total capital to risk-adjusted assets required for bank holding companies is 8% and the minimum consolidated ratio of Tier I capital (as described below) to risk-adjusted assets required for bank holding companies is 4%. At least one-half of the total capital must be composed of common equity, retained earnings, qualifying noncumulative perpetual preferred stock, a limited amount of qualifying cumulative perpetual preferred stock and noncontrolling interests in the equity accounts of consolidated subsidiaries, less certain items such as goodwill and certain other intangible assets, which amount is referred to as “Tier I capital.” The remainder may consist of qualifying hybrid capital instruments, perpetual debt, mandatory convertible debt securities, a limited amount of subordinated debt, preferred stock that does not qualify as Tier I capital and a limited amount of loan and lease loss reserves, which amount, together with Tier I capital, is referred to as “Total Risk-Based Capital.”
In addition to the risk-based standard, we are subject to minimum requirements with respect to the ratio of our Tier I capital to our average assets less goodwill and certain other intangible assets, or the Leverage Ratio. Applicable requirements provide for a minimum Leverage Ratio of 3% for bank holding companies that have the highest supervisory rating, while all other bank holding companies must maintain a minimum Leverage Ratio of at least 4% to 5%. The Office of the Comptroller of the Currency and the FDIC have established capital requirements for banks under their respective jurisdictions that are consistent with those imposed by the Federal Reserve on bank holding companies.
As further described in Note 14 to our consolidated financial statements, First Bank was categorized as well capitalized at December 31, 2012 and 2011 under the prompt corrective action provisions of the regulatory capital standards. The Company did not meet the minimum regulatory capital standards established for bank holding companies by the Federal Reserve at December 31, 2012 and 2011.
The federal regulatory authorities’ risk-based capital guidelines are based upon the 1988 capital accord (Basel I) of the Basel Committee on Banking Supervision, or the Basel Committee. The Basel Committee is a committee of central banks and bank supervisors/regulators from the major industrialized countries that develops broad policy guidelines for use by each country’s supervisors in determining the supervisory policies and regulations to which they apply. Actions of the Basel Committee have no direct effect on banks in participating countries. In 2004, the Basel Committee published a new capital accord (Basel II) to replace Basel I. Basel II provides two approaches for setting capital standards for credit risk – an internal ratings-based approach tailored

8


to individual institutions’ circumstances and a standardized approach that bases risk weightings on external credit assessments to a much greater extent than permitted in existing risk-based capital guidelines. Basel II also sets capital requirements for operational risk and refines the existing capital requirements for market risk exposures. Basel II applies only to certain large or internationally active banking organizations, or “core banks,” defined as those with consolidated total assets of $250 billion or more or consolidated on-balance sheet foreign exposures of $10 billion or more and, accordingly, currently does not apply to the Company.
In 2009, the U.S. Treasury issued a policy statement, or the Treasury Policy Statement, entitled “Principles for Reforming the U.S. and International Regulatory Capital Framework for Banking Firms,” which contemplates changes to the existing regulatory capital regime involving substantial revisions to major parts of the Basel I and Basel II capital frameworks and affecting all regulated banking organizations and other systemically important institutions. The Treasury Policy Statement calls for, among other things, higher and stronger capital requirements for all banking firms, with changes to the regulatory capital framework to be phased in over a period of several years.
In December 2009, the Basel Committee issued a set of proposals, or the 2009 Capital Proposals, that would significantly revise the definitions of Tier 1 capital and Tier 2 capital. Among other things, the 2009 Capital Proposals would re-emphasize that common equity is the predominant component of Tier 1 capital. Concurrently with the release of the 2009 Capital Proposals, the Basel Committee also released a set of proposals related to liquidity risk exposure, or the 2009 Liquidity Proposals. The 2009 Liquidity Proposals include the implementation of (i) a liquidity coverage ratio, or LCR, designed to ensure that a bank maintains an adequate level of unencumbered, high-quality assets sufficient to meet the bank’s liquidity needs over a 30-day time horizon under an acute liquidity stress scenario and (ii) a net stable funding ratio, or NSFR, designed to promote more medium and long-term funding of the assets and activities of banks over a one-year time horizon.
On June 7, 2012, the Federal Reserve approved proposed rules that would substantially amend the regulatory risk-based capital rules applicable to the Company and First Bank. The proposed rules implement the Basel III regulatory capital reforms, or Basel III, and changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act. “Basel III” refers to two consultative documents released by the Basel Committee on Banking Supervision in December 2009, the rules text released in December 2010, and loss absorbency rules issued in January 2011, which include significant changes to bank capital, leverage and liquidity requirements. Although Basel III is intended to be implemented by institutions with greater than $50 billion in assets, its provisions are likely to be considered by United States banking regulators in developing new regulations applicable to other banks in the United States, including First Bank. The extended comment period for the proposed rules ended on October 22, 2012. Consequently, the proposed rules are currently pending finalization.
The proposed rules include new risk-based capital and leverage ratios, which would be phased in from 2013 to 2019, and would refine the definition of what constitutes “capital” for purposes of calculating those ratios. The proposed new minimum capital level requirements applicable to the Company and First Bank under the proposals would be: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions (unchanged from current rules). The proposed rules would also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital and would result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement would be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase by that amount each year until fully implemented in January 2019. An institution would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations would establish a maximum percentage of eligible retained income that could be utilized for such actions.
The proposed rules also implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses, as well as certain instruments that will no longer qualify as Tier 1 capital, some of which, such as trust preferred securities, would be phased out over time, as further described under “Item 7 —Management's Discussion and Analysis of Financial Condition and Results of Operations – Capital and Dividends.”
The federal bank regulatory agencies also proposed revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, including First Bank, if their capital levels begin to show signs of weakness. These revisions would take effect January 1, 2015. Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository institutions would be required to meet the following increased capital level requirements in order to qualify as “well capitalized:” (i) a new common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8% (increased from 6%); (iii) a total capital ratio of 10% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 5% (increased from 4%).
The proposed rules set forth certain changes for the calculation of risk-weighted assets, which we would be required to utilize beginning January 1, 2015. The standardized approach proposed rule utilizes an increased number of credit risk exposure categories and risk weights, and also addresses: (i) a proposed alternative standard of creditworthiness consistent with Section 939A of the

9


Dodd-Frank Act; (ii) revisions to recognition of credit risk mitigation; (iii) rules for risk weighting of equity exposures and past due loans; (iv) revised capital treatment for derivatives and repo-style transactions; and (v) disclosure requirements for top-tier banking organizations with $50 billion or more in total assets that are not subject to the “advance approach rules” that apply to banks with greater than $250 billion in consolidated assets.
The rules ultimately adopted and made applicable to the Company and First Bank may be different from the Basel III proposed rules as published. We continue to evaluate the potential impact that regulatory proposals may have on our liquidity and capital management strategies, including Basel III and those required under the Dodd-Frank Act, as they continue to progress through the final rule-making process.
Prompt Corrective Action. The FDIC Improvement Act, or FDICIA, requires the federal bank regulatory agencies to take prompt corrective action in respect to depository institutions that do not meet minimum capital requirements. A depository institution’s status under the prompt corrective action provisions depends upon how its capital levels compare to various relevant capital measures and other factors as established by regulation.
The federal regulatory agencies have adopted regulations establishing relevant capital measures and relevant capital levels. Under the regulations, a bank will be:
•
“Well capitalized” if it has a total risk-based capital ratio of 10% or greater, a Tier I capital ratio of 6% or greater and a Leverage Ratio of 5% or greater and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure;
•
“Adequately capitalized” if it has a total risk-based capital ratio of 8% or greater, a Tier I capital ratio of 4% or greater and a Leverage Ratio of 4% or greater (3% in certain circumstances);
•
“Undercapitalized” if it has a total risk-based capital ratio of less than 8%, a Tier I capital ratio of less than 4% or a Leverage Ratio of less than 4% (3% in certain circumstances);
•
“Significantly undercapitalized” if it has a total risk-based capital ratio of less than 6%, a Tier I capital ratio of less than 3% or a Leverage Ratio of less than 3%; and
•
“Critically undercapitalized” if its tangible equity is equal to or less than 2% of its average quarterly tangible assets.
Under certain circumstances, a depository institution’s primary federal regulatory agency may use its authority to lower the institution’s capital category. The banking agencies are permitted to establish individual minimum capital requirements exceeding the general requirements described above. See further discussion above under “—Regulatory Agreements.” Generally, failing to maintain the status of “well capitalized” or “adequately capitalized” subjects a bank to restrictions and limitations on its business that become progressively more severe as the capital levels decrease.
A bank is prohibited from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the bank would thereafter be “undercapitalized.” Limitations exist for “undercapitalized” depository institutions regarding, among other things, asset growth, acquisitions, branching, new lines of business, acceptance of brokered deposits and borrowings from the Federal Reserve System. These institutions are also required to submit a capital restoration plan that includes a guarantee from the institution’s holding company. “Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. The appointment of a receiver or conservator may be required for “critically undercapitalized” institutions.
Dividends. Our primary source of funds in the future is the dividends, if any, paid by First Bank. The ability of First Bank to pay dividends is limited by federal laws, by regulations promulgated by the bank regulatory agencies and by principles of prudent bank management. The dividend limitations are further described in Note 22 to our consolidated financial statements appearing elsewhere in this report. In addition, First Bank has agreed that it will not declare or pay any dividends or make certain other payments to us without the prior consent of the MDOF and the FRB, as previously discussed under “—Regulatory Agreements.”
Federal Deposit Insurance Reform. The FDIC maintains the Deposit Insurance Fund, or the DIF, which was created in 2006. The deposit accounts of First Bank are insured by the DIF to the maximum amount provided by law. This insurance is backed by the full faith and credit of the United States Government. As insurer, the FDIC is authorized to conduct examinations of and to require reporting by DIF-insured institutions. It also may prohibit any DIF-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the DIF. The FDIC also has the authority to take enforcement actions against insured institutions. Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged or is engaging in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or written agreement entered into with the FDIC. We do not know of any practice, condition or violation that might lead to termination of our deposit insurance.

10


The FDIC imposes assessments for deposit insurance on an insured institution on a quarterly basis. The Dodd-Frank Act (as defined and further described below) required the FDIC to establish rules setting insurance premium assessments based on an institution’s total assets minus its tangible equity instead of its deposits. These rules were finalized on February 7, 2011 and set base assessment rates for institutions in Risk Categories II, III and IV at annual rates of 14, 23 and 35 basis points, respectively. The base assessment rate for a Risk Category I institution was set at a range of five to nine basis points. These initial base assessment rates are adjusted to determine an institution’s final assessment rate based on its brokered deposits and unsecured debt. Total base assessment rates after adjustments range from 2.5 to nine basis points for Risk Category I, nine to 24 basis points for Risk Category II, 18 to 33 basis points for Risk Category III, and 30 to 45 basis points for Risk Category IV.
In addition, all institutions with deposits insured by the FDIC are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, a mixed-ownership government corporation established to recapitalize a predecessor to the DIF. These assessments will continue until the Financing Corporation bonds mature in 2019.
Pursuant to the Dodd-Frank Act, the FDIC has established 2.0% as the designated reserve ratio, or DRR, that is, the ratio of the DIF to insured deposits. The FDIC has adopted a plan under which it will meet the statutory minimum DRR of 1.35% by September 30, 2020, the deadline imposed by the Dodd-Frank Act.
In November 2010 and January 2011, the FDIC, as mandated by Section 343 of the Dodd-Frank Act, adopted rules providing for unlimited deposit insurance for traditional noninterest-bearing transaction accounts and IOLTA accounts for two years beginning on December 31, 2010. This coverage applied to all insured depository institutions, and there was no separate FDIC assessment for the insurance. This coverage expired on December 31, 2012.
Customer Protection. First Bank is also subject to consumer laws and regulations intended to protect consumers in transactions with depository institutions, as well as other laws or regulations affecting customers of financial institutions generally. These laws and regulations mandate various disclosure requirements and substantively regulate the manner in which financial institutions must deal with their customers. First Bank must comply with numerous regulations in this regard and is subject to periodic examinations with respect to its compliance with the requirements.
Community Reinvestment Act. The Community Reinvestment Act of 1977, or CRA, requires that, in connection with examinations of financial institutions within their jurisdiction, the federal banking regulators evaluate the record of the financial institutions in meeting the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those financial institutions. These factors are also considered in evaluating mergers, acquisitions and other applications to expand.
The Gramm-Leach-Bliley Act. The GLB Act, enacted in 1999, amended and repealed portions of the Glass-Steagall Act and other federal laws restricting the ability of bank holding companies, securities firms and insurance companies to affiliate with each other and to enter new lines of business. The GLB Act established a comprehensive framework to permit financial companies to expand their activities, including through such affiliations, and to modify the federal regulatory structure governing some financial services activities. The GLB Act also adopted consumer privacy safeguards requiring financial services providers to disclose their policies regarding the privacy of customer information to their customers and, subject to some exceptions, allowing customers to “opt out” of policies permitting such companies to disclose confidential financial information to non-affiliated third parties.
The Sarbanes-Oxley Act. The Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, imposes a myriad of corporate governance and accounting measures designed to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and to protect investors by improving the accuracy and reliability of disclosures under securities laws. All public companies that file periodic reports with the SEC are affected by Sarbanes-Oxley. Sarbanes-Oxley addresses, among other matters: (i) the creation of an independent accounting oversight board to oversee the audit of public companies and auditors who perform such audits; (ii) auditor independence provisions which restrict non-audit services that independent accountants may provide to their audit clients; (iii) additional corporate governance and responsibility measures which require the chief executive officer and chief financial officer to certify financial statements, to forfeit salary and bonuses in certain situations, and protect whistleblowers and informants; (iv) expansion of the audit committee’s authority and responsibility by requiring that the audit committee have direct control of the outside auditor, be able to hire and fire the auditor, and approve all non-audit services; (v) requirements that audit committee members be independent; (vi) disclosure of a code of ethics; and (vii) enhanced penalties for fraud and other violations. The provisions of Sarbanes-Oxley also require that management assess the effectiveness of internal control over financial reporting and that the independent auditor issue an attestation report on management’s report on internal control over financial reporting. As we are a non-accelerated filer, management’s report on internal control over financial reporting was not subject to attestation by the Company’s Independent Registered Public Accounting Firm as of December 31, 2012, as further discussed under “Item 9A — Controls and Procedures.”
The USA Patriot Act. The USA Patriot Act, or Patriot Act, is intended to strengthen the ability of U.S. law enforcement agencies and the intelligence communities to work cohesively to combat terrorism on a variety of fronts. The impact of the Patriot Act on

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financial institutions is significant and wide ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws and imposes various regulations, including standards for verifying client 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.
Reserve Requirements; Federal Reserve System and Federal Home Loan Bank System. First Bank is a member of the Federal Reserve System and the Federal Home Loan Bank System. As a member, First Bank is required to hold investments in those systems. First Bank was in compliance with these requirements at December 31, 2012, as further described in Note 1 to our consolidated financial statements.
The Federal Reserve requires all depository institutions to maintain reserves against their transaction accounts and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the Federal Reserve may be used to satisfy liquidity requirements.
First Bank has established a borrowing relationship with the FRB, which is primarily secured by commercial loans, and provides an additional liquidity facility that may be utilized for contingency purposes. Advances drawn on First Bank’s established borrowing relationship require prior approval of the FRB. First Bank also has established a borrowing relationship with the FHLB of Des Moines. The borrowing relationship is secured by one-to-four-family residential, multi-family residential and commercial real estate loans. First Bank requests advances and/or repays advances from the FHLB based on its current and future projected liquidity needs. Advances from the FHLB require prior approval of the FHLB. See further discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity Management.”
Monetary Policy and Economic Control. The commercial banking business is affected by legislation, regulatory policies and general economic conditions as well as the monetary policies of the Federal Reserve. The instruments of monetary policy available to the Federal Reserve include the following: (i) changes in the discount rate on member bank borrowings and the targeted federal funds rate; (ii) the availability of credit at the discount window; (iii) open market operations; (iv) the imposition of and changes in reserve requirements against deposits of domestic banks; (v) the imposition of and changes in reserve requirements against deposits and assets of foreign branches; and (vi) the imposition of and changes in reserve requirements against certain borrowings by banks and their affiliates.
These monetary policies are used in varying combinations to influence overall growth and distributions of bank loans, investments and deposits, and this use may affect interest rates charged on loans or paid on liabilities. The monetary policies of the Federal Reserve have had a significant effect on the operating results of commercial banks and are expected to do so in the future. Such policies are influenced by various factors, including inflation, unemployment, and short-term and long-term changes in the international trade balance and in the fiscal policies of the U.S. Government. We cannot predict the effect that changes in monetary policy or in the discount rate on member bank borrowings will have on our future business and earnings or those of First Bank.
United States Securities and Exchange Commission. We are also under the jurisdiction of the SEC and certain state securities commissions for matters relating to the offering and sale of our securities. We are subject to disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as administered by the SEC. The securities issued by one of our affiliated trusts are registered under the Securities Exchange Act of 1934 and are listed on the NYSE under the trading symbol “FBSPrA,” and therefore, we are subject to certain rules and regulations of the NYSE.
United States Department of the Treasury. As further described above under “Item 1 —Business – Capital Structure,” on December 31, 2008, we completed the sale to the U.S. Treasury of $295.4 million of newly-issued non-voting preferred stock as part of the CPP. The U.S. Treasury has certain supervisory and oversight duties and responsibilities under the CPP and, pursuant to the terms of the Purchase Agreement, the U.S. Treasury is empowered to unilaterally amend any provision of the Purchase Agreement with us to the extent required to comply with any changes in applicable federal statutes. In addition, as a result of our deferral of dividends to the U.S. Treasury for an aggregate of six quarters, the U.S. Treasury had the right to elect two directors to our Board. On July 13, 2011, the U.S. Treasury elected two members to our Board of Directors.
SIGTARP. The Special Inspector General for the Troubled Asset Relief Program, or SIGTARP, was established pursuant to Section 121 of the Emergency Economic Stabilization Act of 2008, or EESA, and has the duty, among other things, to conduct, supervise, and coordinate audits and investigations of the purchase, management and sale of assets by the U.S. Treasury under the CPP, including the shares of non-voting preferred shares purchased from us.
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, implements far-reaching changes across the financial regulatory landscape, including provisions that, among other things:
•
Provides that debit card interchange fees must be reasonable and proportional to the cost incurred by the issuer with respect to the transaction. This provision is known as the “Durbin Amendment.” In June 2011, the Board of Governors of the Federal

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Reserve System adopted regulations setting the maximum permissible interchange fee as the sum of 21 cents per transaction and 5 basis points multiplied by the value of the transaction, with an additional adjustment of up to one cent per transaction if the issuer implements certain fraud-prevention standards. Banks with total assets less than $10 billion, such as First Bank, are not presently impacted by the Durbin Amendment;
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After a three-year phase-in period which began on January 1, 2013, removes trust preferred securities as a permitted component of a holding company’s Tier 1 capital for holding companies with more than $15 billion of assets, and restricts new issuances of trust preferred securities from being included as Tier 1 capital for all holding companies;
•
Changes the basis for determining FDIC premiums from deposits to assets less tangible capital, eliminated the ceiling and the size of the DIF and increased the floor applicable to the size of the DIF;
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Creates a new Consumer Financial Protection Bureau that will have rulemaking authority for a wide range of consumer protection laws that would apply to all banks and would have broad powers to supervise and enforce consumer protection laws;
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Provides for new disclosure and other requirements relating to executive compensation and corporate governance;
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Changes standards for federal preemption of state laws related to federally chartered institutions and their subsidiaries;
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Provides mortgage reform provisions regarding a customer’s ability to repay, restricting variable-rate lending by requiring the ability to repay to be determined for variable-rate loans by using the maximum rate that will apply during the first five years of a variable-rate loan term, and making more loans subject to provisions for higher cost loans, new disclosures, and certain other revisions;
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Creates a financial stability oversight council that will recommend to the Federal Reserve increasingly strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity;
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Permanently increases the deposit insurance coverage to $250,000;
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Repeals the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts;
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Requires publicly-traded bank holding companies with assets of $10 billion or more to establish a risk committee responsible for enterprise-wide risk management practices;
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Increases the authority of the Federal Reserve in its regular examinations;
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Requires all bank holding companies to serve as a source of financial strength to their depository institution subsidiaries in the event such subsidiaries suffer from financial distress; and
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Restricts proprietary trading by banks, bank holding companies and others, and their acquisition and retention of ownership interests in and sponsorship of hedge funds and private equity funds.
Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall impact on the operations and financial condition of the Company. Provisions in the legislation that affect deposit insurance assessments and payment of interest on demand deposits could increase the cost associated with deposits. Provisions in the legislation that require revisions to the capital requirements of the Company and First Bank could require the Company and First Bank to seek additional sources of capital in the future.
CPP Related Compensation and Corporate Governance Requirements. The EESA was signed into law in October 2008 and authorized the U.S. Treasury to provide funds to be used to restore liquidity and stability to the U.S. financial system pursuant to the CPP. Under the authority of EESA, the U.S. Treasury instituted the TARP Capital Purchase Program to encourage U.S. financial institutions to build capital to increase the flow of financing to U.S. businesses and consumers and to support the U.S. economy. As noted above, on December 31, 2008, we participated in this program by issuing 295,400 shares of the Company’s Class C Preferred Stock to the U.S. Treasury for a purchase price of $295.4 million in cash and a Warrant to acquire up to 14,784.78478 shares of Class D Preferred Stock at an exercise price of $1.00 per share.
In addition to the restrictions on the Company’s ability to pay dividends on and repurchase its stock, participation in the CPP also includes certain requirements and restrictions regarding compensation that were expanded significantly by the American Recovery and Reinvestment Act of 2009, or ARRA, as implemented by U.S. Treasury’s Interim Final Rule on TARP Standards for Compensation and Corporate Governance. These requirements and restrictions include, among others, the following: (i) a prohibition on paying or accruing bonuses, retention awards and incentive compensation, other than qualifying long-term restricted stock or pursuant to certain preexisting employment contracts, to the Company’s five most highly-compensated employees; (ii) a general prohibition on providing severance benefits, or other benefits due to a change in control of the Company, to the Company’s senior executive officers (“SEOs”) and next five most highly compensated employees; (iii) a requirement to make subject to clawback any bonus, retention award, or incentive compensation paid to any of the SEOs and any of the next 20 most highly compensated employees if such compensation was based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria; (iv) a requirement to establish a policy on luxury or excessive expenditures; (v) a requirement to annually provide shareholders with a non-binding advisory “say on pay” vote on executive compensation; (vi) a prohibition on deducting more than $500,000 in annual compensation, including performance-based compensation, to the executives covered under Internal Revenue Code Section 162(m); (vii) a requirement that the compensation committee of the board of directors

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evaluate and review on a semi-annual basis the risks involved in employee compensation plans; and (viii) a prohibition on providing tax “gross-ups” to the Company’s SEOs and the next 20 most highly compensated employees. These requirements and restrictions will remain applicable to the Company until the U.S. Treasury ceases to own any shares of the Company’s Class C Preferred Stock and Class D Preferred Stock.
Incentive Compensation. In October 2009, the Federal Reserve issued a comprehensive proposal on incentive compensation policies, or the Incentive Compensation Proposal, intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The Incentive Compensation Proposal, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.
The scope and content of the U.S. banking regulators’ policies on executive compensation are continuing to develop and are likely to continue evolving in the near future. It cannot be determined at this time whether compliance with such policies will adversely affect our ability to hire, retain and motivate our key employees. See further discussion under Item 11 — Executive Compensation.
Other Future Legislation and Changes in Regulations. In addition to the specific proposals described above, from time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment of the Company in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. The Company cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on the financial condition or results of operations of the Company. A change in statutes, regulations or regulatory policies applicable to us or any of our subsidiaries could have a material effect on the Company’s business, financial condition or results of operations.

Item 1A. Risk Factors
Readers of our Annual Report on Form 10-K should consider the risk factors described below in conjunction with the other information included in this Annual Report on Form 10-K, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, our Selected Financial Data, our consolidated financial statements and the related notes thereto, and the financial and other data contained elsewhere in this report. See also “Special Note Regarding Forward-Looking Statements and Factors that Could Affect Future Results” appearing at the beginning of this report. The order of the risk factors described below is not indicative of likelihood or significance.
Our results of operations, financial condition and business may be materially, adversely affected if we fail to successfully implement our Capital Plan. Our Capital Plan contemplates a number of different strategies intended to reduce our costs, increase our regulatory capital ratios and enable us to withstand and better respond to continuing adverse market conditions. There can be no assurance, however, that we will be able to successfully implement each or every component of our Capital Plan in a timely manner or at all, and a number of events and conditions must occur in order for the plan to achieve its intended effect. If we are not able to successfully complete our Capital Plan, we could be adversely impacted and our ability to withstand continued adverse economic conditions could be threatened.
We could be compelled to seek additional capital in the future, but capital may not be available when it is needed or on acceptable terms. Our holding company, First Banks, did not meet the minimum regulatory capital standards established for bank holdings companies by the Federal Reserve at December 31, 2012. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. A number of financial institutions have raised considerable amounts of capital as a result of deterioration in their results of operations and financial condition arising from turmoil in the mortgage loan market, weak economic conditions, declines in real estate values and other factors, which may diminish our ability to raise additional capital. Our previously announced Capital Plan also contemplates raising additional capital in an effort to improve our capital position.
Our ability to raise additional capital, as part of our Capital Plan or otherwise, will depend on conditions in the capital markets, economic conditions and a number of other factors, many of which are outside of our control (including the response to any offers to current holders of the Company’s securities), and on our financial performance. Accordingly, we cannot be assured of our ability to raise additional capital, as part of our Capital Plan or otherwise, or on terms acceptable to us. If we are unable to raise additional capital, as part of our Capital Plan or otherwise, on terms satisfactory to us, our financial condition, results of operations, business

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prospects and our regulatory capital ratios and those of First Bank may be materially and adversely affected. If we are unable to raise additional capital, as part of our Capital Plan or otherwise, we may also be subjected to increased regulatory supervision, which could result in the imposition of additional regulatory restrictions on our operations and/or regulatory enforcement actions and could also potentially limit our future growth opportunities. These restrictions could negatively impact our ability to manage or expand our operations in a manner that we may deem beneficial to our stockholders and debt holders and could result in significant increases in our operating expenses or decreases in our revenues.
The proposed Basel III capital rules, if implemented as proposed, may adversely affect our capital adequacy and the costs of conducting business. The Federal Reserve approved proposed rules in June 2012 that would substantially amend the regulatory risk-based capital rules applicable to the Company and First Bank, including significant changes to bank capital, leverage and liquidity requirements, as further described in “Item 1 —Business – Supervision and Regulation – Regulatory Capital Standards and Proposed Basel III Regulatory Capital Reforms.” The proposed rules include new risk-based capital and leverage ratios, which would be phased in from 2013 to 2019, and would refine the definition of what constitutes “capital” for purposes of calculating those ratios. The proposed rules would also implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses, as well as certain instruments that will no longer qualify as Tier 1 capital, some of which, such as our $345.0 million of trust preferred securities, would be phased out over time, thereby eliminating trust preferred securities as a form of Tier 1 capital. We would be required to begin amortizing down the Tier 1 capital treatment of our trust preferred securities over 10 years beginning in 2013 with full phase-out of such instruments by January 1, 2022. These proposed capital rules could adversely affect our ability to maintain adequate capital levels based on the amount of our trust preferred securities currently outstanding and could require us to find alternate methods to raise capital, which may adversely impact our financial condition, results of operations and ability to grow.
The Company, SFC and First Bank entered into an Agreement with the Federal Reserve Bank of St. Louis. As further described under “—Supervision and Regulation – Regulatory Agreements,” the Company, SFC and First Bank entered into an Agreement with the FRB. Although we cannot predict the ramifications that would result from the failure to comply with each of the provisions of the Agreement, the failure to comply could have a material adverse effect on our business, financial condition, results of operations and cash flows. Furthermore, under the Agreement, the Company, SFC and First Bank must receive approval from the FRB prior to paying any dividends on capital stock or making any interest payments on the Company’s outstanding junior subordinated debentures, which represent the source of distributions to holders of trust preferred securities.
We are subject to extensive government regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not security holders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. The Dodd-Frank Act instituted major changes to the banking and financial institutions regulatory regimes in light of the ongoing performance of and government intervention in the financial services sector. Other changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on our business, financial condition and results of operations. For a further discussion of these matters, see “Item 1. Business —Supervision and Regulation.”
Changes in economic conditions could negatively and materially impact our business. Our business is directly affected by factors such as economic, political and market conditions, broad trends in industry and finance, legislative and regulatory changes, changes in government monetary and fiscal policies and inflation, all of which are beyond our control. A continued deterioration in economic conditions or lack of improvement in economic conditions may result in the following consequences, any of which could negatively and materially impact or continue to negatively and materially impact our business:
•
Loan delinquencies may increase or remain at elevated levels;
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Problem assets and foreclosures may increase or remain at elevated levels;
•
High unemployment may continue;
•
Demand for our products and services may decline;
•
Low cost or noninterest bearing deposits may decrease; and
•
Collateral pledged to us by our customers for loans made by us, especially residential and commercial real estate property, may decline or continue to decline in value, in turn reducing our customers’ borrowing power, and thereby reducing the value of the underlying assets and collateral associated with our existing loans.
Our emphasis on commercial real estate lending and real estate construction and development lending has increased our credit risk. A substantial portion of our loans are secured by commercial real estate. Commercial real estate and real estate construction

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and development loans were $969.7 million and $175.0 million, respectively, at December 31, 2012, representing 33.9% and 6.1%, respectively, of our loans held for portfolio. As discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Loans and Allowance for Loan Losses,” we have experienced high levels of nonperforming loans within our real estate construction and development portfolio and commercial real estate portfolio, reflective of declining market conditions surrounding land acquisition and development loans as a result of increased developer inventories, slower lot and home sales, and declining market values. Adverse developments affecting real estate in one or more of our markets could further increase the credit risk associated with our loan portfolio.
Weakness in the real estate market has adversely affected us and may continue to do so. As discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Loans and Allowance for Loan Losses,” we have experienced deterioration within our residential real estate mortgage loan portfolio beginning in early 2007, primarily in our Alt A and sub-prime loan portfolios. Our one-to-four-family residential real estate mortgage loans were $986.8 million at December 31, 2012, representing 34.4% of our loans held for portfolio. The effects of ongoing mortgage market challenges, as well as the ongoing correction in residential real estate market prices and reduced levels of home sales, could result in further price reductions in single family home values, adversely affecting the value of collateral securing mortgage loans held, mortgage loan originations and gains recognized on the sale of mortgage loans. In the event our allowance for loan losses is insufficient to cover such losses, our financial condition and results of operations may be adversely affected.
Our allowance for loan losses may not be sufficient to cover our actual loan losses, which could adversely affect our results of operations or financial condition. As a lender, we are exposed to the risk that our loan customers may not repay their loans according to their contractual terms and that the collateral securing the payment of these loans may be insufficient to assure repayment in full. We have experienced, and may continue to experience, significant loan losses, which could continue to have a material adverse effect on our results of operations. Management makes various assumptions and judgments about the collectability of our loan portfolio, which are based in part on:
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Current economic conditions and their estimated effects on specific borrowers;
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An evaluation of the existing relationships among loans, potential loan losses and the present level of the allowance for loan losses;
•
Management’s internal review of the loan portfolio, including existing compliance with established policies and procedures; and
•
Results of examinations of our loan portfolio by regulatory agencies.
We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, that represents management’s best estimate of probable incurred loan losses inherent in our loan portfolio. Additional loan losses will likely continue to occur in the future and may occur at a rate greater than we have experienced historically. In determining the amount of the allowance for loan losses, we rely on an analysis of our loan portfolio, experience, and evaluation of general economic, political and regulatory conditions, industry and geographic concentrations, and certain other factors. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and judgment and requires us to make significant estimates of current credit risk and future trends, all of which may undergo material changes. If our assumptions and analysis prove to be incorrect, our current allowance for loan losses may not be sufficient. In addition, adjustments may be necessary to allow for unexpected volatility or deterioration in the local or national economy or other factors such as changes in interest rates that may be beyond our control. In addition, federal and state regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs, based on judgments different than those of management. Any increase in our allowance for loan losses or loan charge-offs could have a material adverse effect on our results of operations.
Our nonperforming loans also impact the sufficiency of our allowance for loan losses. Nonperforming loans totaled $109.9 million as of December 31, 2012. In addition to those loans currently identified and classified as nonperforming loans, management is aware that other possible credit problems may exist with certain borrowers. These include loans that are migrating from grades with lower risks of loss probabilities into grades with higher risks of loss probabilities as performance and potential repayment issues surface. We monitor these loans and adjust the loss rates in our allowance for loan losses accordingly. The most severe of these loans are credits that are classified as substandard loans due to either less than satisfactory performance history, lack of borrower’s paying capacity, or potentially inadequate collateral. Substandard, or potential problem loans, totaled $116.1 million at December 31, 2012. We also make concessions to modify the contractual terms of certain loans when the borrower is experiencing financial difficulty. These modifications are generally made to either prevent a loan from being placed on nonaccrual status or to return a nonaccrual loan to performing status based on the expectations that the borrower can adequately perform in accordance with the modified terms. These loans are classified as performing troubled debt restructurings and totaled $128.9 million at December 31, 2012.

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We are subject to credit quality risks and our credit policies may not be sufficient to avoid losses. We are subject to the risk of losses resulting from the failure of borrowers, guarantors and related parties to pay interest and principal amounts on their loans. Our credit policies and credit underwriting and monitoring and collection procedures may not prevent losses, particularly during periods in which the local, regional or national economy suffers a general decline. If borrowers fail to repay their loans according to the contractual terms of the loans, our financial condition and results of operations will be adversely affected.
The overall level of our nonperforming assets and potential problem loans has elevated our noninterest expense levels. Our nonperforming assets were $201.9 million and $350.1 million at December 31, 2012 and 2011, respectively. We have incurred, and expect to incur for the foreseeable future, significant expenses associated with collection and foreclosure related matters on loans and taxes, insurance, property preservation and other collection matters on other real estate properties. In addition, we recorded write-downs on other real estate properties of $14.5 million, $16.9 million and $34.7 million for the years ended December 31, 2012, 2011 and 2010, respectively. If the overall level of our nonperforming assets does not decrease, these expense levels will continue to have a material adverse affect on our financial condition and results of operations.
Mortgage loan repurchase obligations or claims from third parties could result in material losses. We have sold significant amounts of residential mortgage loans directly to government-sponsored enterprises, Fannie Mae (FNMA) and Freddie Mac (FHLMC) (collectively, the GSEs), and to investors other than GSEs as whole loans. In connection with these sales, we make or have made various representations and warranties, breaches of which may result in a requirement that we repurchase the mortgage loans, or otherwise make whole or provide other remedies to the counterparties. We have recorded an estimated liability related to possible mortgage repurchase losses of $2.0 million as of December 31, 2012. Our estimated liability for possible loss is based on then-currently available information and is dependent on various factors, including our historical claims and settlement experience, projections of future defaults, and significant judgment and assumptions that are subject to change. As such, the future possible loss related to our representations and warranties may materially change in the future based on factors beyond our control or if actual experiences are different from our assumptions, including, without limitation, estimated repurchase rates, economic conditions, estimated home prices, consumer and counterparty behavior, and a variety of other judgmental factors. Adverse developments with respect to one or more of the assumptions underlying the estimated liability and the corresponding estimated range of possible loss could result in significant increases to future provisions and/or the estimated range of possible loss. If future representations and warranties losses occur in excess of our recorded liability and estimated range of possible loss, such losses could have a material adverse effect on our cash flows, financial condition and results of operations.
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition. Liquidity is essential to our business. An inability to raise funds through traditional deposits, brokered deposits, borrowings, the sale of securities or loans and other sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities and on terms which are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of the recent and ongoing turmoil faced by banking organizations and the continued deterioration and instability in credit markets.
We rely on commercial and retail deposits, advances from the FHLB of Des Moines and other borrowings to fund our operations. Although we have historically been able to replace maturing deposits and advances as necessary, we might not be able to replace such funds in the future if, among other things, our results of operations or financial condition or the results of operations or financial condition of the FHLB of Des Moines or overall market conditions were to change.
There can be no assurance these sources of funds will be adequate for our liquidity needs and we may be compelled to seek additional sources of financing in the future. Likewise, we may seek additional debt in the future to achieve our business objectives. There can be no assurance additional borrowings, if sought, would be available to us or, if available, would be on terms acceptable to us. The ability of banks and holding companies to raise capital or borrow in the debt markets has been negatively affected by recent and ongoing adverse economic trends. If additional financing sources are unavailable or not available on reasonable terms, our financial condition, results of operations and future prospects could be materially adversely affected.
We actively monitor the depository institutions that hold our cash operating account balances. It is possible that access to our cash equivalents will be impacted by adverse conditions in the financial markets. Our emphasis is primarily on safety of principal and we seek to diversify our cash balances among counterparties to minimize exposure to any one of these entities. The financial statements and other relevant data of the counterparties are routinely reviewed as part of our asset/liability management process. Balances in our accounts with financial institutions in the U.S. may exceed the FDIC insurance limits. While we monitor and adjust the balances in our accounts as appropriate, these balances could be impacted if the financial institutions fail and could be subject to other adverse conditions in the financial markets. At December 31, 2012, our cash and cash equivalents totaled $518.8 million, of which $347.8 million was maintained in our cash operating account at the FRB.

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First Banks, Inc. is a separate and distinct legal entity from its subsidiaries. The Company’s liquidity position is affected by dividends received from our subsidiaries, the amount of cash and other liquid assets on hand, payment of interest and dividends on debt and equity instruments issued by the Company (all of which are presently suspended or deferred), capital contributions the Company makes into its subsidiaries, any redemption of debt for cash issued by the Company, and proceeds we raise through the issuance of debt and/or equity instruments through the Company, if any. The Company’s future liquidity position may be adversely affected if a combination of the following events occurs:
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First Bank continues to be unable or prohibited by its regulators to pay a dividend to the Company sufficient to satisfy the Company’s operating cash flow needs;
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The Company is unable to pay the cumulative deferred interest payments on its outstanding junior subordinated debentures relating to its $345.0 million of trust preferred securities prior to September 2014, thus potentially triggering a payment default or penalty. Such payment default or penalty would have a material adverse effect on our business, financial condition or results of operations;
•
We deem it advisable, or are required by the FRB, to use cash maintained by the Company to support the capital position of First Bank;
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First Bank fails to remain “well-capitalized” and, accordingly, First Bank is required to pledge additional collateral against its borrowings and is unable to do so; or
•
The Company has difficulty raising cash through the future issuance of debt or equity instruments or by accessing additional sources of credit.
The Company’s financial flexibility may be severely constrained if we are unable to maintain our access to funding or if adequate financing on terms acceptable to us is not available in the marketplace. If we are required to rely more heavily on more expensive funding sources to support our business, our revenues may not increase proportionately to cover our costs. In this case, our operating margins could be materially adversely affected. A lack of liquidity and/or cost-effective funding alternatives could materially adversely affect our business, financial condition and results of operations.
We rely on dividends from our subsidiaries for most of our revenue. The Company is a separate and distinct legal entity from its subsidiaries. We receive substantially all of our revenue from dividends from our subsidiaries. These dividends are the principal source of funds to pay dividends on our preferred stock and interest and principal on our debt. Various federal and/or state laws and regulations limit the amount of dividends that First Bank and certain nonbank subsidiaries may pay to the Company. In the event First Bank is unable to pay dividends, we may not be able to service our debt (including our junior subordinated debentures issued in connection with the issuance of our outstanding trust preferred securities), pay obligations or pay dividends on our preferred stock, including the preferred stock we issued to the U.S. Treasury. The inability to receive dividends from First Bank could have a material adverse effect on our business, financial condition and results of operations. As further described under “Item 1. Business —Supervision and Regulation,” First Bank has agreed not to declare or pay any dividends without the prior consent of the MDOF and the FRB. First Bank did not make any dividend payments during the year ended December 31, 2012.
Our ability to repay our junior subordinated debentures, and our Class C Preferred Stock and Class D Preferred Stock issued under the CPP, could be hindered by the completed and pending divestiture initiatives associated with our Capital Plan. As further described under “Item 1. Recent Developments and Other Matters —Capital Plan,” we have completed, or are in the process of completing, a number of initiatives associated with our Capital Plan, including sales of branch offices, sales of certain loans, sales of nonbank subsidiaries and reductions in our risk-weighted assets. While these transactions were considered necessary by the Company to improve our regulatory capital ratios and preserve our regulatory capital in the short-term, these transactions have also decreased our sources of revenue and could hinder the probability and timing of future repayment of these obligations.
Concern of customers over deposit insurance and the expiration of unlimited FDIC deposit insurance on noninterest-bearing transaction accounts may increase our interest expense, cause a decrease in deposits and affect our liquidity position. With ongoing increased concerns about bank failures, customers increasingly are concerned about the extent to which their deposits are insured by the FDIC. On December 31, 2012, the unlimited deposit insurance for traditional noninterest-bearing transaction accounts and IOLTA accounts that began on December 31, 2010 expired. The reduction in FDIC insurance on these noninterest-bearing transaction accounts to the standard $250,000 maximum available to depositors under the FDIC’s general deposit insurance rules may cause a change in the mix of deposits from noninterest-bearing accounts to interest-bearing accounts, which would increase our cost of funds and negatively impact our results of operations. Customers may withdraw deposits in an effort to ensure that the amount they have on deposit with us is fully insured. Decreases in deposits may adversely affect our liquidity position, funding costs and results of operations.
The Company may be adversely affected by the soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose us to credit risk

18


in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to us. Any such losses could have a material adverse affect on our financial condition and results of operations.
Markets have experienced, and may continue to experience, periods of high volatility accompanied by reduced liquidity. Financial markets are susceptible to severe events evidenced by rapid depreciation in asset values accompanied by a reduction in asset liquidity. Under these extreme conditions, hedging and other risk management strategies may not be as effective at mitigating losses as they would be under more normal market conditions. Moreover, under these conditions, market participants are particularly exposed to trading strategies employed by many market participants simultaneously and on a large scale, such as crowded trades. Our risk management and monitoring processes seek to quantify and mitigate risk to more extreme market moves. Severe market events have historically been difficult to predict, however, and we could realize significant losses if unprecedented extreme market events were to occur, such as the recent conditions in the global financial markets and global economy.
Because of our participation in the CPP under the EESA, we are subject to several restrictions, including restrictions on our ability to declare or pay dividends and repurchase capital stock and trust preferred securities, as well as restrictions on compensation paid to our executive officers. Pursuant to the terms of the Purchase Agreement, our ability to declare or pay dividends on any of our shares is limited. Specifically, we are unable to make any distributions on our trust preferred securities or dividends on pari passu preferred shares if we are in arrears on the payment of dividends on our Class C Preferred Stock and Class D Preferred Stock. In addition, we are not permitted to increase dividends on our common shares above the amount of the last quarterly cash dividend per share declared without the U.S. Treasury’s approval unless all of the Class C Preferred Stock and Class D Preferred Stock has been redeemed or transferred by the U.S. Treasury to unaffiliated third parties. Further, our trust preferred securities and pari passu preferred shares may not be repurchased if we are in arrears on the payment of Class C Preferred Stock and Class D Preferred Stock dividends. The terms of the Purchase Agreement allow the U.S. Treasury to impose additional restrictions, including those on dividends and unilateral amendments required to comply with changes in applicable federal law. We are unable to predict the potential impact of any such amendments.
In addition, pursuant to the terms of the Purchase Agreement, we adopted the U.S. Treasury’s current standards for executive compensation and corporate governance for the period during which the U.S. Treasury holds our equity securities issued pursuant to the Purchase Agreement. These standards generally apply to our executive officers identified in the Summary Compensation Table, as shown under Item 11 —Executive Compensation, and the 20 next most highly compensated employees. The impact of the executive compensation standards may result in the loss of current members of our management team and could adversely affect our ability to compete for talent in the industry.
We expect the U.S. Treasury, our bank regulators and other agencies of the U.S. Government to continue to monitor our use of the CPP proceeds. Our failure to comply with the terms and conditions of the program or the Purchase Agreement may subject us to a regulatory enforcement action or legal proceedings brought by the U.S. Government.
The impact of a potential new shareholder is not known should the U.S. Treasury sell or transfer its shares of our Class C Preferred Stock and Class D Preferred Stock to a third party. As a result of our deferral of dividends to the U.S. Treasury for an aggregate of six quarters, the U.S. Treasury had the right to elect two directors to our Board and did so on July 13, 2011. If the U.S. Treasury sold or transferred its shares of our Class C Preferred Stock and Class D Preferred stock to a third party, the third party may remove the directors elected by the U.S. Treasury and elect two new directors. The impact of a potential new shareholder is not known.
Negative perception could adversely affect our business, impacting our financial condition, results of operations and cash flows. Risk of negative perception or publicity is inherent in any business. Although the Company takes steps to minimize reputation risk in dealing with customers and other constituencies, the Company is inherently exposed to the risk of negative perception by the public and our customers as a result of, but not limited to, our participation in the CPP under the EESA and as a result of actions imposed by our regulators. The risk of negative perception by the public and our customers may adversely affect the Company’s ability to maintain and attract customers and employees.
We could be required to write down goodwill. When we acquire a business, a portion of the purchase price of the acquisition is allocated to goodwill and other identifiable intangible assets. The amount of the purchase price that is allocated to goodwill and other intangible assets is determined by the excess of the purchase price over the net identifiable assets acquired. At December 31, 2012, our goodwill and other identifiable intangible assets were $125.3 million. Under current accounting standards, if we determine goodwill or intangible assets are impaired, we are required to write down the carrying value of these assets. We conduct a review at least annually to determine whether goodwill and other identifiable intangible assets are impaired. We completed such an impairment analysis during the fourth quarter of 2012 and determined our goodwill was not impaired, as further described in Note 6 to our consolidated financial statements. We cannot provide assurance, however, that we will not be required to record an impairment charge in the future. Any additional impairment charge would have an adverse effect on our financial condition and results of operations.

19


Our controls and procedures may fail or be circumvented. Our management regularly reviews and updates the Company’s internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurance that the objectives of the system are met. Any failure or circumvention of the controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, financial condition and results of operations.
The Company’s deposit insurance premiums could be substantially higher in the future, which could have a material adverse effect on our future earnings. The Dodd-Frank Act established 1.35% as the minimum DRR. It is possible that our insurance premiums will increase in the future as a result of the required minimum DRR and/or an increase in our risk assessment rating.
Significant legal actions could subject us to substantial liabilities. We are from time to time subject to claims related to our operations. These claims and legal actions, including supervisory actions by our regulators, could involve monetary claims and significant defense costs. As a result, we may be exposed to substantial liabilities, which could adversely affect our results of operations and financial condition.
The value of securities in the Company’s investment securities portfolio may be negatively affected by continued disruptions in securities markets. The market for some of the investment securities held in our investment portfolio has become extremely volatile over the past five years. Volatile market conditions may detrimentally affect the value of these securities, such as through reduced valuations due to the perception of heightened credit and liquidity risks. There can be no assurance that the declines in market value associated with these disruptions will not result in other-than-temporary impairment of these assets, which could lead to write-downs of the carrying value of these assets that could have a material adverse effect on our net income and capital levels.
Geographic distance between our operations increases operating costs and makes efforts to standardize operations more difficult. We operate banking offices in California, Florida, Illinois and Missouri. The noncontiguous nature of many of our geographic markets increases operating costs and makes it more difficult for us to standardize our business practices and procedures. As a result of our geographic dispersion, we face the following challenges, among others: (a) familiarizing personnel with our business environment, banking practices and customer requirements at geographically dispersed locations; (b) providing administrative support, including accounting, human resources, credit administration, loan servicing, internal audit and credit review at significant distances; and (c) establishing and monitoring compliance with our corporate policies and procedures in different areas.
Decreases in interest rates could have a negative impact on our profitability. Our earnings are principally dependent on our ability to generate net interest income. Net interest income is affected by many factors that are partly or completely beyond our control, including competition, general economic conditions and the policies of regulatory authorities, including the monetary policies of the Federal Reserve. Under our current interest rate risk profile, our net interest income has been and could be negatively affected by a further decline in interest rates, as further discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Interest Rate Risk Management.”
Our interest rate risk hedging activities may not effectively reduce volatility in earnings. To offset the risks associated with the effects of changes in market interest rates, we periodically enter into transactions designed to hedge our interest rate risk. The accounting for such hedging activities under U.S. generally accepted accounting principles, or GAAP, requires our hedging instruments to be recorded at fair value. The effect of certain of our hedging strategies may result in volatility in our quarterly and annual earnings as interest rates change or as the volatility in the underlying derivatives markets increases or decreases. The volatility in earnings is primarily a result of marking to market certain of our hedging instruments and/or modifying our overall hedge position, as further discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Interest Rate Risk Management.”
The financial services business is highly competitive, and we face competitive disadvantages because of our size and the nature of banking regulation. We encounter strong direct competition for deposits, loans and other financial services in all of our market areas. Our larger competitors, which have significantly greater resources, may have advantages over us in providing certain services. Our principal competitors include other commercial banks, savings banks, savings and loan associations, mutual funds, finance companies, trust companies, insurance companies, leasing companies, credit unions, mortgage companies, private issuers of debt obligations and suppliers of other investment alternatives, such as securities firms and financial holding companies. Many of our non-bank competitors are not subject to the same degree of regulation as that imposed on bank holding companies, federally insured banks and national or state chartered banks. As a result, such non-bank competitors may have advantages over us in providing certain services and may make it more difficult for us to achieve our objectives, such as increasing the size of our loan portfolio, attracting customers and implementing our profit and capital improvement plan initiatives.
The repeal of federal prohibitions on payment of interest on demand deposits could increase the Company’s interest expense. All federal prohibitions on the ability of financial institutions to pay interest on demand deposit accounts were repealed as part of the Dodd-Frank Act beginning on July 21, 2011. As a result, some financial institutions have commenced offering interest on demand

20


deposits to compete for customers. The Company continues to monitor interest rates but does not yet know what interest rates other institutions may offer as market interest rates begin to increase in the future. The Company’s interest expense will increase and its net interest margin will decrease if it begins offering interest on demand deposits to attract additional customers or maintain current customers, which could have a material adverse effect on the Company’s business, financial condition and results of operations.
Non-compliance with the USA Patriot Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions. The USA Patriot and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions. Although we have developed policies and procedures designed to assist in compliance with these laws and regulations, no assurance can be given that these policies and procedures will be effective in preventing violations of these laws and regulations.
We provide treasury management services to money services businesses, which include: check cashers, issuers/sellers of traveler’s checks, money orders and stored value cards, and money transmitters. Money services businesses pose a higher level of risk of compliance with regulatory guidance. We provide treasury management services to the check cashing industry, offering check clearing, monetary instrument, depository, and credit services. We also provide treasury management services to money transmitters. Financial institutions that open and maintain accounts for money services businesses are expected to apply the requirements of the USA Patriot Act and Bank Secrecy Act, as they do with all accountholders, on a risk-assessed basis. As with any category of accountholder, there will be money services businesses that pose little risk of money laundering or lack of compliance with other laws and regulations and those that pose a significant risk. Providing treasury management services to money services businesses represents a significant compliance and regulatory risk, and failure to comply with all statutory and regulatory requirements could result in fines or sanctions.
We may not be able to implement technological change as effectively as our competitors. The financial services industry has undergone in the past and continues to undergo rapid technological change related to delivery and availability of new technology-driven products and services and operating efficiencies that enable financial institutions to better serve customers and to reduce costs. In many instances technological improvements require significant capital expenditures, and many of our larger competitors have significantly greater resources to absorb such capital expenditures than we may have available. As such, we may be at a competitive disadvantage in our ability to retain existing customers and compete for new customers in the marketplace.
We are subject to operational and financial risks associated with our reliance on employees, systems, and counterparties and certain failures. Our business operates in many diverse markets and relies on the ability of our employees and systems to process a high number of transactions. Operational risk is the risk of loss resulting from our operations, including, but not limited to, the risk of fraud by employees or persons outside of our Company, unauthorized access to our computer systems, the execution of unauthorized transactions by our employees, errors relating to transaction processing and technology, breaches in internal controls and data security, compliance requirements, and business continuation and disaster recovery. This risk of loss also includes the potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory standards, adverse business decisions or their implementation, and customer attrition due to potential negative publicity. Third parties with whom we do business could also be sources of operational risk to us, including risks relating to breakdowns or failures of such parties’ own systems or employees. We could suffer significant regulatory action or consequences, damage to our reputation and financial loss in the event of a breakdown in the internal control system, improper operation of systems, improper employee actions, or if personal, confidential or proprietary customer or client information in our possession were to be mishandled or misused, including situations in which the information is erroneously provided to parties who are not permitted to have the information, either by fault of our systems, employees, or counterparties, or where the information is intercepted or otherwise inappropriately taken by third parties.
A breach in the security of our systems, or those of our third party vendors, could disrupt our business, result in the disclosure of confidential information, damage our reputation and create significant financial and legal exposure. Information security risks for financial institutions have generally increased in recent years in part because of the proliferation of new technologies, the use of the internet and telecommunications technologies to conduct financial transactions and the increased sophistication and activities of organized crime, hackers, terrorists, activists and other external parties. Although we devote significant resources to maintain and regularly upgrade our systems and processes that are designed to protect the security of our computer systems, software, networks and other technology assets, and the confidentiality, integrity and availability of information belonging to the Company and our customers, there is no assurance that our security measures will provide absolute security. In fact, many other financial services institutions and companies engaged in data processing have reported breaches in the security of their websites or other systems, some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage systems, often through the introduction of computer viruses or

21


malware, cyberattacks and other means. Several financial institutions have recently experienced attacks from technically sophisticated and well-resourced third parties that were intended to disrupt normal business activities by making internet banking systems inaccessible to customers for extended time periods. These “denial-of-service” attacks have not breached our data security systems, but require substantial resources to defend, and may affect customer satisfaction and behavior. Despite efforts to ensure the integrity of our systems, it is possible that we may not be able to anticipate or to implement effective preventive measures against all security breaches of these types, especially because the techniques used change frequently or are not recognized until launched, and because security attacks can originate from a wide variety of sources, including persons who are involved with organized crime or associated with external service providers or who may be linked to terrorist organizations or hostile foreign governments. Those parties may also attempt to fraudulently induce employees, customers or other users of our systems to disclose sensitive information in order to gain access to our data or that of our customers or clients. These risks may increase in the future as we continue to increase our mobile payments and other internet-based product offerings and expand our internal usage of web-based products and applications. If our security systems were penetrated or circumvented, it could cause serious negative consequences, including significant disruption of our operations, misappropriation of our confidential information or that of our customers, or damage to our computers or systems and those of our customers and counterparties, and could result in violations of applicable privacy and other laws, financial loss to us or to our customers, loss of confidence in our security measures, customer dissatisfaction, significant litigation exposure, and harm to our reputation, all of which could have a material adverse effect on our business, financial condition and results of operations. Cybersecurity and the continued development and enhancement of our internal controls, processes and practices designed to protect our systems, computers, software, data and networks from attack, damage or unauthorized access remain a key focus for us. While our policies and procedures are designed to prevent or limit the impact of any such failure, interruption or security breach, there can be no assurance that any such failure, interruption or security breach will not occur. While we closely monitor and evaluate the financial and operational risks associated with reliance on technology and information systems on an ongoing basis and maintain insurance coverage for such risks, any such failure, interruption or security breach could adversely affect our operations and financial condition, including a resulting loss in customer business, damage to our reputation, misappropriation of sensitive information, corruption of data, disruption of internet banking activities or other operations, and possible exposure to regulatory scrutiny and litigation, any of which could have a material adverse affect on our business, financial condition and results of operations.
Severe weather, natural disasters, acts of war or terrorism, and other external events could significantly impact our business. Severe weather, natural disasters, acts of war or terrorism, and other adverse external events could have a significant impact on our ability to conduct business. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue, and/or cause us to incur additional expenses. Changing climate conditions may increase the frequency of natural disasters such as hurricanes, windstorms and other severe weather conditions. Although we have established policies and procedures addressing these types of events, the occurrence of any such event could have a material adverse effect on our business, financial condition and results of operations.
The Company is subject to claims and litigation pertaining to fiduciary responsibility. From time to time, customers make claims and take legal action pertaining to the performance of our fiduciary responsibilities. Whether customer claims and legal action related to the performance of our fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to us, they may result in significant financial liability and/or adversely affect the market perception of us and our products and services as well as impact customer demand for our products and services. Any financial liability or reputation damage could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition, results of operations and cash flows.
The Company is exposed to risk of environmental liabilities with respect to properties to which we take title. In the course of our business, we may own or foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or we may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, as the owner or former owner of a contaminated site, we may be subject to common law or contractual claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we ever become subject to significant environmental liabilities, our business, financial condition, cash flows, liquidity and results of operations could be materially and adversely affected.
Item 1B. Unresolved Staff Comments
None.

22


Item 2. Properties
We own our office building, which houses our principal place of business, located at 135 North Meramec, Clayton, Missouri 63105. The property is in good condition and consists of approximately 60,353 square feet, of which approximately 8,810 square feet is currently leased to others. Of our other 145 offices and two operations and administrative facilities at December 31, 2012, 77 are located in buildings that we own and 70 are located in buildings that we lease.
We consider the properties at which we do business to be in good condition generally and suitable for our business conducted at each location. To the extent our properties or those acquired in connection with our acquisition of other entities provide space in excess of that effectively utilized in the operations of First Bank, we seek to lease or sublease any excess space to third parties. Additional information regarding the premises and equipment utilized by First Bank appears in Note 5 to our consolidated financial statements appearing elsewhere in this report.
Item 3. Legal Proceedings
The information required by this item is set forth in Item 8 under Note 24, Contingent Liabilities, to our consolidated financial statements appearing elsewhere in this report and is incorporated herein by reference.
In the ordinary course of business, we and our subsidiaries become involved in legal proceedings, including litigation arising out of our efforts to collect outstanding loans. It is not uncommon for collection efforts to lead to so-called “lender liability” suits in which borrowers may assert various claims against us. From time to time, we are party to other legal matters arising in the normal course of business. While some matters pending against us specify damages claimed by plaintiffs, others do not seek a specified amount of damages or are at very early stages of the legal process. We record a loss accrual for all legal matters for which we deem a loss is probable and can be reasonably estimated. We are not presently party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business, financial condition or results of operations.
The Company and First Bank entered into agreements with the FRB and MDOF, as further described under “Item 1. Business —Supervision and Regulation – Regulatory Agreements” and in Note 14 to our consolidated financial statements.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information. There is no established public trading market for our common stock. Various trusts, which were established by and are administered by and for the benefit of Mr. James F. Dierberg, our Chairman of the Board, and members of his immediate family, including Mr. Michael Dierberg, our Vice Chairman, own all of our voting stock.
Dividends. We have not paid any dividends on our Common Stock.
On August 10, 2009, we announced the suspension of the payment of cash dividends on our outstanding Class A Convertible Adjustable Rate Preferred Stock and our Class B Non-Convertible Adjustable Rate Preferred Stock beginning with the scheduled dividend payments that would have otherwise been made in September 2009. Prior to this time, we have paid minimal dividends on our Class A Convertible Adjustable Rate Preferred Stock and our Class B Non-Convertible Adjustable Rate Preferred Stock.
On August 10, 2009, we also announced the deferral of dividend payments on our Class C Preferred Stock and Class D Preferred Stock beginning with the regularly scheduled quarterly dividend payments that would otherwise have been made in August 2009, however, we continue to record the declaration of such dividends and the related additional cumulative dividends on our deferred dividend payments in our consolidated financial statements. We have deferred such payments for 14 quarterly periods as of December 31, 2012. In February 2009 and May 2009, we paid the regularly scheduled quarterly dividends on our Class C Preferred Stock and Class D Preferred Stock, which were pre-approved and authorized for payment by the FRB.
Our ability to pay dividends is limited by regulatory requirements and by the receipt of dividend payments from First Bank, which is also subject to regulatory requirements. First Bank has agreed not to declare or pay any dividends or make certain other payments to us without the prior consent of the MDOF and the FRB, as previously discussed under “Item 1. Business —Supervision and Regulation – Regulatory Agreements.” The dividend limitations are further described in Note 13 and Note 22 to our consolidated financial statements appearing elsewhere in this report.

23


Item 6. Selected Financial Data. The selected consolidated financial data set forth below are derived from our consolidated financial statements. This information is qualified by reference to our consolidated financial statements appearing elsewhere in this report. This information should be read in conjunction with such consolidated financial statements, the related notes thereto, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors.”
 
As of or For the Year Ended December 31, (1)
 
2012
 
2011
 
2010
 
2009
 
2008
 
(dollars expressed in thousands, except share and per share data)
Income Statement Data:
 
 
 
 
 
 
 
 
 
Interest income
$
202,565

 
233,296

 
312,468

 
399,925

 
535,971

Interest expense
30,088

 
44,539

 
76,020

 
114,092

 
176,425

Net interest income
172,477

 
188,757

 
236,448

 
285,833

 
359,546

Provision for loan losses
2,000

 
69,000

 
214,000

 
390,000

 
368,000

Net interest income (loss) after provision for loan losses
170,477

 
119,757

 
22,448

 
(104,167
)
 
(8,454
)
Noninterest income
66,206

 
62,194

 
78,492

 
70,763

 
62,715

Noninterest expense
205,318

 
230,246

 
298,639

 
350,475

 
252,700

Income (loss) from continuing operations before (benefit) provision for income taxes
31,365

 
(48,295
)
 
(197,699
)
 
(383,879
)
 
(198,439
)
(Benefit) provision for income taxes
(139
)
 
(10,654
)
 
4,114

 
2,393

 
18,323

Income (loss) from continuing operations, net of tax
31,504

 
(37,641
)
 
(201,813
)
 
(386,272
)
 
(216,762
)
(Loss) income from discontinued operations, net of tax
(5,523
)
 
(6,459
)
 
3,562

 
(62,664
)
 
(71,551
)
Net income (loss)
25,981

 
(44,100
)
 
(198,251
)
 
(448,936
)
 
(288,313
)
Net loss attributable to noncontrolling interest in subsidiary
(297
)
 
(2,950
)
 
(6,514
)
 
(21,315
)
 
(1,158
)
Net income (loss) attributable to First Banks, Inc.
$
26,278

 
(41,150
)
 
(191,737
)
 
(427,621
)
 
(287,155
)
 
 
 
 
 
 
 
 
 
 
Dividends Declared and Undeclared:
 
 
 
 
 
 
 
 
 
Preferred stock
$
18,886

 
17,908

 
16,980

 
16,536

 
786

Common stock
—

 
—

 
—

 
—

 
—

Ratio of total dividends declared to net income (loss)
71.87
%
 
(43.52
)%
 
(8.86
)%
 
(3.87
)%
 
(0.27
)%
 
 
 
 
 
 
 
 
 
 
Earnings (Loss) Per Share and Other Share Data:
 
 
 
 
 
 
 
 
 
Basic and diluted earnings (loss) per common share from continuing operations
$
395.64

 
(2,369.48
)
 
(9,114.61
)
 
(16,262.70
)
 
(9,145.45
)
Basic and diluted (loss) earnings per common share from discontinued operations
(233.42
)
 
(272.98
)
 
150.54

 
(2,648.40
)
 
(3,024.01
)
Weighted average shares of common stock outstanding
23,661

 
23,661

 
23,661

 
23,661

 
23,661

 
 
 
 
 
 
 
 
 
 
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Investment securities
$
2,675,280

 
2,470,704

 
1,483,659

 
530,879

 
564,416

Loans, net of net deferred loan fees
2,930,747

 
3,284,279

 
4,492,284

 
6,608,293

 
8,592,975

Assets of discontinued operations
6,706

 
6,913

 
43,532

 
518,056

 
—

Total assets
6,509,126

 
6,608,913

 
7,378,128

 
10,581,996

 
10,783,154

Total deposits
5,492,847

 
5,623,055

 
6,458,415

 
7,063,973

 
8,741,520

Other borrowings
26,025

 
51,170

 
31,761

 
767,494

 
575,133

Subordinated debentures
354,133

 
354,057

 
353,981

 
353,905

 
353,828

Liabilities of discontinued operations
155,711

 
174,737

 
94,184

 
1,730,264

 
—

Total stockholders’ equity
299,959

 
263,671

 
307,295

 
522,380

 
996,355

 
 
 
 
 
 
 
 
 
 
Earnings Ratios:
 
 
 
 
 
 
 
 
 
Return on average assets
0.40
%
 
(0.59
)%
 
(2.20
)%
 
(4.04
)%
 
(2.66
)%
Return on average stockholders’ equity
9.22

 
(13.71
)
 
(42.36
)
 
(51.82
)
 
(32.78
)
Net interest margin (2)
2.81

 
2.89

 
2.97

 
3.18

 
3.96

Noninterest expense to average assets
3.12

 
3.29

 
3.43

 
3.31

 
2.34

Tangible noninterest expense to average assets (3)
3.12

 
3.25

 
3.39

 
2.56

 
2.29

Efficiency ratio (4)
86.02

 
91.75

 
94.82

 
98.28

 
59.84

Tangible efficiency ratio (4)
86.02

 
90.54

 
93.78

 
76.03

 
58.49

 
 
 
 
 
 
 
 
 
 
Asset Quality Ratios:
 
 
 
 
 
 
 
 
 
Allowance for loan losses to loans
3.13
%
 
4.19
 %
 
4.48
 %
 
4.03
 %
 
2.56
 %
Nonaccrual loans to loans
3.75

 
6.71

 
8.88

 
10.46

 
4.86

Allowance for loan losses to nonaccrual loans
83.37

 
62.52

 
50.40

 
38.55

 
52.71

Nonperforming assets to loans, other real estate and repossessed assets (5)
6.68

 
10.26

 
11.65

 
12.15

 
5.87

Net loan charge-offs to average loans
1.56

 
3.47

 
5.06

 
4.62

 
3.84



24


Selected Financial Data (continued):
 
As of or For the Year Ended December 31, (1)
 
2012
 
2011
 
2010
 
2009
 
2008
 
(dollars expressed in thousands, except share and per share data)
First Banks, Inc. Capital Ratios: (6)
 
 
 
 
 
 
 
 
 
Average stockholders’ equity to average assets
4.33
%
 
4.29
%
 
5.20
%
 
7.79
%
 
8.11
%
Total risk-based capital ratio
2.57

 
1.88

 
6.29

 
9.78

 
12.11

Tier 1 risk-based capital ratio
1.28

 
0.94

 
3.15

 
4.89

 
8.87

Leverage ratio
0.73

 
0.56

 
1.99

 
3.52

 
8.04

First Bank Capital Ratios:
 
 
 
 
 
 
 
 
 
Total risk-based capital ratio
17.18
%
 
14.98
%
 
12.95
%
 
10.39
%
 
11.01
%
Tier 1 risk-based capital ratio
15.92

 
13.70

 
11.66

 
9.11

 
9.75

Leverage ratio
9.13

 
8.19

 
7.40

 
6.56

 
8.85

 
(1)
The selected data is presented on a continuing basis.
(2)
Net interest margin is the ratio of net interest income (expressed on a tax-equivalent basis) to average interest-earning assets.
(3)
Tangible noninterest expense to average assets is the ratio of noninterest expense (excluding goodwill impairment and amortization of intangible assets) to average assets.
(4)
Efficiency ratio is noninterest expense to the sum of net interest income and noninterest income. Tangible efficiency ratio is the ratio of noninterest expense (excluding goodwill impairment and amortization of intangible assets) to the sum of net interest income and noninterest income.
(5)
Nonperforming assets consist of nonaccrual loans, other real estate and repossessed assets.
(6)
The capital ratios at December 31, 2012 and 2011 reflect the implementation of new Federal Reserve rules that became effective on March 31, 2011.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following presents management’s discussion and analysis of our financial condition and results of operations as of the dates and for the periods indicated. This discussion should be read in conjunction with our “Selected Financial Data,” our consolidated financial statements and the related notes thereto, and the other financial data appearing elsewhere in this report. This discussion set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements with respect to our financial condition, results of operations and business. These forward-looking statements are subject to certain risks and uncertainties, not all of which can be predicted or anticipated. Various factors may cause our actual results to differ materially from those contemplated by the forward-looking statements herein. We do not have a duty to and do not undertake any obligation to update these forward-looking statements. Readers of our Annual Report on Form 10-K should therefore consider these risks and uncertainties in evaluating forward-looking statements and should not place undue reliance on forward-looking statements. See “Special Note Regarding Forward-Looking Statements and Factors that Could Affect Future Results” appearing at the beginning of this report and “Item 1A – Risk Factors,” appearing elsewhere in this report.
RESULTS OF OPERATIONS
Overview
All financial information in this Annual Report on Form 10-K is reported on a continuing operations basis, unless otherwise noted. See Note 2 to our consolidated financial statements appearing elsewhere in this report for further discussion regarding our discontinued operations.
We recorded net income, including discontinued operations, of $26.3 million for the year ended December 31, 2012, compared to net losses of $41.2 million and $191.7 million for the years ended December 31, 2011 and 2010, respectively. Our results of operations reflect the following:
•
Net interest income of $172.5 million for the year ended December 31, 2012, compared to $188.8 million in 2011 and $236.4 million in 2010, which contributed to a decline in our net interest margin to 2.81% for the year ended December 31, 2012, compared to 2.89% in 2011 and 2.97% in 2010;
•
A provision for loan losses of $2.0 million for the year ended December 31, 2012, compared to $69.0 million in 2011 and $214.0 million in 2010;
•
Noninterest income of $66.2 million for the year ended December 31, 2012, compared to $62.2 million in 2011 and $78.5 million in 2010;
•
Noninterest expense of $205.3 million for the year ended December 31, 2012, compared to $230.2 million in 2011 and $298.6 million in 2010;
•
A benefit for income taxes of $139,000 for the year ended December 31, 2012, compared to a benefit for income taxes of $10.7 million in 2011 and a provision for income taxes of $4.1 million in 2010;

25


•
A net loss from discontinued operations, net of tax, of $5.5 million for the year ended December 31, 2012, compared to a net loss from discontinued operations, net of tax, of $6.5 million in 2011 and net income from discontinued operations, net of tax, of $3.6 million in 2010; and
•
A net loss attributable to noncontrolling interest in subsidiary of $297,000 for the year ended December 31, 2012, compared to net losses of $3.0 million in 2011 and $6.5 million in 2010.
Net Interest Income and Average Balance Sheets
The primary source of our income is net interest income. Net interest income is the difference between the interest earned on our interest-earning assets, such as loans and investment securities, and the interest paid on our interest-bearing liabilities, such as deposits and borrowings. The following table sets forth, on a tax-equivalent basis, certain information on a continuing basis relating to our average balance sheets, and reflects the average yield earned on our interest-earning assets, the average cost of our interest-bearing liabilities and the resulting net interest income for the years ended December 31, 2012, 2011 and 2010.
 
Years Ended December 31,
 
2012
 
2011
 
2010
 
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Rate
 
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Rate
 
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Rate
 
(dollars expressed in thousands)
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans: (1) (2) (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
$
3,076,523

 
143,658

 
4.67
 %
 
$
3,807,427

 
184,477

 
4.85
%
 
$
5,513,929

 
281,327

 
5.10
%
Tax-exempt (4)
2,821

 
165

 
5.85

 
4,024

 
178

 
4.42

 
6,846

 
503

 
7.35

Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
2,708,865

 
56,547

 
2.09

 
2,043,048

 
45,172

 
2.21

 
990,479

 
24,612

 
2.48

Tax-exempt (4)
9,805

 
442

 
4.51

 
12,143

 
740

 
6.09

 
13,604

 
915

 
6.73

FRB and FHLB stock
26,603

 
1,146

 
4.31

 
27,648

 
1,416

 
5.12

 
49,718

 
2,063

 
4.15

Short-term investments
325,341

 
820

 
0.25

 
652,195

 
1,634

 
0.25

 
1,403,474

 
3,544

 
0.25

Total interest-earning assets
6,149,958

 
202,778

 
3.30

 
6,546,485

 
233,617

 
3.57

 
7,978,050

 
312,964

 
3.92

Nonearning assets
429,907

 
 
 
 
 
424,082

 
 
 
 
 
448,542

 
 
 
 
Assets of discontinued operations
6,892

 
 
 
 
 
21,885

 
 
 
 
 
277,132

 
 
 
 
Total assets
$
6,586,757

 
 
 
 
 
$
6,992,452

 
 
 
 
 
$
8,703,724

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand
$
937,971

 
569

 
0.06
 %
 
$
938,758

 
1,023

 
0.11
%
 
$
901,685

 
1,409

 
0.16
%
Savings and money market
1,931,146

 
3,535

 
0.18

 
2,054,452

 
8,577

 
0.42

 
2,083,099

 
13,959

 
0.67

Time deposits of $100 or more
507,867

 
4,153

 
0.82

 
648,258

 
8,068

 
1.24

 
859,015

 
15,257

 
1.78

Other time deposits
904,971

 
7,002

 
0.77

 
1,117,908

 
13,233

 
1.18

 
1,369,827

 
24,539

 
1.79

Total interest-bearing deposits
4,281,955

 
15,259

 
0.36

 
4,759,376

 
30,901

 
0.65

 
5,213,626

 
55,164

 
1.06

Other borrowings
33,007

 
(18
)
 
(0.05
)
 
46,991

 
15

 
0.03

 
514,655

 
7,844

 
1.52

Subordinated debentures
354,096

 
14,847

 
4.19

 
354,019

 
13,623

 
3.85

 
353,943

 
13,012

 
3.68

Total interest-bearing liabilities
4,669,058

 
30,088

 
0.64

 
5,160,386

 
44,539

 
0.86

 
6,082,224

 
76,020

 
1.25

Noninterest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
1,305,282

 
 
 
 
 
1,166,128

 
 
 
 
 
1,148,102

 
 
 
 
Other liabilities
161,214

 
 
 
 
 
129,787

 
 
 
 
 
108,761

 
 
 
 
Liabilities of discontinued operations
166,076

 
 
 
 
 
236,017

 
 
 
 
 
912,012

 
 
 
 
Total liabilities
6,301,630

 
 
 
 
 
6,692,318

 
 
 
 
 
8,251,099

 
 
 
 
Stockholders’ equity
285,127

 
 
 
 
 
300,134

 
 
 
 
 
452,625

 
 
 
 
Total liabilities and stockholders’ equity
$
6,586,757

 
 
 
 
 
$
6,992,452

 
 
 
 
 
$
8,703,724

 
 
 
 
Net interest income
 
 
172,690

 
 
 
 
 
189,078

 
 
 
 
 
236,944

 
 
Interest rate spread
 
 
 
 
2.66

 
 
 
 
 
2.71

 
 
 
 
 
2.67

Net interest margin (5)
 
 
 
 
2.81
 %
 
 
 
 
 
2.89
%
 
 
 
 
 
2.97
%
 
(1)
For purposes of these computations, nonaccrual loans are included in the average loan amounts.
(2)
Interest income on loans includes loan fees.
(3)
Interest income on loans includes the effects of interest rate swap agreements.
(4)
Information is presented on a tax-equivalent basis assuming a tax rate of 35%. The tax-equivalent adjustments were $213,000, $321,000 and $496,000 for the years ended December 31, 2012, 2011 and 2010, respectively.
(5)
Net interest margin is the ratio of net interest income (expressed on a tax-equivalent basis) to average interest-earning assets.

26


Net interest income is affected by the level and composition of assets, liabilities and stockholders’ equity, as well as the general level of interest rates and changes in interest rates. Interest income on a tax-equivalent basis includes the additional amount of interest income that would have been earned if our investment in certain tax-exempt interest-earning assets had been made in assets subject to federal, state and local income taxes yielding the same after-tax income. Net interest margin is determined by dividing net interest income on a tax-equivalent basis by average interest-earning assets. The interest rate spread is the difference between the average equivalent yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities.
Our balance sheet is presently asset sensitive, and as such, our net interest margin has been negatively impacted by the low interest rate environment as our loan portfolio re-prices on an immediate basis; whereas we are unable to immediately re-price our deposit portfolio to current market interest rates, thereby resulting in a compression of our net interest margin. Our asset-sensitive position, coupled with the level of our nonperforming assets, the increased level of average lower-yielding short-term investments and investment securities, the lower level of average loans and the additional interest expense accrued on our regularly scheduled deferred interest payments on our junior subordinated debentures has negatively impacted our net interest income and is expected to continue to impact the level of our net interest income in the future. We continue our efforts to reduce nonperforming and potential problem loans and re-define our overall strategy and business plans with respect to our loan portfolio in light of ongoing changes in market conditions in our markets, focusing on loan growth initiatives to offset the impact of the decrease in nonaccrual loans, problem loans and other loan relationships.
Comparison of 2012 and 2011. Net interest income, expressed on a tax-equivalent basis, decreased $16.4 million to $172.7 million for the year ended December 31, 2012, compared to $189.1 million in 2011. Our net interest margin decreased to 2.81% for the year ended December 31, 2012, from 2.89% in 2011.
We attribute the decrease in our net interest margin and net interest income to a lower average balance of interest-earning assets in addition to a significant change in the mix of our interest-earning assets, which has shifted from loans to investment securities, partially offset by a decrease in interest-bearing liabilities and a decrease in deposit and other borrowing costs. The average yield earned on our interest-earning assets decreased 27 basis points to 3.30% for the year ended December 31, 2012, compared to 3.57% in 2011, while the average rate paid on our interest-bearing liabilities decreased 22 basis points to 0.64% for the year ended December 31, 2012, compared to 0.86% in 2011. Average interest-earning assets decreased $396.5 million to $6.15 billion for the year ended December 31, 2012, compared to $6.55 billion in 2011. Average interest-bearing liabilities decreased $491.3 million to $4.67 billion for the year ended December 31, 2012, compared to $5.16 billion in 2011.
Interest income on our loan portfolio, expressed on a tax-equivalent basis, decreased $40.8 million for the year ended December 31, 2012, as compared to 2011. Average loans decreased $732.1 million to $3.08 billion for the year ended December 31, 2012, from $3.81 billion in 2011. The decrease in average loans primarily reflects a substantial level of loan payoffs and principal payments, reduced loan demand within our markets, loan charge-offs, transfers of loans to other real estate and repossessed assets, and the exit of certain of our problem credit relationships, including the sale of certain special mention, potential problem and nonaccrual loans during the fourth quarter of 2012. The yield on our loan portfolio decreased 17 basis points to 4.67% for the year ended December 31, 2012, compared to 4.84% in 2011. The yield on our loan portfolio continues to be adversely impacted by the historically low prime and LIBOR interest rates, as a significant portion of our loan portfolio is priced to these indices. Furthermore, the yield on our loan portfolio continues to be adversely impacted by the higher levels of average nonaccrual loans, as further discussed under “—Loans and Allowance for Loan Losses.” Our nonaccrual loans decreased our average yield on loans by approximately 23 and 47 basis points in 2012 and 2011, respectively. We continue to focus on loan growth initiatives to offset the impact of the decrease in nonaccrual loans, problem loans and other loan relationships in future periods.
Interest income on our investment securities, expressed on a tax-equivalent basis, increased $11.1 million for the year ended December 31, 2012, as compared to 2011. Average investment securities increased $663.5 million for the year ended December 31, 2012, as compared to 2011. The increase in average investment securities reflects the continued utilization of a portion of our cash and short-term investments to fund gradual and planned increases in our investment securities portfolio in an effort maximize our net interest income and net interest margin while maintaining appropriate liquidity levels and diversification within our investment securities portfolio. The yield earned on our investment securities portfolio decreased 13 basis points to 2.10% for the year ended December 31, 2012, compared to 2.23% in 2011, reflecting significant purchases of investment securities at lower market rates.
Interest income on our short-term investments decreased $814,000 for the year ended December 31, 2012, as compared to 2011. Average short-term investments decreased $326.9 million for the year ended December 31, 2012, as compared to 2011. The yield on our short-term investments was 0.25% for the years ended December 31, 2012 and 2011, reflecting the investment of the majority of funds in our short-term investments in our correspondent bank account with the FRB, which currently earns 0.25%. The decrease in our average short-term investments reflects the utilization of such funds, coupled with funds available from the decline in our loan portfolio, to fund increases in our investment securities portfolio and decreases in our average total deposits. Since 2009, we have built a significant amount of available balance sheet liquidity in anticipation of the expected completion of certain transactions associated with our Capital Plan, as further discussed under “—Liquidity Management” and in Note 2 to our consolidated financial statements. The high level of short-term investments, while necessary to complete certain transactions

27


associated with our Capital Plan and to maintain significant balance sheet liquidity in light of uncertain economic conditions during these periods, has negatively impacted our net interest margin and will negatively impact our net interest margin in future periods until we have the opportunity to further reduce our short-term investments through deployment of such funds into other higher-yielding assets.
Interest expense on our interest-bearing deposits decreased $15.6 million for the year ended December 31, 2012, as compared to 2011. Average total deposits decreased $338.3 million to $5.59 billion for the year ended December 31, 2012, from $5.93 billion in 2011. Average interest-bearing deposits decreased $477.4 million for the year ended December 31, 2012, as compared to 2011. The decrease in average interest-bearing deposits primarily reflects anticipated reductions of higher rate certificates of deposit and promotional money market deposits, partially offset by organic growth through deposit development programs, including marketing campaigns and enhanced product and service offerings. The mix in our deposit portfolio volumes for 2012, as compared to 2011, primarily reflects a shift from time deposits, savings and money market deposits, and interest-bearing demand deposits to noninterest-bearing demand deposits. Decreases in our average time deposits, savings and money market deposits, and interest-bearing deposits of $353.3 million, $123.3 million and $787,000, respectively, for 2012 as compared to 2011, were partially offset by an increase in average noninterest-bearing demand deposits of $139.2 million. The aggregate weighted average rate paid on our interest-bearing deposit portfolio decreased 29 basis points to 0.36% for the year ended December 31, 2012, as compared to 0.65% in 2011, reflecting the re-pricing of certificate of deposit accounts to current market interest rates upon maturity and our efforts to reduce deposit costs across our deposit portfolio, in particular promotional money market deposits. The weighted average rate paid on our time deposit portfolio declined to 0.79% in 2012 from 1.21% in 2011; the weighted average rate paid on our savings and money market deposit portfolio declined to 0.18% in 2012 from 0.42% in 2011; and the weighted average rate paid on our interest-bearing demand deposits declined to 0.06% in 2012 from 0.11% in 2011. Assuming that the prevailing interest rate environment remains relatively stable, we anticipate continued reductions in our deposit costs into 2013.
Interest expense on our junior subordinated debentures increased $1.2 million for the year ended December 31, 2012, as compared to 2011. Average junior subordinated debentures were $354.1 million and $354.0 million for the years ended December 31, 2012 and 2011, respectively. The aggregate weighted average rate paid on our junior subordinated debentures increased to 4.19% for the year ended December 31, 2012, compared to 3.85% in 2011. The aggregate weighted average rates paid and the resulting level of interest expense reflect the LIBOR rates and the impact to the related spreads to LIBOR during the periods, as approximately 79.4% of our junior subordinated debentures are variable rate. The aggregate weighted average rates also reflect additional interest expense accrued on the regularly scheduled deferred interest payments on our junior subordinated debentures of $2.0 million and $1.3 million for the years ended December 31, 2012 and 2011, respectively, as further discussed in Note 12 to our consolidated financial statements. The additional interest expense accrued on the regularly scheduled deferred interest payments increased the weighted average rate paid on our junior subordinated debentures by approximately 58 and 36 basis points in 2012 and 2011, respectively.
Comparison of 2011 and 2010. Net interest income, expressed on a tax-equivalent basis, decreased $47.9 million to $189.1 million for the year ended December 31, 2011, compared to $236.9 million in 2010. Our net interest margin decreased to 2.89% for the year ended December 31, 2011, from 2.97% in 2010.
We attribute the decrease in our net interest margin and net interest income to a lower average balance of interest-earning assets in addition to a significant change in the mix of our interest-earning assets from loans to investment securities, partially offset by a decrease in interest-bearing liabilities and a decrease in the cost of our interest-bearing liabilities. The average yield earned on our interest-earning assets decreased 35 basis points to 3.57% for the year ended December 31, 2011, compared to 3.92% in 2010, while the average rate paid on our interest-bearing liabilities decreased 39 basis points to 0.86% for the year ended December 31, 2011, compared to 1.25% in 2010. Average interest-earning assets decreased $1.43 billion to $6.55 billion for the year ended December 31, 2011, compared to $7.98 billion in 2010. Average interest-bearing liabilities decreased $921.8 million to $5.16 billion for the year ended December 31, 2011, compared to $6.08 billion in 2010.
Interest income on our loan portfolio, expressed on a tax-equivalent basis, decreased $97.2 million for the year ended December 31, 2011, as compared to 2010. Average loans decreased $1.71 billion to $3.81 billion for the year ended December 31, 2011, from $5.52 billion in 2010. The decrease in average loans primarily reflects a substantial level of loan payoffs and principal payments, a decline in loan production and reduced loan demand within our markets, loan charge-offs, transfers of loans to other real estate and repossessed assets and the exit of certain of our problem credit relationships. The yield on our loan portfolio decreased 26 basis points to 4.84% for the year ended December 31, 2011, compared to 5.10% in 2010. The yield on our loan portfolio continues to be adversely impacted by the historically low prime and LIBOR interest rates, as a significant portion of our loan portfolio is priced to these indices. Furthermore, the yield on our loan portfolio continues to be adversely impacted by the higher levels of average nonaccrual loans. Our nonaccrual loans decreased our average yield on loans by approximately 47 and 64 basis points in 2011 and 2010, respectively. An interest adjustment of $1.8 million associated with the amortization of the remaining loan premium related to prior bank acquisitions decreased our average yield on loans by five basis points during 2011. This adjustment was necessitated by an acceleration of loan payoffs within these acquired portfolios. Interest income on our loan

28


portfolio was positively impacted by income associated with our interest rate swap agreements of $5.7 million in 2010. This income ceased during the third quarter of 2010 with the expiration of the amortization period of the unrealized pre-tax gain associated with the termination of our interest rate swap agreements designated as cash flow hedges, as further discussed under “—Interest Rate Risk Management” and in Note 8 to our consolidated financial statements.
Interest income on our investment securities, expressed on a tax-equivalent basis, increased $20.4 million for the year ended December 31, 2011, as compared to 2010. Average investment securities increased $1.05 billion for the year ended December 31, 2011, as compared to 2010. The increase in average investment securities reflects the continued utilization of a portion of our cash and short-term investments to fund gradual and planned increases in our investment securities portfolio in an effort maximize our net interest income and net interest margin while maintaining appropriate liquidity levels and appropriate diversification within our investment securities portfolio. The yield earned on our investment securities portfolio decreased 31 basis points to 2.23% for the year ended December 31, 2011, compared to 2.54% in 2010, reflecting significant purchases of investment securities at lower market rates.
Dividends on our FRB and FHLB stock decreased $647,000 for the year ended December 31, 2011, as compared to 2010. Average FRB and FHLB stock decreased $22.1 million for the year ended December 31, 2011, as compared to 2010. The decrease in average FRB and FHLB stock reflects the net redemption of FRB and FHLB stock during 2010 and 2011 associated with the reduction in our total assets, in addition to the redemption of FHLB stock during 2010 associated with the prepayment of $600.0 million of FHLB advances during 2010. The yield earned on our FRB and FHLB stock was 5.12% for the year ended December 31, 2011, compared to 4.15% in 2010.
Interest income on our short-term investments decreased $1.9 million for the year ended December 31, 2011, as compared to 2010. Average short-term investments decreased $751.3 million for the year ended December 31, 2011, as compared to 2010. The yield on our short-term investments was 0.25% for the years ended December 31, 2011 and 2010, reflecting the investment of the majority of funds in our short-term investments in our correspondent bank account with the FRB, which earned 0.25%. The decrease in our average short-term investments reflects the utilization of such funds, coupled with funds available from the decline in our loan portfolio, to fund increases in our investment securities portfolio, divestitures associated with our Capital Plan, and decreases in our average total deposits. We built a significant amount of available balance sheet liquidity throughout 2009, 2010 and 2011 in anticipation of the expected completion of certain transactions associated with our Capital Plan.
Interest expense on our interest-bearing deposits decreased $24.3 million for the year ended December 31, 2011, as compared to 2010. Average total deposits decreased $436.2 million to $5.93 billion for the year ended December 31, 2011, from $6.36 billion in 2010. Average interest-bearing deposits decreased $454.3 million for the year ended December 31, 2011, as compared to 2010. The decrease in average interest-bearing deposits primarily reflects anticipated reductions of higher rate certificates of deposit and promotional money market deposits, partially offset by organic growth through deposit development programs, including marketing campaigns and enhanced product and service offerings. The mix in our deposit portfolio volumes during 2011 primarily reflects a shift from time deposits and savings and money market deposits to interest-bearing and noninterest-bearing demand deposits. Decreases in our average time deposits and savings and money market deposits of $462.7 million and $28.6 million, respectively, for 2011 as compared to 2010, were partially offset by increases in average interest-bearing demand deposits and noninterest-bearing demand deposits of $37.1 million and $18.0 million, respectively. The aggregate weighted average rate paid on our interest-bearing deposit portfolio decreased 41 basis points to 0.65% for the year ended December 31, 2011, compared to 1.06% in 2010, reflecting the re-pricing of certificate of deposit accounts to current market interest rates upon maturity and our efforts to reduce deposit costs across our deposit portfolio, in particular promotional money market deposits. The weighted average rate paid on our time deposit portfolio declined to 1.21% in 2011 from 1.79% in 2010; the weighted average rate paid on our savings and money market deposit portfolio declined to 0.42% in 2011 from 0.67% in 2010; and the weighted average rate paid on our interest-bearing demand deposits declined to 0.11% in 2011 from 0.16% in 2010.
Interest expense on our other borrowings decreased $7.8 million for the year ended December 31, 2011, as compared to 2010. Average other borrowings decreased $467.7 million for the year ended December 31, 2011, as compared to 2010. Average other borrowings for the year ended December 31, 2011 were comprised solely of daily repurchase agreements utilized by our commercial deposit customers as an alternative deposit product in connection with cash management activities. The decrease in average other borrowings for 2011, as compared to 2010, primarily reflects the prepayment of $600.0 million of our outstanding FHLB advances and the early termination of our $120.0 million term repurchase agreement in 2010. The aggregate weighted average rate paid on our other borrowings decreased to 0.03% for the year ended December 31, 2011, compared to 1.52% in 2010, reflecting the repayment of our higher cost secured borrowings during 2010. See further discussion regarding activity in other borrowings under “—Liquidity Management.”
Interest expense on our junior subordinated debentures increased $611,000 for the year ended December 31, 2011, as compared to 2010. Average junior subordinated debentures were $354.0 million and $353.9 million for the years ended December 31, 2011 and 2010, respectively. The aggregate weighted average rate paid on our junior subordinated debentures increased to 3.85% for the year ended December 31, 2011, compared to 3.68% in 2010. The aggregate weighted average rates paid and the resulting level

29


of interest expense reflect the LIBOR rates and the impact to the related spreads to LIBOR during the periods, as approximately 79.4% of our junior subordinated debentures are variable rate. The aggregate weighted average rates paid also reflect additional interest expense accrued on the regularly scheduled deferred interest payments on our junior subordinated debentures of $1.3 million and $581,000 for the years ended December 31, 2011 and 2010, respectively . The additional interest expense accrued on the regularly scheduled deferred interest payments increased the weighted average rate paid on our junior subordinated debentures by approximately 36 and 16 basis points in 2011 and 2010, respectively.
Rate / Volume
The following table indicates, on a tax-equivalent basis, the changes in interest income and interest expense on a continuing basis that are attributable to changes in average volume and changes in average rates, in comparison with the preceding year. The change in interest due to the combined rate/volume variance has been allocated to rate and volume changes in proportion to the dollar amounts of the change in each.
 
Increase (Decrease) Attributable to Change in:
 
2012 Compared to 2011
 
2011 Compared to 2010
 
Volume
 
Rate
 
Net
Change
 
Volume
 
Rate
 
Net
Change
 
(dollars expressed in thousands)
Interest earned on:
 
 
 
 
 
 
 
 
 
 
 
Loans: (1) (2) (3)
 
 
 
 
 
 
 
 
 
 
 
Taxable
$
(34,206
)
 
(6,613
)
 
(40,819
)
 
(83,608
)
 
(13,242
)
 
(96,850
)
Tax-exempt (4)
(62
)
 
49

 
(13
)
 
(165
)
 
(160
)
 
(325
)
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
Taxable
13,953

 
(2,578
)
 
11,375

 
23,501

 
(2,941
)
 
20,560

Tax-exempt (4)
(127
)
 
(171
)
 
(298
)
 
(93
)
 
(82
)
 
(175
)
FRB and FHLB stock
(52
)
 
(218
)
 
(270
)
 
(1,056
)
 
409

 
(647
)
Short-term investments
(814
)
 
—

 
(814
)
 
(1,910
)
 
—

 
(1,910
)
Total interest income
(21,308
)
 
(9,531
)
 
(30,839
)
 
(63,331
)
 
(16,016
)
 
(79,347
)
Interest paid on:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand deposits
(1
)
 
(453
)
 
(454
)
 
60

 
(446
)
 
(386
)
Savings and money market deposits
(479
)
 
(4,563
)
 
(5,042
)
 
(191
)
 
(5,191
)
 
(5,382
)
Time deposits
(3,710
)
 
(6,436
)
 
(10,146
)
 
(7,222
)
 
(11,273
)
 
(18,495
)
Other borrowings
(3
)
 
(30
)
 
(33
)
 
(3,766
)
 
(4,063
)
 
(7,829
)
Subordinated debentures
3

 
1,221

 
1,224

 
3

 
608

 
611

Total interest expense
(4,190
)
 
(10,261
)
 
(14,451
)
 
(11,116
)
 
(20,365
)
 
(31,481
)
Net interest income
$
(17,118
)
 
730

 
(16,388
)
 
(52,215
)
 
4,349

 
(47,866
)
 
(1)
For purposes of these computations, nonaccrual loans are included in the average loan amounts.
(2)
Interest income on loans includes loan fees.
(3)
Interest income on loans includes the effects of interest rate swap agreements.
(4)
Information is presented on a tax-equivalent basis assuming a tax rate rate of 35%.
Net interest income, expressed on a tax-equivalent basis, decreased $16.4 million for year ended December 31, 2012, as compared to 2011, and reflects a decrease due to volume of $17.1 million, partially offset by an increase due to rate of $730,000. Net interest income, expressed on a tax-equivalent basis, decreased $47.9 million for year ended December 31, 2011, as compared to 2010, and reflects a decrease due to volume of $52.2 million, partially offset by an increase due to rate of $4.3 million. The decrease in net interest income, expressed on a tax-equivalent basis, due to volume for 2012 as compared to 2011, and for 2011 as compared to 2010, was primarily driven by a decrease in the volume of loans, partially offset by an increase in the volume of investment securities and a decrease in the volume of interest-bearing deposits. We have been utilizing cash proceeds resulting from loan payoffs to fund gradual and planned increases in our investment securities portfolio in an effort to maximize our net interest income and net interest margin while maintaining appropriate liquidity levels and diversification within our investment securities portfolio and closely monitoring key risk metrics within the investment securities portfolio. Because loans generally have a higher yield than investment securities, the change in our interest-earning asset mix has had a negative impact on our net interest income. The increase in net interest income due to rate was primarily driven by a decline in the cost of our interest-bearing deposits, partially offset by a decrease in our loan and investment securities yields, reflective of overall market conditions and competition during these periods.
Provision for Loan Losses
Comparison of 2012 and 2011. We recorded a provision for loan losses of $2.0 million for the year ended December 31, 2012, compared to $69.0 million in 2011. The decrease in the provision for loan losses for the year ended December 31, 2012, as compared to 2011, was primarily driven by the decrease in our overall level of nonaccrual loans and potential problem loans, a decrease in

30


net loan charge-offs and less severe asset migration to classified asset categories during 2012 than the migration levels experienced during 2011, as further discussed under “—Loans and Allowance for Loan Losses.”
Our nonaccrual loans were $109.9 million at December 31, 2012, compared to $220.3 million at December 31, 2011. The decrease in the overall level of nonaccrual loans during 2012 was primarily driven by resolution of certain nonaccrual loans, including the sale of certain nonaccrual loans, gross loan charge-offs, and transfers to other real estate and repossessed assets exceeding net additions to nonaccrual loans, as further discussed under “—Loans and Allowance for Loan Losses,” and reflects our continued progress with respect to the implementation of our Asset Quality Improvement Plan initiatives, designed to reduce the overall balance of nonaccrual and other potential problem loans and assets.
Our net loan charge-offs decreased to $48.1 million for the year ended December 31, 2012, compared to $132.3 million in 2011. Our net loan charge-offs were 1.56% of average loans in 2012, compared to 3.47% of average loans in 2011. Loan charge-offs were $78.1 million for 2011, compared to $154.6 million in 2011, and loan recoveries were $30.0 million for 2012, compared to $22.3 million in 2011.
Tables summarizing nonperforming assets, past due loans and charge-off and recovery experience are presented under “—Loans and Allowance for Loan Losses.”
Comparison of 2011 and 2010. We recorded a provision for loan losses of $69.0 million for the year ended December 31, 2011, compared to $214.0 million in 2010. The decrease in the provision for loan losses for the year ended December 31, 2011, as compared to 2010, was primarily driven by the decrease in our overall level of nonaccrual loans and potential problem loans, a decrease in net loan charge-offs and less severe asset migration to classified asset categories during 2011 than the migration levels experienced during 2010.
Our nonaccrual loans were $220.3 million at December 31, 2011, compared to $398.9 million at December 31, 2010. The decrease in the overall level of nonaccrual loans during 2011 was primarily driven by gross loan charge-offs, transfers to other real estate and repossessed assets and resolution of certain nonaccrual loans exceeding net additions to nonaccrual loans.
Our net loan charge-offs decreased to $132.3 million for the year ended December 31, 2011, compared to $279.1 million in 2010. Our net loan charge-offs were 3.47% of average loans in 2011, compared to 5.06% of average loans in 2010. Loan charge-offs were $154.6 million for 2011, compared to $331.2 million in 2010, and loan recoveries were $22.3 million for 2011, compared to $52.1 million in 2010.
Noninterest Income
Comparison of 2012 and 2011. Noninterest income increased $4.0 million to $66.2 million for the year ended December 31, 2012, from $62.2 million in 2011. The increase in our noninterest income was primarily attributable to increased gains on loans sold and held for sale, reduced declines in the fair value of servicing rights and increased other income, partially offset by lower service charges on deposit accounts and customer service fees, decreased net gains on investment securities and lower loan servicing fees. The following table summarizes noninterest income for the years ended December 31, 2012 and 2011:
 
December 31,
 
Increase (Decrease)
 
2012
 
2011
 
Amount
 
%
 
(dollars expressed in thousands)
Noninterest income:
 
 
 
 
 
 
 
Service charges on deposit accounts and customer service fees
$
36,197

 
39,101

 
(2,904
)
 
(7.4
)%
Gain on loans sold and held for sale
12,931

 
5,176

 
7,755

 
149.8

Net gain on investment securities
1,306

 
5,335

 
(4,029
)
 
(75.5
)
Decrease in fair value of servicing rights
(5,475
)
 
(7,652
)
 
2,177

 
28.5

Loan servicing fees
7,403

 
8,271

 
(868
)
 
(10.5
)
Other
13,844

 
11,963

 
1,881

 
15.7

Total noninterest income
$
66,206

 
62,194

 
4,012

 
6.5

Service charges on deposit accounts and customer service fees decreased $2.9 million for the year ended December 31, 2012, as compared to 2011, primarily reflecting reduced non-sufficient funds and returned check fee income on retail and commercial accounts coupled with changes in our deposit mix and certain product modifications designed to enhance overall product offerings to our customer base during these periods.
Gains on loans sold and held for sale increased $7.8 million for the year ended December 31, 2012, as compared to 2011. The increase was primarily attributable to an increase in the volume of mortgage loans originated for sale in the secondary market during 2012 associated with an increase in refinancing volume in our mortgage banking division in addition to higher margins on the loans originated for sale in the secondary market. The gain on the sale of mortgage loans was $12.9 million and $5.2 million

31


for the years ended December 31, 2012 and 2011, respectively. For the years ended December 31, 2012 and 2011, we originated residential mortgage loans totaling $470.1 million and $294.0 million, respectively, and sold residential mortgage loans totaling $435.3 million and $298.5 million, respectively. Gains on loans sold and held for sale for 2011 also include a loss on the sale of SBA loans of $100,000.
Net gains on investment securities decreased $4.0 million for the year ended December 31, 2012, as compared to 2011. Proceeds from sales of available-for-sale investment securities were $315.2 million for the year ended December 31, 2012, as compared to $283.7 million for 2011. The net gains on investment securities reflect sales of certain investment securities during the respective periods to partially fund specific loan purchase transactions and/or reposition the investment securities portfolio based on our ongoing evaluation of liquidity requirements and overall market and economic conditions.
Net losses associated with changes in the fair value of mortgage and SBA servicing rights decreased $2.2 million for the year ended December 31, 2012, as compared to 2011. The changes in the fair value of mortgage and SBA servicing rights during the periods reflect changes in mortgage interest rates and the related changes in estimated prepayment speeds, as well as changes in cash flow assumptions underlying SBA loans serviced for others.
Loan servicing fees decreased $868,000 for the year ended December 31, 2012, as compared to 2011. Loan servicing fees are primarily comprised of fee income generated from the servicing of real estate mortgage loans owned by investors and originated by our mortgage banking division, as well as SBA loans originated to small business concerns, in addition to unused commitment fees received from lending customers. The level of such fees is primarily impacted by the balance of loans serviced and interest shortfall on serviced residential mortgage loans. Interest shortfall represents the difference between the interest collected from a loan servicing customer upon prepayment of the loan and the full month of interest that is required to be remitted to the security owner. The level of fees was also impacted by a decrease in loan servicing fees associated with declining volumes of SBA loans serviced for others and unused commitment fees associated with declining loan and unused commitment amounts.
Other income increased $1.9 million for the year ended December 31, 2012, as compared to 2011. The increase in other income primarily reflects the following:
•
Net gains on sales of other real estate and repossessed assets of $2.6 million during 2012, as compared to net losses on sales of other real estate and repossessed assets of $1.3 million in 2011; and
•
The receipt of a litigation settlement of $561,000 in the first quarter of 2012; partially offset by
•
A loss on the sale of certain bank-owned properties of $1.1 million during 2012;
•
Income recognized on Community Reinvestment Act, or CRA, investments of $721,000 during 2012, as compared to $1.1 million in 2011; and
•
The recovery of $1.8 million received during 2011 from a suspected fraud loss recognized in 2010.
Comparison of 2011 and 2010. Noninterest income decreased $16.3 million, to $62.2 million for the year ended December 31, 2011, from $78.5 million in 2010. The decrease in our noninterest income was primarily attributable to lower service charges on deposit accounts and customer service fees, reduced gains on loans sold and held for sale, reduced gains on investment securities, a higher decline in the fair value of servicing rights, lower loan servicing fees and decreased other income, partially offset by a reduction in net losses on derivative financial instruments (included in other income). The following table summarizes noninterest income for the years ended December 31, 2011 and 2010:
 
December 31,
 
Increase (Decrease)
 
2011
 
2010
 
Amount
 
%
 
(dollars expressed in thousands)
Noninterest income:
 
 
 
 
 
 
 
Service charges on deposit accounts and customer service fees
$
39,101

 
42,370

 
(3,269
)
 
(7.7
)%
Gain on loans sold and held for sale
5,176

 
9,516

 
(4,340
)
 
(45.6
)
Net gain on investment securities
5,335

 
8,315

 
(2,980
)
 
(35.8
)
Decrease in fair value of servicing rights
(7,652
)
 
(5,558
)
 
(2,094
)
 
(37.7
)
Loan servicing fees
8,271

 
8,783

 
(512
)
 
(5.8
)
Other
11,963

 
15,066

 
(3,103
)
 
(20.6
)
Total noninterest income
$
62,194

 
78,492

 
(16,298
)
 
(20.8
)
Service charges on deposit accounts and customer service fees decreased $3.3 million for the year ended December 31, 2011, as compared to 2010, primarily reflecting reduced non-sufficient funds and returned check fee income on retail and commercial accounts coupled with changes in our deposit mix and certain product modifications designed to enhance overall product offerings to our customer base during these periods.
Gains on loans sold and held for sale decreased $4.3 million for the year ended December 31, 2011, as compared to 2010. The decrease was primarily attributable to a decrease in the volume of mortgage loans originated for sale in the secondary market

32


during 2011 associated with the decline in refinancing volume in our mortgage banking division in addition to lower margins on the loans originated for sale in the secondary market. For the years ended December 31, 2011 and 2010, we originated residential mortgage loans totaling $294.0 million and $398.9 million, respectively, and sold residential mortgage loans totaling $298.5 million and $376.2 million, respectively.
Net gains on investment securities decreased $3.0 million for the year ended December 31, 2011, as compared to 2010. During the first quarter of 2011, we reduced our overall number of smaller investment securities holdings, many of which were acquired in previous acquisitions, in an effort to reduce the operational requirements and overall costs associated with maintaining these securities. During the second quarter of 2011, we sold $100.0 million of U.S. Treasury securities at a gain of $592,000. During the third quarter of 2011, we sold $148.5 million of mortgage-backed securities at a gain of $4.1 million. During 2010, we sold investment securities primarily to provide funding to pay off our remaining term secured borrowings, including our FHLB advances and our $120.0 million term repurchase agreement. These investment securities were sold at net gains. Proceeds from sales of available-for-sale investment securities were $283.7 million for the year ended December 31, 2011, as compared to $249.2 million in 2010.
Net losses associated with changes in the fair value of mortgage and SBA servicing rights increased $2.1 million for the year ended December 31, 2011, as compared to 2010. The changes in the fair value of mortgage and SBA servicing rights during the periods reflect changes in mortgage interest rates and the related changes in estimated prepayment speeds, as well as changes in cash flow assumptions underlying SBA loans serviced for others. The higher decline in the fair value of servicing rights during 2011 was primarily attributable to the substantial decrease in mortgage interest rates during 2011 and related increase in loan prepayment speeds resulting from historically low mortgage interest rates.
Loan servicing fees decreased $512,000 for the year ended December 31, 2011, as compared to 2010, and are primarily comprised of fee income generated from the servicing of real estate mortgage loans owned by investors and originated by our mortgage banking division, as well as SBA loans originated to small business concerns, in addition to unused commitment fees received from lending customers. The level of such fees is primarily impacted by the balance of loans serviced and interest shortfall on serviced residential mortgage loans. The decrease in loan servicing fees during 2011 was primarily attributable to a decrease in unused commitment fees of $533,000 for the year ended December 31, 2011, as compared to 2010, driven by the decrease in our loan portfolio and related unused commitments.
Other income decreased $3.1 million for the year ended December 31, 2011, as compared to 2010. The decrease in other income primarily reflects the following:
•
Net losses on sales of other real estate and repossessed assets of $1.3 million for the year ended December 31, 2011, compared to net gains on sales of other real estate and repossessed assets of $3.5 million in 2010;
•
A loss of $334,000 recognized in the first quarter of 2011 on the sale of our San Jose Branch and a gain of $263,000 recognized in the second quarter of 2011 on the sale of our Edwardsville Branch, compared to a gain of $168,000 recognized in the first quarter of 2010 on the sale of our Lawrenceville, Illinois branch, as further described in Note 2 to our consolidated financial statements; and
•
The receipt of a litigation settlement of $2.6 million recognized in the second quarter of 2010; partially offset by
•
The recovery of $1.8 million received during 2011 from a suspected fraud loss recognized in 2010;
•
Income recognized on CRA investments of $1.1 million during 2011, as compared to $35,000 in 2010; and
•
A decrease in net losses on derivative instruments to $193,000 for the year ended December 31, 2011, from $2.9 million in 2010, primarily attributable to changes in fair value and the net interest differential on our interest rate swap agreements.
Noninterest Expense
Comparison of 2012 and 2011. Noninterest expense decreased $24.9 million to $205.3 million for the year ended December 31, 2012, from $230.2 million in 2011. The decrease in our noninterest expense during 2012, as compared to 2011, was primarily attributable to reductions in nearly all expense categories attributable to our profit improvement initiatives and the reduction in our overall asset levels. The following table summarizes noninterest expense for the years ended December 31, 2012 and 2011:

33


 
December 31,
 
Increase (Decrease)
 
2012
 
2011
 
Amount
 
%
 
(dollars expressed in thousands)
Noninterest expense:
 
 
 
 
 
 
 
Salaries and employee benefits
$
77,788

 
79,518

 
(1,730
)
 
(2.2
)%
Occupancy, net of rental income, and furniture and equipment
33,409

 
35,668

 
(2,259
)
 
(6.3
)
Postage, printing and supplies
2,721

 
2,777

 
(56
)
 
(2.0
)
Information technology fees
22,446

 
25,804

 
(3,358
)
 
(13.0
)
Legal, examination and professional fees
8,890

 
12,215

 
(3,325
)
 
(27.2
)
Amortization of intangible assets
—

 
3,024

 
(3,024
)
 
(100.0
)
Advertising and business development
2,125

 
1,868

 
257

 
13.8

FDIC insurance
12,436

 
16,103

 
(3,667
)
 
(22.8
)
Write-downs and expenses on other real estate and repossessed assets
18,672

 
22,983

 
(4,311
)
 
(18.8
)
Other
26,831

 
30,286

 
(3,455
)
 
(11.4
)
Total noninterest expense
$
205,318

 
230,246

 
(24,928
)
 
(10.8
)
Salaries and employee benefits expense decreased $1.7 million for the year ended December 31, 2012, as compared to 2011. The overall decrease in salaries and employee benefits expense reflects lower salary expense associated with a decline in the overall level of our full-time equivalent employees, or FTEs, excluding discontinued operations, which decreased 2.9% to 1,177 at December 31, 2012 from 1,212 at December 31, 2011. The decrease in salary expense was partially offset by an increase in benefits expenses, including medical claims and prescription expenses, and expense associated with our nonqualified deferred compensation plan resulting from market value increases in the underlying employee investment accounts in this plan.
Occupancy, net of rental income, and furniture and equipment expense decreased $2.3 million for the year ended December 31, 2012, as compared to 2011. The decrease reflects reduced furniture, fixture and technology equipment expenditures associated with prior expansion and branch renovation activities and certain branch closures completed in conjunction with profit improvement initiatives. In addition, occupancy expense, net of rental income, includes a $787,000 decrease in rent expense during the first quarter of 2012 associated with the transfer of a lease obligation to an unaffiliated third party and the related reversal of the corresponding straight-line rent liability.
Information technology fees decreased $3.4 million for the year ended December 31, 2012, as compared to 2011. The decrease in information technology fees is primarily due to the implementation of certain profit improvement initiatives and related fee reductions with First Services, L.P. As more fully described in Note 20 to our consolidated financial statements, First Services, L.P., a limited partnership indirectly owned by our Chairman and members of his immediate family, including Mr. Michael Dierberg, Vice Chairman of the Company, provides information technology and various operational support services to our subsidiaries and us. Information technology fees also include fees paid to outside servicers associated with our mortgage lending, trust and small business lending divisions as well as our payroll processing department.
Legal, examination and professional fees decreased $3.3 million for the year ended December 31, 2012, as compared to 2011. The decrease in legal, examination and professional fees reflects a decrease in legal expenses associated with loan collection activities, divestiture activities and litigation matters in comparison to the level of such expenses during 2011. We anticipate legal, examination and professional fees to remain at higher-than-historical levels during 2013, primarily as a result of elevated levels of legal and professional fees associated with ongoing collection efforts on commercial and consumer problem loans as well as ongoing matters associated with our Capital Plan, as further described under “Item 1 —Business – Recent Developments and Other Matters – Capital Plan.”
Amortization of intangible assets was $3.0 million for the year ended December 31, 2011, and reflects the amortization of core deposit intangibles associated with prior acquisitions. Our core deposit intangibles became fully amortized during 2011.
Advertising and business development expense increased $257,000 for the year ended December 31, 2012, as compared to 2011, reflecting increased advertising during 2012 as compared to 2011. We expect these expenses to increase over time as we further market our products and services throughout our geographic market areas.
FDIC insurance expense decreased $3.7 million for the year ended December 31, 2012, as compared to 2011. Prior to April 1, 2011, the FDIC’s assessment base for the calculation of insurance premium assessments was an institution’s average deposits. The Dodd-Frank Wall Street Reform and Consumer Protection Act required the FDIC to establish rules setting insurance premium assessments based on an institution’s average consolidated assets minus its average tangible equity instead of its deposits. The change in the assessment base had the impact of reducing the level of our FDIC insurance expense beginning with the second quarter of 2011. The decrease in FDIC insurance expense is also reflective of our reduced level of deposits and total assets during 2012 as compared to 2011 and a reduction in our assessment rate effective October 2, 2012.

34


Write-downs and expenses on other real estate and repossessed assets decreased $4.3 million for the year ended December 31, 2012, as compared to 2011. Write-downs related to the revaluation of certain other real estate properties and repossessed assets were $14.5 million in 2012, as compared to $16.9 million in 2011. Other real estate and repossessed asset expenses, exclusive of write-downs, such as taxes, insurance, and repairs and maintenance, were $4.2 million in 2012 as compared to $6.1 million in 2011, reflecting a decrease in the balance of other real estate and repossessed assets and the sale of certain properties that required higher operating expenditures. The balance of our other real estate and repossessed assets decreased to $92.0 million at December 31, 2012, from $129.9 million at December 31, 2011. The overall higher-than-historical level of expenses on other real estate and repossessed assets is associated with ongoing foreclosure activity, including current and delinquent real estate taxes paid on other real estate properties, as well as other property preservation related expenses. We expect the level of write-downs and expenses on our other real estate and repossessed assets to continue to remain at elevated levels in the near term as a result of the high level of our other real estate and repossessed assets and the expected future transfer of certain of our nonaccrual loans into our other real estate portfolio.
Other expense decreased $3.5 million for the year ended December 31, 2012, as compared to 2011. Other expense encompasses numerous general and administrative expenses including communications, insurance, freight and courier services, correspondent bank charges, loan expenses, miscellaneous losses and recoveries, memberships and subscriptions, transfer agent fees, sales taxes, travel, meals and entertainment, overdraft losses and other nonrecurring expenses. The decrease in the overall level of other expense during 2012, as compared to 2011, is reflective of the following:
•
Amortization expense and losses associated with CRA investments of $1.2 million during 2012, as compared to $2.3 million in 2011;
•
Loan expenses related to collection matters of $3.6 million during 2012, as compared to $5.3 million in 2011;
•
A reduction in overdraft losses, net of recoveries, to $678,000 in 2012, as compared to $1.2 million in 2011;
•
Write-downs of bank-owned facilities to estimated fair value less costs to sell of $150,000 during 2012, as compared to $2.6 million in 2011, associated with space consolidation initiatives; and
•
Profit improvement initiatives and management’s efforts to reduce overall expense levels; partially offset by
•
An expense of $2.3 million associated with a fair value adjustment on bank-owned facilities of eight of our Florida branches previously reported as discontinued operations that were reclassified to continuing operations during the fourth quarter of 2012; and
•
Accruals and cash payments associated with repurchase losses in our Mortgage Division, resulting in expense of $2.3 million during 2012, as compared to $1.3 million in 2011.
Comparison of 2011 and 2010. Noninterest expense decreased $68.4 million to $230.2 million for the year ended December 31, 2011, from $298.6 million in 2010. The decrease in our noninterest expense during 2011, as compared to 2010, was primarily attributable to reductions in nearly all expense categories attributable to our profit improvement initiatives and the decrease in our total assets. The following table summarizes noninterest expense for the years ended December 31, 2011 and 2010:
 
December 31,
 
Increase (Decrease)
 
2011
 
2010
 
Amount
 
%
 
(dollars expressed in thousands)
Noninterest expense:
 
 
 
 
 
 
 
Salaries and employee benefits
$
79,518

 
84,101

 
(4,583
)
 
(5.4
)%
Occupancy, net of rental income, and furniture and equipment
35,668

 
40,477

 
(4,809
)
 
(11.9
)
Postage, printing and supplies
2,777

 
3,379

 
(602
)
 
(17.8
)
Information technology fees
25,804

 
27,745

 
(1,941
)
 
(7.0
)
Legal, examination and professional fees
12,215

 
13,818

 
(1,603
)
 
(11.6
)
Amortization of intangible assets
3,024

 
3,292

 
(268
)
 
(8.1
)
Advertising and business development
1,868

 
1,479

 
389

 
26.3

FDIC insurance
16,103

 
21,664

 
(5,561
)
 
(25.7
)
Write-downs and expenses on other real estate and repossessed assets
22,983

 
44,662

 
(21,679
)
 
(48.5
)
Other
30,286

 
58,022

 
(27,736
)
 
(47.8
)
Total noninterest expense
$
230,246

 
298,639

 
(68,393
)
 
(22.9
)
Salaries and employee benefits expense decreased $4.6 million for the year ended December 31, 2011, as compared to 2010. The overall decrease in salaries and employee benefits expense is reflective of the completion of certain staff reductions in 2010 and 2011. Our total full-time equivalent employees or FTEs, excluding discontinued operations, decreased to 1,212 at December 31, 2011, from 1,347 at December 31, 2010, representing a decrease of 10.0%. The overall reduction in salaries and employee benefits expense was partially offset by an increase in our 401(k) matching contribution, resulting from the reinstatement of our 401(k) matching contribution in the first quarter of 2011 following the elimination of our matching contribution in April 2009.
Occupancy, net of rental income, and furniture and equipment expense decreased $4.8 million for the year ended December 31, 2011, as compared to 2010. The decrease reflects reduced furniture, fixture and technology equipment expenditures associated

35


with prior expansion and branch renovation activities and certain branch closures completed in conjunction with profit improvement initiatives.
Postage, printing and supplies expense decreased $602,000 for the year ended December 31, 2011, as compared to 2010, primarily reflecting decreases in office supplies expenses as a result of profit improvement initiatives.
Information technology fees decreased $1.9 million for the year ended December 31, 2011, as compared to 2010. The decrease in information technology fees is primarily due to the implementation of certain profit improvement initiatives and negotiated fee reductions with First Services, L.P, as previously discussed. Information technology fees also include fees paid to outside servicers associated with our mortgage lending, trust and small business lending divisions as well as our payroll processing department.
Legal, examination and professional fees decreased $1.6 million for the year ended December 31, 2011, as compared to 2010. The decrease in legal, examination and professional fees reflects a decrease in legal expenses associated with loan collection activities, divestiture activities and litigation matters in comparison to the level of such expenses during 2010.
Amortization of intangible assets decreased $268,000 for the year ended December 31, 2011, as compared to 2010, reflecting a decrease in the amortization of core deposit intangibles associated with prior acquisitions. Our core deposit intangibles became fully amortized during 2011.
Advertising and business development expense increased $389,000 for the year ended December 31, 2011, as compared to 2010, reflecting increased advertising during 2011 as compared to 2010.
FDIC insurance expense decreased $5.6 million for the year ended December 31, 2011, as compared to 2010. Prior to April 1, 2011, the FDIC’s assessment base for the calculation of insurance premium assessments was an institution’s average deposits. The Dodd-Frank Act required the FDIC to establish rules setting insurance premium assessments based on an institution’s average consolidated assets minus its average tangible equity instead of its deposits. The change in the assessment base had the impact of reducing the level of our FDIC insurance expense beginning with the second quarter of 2011, as previously discussed. The decrease in FDIC insurance expense is also reflective of our lower level of deposits and total assets during 2011 as compared to 2010.
Write-downs and expenses on other real estate and repossessed assets decreased $21.7 million for the year ended December 31, 2011, as compared to 2010. Write-downs related to the revaluation of certain other real estate properties and repossessed assets were $16.9 million in 2011, as compared to $34.7 million in 2010. Other real estate and repossessed asset expenses, exclusive of write-downs, such as taxes, insurance, and repairs and maintenance, were $6.1 million in 2011 as compared to $10.0 million in 2010, reflecting a decrease in the balance of other real estate and repossessed assets and the sale of certain properties that required higher operating expenditures. The balance of our other real estate and repossessed assets decreased to $129.9 million at December 31, 2011, from $140.7 million at December 31, 2010. The overall higher-than-historical level of expenses on other real estate and repossessed assets is associated with ongoing foreclosure activity, including current and delinquent real estate taxes paid on other real estate properties, as well as other property preservation related expenses.
Other expense decreased $27.7 million for the year ended December 31, 2011, as compared to 2010. The decrease in the overall level of other expense during 2011, as compared to 2010, is reflective of the following:
•
An operating loss of $13.6 million during 2010 resulting from suspected fraud involving a customer relationship;
•
Prepayment penalties of $5.1 million associated with the prepayment of all of our outstanding FHLB advances during 2010;
•
A fee of $5.5 million paid during 2010 associated with the early termination of our $120.0 million term repurchase agreement;
•
Payments related to litigation matters of $3.5 million in 2010;
•
The establishment of a specific reserve on an unfunded letter of credit of $2.4 million in 2010;
•
A reduction in overdraft losses, net of recoveries, to $1.2 million in 2011, as compared to $1.6 million in 2010; and
•
Profit improvement initiatives and management’s efforts to reduce overall expense levels; partially offset by
•
Write-downs of bank-owned facilities to estimated fair value less costs to sell of $2.6 million associated with space consolidation initiatives completed during 2011; and
•
An increase in expenses associated with CRA investments to $2.3 million in 2011, as compared to $1.5 million in 2010.
(Benefit) Provision for Income Taxes.
Comparison of 2012 and 2011. We recorded a benefit for income taxes of $139,000 and $10.7 million for the years ended December 31, 2012 and 2011, respectively. The benefit for income taxes during 2012 and 2011 reflects the establishment of a full deferred tax asset valuation allowance during 2008 and the resulting inability to record tax benefits on our net loss in 2011 due to existing federal and state net operating loss carryforwards on which the realization of the related tax benefits is not presently “more

36


likely than not,” as further described in Note 17 to our consolidated financial statements. The deferred tax asset valuation allowance was primarily established as a result of our three-year cumulative operating loss for the years ended December 31, 2008, 2007 and 2006, after considering all available objective evidence and potential tax planning strategies related to the amount of the deferred tax assets that are “more likely than not” to be realized.
Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expenses. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and results of recent operations. In projecting future taxable income, we begin with historical results adjusted for the results of discontinued operations and changes in accounting policies and incorporate assumptions including the amount of future state and federal pre-tax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts and future taxable income and are consistent with the plans and estimates we are using to manage the underlying business. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income (loss).
After analysis of all available positive and negative evidence, we believe it is reasonably possible to reverse a portion, or all, of our deferred tax asset valuation allowance in the future. Historical and forecasted positive evidence includes: pre-tax operating income for the year ended December 31, 2012; forecasted cumulative pre-tax operating income for the three years ending December 31, 2013; continued improvement in asset quality metrics; and certain other relevant factors. Any determination to reverse a portion, or all, of our deferred tax asset valuation allowance would be subject to ongoing evaluation with our advisors and subject to changes in circumstances and then-current available information.
The benefit for income taxes during 2011 also reflects the recognition of an intraperiod tax allocation between other comprehensive income and loss from continuing operations, resulting in a benefit for income taxes of $11.6 million during the third quarter of 2011 and a provision for income taxes of $1.1 million during the fourth quarter of 2011. This intraperiod tax allocation was primarily driven by market appreciation in our investment securities portfolio during the third quarter of 2011 and a subsequent decline in the fair value of our investment securities portfolio during the fourth quarter of 2011.
Comparison of 2011 and 2010. We recorded a benefit for income taxes of $10.7 million for the year ended December 31, 2011, compared to a provision for income taxes of $4.1 million for the year ended December 31, 2010. The (benefit) provision for income taxes during 2011 and 2010 reflects the establishment of a full deferred tax asset valuation allowance during 2008, as previously discussed.
The benefit for income taxes during 2011 also reflects a benefit for income taxes of $10.5 million related to an intraperiod tax allocation between other comprehensive income and loss from continuing operations, as previously discussed.
The provision for income taxes for 2010 also reflects a provision for income taxes of $6.8 million related to the establishment of a deferred tax asset valuation allowance regarding the unrealized gain on certain interest rate swap agreements that were designated as cash flow hedges on certain of our loans. These interest rate swap agreements were terminated in December 2008, and as a result, the unrealized gain at the date of termination of $20.8 million was being amortized as an increase to interest and fees on loans in the consolidated statements of operations over the remaining terms of the respective interest rate swap agreements, which had contractual maturity dates through September 2010. During the third quarter of 2010, we recorded a provision for income taxes of $6.8 million related to the expiration of the amortization period of the unrealized gain on the interest rate swap agreements with a corresponding increase to accumulated other comprehensive income. The provision for income taxes also reflects a $2.1 million benefit related to the expiration of the statute of limitations and the related reversal of certain reserves on a number of uncertain tax positions, and expense of $240,000 related to the termination of our remaining BOLI policies.
The American Taxpayer Relief Act of 2012 was enacted on January 2, 2013 and includes provisions that are effective for the 2012 tax year. ASC Topic 740, which is more fully described in Note 17 to our consolidated financial statements, requires that any change in tax law be recognized at the date of enactment, which, in this case, would be the annual or interim period that includes January 2, 2013. The impact of this new tax law is not expected to have a material impact on our consolidated financial statements or results of operations.
The level of our (benefit) provision for income taxes and the deferred tax asset valuation allowance are more fully described in Note 17 to our consolidated financial statements.
(Loss) Income from Discontinued Operations, Net of Tax
We recorded a loss from discontinued operations, net of tax, of $5.5 million for the year ended December 31, 2012, compared to a loss from discontinued operations, net of tax, of $6.5 million in 2011 and income from discontinued operations, net of tax, of

37


$3.6 million in 2010. The (loss) income from discontinued operations, net of tax, for 2012, 2011 and 2010 is reflective of the following:
•
A gain of $425,000 during the second quarter of 2011 associated with the sale of our remaining Northern Illinois Region on May 13, 2011 after the write-off of goodwill and intangible assets allocated to the Northern Illinois Region of $1.6 million;
•
A gain of $6.4 million during the third quarter of 2010 associated with the sale of a portion of our Northern Illinois Region during September 2010 after the write-off of goodwill and intangible assets allocated to the Northern Illinois Region of $9.7 million;
•
A gain of $5.0 million during the second quarter of 2010 associated with the sale of our Texas Region on April 30, 2010 after the write-off of goodwill and intangible assets allocated to the Texas Region of $20.0 million;
•
A loss of $156,000 during the second quarter of 2010 associated with the sale of MVP on April 15, 2010;
•
A gain of $8.4 million during the first quarter of 2010 associated with the sale of our Chicago Region on February 19, 2010 after the write-off of goodwill and intangible assets allocated to the Chicago Region of $26.3 million; and
•
Other income (loss) from all discontinued operations during the respective periods, as further described in Note 2 to our consolidated financial statements.
See Note 2 to our consolidated financial statements for further discussion of discontinued operations.
Net Loss Attributable to Noncontrolling Interest in Subsidiary
The net loss attributable to noncontrolling interest in subsidiary was $297,000 for the year ended December 31, 2012, compared to $3.0 million in 2011, and was comprised of the noncontrolling interest in the net losses of FB Holdings. The decrease is primarily reflective of increased gains on the sale of other real estate properties and reduced expenses and write-downs on other real estate properties associated with the reduction of loan and other real estate balances in FB Holdings during 2012 as compared to 2011.
The net loss attributable to noncontrolling interest in subsidiary was $3.0 million for the year ended December 31, 2011, compared to $6.5 million in 2010, and was comprised of the noncontrolling interest in the net losses of FB Holdings. The decrease is primarily reflective of lower collection and other real estate related expenses primarily resulting from lower balances of nonaccrual loans and other real estate in FB Holdings during 2011 as compared to 2010.
Noncontrolling interest in our subsidiaries is more fully described in Note 1 and Note 20 to our consolidated financial statements.
FINANCIAL CONDITION
Total assets decreased $99.8 million to $6.51 billion at December 31, 2012, from $6.61 billion at December 31, 2011. The decrease in our total assets was attributable to decreases in our loans, bank premises and equipment and other real estate and repossessed assets, partially offset by increases in our cash and short-term investments, our investment securities portfolio and our deferred income taxes.
Cash and cash equivalents, which are comprised of cash and short-term investments, increased $45.7 million to $518.8 million at December 31, 2012, from $473.1 million at December 31, 2011. The majority of funds in our short-term investments were maintained in our correspondent bank account with the FRB, as further discussed under “—Liquidity Management.” The increase in our cash and cash equivalents was primarily attributable to the following:
•
A decrease in loans of $337.2 million, exclusive of the loan purchase and sale transactions discussed below, loan charge-offs and transfers of loans to other real estate and repossessed assets;
•
Sales of certain special mention, potential problem and nonaccrual loans during 2012 resulting in net proceeds of $55.1 million;
•
Recoveries of loans previously charged off of $30.0 million;
•
Sales of other real estate and repossessed assets resulting in the receipt of cash proceeds from these sales of approximately $48.5 million; and
•
Cash generated by operating earnings.
These increases in cash and cash equivalents were partially offset by:
•
Payments associated with a net increase in our investment securities portfolio of $189.9 million, as further discussed below;
•
A purchase of $141.0 million of seasoned, performing one-to-four-family residential real estate loans in September 2012;
•
A decrease in our deposit balances of $130.2 million; and
•
A net decrease in our other borrowings of $25.1 million, consisting of changes in our daily repurchase agreements utilized by customers as an alternative deposit product.

38


Investment securities increased $204.6 million to $2.68 billion at December 31, 2012, from $2.47 billion at December 31, 2011. The net increase in our investment securities during 2012 reflects the utilization of excess cash and cash equivalents to fund gradual and planned increases in our investment securities portfolio in a continued effort to maximize net interest income and net interest margin while maintaining appropriate liquidity levels, and an increase in the fair value adjustment of our available-for-sale investment securities of $20.6 million during 2012 primarily resulting from a decrease in market interest rates during the period, partially offset by the sale of $106.8 million of mortgage-backed securities during the third quarter of 2012 to partially fund the purchase of the one-to-four-family residential mortgage loans, as further described below. On June 30, 2012, we reclassified $729.1 million of available-for-sale investment securities to held-to-maturity investment securities, as further described in Note 3 to our consolidated financial statements and under “—Liquidity Management.”
Loans, net of net deferred loan fees, decreased $353.5 million to $2.93 billion at December 31, 2012, from $3.28 billion at December 31, 2011. The decrease reflects the sale of $69.3 million of special mention, potential problem and nonaccrual loans resulting in net loan charge-offs of $14.5 million, other loan charge-offs of $63.6 million, transfers of loans to other real estate and repossessed assets of $24.2 million, overall continued low loan demand within our markets and other net loan activity of $337.2 million, including significant principal repayments and/or payoffs on nonperforming, potential problem and other loans in addition to loan runoff in problem loans and loans in markets we previously exited. These decreases were partially offset by the purchase of $141.0 million of seasoned, performing one-to-four-family residential real estate loans in September 2012, as further discussed under “—Loans and Allowance for Loan Losses.”
Bank premises and equipment, net of depreciation and amortization, decreased $9.7 million to $127.5 million at December 31, 2012, from $137.2 million at December 31, 2011. The decrease is primarily attributable to depreciation and amortization of $12.1 million and write-downs of certain bank-owned facilities of $3.5 million, including a write-down of $2.3 million associated with a fair value adjustment on bank-owned facilities of eight of our Florida branches previously reported as discontinued operations that were reclassified to continuing operations during the fourth quarter of 2012. These decreases were partially offset by net purchases of premises and equipment of $5.9 million.
Goodwill and other intangible assets were $125.3 million at December 31, 2012 and 2011, and reflect the allocation of $700,000 of goodwill associated with our Florida Region to assets of discontinued operations at December 31, 2012 and 2011.
Deferred income taxes increased $9.9 million to $29.0 million at December 31, 2012, from $19.1 million at December 31, 2011. The net increase in deferred income taxes is comprised of a reduction in gross deferred tax assets of $5.5 million and a reduction in the Company’s deferred tax asset valuation allowance of $15.4 million, as more fully described in Note 17 to our consolidated financial statements.
Other real estate and repossessed assets decreased $37.9 million to $92.0 million at December 31, 2012, from $129.9 million at December 31, 2011. The decrease in other real estate and repossessed assets was primarily attributable to the sale of other real estate properties and repossessed assets with a carrying value of $45.9 million at a net gain of $2.6 million, and write-downs of other real estate properties and repossessed assets of $14.5 million primarily attributable to declining real estate values on certain properties. These decreases were partially offset by foreclosures and additions to other real estate and repossessed assets aggregating $24.2 million, as further discussed under “—Loans and Allowance for Loan Losses.”
Other assets decreased $5.0 million to $68.0 million at December 31, 2012, from $73.0 million at December 31, 2011, and are primarily comprised of accrued interest receivable, servicing rights, derivative instruments and miscellaneous other receivables.
Assets and liabilities of discontinued operations were $6.7 million and $155.7 million, respectively, at December 31, 2012, as compared to assets and liabilities of discontinued operations of $6.9 million and $174.7 million, respectively, at December 31, 2011, and represent the assets and liabilities of a portion of our Florida Region expected to be sold during the second quarter of 2013. See Note 2 to our consolidated financial statements for further discussion of discontinued operations.
Deposits decreased $130.2 million to $5.49 billion at December 31, 2012, from $5.62 billion at December 31, 2011. The decrease reflects reductions of higher rate certificates of deposit and money market deposits, partially offset by an increase in demand deposits of $203.1 million attributable to organic growth through our deposit development programs and seasonal fluctuations. Time deposits and savings and money market deposits decreased $248.7 million and $84.6 million, respectively, reflecting our efforts to exit unprofitable relationships to reduce overall deposit costs and improve First Bank’s leverage ratio.
Other borrowings, which are comprised of daily securities sold under agreements to repurchase (in connection with cash management activities of our commercial deposit customers), decreased $25.1 million to $26.0 million at December 31, 2012, from $51.2 million at December 31, 2011, reflecting changes in customer balances associated with this product segment.
Deferred income taxes increased $9.9 million to $36.2 million at December 31, 2012, from $26.3 million at December 31, 2011. The net increase in deferred income taxes is primarily attributable to an increase in deferred tax liabilities associated with the

39


increase in the fair value of our available-for-sale investment securities portfolio, as more fully described in Note 17 to our consolidated financial statements.
Accrued expenses and other liabilities increased $28.3 million to $144.3 million at December 31, 2012, from $116.0 million at December 31, 2011. The increase was primarily attributable to an increase in dividends payable on our Class C Fixed Rate Cumulative Perpetual Preferred Stock, or Class C Preferred Stock, and our Class D Fixed Rate Cumulative Perpetual Preferred Stock, or Class D Preferred Stock, of $18.9 million to $61.9 million at December 31, 2012, and an increase in accrued interest payable on our junior subordinated debentures of $14.8 million to $47.9 million at December 31, 2012, as further discussed in Notes 12 and 13 to our consolidated financial statements.
Stockholders’ equity, including noncontrolling interest in subsidiary, increased $36.3 million to $300.0 million at December 31, 2012, from $263.7 million at December 31, 2011. The increase primarily reflects net income, including discontinued operations, of $26.3 million and a net increase in accumulated other comprehensive income of $29.2 million primarily associated with an increase in unrealized gains on available-for-sale investment securities resulting from the decrease in market interest rates experienced during 2012, partially offset by dividends declared of $18.9 million on our Class C Preferred Stock and our Class D Preferred Stock.
Investment Securities
We classify the securities within our investment portfolio as available for sale or held to maturity. Our investment securities portfolio consists primarily of securities designated as available for sale.
Our investment securities increased $204.6 million to $2.68 billion at December 31, 2012, from $2.47 billion at December 31, 2011. The increase in our investment securities portfolio in 2012 was primarily attributable to the utilization of excess cash and cash equivalents to fund gradual and planned increases in our investment securities portfolio in a continued effort to maximize our net interest income and net interest margin while maintaining appropriate liquidity levels and appropriate diversification within our investment securities portfolio, in addition to an increase in the fair value adjustment of our available-for-sale investment securities of $20.6 million during 2012 resulting from a decrease in market interest rates. The increase was partially offset by the sale of $106.8 million of mortgage-backed securities during the third quarter of 2012 to partially fund the purchase of the one-to-four-family residential mortgage loans, as previously discussed. Funds available from cash and cash equivalents and reductions in our loan portfolio, in addition to the reinvestment of funds available from maturities and/or calls of investment securities of $791.7 million and sales of available-for-sale investment securities of $315.2 million, were utilized to purchase investment securities of $1.30 billion during 2012.
Our investment securities increased $987.0 million to $2.47 billion at December 31, 2011, from $1.48 billion at December 31, 2010. The increase in our investment securities portfolio in 2011 was primarily attributable to the utilization of a portion of our cash and cash equivalents to fund gradual and planned increases in our investment securities portfolio in a continued effort to maximize our net interest income and net interest margin while maintaining appropriate liquidity levels and appropriate diversification within our investment securities portfolio, in addition to an increase in the fair value adjustment of our available-for-sale investment securities of $29.6 million during 2011 resulting from a decrease in market interest rates. Funds available from cash and cash equivalents and reductions in our loan portfolio, in addition to the reinvestment of funds available from maturities and/or calls of investment securities of $342.8 million and sales of available-for-sale investment securities of $283.7 million, were utilized to purchase investment securities of $1.59 billion during 2011. Purchases of investment securities during 2011 included $193.0 million of corporate securities, primarily representing large financial institutions.
Additional information regarding our investment securities portfolio is more fully described in Note 3 to our consolidated financial statements.

40


Loans and Allowance for Loan Losses
Loan Portfolio Composition. Loans, net of net deferred loan fees, represented 45.0% of our assets as of December 31, 2012, compared to 49.7% of our assets at December 31, 2011. Loans, net of net deferred loan fees, decreased $353.5 million to $2.93 billion at December 31, 2012 from $3.28 billion at December 31, 2011. The following table summarizes the composition of our loan portfolio by portfolio segment and the percent of each portfolio segment to the total portfolio as of the dates presented:
 
December 31,
 
2012
 
2011
 
2010
 
2009
 
2008
 
Amount
 
%
 
Amount
 
%
 
Amount
 
%
 
Amount
 
%
 
Amount
 
%
 
(dollars expressed in thousands)
 
 
Commercial, financial and agricultural
$
610,301

 
21.3
 %
 
$
725,195

 
22.3
 %
 
$
1,045,832

 
23.5
 %
 
$
1,692,922

 
25.8
 %
 
$
2,575,505

 
30.1
 %
Real estate construction and development
174,979

 
6.1

 
249,987

 
7.7

 
490,766

 
11.1

 
1,052,922

 
16.0

 
1,572,212

 
18.4

Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four-family residential loans
986,767

 
34.4

 
902,438

 
27.7

 
1,050,895

 
23.7

 
1,279,166

 
19.5

 
1,553,366

 
18.1

Multi-family residential loans
103,684

 
3.6

 
127,356

 
3.9

 
178,289

 
4.0

 
223,044

 
3.4

 
220,404

 
2.6

Commercial real estate loans
969,680

 
33.9

 
1,225,538

 
37.7

 
1,642,920

 
37.0

 
2,269,372

 
34.6

 
2,562,598

 
30.0

Consumer and installment
19,262

 
0.7

 
23,596

 
0.7

 
33,623

 
0.8

 
56,029

 
0.8

 
77,877

 
0.9

Net deferred loan fees
(59
)
 
—

 
(942
)
 
—

 
(4,511
)
 
(0.1
)
 
(7,846
)
 
(0.1
)
 
(7,707
)
 
(0.1
)
Total loans, excluding loans held for sale
2,864,614

 
100.0
 %
 
3,253,168

 
100.0
 %
 
4,437,814

 
100.0
 %
 
6,565,609

 
100.0
 %
 
8,554,255

 
100.0
 %
Loans held for sale
66,133

 
 
 
31,111

 
 
 
54,470

 
 
 
42,684

 
 
 
38,720

 
 
Total loans
$
2,930,747

 
 
 
$
3,284,279

 
 
 
$
4,492,284

 
 
 
$
6,608,293

 
 
 
$
8,592,975

 
 
The following table summarizes the composition of our loan portfolio by geographic region and/or business segment at December 31, 2012 and 2011:
 
December 31,
 
2012
 
2011
 
(dollars expressed in thousands)
Mortgage Division
$
582,021

 
404,761

Florida
65,582

 
85,633

Northern California
383,519

 
497,434

Southern California
922,191

 
998,976

Chicago
122,508

 
190,610

Missouri
528,168

 
613,417

Texas
41,951

 
99,873

First Bank Business Capital, Inc.
—

 
19,496

Northern and Southern Illinois
212,177

 
278,541

Other
72,630

 
95,538

Total
$
2,930,747

 
3,284,279

We attribute the net decrease in our loan portfolio in 2012 primarily to:
•
A decrease of $114.9 million, or 15.8%, in our commercial, financial and agricultural portfolio, reflecting gross loan charge-offs of $17.4 million, low loan demand within our markets and our efforts to reduce the overall level of our special mention, potential problem and nonaccrual loans within this portfolio segment, including the sale of $19.4 million of potential problem and nonaccrual loans during 2012;
•
A decrease of $75.0 million, or 30.0%, in our real estate construction and development portfolio, primarily attributable to gross loan charge-offs of $12.2 million, transfers to other real estate and repossessed assets of $10.0 million, the sale of $5.3 million of potential problem and nonaccrual loans, and other loan activity reflective of our efforts to reduce the overall level of our special mention, potential problem and nonaccrual loans within this portfolio segment. The following table summarizes the composition of our real estate construction and development portfolio by region as of December 31, 2012 and 2011:

41


 
December 31,
 
2012
 
2011
 
(dollars expressed in thousands)
Northern California
$
30,388

 
51,968

Southern California
88,893

 
99,517

Chicago
21,024

 
30,105

Missouri
9,791

 
18,096

Texas
9,927

 
24,850

Florida
378

 
1,398

Northern and Southern Illinois
8,260

 
17,210

Other
6,318

 
6,843

Total
$
174,979

 
249,987

We have reduced our exposure to our real estate construction and development portfolio over the past several years due primarily to weak economic conditions and declines in real estate values in certain of our market areas which resulted in higher levels of charge-offs and foreclosures during these periods. As a result of our efforts to reduce our exposure to this portfolio segment, we decreased the portfolio balance by $1.97 billion, or 91.8%, from $2.14 billion at December 31, 2007 to $175.0 million at December 31, 2012. Of the remaining portfolio balance of $175.0 million, $32.2 million, or 18.4%, of these loans were on nonaccrual status as of December 31, 2012, including an $18.6 million loan in our Northern California region, and $81.4 million, or 46.5%, of these loans were considered potential problem loans, including a $68.4 million loan relationship in our Southern California region, as further discussed below;
•
An increase of $84.3 million, or 9.3%, in our one-to-four-family residential real estate loan portfolio primarily attributable to the purchase of $141.0 million of seasoned, performing one-to-four-family residential real estate loans from another financial institution on September 28, 2012 and new loan production, partially offset by gross loan charge-offs of $21.8 million, transfers to other real estate of $7.4 million and principal payments. The following table summarizes the composition of our one-to-four-family residential real estate loan portfolio as of December 31, 2012 and 2011:
 
December 31,
 
2012
 
2011
 
(dollars expressed in thousands)
One-to-four-family residential real estate:
 
 
 
Bank portfolio
$
122,338

 
165,578

Mortgage Division portfolio, excluding Florida
427,759

 
269,097

Florida Mortgage Division portfolio
82,212

 
97,818

Home equity portfolio
354,458

 
369,945

Total
$
986,767

 
902,438

Our Bank portfolio consists of mortgage loans originated to customers from our retail branch banking network. The decrease in this portfolio of $43.2 million, or 26.1%, during 2012 is primarily attributable to principal payments resulting from an increasing volume of loan refinancings and the low mortgage interest rate environment. As of December 31, 2012, approximately $8.5 million, or 7.0%, of this portfolio is considered impaired, consisting of nonaccrual loans of $6.9 million and performing troubled debt restructurings, or performing TDRs, of $1.6 million.
Our Mortgage Division portfolio, excluding Florida, consists of both prime mortgage loans and Alt A and sub-prime mortgage loans that were originated prior to our discontinuation of Alt A and sub-prime loan products in 2007. The increase in this portfolio of $158.7 million, or 59.0%, during 2012 is primarily attributable to the purchase of $141.0 million of seasoned, performing one-to-four-family residential real estate loans from another financial institution on September 28, 2012 and the addition of approximately $67.6 million of new loan production into this portfolio, consisting of jumbo adjustable rate and 10 and 15-year fixed rate mortgages; partially offset by principal payments, gross loan charge-offs of $10.0 million and transfers to other real estate. As of December 31, 2012, approximately $88.2 million, or 20.6%, of this portfolio is considered impaired, consisting of nonaccrual loans of $17.2 million and performing TDRs of $71.0 million, including loans modified in the Home Affordable Modification Program, or HAMP, of $64.2 million.
Our Florida Mortgage Division portfolio, the majority of which was acquired in November 2007 through our acquisition of Coast Bank, consists primarily of prime mortgage loans and Alt A mortgage loans. The decrease in this portfolio of $15.6 million, or 16.0%, is primarily attributable to principal payments, gross loan charge-offs of $3.1 million and transfers to other real estate. As of December 31, 2012, approximately $9.9 million, or 12.0%, of this portfolio is considered impaired, consisting of performing TDRs of $7.3 million, including loans modified in HAMP of $5.5 million, and nonaccrual loans of $2.6 million. Our Mortgage Division portfolio, excluding Florida, and our Florida Mortgage Division portfolio are collectively defined as our Mortgage Division portfolio unless otherwise noted.

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Our home equity portfolio consists of loans originated to customers from our retail branch banking network. The decrease in this portfolio of $15.5 million, or 4.2%, during 2012 is primarily attributable to gross loan charge-offs of $5.0 million, in addition to principal payments and ordinary and seasonal fluctuations experienced within this loan product type. As of December 31, 2012, approximately $8.7 million, or 2.4%, of this portfolio is on nonaccrual status;
•
A decrease of $23.7 million, or 18.6%, in our multi-family residential real estate portfolio primarily attributable to reduced loan demand within our markets as well as our efforts to reduce the overall level of our special mention, potential problem and nonaccrual loans within this portfolio segment, including the payoff of a $15.4 million special mention credit in our Southern Illinois region in the third quarter of 2012, and gross loan charge-offs of $2.4 million. As of December 31, 2012, approximately $35.0 million, or 33.8%, of this portfolio is considered impaired, consisting of nonaccrual loans of $6.8 million and performing TDRs of $28.2 million, consisting solely of one loan relationship in our Chicago region restructured during the fourth quarter of 2012.
•
A decrease of $255.9 million, or 20.9%, in our commercial real estate portfolio primarily attributable to gross loan charge-offs of $23.9 million, transfers to other real estate of $6.7 million, reduced loan demand within our markets and our efforts to reduce the overall level of our special mention, potential problem and nonaccrual loans within this portfolio segment, including the sale of $43.9 million of special mention, potential problem and nonaccrual loans and the payoff of a $17.0 million non-owner occupied performing TDR in our Northern California region in the second quarter of 2012. The following table summarizes the composition of our commercial real estate portfolio by loan type as of December 31, 2012 and 2011:
 
December 31,
 
2012
 
2011
 
(dollars expressed in thousands)
Farmland
$
17,784

 
19,322

Owner occupied
552,983

 
686,081

Non-owner occupied
398,913

 
520,135

Total
$
969,680

 
1,225,538

Our non-owner occupied portfolio constitutes approximately 41.1% of our commercial real estate portfolio at December 31, 2012. As of December 31, 2012, $13.7 million, or 3.4%, of our non-owner occupied segment is considered impaired, consisting of nonaccrual loans of $7.9 million and performing TDRs of $5.8 million. The following table summarizes the composition of our non-owner occupied loan portfolio by region as of December 31, 2012 and 2011:
 
December 31,
 
2012
 
2011
 
(dollars expressed in thousands)
Northern California
$
120,247

 
146,808

Southern California
174,494

 
213,394

Chicago
4,149

 
19,918

Missouri
60,981

 
77,449

Texas
14,203

 
27,639

Florida
7,122

 
10,233

Northern and Southern Illinois
15,921

 
22,803

Other
1,796

 
1,891

Total
$
398,913

 
520,135

•
A decrease of $4.3 million, or 18.4%, in our consumer and installment portfolio, reflecting portfolio runoff and reduced loan demand within our markets; and
•
An increase of $35.0 million, or 112.6%, in our loans held for sale portfolio primarily resulting from an increase in origination volumes and the timing of subsequent sales into the secondary mortgage market.
We attribute the net decrease in our loan portfolio in 2011 primarily to:
•
A decrease of $320.6 million, or 30.7%, in our commercial, financial and agricultural portfolio, reflecting gross loan charge-offs of $46.3 million and portfolio runoff associated with a decline in internal production, low loan demand within our markets and our efforts to reduce the overall level of our special mention, potential problem and nonaccrual loans within this portfolio segment;
•
A decrease of $240.8 million, or 49.1%, in our real estate construction and development portfolio, primarily attributable to gross loan charge-offs of $35.5 million, transfers to other real estate and repossessed assets of $28.2 million and other loan activity reflective of our efforts to reduce the overall level of our special mention, potential problem and nonaccrual

43


loans within this portfolio segment, including the sale of a $43.7 million special mention loan in our Texas region during the second quarter of 2011. The following table summarizes the composition of our real estate construction and development portfolio by region as of December 31, 2011 and 2010:
 
December 31,
 
2011
 
2010
 
(dollars expressed in thousands)
Northern California
$
51,968

 
64,647

Southern California
99,517

 
157,306

Chicago
30,105

 
44,166

Missouri
18,096

 
62,012

Texas
24,850

 
128,794

Florida
1,398

 
3,799

Northern and Southern Illinois
17,210

 
28,721

Other
6,843

 
1,321

Total
$
249,987

 
490,766

Of the remaining portfolio balance of $250.0 million, $71.2 million, or 28.5%, of these loans were on nonaccrual status as of December 31, 2011 and $97.2 million, or 38.9%, of these loans were considered potential problem loans, as further discussed below;
•
A decrease of $148.5 million, or 14.1%, in our one-to-four-family residential real estate loan portfolio primarily attributable to gross loan charge-offs of $31.4 million, transfers to other real estate of $14.4 million and principal payments. The following table summarizes the composition of our one-to-four-family residential real estate loan portfolio as of December 31, 2011 and 2010:
 
December 31,
 
2011
 
2010
 
(dollars expressed in thousands)
One-to-four-family residential real estate:
 
 
 
Bank portfolio
$
165,578

 
239,363

Mortgage Division portfolio, excluding Florida
269,097

 
286,584

Florida Mortgage Division portfolio
97,818

 
125,369

Home equity portfolio
369,945

 
399,579

Total
$
902,438

 
1,050,895

The decrease in our Bank portfolio of $73.8 million, or 30.8%, during 2011 is primarily attributable to principal payments, including the payoff of a single $10.0 million loan relationship during the first quarter of 2011, primarily resulting from an increasing volume of loan refinancings and the mortgage interest rate environment. As of December 31, 2011, approximately $14.7 million, or 8.9%, of our Bank portfolio is on nonaccrual status.
The decrease in our Mortgage Division portfolio of $17.5 million, or 6.1%, during 2011 is primarily attributable to principal payments, gross charge-offs of $12.4 million and transfers to other real estate; partially offset by the addition of approximately $17.6 million of new loan production into this portfolio, consisting of jumbo adjustable rate and 10 and 15-year fixed rate mortgages. As of December 31, 2011, approximately $90.2 million, or 33.5%, of this portfolio is considered impaired, consisting of nonaccrual loans of $13.9 million and performing TDRs of $76.3 million, including those loans modified in HAMP, of $68.7 million.
The decrease in our Florida Mortgage Division portfolio of $27.6 million, or 22.0%, is primarily attributable to principal payments, gross charge-offs of $6.7 million and transfers to other real estate. As of December 31, 2011, approximately $9.2 million, or 9.4%, of this portfolio is considered impaired, consisting of performing TDRs of $6.3 million, including loans modified in HAMP of $4.3 million, and nonaccrual loans of $2.9 million.
The decrease in our home equity portfolio of $29.6 million, or 7.4%, during 2011 is primarily attributable to gross loan charge-offs of $7.7 million, in addition to principal payments and ordinary and seasonal fluctuations experienced within this loan product type. As of December 31, 2011, approximately $6.9 million, or 1.9%, of this portfolio is on nonaccrual status;
•
A decrease of $50.9 million, or 28.6%, in our multi-family residential real estate portfolio primarily attributable to gross loan charge-offs of $3.1 million, portfolio runoff associated with a decline in internal production, reduced loan demand within our markets as well as our efforts to reduce the overall level of our special mention, potential problem and nonaccrual loans within this portfolio segment;

44


•
A decrease of $417.4 million, or 25.4%, in our commercial real estate portfolio primarily attributable to gross loan charge-offs of $38.0 million, transfers to other real estate of $24.1 million and our efforts to reduce our exposure to commercial real estate in the current economic environment. The following table summarizes the composition of our commercial real estate portfolio by loan type as of December 31, 2011 and 2010:
 
December 31,
 
2011
 
2010
 
(dollars expressed in thousands)
Farmland
$
19,322

 
36,735

Owner occupied
686,081

 
798,842

Non-owner occupied
520,135

 
807,343

Total
$
1,225,538

 
1,642,920

Within our commercial real estate portfolio, we experienced the most distress in our non-owner occupied portfolio, which constitutes approximately 42.4% of our commercial real estate portfolio at December 31, 2011. As of December 31, 2011, $44.8 million, or 8.6%, of our non-owner occupied segment is considered impaired, consisting of performing TDRs of $21.7 million and nonaccrual loans of $23.1 million. The following table summarizes the composition of our non-owner occupied loan portfolio by region as of December 31, 2011 and 2010:
 
December 31,
 
2011
 
2010
 
(dollars expressed in thousands)
Northern California
$
146,808

 
208,127

Southern California
213,394

 
305,287

Chicago
19,918

 
27,907

Missouri
77,449

 
149,106

Texas
27,639

 
61,258

Florida
10,233

 
13,338

Northern and Southern Illinois
22,803

 
24,990

Other
1,891

 
17,330

Total
$
520,135

 
807,343

The decrease in non-owner occupied loans in our Southern California region of $91.9 million includes the payoff of a single credit relationship in the amount of $29.0 million in the second quarter of 2011;
•
A decrease of $10.0 million, or 29.8%, in our consumer and installment portfolio, reflecting gross loan charge-offs of $457,000 and portfolio runoff associated with a decline in internal production and reduced loan demand within our markets;
•
A decrease of $23.4 million, or 42.9%, in our loans held for sale portfolio primarily resulting from a decrease in origination volumes and subsequent sales into the secondary mortgage market; and
•
A decrease of $3.6 million, or 79.1%, in our net deferred loan fees, primarily attributable to an unearned discount of $6.8 million associated with the sale of the $43.7 million real estate construction and development loan in our Texas region as discussed above.
Loans at December 31, 2012 mature as follows:
 
 
 
Over One Year Through
Five Years
 
Over Five Years
 
 
 
One Year
or Less
 
Fixed
Rate
 
Floating
Rate
 
Fixed
Rate
 
Floating
Rate
 
Total
 
(dollars expressed in thousands)
Commercial, financial and agricultural
$
156,835

 
139,199

 
210,569

 
41,439

 
62,259

 
610,301

Real estate construction and development
126,804

 
28,660

 
13,017

 
181

 
6,317

 
174,979

Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
One-to-four-family residential loans
23,172

 
44,640

 
38,781

 
283,006

 
597,168

 
986,767

Multi-family residential loans
7,407

 
53,645

 
6,918

 
26,064

 
9,650

 
103,684

Commercial real estate loans
131,750

 
420,535

 
184,155

 
118,094

 
115,146

 
969,680

Consumer and installment and net deferred loan fees
3,626

 
13,245

 
2,141

 
121

 
70

 
19,203

Loans held for sale
66,133

 
—

 
—

 
—

 
—

 
66,133

Total loans
$
515,727

 
699,924

 
455,581

 
468,905

 
790,610

 
2,930,747


45


The following table summarizes the components of changes in our loan portfolio, net of net deferred loan fees, for the five years ended December 31, 2012:
 
Increase (Decrease) For the Year Ended December 31,
 
2012
 
2011
 
2010
 
2009
 
2008
 
(dollars expressed in thousands)
Internal loan volume (decrease) increase
$
(337,206
)
 
(868,141
)
 
(1,339,445
)
 
(749,712
)
 
184,743

Loans purchased (1)
141,048

 
—

 
—

 
—

 
—

Loans and leases sold (2)
(55,081
)
 
(115,296
)
 
(245,420
)
 
(308,034
)
 
(37,643
)
Loans transferred to assets held for sale
—

 
—

 
(794
)
 
(14,382
)
 
—

Loans transferred to discontinued operations (3)
—

 
—

 
(40,265
)
 
(416,245
)
 
—

Loans charged-off
(78,070
)
 
(154,627
)
 
(331,196
)
 
(352,723
)
 
(331,021
)
Loans transferred to other real estate and repossessed assets
(24,223
)
 
(69,941
)
 
(158,889
)
 
(143,586
)
 
(109,288
)
Total decrease in loan portfolio
$
(353,532
)
 
(1,208,005
)
 
(2,116,009
)
 
(1,984,682
)
 
(293,209
)
 
(1)
Loans purchased for 2012 consist of $141.0 million of seasoned, performing one-to-four-family residential real estate loans purchased for our Mortgage Banking portfolio from another financial institution.
(2)
Loans and leases sold for 2012 primarily reflects the sale of special mention, potential problem and nonaccrual loans, resulting in net loan charge-offs of $14.5 million. Loans and leases sold for 2011 include loans associated with the sale of the remaining portion of our Northern Illinois Region of $37.5 million, loans associated with our Edwardsville Branch of $667,000 and other commercial loan sales of $77.1 million. Loans and leases sold for 2010 include loans associated with the partial sale of our Northern Illinois Region of $137.4 million and other commercial loan sales of $108.0 million. Loans and leases sold for 2009 include loans associated with WIUS, our former asset based lending subsidiary and restaurant franchise loans of $141.3 million, $101.5 million and $64.4 million, respectively, in addition to loans associated with our Springfield Branch of $887,000. See Note 2 to our consolidated financial statements for further discussion of discontinued operations.
(3)
Loans transferred to discontinued operations for 2010 include loans associated with our Northern Illinois Region of $40.3 million. Loans transferred to discontinued operations for 2009 include loans associated with our Chicago Region, Texas Region and WIUS of $311.3 million, $103.4 million and $1.5 million, respectively. See Note 2 to our consolidated financial statements for further discussion of discontinued operations.
Nonperforming Assets. Nonperforming assets include nonaccrual loans, other real estate and repossessed assets. The following table presents the categories of nonperforming assets and certain ratios as of the dates presented:
 
December 31,
 
2012
 
2011
 
2010
 
2009
 
2008
 
(dollars expressed in thousands)
Nonperforming Assets: (1)
 
 
 
 
 
 
 
 
 
Nonaccrual loans:
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
$
19,050

 
55,340

 
67,365

 
41,408

 
40,647

Real estate construction and development
32,152

 
71,244

 
134,244

 
407,077

 
270,444

One-to-four-family residential real estate:
 
 
 
 
 
 
 
 
 
Bank portfolio
6,910

 
14,690

 
14,479

 
13,500

 
10,996

Mortgage Division portfolio
19,780

 
16,778

 
33,386

 
94,433

 
69,122

Home equity portfolio
8,671

 
6,940

 
7,122

 
4,303

 
3,022

Multi-family residential
6,761

 
7,975

 
12,960

 
14,734

 
545

Commercial real estate
16,520

 
47,262

 
129,187

 
115,312

 
23,009

Consumer and installment
28

 
22

 
165

 
337

 
—

Total nonaccrual loans
109,872

 
220,251

 
398,908

 
691,104

 
417,785

Other real estate and repossessed assets
91,995

 
129,896

 
140,665

 
126,911

 
92,218

Total nonperforming assets
$
201,867

 
350,147

 
539,573

 
818,015

 
510,003

 
 
 
 
 
 
 
 
 
 
Loans, net of net deferred loan fees
$
2,930,747

 
3,284,279

 
4,492,284

 
6,608,293

 
8,592,975

 
 
 
 
 
 
 
 
 
 
Performing troubled debt restructurings
$
128,917

 
126,442

 
112,903

 
54,336

 
24,641

 
 
 
 
 
 
 
 
 
 
Loans past due 90 days or more and still accruing
$
1,090

 
2,744

 
5,523

 
3,807

 
7,094

 
 
 
 
 
 
 
 
 
 
Ratio of:
 
 
 
 
 
 
 
 
 
Allowance for loan losses to loans
3.13
%
 
4.19
%
 
4.48
%
 
4.03
%
 
2.56
%
Nonaccrual loans to loans
3.75

 
6.71

 
8.88

 
10.46

 
4.86

Allowance for loan losses to nonaccrual loans
83.37

 
62.52

 
50.40

 
38.55

 
52.71

Nonperforming assets to loans, other real estate and repossessed assets
6.68

 
10.26

 
11.65

 
12.15

 
5.87

 
(1)
During the first quarter of 2010, the Company modified its definition of nonperforming assets to exclude performing TDRs because these loans were performing in accordance with the current or modified terms. Prior periods have been adjusted for this reclassification.
Our nonperforming assets, consisting of nonaccrual loans, other real estate and repossessed assets, were $201.9 million, $350.1 million and $539.6 million at December 31, 2012, 2011 and 2010, respectively.

46


We attribute the $110.4 million, or 50.1%, net decrease in our nonaccrual loans during the year ended December 31, 2012 to the following:
•
A decrease in nonaccrual loans of $36.3 million, or 65.6%, in our commercial, financial and agricultural portfolio, primarily driven by gross loan charge-offs of $17.4 million, the sale of $15.0 million of nonaccrual loans, including a $10.2 million nonaccrual loan in our First Bank Business Capital, Inc. subsidiary resulting in a charge-off of $601,000 during the first quarter of 2012, and payments received, partially offset by additions to nonaccrual loans during the year;
•
A decrease in nonaccrual loans of $39.1 million, or 54.9%, in our real estate construction and development loan portfolio driven by gross loan charge-offs of $12.2 million, transfers to other real estate of $10.0 million, the sale of $3.5 million of nonaccrual loans, and payments received, partially offset by additions to nonaccrual loans during the year. Nonaccrual real estate construction and development loans at December 31, 2012 include a single loan in our Northern California region with a recorded investment of $18.6 million. Although the level of deterioration in this portfolio is slowing due in part to the decline in the total portfolio balance, as previously discussed, we continue to experience deterioration as a result of weak economic conditions and declines in real estate values in certain of our market areas, and we expect these trends to continue until market conditions stabilize in our primary market areas;
•
A decrease in nonaccrual loans of $3.0 million, or 7.9%, in our one-to-four-family residential real estate loan portfolio driven by gross loan charge-offs of $21.8 million, transfers to other real estate of $7.4 million and payments received, partially offset by additions to nonaccrual loans during the year. We continue to modify loans under HAMP where deemed economically advantageous to our borrowers and us;
•
A decrease in nonaccrual loans of $1.2 million, or 15.2%, in our multi-family residential loan portfolio primarily driven by gross loan charge-offs of $2.4 million and payments received, partially offset by additions to nonaccrual loans during the year; and
•
A decrease in nonaccrual loans of $30.7 million, or 65.0%, in our commercial real estate portfolio primarily driven by gross loan charge-offs of $23.9 million, transfers to other real estate of $6.7 million, the sale of $11.1 million of nonaccrual loans, and payments received, partially offset by additions to nonaccrual loans during the year.
The decrease in other real estate and repossessed assets of $37.9 million, or 29.2%, during 2012 was primarily driven by the sale of other real estate properties with an aggregate carrying value of $45.9 million at a net gain of $2.6 million and write-downs of other real estate and repossessed assets of $14.5 million attributable to declining real estate values on certain properties, partially offset by foreclosures and other additions to other real estate aggregating $24.2 million. Of the $92.0 million of other real estate and repossessed assets at December 31, 2012, $77.7 million consisted of collateral with the most recent appraisal date being in 2012. The remaining $14.3 million of other real estate and repossessed assets at December 31, 2012 consisted of collateral with the most recent appraisal date being in 2011, 2010 and 2009 of $11.7 million, $2.6 million and $4,000, respectively.
The following table summarizes the composition of our nonperforming assets by region / business segment at December 31, 2012 and 2011:
 
December 31,
 
2012
 
2011
 
(dollars expressed in thousands)
Mortgage Division
$
22,507

 
22,137

Florida
2,308

 
5,819

Northern California
25,661

 
42,370

Southern California
62,130

 
85,233

Chicago
18,126

 
37,760

Missouri
36,411

 
60,578

Texas
9,194

 
40,025

First Bank Business Capital, Inc.
—

 
11,411

Northern and Southern Illinois
13,362

 
28,931

Other
12,168

 
15,883

Total nonperforming assets
$
201,867

 
350,147

During 2012, we experienced a decline in nonperforming assets in all of our regions, with the exception of our Mortgage Division, as a result of payment and sales activity on loans, sales of other real estate properties, charge-offs of loans and write-downs of other real estate properties. We have been successful in reducing our overall level of nonperforming assets as a result of the completion of several initiatives in our Asset Quality Improvement Plan.
We attribute the $178.7 million, or 44.8%, net decrease in our nonaccrual loans during the year ended December 31, 2011 to the following:

47


•
A decrease in nonaccrual loans of $12.0 million, or 17.9%, in our commercial, financial and agricultural portfolio, primarily driven by gross loan charge-offs of $46.3 million and payments received, partially offset by additions to nonaccrual loans during the year, including one credit in our First Bank Business Capital, Inc. subsidiary with a recorded investment of $10.6 million;
•
A decrease in nonaccrual loans of $63.0 million, or 46.9%, in our real estate construction and development loan portfolio driven by gross loan charge-offs of $35.5 million, transfers to other real estate and repossessed assets of $28.2 million and payments received, partially offset by additions to nonaccrual loans during the year. Nonaccrual construction and development loans at December 31, 2011 include a single loan in our Northern California region with a recorded investment of $19.7 million and a single loan in our Texas region with a recorded investment of $8.8 million;
•
A decrease in nonaccrual loans of $16.6 million, or 49.7%, in our one-to-four-family residential real estate Mortgage Division loan portfolio primarily driven by gross loan charge-offs of $19.1 million, transfers to other real estate of $9.3 million and payments received, partially offset by additions to nonaccrual loans during the year driven by current market conditions and the overall deterioration of Alt A and sub-prime residential mortgage loan products experienced throughout the mortgage banking industry;
•
A decrease in nonaccrual loans of $5.0 million, or 38.5%, in our multi-family residential loan portfolio primarily driven by gross loan charge-offs of $3.1 million, transfers to other real estate of $1.4 million and payments received, partially offset by new additions to nonaccrual loans during the year resulting from continued weak economic conditions and declines in real estate values; and
•
A decrease in nonaccrual loans of $81.9 million, or 63.4%, in our commercial real estate portfolio primarily driven by gross loan charge-offs of $38.0 million, transfers to other real estate of $24.1 million and payments received, partially offset by new additions to nonaccrual loans during the year resulting from continued weak economic conditions and declines in real estate values. During the second quarter of 2011, a single $29.0 million nonaccrual credit relationship in our Southern California region was repaid.
The decrease in other real estate and repossessed assets of $10.8 million, or 7.7%, during 2011 was primarily driven by the sale of other real estate properties with an aggregate carrying value of $66.6 million at a net loss of $1.3 million and write-downs of other real estate and repossessed assets of $16.9 million attributable to declining real estate values on certain properties, partially offset by foreclosures and other additions to other real estate and repossessed assets aggregating $76.4 million.
As of December 31, 2012, 2011 and 2010, loans identified by management as TDRs aggregating $40.0 million, $40.8 million $26.2 million, respectively, were on nonaccrual status and were classified as nonperforming loans.
While we continue our efforts to reduce nonperforming and potential problem loans, we expect the unstable market conditions associated with our loan portfolio to continue, which will likely continue to impact the overall level of our nonperforming and potential problem loans, loan charge-offs, provision for loan losses and other real estate and repossessed assets balances.
Performing Troubled Debt Restructurings. The following table presents the categories of performing TDRs as of December 31, 2012 and 2011:
 
December 31,
 
2012
 
2011
 
(dollars expressed in thousands)
Commercial, financial and agricultural
$
—

 
4,264

Real estate construction and development
10,031

 
12,014

Real estate mortgage:
 
 
 
One-to-four-family residential
79,905

 
82,629

Multi-family residential
28,240

 
3,166

Commercial real estate
10,741

 
24,369

Total performing troubled debt restructurings
$
128,917

 
126,442

The increase in performing TDRs of $2.5 million, or 2.0%, during 2012 was primarily attributable to the modification of the contractual terms of a $28.2 million multi-family residential loan relationship in our Chicago region during the fourth quarter of 2012, partially offset by the payoff of a $17.0 million commercial real estate loan in our Northern California region during the second quarter of 2012 and other payment activity. We are closely monitoring the $28.2 million loan relationship in our Chicago region. While facts and circumstances are subject to change in the future, the borrower continues to service this obligation in accordance with the existing terms and conditions of the credit agreement as of December 31, 2012.
Potential Problem Loans. As of December 31, 2012 and 2011, loans aggregating $116.1 million and $233.5 million, respectively, which were not classified as nonperforming assets or performing TDRs, were identified by management as having potential

48


credit problems, or potential problem loans. These loans are generally defined as loans having an internally assigned grade of substandard and loans in the Mortgage Division which are 30-89 days past due. The following table presents the categories of our potential problem loans as of December 31, 2012 and 2011:
 
December 31,
 
2012
 
2011
 
(dollars expressed in thousands)
Commercial, financial and agricultural
$
8,423

 
32,851

Real estate construction and development
81,364

 
97,158

Real estate mortgage:
 
 
 
One-to-four-family residential
11,664

 
13,797

Multi-family residential
773

 
28,789

Commercial real estate
13,868

 
60,876

Total potential problem loans
$
116,092

 
233,471

Potential problem loans decreased $117.4 million, or 50.3%, during 2012. The decrease in potential problem loans is primarily attributable to loan sales of $21.7 million, the reclassification to performing TDRs of a $28.2 million loan relationship in our Chicago region during the fourth quarter of 2012, as previously discussed, upgrades of certain potential problem loans to special mention status and transfers to nonaccrual status, in addition to payment activity. Potential problem loans at December 31, 2012 include a $68.4 million real estate construction and development credit relationship in our Southern California region. We are continuing to closely monitor this loan relationship. Based on recent valuations of the underlying collateral securing this loan relationship, we have determined that it is currently adequately secured. While facts and circumstances are subject to change in the future, the borrower continues to service this obligation in accordance with the existing terms and conditions of the credit agreement as of December 31, 2012.
The following table summarizes the composition of our potential problem loans by region / business segment at December 31, 2012 and 2011:
 
December 31,
 
2012
 
2011
 
(dollars expressed in thousands)
Mortgage Division
$
6,627

 
4,429

Florida
4,443

 
8,100

Northern California
860

 
3,507

Southern California
88,690

 
113,682

Chicago
1,835

 
41,720

Missouri
7,391

 
28,349

Texas
842

 
3,359

First Bank Business Capital, Inc.
—

 
6,114

Northern and Southern Illinois
4,775

 
20,922

Other
629

 
3,289

Total potential problem loans
$
116,092

 
233,471

During 2012, we experienced a decline in potential problem loans in most of our regions as a result of payment activity, upgrades of certain loans to special mention status from potential problem status, transfers to nonaccrual and performing TDR status and the sale of certain potential problem loans, as previously discussed. We have been successful in reducing the overall level of our potential problem loans as a result of the completion of several initiatives in our Asset Quality Improvement Plan.
Our credit risk management policies and procedures, as further described under “—Allowance for Loan Losses,” focus on identifying potential problem loans. Potential problem loans may be identified by the assigned lender, the credit administration department or the internal credit review department. Specifically, the originating loan officers have primary responsibility for monitoring and overseeing their respective credit relationships, including, but not limited to: (a) periodic reviews of financial statements; (b) periodic site visits to inspect and evaluate loan collateral; (c) ongoing communication with primary borrower representatives; and (d) appropriately monitoring and adjusting the risk rating of the respective credit relationships should ongoing conditions or circumstances associated with the relationship warrant such adjustments. In addition, in the current severely weakened economic environment, our credit administration department and our internal credit review department are reviewing all loans with credit exposure over certain thresholds in loan portfolio segments in which we, or other financial institutions, have experienced significant loan charge-offs, such as real estate construction and development and one-to-four-family residential real estate loans, and on loan portfolio segments that appear to be most likely to generate additional loan charge-offs in the future, such as commercial real estate. We include adversely rated credits, including potential problem loans, on our monthly loan watch list. Loans on our watch list require regular detailed loan status reports prepared by the responsible officer which are discussed in formal meetings with internal credit review and credit administration staff members that are

49


generally conducted on a quarterly basis. The primary purpose of these meetings is to closely monitor these loan relationships and further develop, modify and oversee appropriate action plans with respect to the ultimate and timely resolution of the individual loan relationships.
Each loan is assigned an FDIC collateral code at the time of origination which provides management with information regarding the nature and type of the underlying collateral supporting all individual loans, including potential problem loans. Upon identification of a potential problem loan, management makes a determination of the value of the underlying collateral via a third party appraisal and/or an assessment of value from our internal appraisal review department. The estimated value of the underlying collateral is a significant factor in the risk rating and allowance for loan losses allocation assigned to potential problem loans.
Potential problem loans are regularly evaluated for impaired loan status by lenders, the credit administration department and the internal credit review department. When management makes the determination that a loan should be considered impaired, an initial specific reserve is allocated to the impaired loan, if necessary, until the loan is charged down to the appraised value of the underlying collateral, typically within 30 to 90 days of becoming impaired. In the current economic environment, management typically utilizes appraisals performed no earlier than 180 days prior to the charge-off, and in most cases, appraisals utilized are dated within 60 days of the charge-off. As such, management typically addresses collateral shortfalls through charge-offs as opposed to recording specific reserves on individual loans. Once a loan is charged down to the appraised value of the underlying collateral, management regularly monitors the carrying value of the loan for any additional deterioration and records additional reserves or charge-offs as necessary. As a general guideline, management orders new appraisals on any impaired loan or other real estate property in which the most recent appraisal is more than 18 months old; however, management also orders new appraisals on impaired loans or other real estate properties if management determines new appraisals are prudent based on many different factors, such as a rapid change in market conditions in a particular region.
We continue our efforts to reduce nonperforming and potential problem loans and re-define our overall strategy and business plans with respect to our loan portfolio as deemed necessary in light of ongoing and dramatic changes in market conditions in the markets in which we operate.
Allowance for Loan Losses. Our allowance for loan losses decreased to $91.6 million at December 31, 2012, compared to $137.7 million and $201.0 million at December 31, 2011 and 2010, respectively. The decrease in our allowance for loan losses of $46.1 million during 2012 was primarily attributable to the decrease in nonaccrual loans of $110.4 million, the decrease in potential problem loans of $117.4 million and the $353.5 million decrease in the overall level of our loan portfolio.
Our allowance for loan losses as a percentage of loans, net of net deferred loan fees, was 3.13%, 4.19% and 4.48% at December 31, 2012, 2011 and 2010, respectively. The decrease in the allowance for loan losses as a percentage of loans, net of net deferred loan fees, during 2012 was primarily attributable to the decrease in our nonaccrual and potential problem loans, which generally require a higher allowance for loan losses relative to the amount of the loans than the remainder of the loan portfolio, in addition to a decrease in our historical net loan charge-off experience as a result of declining charge-off levels for the years ended December 31, 2012 and 2011, as compared to the years ended December 31, 2010, 2009 and 2008.
Our allowance for loan losses as a percentage of nonaccrual loans was 83.37%, 62.52% and 50.40% at December 31, 2012, 2011 and 2010, respectively. The increase in the allowance for loan losses as a percentage of nonaccrual loans during 2012 was primarily attributable to the decrease in nonaccrual loans, a portion of which did not carry a specific allowance for loan losses as these loans had been charged down to the estimated fair value of the related collateral less estimated costs to sell.

50


The following table is a summary of the changes in the allowance for loan losses for the five years ended December 31, 2012:
 
As of or For the Years Ended December 31,
 
2012
 
2011
 
2010
 
2009
 
2008
 
(dollars expressed in thousands)
Allowance for loan losses, beginning of year
$
137,710

 
201,033

 
266,448

 
220,214

 
168,391

Allowance for loan losses allocated to loans sold
—

 
—

 
(321
)
 
(4,725
)
 
—

Total
137,710

 
201,033

 
266,127

 
215,489

 
168,391

Loans charged-off:
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
(17,410
)
 
(46,256
)
 
(52,072
)
 
(104,648
)
 
(21,931
)
Real estate construction and development
(12,244
)
 
(35,459
)
 
(143,394
)
 
(122,303
)
 
(236,715
)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
One-to-four-family residential loans:
 
 
 
 
 
 
 
 
 
Bank portfolio
(3,699
)
 
(4,561
)
 
(5,274
)
 
(5,820
)
 
(9,209
)
Mortgage Division portfolio
(13,095
)
 
(19,086
)
 
(47,525
)
 
(71,528
)
 
(54,796
)
Home equity portfolio
(5,020
)
 
(7,708
)
 
(9,409
)
 
(6,298
)
 
(3,241
)
Multi-family residential loans
(2,435
)
 
(3,126
)
 
(9,266
)
 
(508
)
 
(19
)
Commercial real estate loans
(23,856
)
 
(37,974
)
 
(63,259
)
 
(40,255
)
 
(3,244
)
Consumer and installment
(311
)
 
(457
)
 
(997
)
 
(1,363
)
 
(1,866
)
Total
(78,070
)
 
(154,627
)
 
(331,196
)
 
(352,723
)
 
(331,021
)
Recoveries of loans previously charged-off:
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
12,886

 
6,962

 
37,776

 
1,983

 
7,226

Real estate construction and development
5,659

 
6,694

 
5,256

 
2,065

 
5,705

Real estate mortgage:
 
 
 
 
 
 
 
 
 
One-to-four-family residential loans:
 
 
 
 
 
 
 
 
 
Bank portfolio
1,090

 
570

 
331

 
539

 
500

Mortgage Division portfolio
3,544

 
2,903

 
4,634

 
2,930

 
626

Home equity portfolio
554

 
512

 
264

 
62

 
54

Multi-family residential loans
44

 
562

 
14

 
5

 
5

Commercial real estate loans
5,982

 
3,787

 
3,370

 
5,843

 
401

Consumer and installment
203

 
314

 
457

 
255

 
327

Total
29,962

 
22,304

 
52,102

 
13,682

 
14,844

Net loans charged-off
(48,108
)
 
(132,323
)
 
(279,094
)
 
(339,041
)
 
(316,177
)
Provision for loan losses
2,000

 
69,000

 
214,000

 
390,000

 
368,000

Allowance for loan losses, end of year
$
91,602

 
137,710

 
201,033

 
266,448

 
220,214

Loans outstanding, net of net deferred loan fees:
 
 
 
 
 
 
 
 
 
Average
$
3,079,344

 
3,811,451

 
5,520,775

 
7,333,973

 
8,239,601

End of year
2,930,747

 
3,284,279

 
4,492,284

 
6,608,293

 
8,592,975

End of year, excluding loans held for sale
2,864,614

 
3,253,168

 
4,437,814

 
6,565,609

 
8,554,255

Ratio of allowance for loan losses to loans outstanding:
 
 
 
 
 
 
 
 
 
Average
2.97
%
 
3.61
%
 
3.64
%
 
3.63
%
 
2.67
%
End of year
3.13

 
4.19

 
4.48

 
4.03

 
2.56

End of year, excluding loans held for sale
3.20

 
4.23

 
4.53

 
4.06

 
2.57

Ratio of net charge-offs to average loans outstanding
1.56

 
3.47

 
5.06

 
4.62

 
3.84

Ratio of current year recoveries to preceding year’s charge-offs
19.38

 
6.73

 
14.77

 
4.13

 
22.66

Our net loan charge-offs were $48.1 million, $132.3 million and $279.1 million for the years ended December 31, 2012, 2011 and 2010, respectively. Our net loan charge-offs as a percentage of average loans were 1.56%, 3.47% and 5.06% for the years ended December 31, 2012, 2011 and 2010, respectively.
The decrease in our net loan charge-off levels in 2012, as compared to 2011, is primarily attributable to the following:
•
A decrease in net loan charge-offs associated with our commercial, financial and agricultural portfolio of $34.8 million to $4.5 million in 2012, compared to $39.3 million in 2011. Net loan charge-offs for 2012 included aggregate charge-offs of $2.5 million associated with the sale of $19.4 million of loans. Net loan charge-offs for 2011 included charge-offs of $7.3 million on a First Bank Business Capital, Inc. loan, $4.1 million on a loan in our Missouri region, $3.9 million on a loan in our Texas region and $3.4 million on a loan in our Northern California region;
•
A decrease in net loan charge-offs associated with our real estate construction and development portfolio of $22.2 million to $6.6 million in 2012, compared to $28.8 million in 2011. Net loan charge-offs for 2011 included charge-offs of $5.7 million and $3.6 million, or $9.3 million in aggregate, on two loans in our Missouri region. Although the overall level of charge-offs has declined with the significant decrease in the balance of loans in our real estate construction and development portfolio, we continue to experience significant distress and unstable market conditions throughout certain

51


of our market areas, resulting in continued high levels of developer inventories, slower lot and home sales and declining real estate values;
•
A decrease in net loan charge-offs associated with our one-to-four-family residential loan portfolio of $10.7 million in 2012 to $16.6 million in 2012, compared to $27.4 million in 2011. Net loan charge-offs in our Mortgage Division portfolio decreased $6.6 million to $9.6 million in 2012, compared to $16.2 million in 2011, reflective of the continued decline in our portfolio balance of Alt A and subprime loans; and
•
A decrease in net loan charge-offs associated with our commercial real estate portfolio of $16.3 million to $17.9 million in 2012, compared to $34.2 million in 2011, primarily attributable to the declining portfolio balance, in particular our non-owner occupied commercial real estate portfolio, and decreases in nonaccrual and potential problem loans. Net loan charge-offs for 2012 included aggregate charge-offs of $11.2 million associated with the sale of $43.9 million of loans. During 2011, we recorded loan charge-offs of $4.6 million and $4.0 million, or $8.6 million in aggregate, on two loans in our Northern California region and $5.3 million on a loan in our Southern California region.
Changes in our net loan charge-off levels in 2011 are primarily attributable to the following:
•
An increase in net loan charge-offs associated with our commercial, financial and agricultural portfolio of $25.0 million to $39.3 million in 2011, compared to $14.3 million in 2010. Specifically in this portfolio, during 2011, we recorded charge-offs of $7.3 million on a First Bank Business Capital, Inc. loan, $4.1 million on a loan in our Missouri region, $3.9 million on a loan in our Texas region and $3.4 million on a loan in our Northern California region. During 2010, we recorded a $25.0 million recovery on a single loan in our Southern California region whereby we had previously recorded aggregate charge-offs of $30.0 million during 2009 on the same credit;
•
A decrease in net loan charge-offs of $109.4 million associated with our real estate construction and development portfolio to $28.8 million in 2011, compared to $138.1 million in 2010. Net loan charge-offs for 2011 included charge-offs of $5.7 million and $3.6 million, or $9.3 million in aggregate, on two loans in our Missouri region. Net loan charge-offs for 2010 include charge-offs of $24.5 million, $11.5 million and $7.5 million, or $43.5 million in aggregate, on three loans in our Southern California region and a $9.7 million charge-off on a loan in our St. Louis region;
•
A decrease in net loan charge-offs of $29.6 million associated with our one-to-four-family residential loan portfolio to $27.4 million in 2011, compared to $57.0 million in 2010. These net loan charge-offs primarily consist of $16.2 million associated with our Mortgage Division one-to-four-family residential mortgage portfolio in 2011, compared to $42.9 million in 2010. The decrease in net loan charge-offs in our Mortgage Division in 2011 is reflective of the declining portfolio balance and the substantial decrease in nonaccrual loans and performing TDRs throughout 2010 and 2011, in addition to improving delinquency trends; and
•
A decrease in net loan charge-offs of $25.7 million associated with our commercial real estate portfolio to $34.2 million in 2011, compared to $59.9 million in 2010, primarily attributable to the declining portfolio balance, in particular our non-owner occupied commercial real estate portfolio, and decreases in nonaccrual and potential problem loans. During 2011, we recorded loan charge-offs of $4.6 million and $4.0 million, or $8.6 million in aggregate, on two loans in our Northern California region and $5.3 million on a loan in our Southern California region. During 2010, we recorded loan charge-offs of $7.3 million and $2.8 million on two loans in our Southern California region.
The following table summarizes the composition of our net loan charge-offs by region / business segment for the years ended December 31, 2012 and 2011:
 
December 31,
 
2012
 
2011
 
(dollars expressed in thousands)
Mortgage Division
$
9,551

 
16,182

Florida
2,863

 
3,910

Northern California
6,099

 
26,647

Southern California
8,729

 
20,405

Chicago
5,666

 
6,913

Missouri
6,083

 
23,960

Texas
1,794

 
14,003

First Bank Business Capital, Inc.
1,180

 
6,708

Northern and Southern Illinois
4,163

 
6,855

Other
1,980

 
6,740

Total net loan charge-offs
$
48,108

 
132,323


52


As discussed above, the decrease in net loan charge-offs in our Mortgage Division is reflective of the declining portfolio balance of Alt A and subprime loans. The decrease in net loan charge-offs in our Northern California region was primarily attributable to charge-offs of $3.4 million on a commercial, financial and agricultural loan and $8.6 million on two commercial real estate loans during 2011. The decrease in net loan charge-offs in our Southern California region was primarily attributable to the resolution and declining balance of nonaccrual loans in this region and a charge-off of $5.3 million on a commercial real estate loan during 2011. The decrease in net loan charge-offs in our Missouri region was primarily attributable to a recovery of $3.2 million on a commercial, financial and agricultural loan during the third quarter of 2012 and charge-offs of $4.1 million on a commercial, financial and agricultural loan and $9.3 million on two real estate construction and development loans during 2011. The decrease in net charge-offs in our Texas Region was primarily attributable to charge-offs of $3.9 million on a commercial, financial and agricultural loan during 2011 in addition to the declining portfolio balance and decrease in nonaccrual loans in this region throughout 2011 and 2012.
We continue to closely monitor our loan portfolio and address the ongoing challenges posed by the severely weakened economic environment that has directly impacted and continues to impact many of our market segments. Specifically, we continue to focus on loan portfolio segments in which we have experienced significant loan charge-offs, such as real estate construction and development and one-to-four-family residential, and on loan portfolio segments that could generate additional loan charge-offs in the future, such as commercial real estate and commercial and industrial. We consider these factors in our overall assessment of the adequacy of our allowance for loan losses.
Each month, the credit administration department provides management with detailed lists of loans on the watch list and summaries of the entire loan portfolio by risk rating. These are coupled with analyses of changes in the risk profile of the portfolio, changes in past-due and nonperforming loans and changes in watch list and classified loans over time. In this manner, we continually monitor the overall increases or decreases in the level of risk in our loan portfolio. Factors are applied to the loan portfolio for each category of loan risk to determine acceptable levels of allowance for loan losses. Furthermore, management has implemented additional procedures to analyze concentrations in our real estate portfolio in light of economic and market conditions. These procedures include enhanced reporting to track land, lot, construction and finished inventory levels within our real estate construction and development portfolio. In addition, a quarterly evaluation of each lending unit is performed based on certain factors, such as lending personnel experience, recent credit reviews, loan concentrations and other factors. Based on this evaluation, changes to the allowance for loan losses may be required due to the perceived risk of particular portfolios. In addition, management exercises a certain degree of judgment in its analysis of the overall adequacy of the allowance for loan losses. In its analysis, management considers the changes in the portfolio, including growth, composition, the ratio of net loans to total assets, and the economic conditions of the regions in which we operate. Based on this quantitative and qualitative analysis, adjustments are made to the allowance for loan losses. Such adjustments are reflected in our consolidated statements of operations.
We record charge-offs on nonperforming loans typically within 30 to 90 days of the credit relationship reaching nonperforming loan status. We measure impairment and the resulting charge-off amount based primarily on third party appraisals. As such, rather than carrying specific reserves on nonperforming loans, we generally recognize a loan loss through a charge to the allowance for loan losses once the credit relationship reaches nonperforming loan status.
The allocation of the allowance for loan losses by loan category is a result of the application of our risk rating system augmented by historical loss data by loan type and other qualitative analysis. Consequently, the distribution of the allowance for loan losses will change from period to period due to the following factors:
•
Changes in the aggregate loan balances by loan category;
•
Changes in the identified risk in individual loans in our loan portfolio over time, excluding those homogeneous categories of loans such as consumer and installment loans and residential real estate mortgage loans for which risk ratings are changed based on payment performance;
•
Changes in historical loss data as a result of recent charge-off experience by loan type; and
•
Changes in qualitative factors such as changes in economic conditions, the volume of nonaccrual and potential problem loans by loan category and geographical location, and changes in the value of the underlying collateral for collateral-dependent loans.

53


The following table is a summary of the allocation of the allowance for loan losses for the five years ended December 31, 2012:
 
2012
 
2011
 
2010
 
2009
 
2008
 
Amount
 
Percent
of
Category
of Loans
to Total
Loans
 
Amount
 
Percent
of
Category
of Loans
to Total
Loans
 
Amount
 
Percent
of
Category
of Loans
to Total
Loans
 
Amount
 
Percent
of
Category
of Loans
to Total
Loans
 
Amount
 
Percent
of
Category
of Loans
to Total
Loans
 
(dollars expressed in thousands)
Commercial, financial and agricultural
$
13,572

 
20.8
%
 
$
27,243

 
22.1
%
 
$
28,000

 
23.3
%
 
$
42,533

 
25.6
%
 
$
56,592

 
30.0
%
Real estate construction and development
14,434

 
6.0

 
24,868

 
7.6

 
58,439

 
10.9

 
90,006

 
15.9

 
72,840

 
18.3

Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four-family residential loans
38,897

 
33.7

 
50,864

 
27.5

 
60,762

 
23.4

 
78,593

 
19.4

 
37,742

 
18.0

Multi-family residential loans
4,252

 
3.5

 
4,851

 
3.9

 
5,158

 
4.0

 
5,108

 
3.4

 
4,243

 
2.6

Commercial real estate loans
20,048

 
33.1

 
29,448

 
37.3

 
47,880

 
36.6

 
49,189

 
34.4

 
47,663

 
29.8

Consumer and installment
399

 
0.6

 
436

 
0.7

 
794

 
0.6

 
1,019

 
0.7

 
342

 
0.8

Loans held for sale
—

 
2.3

 
—

 
0.9

 
—

 
1.2

 
—

 
0.6

 
792

 
0.5

Total
$
91,602

 
100.0
%
 
$
137,710

 
100.0
%
 
$
201,033

 
100.0
%
 
$
266,448

 
100.0
%
 
$
220,214

 
100.0
%
A summary of the allowance for loan losses to loans by category as of December 31, 2012 and 2011 is as follows:
 
December 31,
 
2012
 
2011
Commercial, financial and agricultural
2.22
%
 
3.76
%
Real estate construction and development
8.25

 
9.95

Real estate mortgage:
 
 
 
One-to-four-family residential loans
3.94

 
5.64

Multi-family residential loans
4.10

 
3.81

Commercial real estate loans
2.07

 
2.40

Consumer and installment
2.08

 
1.92

Total
3.13

 
4.19

The changes in the percentage of the allocated allowance for loan losses to loans in these portfolio segments are reflective of changes in the overall level of special mention loans, potential problem loans, performing TDRs and nonaccrual loans within each of these portfolio segments, in addition to other qualitative and quantitative factors. Specifically, the decrease in the percentage of the allowance for loan losses to commercial, financial and agricultural loans is primarily due to the decrease in nonaccrual and potential problem loans to total loans in this category to 3.1% and 1.4%, respectively, at December 31, 2012, as compared to 7.6% and 4.5%, respectively, at December 31, 2011. The decrease in this ratio for real estate construction and development loans is primarily due to the decrease in nonaccrual loans to total loans in this category to 18.4% at December 31, 2012, as compared to 28.5% at December 31, 2011, partially offset by the increase in potential problem loans to total loans in this category to 46.5% at December 31, 2012, as compared to 38.9% at December 31, 2011. The decrease in this ratio for one-to-four family residential loans is primarily due to the decrease in nonaccrual loans and performing TDRs to total loans in this category to 3.6% and 8.1%, respectively, at December 31, 2012, as compared to 4.3% and 9.2%, respectively, at December 31, 2011. The increase in this ratio for multi-family residential loans is primarily due to the increase in nonaccrual loans to total loans to 6.5% at December 31, 2012, as compared to 6.3% at December 31, 2011. The decrease in this ratio for commercial real estate loans is primarily due to the decrease in nonaccrual and potential problem loans to total loans in this category to 1.7% and 1.4%, respectively, at December 31, 2012, as compared to 3.9% and 5.0%, respectively, at December 31, 2011.

54


Deposits
Deposits are the primary source of funds for First Bank. Our deposits consist principally of core deposits from our local market areas, including individual and corporate customers. The following table sets forth the distribution of our average deposit accounts for the years ended December 31, 2012, 2011 and 2010, and the weighted average interest rates paid on each category of deposits:
 
Years Ended December 31,
 
2012
 
2011
 
2010
 
Amount
 
Percent
of
Deposits
 
Rate
 
Amount
 
Percent
of
Deposits
 
Rate
 
Amount
 
Percent
of
Deposits
 
Rate
 
(dollars expressed in thousands)
Noninterest-bearing demand
$
1,305,282

 
23.4
%
 
—
%
 
$
1,166,128

 
19.7
%
 
—
%
 
$
1,148,102

 
18.1
%
 
—
%
Interest-bearing demand
937,971

 
16.8

 
0.06

 
938,758

 
15.8

 
0.11

 
901,685

 
14.2

 
0.16

Savings and money market
1,931,146

 
34.5

 
0.18

 
2,054,452

 
34.7

 
0.42

 
2,083,099

 
32.7

 
0.67

Time deposits
1,412,838

 
25.3

 
0.79

 
1,766,166

 
29.8

 
1.21

 
2,228,842

 
35.0

 
1.79

Total average deposits
$
5,587,237

 
100.0
%
 
 
 
$
5,925,504

 
100.0
%
 
 
 
$
6,361,728

 
100.0
%
 
 

Capital and Dividends
On December 31, 2008, the Company issued: (a) 295,400 shares of Class C Fixed Rate Cumulative Perpetual Preferred Stock, par value $1.00 per share, and liquidation preference of $1,000.00 per share; and (b) 14,770 shares of Class D Fixed Rate Cumulative Perpetual Preferred Stock, par value $1.00 per share, and liquidation preference of $1,000.00 per share, to the U.S. Treasury pursuant to the Company’s participation in the CPP program, as further described in “Item 1 —Business – Ownership Structure” and in Note 13 to our consolidated financial statements. The Class C and Class D cumulative perpetual preferred stock qualify as Tier 1 capital. Dividends on our Class C and Class D cumulative perpetual preferred stock, which currently carry annual dividend rates of 5.00% and 9.00%, respectively, were payable quarterly, beginning in February 2009. The dividends on our Class C cumulative perpetual preferred stock of 5.00% increases to 9.00% per annum on and after February 15, 2014.
The redemption of any of our preferred stock requires the prior approval of the Federal Reserve. As previously discussed under “Item 1 —Business – Supervision and Regulation – Regulatory Agreements,” under the terms of the Agreement with the FRB, we have agreed, among other things, not to declare and pay any dividends on our common or preferred stock or to make any distributions of interest, or other sums, on our trust preferred securities without the prior approval of the FRB.
On August 10, 2009, we elected to defer the regularly scheduled interest payments on our outstanding junior subordinated debentures relating to the Company’s $345.0 million of trust preferred securities in accordance with the terms of such securities. The deferral election began with the regularly scheduled quarterly interest payments that would otherwise have been made in September and October 2009, as further described in Note 12 to our consolidated financial statements. Under the terms of such securities, we may defer such payments for up to 20 consecutive quarterly periods without triggering a payment default or penalty. Such payment default or penalty would likely have a material adverse effect on our business, financial condition or results of operations. We have deferred such payments for 14 quarterly periods as of December 31, 2012. We have deferred $43.8 million of our regularly scheduled interest payments as of December 31, 2012, and in conjunction with these deferred interest payments, we also accrued and deferred additional interest expense of $3.9 million as of December 31, 2012. The current 20 consecutive quarterly deferral period ends with the respective payment dates of the trust preferred securities in September and October 2014. During the deferral period, the respective trusts have suspended the declaration and payment of dividends on the trust preferred securities. During the deferral period, we may not, among other things and with limited exceptions, pay cash dividends on or repurchase our common stock or preferred stock nor make any payment on outstanding debt obligations that rank equally with or junior to the junior subordinated debentures.
We also suspended the payment of cash dividends on our outstanding common stock and preferred stock beginning with the regularly scheduled quarterly dividend payments on the preferred stock that would otherwise have been made in August and September 2009, as further described in Note 13 to our consolidated financial statements. We have deferred such payments for 14 quarterly periods as of December 31, 2012. Prior to August 10, 2009, we declared and paid $6.0 million of dividend payments on our Class C Preferred Stock and our Class D Preferred Stock. We subsequently declared and deferred an additional $51.7 million and $4.6 million of regularly scheduled dividend payments on our Class C Preferred Stock and our Class D Preferred Stock, respectively, as of December 31, 2012, and, in conjunction with these deferred dividend payments, we also declared and deferred an additional $4.8 million and $808,000 of cumulative dividends on our deferred Class C Preferred Stock and Class D Preferred Stock dividend payments, respectively, as of December 31, 2012.

55


Effective August 10, 2009, we also suspended the declaration of dividends on our Class A Convertible, Adjustable Rate Preferred Stock and our Class B Adjustable Rate Preferred Stock. Prior to that time, we declared and paid relatively small dividends on our Class A and Class B preferred stock.
The Company’s and First Bank’s capital ratios at December 31, 2012 and 2011 were as follows:
 
December 31,
 
2012
 
2011
First Bank:
 
 
 
Total Capital Ratio
17.18%
 
14.98%
Tier 1 Ratio
15.92
 
13.70
Leverage Ratio
9.13
 
8.19
First Banks, Inc.:
 
 
 
Total Capital Ratio
2.57
 
1.88
Tier 1 Ratio
1.28
 
0.94
Leverage Ratio
0.73
 
0.56
First Bank was categorized as well capitalized at December 31, 2012 and 2011 under the prompt corrective action provisions of the regulatory capital standards. The Company did not meet the minimum regulatory capital standards established for bank holding companies by the Federal Reserve at December 31, 2012 and 2011. First Bank’s and our actual and required capital ratios are further described in Note 14 to our consolidated financial statements. First Bank’s Tier 1 capital to total assets ratio of 9.20% at December 31, 2012 exceeded the 7.00% minimum level required under the terms of the informal agreement with the MDOF. As previously discussed under “Item 1 —Business – Recent Developments and Other Matters – Capital Plan,” in August 2009, we announced the adoption of our Capital Plan, in order to, among other things, preserve and enhance our regulatory capital. The successful completion of all or any portion of our Capital Plan is not assured, and no assurance can be made that our Capital Plan will not be materially modified in the future. If we are not able to complete substantially all of our Capital Plan, our regulatory capital ratios may be materially and adversely affected and our ability to withstand continued adverse economic conditions could be threatened.
As of December 31, 2012, we had 13 affiliated Delaware or Connecticut statutory and business trusts that were created for the sole purpose of issuing trust preferred securities. As further described in Note 12 to our consolidated financial statements, the sole assets of the statutory and business trusts are our junior subordinated debentures. A summary of the outstanding trust preferred securities issued by our affiliated statutory and business trusts, and our related junior subordinated debentures issued to the respective trusts in conjunction with the trust preferred securities offerings as of December 31, 2012, is as follows:
Name of Trust
Date of Trust Formation
 
Type of Offering
 
Interest Rate
 
Preferred Securities
 
Subordinated Debentures
First Preferred Capital Trust IV
January 2003
 
Publicly Underwritten
 
8.15%
 
$
46,000,000

 
$
47,422,700

First Bank Statutory Trust
March 2003
 
Private Placement
 
8.10%
 
25,000,000

 
25,774,000

First Bank Statutory Trust II
September 2004
 
Private Placement
 
Variable
 
20,000,000

 
20,619,000

Royal Oaks Capital Trust I
October 2004
 
Private Placement
 
Variable
 
4,000,000

 
4,124,000

First Bank Statutory Trust III
November 2004
 
Private Placement
 
Variable
 
40,000,000

 
41,238,000

First Bank Statutory Trust IV
February 2006
 
Private Placement
 
Variable
 
40,000,000

 
41,238,000

First Bank Statutory Trust V
April 2006
 
Private Placement
 
Variable
 
20,000,000

 
20,619,000

First Bank Statutory Trust VI
June 2006
 
Private Placement
 
Variable
 
25,000,000

 
25,774,000

First Bank Statutory Trust VII
December 2006
 
Private Placement
 
Variable
 
50,000,000

 
51,547,000

First Bank Statutory Trust VIII
February 2007
 
Private Placement
 
Variable
 
25,000,000

 
25,774,000

First Bank Statutory Trust X
August 2007
 
Private Placement
 
Variable
 
15,000,000

 
15,464,000

First Bank Statutory Trust IX
September 2007
 
Private Placement
 
Variable
 
25,000,000

 
25,774,000

First Bank Statutory Trust XI
September 2007
 
Private Placement
 
Variable
 
10,000,000

 
10,310,000

For regulatory reporting purposes, the trust preferred securities are eligible for inclusion, subject to certain limitations, in our Tier 1 and Tier 2 capital. Because of these limitations, as of December 31, 2012, $333.3 million of trust preferred securities were not eligible for inclusion in our Tier 1 capital. Of the $333.3 million not eligible for inclusion in our Tier 1 capital, $23.4 million was eligible for inclusion in our Tier 2 capital and $309.9 million was not eligible for inclusion in our Tier 2 capital.
On June 7, 2012, the Federal Reserve approved proposed rules that would substantially amend the regulatory risk-based capital rules applicable to the Company and First Bank, as further described in “Item 1 —Business – Supervision and Regulation – Regulatory Capital Standards and Proposed Basel III Regulatory Capital Reforms.” The proposed rules implement Basel III and changes required by the Dodd-Frank Act, which include significant changes to bank capital, leverage and liquidity requirements. The proposed rules include new risk-based capital and leverage ratios, which would be phased in from 2013 to 2019, and would refine the definition of what constitutes “capital” for purposes of calculating those ratios. The proposed rules also implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity,

56


unrealized gains and losses, as well as certain instruments that will no longer qualify as Tier 1 capital, some of which, such as trust preferred securities, would be phased out over time. The proposed rules will eliminate trust preferred securities as a form of Tier 1 capital and will begin amortizing down the Tier 1 capital treatment of trust preferred securities over 10 years beginning on January 1, 2013 with full phase-out of these instruments occurring on January 1, 2022 for all insured depository institutions and bank holding companies with assets over $500 million. The proposed rules will require the Tier 1 capital treatment of trust preferred securities to be amortized over three years beginning on January 1, 2013 with full phaseout occurring on January 1, 2016 for bank holding companies with assets of $15 billion or more.
In January, 2011, we, the holder of 100% of the outstanding common stock of First Preferred Capital Trust IV, or the Trust, successfully completed a consent solicitation from the holders of the 8.15% cumulative trust preferred securities of the Trust, and entered into certain amendments that were approved in the consent solicitation. We solicited the consents in order to increase our capital planning flexibility under the terms of the documents and the provisions of the indentures, guarantee agreements and trust agreements relating to our other tranches of trust preferred securities. The amendments provide an opportunity for the Company to seek to improve its capital position and decrease its level of indebtedness during a period in which it is deferring interest payments in accordance with the terms of the indenture. Thus, as a result of the successful completion of the consent solicitation, the Company believes it is better positioned to consider certain potential capital planning strategies to improve the regulatory capital ratios of First Banks, Inc. and further strengthen the Company’s overall financial position.
INTEREST RATE RISK MANAGEMENT
The maintenance of a satisfactory level of net interest income is a primary factor in our ability to achieve acceptable income levels. However, the maturity and repricing characteristics of our loan and investment portfolios may differ significantly from those within our deposit structure. The nature of the loan and deposit markets within which we operate, and our objectives for business development within those markets at any point in time, influence these characteristics. In addition, the ability of borrowers to repay loans and the possibility of depositors withdrawing funds prior to stated maturity dates introduces divergent option characteristics that fluctuate as interest rates change. These factors cause various elements of our balance sheet to react in different manners and at different times relative to changes in interest rates, potentially leading to increases or decreases in net interest income over time. Depending upon the direction and magnitude of interest rate movements and their effect on the specific components of our balance sheet, the effects on net interest income can be substantial. Consequently, it is critical that we establish effective control over our exposure to changes in interest rates. We strive to manage our interest rate risk by:
•
Maintaining an Asset Liability Committee, or ALCO, responsible to our Board of Directors and Executive Management, to review the overall interest rate risk management activity and approve actions taken to reduce risk;
•
Employing a financial simulation model to determine our exposure to changes in interest rates;
•
Coordinating the lending, investing and deposit-generating functions to control the assumption of interest rate risk; and
•
Utilizing various financial instruments, including derivatives, to offset inherent interest rate risk should it become excessive.
The objective of these procedures is to limit the adverse impact that changes in interest rates may have on our net interest income.
The ALCO has overall responsibility for the effective management of interest rate risk and the approval of policy guidelines. The ALCO includes our President and Chief Executive Officer, Chief Financial Officer, Controller, Chief Investment Officer, Chief Credit Officer, Executive Vice President of Retail Banking, Director of Risk Management and Audit, and certain other senior officers. The Asset Liability Management Group, which monitors interest rate risk, supports the ALCO, prepares analyses for review by the ALCO and implements actions that are either specifically directed by the ALCO or established by policy guidelines.
In managing sensitivity, we strive to reduce the adverse impact on earnings by managing interest rate risk within internal policy constraints. Our policy is to manage exposure to potential risks associated with changing interest rates by maintaining a balance sheet posture in which annual net interest income is not significantly impacted by reasonably possible near-term changes in interest rates. To measure the effect of interest rate changes, we project our net income over a two-year horizon on a pro forma basis. The analysis assumes various scenarios for increases and decreases in interest rates including both instantaneous and gradual, and parallel and non-parallel, shifts in the yield curve, in varying amounts. For purposes of arriving at reasonably possible near-term changes in interest rates, we include scenarios based on actual changes in interest rates, which have occurred over a two-year period, simulating both a declining and rising interest rate scenario.
We are “asset-sensitive,” indicating that our assets would generally re-price with changes in interest rates more rapidly than our liabilities, and our simulation model indicates a loss of projected net interest income should interest rates decline. While a decline in interest rates of less than 50 basis points was projected to have a relatively minimal impact on our net interest income, an instantaneous parallel decline in the interest yield curve of 50 basis points indicates a pre-tax projected loss of approximately 7.0% of net interest income, based on assets and liabilities at December 31, 2012. At December 31, 2012, we remain in an asset-sensitive position and thus, remain subject to a higher level of risk in a declining interest rate environment. Although we do not anticipate

57


that instantaneous shifts in the yield curve, as projected in our simulation model, are likely, these are indications of the effects that changes in interest rates would have over time. Our asset-sensitive position, coupled with the effect of significant declines in interest rates that began in late 2007 and continued throughout 2008 and 2009 to historically low levels that remain prevalent in the current marketplace, and the overall level of our nonperforming assets, has negatively impacted our net interest income and is expected to continue to impact the level of our net interest income throughout the near future.
We also prepare and review a more traditional interest rate sensitivity position in conjunction with the results of our simulation model. The following table presents the projected maturities and periods to repricing of our rate sensitive assets and liabilities as of December 31, 2012, adjusted to account for anticipated prepayments:
 
Three
Months or
Less
 
Over Three
through Six
Months
 
Over Six
through
Twelve
Months
 
Over One
through Five
Years
 
Over Five
Years
 
Total
 
(dollars expressed in thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Loans (1)
$
1,536,011

 
220,242

 
333,443

 
747,482

 
93,569

 
2,930,747

Investment securities
157,460

 
177,317

 
234,036

 
1,348,763

 
757,704

 
2,675,280

FRB and FHLB stock
27,329

 
—

 
—

 
—

 
—

 
27,329

Short-term investments
404,005

 
—

 
—

 
—

 
—

 
404,005

Total interest-earning assets
$
2,124,805

 
397,559

 
567,479

 
2,096,245

 
851,273

 
6,037,361

Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand deposits
$
370,247

 
230,153

 
150,100

 
110,073

 
140,093

 
1,000,666

Money market deposits
1,606,543

 
—

 
—

 
—

 
—

 
1,606,543

Savings deposits
46,534

 
38,322

 
32,847

 
46,534

 
109,491

 
273,728

Time deposits
378,858

 
296,730

 
351,749

 
257,289

 
101

 
1,284,727

Other borrowings
26,025

 
—

 
—

 
—

 
—

 
26,025

Subordinated debentures
282,480

 
—

 
—

 
—

 
71,653

 
354,133

Total interest-bearing liabilities
$
2,710,687

 
565,205

 
534,696

 
413,896

 
321,338

 
4,545,822

Interest-sensitivity gap:
 
 
 
 
 
 
 
 
 
 
 
Periodic
$
(585,882
)
 
(167,646
)
 
32,783

 
1,682,349

 
529,935

 
1,491,539

Cumulative
(585,882
)
 
(753,528
)
 
(720,745
)
 
961,604

 
1,491,539

 
 
Ratio of interest-sensitive assets to interest-sensitive liabilities:
 
 
 
 
 
 
 
 
 
 
 
Periodic
0.78

 
0.70

 
1.06

 
5.06

 
2.65

 
1.33

Cumulative
0.78

 
0.77

 
0.81

 
1.23

 
1.33

 
 
 
(1)
Loans are presented net of net deferred loan fees.
Management made certain assumptions in preparing the foregoing table. These assumptions included:
•
Loans will repay at projected repayment rates;
•
Mortgage-backed securities, included in investment securities, will repay at projected repayment rates;
•
Interest-bearing demand accounts and savings deposits will behave in a projected manner with regard to their interest rate sensitivity; and
•
Fixed maturity deposits will not be withdrawn prior to maturity.
A significant variance in actual results from one or more of these assumptions could materially affect the results reflected in the foregoing table.
We were in an overall asset-sensitive position of $1.49 billion, or 22.9% of our total assets at December 31, 2012. We were in an overall liability-sensitive position on a cumulative basis through the twelve-month time horizon of $720.7 million, or 11.1% of our total assets at December 31, 2012.
The interest-sensitivity position is one of several measurements of the impact of interest rate changes on net interest income. Its usefulness in assessing the effect of potential changes in net interest income varies with the constant change in the composition of our assets and liabilities and changes in interest rates. For this reason, we place greater emphasis on our simulation model for monitoring our interest rate risk exposure.
As previously discussed, we utilize derivative instruments to assist in our management of interest rate sensitivity by modifying the repricing, maturity and option characteristics of certain assets and liabilities. We also sell interest rate swap agreement contracts to certain customers who wish to modify their interest rate sensitivity. We offset the interest rate risk of these swap agreements by simultaneously purchasing matching interest rate swap agreement contracts with offsetting pay/receive rates from other financial institutions. Because of the matching terms of the offsetting contracts, the net effect of the changes in the fair value of the paired swaps is minimal.

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The derivative financial instruments we held as of December 31, 2012 and 2011 are summarized as follows:
 
December 31,
 
2012
 
2011
 
Notional
Amount
 
Credit
Exposure
 
Notional
Amount
 
Credit
Exposure
 
(dollars expressed in thousands)
Interest rate swap agreements
$
—

 
—

 
50,000

 
—

Customer interest rate swap agreements
12,149

 
115

 
47,240

 
441

Interest rate lock commitments
59,932

 
1,837

 
38,985

 
1,381

Forward commitments to sell mortgage-backed securities
107,700

 
—

 
58,800

 
—

The notional amounts of our derivative instruments do not represent amounts exchanged by the parties and, therefore, are not a measure of our credit exposure through our use of these instruments. The credit exposure represents the loss we would incur in the event the counterparties failed completely to perform according to the terms of the derivative instruments and the collateral held to support the credit exposure was of no value.
The earnings associated with our derivative instruments reflect the interest rate environment during these periods as well as the overall level of our derivative instruments throughout these periods. For the year ended December 31, 2010, we realized net interest income on our derivative financial instruments of $5.7 million, comprised of amortization associated with a deferred gain on the previous termination of certain of our interest rate swap agreements. In December 2008, we terminated certain of our interest rate swap agreements that were designated as cash flow hedges on certain of our loans, and recorded a gain of $20.8 million, in aggregate, which was being amortized as an increase to interest and fees on loans in the consolidated statements of operations over the remaining terms of the respective interest rate swap agreements, which had contractual maturity dates of September 2009 and September 2010.
We recorded net losses on derivative instruments, which are included in noninterest income in the consolidated statements of operations, of $40,000, $193,000 and $2.9 million for the years ended December 31, 2012, 2011 and 2010, respectively. The net losses on derivative instruments were attributable to changes in the fair value and the net interest differential on our interest rate swap agreements previously designated as cash flow hedges on our junior subordinated debentures. In 2009, we recorded a cumulative fair value adjustment of $4.6 million on our interest rate swap agreements designated as cash flow hedges on our junior subordinated debentures that was reclassified from accumulated other comprehensive loss to net loss on derivative instruments as a result of the discontinuation of hedge accounting treatment following the announcement of the deferral of interest payments on the underlying trust preferred securities in August 2009. In conjunction with the discontinuation of hedge accounting, the net interest differential on these interest rate swap agreements, which was previously recorded as interest expense on junior subordinated debentures in the consolidated statements of operations, was recorded as a net reduction of noninterest income effective August 2009. We have no remaining interest rate swap agreements at December 31, 2012 with the exception of customer interest rate swap agreements.
Our derivative financial instruments are more fully described in Note 8 to our consolidated financial statements.
LIQUIDITY MANAGEMENT
First Bank. Our liquidity is the ability to maintain a cash flow that is adequate to fund operations, service debt obligations and meet obligations and other commitments on a timely basis. First Bank receives funds for liquidity from customer deposits, loan payments, maturities of loans and investments, sales of investments and earnings before provision for loan losses. In addition, we may avail ourselves of other sources of funds by issuing certificates of deposit in denominations of $100,000 or more (including certificates issued through the Certificate of Deposit Account Registry Service, or CDARS program), selling securities under agreements to repurchase, and utilizing borrowings from the FHLB, the FRB and other borrowings.
As a financial intermediary, we are subject to liquidity risk. We closely monitor our liquidity position through our Liquidity Management Committee and we continue to implement actions deemed necessary to maintain an appropriate level of liquidity in light of ongoing unstable market conditions, changes in loan funding needs, operating and debt service requirements, current deposit trends and events that may occur in conjunction with our Capital Plan. We continue to seek opportunities to improve our overall liquidity position, and we maintain an efficient collateral management process that allows us to maximize our overall collateral position related to our alternative borrowing sources. In conjunction with our liquidity management process, we analyze and manage short-term and long-term liquidity through an ongoing review of internal funding sources, projected cash flows from loans, securities and customer deposits, internal and competitor deposit pricing structures and maturity profiles of current borrowing sources. We utilize planning, management reporting and adverse stress scenarios to monitor sources and uses of funds on a daily basis to assess cash levels to ensure adequate funds are available to meet normal business operating requirements and to supplement liquidity needs to meet unusual demands for funds that may result from an unexpected change in customer deposit levels or potential planned or unexpected liquidity events that may arise from time to time.

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First Bank has built a significant amount of available balance sheet liquidity since 2009 in anticipation of the expected completion of certain transactions associated with our Capital Plan, as further described under “Item 1 —Business – Recent Developments and Other Matters – Capital Plan.” We continue to maintain a significant amount of available balance sheet liquidity, as reflected by the increase in our cash and short-term investments and our investment securities portfolio during 2012, in anticipation of the expected completion of the sale of a portion of our Florida branches in the second quarter of 2013 and to provide funds for future loan growth initiatives to offset the impact of the decrease in nonaccrual loans, problem loans and other loan relationships, as previously discussed. Our cash and cash equivalents were $518.8 million and $473.1 million at December 31, 2012 and 2011, respectively. The majority of funds were maintained in our correspondent bank account with the FRB. The increase in our cash and cash equivalents of $45.7 million is further discussed under “—Financial Condition.”
Our unpledged investment securities increased $180.8 million to $2.42 billion at December 31, 2012, compared to $2.24 billion at December 31, 2011, and are mostly comprised of highly liquid and readily marketable available-for-sale securities. The combined level of cash and cash equivalents and unpledged investment securities provided us with total available liquidity of $2.94 billion and $2.71 billion at December 31, 2012 and 2011, respectively. As such, despite significant cash outflows to support transactions associated with our Capital Plan and the prepayment of $720.0 million of secured term borrowings during 2010, we have maintained available liquidity of $2.94 billion, or 45.2% of total assets, at December 31, 2012 and $2.71 billion, or 41.1% of total assets, at December 31, 2011. Our ability to maintain strong liquidity was achieved by a substantial shift in our balance sheet from loans to short-term investments and investment securities while substantially maintaining our deposit levels, exclusive of transactions resulting from our Capital Plan and planned reductions in higher-rate, single-service time deposits in recent periods. Our loan-to-deposit ratio decreased to 53.4% at December 31, 2012 from 58.4% at December 31, 2011, while the ratio of our cash and cash equivalents and investment securities to total assets increased to 49.1% at December 31, 2012 from 44.5% at December 31, 2011.
On September 28, 2012, we purchased $141.0 million of seasoned, performing one-to-four-family residential real estate loans from another financial institution in an effort to deploy a portion of our substantial balance sheet liquidity into higher earning alternatives that began contributing to net interest margin in the fourth quarter of 2012. The loan purchase was partially funded through the sale of certain available-for-sale investment securities, as previously discussed.
On June 30, 2012, we reclassified certain of our available-for-sale investment securities to held-to-maturity investment securities at their respective fair values, which totaled $729.1 million in aggregate, as further described in Note 3 to the consolidated financial statements. The net gross unrealized gain on these available-for-sale investment securities at the time of transfer was $11.7 million, in aggregate, and was recorded as additional premium on the investment securities and is being amortized over the remaining lives of the respective securities. The unrealized gain included as a component of accumulated other comprehensive income was $6.8 million at June 30, 2012, net of tax of $4.9 million. The amortization of the unrealized gain reported in stockholders’ equity is being amortized as an adjustment to interest income on investment securities over the remaining lives of the respective securities. Consequently, the combined amortization of the additional premium and the unrealized gain have no impact on interest income on investment securities. The determination of the reclassification was made by management based on our current and expected future liquidity levels and the resulting intent to hold those investment securities to maturity.
During 2012, we reduced our aggregate funds acquired from other sources of funds by $110.4 million to $486.8 million at December 31, 2012, from $597.2 million at December 31, 2011. These other sources of funds include certificates of deposit of $100,000 or more and other borrowings, which are comprised of daily securities sold under agreements to repurchase. The decrease was attributable to a reduction in certificates of deposit of $100,000 or more of $85.3 million and a decrease in our daily repurchase agreements of $25.1 million. The reduction in certificates of deposit of $100,000 or more was primarily attributable to a planned reduction of higher rate, single-service certificate of deposit relationships in an effort to utilize a portion of our current available liquidity and improve First Bank’s leverage ratio. The following table presents the maturity structure of these other sources of funds at December 31, 2012:
 
Certificates of
Deposit of
$100,000 or More
 
Other
Borrowings
 
Total
 
(dollars expressed in thousands)
Three months or less
$
137,982

 
26,025

 
164,007

Over three months through six months
108,062

 
—

 
108,062

Over six months through twelve months
125,281

 
—

 
125,281

Over twelve months
89,466

 
—

 
89,466

Total
$
460,791

 
26,025

 
486,816

In addition to these sources of funds, First Bank has established a borrowing relationship with the FRB. This borrowing relationship, which is secured primarily by commercial loans, provides an additional liquidity facility that may be utilized for contingency liquidity purposes. Advances drawn on First Bank’s established borrowing relationship require the prior approval of the FRB. First Bank did not have any FRB borrowings outstanding at December 31, 2012 or 2011.

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First Bank also has a borrowing relationship with the FHLB. First Bank’s borrowing capacity through its relationship with the FHLB was approximately $363.2 million and $370.7 million at December 31, 2012 and 2011, respectively. The borrowing relationship is secured by one-to-four-family residential, multi-family residential and commercial real estate loans. The reduction in First Bank’s borrowing capacity with the FHLB during 2012 primarily resulted from the corresponding decrease in the loan portfolio during this period, as further described under “—Loans and Allowance for Loan Losses.” First Bank requests advances and/or repays advances from the FHLB based on its current and future projected liquidity needs. All borrowing requests require approval from the FHLB. First Bank did not have any FHLB advances outstanding at December 31, 2012 or 2011.
As a means of further contingency funding, First Bank may use broker dealers to acquire deposits to fund both short-term and long-term funding needs, including brokered money market accounts, and has available funding, subject to certain limits, through the CDARS program. Exclusive of the CDARS program, First Bank does not currently utilize broker dealers to acquire deposits.
We believe First Bank has sufficient liquidity to meet its current and future near-term liquidity needs; however, no assurance can be made that First Bank’s liquidity position will not be materially, adversely affected in the future.
First Banks, Inc. First Banks, Inc. is a separate and distinct legal entity from its subsidiaries. The Company’s liquidity position is affected by dividends received from its subsidiaries and the amount of cash and other liquid assets on hand, payment of interest and dividends on debt and equity instruments issued by the Company (all of which are presently suspended or deferred), capital contributions the Company makes into its subsidiaries, any redemption of debt for cash issued by the Company, and proceeds the Company raises through the issuance of debt and/or equity instruments, if any. The Company’s unrestricted cash totaled $2.7 million and $2.8 million at December 31, 2012 and 2011, respectively. The Company had restricted cash of $2.0 million at December 31, 2011, which became unrestricted in February 2012.
In March 2011, the Company entered into a Revolving Credit Note and a Stock Pledge Agreement with Investors of America Limited Partnership, or Investors of America, LP, as further described in Note 11 and Note 20 to our consolidated financial statements. The agreement provided for a $5.0 million secured revolving line of credit to be utilized for general working capital needs. This borrowing arrangement, which had an interest rate of LIBOR plus 300 basis points, was intended to supplement, if necessary, the parent company’s overall level of unrestricted cash to cover the parent company’s projected operating expenses. There were no balances outstanding under this borrowing arrangement during the period from its inception in March 2011 to its maturity date on December 31, 2012.
On March 20, 2013, the Company entered into a new Revolving Credit Note and a Stock Pledge Agreement with Investors of America, LP, as further described in Note 25 to our consolidated financial statements. The agreement provides for a $5.0 million secured revolving line of credit to be utilized for general working capital needs. This borrowing arrangement, which has a maturity date of March 31, 2014 and an interest rate of LIBOR plus 300 basis points, is intended to supplement, on a contingent basis, the parent company’s overall level of unrestricted cash to cover the parent company’s projected operating expenses should the parent company’s existing cash resources become insufficient in the future.
We cannot be assured of our ability to access future liquidity through debt markets. As further described under “Item 1A – Risk Factors,” the Company’s ability to access debt markets on terms satisfactory to us will depend on conditions in the capital markets, economic conditions and a number of other factors, many of which are outside of our control, and on our financial performance.
Additional long-term funding is provided by our junior subordinated debentures, as further described in Note 12 to our consolidated financial statements. As of December 31, 2012, we had 13 affiliated Delaware or Connecticut statutory and business trusts that were created for the sole purpose of issuing trust preferred securities. The sole assets of the statutory and business trusts are our junior subordinated debentures.
We agreed, among other things, not to pay any dividends on our common or preferred stock or make any distributions of interest or other sums on our trust preferred securities without the prior approval of the FRB, as previously discussed under “Item 1 —Business – Supervision and Regulation – Regulatory Agreements.”
In August 2009, we announced the deferral of our regularly scheduled interest payments on our outstanding junior subordinated debentures relating to our $345.0 million of trust preferred securities beginning with the regularly scheduled quarterly interest payments that would otherwise have been made in September and October 2009. The terms of the junior subordinated debentures and the related trust indentures allow us to defer such payments of interest for up to 20 consecutive quarterly periods without triggering a payment default or penalty. Such payment default or penalty would likely have a material adverse effect on our business, financial condition or results of operations. During the deferral period, we may not, among other things and with limited exceptions, pay cash dividends on or repurchase our common stock or preferred stock nor make any payment on outstanding debt obligations that ranks equally with or junior to our junior subordinated debentures. Accordingly, we also suspended the payment of cash dividends on our outstanding common stock and preferred stock beginning with the regularly scheduled quarterly dividend payments on our preferred stock that would otherwise have been made in August and September 2009, as further described under “—Capital and Dividends,” and in Note 13 to our consolidated financial statements.

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The Company’s financial position may be adversely affected if it experiences increased liquidity needs if any of the following events occur:
•
First Bank continues to be unable or prohibited by its regulators to pay a dividend to the Company sufficient to satisfy the Company’s operating cash flow needs. The Company’s ability to receive future dividends from First Bank to assist the Company in meeting its operating requirements, both on a short-term and long-term basis, is currently subject to regulatory approval, as further described above and under “Item 1 —Business – Supervision and Regulation – Regulatory Agreements;”
•
We deem it advisable, or are required by regulatory authorities, to use cash maintained by the Company to support the capital position of First Bank;
•
First Bank fails to remain “well-capitalized” and, accordingly, First Bank is required to pledge additional collateral against its borrowings and is unable to do so. As discussed above, First Bank has no outstanding borrowings at December 31, 2012, with the exception of $26.0 million of daily repurchase agreements utilized by customers as an alternative deposit product, and has substantial borrowing capacity through its relationship with the FHLB, as previously discussed; or
•
The Company has difficulty raising cash through the future issuance of debt or equity instruments or by accessing additional sources of credit.
The Company’s financial flexibility may be severely constrained if we are unable to maintain our access to funding or if adequate financing on terms acceptable to us is not available in the marketplace. If we are required to rely more heavily on more expensive funding sources to support our business, our revenues may not increase proportionately to cover our costs. In this case, our operating margins would likely be materially adversely affected. A lack of liquidity and/or cost-effective funding alternatives could materially adversely affect our business, financial condition and results of operations.
Other Commitments and Contractual Obligations. We have entered into long-term leasing arrangements and other commitments and contractual obligations in conjunction with our ongoing operating activities. The required payments under such leasing arrangements, other commitments and contractual obligations at December 31, 2012 were as follows:
 
Less Than 1
Year
 
1-3 Years
 
3-5 Years
 
Over 5 Years
 
Total (1)
 
(dollars expressed in thousands)
Operating leases (2)
$
8,979

 
12,880

 
7,679

 
12,765

 
42,303

Certificates of deposit (3)
1,026,809

 
230,363

 
27,454

 
101

 
1,284,727

Other borrowings
26,025

 
—

 
—

 
—

 
26,025

Subordinated debentures (4)
—

 
—

 
—

 
354,133

 
354,133

Preferred stock issued under the CPP (4) (5)
—

 
—

 
—

 
310,170

 
310,170

Other contractual obligations
474

 
7

 
2

 
—

 
483

Total
$
1,062,287

 
243,250

 
35,135

 
677,169

 
2,017,841

 
(1)
Amounts exclude ASC Topic 740 unrecognized tax liabilities of $1.1 million and related accrued interest expense of $116,000 for which the timing of payment of such liabilities cannot be reasonably estimated as of December 31, 2012.
(2)
Amounts exclude operating leases associated with discontinued operations of $1.0 million, $2.1 million, $1.8 million and $2.9 million for less than 1 year, 1-3 years, 3-5 years and over 5 years, respectively, or a total of $7.8 million.
(3)
Amounts exclude the related accrued interest expense on certificates of deposit of $540,000 as of December 31, 2012.
(4)
Amounts exclude the accrued interest expense on junior subordinated debentures and the accrued dividends declared on preferred stock issued under the CPP of $47.9 million and $61.9 million, respectively, as of December 31, 2012. As further described under “Item 1 —Business – Supervision and Regulation – Regulatory Agreements,” we currently may not make any distributions of interest or other sums on our junior subordinated debentures and related underlying trust preferred securities without the prior approval of the FRB.
(5)
Represents amounts payable upon redemption of the Class C Preferred Stock and the Class D Preferred Stock issued under the CPP of $295.4 million and $14.8 million, respectively.

CRITICAL ACCOUNTING POLICIES
Our financial condition and results of operations presented in our consolidated financial statements, notes to our consolidated financial statements, selected consolidated and other financial data appearing elsewhere in this report, and management’s discussion and analysis of financial condition and results of operations are, to a large degree, dependent upon our accounting policies. The selection and application of our accounting policies involve judgments, estimates and uncertainties that are susceptible to change.
We have identified the following accounting policies that we believe are the most critical to the understanding of our financial condition and results of operations. These critical accounting policies require management’s most difficult, subjective and complex judgments about matters that are inherently uncertain. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of a materially different financial condition and/or results of operations could be a reasonable likelihood. The impact and any associated risks related to our critical accounting policies on our business operations is discussed throughout “—Management’s Discussion and Analysis of Financial Condition and Results of Operations,”

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where such policies affect our reported and expected financial results. A detailed discussion of the application of these and other accounting policies is summarized in Note 1 to our consolidated financial statements appearing elsewhere in this report.
Allowance for Loan Losses. We maintain an allowance for loan losses at a level we consider appropriate to provide for probable losses in our loan portfolio. The determination of our allowance for loan losses requires management to make significant judgments and estimates based upon a periodic analysis of our loans held for portfolio and held for sale considering, among other factors, current economic conditions, loan portfolio composition, past loan loss experience, independent appraisals, the fair value of underlying loan collateral, our customers’ ability to repay their loans and selected key financial ratios. If actual events prove the estimates and assumptions we used in determining our allowance for loan losses were incorrect, we may need to make additional provisions for loan losses. Any increases in our allowance for loan losses will result in a decrease in net income and capital, and may have a material adverse effect on our financial condition and results of operations. For further discussion, refer to “—Loans and Allowance for Loan Losses,” “Item 1A – Risk Factors” and Note 4 to our consolidated financial statements appearing elsewhere in this report.
Deferred Tax Assets. We recognize deferred tax assets for the estimated future tax effects of temporary differences, net operating loss carryforwards and tax credits. We recognize deferred tax assets subject to management’s judgment based upon available evidence that realization is more likely than not. Our deferred tax assets are reduced, if necessary, by a deferred tax asset valuation allowance. In the event that we determine we would not be able to realize all or part of our deferred tax assets in the future, we would need to adjust the recorded value of our deferred tax assets, which would result in a direct charge to our provision for income taxes in the period in which such determination is made. For further discussion, refer to “—(Benefit) Provision for Income Taxes,” and Note 1 and Note 17 to our consolidated financial statements appearing elsewhere in this report.
Goodwill and Other Intangible Assets / Business Combinations. The determination of the fair value of the assets and liabilities acquired, as well as the returns on investment that may be achieved, requires management to make significant judgments and estimates based upon detailed analyses of the existing and future economic value of such assets and liabilities and/or the related income streams, including the resulting intangible assets. If actual events prove the estimates and assumptions we used in determining the fair values of the acquired assets and liabilities or the projected income streams were incorrect, we may need to make additional adjustments to the recorded values of such assets and liabilities, which could result in increased volatility in our reported earnings. In addition, we may need to make additional adjustments to the recorded value of our intangible assets, which may impact our reported earnings and directly impacts our regulatory capital levels. For further discussion, refer to Note 2, Note 6 and Note 14 to our consolidated financial statements appearing elsewhere in this report.
Our annual impairment testing date for goodwill and other intangible assets is December 31. In addition, a goodwill impairment assessment is performed if an event occurs or circumstances change that would make it more likely than not that the fair value of our single reporting unit is below its carrying value. We have the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that our indefinite-lived intangible assets are impaired. If, after assessing the totality of events and circumstances, we conclude that it is not more likely than not that the indefinite-lived intangible assets are impaired, then we are not required to take further action. However, if we conclude otherwise, then we are required to determine the fair value of the indefinite-lived intangible assets and perform the quantitative impairment test by comparing the fair value with the carrying amount. We also have the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test but will be able to resume performing the qualitative assessment in any subsequent period. The goodwill impairment test is a two-step process which requires us to make assumptions regarding fair value. Our policy allows management to make the determination of fair value using internal cash flow models or by engaging independent third parties. The first step consists of estimating the fair value of the reporting unit using a number of factors, including projected future operating results and business plans, economic projections, anticipated future cash flows, discount rates, and comparable marketplace fair value data from within a comparable industry grouping. We compare the estimated fair value of our reporting unit to the carrying value, which includes allocated goodwill. If the estimated fair value is less than the carrying value, the second step is completed to compute the impairment amount by determining the “implied fair value” of goodwill. This determination requires the allocation of the estimated fair value of the reporting unit to the assets and liabilities of the reporting unit. Any remaining unallocated fair value represents the “implied fair value” of goodwill, which is compared to the corresponding carrying value to compute the goodwill impairment amount, if any. Although we believe our estimates of fair value are reasonable, many of the factors used in assessing fair value and the allocation of estimated fair value to the assets and liabilities of our reporting unit are outside the control of management, and it is reasonably likely that assumptions and estimates may change in future periods. These changes may result in future impairment that may materially affect the carrying value of our assets and our results of operations.
Due to the ongoing uncertainty regarding market conditions, which may continue to negatively impact the performance of our reporting unit, management will continue to monitor the goodwill impairment indicators and evaluate the carrying amount of our goodwill, if necessary. Events and circumstances that could trigger the need for interim impairment testing include:
•
A significant change in legal factors or in the business climate;

63


•
An adverse action or assessment by a regulator;
•
Unanticipated competition;
•
A loss of key personnel;
•
A more-likely-than-not expectation that our reporting unit or a significant portion of our reporting unit will be sold or otherwise disposed of; and
•
The testing for recoverability of a significant asset group within a reporting unit.
For further discussion, refer to “Item 1A – Risk Factors,” “—Noninterest Expense,” and Note 1 and Note 6 to our consolidated financial statements appearing elsewhere in this report.
EFFECTS OF NEW ACCOUNTING STANDARDS
In January 2010, the FASB issued ASU No. 2010-06 – Fair Value Measurements and Disclosures (ASC Topic 820) – Improving Disclosures about Fair Value Measurements. This ASU amends certain disclosure requirements of Subtopic 820-10, providing additional disclosures for transfers in and out of Levels I and II and for activity in Level III and clarifies certain other existing disclosure requirements including the level of disaggregation and disclosures around inputs and valuation techniques. The final amendments of this ASU were effective for annual or interim periods beginning after December 15, 2009, except for the requirement to provide the Level 3 activity for purchases, sales, issuances, and settlements on a gross basis. This requirement was effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The amended ASU does not require disclosures for earlier periods presented for comparative purposes at initial adoption. We implemented the disclosure requirements under this ASU on January 1, 2010, except for the disclosure requirement to provide the Level 3 activity for purchases, sales, issuances, and settlements on a gross basis, which we implemented on January 1, 2011. The implementation of the new disclosure requirements did not have a material impact on our consolidated financial statements or the disclosures presented in our consolidated financial statements.
In July 2010, the FASB issued ASU No. 2010-20 – Receivables (ASC Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This ASU requires expanded credit risk disclosures intended to provide investors with greater transparency regarding the allowance for credit losses and the credit quality of financing receivables. Under this ASU, companies will be required to provide more information about the credit quality of their financing receivables in the disclosures to financial statements, such as aging information, credit quality indicators, changes in the allowance for credit losses, and the nature and extent of troubled debt restructurings and their effect on the allowance for credit losses. Both new and existing disclosures must be disaggregated by portfolio segment or class based on the level of disaggregation that management uses when assessing its allowance for credit losses and managing its credit exposure. The disclosures as of the end of a reporting period were effective for interim and annual periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period were effective for interim and annual reporting periods beginning on or after December 15, 2010. We implemented the disclosure requirements under this ASU for the reporting period ended December 31, 2010, except for the requirement to provide disclosures about activity that occurs during a reporting period, which we implemented on January 1, 2011. The implementation of the new disclosure requirements did not have a material impact on our consolidated financial statements.
In April 2011, the FASB issued ASU No. 2011-02 – Receivables (ASC Topic 310) – A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. The provisions of this ASU: provide additional guidance related to determining whether a creditor has granted a concession; include factors and examples for creditors to consider in evaluating whether a restructuring results in a delay in payment that is insignificant; prohibit creditors from using the borrower’s effective rate test to evaluate whether a concession has been granted to the borrower; and add factors for creditors to use in determining whether a borrower is experiencing financial difficulties. The provisions of this ASU were effective for the Company’s reporting period ended September 30, 2011. We adopted the requirements of this ASU on July 1, 2011, and applied this guidance to restructurings occurring on or after January 1, 2011. The new guidance did not impact our financial condition, results of operations or the number of TDRs identified.
In May 2011, the FASB issued ASU 2011-04 - Fair Value Measurement (ASC Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU provides a consistent definition of fair value and common fair value measurement and disclosure requirements between GAAP and International Financial Reporting Standards, or IFRS. This ASU eliminates wording differences used to describe the requirements for measuring fair value and for disclosure information about fair value measurements between GAAP and IFRS, clarifies the application of existing fair value measurement requirements, and changes certain principles or requirements for measuring fair value or for disclosing information about fair value measurements. The provisions of this ASU were effective for interim and annual periods beginning on or after December 15, 2011, and should be applied prospectively. We adopted the requirements of this ASU on January 1, 2012, which did not have a material impact on our consolidated financial statements or results of operations or the disclosures presented in our consolidated financial statements.

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In June 2011, the FASB issued ASU 2011-05 - Comprehensive Income (ASC Topic 220) - Presentation of Comprehensive Income. This ASU requires companies to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments of this ASU were effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and were required to be applied retrospectively. We adopted the requirements of this ASU on January 1, 2012 and presented the components of net income and other comprehensive income in two separate but consecutive statements. In December 2011, the FASB issued ASU 2011-12 - Comprehensive Income (ASC Topic 220) - Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-05 that deferred the provisions in ASU 2011-05 related to the presentation of reclassification adjustments out of accumulated other comprehensive income to allow the FASB time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. This ASU reinstated the requirements for the presentation of reclassifications out of accumulated other comprehensive income that were in place before the issuance of ASU 2011-05, and did not have an material impact on our consolidated financial statements or results of operations.
In February 2013, the FASB issued ASU 2013-02 - Comprehensive Income (ASC Topic 220) - Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This ASU requires an entity to provide, either on the face of the statement where net income is presented or in the notes to financial statements, information about the amounts reclassified out of accumulated other comprehensive income by component. An entity is required to include significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. Amounts not required under GAAP to be reclassified in their entirety to net income are required to be cross-referenced to other disclosures required under GAAP that provide additional detail on those amounts. The amendments of this ASU are effective for interim and annual periods beginning after December 15, 2012, and are required to be applied prospectively. The adoption of this ASU is not expected to have a material impact on our consolidated financial statements or results of operations.
In September 2011, the FASB issued ASU 2011-08 - Intangibles - Goodwill and Other (ASC Topic 350) - Testing of Goodwill for Impairment. ASU 2011-08 amends ASC Topic 350 to give entities the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. ASU 2011-08 is effective for annual and interim impairment tests beginning after December 15, 2011. We adopted the requirements of this ASU on January 1, 2012, which did not have a material impact on our consolidated financial statements or results of operations.
In July 2012, the FASB issued ASU 2012-02 - Intangibles - Goodwill and Other (Topic 350) -Testing Indefinite-Lived Intangible Assets for Impairment. The provisions of this ASU permit an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform a quantitative impairment test in accordance with Subtopic 350-30, Intangibles - Goodwill and Other - General Intangibles Other Than Goodwill. This ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of this ASU is not expected to have a material impact on our consolidated financial statements or results of operations.
In October 2012, the FASB issued ASU 2012-06 - Business Combinations (Topic 805) - Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution (a consensus of the FASB Emerging Issues Task Force). This ASU clarifies the applicable guidance for subsequently measuring an indemnification asset recognized as a result of a government-assisted acquisition of a financial institution. Under this ASU, when a reporting entity recognizes an indemnification asset as a result of a government-assisted acquisition of a financial institution and, subsequently, a change in the cash flows expected to be collected on the indemnification asset occurs (as a result of a change in cash flows expected to be collected on the assets subject to indemnification), the reporting entity should subsequently account for the change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value should be limited to the contractual term of the indemnification agreement (that is, the lesser of the term of the indemnification agreement and the remaining life of the indemnified assets). This ASU is effective for interim and annual periods beginning after December 15, 2012, and is required to be applied prospectively. The adoption of this ASU is not expected to have a material impact on our consolidated financial statements or results of operations.

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Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The quantitative and qualitative disclosures about market risk are included under “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Interest Rate Risk Management” appearing on pages 57 through 59 of this report.
Effects of Inflation. Inflation affects financial institutions less than other types of companies. Financial institutions make relatively few significant asset acquisitions that are directly affected by changing prices. Instead, the assets and liabilities are primarily monetary in nature. Consequently, interest rates are more significant to the performance of financial institutions than the effect of general inflation levels. While a relationship exists between the inflation rate and interest rates, we believe this is generally manageable through our asset-liability management program.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data appear on pages 79 through 134 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
The Company’s management, including our President and Chief Executive Officer and our Chief Financial Officer, have evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this report. Based on such evaluation, our President and Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective as of December 31, 2012 to provide reasonable assurance that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its President and Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of the President and Chief Executive Officer and the Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Our internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that accurately and fairly reflect, in reasonable detail, transactions and dispositions of our assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that receipts and expenditures are being made only in accordance with authorizations of management and our directors, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our consolidated 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 circumstances or that the degree of compliance with the policies and procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2012, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework. Based on that assessment, management concluded that, as of December 31, 2012, the Company’s internal control over financial reporting is effective based on the criteria established in COSO’s Internal Control – Integrated Framework.

66


This annual report does not include an attestation report of the Company’s Independent Registered Public Accounting Firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s Independent Registered Public Accounting Firm.
Item 9B. Other Information
On March 20, 2013, the Company entered into a Revolving Credit Note and a Stock Pledge Agreement with Investors of America, LP, a limited partnership that was created by and for the benefit of the Company’s Chairman and members of his immediate family. The agreement provides for a $5.0 million secured revolving line of credit to be utilized for general working capital needs, as further described in Note 11 and Note 25 to our consolidated financial statements, which descriptions are incorporated herein by reference to Exhibits 10.15 and 10.16 of this report.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Board of Directors and Committees of the Board
Our Board of Directors consists of nine members. The Board determined that Messrs. Blake, Cooper, Poelker, Rounsaville, Steward and Yaeger are independent. Each of our directors identified in the following table was elected to serve a one-year term and until his successor has been duly qualified for office.
Name
 
Age
 
Director
Since
 
Principal Occupation(s) During Last Five Years
and Directorships of Public Companies
James F. Dierberg
 
75
 
1979
 
Chairman of the Board of Directors of First Banks, Inc. since 1988; Chief Executive Officer of First Banks, Inc. from 1988 to April 2003; President of First Banks, Inc. from 1979 to 1992 and from 1994 to October 1999.
 
 
 
 
 
 
 
Terrance M. McCarthy
 
58
 
2003
 
President and Chief Executive Officer of First Banks, Inc. since April 2007; Senior Executive Vice President and Chief Operating Officer of First Banks, Inc. from August 2002 to March 2007; Chairman of the Board of Directors of First Bank since January 2003; President and Chief Executive Officer of First Bank from August 2002 to June 2007 and since April 22, 2009; Executive Vice President of First Bank from June 2007 to April 22, 2009. The Board and voting shareholders considered these qualifications, in addition to his prior service as Chief Operating Officer of the Company and President of First Bank, and his current position and experience with the Company and the banking industry, in making a determination that Mr. McCarthy should be a nominee for director of the Company.
 
 
 
 
 
 
 
Allen H. Blake (1)
 
70
 
2008
 
Director of First Banks, Inc. since December 2008 and from 1988 to March 2007; Director of First Bank since December 2008; Prior to Mr. Blake’s announcement of his retirement and resignation of his positions at First Banks, Inc., effective March 31, 2007, Mr. Blake served in the following positions: President of First Banks, Inc. from October 1999 to March 2007; Chief Executive Officer of First Banks, Inc. from April 2003 to March 2007; and Chief Financial Officer of First Banks, Inc. from 1984 to September 1999 and from May 2001 to August 2005. The Board and voting shareholders considered these qualifications, in addition to his significant financial and accounting expertise, prior service as Chief Executive Officer and Chief Financial Officer of the Company and experience with the Company and the banking industry, in making a determination that Mr. Blake should be a nominee for director of the Company.
 
 
 
 
 
 
 
James A. Cooper (1)(2)
 
57
 
2008
 
Senior Managing Partner of Thompson Street Capital Partners, a private equity firm with investments in middle-market manufacturing, service and distribution businesses, in St. Louis, Missouri, since 2000; Director of Thermon Group Holdings, Inc. and Thermon Holding Corporation from April 2010 to May 2012. The Board and voting shareholders considered these qualifications, in addition to his investment management expertise, financial expertise and stature in the local community, in making a determination that Mr. Cooper should be a nominee for director of the Company.
 
 
 
 
 
 
 
Michael J. Dierberg (3)
 
42
 
2011
 
Vice Chairman of First Banks, Inc. since January 2012; Director of First Banks, Inc. from May 2011 to January 2012 and from July 2001 to July 2004; General Counsel of First Banks, Inc. from June 2002 to July 2004; Prior to rejoining First Banks, Inc. as a Director, Mr. Dierberg served as an attorney for the United States Department of Justice in Washington, D.C. from July 2004 to June 2010. The Board and voting shareholders considered these qualifications, in addition to his experience with the Company and the banking industry, in making a determination that Mr. Dierberg should be a nominee for director of the Company.
 
 
 
 
 
 
 
John S. Poelker (1)(4)
 
70
 
2011
 
President of The Poelker Consultancy, Inc., a corporation that provides strategic and financial management advisory and consulting services to the banking industry and other financial services companies, since 2005; Executive Vice President and Chief Financial Officer of State Bank Financial Corporation, a bank holding company in Atlanta, Georgia, from March 2011 to October 2011; Chief Executive Officer of Beach First National Bank in Myrtle Beach, South Carolina, from February 2010 to April 2010; President and Chief Executive Officer of State Bank of Georgia in Fayetteville, Georgia, from December 2009 to February 2010; President and Chief Executive Officer of Georgian Bancorporation and Georgian Bank in Atlanta, Georgia, from July 2009 to September 2009; Executive Vice President and Chief Financial Officer of Old National Bancorp in Evansville, Indiana, from 1998 to 2005; Director of First Charter Corporation from 2006 to 2008; Director of Capmark Financial Group, Inc. since September 2011.

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(continued)
Name
 
Age
 
Director
Since
 
Principal Occupation(s) During Last Five Years
and Directorships of Public Companies
Guy Rounsaville, Jr. (2)(4)
 
69
 
2011
 
Former Director of Diversity at Allen Matkins Leck Gamble Mallory & Natsis LLP, a law firm based in California, from September 2009 to June 2012; Deputy General Counsel of Bank of America from October 2007 to March 2008; General Counsel and Corporate Secretary of LaSalle Bank Corporation and ABN AMRO’s North American Region from November 2006 to October 2007; Executive Vice President and General Counsel of VISA International from 2001 to October 2006; General Counsel of Wells Fargo Bank, N.A. and Wells Fargo & Company from 1969 to 1998; Director of Medley Capital Corporation from 2010 to November 2011; Director of Tri-Valley Bank; Director of United American Bank.
 
 
 
 
 
 
 
David L. Steward (2)
 
61
 
2000
 
Chairman of the Board of Directors of World Wide Technology Holding Co., Inc., an electronic procurement and logistics company in the information technology industry, in St. Louis, Missouri, since 1990; Director of Centene Corporation. The Board and voting shareholders considered these qualifications, in addition to his significant management expertise and stature in the local community, in making a determination that Mr. Steward should be a nominee for director of the Company.
 
 
 
 
 
 
 
Douglas H. Yaeger (1)
 
64
 
2000
 
Prior to Mr. Yaeger’s retirement on February 1, 2012, Mr. Yaeger served in the following positions: Chairman of the Board of Directors, President and Chief Executive Officer of The Laclede Group, Inc., an exempt public utility holding company in St. Louis, Missouri, since its inception in October 2000; Chairman of the Board of Directors, President and Chief Executive Officer of Laclede Gas Company since 1999. The Board and voting shareholders considered these qualifications, in addition to his financial expertise, public company managerial experience and stature in the local community, in making a determination that Mr. Yaeger should be a nominee for director of the Company.
 
(1)
Member of the Audit Committee. Mr. John S. Poelker serves as Chairman of the Audit Committee and the Audit Committee Financial Expert.
(2)
Member of the Compensation Committee. Mr. James A. Cooper serves as Chairman of the Compensation Committee.
(3)
Mr. Michael J. Dierberg is the son of Mr. James F. Dierberg and was appointed an executive officer of the Company effective January 25, 2013. See Item 12. Security Ownership of Certain Beneficial Owners and Management.
(4)
Elected to the Board of Directors by the U.S. Treasury as the sole holder of the Company’s Class C Preferred Stock and Class D Preferred Stock.
Committees of the Board of Directors
Audit Committee. Four members of our Board of Directors currently serve on the Audit Committee, all of whom the Board of Directors determined to be independent. The Audit Committee assists the Board of Directors in fulfilling the Board’s oversight responsibilities with respect to the quality and integrity of the consolidated financial statements, financial reporting process and systems of internal controls. The Audit Committee also assists the Board of Directors in monitoring the independence and performance of the independent auditors, the internal audit department and the operation of ethics programs. The Audit Committee operates under a written charter adopted by the Board of Directors.
The members of the Audit Committee as of March 26, 2013 were Messrs. Blake, Cooper, Poelker and Yaeger. Mr. Poelker serves as Chairman of the Audit Committee and the Audit Committee Financial Expert.
Compensation Committee. In accordance with the requirements of the EESA, as amended by the ARRA, the Board of Directors maintains a Compensation Committee comprised solely of directors determined to be independent. The members of the Compensation Committee as of March 26, 2013 were Messrs. Cooper, Rounsaville and Steward. Mr. Cooper serves as Chairman of the Compensation Committee. The Compensation Committee, governed by a written charter adopted by the Board of Directors, oversees the compensation of the executive officers of the Company and reviews compensation and benefit packages and programs for the Company’s employees generally and reviews the Company’s compliance with the requirements of the EESA and regulations thereunder.
Audit Committee Report
The Audit Committee is responsible for oversight of our financial reporting process on behalf of the Board of Directors. Management has primary responsibility for our financial statements and financial reporting, including internal controls, subject to the oversight of the Audit Committee and the Board of Directors. In fulfilling its responsibilities, the Audit Committee reviewed the audited consolidated financial statements with management and discussed the acceptability of the accounting principles used, the reasonableness of significant judgments made and the clarity of the disclosures.
The Audit Committee reviewed with the Independent Registered Public Accounting Firm, who is responsible for planning and carrying out a proper audit and expressing an opinion on the conformity of our audited consolidated financial statements with U.S. generally accepted accounting principles, their judgments as to the acceptability of the accounting principles we use, and such other matters as are required to be discussed with the Audit Committee by Statement on Auditing Standards No. 114, The Auditor’s Communication With Those Charged With Governances. In addition, the Audit Committee discussed with the Independent Registered Public Accounting Firm its independence from management and the Company, including the matters required by Public Company Accounting Oversight Board, or PCAOB, Rule 3526, Communication with Audit Committees Concerning Independence, and the Audit Committee considered the compatibility of non-audit services provided by the Independent Registered Public

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Accounting Firm with the firm’s independence. KPMG LLP has provided the Audit Committee with the written disclosures and letter required by Standard No. 1 of the Independence Standards Board.
The Audit Committee discussed with our Internal Audit Department and Independent Registered Public Accounting Firm the overall scope and plans for their respective audits. The Audit Committee met with the Internal Audit Department and Independent Registered Public Accounting Firm with and without management present to discuss the results of their examinations, their evaluations of our internal controls and the overall quality of our financial reporting.
In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited consolidated financial statements be included in the Annual Report on Form 10-K as of and for the year ended December 31, 2012 for filing with the SEC.
 
Audit Committee
 
John S. Poelker, Chairman of the Audit Committee
 
Allen H. Blake
 
James A. Cooper
 
Douglas H. Yaeger
Code of Ethics for Principal Executive Officer and Financial Professionals
The Board of Directors has approved a Code of Ethics for Principal Executive Officer and Financial Professionals that covers the Chief Executive Officer, the Chief Financial Officer, the Chief Credit Officer, the Chief Investment Officer, the Controller, the Director of Taxes, and all professionals serving in a Corporate Finance, Accounting, Treasury, Tax or Investor Relations role. These individuals are also subject to the policies and procedures adopted by the Company that govern the conduct of all of its employees. The Code of Ethics for Principal Executive Officer and Financial Professionals is included as an exhibit to this Annual Report on Form 10-K. The Company intends to post on its website at www.firstbanks.com any amendment to or waiver from any provision in the Code of Ethics for Principal Executive Officers and Financial Professionals that applies to the Chief Executive Officer, Chief Financial Officer, Controller or other person performing similar functions and that relate to any element of the standards enumerated in the SEC rules.
Code of Conduct for Employees, Officers and Directors
The Board of Directors has approved a Code of Conduct applicable to all employees, officers and directors of the Company that addresses conflicts of interest, honesty and fair dealing, accounting and auditing matters, political activities and application and enforcement of the Code of Conduct. The Code of Conduct is available on the Company’s website, www.firstbanks.com, under “About us.”

69


Executive Officers
Our executive officers, each of whom was elected to the office(s) indicated by the Board of Directors, as of March 26, 2013, were as follows:
Name
 
Age
 
Current First Banks, Inc.
Office(s) Held
 
Principal Occupation(s)
During Last Five Years
James F. Dierberg
 
75
 
Chairman of the Board of Directors.
 
See “Item 10 – Directors, Executive Officers and Corporate Governance – Board of Directors.”
 
 
 
 
 
 
 
Terrance M. McCarthy
 
58
 
President, Chief Executive Officer and Director; Chairman of the Board of Directors, President and Chief Executive Officer of First Bank.
 
See “Item 10 – Directors, Executive Officers and Corporate Governance – Board of Directors.”
 
 
 
 
 
 
 
Michael J. Dierberg (1)
 
42
 
Vice Chairman of the Board of Directors.
 
See “Item 10 – Directors, Executive Officers and Corporate Governance – Board of Directors.”
 
 
 
 
 
 
 
F. Christopher McLaughlin
 
59
 
Executive Vice President; Director of Retail Banking and Director of Sales, Marketing and Products; Executive Vice President, Director of Retail Banking and Director of First Bank.
 
Executive Vice President, Director of Retail Banking and Director of Sales, Marketing and Products of First Banks, Inc. and First Bank since April 2007; Executive Vice President and Director of Sales, Marketing and Products of First Banks, Inc. and First Bank from September 2003 to March 2007; Director of First Bank since October 2004.
 
 
 
 
 
 
 
Gary S. Pratte
 
65
 
Executive Vice President and Chief Credit Officer; Executive Vice President, Chief Credit Officer and Director of First Bank.
 
Executive Vice President and Chief Credit Officer of First Banks, Inc. since May 2011; Executive Vice President and Chief Credit Officer of First Bank since April 2011; Director of First Bank since April 2011; Executive Vice President and Acting Chief Credit Officer of First Banks, Inc. from August 2010 to May 2011, and of First Bank from August 2010 to April 2011; Executive Vice President and Senior Regional Credit Officer of First Bank from April 2007 to August 2010; Senior Vice President and Senior Regional Credit Officer of First Bank from March 2001 to April 2007.
 
 
 
 
 
 
 
Lisa K. Vansickle
 
45
 
Executive Vice President and Chief Financial Officer; Executive Vice President, Chief Financial Officer, Secretary and Director of First Bank.
 
Executive Vice President and Chief Financial Officer of First Banks, Inc. since April 2010; Senior Vice President and Chief Financial Officer of First Banks, Inc. from April 2007 to April 2010; Senior Vice President and Controller of First Banks, Inc. from January 2001 to April 2007; Executive Vice President, Chief Financial Officer, Secretary and Director of First Bank since May 2010. Senior Vice President, Secretary and Director of First Bank from July 2001 to May 2010. 
 
(1)
Mr. Michael J. Dierberg was appointed an executive officer of the Company effective January 25, 2013. See Item 12. Security Ownership of Certain Beneficial Owners and Management.

Item 11. Executive Compensation
Compensation Discussion and Analysis. The compensation program of the Company and its affiliates (collectively referred to only in this Item 11 as the “Company”) is reflective of its ownership structure and its participation in the CPP under the EESA. As outlined in the stock ownership table included in “Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,” all of our voting stock is owned by various trusts, established by and administered by and for the benefit of Mr. James F. Dierberg, our Chairman of the Board, and members of his immediate family, including Mr. Michael J. Dierberg, our Vice Chairman. Therefore, we do not use equity awards in our compensation program. As a participant in the CPP, we are subject to certain corporate governance and executive compensation standards applicable to all CPP participants as required by the ARRA and rules adopted thereunder, as further described below.
Capital Purchase Program – Executive Compensation and Governance Requirements. As a result of our participation in the CPP, we became subject to certain restrictions on executive compensation set forth in Section 111 of the EESA and the Purchase Agreement entered into by the Company and the U.S. Treasury. Subsequently, the ARRA was signed into law and included a provision that amended Section 111 of the EESA and directed the U.S. Treasury to establish specified standards on executive compensation and corporate governance. The U.S. Treasury published its Interim Final Rule on TARP Standards for Compensation and Corporate Governance (sometimes referred to as the Interim Final Rule). As amended, Section 111 of the EESA and the Interim Final Rule established the following standards applicable to the Company as a result of its participation in the CPP (“CPP Rules”):
•
A prohibition on paying bonuses, retention awards and incentive compensation, other than pursuant to certain preexisting employment contracts, to our named executive officers identified in the Summary Compensation Table, below (the “Senior Executive Officers” or “SEOs”), and the ten next most highly-compensated employees;
•
A prohibition on the payment of “golden parachute payments” to our SEOs and the five next most highly compensated employees upon their termination of employment or a change in control of the Company;

70


•
A requirement to “clawback” any bonus, retention award or incentive compensation paid to an SEO and/or any of the twenty (20) next most highly compensated employees if such bonus, retention award, or incentive compensation was based on statements of earnings, revenues, gains or other criteria later found to be materially inaccurate;
•
A requirement to establish a policy on luxury or excessive expenditures;
•
A prohibition on deducting more than $500,000 in annual compensation paid to each of the SEOs;
•
A prohibition on tax gross-ups to the SEOs and the twenty (20) next most highly compensated employees;
•
A requirement to disclose to the U.S. Treasury any perquisite with a total value for the year in excess of $25,000 paid or provided to an SEO or any of the twenty (20) next most highly compensated employees;
•
A requirement to disclose to the U.S. Treasury whether the Company, Board or Compensation Committee has retained a compensation consultant and the types of services provided by the consultant and its affiliates, whether or not such services were compensation-related;
•
A requirement that the Compensation Committee evaluate and review with our senior risk officers at least every six (6) months the SEO compensation plans to limit any features in such plans that would encourage SEOs to take “unnecessary and excessive risks” that could threaten the value of the Company;
•
A requirement that the Compensation Committee review at least every six (6) months the Company’s employee compensation plans to identify and eliminate any provisions in such plans that encourage the manipulation of reported earnings to enhance the compensation of any employee;
•
A requirement that the Compensation Committee evaluate and review with our senior risk officers at least every six (6) months the risks involved in the Company’s employee compensation plans and how to limit the risks posed to the Company by such plans;
•
A requirement that the Compensation Committee provide a certification that it has conducted the foregoing reviews; and
•
A requirement that the Chief Executive Officer and the Chief Financial Officer provide written certifications of compliance with all of the foregoing requirements.
The SEOs for 2012 were the named executive officers identified in the Company’s Form 10-K for the fiscal year ended December 31, 2011, and were Messrs. James F. Dierberg, Terrance M. McCarthy, F. Christopher McLaughlin, Gary S. Pratte, and Ms. Lisa K. Vansickle. The SEOs for 2013 are the named executive officers identified in the Summary Compensation Table, below. The CPP Rules apply during the period in which any of the CPP capital securities remain outstanding and held by the U.S. Treasury. The Company has entered into agreements with each of the named executive officers under which the officer acknowledges and agrees to the relevant compensation restrictions set forth under the CPP Rules.
Compensation Objective. The objective of our executive compensation policies and practices is to attract and retain talented key executives that will contribute to the achievement of strategic goals and the growth and success of the Company in order to enhance the long-term value of the Company. Compensation is based upon the achievement of corporate goals and objectives, as established by key corporate executives and reported to the Board of Directors. Rewards for performance are designed to motivate the continued strong performance of key executives on a long-term basis.
Our executive compensation program is designed to reward the achievement of financial results in accordance with our corporate goals and objectives within the limits of our ownership structure and the CPP Rules. The current elements of our executive compensation program include a base salary and a benefits program including health insurance, 401(k) plan, time away benefits and life insurance which are offered to all of our employees. Our executive compensation programs are cash-based and do not include any other forms of non-cash compensation. We do not provide the named executive officers with employment contracts or severance agreements, and consequently, we are under no obligation to make additional payments to any of the named executive officers in the event of severance, change in control, retirement or resignation.
The Compensation Committee and management intend to monitor the Company’s overall compensation program to determine what actions may be necessary to continue to fulfill its compensation objectives while complying with the CPP Rules which have effectively eliminated performance based incentives for our SEOs and the ten (10) next most highly compensated employees. Historically, the Company, as a family owned company, has compensated its executive officers conservatively while maintaining key talent without using extravagant compensation packages or perquisites to reward executive officers. The Compensation Committee intends to continue to apply these long-held philosophies in setting future compensation within the limits of the CPP Rules and any other applicable regulations.
Salary. The base salaries of the executive officers are generally established in March of each year and are dependent upon the evaluation of certain factors and, in part, on subjective considerations. The level of base salaries of executive officers is designed to reward the officer’s performance based upon an evaluation of the following factors: (i) the performance of the Company and the achievement of corporate goals and objectives, considering general business and industry conditions, among other factors, and the contributions of specific executives towards the overall performance; (ii) each executive officer’s areas of responsibility and the Company’s performance in those areas; and (iii) the level of compensation paid to comparable executives by other financial

71


institutions of comparable size in the market areas in which we operate to ensure we maintain a competitive compensation package. Our corporate goals and objectives provide particular measurements to which the Compensation Committee and executive management assign significance, such as net income, organic and external growth in target market areas, expense control, net interest margin, credit quality, and regulatory examination results. In 2012, the Compensation Committee considered these factors and suggestions of the Chairman of the Board and the Chief Executive Officer, without assigning a specific weight to any particular factor, and evaluated the appropriate base salary and related annual salary increases of the SEOs. Base salaries of executive officers are reviewed on an ongoing basis and are generally adjusted on an annual basis, and may be further adjusted periodically as a result of significant changes in responsibility, employment market conditions, and other factors.
The challenge for management and the Board of Directors is to motivate, retain and reward key personnel through the current economic environment with compensation tools limited by the CPP Rules while recognizing the Company’s performance. Mr. Dierberg receives a fee of $144,000 for serving as Chairman of the Board of Directors. The base salary of Mr. McCarthy, which was increased in 2011 by 15.0% due to the significance of his responsibilities, was increased by 5.2% in 2012. The base salaries of Ms. Vansickle, Mr. McLaughlin and Mr. Pratte were increased in 2012 by 6.3%, 3.8% and 3.6%, respectively.
Bonuses. The CPP Rules prohibit paying bonuses to the SEOs and the next ten (10) most highly compensated employees, and in compliance with this prohibition, the compensation structure for the SEOs and the next ten (10) most highly compensated employees does not contemplate payment of bonuses. The SEOs have not received a bonus since 2007, except Mr. Pratte who received awards in 2008 and 2009 under incentive plans that Mr. Pratte participated in prior to the time he became a named executive officer. Mr. Pratte’s participation in those incentive plans terminated at the time he became a named executive officer.
Deferred Compensation. We offer the opportunity to defer a portion of compensation under a Nonqualified Deferred Compensation Plan, or NQDC Plan, to the executive officers and other key employees to promote retention by providing a long-term savings opportunity on a tax-deferred basis. We elected to suspend the availability of deferrals under the NQDC Plan in 2010 and 2011 but reinstated the availability of such deferrals beginning in January 2012. Although the NQDC Plan allows the Company to credit the accounts of any participant with discretionary contributions, no such discretionary contributions have been made since the NQDC Plan’s inception. The Company has not and will not make any discretionary contributions to the accounts of the SEOs and the next ten (10) most highly compensated employees during the period the Company is subject to the CPP Rules because such contributions are considered “bonus payments” and therefore prohibited.
Executive Compensation. The following table sets forth certain information regarding compensation earned by the named executive officers for the years ended December 31, 2012, 2011 and 2010:
SUMMARY COMPENSATION TABLE
Name and Principal Position(s)
Year
 
Salary (1)
 
Bonus (1)
 
All Other Compensation (2)
 
Total (1)
James F. Dierberg
2012
 
$
—

 
—

 
149,800

(3) 
149,800

Chairman of the Board of Directors
2011
 
—

 
—

 
149,800

(3) 
149,800

 
2010
 
—

 
—

 
144,000

(3) 
144,000

 
 
 
 
 
 
 
 
 
 
Terrance M. McCarthy
2012
 
593,700

 
—

 
10,000

 
603,700

President and Chief Executive Officer
2011
 
556,200

 
—

 
9,800

 
566,000

 
2010
 
500,000

 
—

 
—

 
500,000

 
 
 
 
 
 
 
 
 
 
Lisa K. Vansickle
2012
 
250,600

 
—

 
9,700

 
260,300

Executive Vice President and Chief Financial Officer
2011
 
237,500

 
—

 
9,500

 
247,000

 
2010
 
230,000

 
—

 
—


230,000

 
 
 
 
 
 
 
 
 
 
F. Christopher McLaughlin
2012
 
267,100

 
—

 
10,000

 
277,100

Executive Vice President, Director of Retail Banking,
2011
 
257,500

 
—

 
9,800

 
267,300

and Director of Sales, Marketing and Products
2010
 
250,000

 
—

 
—

 
250,000

 
 
 
 
 
 
 
 
 
 
Gary S. Pratte
2012
 
282,100

 
—

 
9,900

 
292,000

Executive Vice President and Chief Credit Officer
2011
 
273,700

 
—

 
9,800

 
283,500

 
2010
 
227,700

 
—

 
—

 
227,700

 
(1)
Salary and bonus reported for Ms. Vansickle and Messrs. Dierberg, McCarthy, McLaughlin and Pratte did not include any amounts deferred in our NQDC Plan, except as further described herein. Salary and bonus reported for Mr. McCarthy for 2012 include amounts deferred in our NQDC Plan of $59,400, as further described below and in Note 21 to our consolidated financial statements. Earnings by the named executive officers on their NQDC Plan balances did not include any above-market or preferential earnings.
(2)
All other compensation reported reflects 401(k) employer match contributions, as further described in Note 21 to our consolidated financial statements, with the exception of the amounts reported for Mr. Dierberg, as further described below. The Company did not offer employer matching contributions in 2010.
(3)
All other compensation reported for Mr. Dierberg for 2012, 2011 and 2010 reflects director compensation of $144,000 and 401(k) employer match contributions of $5,800 for 2012 and 2011.

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Nonqualified Deferred Compensation. Officers that meet certain position and base salary criteria and non-employee directors are eligible to participate in our NQDC Plan. Participants are allowed to defer, on an annual basis, up to 25% of their salary and up to 100% of their bonus payments, and hypothetically invest in various investment options available in the NQDC Plan that are selected by the participant and may be changed by the participant at any time. These investment options mirror the investment options that we offer through our 401(k) plan and include various investment funds such as equity funds, international stock funds, capital appreciation funds, money market funds, bond funds, mid-cap value funds and growth funds. However, as previously discussed, we suspended the availability of deferrals to the NQDC Plan in 2010 and 2011 but reinstated the availability of such deferrals beginning in January 2012.
The NQDC Plan allows for us to credit the deferred compensation accounts of any participant with discretionary contributions; however, we have not made any such discretionary contributions under the NQDC Plan since its inception. Any such contributions, if made, would vest over a five-year period. Earnings or losses on participant account balances resulting from the participant’s investment choices are credited or charged to the participant accounts on a monthly basis. We recognize these earnings or losses in our consolidated statements of operations on a monthly basis. In the event of retirement, payment of the vested portion of the participant’s deferred compensation account balance is either made through a single lump sum payment or annual payments over five or ten years, subject to election by the participant. Payment of the vested portion of the participant’s deferred compensation account balance is made through a single lump sum payment in the event the participant terminates his or her employment for reasons other than retirement.
The following table sets forth certain information regarding nonqualified deferred compensation earned by the named executive officers for the year ended December 31, 2012:
NONQUALIFIED DEFERRED COMPENSATION TABLE
Name and Principal Position(s)
Executive
Contributions in
Last Fiscal Year (1)
 
Aggregate
Earnings in Last Fiscal Year (2)
 
Aggregate
Withdrawals /
Distributions in Last Fiscal Year
 
Aggregate
Balance at
December 31, 2012 (3)
James F. Dierberg
$
—

 
69,400

 
—

 
532,700

Chairman of the Board of Directors
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Terrance M. McCarthy
59,400

 
102,900

 
—

 
978,400

President and Chief Executive Officer
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lisa K. Vansickle
—

 
5,700

 
—

 
48,600

Executive Vice President and Chief Financial Officer
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gary S. Pratte
—

 
6,900

 
—

 
85,200

Executive Vice President and Chief Credit Officer
 
 
 
 
 
 
 
 
(1)
All executive contributions represent the deferral of base salary and/or bonus payments reflected in the “Summary Compensation Table.” We did not make any discretionary contributions under the NQDC Plan as of and for the year ended December 31, 2012. In addition, Mr. McLaughlin has not elected to participate in the NQDC Plan.
(2)
Earnings by the named executive officers on their NQDC Plan balances did not include any above-market or preferential earnings.
(3)
Represents deferrals of cash consideration from prior years, as previously reported as compensation in the Company’s previously filed Annual Reports on Form 10-K, and the cumulative earnings on the original deferred amounts and the participant’s 2012 activity.
Potential Payments upon Termination. Upon termination of employment, the executive officers will receive payments of the vested portion of the executive’s deferred compensation account balance under our NQDC Plan as previously described above.

73


Compensation of Directors. The following table sets forth compensation earned by the named directors for the year ended December 31, 2012:
DIRECTOR COMPENSATION TABLE
Name
 
Total Fees Earned or Paid in Cash
James F. Dierberg (1)
 
$
144,000

Allen H. Blake (2)
 
46,000

James A. Cooper (3)
 
36,000

John S. Poelker (4)(7)
 
37,750

Guy Rounsaville, Jr. (5)(7)
 
33,000

David L. Steward
 
27,000

Douglas H. Yaeger (6)
 
36,250

 
(1)
Director compensation for Mr. Dierberg is also included in the “Summary Compensation Table.”
(2)
Mr. Blake received fees of $31,000 for the Company’s board and committee meetings attended and fees of $15,000 for First Bank board and committee meetings attended.
(3)
Mr. Cooper serves as Chairman of the Compensation Committee.
(4)
Mr. John S. Poelker was elected Chairman of the Audit Committee on January 27, 2012 and also serves as the Audit Committee Financial Expert.
(5)
Mr. Guy Rounsaville, Jr. was elected to the Compensation Committee on January 27, 2012.
(6)
Mr. Yaeger served as Chairman of the Audit Committee and the Audit Committee Financial Expert until January 27, 2012.
(7)
Excludes reimbursement of travel expenses.
Mr. James F. Dierberg received an annual fee of $144,000, paid semi-monthly, for his service as Chairman of the Board of Directors during 2012. Messrs. Michael Dierberg and McCarthy do not receive remuneration other than salary for serving on our Board of Directors. Mr. Michael Dierberg was appointed as an executive officer of the Company, effective January 25, 2013. Directors who are neither our employees nor employees of any of our subsidiaries receive cash remuneration for their services as directors. Non-employee directors received a fee of $3,000 for each Board meeting attended, a fee of $3,750 per calendar quarter as a retainer for their service as members of the Board of Directors and a fee of $1,000 for each Audit Committee and Compensation Committee meeting attended. In addition, the Chairmen of the Audit Committee and Compensation Committee received a fee of $5,000 for their service as Chairmen. Mr. Blake, as a non-employee Director of First Bank, also received a fee of $1,000 for each monthly First Bank Board meeting attended and a fee of $500 for each monthly meeting attended of the Company’s Enterprise Risk Management Committee. The Enterprise Risk Management Committee is a committee of the Company’s management in which Mr. Blake and Mr. Michael Dierberg participate.
Prior to 2010 and beginning in January 2012, our non-employee directors were also eligible to defer payment of all or a portion of their compensation through contributions to our NQDC Plan. Earnings by the directors on their NQDC Plan balances did not include any above-market or preferential earnings. Our directors do not receive any other compensation, and there are no arrangements for amounts to be paid to directors upon resignation or any other termination of such director or a change in control of the Company. The Audit Committee, the Compensation Committee and the Compliance Committee are currently the only committees of our Board of Directors.
Compensation Committee Interlocks and Insider Participation. The Compensation Committee is comprised solely of independent directors and no members of the Compensation Committee are current or former officers or employees of the Company. See further information regarding transactions with related parties in Note 20 to our consolidated financial statements appearing on pages 128 through 129 of this report.
Compensation Committee Report.
The Compensation Committee has reviewed the Compensation Discussion and Analysis and discussed such with management. Based on such review and discussions, the Compensation Committee recommended the Compensation Discussion and Analysis be included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2012 for filing with the SEC.
In addition, the Compensation Committee certifies that (i) it has reviewed with the Company’s senior risk officers the SEO compensation arrangements and has made all reasonable efforts to ensure that such arrangements do not encourage SEOs to take unnecessary and excessive risks that threaten the value of the Company; (ii) it has reviewed with senior risk officers the employee compensation plans and has made all reasonable efforts to limit any unnecessary risks these plans pose to the Company; and (iii) it has reviewed the employee compensation plans to eliminate any features of these plans that would encourage the manipulation of reported earnings of the Company.

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Review of Risk Associated with Compensation Plans. Our senior risk officers conducted two assessments of our compensation plans in 2012 and reviewed and discussed each assessment and the compensation plans with the Compensation Committee. The senior risk officers recommended, and the Compensation Committee approved such recommendation, that the review of all compensation plans maintained by the Company focus on incentive based compensation plans. The senior risk officers, with the approval of the Compensation Committee, reviewed the Company’s non-incentive based compensation plans, such as the Company’s NQDC Plan, and broad-based welfare and benefit plans that do not discriminate in scope and terms of operation and determined that such plans do not present opportunities for employees to take excessive and unnecessary risks.
SEO Compensation Plans. The components of our executive compensation program are base salary, the NQDC Plan, and qualified benefit plans available to other employees of the Company. Based on the assessment of the compensation plans and the lack of any incentive compensation, the Compensation Committee determined that our executive compensation program does not encourage the SEOs to take unnecessary and excessive risks that threaten the value of the Company.
Employee Compensation Plans. The Company maintains and administers multiple compensation and bonus plans for employees of the Company. The bonus plans reward employees, other than the SEOs and the next ten (10) most highly compensated employees, for measurable performance throughout the Company. These bonus plans are reviewed on a regular basis and have terms and conditions that enable us to adjust potential payments based on management’s discretion and consideration of certain factors, including, but not limited to, credit quality. Although the “clawback” requirement under the CPP Rules, discussed above, affects only the SEOs and the twenty (20) next most highly compensated employees, we have ensured that all compensation plans provide the Company a clawback right in the event incentive compensation is paid based upon incorrect or fraudulent information. We also require that any new compensation plans are risk assessed and approved by our Enterprise Risk Management Committee comprised of certain directors and executive officers. In addition, to address the risk of potentially encouraging employees to focus on short-term results rather than long-term value creation, we continue to evaluate, and where practical, implement an extended payment schedule for our compensation plans.
Further, in light of the level of oversight and controls surrounding the Company’s compensation plans and incentive compensation plans, and the lack of any equity-based compensation plans, the Compensation Committee has determined that the compensation plans for all employees do not contain any features that would encourage the manipulation of reported earnings to enhance the compensation of any employee.
 
Compensation Committee
 
James A. Cooper, Chairman of the Compensation Committee
 
Guy Rounsaville, Jr.
 
David L. Steward


75


Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth, as of March 26, 2013, certain information with respect to the beneficial ownership of all classes of our capital stock by each person known to us to be the beneficial owner of more than five percent of the outstanding shares of the respective classes of our stock:
Title of Class and Name of Owner
Number
of
Shares Owned
 
Percent
of Class
 
Percent
of Total
Voting Power
Common Stock ($250.00 par value):
 
 
 
 
 
James F. Dierberg II Family Trust (1)
7,714.677

(2) 
32.605%
 
*
Ellen C. Dierberg Family Trust (1)
7,714.676

(2) 
32.605
 
*
Michael J. Dierberg Family Trust (1)
4,255.319

(2) 
17.985
 
*
Michael J. Dierberg Irrevocable Trust (1)
3,459.358

(2) 
14.621
 
*
First Trust (Mary W. Dierberg and First Bank, Trustees) (1)
516.830

(3) 
2.184
 
*
 
 
 
 
 
 
Class A Convertible Adjustable Rate Preferred Stock ($20.00 par value):
 
 
 
 
 
James F. Dierberg, Trustee of the James F. Dierberg Living Trust (1)
641,082

(4)(5) 
100%
 
77.7%
 
 
 
 
 
 
Class B Non-Convertible Adjustable Rate Preferred Stock ($1.50 par value):
 
 
 
 
 
James F. Dierberg, Trustee of the James F. Dierberg Living Trust (1)
160,505

(5) 
100%
 
19.4%
 
 
 
 
 
 
Class C Fixed Rate Cumulative Perpetual Preferred Stock ($1.00 par value):
 
 
 
 
 
United States Department of the Treasury
295,400

(6) 
100%
 
0.0%
 
 
 
 
 
 
Class D Fixed Rate Cumulative Perpetual Preferred Stock ($1.00 par value):
 
 
 
 
 
United States Department of the Treasury
14,770

(6) 
100%
 
0.0%
 
 
 
 
 
 
All executive officers and directors other than Mr. James F. Dierberg and members of his immediate family
0

 
0%
 
0.0%
 
*
Represents less than 1.0%.
1.
Each of the above-named trustees and beneficial owners are United States citizens, and the business address for each such individual is 135 North Meramec, Clayton, Missouri 63105. Mr. James F. Dierberg, our Chairman of the Board, and Mrs. Mary W. Dierberg, are husband and wife, and Messrs. James F. Dierberg II and Michael J. Dierberg, our Vice Chairman, and Ms. Ellen D. Milne, are their adult children.
2.
Due to the relationship between Mr. James F. Dierberg, his wife and their children, Mr. Dierberg is deemed to share voting and investment power over these shares.
3.
Due to the relationship between Mr. James F. Dierberg, his wife and First Bank, Mr. Dierberg is deemed to share voting and investment power over these shares.
4.
Convertible into common stock, based on the appraised value of the common stock at the date of conversion.
5.
Sole voting and investment power.
6.
Shares were issued to the U.S. Treasury on December 31, 2008 pursuant to the CPP. The holders of the Class C Preferred Stock and the Class D Preferred Stock have no voting rights except in certain limited circumstances. As a result of our deferral of dividends on the preferred stock issued to the U.S. Treasury for an aggregate of six quarters, the U.S. Treasury had the right to elect two directors to our Board of Directors. As further described in “Item 10 – Directors, Executive Officers and Corporate Governance,” on July 13, 2011, the U.S. Treasury elected two members to our Board of Directors, effective immediately. The address of the U.S. Treasury is 1500 Pennsylvania Avenue, NW, Room 2312, Washington, D.C. 20220.
The following table sets forth, as of March 26, 2013, certain information with respect to the beneficial ownership of all classes of the capital securities of our subsidiary, FB Holdings, by each of our directors and named executive officers:
Title of Class and Name of Owner
Percent of Membership Interests Owned
Membership Interests
 
First Bank (1)
53.23%
First Capital America, Inc. (1)
46.77%
 
(1)       See further discussion of the membership interests of FB Holdings in Note 20 to our consolidated financial statements.


76


Item 13. Certain Relationships and Related Transactions, and Director Independence
Review and Approval of Related Person Transactions. We review all relationships and transactions in which we and our directors and executive officers and their immediate family members and entities in which such persons have a significant interest are participants to determine whether such persons have a direct or indirect material interest. Our management collects information from the executive officers and the directors regarding the related person transactions and determines whether we or a related person has a direct or indirect material interest in the transaction. If we determine that a transaction is directly or indirectly material to us or a related person, then the transaction is disclosed in accordance with applicable requirements. In addition, the Audit Committee of our Board of Directors reviews and approves or ratifies any related person transaction that is required to be so disclosed. In the event that a member of the Audit Committee is a related person to such a transaction, such member may not participate in the discussion or vote regarding approval or ratification of the transaction.
Related Person Transactions. Outside of normal customer relationships, no directors, executive officers or shareholders holding over 5% of our voting securities, and no corporations or firms with which such persons or entities are associated, currently maintain or have maintained since the beginning of the last full fiscal year, any significant business or personal relationship with our subsidiaries or us, other than that which arises by virtue of such position or ownership interest in our subsidiaries or us, except as set forth in “Item 11 – Executive Compensation – Compensation of Directors,” or as described in the following paragraphs.
First Bank has had in the past, and may have in the future, loan transactions and related banking services in the ordinary course of business with our directors and/or their affiliates. These loan transactions have been made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unaffiliated persons and, except as described below, did not involve more than the normal risk of collectability or present other unfavorable features. First Bank does not extend credit to our officers or to officers of First Bank, except extensions of credit secured by mortgages on personal residences, loans to purchase automobiles and personal credit card accounts.
Loans to directors, their affiliates and executive officers of the Company at December 31, 2011 included a $15.6 million multi-family real estate loan to a limited liability company which was 50% owned by the brother-in-law of Mr. Douglas H. Yaeger, a director of the Company. The loan had been paid as agreed and was not reported as past due, nonaccrual or restructured as of December 31, 2011. However, based on then current economic and financial considerations, management had classified this loan as special mention in our loan watch list as of December 31, 2011. On September 28, 2012, the then current balance of $15.4 million was repaid in full. Loans to directors, their affiliates and executive officers of the Company at December 31, 2011 also included two credit relationships aggregating $1.2 million to companies which were approximately 16% owned by the brother-in-law of Mr. Yaeger, including a $328,000 credit relationship that was 60 - 89 days past due. Both loans had been classified by management as problem loans in our loan watch list as of December 31, 2011 and were subsequently placed on nonaccrual status during 2012. On December 14, 2012, First Bank sold these nonaccrual loans for an aggregate purchase price of $785,000 to a company partially owned by the brother-in-law of Mr. Yaeger.
Certain of our shareholders, directors and officers and their respective affiliates have deposit accounts and related banking services with First Bank. It is First Bank’s policy not to permit any of its officers or directors or their affiliates to overdraw their respective deposit accounts. Deposit account overdraft protection may be approved for persons or entities under a plan whereby a credit limit has been established in accordance with First Bank’s standard credit criteria.
Transactions with related parties, including transactions with affiliated persons and entities, are described in Note 20 to our consolidated financial statements on pages 128 through 129 of this report, which descriptions are incorporated by reference herein, and in Note 11 and Note 25 to our consolidated financial statements.
Director Independence. Our Board of Directors has determined that Messrs. Allen H. Blake, James A. Cooper, John S. Poelker, Guy Rounsaville, Jr., David L. Steward and Douglas H. Yaeger have no material relationship with us and each is independent. Our Audit Committee of the Board of Directors and our Compensation Committee are comprised solely of independent directors. In order to be considered independent, our Board of Directors must determine that a director does not have any direct or indirect material relationship with us as provided under the rules of the NYSE. In making such a determination, the Board of Directors considers all relationships between us, or any of our subsidiaries, and the director, or any of his immediate family members, or any entity with which the director or any of his immediate family members is affiliated by reason of being a partner, officer or significant shareholder thereof. In assessing the independence of our directors, the Board of Directors considered all relationships between us and our directors based primarily upon responses of the directors to questions posed through a directors’ and officers’ questionnaire. The Board of Directors considered each of the related person transactions discussed above in making its independence determination.
The Company has preferred securities of only one of its capital trusts listed on the NYSE and, pursuant to the General Application section of NYSE Rule 303A, is not subject to NYSE Rule 303A.01 requiring a majority of independent directors. Messrs. James

77


F. Dierberg, Michael J. Dierberg and Terrance M. McCarthy are not independent because they are each current executive officers of the Company.
Item 14. Principal Accounting Fees and Services
Fees of Independent Registered Public Accounting Firm
During 2012 and 2011, KPMG LLP served as our Independent Registered Public Accounting Firm and provided services to our affiliates and us. The following table sets forth fees for professional audit services rendered by KPMG LLP for the audit of our consolidated financial statements and other audit services in 2012 and 2011:
 
2012
 
2011
Audit fees (1)
$
633,000

 
583,500

Audit related fees
—

 
—

Tax fees (2)
62,532

 
31,309

All other fees
—

 
—

Total
$
695,532

 
614,809

 
(1)
For 2012 and 2011, audit fees include the audit of the consolidated financial statements of the Company, as well as services provided for reporting requirements under FDICIA and mortgage banking activities, which are included in the audit fees of the Company, as these services are closely related to the audit of the Company’s consolidated financial statements. Audit fees also include other accounting and reporting consultations. On an accrual basis, audit fees for 2012 and 2011 were $598,000 and $578,500, respectively.
(2)
For 2012 and 2011, tax fees consist of tax filing, compliance and other advisory services.
Policy Regarding the Approval of Independent Auditor Provision of Audit and Non-Audit Services
Consistent with the SEC requirements regarding auditor independence, the Audit Committee recognizes the importance of maintaining the independence, in fact and appearance, of our independent auditors. As such, the Audit Committee has adopted a policy for pre-approval of all audit and permissible non-audit services provided by our independent auditors. Under the policy, the Audit Committee, or its designated member, must pre-approve services prior to commencement of the specified service. The requests for pre-approval are submitted to the Audit Committee or its designated member by the Director of Risk Management and Audit with a statement as to whether in his/her view the request is consistent with the SEC’s rules on auditor independence. The Audit Committee reviews the pre-approval requests and the fees paid for such services at their regularly scheduled quarterly meetings or at special meetings.

PART IV
Item 15. Exhibits, Financial Statement Schedules
(a)
1.
Financial Statements and Supplementary Data – The financial statements and supplementary data filed as part of this Report are included in Item 8.
 
 
 
 
2.
Financial Statement Schedules – These schedules are omitted for the reason they are not required or are not applicable.
 
 
 
 
3.
Exhibits – The exhibits are listed in the index of exhibits required by Item 601 of Regulation S-K at Item (b) below and are incorporated herein by reference.
 
 
 
(b)
The index of required exhibits is included beginning on page 138 of this Report.
 
 
(c)
Not Applicable.

78


FIRST BANKS, INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





The Board of Directors and Stockholders
First Banks, Inc.:
We have audited the accompanying consolidated balance sheets of First Banks, Inc. and subsidiaries (the Company) as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2012. These consolidated financial statements are the responsibility of the Company’s 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 First Banks, Inc. and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.
                                

St. Louis, Missouri
March 26, 2013

79
FIRST BANKS, INC.
CONSOLIDATED BALANCE SHEETS

(dollars expressed in thousands, except share and per share data)
 
December 31,
 
2012
 
2011
ASSETS
 
 
 
Cash and cash equivalents:
 
 
 
Cash and due from banks
$
114,841

 
101,822

Short-term investments
404,005

 
371,318

Total cash and cash equivalents
518,846

 
473,140

Investment securities:
 
 
 
Available for sale
2,043,727

 
2,457,887

Held to maturity (fair value of $637,024 and $13,424, respectively)
631,553

 
12,817

Total investment securities
2,675,280

 
2,470,704

Loans:
 
 
 
Commercial, financial and agricultural
610,301

 
725,195

Real estate construction and development
174,979

 
249,987

Real estate mortgage
2,060,131

 
2,255,332

Consumer and installment
19,262

 
23,596

Loans held for sale
66,133

 
31,111

Net deferred loan fees
(59
)
 
(942
)
Total loans
2,930,747

 
3,284,279

Allowance for loan losses
(91,602
)
 
(137,710
)
Net loans
2,839,145

 
3,146,569

Federal Reserve Bank and Federal Home Loan Bank stock
27,329

 
27,078

Bank premises and equipment, net
127,520

 
137,199

Goodwill and other intangible assets
125,267

 
125,267

Deferred income taxes
29,042

 
19,121

Other real estate and repossessed assets
91,995

 
129,896

Other assets
67,996

 
73,026

Assets of discontinued operations
6,706

 
6,913

Total assets
$
6,509,126

 
6,608,913

LIABILITIES
 
 
 
Deposits:
 
 
 
Noninterest-bearing demand
$
1,327,183

 
1,225,622

Interest-bearing demand
1,000,666

 
899,114

Savings and money market
1,880,271

 
1,964,905

Time deposits of $100 or more
460,791

 
546,045

Other time deposits
823,936

 
987,369

Total deposits
5,492,847

 
5,623,055

Other borrowings
26,025

 
51,170

Subordinated debentures
354,133

 
354,057

Deferred income taxes
36,182

 
26,261

Accrued expenses and other liabilities
144,269

 
115,962

Liabilities of discontinued operations
155,711

 
174,737

Total liabilities
6,209,167

 
6,345,242

STOCKHOLDERS’ EQUITY
 
 
 
First Banks, Inc. stockholders’ equity:
 
 
 
Preferred stock:
 
 
 
Class A convertible, adjustable rate, $20.00 par value, 750,000 shares authorized, 641,082 shares issued and outstanding
12,822

 
12,822

Class B adjustable rate, $1.50 par value, 200,000 shares authorized, 160,505 shares issued and outstanding
241

 
241

Class C fixed rate, cumulative, perpetual, $1.00 par value, 295,400 shares authorized, issued and outstanding
291,757

 
288,203

Class D fixed rate, cumulative, perpetual, $1.00 par value, 14,770 shares authorized, issued and outstanding
17,343

 
17,343

Common stock, $250.00 par value, 25,000 shares authorized, 23,661 shares issued and outstanding
5,915

 
5,915

Additional paid-in capital
12,480

 
12,480

Retained deficit
(179,513
)
 
(183,351
)
Accumulated other comprehensive income
45,259

 
16,066

Total First Banks, Inc. stockholders’ equity
206,304

 
169,719

Noncontrolling interest in subsidiary
93,655

 
93,952

Total stockholders’ equity
299,959

 
263,671

Total liabilities and stockholders’ equity
$
6,509,126

 
6,608,913

The accompanying notes are an integral part of the consolidated financial statements.

80
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS


(dollars expressed in thousands, except share and per share data)
 
Years Ended December 31,
 
2012
 
2011
 
2010
Interest income:
 
 
 
 
 
Interest and fees on loans
$
143,765

 
184,593

 
281,654

Investment securities:
 
 
 
 
 
Taxable
56,547

 
45,172

 
24,612

Nontaxable
287

 
481

 
595

Federal Reserve Bank and Federal Home Loan Bank stock
1,146

 
1,416

 
2,063

Short-term investments
820

 
1,634

 
3,544

Total interest income
202,565

 
233,296

 
312,468

Interest expense:
 
 
 
 
 
Deposits:
 
 
 
 
 
Interest-bearing demand
569

 
1,023

 
1,409

Savings and money market
3,535

 
8,577

 
13,959

Time deposits of $100 or more
4,153

 
8,068

 
15,257

Other time deposits
7,002

 
13,233

 
24,539

Other borrowings
(18
)
 
15

 
7,844

Subordinated debentures
14,847

 
13,623

 
13,012

Total interest expense
30,088

 
44,539

 
76,020

Net interest income
172,477

 
188,757

 
236,448

Provision for loan losses
2,000

 
69,000

 
214,000

Net interest income after provision for loan losses
170,477

 
119,757

 
22,448

Noninterest income:
 
 
 
 
 
Service charges on deposit accounts and customer service fees
36,197

 
39,101

 
42,370

Gain on loans sold and held for sale
12,931

 
5,176

 
9,516

Net gain on investment securities
1,306

 
5,335

 
8,315

Decrease in fair value of servicing rights
(5,475
)
 
(7,652
)
 
(5,558
)
Loan servicing fees
7,403

 
8,271

 
8,783

Other
13,844

 
11,963

 
15,066

Total noninterest income
66,206

 
62,194

 
78,492

Noninterest expense:
 
 
 
 
 
Salaries and employee benefits
77,788

 
79,518

 
84,101

Occupancy, net of rental income
21,911

 
23,887

 
26,675

Furniture and equipment
11,498

 
11,781

 
13,802

Postage, printing and supplies
2,721

 
2,777

 
3,379

Information technology fees
22,446

 
25,804

 
27,745

Legal, examination and professional fees
8,890

 
12,215

 
13,818

Amortization of intangible assets
—

 
3,024

 
3,292

Advertising and business development
2,125

 
1,868

 
1,479

FDIC insurance
12,436

 
16,103

 
21,664

Write-downs and expenses on other real estate and repossessed assets
18,672

 
22,983

 
44,662

Other
26,831

 
30,286

 
58,022

Total noninterest expense
205,318

 
230,246

 
298,639

Income (loss) from continuing operations, before (benefit) provision for income taxes
31,365

 
(48,295
)
 
(197,699
)
(Benefit) provision for income taxes
(139
)
 
(10,654
)
 
4,114

Net income (loss) from continuing operations, net of tax
31,504

 
(37,641
)
 
(201,813
)
(Loss) income from discontinued operations, net of tax
(5,523
)
 
(6,459
)
 
3,562

Net income (loss)
25,981

 
(44,100
)
 
(198,251
)
Less: net loss attributable to noncontrolling interest in subsidiary
(297
)
 
(2,950
)
 
(6,514
)
Net income (loss) attributable to First Banks, Inc.
$
26,278

 
(41,150
)
 
(191,737
)
Preferred stock dividends declared and undeclared
18,886

 
17,908

 
16,980

Accretion of discount on preferred stock
3,554

 
3,466

 
3,381

Net income (loss) available to common stockholders
$
3,838

 
(62,524
)
 
(212,098
)
 
 
 
 
 
 
Basic and diluted earnings (loss) per common share from continuing operations
$
395.64

 
(2,369.48
)
 
(9,114.61
)
Basic and diluted (loss) earnings per common share from discontinued operations
(233.42
)
 
(272.98
)
 
150.54

Basic and diluted earnings (loss) per common share
$
162.22

 
(2,642.46
)
 
(8,964.07
)
 
 
 
 
 
 
Weighted average shares of common stock outstanding
23,661

 
23,661

 
23,661

The accompanying notes are an integral part of the consolidated financial statements.

81
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(dollars expressed in thousands)
 
Years Ended December 31,
 
2012
 
2011
 
2010
 
 
 
 
 
 
Net income (loss)
$
25,981

 
(44,100
)
 
(198,251
)
Other comprehensive income:
 
 
 
 
 
Unrealized gains on available-for-sale investment securities, net of tax
17,420

 
22,676

 
4,764

Reclassification adjustment for available-for-sale investment securities gains included in net income (loss), net of tax
(758
)
 
(3,461
)
 
(5,378
)
Amortization of net unrealized gain associated with reclassification of available-for-sale investment securities to held-to-maturity investment securities, net of tax
(913
)
 
—

 
—

Reclassification adjustment for deferred tax asset valuation allowance on investment securities
15,014

 
(119
)
 
(331
)
Change in unrealized gains on derivative instruments, net of tax
—

 
—

 
(3,734
)
Reclassification adjustment for deferred tax asset valuation allowance on derivative instruments
—

 
—

 
4,806

Amortization of net loss related to pension liability, net of tax
(911
)
 
(413
)
 
(4
)
Reclassification adjustment for deferred tax asset valuation allowance on pension liability
(659
)
 
(299
)
 
23

Other comprehensive income
29,193

 
18,384


146

Comprehensive income (loss)
55,174

 
(25,716
)
 
(198,105
)
Comprehensive loss attributable to noncontrolling interest in subsidiary
(297
)
 
(2,950
)
 
(6,514
)
Comprehensive income (loss) attributable to First Banks, Inc.
$
55,471

 
(22,766
)
 
(191,591
)
The accompanying notes are an integral part of the consolidated financial statements.



82
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
THREE YEARS ENDED DECEMBER 31, 2012

(dollars expressed in thousands)
 
First Banks, Inc. Stockholders’ Equity
 
 
 
 
 
Preferred
Stock
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
(Deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Non-
controlling
Interest
 
Total
Stockholders’
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2010
$
311,762

 
5,915

 
12,480

 
91,271

 
(2,464
)
 
103,416

 
522,380

Net loss
—

 
—

 
—

 
(191,737
)
 
—

 
(6,514
)
 
(198,251
)
Other comprehensive income
—

 
—

 
—

 
—

 
146

 
—

 
146

Accretion of discount on preferred stock
3,381

 
—

 
—

 
(3,381
)
 
—

 
—

 
—

Preferred stock dividends declared
—

 
—

 
—

 
(16,980
)
 
—

 
—

 
(16,980
)
Balance, December 31, 2010
315,143

 
5,915

 
12,480

 
(120,827
)
 
(2,318
)
 
96,902

 
307,295

Net loss
—

 
—

 
—

 
(41,150
)
 
—

 
(2,950
)
 
(44,100
)
Other comprehensive income
—

 
—

 
—

 
—

 
18,384

 
—

 
18,384

Accretion of discount on preferred stock
3,466

 
—

 
—

 
(3,466
)
 
—

 
—

 
—

Preferred stock dividends declared
—

 
—

 
—

 
(17,908
)
 
—

 
—

 
(17,908
)
Balance, December 31, 2011
318,609

 
5,915

 
12,480

 
(183,351
)
 
16,066

 
93,952

 
263,671

Net income
—

 
—

 
—

 
26,278

 
—

 
(297
)
 
25,981

Other comprehensive income
—

 
—

 
—

 
—

 
29,193

 
—

 
29,193

Accretion of discount on preferred stock
3,554

 
—

 
—

 
(3,554
)
 
—

 
—

 
—

Preferred stock dividends declared
—

 
—

 
—

 
(18,886
)
 
—

 
—

 
(18,886
)
Balance, December 31, 2012
$
322,163

 
5,915

 
12,480

 
(179,513
)
 
45,259

 
93,655

 
299,959

The accompanying notes are an integral part of the consolidated financial statements.

83
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars expressed in thousands)
 
Years Ended December 31,
 
2012
 
2011
 
2010
Cash flows from operating activities:
 
 
 
 
 
Net income (loss) attributable to First Banks, Inc.
$
26,278

 
(41,150
)
 
(191,737
)
Net loss attributable to noncontrolling interest in subsidiary
(297
)
 
(2,950
)
 
(6,514
)
Less: net (loss) income from discontinued operations
(5,523
)
 
(6,459
)
 
3,562

Net income (loss) from continuing operations
31,504

 
(37,641
)
 
(201,813
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization of bank premises and equipment
12,079

 
13,445

 
16,537

Amortization of intangible assets
—

 
3,024

 
3,292

Amortization and accretion of investment securities
17,412

 
11,934

 
6,267

Originations of loans held for sale
(470,119
)
 
(274,254
)
 
(396,855
)
Proceeds from sales of loans held for sale
442,476

 
301,343

 
385,109

Provision for loan losses
2,000

 
69,000

 
214,000

(Benefit) provision for current income taxes
(32
)
 
181

 
(437
)
Provision (benefit) for deferred income taxes
6,638

 
(23,521
)
 
(70,845
)
(Decrease) increase in deferred tax asset valuation allowance
(6,745
)
 
12,686

 
75,396

Decrease in accrued interest receivable
4,000

 
3,884

 
5,732

Increase in accrued interest payable
12,106

 
7,890

 
4,079

Gain on loans sold and held for sale
(12,931
)
 
(5,176
)
 
(9,516
)
Net gain on investment securities
(1,306
)
 
(5,335
)
 
(8,315
)
Decrease in fair value of servicing rights
5,475

 
7,652

 
5,558

Write-downs on other real estate and repossessed assets
14,510

 
16,922

 
34,680

Other operating activities, net
4,356

 
20,945

 
11,785

Net cash provided by operating activities – continuing operations
61,423

 
122,979

 
74,654

Net cash used in operating activities – discontinued operations
(5,241
)
 
(6,626
)
 
(5,083
)
Net cash provided by operating activities
56,182

 
116,353

 
69,571

Cash flows from investing activities:
 
 
 
 
 
Net cash paid for sale of assets and liabilities of discontinued operations, net of cash and cash equivalents sold
—

 
(51,339
)
 
(1,400,472
)
Cash paid for sale of branches, net of cash and cash equivalents sold
—

 
(16,256
)
 
(8,408
)
Proceeds from sales of investment securities available for sale
315,238

 
283,713

 
249,209

Maturities and calls of investment securities available for sale
684,639

 
341,179

 
189,887

Maturities and calls of investment securities held to maturity
107,061

 
1,660

 
2,418

Purchases of investment securities available for sale
(1,296,857
)
 
(1,587,313
)
 
(1,419,739
)
Purchases of investment securities held to maturity
—

 
(3,450
)
 
—

Net (purchases) redemptions of Federal Reserve Bank and Federal Home Loan Bank stock
(251
)
 
3,043

 
34,955

Proceeds from sales of commercial loans
55,081

 
65,867

 
107,414

Cash paid for purchase of one-to-four-family residential real estate loans
(141,048
)
 
—

 
—

Net decrease in loans
367,233

 
884,010

 
1,309,598

Recoveries of loans previously charged-off
29,962

 
22,304

 
52,102

Purchases of bank premises and equipment
(5,906
)
 
(5,170
)
 
(4,024
)
Net proceeds from sales of other real estate and repossessed assets
48,531

 
65,398

 
108,321

Proceeds from termination of bank-owned life insurance policy
—

 
—

 
25,957

Other investing activities, net
295

 
2,109

 
3,621

Net cash provided by (used in) investing activities – continuing operations
163,978

 
5,755

 
(749,161
)
Net cash (used in) provided by investing activities – discontinued operations
(92
)
 
3,030

 
50,052

Net cash provided by (used in) investing activities
163,886

 
8,785

 
(699,109
)

84
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

 
Years Ended December 31,
 
2012
 
2011
 
2010
Cash flows from financing activities:
 
 
 
 
 
Increase (decrease) in demand, savings and money market deposits
118,479

 
(86,668
)
 
83,838

Decrease in time deposits
(248,687
)
 
(528,795
)
 
(189,783
)
Repayments of Federal Home Loan Bank advances
—

 
—

 
(600,000
)
(Decrease) increase in other borrowings
(25,145
)
 
19,416

 
(134,958
)
Net cash used in financing activities – continuing operations
(155,353
)
 
(596,047
)
 
(840,903
)
Net cash used in financing activities – discontinued operations
(19,009
)
 
(51,709
)
 
(50,052
)
Net cash used in financing activities
(174,362
)
 
(647,756
)
 
(890,955
)
Net increase (decrease) in cash and cash equivalents
45,706

 
(522,618
)
 
(1,520,493
)
Cash and cash equivalents, beginning of year
473,140

 
995,758

 
2,516,251

Cash and cash equivalents, end of year
$
518,846

 
$
473,140

 
$
995,758

 
 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
 
 
Cash paid for interest on liabilities
$
17,982

 
$
36,649

 
$
71,941

Cash received for income taxes
(661
)
 
(239
)
 
(1,873
)
Noncash investing and financing activities:
 
 
 
 
 
Reclassification of investment securities from available for sale to held to maturity
$
729,142

 
$
—

 
$
—

Loans transferred to other real estate and repossessed assets
24,223

 
$
69,941

 
$
158,889

Bank premises and equipment transferred to other real estate and repossessed assets
—

 
6,537

 
—

The accompanying notes are an integral part of the consolidated financial statements.

85
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 


NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The accompanying consolidated financial statements of First Banks, Inc. and subsidiaries (the Company) have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and conform to predominant practices within the banking industry. Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare the consolidated financial statements in conformity with GAAP. Actual results could differ from those estimates.
Certain reclassifications of 2011 and 2010 amounts have been made to conform to the 2012 presentation, including the reclassification of the Company’s investment in the common securities of its various affiliated statutory and business trusts (collectively, the Trusts) that were created for the sole purpose of issuing trust preferred securities, as further described in Note 12 to the consolidated financial statements. The investment in the common securities of the Trusts was reclassified from available-for-sale investment securities to other assets and the dividend income accrued on the common securities of the Trusts was reclassified from interest income on investment securities to other income. The reclassifications were applied retrospectively to all periods presented.
Principles of Consolidation. The consolidated financial statements include the accounts of the parent company and its subsidiaries, giving effect to the noncontrolling interest in subsidiaries, as more fully described below and in Note 20 to the consolidated financial statements. All significant intercompany accounts and transactions have been eliminated.
All financial information is reported on a continuing operations basis, unless otherwise noted. See Note 2 to the consolidated financial statements for a discussion regarding discontinued operations.
The Company operates through its wholly owned subsidiary bank holding company, The San Francisco Company (SFC), headquartered in St. Louis, Missouri, and SFC’s wholly owned subsidiary bank, First Bank, also headquartered in St. Louis, Missouri. First Bank operates through its branch banking offices and subsidiaries: First Bank Business Capital, Inc.; FB Holdings, LLC (FB Holdings); Small Business Loan Source LLC; ILSIS, Inc.; FBIN, Inc.; SBRHC, Inc.; HVIIHC, Inc.; FBSA Missouri, Inc.; FBSA California, Inc.; NT Resolution Corporation; and LC Resolution Corporation. All of the subsidiaries are wholly owned as of December 31, 2012, except FB Holdings, which is 53.23% owned by First Bank and 46.77% owned by First Capital America, Inc. (FCA), a corporation owned and operated by the Company’s Chairman of the Board and members of his immediate family, including Mr. Michael Dierberg, Vice Chairman of the Company, as further described in Note 20 to the consolidated financial statements. FB Holdings is included in the consolidated financial statements with the noncontrolling ownership interest reported as a component of stockholders’ equity in the consolidated balance sheets as “noncontrolling interest in subsidiary” and the earnings or loss, net of tax, attributable to the noncontrolling ownership interest, reported as “net loss attributable to noncontrolling interest in subsidiary” in the consolidated statements of operations.
Significant Accounting Policies:
Cash and Cash Equivalents. Cash, due from banks and short-term investments, which include federal funds sold and interest-bearing deposits, are considered to be cash and cash equivalents for purposes of the consolidated statements of cash flows. Interest-bearing deposits were $404.0 million and $371.3 million at December 31, 2012 and 2011, respectively. The Company did not have any federal funds sold outstanding at December 31, 2012 and 2011. First Bank is required to maintain certain daily reserve balances on hand in accordance with regulatory requirements. These reserve balances maintained in accordance with such requirements were $14.6 million and $13.1 million at December 31, 2012 and 2011, respectively.
Federal Reserve Bank and Federal Home Loan Bank Stock. First Bank is a member of the Federal Reserve Bank of St. Louis (FRB) system and the Federal Home Loan Bank (FHLB) system and maintains investments in FRB and FHLB stock. These investments are recorded at cost, which represents redemption value. The investment in FRB stock is maintained at a minimum of 6% of First Bank’s capital stock and capital surplus. The investment in FHLB of Des Moines stock is maintained at an amount equal to 0.12% of First Bank’s total assets as of December 31 of the preceding year, up to a maximum of $10.0 million, plus 4.45% of advances. Investments in FRB and FHLB of Des Moines stock were $19.4 million and $7.9 million, respectively, at December 31, 2012, and $18.3 million and $8.8 million, respectively, at December 31, 2011.
Investment Securities. The classification of investment securities as available for sale or held to maturity is determined at the date of purchase. Investment securities designated as available for sale, which represent any security that the Company has no immediate plan to sell but which may be sold in the future under different circumstances, are stated at fair value. Realized gains and losses are included in noninterest income, based on the amortized cost of the individual security sold. Unrealized gains and losses, net of related income tax effects, are recorded in accumulated other comprehensive income (loss). All previous fair value adjustments included in the separate component of accumulated other comprehensive income (loss) are reversed upon sale. Premiums and

86
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

discounts incurred relative to the par value of securities purchased are amortized or accreted, respectively, on the level-yield method taking into consideration the level of current and anticipated prepayments. Investment securities designated as held to maturity, which represent any security that the Company has the positive intent and ability to hold to maturity, are stated at cost, net of amortization of premiums and accretion of discounts computed on the level-yield method taking into consideration the level of current and anticipated prepayments. Any reclassification of available-for-sale investment securities to held-to-maturity investment securities are recorded at fair value, and the gross unrealized gain or loss on available-for-sale investment securities at the time of transfer is recorded as additional premium or discount on the securities and amortized over the remaining lives of the respective securities. A decline in the fair value of any available-for-sale or held-to-maturity investment security below its carrying value that is deemed to be other than temporary results in a reduction in the cost basis of the carrying value to fair value. The other-than-temporary impairment, which is not expected to be reversed, is charged to noninterest income and a new cost basis is established. When determining other-than-temporary impairment, consideration is given as to whether the Company has the ability and intent to hold the investment security until a market price recovery and whether evidence indicating the carrying value of the investment security is recoverable outweighs evidence to the contrary.
Loans Held for Portfolio. Loans held for portfolio are carried at cost, adjusted for amortization of premiums and accretion of discounts using the interest method. Interest and fees on loans are recognized as income using the interest method. Loan origination fees and costs are deferred and accreted to interest income over the estimated life of the loans using the interest method. Loans held for portfolio are stated at cost as the Company has the ability and it is management’s intention to hold them to maturity.
The accrual of interest on loans is discontinued when it appears that interest or principal may not be paid in a timely manner in the normal course of business or once principal or interest payments become 90 days past due under the contractual terms of the loan agreement. Generally, payments received on nonaccrual and impaired loans are recorded as principal reductions. Interest income is recognized after all delinquent principal has been repaid or an improvement in the condition of the loan has occurred that warrants resumption of interest accruals.
A loan is considered impaired when it is probable that the Company will be unable to collect all amounts due, both principal and interest, according to the contractual terms of the loan agreement. Loans on nonaccrual status and restructured loans are considered to be impaired loans. When measuring impairment, the expected future cash flows of an impaired loan are discounted at the loan’s effective interest rate. Alternatively, impairment is measured by reference to an observable market price, if one exists, or the fair value of the collateral for a collateral-dependent loan. Regardless of the historical measurement method used, the Company measures impairment based on the fair value of the collateral when foreclosure is probable.
A loan is classified as a troubled debt restructuring when all of the following conditions are present: (i) the borrower is experiencing financial difficulty, (ii) the Company makes a concession to the original contractual loan terms, and (iii) the Company would not consider the concessions but for economic or legal reasons related to the borrower’s financial difficulty. These concessions may include, but are not limited to, rate reductions, principal forgiveness, extension of maturity date and other actions intended to minimize potential losses. A loan that is modified at a market rate of interest may no longer be classified as a troubled debt restructuring in the calendar year subsequent to the restructuring if it is in compliance with the modified terms. Performance prior to the restructuring is considered when assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual at the time of the restructuring or after a shorter performance period.
Acquired impaired loans are classified as nonaccrual loans and are initially measured at fair value with no allocated allowance for loan losses. An allowance for loan losses is recorded to the extent there is further credit deterioration subsequent to the acquisition date.
Loans Held for Sale. Loans held for sale are comprised of residential mortgage loans held for sale in the secondary mortgage market, frequently in the form of a mortgage-backed security, U.S. Small Business Administration (SBA) loans awaiting sale of the guaranteed portion to the SBA, and commercial real estate loans which may be identified for sale to specific buyers to achieve credit or loan concentration objectives. One-to-four-family residential mortgage loans held for sale are carried at fair value on a recurring basis. The determination of fair value is based on quoted market prices of comparable instruments obtained from independent pricing vendors based on recent trading activity and other relevant information. Other loans held for sale, primarily SBA loans, are carried at the lower of cost or market value, which is determined on an individual loan basis. The amount by which cost exceeds market value is recorded in a valuation allowance as a reduction of loans held for sale. Changes in the valuation allowance are reflected as part of the gain on loans sold and held for sale in the consolidated statements of operations in the periods in which the changes occur. Gains or losses on the sale of loans held for sale are determined on a specific identification basis and reflect the difference between the value received upon sale and the carrying value of the loans held for sale, including any recourse reserve established for potential repurchase obligations. Loans held for sale transferred to loans held for portfolio or available-for-sale investment securities are transferred at fair value.

87
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

Loan Servicing Income. Loan servicing income is included in noninterest income and represents fees earned for servicing real estate mortgage loans owned by investors and originated by First Bank’s mortgage banking operation, as well as SBA loans to small business concerns. These fees are net of federal agency guarantee fees and interest shortfall. Such fees are generally calculated on the outstanding principal balance of the loans serviced and are recorded as income when earned.
Allowance for Loan Losses. The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The Company’s allowance for loan loss methodology follows the accounting guidance set forth in GAAP and the Interagency Policy Statement on the Allowance for Loan and Lease Losses, which was jointly issued by the Company’s regulatory agencies. Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. The Company’s process for determining the appropriate level of the allowance for loan losses is designed to account for credit deterioration as it occurs. The provision for loan losses reflects loan quality trends, including the levels of and trends related to nonaccrual loans, past due loans, substandard loans, special mention loans and net charge-offs or recoveries, among other factors. The provision for loan losses also reflects the totality of actions taken on all loans for a particular period. In other words, the amount of the provision reflects not only the necessary increases in the allowance for loan losses related to newly identified problem loans, but it also reflects actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans or loan pools.
The level of the allowance for loan losses reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss and recovery experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate determination of the appropriate level of the allowance is dependent upon a variety of factors beyond the Company’s control, including, among other things, the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications. The Company monitors whether or not the allowance for loan loss allocation model, as a whole, calculates an appropriate level of allowance for loan losses that moves in direct correlation to the general macroeconomic and loan portfolio conditions the Company experiences over time.
The Company’s allowance for loan losses consists of three elements: (i) specific valuation allowances based on probable losses on impaired loans; (ii) historical valuation allowances determined based on historical loan loss experience for similar loans with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions; and (iii) general valuation allowances based on general economic conditions and other risk factors both internal and external to the Company.
The specific valuation allowances established for probable losses on impaired loans are based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral, other sources of cash flows, as well as evaluation of legal options available to the Company. The amount of impairment is measured based upon the present value of expected future cash flows discounted at the loan’s effective interest rate, the fair value of the underlying collateral less applicable selling costs, or the observable market price of the loan. If foreclosure is probable or the loan is collateral dependent, impairment is measured using the fair value of the loan’s collateral, less estimated costs to sell. Large groups of homogeneous loans, such as residential mortgage, home equity and consumer and installment loans, are aggregated and collectively evaluated for impairment.
Historical valuation allowances are calculated based on the historical loss experience of specific types of loans. The Company calculates historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool. The historical loss ratios are updated on a quarterly basis based on actual charge-off experience. A historical valuation allowance is established for each pool of similar loans based upon the product of the historical loss ratio and the total dollar amount of the loans in the pool.
The components of the general valuation allowances include (i) additional reserves allocated to specific loan portfolio segments as a result of applying a qualitative adjustment factor to the base historical loss allocation; (ii) additional reserves allocated to specific geographical regions where negative trends are being experienced; and (iii) additional reserves established based on consideration of trends in past due loans, potential problem loans, performing troubled debt restructurings and nonaccrual loans and other qualitative and quantitative factors both internal and external to the Company which could affect potential credit losses.
Management believes that the level of the Company’s allowance for loan losses is appropriate. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions.

88
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses. Such agencies may require the Company to modify its allowance for loan losses based on their judgment about information available to them at the time of their examination.
Derivative Instruments and Hedging Activities. The Company utilizes derivative instruments and hedging strategies to assist in the management of interest rate sensitivity and to modify the repricing, maturity and option characteristics of certain assets and liabilities. The Company uses such derivative instruments solely to reduce its interest rate risk exposure. First Bank also offers interest rate swap agreement contracts to certain customers who wish to modify their interest rate sensitivity positions. First Bank offsets the interest rate risk of these swap agreements by simultaneously purchasing matching interest rate swap agreement contracts with offsetting pay/receive rates from other financial institutions.
Derivative instruments are recorded in the consolidated balance sheets and measured at fair value. At inception of a non-customer derivative transaction, the Company designates the derivative instrument as either a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedges) or a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedges). For all hedging relationships, the Company documents the hedging relationship and its risk-management objectives and strategy for entering into the hedging relationship including the hedging instrument, the hedged item(s), the nature of the risk being hedged, how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed and a description of the method the Company will utilize to measure hedge ineffectiveness. This process also includes linking all derivative instruments that are designated as fair value hedges or cash flow hedges to the underlying assets and liabilities or to specific firm commitments or forecasted transactions. The Company also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of the hedged item(s). The Company discontinues hedge accounting prospectively when it is determined that the derivative instrument is no longer effective in offsetting changes in the fair value or cash flows of the hedged item(s), the derivative instrument expires or is sold, terminated, or exercised, the derivative instrument is de-designated as a hedging instrument because it is unlikely that a forecasted transaction will occur, a hedged firm commitment no longer meets the definition of a firm commitment, or management determines that designation of the derivative instrument as a hedging transaction is no longer appropriate.
A summary of the Company’s accounting policies for its derivative instruments and hedging activities is as follows:
•
Interest Rate Swap Agreements – Cash Flow Hedges. Interest rate swap agreements designated as cash flow hedges are accounted for at fair value. The effective portion of the change in the cash flow hedge’s gain or loss is initially reported as a component of other comprehensive income (loss) and subsequently reclassified into interest income or interest expense when the underlying transaction affects earnings. The ineffective portion of the change in the cash flow hedge’s gain or loss is recorded in noninterest income on each monthly measurement date. The net interest differential is recognized as an adjustment to interest income or interest expense of the related asset or liability being hedged. In the event of early termination or ineffectiveness, the gain or loss on the cash flow hedge would continue to be reported as a component of other comprehensive income (loss) until the underlying transaction affects earnings.
•
Interest Rate Swap Agreements – Fair Value Hedges. Interest rate swap agreements designated as fair value hedges are accounted for at fair value. Changes in the fair value of the swap agreements are recognized currently in noninterest income. The change in the fair value of the underlying hedged item is recognized as an adjustment to the carrying amount of the underlying hedged item and is also reflected currently in noninterest income. All changes in fair value are measured on a monthly basis. The net interest differential is recognized as an adjustment to interest income or interest expense of the related asset or liability being hedged. In the event of early termination or ineffectiveness, the net proceeds received or paid on the interest rate swap agreements are recognized immediately in noninterest income and the future net interest differential, if any, is recognized prospectively in noninterest income. The cumulative change in the fair value of the underlying hedged item is deferred and amortized or accreted to interest income or interest expense over the weighted average life of the related asset or liability. If, however, the underlying hedged item is repaid, the cumulative change in the fair value of the underlying hedged item is recognized immediately in noninterest income.
•
Customer Interest Rate Swap Agreement Contracts. Derivative instruments are offered to customers to assist in hedging their risks of adverse changes in interest rates. First Bank serves as an intermediary between its customers and the financial markets. Each contract between First Bank and its customers is offset by a contract between First Bank and various counterparties. These contracts do not qualify for hedge accounting. Customer interest rate swap agreement contracts are carried at fair value. Changes in the fair value are recognized in noninterest income on a monthly basis. Each customer contract is paired with an offsetting contract, and as such, there is no significant impact to net income (loss).
•
Interest Rate Lock Commitments. Commitments to originate loans for subsequent sale in the secondary market (interest rate lock commitments), which primarily consist of commitments to originate fixed rate residential mortgage loans, are recorded at fair value. Fair values are based upon quoted market prices. The value of loan servicing rights is also incorporated

89
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

into fair value measurements for mortgage loan commitments. Changes in the fair value of interest rate lock commitments are recognized in noninterest income on a monthly basis.
•
Forward Commitments to Sell Mortgage-Backed Securities. Forward commitments to sell mortgage-backed securities are recorded at fair value. Changes in the fair value of forward commitments to sell mortgage-backed securities are recognized in noninterest income on a monthly basis.
Bank Premises and Equipment, Net. Bank premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Amortization of leasehold improvements is calculated using the straight-line method over the shorter of the useful life of the related asset or the term of the lease. Bank premises and improvements are depreciated over five to 40 years and equipment is depreciated over three to seven years.
Goodwill and Other Intangible Assets. Goodwill and other intangible assets primarily consist of goodwill and, prior to December 31, 2011, core deposit intangibles. Goodwill and intangible assets with indefinite useful lives are not amortized, but instead tested at least annually for impairment. Intangible assets with definite useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment. The Company amortized its core deposit intangibles on a straight-line basis over the estimated periods to be benefited, which had been estimated at five to seven years.
The Company has the option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible assets are impaired as a basis for determining whether it is necessary to perform a quantitative impairment test. If, after assessing the totality of events and circumstances, the Company concludes that it is not more likely than not that the indefinite-lived intangible assets are impaired, then the Company is not required to take further action. However, if the Company concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount. The Company also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. The Company will be able to resume performing the qualitative assessment in any subsequent period.
The goodwill impairment test is a two-step process which requires the Company to make assumptions regarding fair value. The Company’s policy allows management to make the determination of fair value using internal cash flow models or by engaging independent third parties. The first step consists of estimating the fair value of the reporting unit using a number of factors, including projected future operating results and business plans, economic projections, anticipated future cash flows, discount rates, and comparable marketplace fair value data from within a comparable industry grouping. The Company compares the estimated fair value of its reporting unit to the carrying value, which includes allocated goodwill. If the estimated fair value is less than the carrying value, the second step is completed to compute the impairment amount by determining the “implied fair value” of goodwill. This determination requires the allocation of the estimated fair value of the reporting unit to the assets and liabilities of the reporting unit. Any remaining unallocated fair value represents the “implied fair value” of goodwill, which is compared to the corresponding carrying value to compute the goodwill impairment amount, if any. Adverse changes in the economic environment, operations of the reporting unit, or other factors could result in a decline in the implied fair value of goodwill which could result in future goodwill impairment. See Note 6 to the consolidated financial statements for further discussion.
Servicing Rights. The Company has mortgage servicing rights and SBA servicing rights, which are measured at fair value as permitted by ASC Topic 860 – Accounting for Servicing of Financial Assets. Changes in the fair value of mortgage and SBA servicing rights are recognized in earnings in the period in which the change occurs and such changes are reflected in other noninterest income in the consolidated statements of operations. Servicing rights are valued based on valuation models that utilize assumptions based on the predominant risk characteristics of the underlying loans, including size, interest rate, weighted average life, cost to service and estimated prepayment speeds. The valuation models estimate the present value of estimated future net servicing income.
Mortgage and SBA servicing rights are capitalized upon the sale of the underlying loan at estimated fair value. The fair value of mortgage and SBA servicing rights fluctuates based on changes in interest rates and certain other assumptions utilized to value the mortgage and SBA servicing rights. The value is adversely affected when interest rates decline which normally causes loan prepayments to increase. The determination of the fair value of the mortgage and SBA servicing rights is performed monthly based upon an independent third party valuation. The valuation analysis is prepared using stratifications of the mortgage and SBA servicing rights based on the predominant risk characteristics of the underlying loans, including size, interest rate, weighted average original term, weighted average remaining term and estimated prepayment speeds.
Other Real Estate and Repossessed Assets. Other real estate and repossessed assets, consisting of real estate and other assets acquired through foreclosure or deed in lieu of foreclosure, are stated at the lower of cost or fair value less applicable selling costs. The excess of cost over fair value of the property at the date of acquisition is charged to the allowance for loan losses. Subsequent

90
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

reductions in carrying value, to reflect current fair value or costs incurred in maintaining the other real estate and repossessed assets, are charged to noninterest expense as incurred.
Income Taxes. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in the tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Valuation allowances are then recorded to reduce deferred tax assets to the amounts management concludes are more-likely-than-not to be realized. The Company and its eligible subsidiaries file a consolidated federal income tax return and unitary or consolidated state income tax returns in all applicable states.
The Company’s policy is to separately disclose any interest or penalties arising from the application of federal or state income taxes. Interest related to unrecognized tax benefits is included in interest expense and penalties related to unrecognized tax benefits are included in noninterest expense.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states. Management of the Company believes the accrual for tax liabilities is adequate for all open audit years based on its assessment of many factors, including past experience and interpretations of tax law applied to the facts of each matter. This assessment relies on estimates and assumptions.
Noncontributory Defined Benefit Pension Plan. The Company has a noncontributory defined benefit pension plan covering certain former employees of a bank holding company acquired by the Company in 1994 (the Plan) and subsequently merged with and into the Company on December 31, 2002. The Company discontinued the accumulation of benefits under the Plan in 1994, and as such, there is no longer any service cost being accrued by Plan participants. The Company records annual amounts relating to the Plan based on calculations that incorporate various actuarial and other assumptions including discount rates, mortality rates, and assumed rates of return. The Company reviews these assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when deemed appropriate. The funded status of the Plan is recognized as a net asset or liability and changes in the Plan’s funded status are recognized through other comprehensive income to the extent those changes are not included in the net periodic cost.
Financial Instruments With Off-Balance Sheet Risk. A financial instrument is defined as cash, evidence of an ownership interest in an entity, or a contract that conveys or imposes on an entity the contractual right or obligation to either receive or deliver cash or another financial instrument. The Company utilizes financial instruments to reduce the interest rate risk arising from its financial assets and liabilities. These instruments involve, in varying degrees, elements of interest rate risk and credit risk in excess of the amount recognized in the consolidated balance sheets. “Interest rate risk” is defined as the possibility that interest rates may move unfavorably from the perspective of the Company due to maturity and/or interest rate adjustment timing differences between interest-earning assets and interest-bearing liabilities. The risk that a counterparty to an agreement entered into by the Company may default is defined as “credit risk.”
The Company is a party to commitments to extend credit and commercial and standby letters of credit in the normal course of business to meet the financing needs of its customers. These commitments involve, in varying degrees, elements of interest rate risk and credit risk in excess of the amount reflected in the consolidated balance sheets.
Earnings (Loss) Per Common Share. Basic earnings (loss) per common share (EPS) are computed by dividing the income (loss) available to common stockholders (the numerator) by the weighted average number of shares of common stock outstanding (the denominator) during the year. The computation of dilutive EPS is similar except the denominator is increased to include the number of additional shares of common stock that would have been outstanding if the dilutive potential shares had been issued. In addition, in computing the dilutive effect of convertible securities, the numerator is adjusted to add back any convertible preferred dividends.
NOTE 2 - DISCONTINUED OPERATIONS
Discontinued Operations. The assets and liabilities associated with the transactions described (and defined) below were previously reported in the First Bank segment and were sold, or are expected to be sold, as part of the Company’s Capital Optimization Plan (Capital Plan). The Company applied discontinued operations accounting in accordance with ASC Topic 205-20, “Presentation of Financial Statements – Discontinued Operations,” to the assets and liabilities associated with the Northern Florida Region as of December 31, 2012 and 2011, and to the operations of First Bank’s Northern Florida, Northern Illinois, Chicago and Texas Regions, in addition to the operations of WIUS and MVP, for the years ended December 31, 2012, 2011 and 2010, as applicable. The Company did not allocate any consolidated interest that is not directly attributable to or related to discontinued operations. All financial information in the consolidated financial statements and notes to the consolidated financial statements is reported on a continuing operations basis, unless otherwise noted.

91
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

Northern Florida Region. On November 21, 2012, First Bank entered into a Branch Purchase and Assumption Agreement that provides for the sale of certain assets and the transfer of certain liabilities associated with eight of First Bank’s retail branches located in Pinellas County, Florida to HomeBanc National Association (HomeBanc), headquartered in Lake Mary, Florida. Under the terms of the agreement, HomeBanc is to assume approximately $133.4 million of deposits, purchase the premises and equipment and assume the leases associated with these eight retail branches. The transaction, which is subject to certain closing conditions, is expected to be completed during the second quarter of 2013. The transaction is not expected to result in a significant gain or loss.
First Bank also announced its intention to close its two retail branches in Hillsborough County and its single retail branch located in Pasco County. The closure of these three Northern Florida retail branches is also expected to be completed during the second quarter of 2013. The eight branches being sold and three branches being closed are collectively defined as the Northern Florida Region. The assets and liabilities associated with the Northern Florida Region are reflected in assets and liabilities of discontinued operations in the consolidated balance sheets as of December 31, 2012 and 2011.
First Bank intends to continue to hold and operate its remaining eight retail branches in Manatee County’s communities of Bradenton, Palmetto and Longboat Key, Florida. These eight branches were previously reported as discontinued operations but were reclassified to continuing operations during the fourth quarter of 2012. The related assets and liabilities associated with these eight retail branches were reclassified from assets and liabilities of discontinued operations to continuing operations in the consolidated balance sheets as of December 31, 2012 and 2011. Upon reclassification of the assets of these branches from assets of discontinued operations to continuing operations, the assets were recorded at the lower of their carrying amount and their fair value at the time of the Company’s change in its intent to continue to hold and operate the branches. As a result of the Company’s change in its intent to hold and operate these branches, the Company recorded a write-down of $2.3 million during the fourth quarter of 2012 associated with a fair value adjustment on the premises and equipment of these branches, which is included in other noninterest expense in the consolidated statements of operations.
Northern Illinois Region. During 2010, First Bank entered into three Branch Purchase and Assumption Agreements that provided for the sale of certain assets and the transfer of certain liabilities associated with 14 of First Bank’s branch banking offices in Northern Illinois, as further described below.
On December 21, 2010, First Bank entered into a Branch Purchase and Assumption Agreement with United Community Bank (United Community) that provided for the sale of certain assets and the transfer of certain liabilities associated with First Bank’s three retail branches in Pittsfield, Roodhouse and Winchester, Illinois to United Community. The transaction was completed on May 13, 2011. Under the terms of the agreement, United Community assumed $92.2 million of deposits associated with these branches for a weighted average premium of approximately 2.4%, or $2.2 million. United Community also purchased $37.5 million of loans as well as certain other assets at par value, including premises and equipment, associated with these branches.
On June 7, 2010, First Bank entered into a Branch Purchase and Assumption Agreement with Bank of Springfield that provided for the sale of certain assets and the transfer of certain liabilities of First Bank’s branch banking office located in Jacksonville, Illinois (Jacksonville Branch) to Bank of Springfield. The transaction was completed on September 24, 2010. Under the terms of the agreement, Bank of Springfield assumed $28.9 million of deposits associated with the Jacksonville Branch for a premium of approximately 4.00%, or $1.2 million. Bank of Springfield also purchased $2.2 million of loans as well as certain other assets at par value, including premises and equipment, associated with the Jacksonville Branch.
On May 7, 2010, First Bank entered into a Branch Purchase and Assumption Agreement with First Mid-Illinois Bank & Trust, N.A. (First Mid-Illinois) that provided for the sale of certain assets and the transfer of certain liabilities associated with 10 of First Bank’s retail branches in Peoria, Galesburg, Quincy, Bartonville, Knoxville and Bloomington, Illinois to First Mid-Illinois. The transaction was completed on September 10, 2010. Under the terms of the agreement, First Mid-Illinois assumed $336.0 million of deposits for a premium of 4.77%, or $15.6 million. First Mid-Illinois also purchased $135.2 million of loans as well as certain other assets at par value, including premises and equipment, associated with these branches.
The 14 branches in the transactions with United Community, Bank of Springfield and First Mid-Illinois are collectively defined as the Northern Illinois Region (Northern Illinois Region). The Bank of Springfield and First Mid-Illinois transactions, in the aggregate, resulted in a gain of $6.4 million, after the write-off of goodwill and intangible assets of $9.7 million allocated to the Northern Illinois Region, during the third quarter of 2010. The United Community transaction resulted in a gain of $425,000, after the write-off of goodwill and intangible assets of $1.6 million allocated to the Northern Illinois Region, during the second quarter of 2011.
Missouri Valley Partners, Inc. On March 5, 2010, First Bank entered into a Stock Purchase Letter Agreement that provided for the sale of First Bank’s subsidiary, Missouri Valley Partners, Inc. (MVP) to Stifel Financial Corp. The transaction was completed

92
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

on April 15, 2010. Under the terms of the agreement, First Bank sold all of the capital stock of MVP for a purchase price of $515,000. The transaction resulted in a loss of $156,000 during the second quarter of 2010.
Texas Region. On February 8, 2010, First Bank entered into a Purchase and Assumption Agreement with Prosperity Bank (Prosperity), headquartered in Houston, Texas, that provided for the sale of certain assets and the transfer of certain liabilities of First Bank’s Texas franchise (Texas Region) to Prosperity. The transaction was completed on April 30, 2010. Under the terms of the agreement, Prosperity assumed substantially all of the deposits associated with First Bank’s 19 Texas retail branches which totaled $492.2 million, for a premium of 5.50%, or $26.9 million. Prosperity also purchased $96.7 million of loans as well as certain other assets, including premises and equipment, associated with First Bank’s Texas Region. The transaction resulted in a gain of $5.0 million, after the write-off of goodwill and intangible assets of $20.0 million allocated to the Texas Region, during the second quarter of 2010.
WIUS, Inc. and WIUS of California, Inc. On December 3, 2009, First Bank and Universal Premium Acceptance Corporation, predecessor to WIUS, Inc., and its wholly owned subsidiary, WIUS of California, Inc. (collectively, WIUS), entered into a Purchase and Sale Agreement that provided for the sale of certain assets and the transfer of certain liabilities of WIUS to PFS Holding Company, Inc., Premium Financing Specialists, Inc., Premium Financing Specialists of California, Inc. and Premium Financing Specialists of the South, Inc. (collectively, PFS). Under the terms of the agreement, PFS purchased $141.3 million of loans as well as certain other assets, including premises and equipment, associated with WIUS, and assumed certain other liabilities associated with WIUS upon completion of the transaction on December 31, 2009. In conjunction with this transaction, WIUS sold $1.5 million of additional loans to PFS on February 26, 2010. On August 31, 2010, First Bank sold all of the capital stock of WIUS to an unrelated third party for a purchase price of $100,000, which resulted in a loss of $29,000 during the third quarter of 2010.
Chicago Region. On November 11, 2009, First Bank entered into a Purchase and Assumption Agreement that provided for the sale of certain assets and the transfer of certain liabilities of First Bank’s Chicago franchise (Chicago Region) to FirstMerit Bank, N.A. (FirstMerit). The transaction was completed on February 19, 2010. Under the terms of the agreement, FirstMerit assumed substantially all of the deposits associated with First Bank’s 24 Chicago retail branches which totaled $1.20 billion, for a premium of 3.50%, or $42.1 million. FirstMerit also purchased $301.2 million of loans as well as certain other assets, including premises and equipment, associated with First Bank’s Chicago Region. The transaction resulted in a gain of $8.4 million, after the write-off of goodwill and intangible assets of $26.3 million allocated to the Chicago Region, during the first quarter of 2010.
Assets and liabilities of discontinued operations at December 31, 2012 and 2011 were as follows:
 
December 31, 2012
 
December 31, 2011
 
Florida
 
Florida
 
(dollars expressed in thousands)
Cash and due from banks
$
1,139

 
1,018

Total loans
—

 
—

Bank premises and equipment, net
4,837

 
5,165

Goodwill and other intangible assets
700

 
700

Other assets
30

 
30

Assets of discontinued operations
$
6,706

 
6,913

Deposits:
 
 
 
Noninterest-bearing demand
$
12,488

 
9,103

Interest-bearing demand
10,480

 
8,198

Savings and money market
67,686

 
86,983

Time deposits of $100 or more
27,034

 
24,242

Other time deposits
37,964

 
46,123

Total deposits
155,652

 
174,649

Other borrowings
—

 
12

Accrued expenses and other liabilities
59

 
76

Liabilities of discontinued operations
$
155,711

 
174,737



93
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

Loss from discontinued operations, net of tax, for the year ended December 31, 2012 was as follows:
 
Florida
 
(dollars expressed in thousands)
Year ended December 31, 2012:
 
Interest income:
 
Interest and fees on loans
$
—

Interest expense:
 
Interest on deposits
972

Net interest loss
(972
)
Provision for loan losses
—

Net interest loss after provision for loan losses
(972
)
Noninterest income:
 
Service charges and customer service fees
467

Other
13

Total noninterest income
480

Noninterest expense:
 
Salaries and employee benefits
2,279

Occupancy, net of rental income
1,760

Furniture and equipment
278

Legal, examination and professional fees
5

FDIC insurance
358

Other
351

Total noninterest expense
5,031

Loss from operations of discontinued operations
(5,523
)
Benefit for income taxes
—

Net loss from discontinued operations, net of tax
$
(5,523
)
Loss from discontinued operations, net of tax, for the year ended December 31, 2011 was as follows:
 
Florida
 
Northern
Illinois
 
Total
 
(dollars expressed in thousands)
Year ended December 31, 2011:
 
 
 
 
 
Interest income:
 
 
 
 
 
Interest and fees on loans
$
—

 
895

 
895

Interest expense:
 
 
 
 
 
Interest on deposits
2,160

 
261

 
2,421

Net interest (loss) income
(2,160
)
 
634

 
(1,526
)
Provision for loan losses
—

 
—

 
—

Net interest (loss) income after provision for loan losses
(2,160
)
 
634

 
(1,526
)
Noninterest income:
 
 
 
 
 
Service charges and customer service fees
411

 
259

 
670

Other
8

 
5

 
13

Total noninterest income
419

 
264

 
683

Noninterest expense:
 
 
 
 
 
Salaries and employee benefits
2,325

 
357

 
2,682

Occupancy, net of rental income
1,746

 
68

 
1,814

Furniture and equipment
431

 
29

 
460

Legal, examination and professional fees
1

 
6

 
7

Amortization of intangible assets
63

 
—

 
63

FDIC insurance
469

 
100

 
569

Other
379

 
67

 
446

Total noninterest expense
5,414

 
627

 
6,041

(Loss) income from operations of discontinued operations
(7,155
)
 
271

 
(6,884
)
Net gain on sale of discontinued operations
—

 
425

 
425

Benefit for income taxes
—

 
—

 
—

Net (loss) income from discontinued operations, net of tax
$
(7,155
)
 
696

 
(6,459
)


94
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

Income from discontinued operations, net of tax, for the year ended December 31, 2010 was as follows:
 
Florida
 
Northern
Illinois
 
Chicago
 
Texas
 
WIUS
 
MVP
 
Total
 
(dollars expressed in thousands)
Year ended December 31, 2010:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest and fees on loans
$
—

 
9,629

 
2,391

 
1,816

 
33

 
—

 
13,869

Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest on deposits
3,305

 
4,232

 
2,550

 
1,796

 
—

 
—

 
11,883

Other borrowings
—

 
—

 
—

 
3

 
(2
)
 
—

 
1

Total interest expense
3,305

 
4,232

 
2,550

 
1,799

 
(2
)
 
—

 
11,884

Net interest (loss) income
(3,305
)
 
5,397

 
(159
)
 
17

 
35

 
—

 
1,985

Provision for loan losses
—

 
—

 
—

 
—

 
—

 
—

 
—

Net interest (loss) income after provision for loan losses
(3,305
)
 
5,397

 
(159
)
 
17

 
35

 
—

 
1,985

Noninterest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Service charges and customer service fees
400

 
2,500

 
523

 
1,192

 
—

 
—

 
4,615

Investment management income
—

 
—

 
—

 
—

 
—

 
787

 
787

Other
5

 
30

 
254

 
161

 
—

 
(1
)
 
449

Total noninterest income
405

 
2,530

 
777

 
1,353

 
—

 
786

 
5,851

Noninterest expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries and employee benefits
2,325

 
3,403

 
2,137

 
2,843

 
32

 
517

 
11,257

Occupancy, net of rental income
1,734

 
1,115

 
606

 
1,148

 
—

 
59

 
4,662

Furniture and equipment
652

 
365

 
178

 
345

 
—

 
17

 
1,557

Legal, examination and professional fees
—

 
62

 
123

 
111

 
153

 
115

 
564

Amortization of intangible assets
33

 
319

 
—

 
—

 
—

 
—

 
352

FDIC insurance
636

 
1,650

 
292

 
478

 
—

 
—

 
3,056

Other
345

 
709

 
424

 
860

 
184

 
29

 
2,551

Total noninterest expense
5,725

 
7,623

 
3,760

 
5,785

 
369

 
737

 
23,999

(Loss) income from operations of discontinued operations
(8,625
)
 
304

 
(3,142
)
 
(4,415
)
 
(334
)
 
49

 
(16,163
)
Net gain (loss) on sale of discontinued operations
—

 
6,355

 
8,414

 
4,984

 
(29
)
 
(156
)
 
19,568

Benefit for income taxes
—

 
—

 
—

 
—

 
(157
)
 
—

 
(157
)
Net (loss) income from discontinued operations, net of tax
$
(8,625
)
 
6,659

 
5,272

 
569

 
(206
)
 
(107
)
 
3,562



95
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

NOTE 3 - INVESTMENTS IN DEBT AND EQUITY SECURITIES
Securities Available for Sale. The amortized cost, contractual maturity, gross unrealized gains and losses and fair value of investment securities available for sale at December 31, 2012 and 2011 were as follows:
 
Maturity
 
Total Amortized Cost
 
Gross Unrealized
 
 
 
Weighted Average Yield
 
1 Year or Less
 
1-5
Years
 
5-10 Years
 
After 10 Years
 
 
Gains
 
Losses
 
Fair Value
 
 
(dollars expressed in thousands)
December 31, 2012:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Carrying value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government sponsored agencies
$
10,051

 
80,328

 
—

 
213,892

 
304,271

 
6,304

 
(146
)
 
310,429

 
1.42
%
Residential mortgage-backed
364

 
24,014

 
219,286

 
1,251,917

 
1,495,581

 
38,983

 
(497
)
 
1,534,067

 
2.32

Commercial mortgage-backed
—

 
—

 
806

 
—

 
806

 
109

 
—

 
915

 
4.86

State and political subdivisions
985

 
3,579

 
201

 
—

 
4,765

 
164

 
—

 
4,929

 
4.05

Corporate notes
—

 
137,090

 
49,704

 
—

 
186,794

 
6,192

 
(621
)
 
192,365

 
3.13

Equity investments
—

 
—

 
—

 
1,000

 
1,000

 
22

 
—

 
1,022

 
2.54

Total
$
11,400

 
245,011

 
269,997

 
1,466,809

 
1,993,217

 
51,774

 
(1,264
)
 
2,043,727

 
2.26

Fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities
$
11,476

 
251,558

 
275,251

 
1,504,420

 
 
 
 
 
 
 
 
 
 
Equity securities
—

 
—

 
—

 
1,022

 
 
 
 
 
 
 
 
 
 
Total
$
11,476

 
251,558

 
275,251

 
1,505,442

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average yield
2.01
%
 
2.17
%
 
2.65
%
 
2.21
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2011:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Carrying value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government sponsored agencies
$
1,000

 
231,691

 
107,019

 
—

 
339,710

 
2,107

 
—

 
341,817

 
1.75
%
Residential mortgage-backed
—

 
2,726

 
64,309

 
1,821,209

 
1,888,244

 
36,908

 
(232
)
 
1,924,920

 
2.27

Commercial mortgage-backed
—

 
—

 
818

 
—

 
818

 
92

 
—

 
910

 
4.86

State and political subdivisions
310

 
4,088

 
786

 
—

 
5,184

 
226

 
—

 
5,410

 
4.00

Corporate Notes
—

 
122,941

 
65,088

 
5,000

 
193,029

 
—

 
(9,216
)
 
183,813

 
3.28

Equity investments
—

 
—

 
—

 
1,000

 
1,000

 
17

 
—

 
1,017

 
2.83

Total
$
1,310

 
361,446

 
238,020

 
1,827,209

 
2,427,985

 
39,350

 
(9,448
)
 
2,457,887

 
2.28

Fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities
$
1,314

 
357,194

 
236,824

 
1,861,538

 
 
 
 
 
 
 
 
 
 
Equity securities
—

 
—

 
—

 
1,017

 
 
 
 
 
 
 
 
 
 
Total
$
1,314

 
357,194

 
236,824

 
1,862,555

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average yield
2.93
%
 
2.07
%
 
2.56
%
 
2.28
%
 
 
 
 
 
 
 
 
 
 

96
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

Securities Held to Maturity. The amortized cost, contractual maturity, gross unrealized gains and losses and fair value of investment securities held to maturity at December 31, 2012 and 2011 were as follows:
 
Maturity
 
Total Amortized Cost
 
Gross Unrealized
 
 
 
Weighted Average Yield
 
1 Year or Less
 
1-5 Years
 
5-10 Years
 
After 10 Years
 
 
Gains
 
Losses
 
Fair Value
 
 
(dollars expressed in thousands)
December 31, 2012:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Carrying value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government sponsored agencies
$
—

 
—

 
52,582

 
—

 
52,582

 
269

 
—

 
52,851

 
1.63
%
Residential mortgage-backed
—

 
—

 
108,420

 
466,863

 
575,283

 
6,142

 
(614
)
 
580,811

 
1.82

State and political subdivisions
826

 
1,099

 
252

 
1,511

 
3,688

 
51

 
(377
)
 
3,362

 
1.89

Total
$
826

 
1,099

 
161,254

 
468,374

 
631,553

 
6,462

 
(991
)
 
637,024

 
1.80

Fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities
$
836

 
1,129

 
164,433

 
470,626

 
 
 
 
 
 
 
 
 
 
Weighted average yield
2.56
%
 
3.40
%
 
1.77
%
 
1.81
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2011:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Carrying value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
$
—

 
—

 
728

 
615

 
1,343

 
116

 
—

 
1,459

 
5.06
%
Commercial mortgage-backed
—

 
6,310

 
—

 
—

 
6,310

 
447

 
—

 
6,757

 
5.16

State and political subdivisions
1,372

 
2,004

 
254

 
1,534

 
5,164

 
44

 
—

 
5,208

 
4.20

Total
$
1,372

 
8,314

 
982

 
2,149

 
12,817

 
607

 
—

 
13,424

 
4.76

Fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities
$
1,387

 
8,768

 
1,056

 
2,213

 
 
 
 
 
 
 
 
 
 
Weighted average yield
2.55
%
 
4.67
%
 
4.60
%
 
6.61
%
 
 
 
 
 
 
 
 
 
 
Proceeds from sales of available-for-sale investment securities were $315.2 million, $283.7 million and $249.2 million for the years ended December 31, 2012, 2011 and 2010, respectively. Proceeds from calls of investment securities were $277.2 million, $56.0 million and $2.4 million for the years ended December 31, 2012, 2011 and 2010, respectively. Gross realized gains and gross realized losses on investment securities for the years ended December 31, 2012, 2011 and 2010 were as follows:
 
2012
 
2011
 
2010
 
(dollars expressed in thousands)
Gross realized gains on sales of available-for-sale securities
$
1,675

 
5,286

 
8,350

Gross realized losses on sales of available-for-sale securities
(374
)
 
(1
)
 
(31
)
Other-than-temporary impairment
(2
)
 
(3
)
 
(4
)
Gross realized gains on calls of investment securities
7

 
53

 
—

Net realized gain on investment securities
$
1,306

 
5,335

 
8,315

Investment securities with a carrying value of approximately $257.6 million and $228.9 million at December 31, 2012 and 2011, respectively, were pledged in connection with deposits of public and trust funds, securities sold under agreements to repurchase and for other purposes as required by law.
On June 30, 2012, the Company reclassified certain of its available-for-sale investment securities to held-to-maturity investment securities at their respective fair values, which totaled $729.1 million, in aggregate. The determination of the reclassification was made by management based on the Company’s current and expected future liquidity levels and the resulting intent to hold such investment securities to maturity. The net gross unrealized gain on these available-for-sale investment securities at the time of transfer of $11.7 million, in aggregate, was recorded as additional premium on the securities and is being amortized over the remaining lives of the respective securities, as further described in Note 13 to the consolidated financial statements.

97
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2012 and 2011, were as follows:
 
Less than 12 months
 
12 months or more
 
Total
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
(dollars expressed in thousands)
December 31, 2012:
 
 
 
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government sponsored agencies
$
20,018

 
(146
)
 
—

 
—

 
20,018

 
(146
)
Residential mortgage-backed
125,449

 
(441
)
 
270

 
(56
)
 
125,719

 
(497
)
Corporate notes
—

 
—

 
17,675

 
(621
)
 
17,675

 
(621
)
Total
$
145,467

 
(587
)
 
17,945

 
(677
)
 
163,412

 
(1,264
)
 
 
 
 
 
 
 
 
 
 
 
 
Held to maturity:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
$
66,011

 
(614
)
 
—

 
—

 
66,011

 
(614
)
State and political subdivisions
1,133

 
(377
)
 
—

 
—

 
1,133

 
(377
)
Total
$
67,144

 
(991
)
 
—

 
—

 
67,144

 
(991
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2011:
 
 
 
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
$
67,395

 
(126
)
 
22,349

 
(106
)
 
89,744

 
(232
)
Corporate notes
173,813

 
(9,216
)
 
—

 
—

 
173,813

 
(9,216
)
Total
$
241,208

 
(9,342
)
 
22,349

 
(106
)
 
263,557

 
(9,448
)
The Company does not believe that the investment securities that were in an unrealized loss position at December 31, 2012 and 2011 are other-than-temporarily impaired. The unrealized losses on the investment securities were primarily attributable to fluctuations in interest rates. It is expected that the securities would not be settled at a price less than the amortized cost. Because the decline in fair value is attributable to changes in interest rates and not credit loss, and because the Company does not intend to sell these investments and it is more likely than not that the Company will not be required to sell these securities before the anticipated recovery of the remaining amortized cost basis or maturity, these investments are not considered other-than-temporarily impaired. The unrealized losses for residential mortgage-backed securities for 12 months or more at December 31, 2012 and 2011 included nine and 11 securities, respectively. The unrealized losses for corporate notes for 12 months or more at December 31, 2012 included six securities.
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
The following table summarizes the composition of the loan portfolio at December 31, 2012 and 2011:
 
2012
 
2011
 
(dollars expressed in thousands)
Commercial, financial and agricultural
$
610,301

 
725,195

Real estate construction and development
174,979

 
249,987

Real estate mortgage:
 
 
 
One-to-four-family residential
986,767

 
902,438

Multi-family residential
103,684

 
127,356

Commercial real estate
969,680

 
1,225,538

Consumer and installment
19,262

 
23,596

Loans held for sale
66,133

 
31,111

Net deferred loan fees
(59
)
 
(942
)
Loans, net of net deferred loan fees
$
2,930,747

 
3,284,279

The Company's loan portfolio is primarily comprised of residential and commercial real estate loans, and commercial, financial and agricultural loans. The Company primarily lends to borrowers within its primary market areas of California, Florida, southern Illinois and eastern Missouri. The Company maintains a diversified portfolio with limited industry concentrations of credit risk. Real estate lending constitutes the only significant concentration of credit risk. Real estate loans comprised approximately 79% and 77% of the loan portfolio at December 31, 2012 and 2011, respectively, of which 46% and 37%, respectively, were made to consumers in the form of residential real estate mortgages and home equity lines of credit. First Bank also offers residential real

98
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

estate mortgage loans with terms that require interest only payments. At December 31, 2012, the balance of such loans, all of which were held for portfolio, was approximately $25.3 million, of which approximately 5.1% were delinquent. At December 31, 2011, the balance of such loans, all of which were held for portfolio, was approximately $40.2 million, of which approximately 14.5% were delinquent. In general, the Company is a secured lender. At December 31, 2012 and 2011, 99.0% of the loan portfolio was collateralized. Collateral is required in accordance with the normal credit evaluation process based upon the creditworthiness of the customer and the credit risk associated with the particular transaction. First Bank also originates certain one-to-four-family residential mortgage loans for sale in the secondary market. First Bank has a repurchase obligation on these loans in the event of fraud or, on certain loans, early payment default. The early payment default provisions generally range from four months to one year after sale of the loan in the secondary market. First Bank has not sold any one-to-four-family residential mortgage loans into the secondary market with early payment default provisions since 2007.
Loans to directors, their affiliates and executive officers of the Company were approximately $9.1 million and $23.4 million at December 31, 2012 and 2011, respectively, as further described in Note 20 to the consolidated financial statements.
Loans with a carrying value of approximately $1.17 billion and $1.40 billion at December 31, 2012 and 2011, respectively, were pledged as collateral under borrowing arrangements with the FRB and the FHLB. At December 31, 2012 and 2011, First Bank had no outstanding advances under these borrowing arrangements.
Aging of Loans. The following table presents the aging of loans by loan classification at December 31, 2012 and 2011:
 
30-59
Days
 
60-89
Days
 
Recorded
Investment
> 90 Days
Accruing
 
Nonaccrual
 
Total Past
Due
 
Current
 
Total Loans
 
(dollars expressed in thousands)
December 31, 2012:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
$
1,180

 
322

 
—

 
19,050

 
20,552

 
589,749

 
610,301

Real estate construction and development
93

 
—

 
—

 
32,152

 
32,245

 
142,734

 
174,979

One-to-four-family residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank portfolio
1,871

 
1,121

 
874

 
6,910

 
10,776

 
111,562

 
122,338

Mortgage Division portfolio
6,264

 
4,375

 
—

 
19,780

 
30,419

 
479,552

 
509,971

Home equity
2,494

 
1,221

 
216

 
8,671

 
12,602

 
341,856

 
354,458

Multi-family residential
—

 
629

 
—

 
6,761

 
7,390

 
96,294

 
103,684

Commercial real estate
66

 
693

 
—

 
16,520

 
17,279

 
952,401

 
969,680

Consumer and installment
174

 
43

 
—

 
28

 
245

 
18,958

 
19,203

Loans held for sale
—

 
—

 
—

 
—

 
—

 
66,133

 
66,133

Total
$
12,142

 
8,404

 
1,090

 
109,872

 
131,508

 
2,799,239

 
2,930,747

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2011:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
$
1,602

 
2,085

 
1,095

 
55,340

 
60,122

 
665,073

 
725,195

Real estate construction and development
170

 
3,033

 
—

 
71,244

 
74,447

 
175,540

 
249,987

One-to-four-family residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank portfolio
4,506

 
2,577

 
362

 
14,690

 
22,135

 
143,443

 
165,578

Mortgage Division portfolio
5,994

 
1,571

 
—

 
16,778

 
24,343

 
342,572

 
366,915

Home equity
3,990

 
2,151

 
856

 
6,940

 
13,937

 
356,008

 
369,945

Multi-family residential
—

 
118

 
—

 
7,975

 
8,093

 
119,263

 
127,356

Commercial real estate
3,888

 
7,092

 
427

 
47,262

 
58,669

 
1,166,869

 
1,225,538

Consumer and installment
396

 
192

 
4

 
22

 
614

 
22,040

 
22,654

Loans held for sale
—

 
—

 
—

 
—

 
—

 
31,111

 
31,111

Total
$
20,546

 
18,819

 
2,744

 
220,251

 
262,360

 
3,021,919

 
3,284,279

Under the Company’s loan policy, loans are placed on nonaccrual status once principal or interest payments become 90 days past due. However, individual loan officers may submit written requests for approval to continue the accrual of interest on loans that become 90 days past due. These requests may be submitted for approval consistent with the authority levels provided in the Company’s credit approval policies, and they are only granted if an expected near term future event, such as a pending renewal or expected payoff, exists at the time the loan becomes 90 days past due. If the expected near term future event does not occur as anticipated, the loan is then placed on nonaccrual status.
Credit Quality Indicators. The Company’s credit management policies and procedures focus on identifying, measuring and controlling credit exposure. These procedures employ a lender-initiated system of rating credits, which is ratified in the loan approval process and subsequently tested in internal credit reviews, external audits and regulatory bank examinations. The system

99
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

requires the rating of all loans at the time they are originated or acquired, except for homogeneous categories of loans, such as residential real estate mortgage loans and consumer loans. These homogeneous loans are assigned an initial rating based on the Company’s experience with each type of loan. The Company adjusts the ratings of the homogeneous loans based on payment experience subsequent to their origination.
The Company includes adversely rated credits, including loans requiring close monitoring that would not normally be considered classified credits by the Company’s regulators, on its monthly loan watch list. Loans may be added to the Company’s watch list for reasons that are temporary and correctable, such as the absence of current financial statements of the borrower or a deficiency in loan documentation. Loans may also be added to the Company’s watch list whenever any adverse circumstance is detected which might affect the borrower’s ability to comply with the contractual terms of the loan. The delinquency of a scheduled loan payment, deterioration in the borrower’s financial condition identified in a review of periodic financial statements, a decrease in the value of the collateral securing the loan, or a change in the economic environment within which the borrower operates could initiate the addition of a loan to the Company’s watch list. Loans on the Company’s watch list require periodic detailed loan status reports prepared by the responsible officer which are discussed in formal meetings with credit review and credit administration staff members. Upgrades and downgrades of loan risk ratings may be initiated by the responsible loan officer. However, upgrades of risk ratings associated with significant credit relationships and/or problem credit relationships may only be made with the concurrence of appropriate regional credit officers.
Under the Company’s risk rating system, special mention loans are those loans that do not currently expose the Company to sufficient risk to warrant classification as substandard, troubled debt restructuring (TDR) or nonaccrual, but possess weaknesses that deserve management’s close attention. Substandard loans include those loans characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. A loan is classified as a TDR when a borrower is experiencing financial difficulties that lead to the restructuring of a loan, and the Company grants concessions to the borrower in the restructuring that it would not otherwise consider. Loans classified as TDRs which are accruing interest are classified as performing TDRs. Loans classified as TDRs which are not accruing interest are classified as nonperforming TDRs and are included with all other nonaccrual loans for presentation purposes. Loans classified as nonaccrual have all the weaknesses inherent in those loans classified as substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of the currently existing facts, conditions and values, highly questionable and improbable. Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans.
The following tables present the credit exposure of the loan portfolio by internally assigned credit grade and payment activity as of December 31, 2012 and 2011:
Commercial Loan Portfolio
Credit Exposure by Internally Assigned Credit Grade
Commercial
and
Industrial
 
Real Estate
Construction
and
Development
 
Multi-family
 
Commercial
Real Estate
 
Total
 
 
 
(dollars expressed in thousands)
 
 
December 31, 2012:
 
 
 
 
 
 
 
 
 
Pass
$
572,248

 
45,356

 
67,690

 
858,101

 
1,543,395

Special mention
10,580

 
6,076

 
220

 
70,450

 
87,326

Substandard
8,423

 
81,364

 
773

 
13,868

 
104,428

Performing troubled debt restructuring
—

 
10,031

 
28,240

 
10,741

 
49,012

Nonaccrual
19,050

 
32,152

 
6,761

 
16,520

 
74,483

Total
$
610,301

 
174,979

 
103,684

 
969,680

 
1,858,644

 
 
 
 
 
 
 
 
 
 
December 31, 2011:
 
 
 
 
 
 
 
 
 
Pass
$
606,998

 
57,594

 
68,748

 
973,553

 
1,706,893

Special mention
25,742

 
11,977

 
18,678

 
119,478

 
175,875

Substandard
32,851

 
97,158

 
28,789

 
60,876

 
219,674

Performing troubled debt restructuring
4,264

 
12,014

 
3,166

 
24,369

 
43,813

Nonaccrual
55,340

 
71,244

 
7,975

 
47,262

 
181,821

Total
$
725,195

 
249,987

 
127,356

 
1,225,538

 
2,328,076



100
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

One-to-Four-Family Residential Mortgage Bank and Home Equity Loan Portfolio
Credit Exposure by Internally Assigned Credit Grade
Bank
Portfolio
 
Home
Equity
 
Total
 
(dollars expressed in thousands)
December 31, 2012:
 
 
 
 
 
Pass
$
107,625

 
342,321

 
449,946

Special mention
4,405

 
216

 
4,621

Substandard
1,787

 
3,250

 
5,037

Performing troubled debt restructuring
1,611

 
—

 
1,611

Nonaccrual
6,910

 
8,671

 
15,581

Total
$
122,338

 
354,458

 
476,796

 
 
 
 
 
 
December 31, 2011:
 
 
 
 
 
Pass
$
131,973

 
358,801

 
490,774

Special mention
12,797

 
954

 
13,751

Substandard
6,118

 
3,250

 
9,368

Nonaccrual
14,690

 
6,940

 
21,630

Total
$
165,578

 
369,945

 
535,523


One-to-Four-Family Residential Mortgage Division
and Consumer and Installment Loan Portfolio
Credit Exposure by Payment Activity
Mortgage
Division
Portfolio
 
Consumer
and
Installment
 
Total
 
(dollars expressed in thousands)
December 31, 2012:
 
 
 
 
 
Pass
$
405,270

 
19,175

 
424,445

Substandard
6,627

 
—

 
6,627

Performing troubled debt restructuring
78,294

 
—

 
78,294

Nonaccrual
19,780

 
28

 
19,808

Total
$
509,971

 
19,203

 
529,174

 
 
 
 
 
 
December 31, 2011:
 
 
 
 
 
Pass
$
263,079

 
22,632

 
285,711

Substandard
4,429

 
—

 
4,429

Performing troubled debt restructuring
82,629

 
—

 
82,629

Nonaccrual
16,778

 
22

 
16,800

Total
$
366,915

 
22,654

 
389,569

Impaired Loans. Loans deemed to be impaired include performing TDRs and nonaccrual loans. Impaired loans with outstanding balances equal to or greater than $500,000 are evaluated individually for impairment. For these loans, the Company measures the level of impairment based on the present value of the estimated projected cash flows or the estimated value of the collateral. If the current valuation is lower than the current book balance of the loan, the amount of the difference is evaluated for possible charge-off. In instances where management determines that a charge-off is not appropriate, a specific reserve is established for the individual loan in question. This specific reserve is included as a part of the overall allowance for loan losses.
The following tables present the recorded investment, unpaid principal balance, related allowance for loan losses, average recorded investment and interest income recognized while on impaired status for impaired loans without a related allowance for loan losses and for impaired loans with a related allowance for loan losses by loan classification at December 31, 2012 and 2011:

101
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance for
Loan Losses
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
(dollars expressed in thousands)
December 31, 2012:
 
 
 
 
 
 
 
 
 
With No Related Allowance Recorded:
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
$
6,451

 
24,287

 
—

 
12,369

 
215

Real estate construction and development
39,706

 
74,044

 
—

 
59,094

 
561

Real estate mortgage:
 
 
 
 
 
 
 
 
 
Bank portfolio
1,611

 
1,690

 
—

 
2,166

 
32

Mortgage Division portfolio
10,255

 
22,102

 
—

 
10,308

 
—

Home equity portfolio
1,382

 
1,507

 
—

 
1,232

 
—

Multi-family residential
33,709

 
37,206

 
—

 
13,682

 
280

Commercial real estate
18,808

 
24,279

 
—

 
35,959

 
1,160

Consumer and installment
—

 
—

 
—

 
—

 
—

 
111,922

 
185,115

 
—

 
134,810

 
2,248

With A Related Allowance Recorded:
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
12,599

 
19,255

 
676

 
24,157

 
—

Real estate construction and development
2,477

 
10,221

 
1,452

 
3,687

 
114

Real estate mortgage:
 
 
 
 
 
 
 
 
 
Bank portfolio
6,910

 
8,655

 
284

 
9,288

 
—

Mortgage Division portfolio
87,819

 
96,931

 
11,574

 
88,277

 
2,050

Home equity portfolio
7,289

 
8,188

 
1,784

 
6,500

 
—

Multi-family residential
1,292

 
1,403

 
1,138

 
524

 
—

Commercial real estate
8,453

 
12,909

 
1,043

 
16,161

 
11

Consumer and installment
28

 
28

 
1

 
51

 
—

 
126,867

 
157,590

 
17,952

 
148,645

 
2,175

Total:
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
19,050

 
43,542

 
676

 
36,526

 
215

Real estate construction and development
42,183

 
84,265

 
1,452

 
62,781

 
675

Real estate mortgage:
 
 
 
 
 
 
 
 
 
Bank portfolio
8,521

 
10,345

 
284

 
11,454

 
32

Mortgage Division portfolio
98,074

 
119,033

 
11,574

 
98,585

 
2,050

Home equity portfolio
8,671

 
9,695

 
1,784

 
7,732

 
—

Multi-family residential
35,001

 
38,609

 
1,138

 
14,206

 
280

Commercial real estate
27,261

 
37,188

 
1,043

 
52,120

 
1,171

Consumer and installment
28

 
28

 
1

 
51

 
—

 
$
238,789

 
342,705

 
17,952

 
283,455

 
4,423


102
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance for
Loan Losses
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
(dollars expressed in thousands)
December 31, 2011:
 
 
 
 
 
 
 
 
 
With No Related Allowance Recorded:
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
$
20,494

 
53,140

 
—

 
25,294

 
336

Real estate construction and development
62,524

 
113,412

 
—

 
80,230

 
72

Real estate mortgage:
 
 
 
 
 
 
 
 
 
Bank portfolio
3,274

 
5,030

 
—

 
3,291

 
—

Mortgage Division portfolio
10,250

 
22,541

 
—

 
11,352

 
—

Home equity portfolio
196

 
198

 
—

 
210

 
—

Multi-family residential
7,961

 
8,378

 
—

 
8,358

 
92

Commercial real estate
45,452

 
61,766

 
—

 
59,613

 
435

Consumer and installment
1

 
1

 
—

 
2

 
—

 
150,152

 
264,466

 
—

 
188,350

 
935

With A Related Allowance Recorded:
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
39,110

 
64,867

 
5,475

 
48,270

 
—

Real estate construction and development
20,734

 
39,832

 
3,432

 
26,605

 
183

Real estate mortgage:
 
 
 
 
 
 
 
 
 
Bank portfolio
11,416

 
12,926

 
796

 
11,473

 
—

Mortgage Division portfolio
89,157

 
98,118

 
15,324

 
98,739

 
2,306

Home equity portfolio
6,744

 
7,657

 
1,388

 
7,212

 
—

Multi-family residential
3,180

 
5,281

 
335

 
3,339

 
—

Commercial real estate
26,179

 
34,073

 
3,875

 
34,335

 
168

Consumer and installment
21

 
21

 
4

 
60

 
—

 
196,541

 
262,775

 
30,629

 
230,033

 
2,657

Total:
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
59,604

 
118,007

 
5,475

 
73,564

 
336

Real estate construction and development
83,258

 
153,244

 
3,432

 
106,835

 
255

Real estate mortgage:
 
 
 
 
 
 
 
 
 
Bank portfolio
14,690

 
17,956

 
796

 
14,764

 
—

Mortgage Division portfolio
99,407

 
120,659

 
15,324

 
110,091

 
2,306

Home equity portfolio
6,940

 
7,855

 
1,388

 
7,422

 
—

Multi-family residential
11,141

 
13,659

 
335

 
11,697

 
92

Commercial real estate
71,631

 
95,839

 
3,875

 
93,948

 
603

Consumer and installment
22

 
22

 
4

 
62

 
—

 
$
346,693

 
527,241

 
30,629

 
418,383

 
3,592

Recorded investment represents the Company’s investment in its impaired loans reduced by cumulative charge-offs recorded against the allowance for loan losses on these same loans. At December 31, 2012 and 2011, the Company had recorded charge-offs of $103.9 million and $180.5 million, respectively, on its impaired loans, representing the difference between the unpaid principal balance and the recorded investment reflected in the tables above. The unpaid principal balance represents the principal amount contractually owed to the Company by the borrowers on the impaired loans.
The Company had $238.8 million and $346.7 million of impaired loans, consisting of loans on nonaccrual status and performing TDRs, at December 31, 2012 and 2011, respectively. Interest on impaired loans that would have been recorded under the original terms of the loans was $21.7 million, $34.2 million and $46.3 million for the years ended December 31, 2012, 2011 and 2010, respectively. Of these amounts, $6.0 million, $8.0 million and $14.2 million was recorded as interest income on such loans in 2012, 2011 and 2010, respectively. The average recorded investment in impaired loans was $283.5 million, $418.4 million and $619.4 million for the years ended December 31, 2012, 2011 and 2010, respectively. The amount of interest income recognized during the time these loans were impaired was $4.4 million, $3.6 million and $5.9 million in 2012, 2011 and 2010, respectively.
Troubled Debt Restructurings. In the ordinary course of business, the Company modifies loan terms across loan types, including both consumer and commercial loans, for a variety of reasons. Modifications to consumer loans may include, but are not limited to, changes in interest rate, maturity, amortization and financial covenants. In the original underwriting, loan terms are established that represent the then current and projected financial condition of the borrower. Over any period of time, modifications to these loan terms may be required due to changes in the original underwriting assumptions. These changes may include the financial covenants of the borrower as well as underwriting standards.
Loan modifications are generally performed at the request of the borrower, whether commercial or consumer, and may include reduction in interest rates, changes in payments and maturity date extensions. Although the Company does not have formal,

103
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

standardized loan modification programs for its commercial or consumer loan portfolios, it addresses loan modifications on a case-by-case basis and also participates in the U.S. Treasury’s Home Affordable Modification Program (HAMP). HAMP gives qualifying homeowners an opportunity to refinance into more affordable monthly payments, with the U.S. Treasury compensating the Company for a portion of the reduction in monthly amounts due from borrowers participating in this program. At December 31, 2012 and 2011, the Company had $75.7 million and $75.9 million, respectively, of modified loans in the HAMP program.
For a loan modification to be classified as a TDR, all of the following conditions must be present: (1) the borrower is experiencing financial difficulty, (2) the Company makes a concession to the original contractual loan terms and (3) the Company would not consider the concessions but for economic or legal reasons related to the borrower’s financial difficulty. Modifications of loan terms to borrowers experiencing financial difficulty are made in an attempt to protect as much of the investment in the loan as possible. These modifications are generally made to either prevent a loan from becoming nonaccrual or to return a nonaccrual loan to performing status based on the expectations that the borrower can adequately perform in accordance with the modified terms.
The determination of whether a modification should be classified as a TDR requires significant judgment after taking into consideration all facts and circumstances surrounding the transaction. No single characteristic or factor, taken alone, is determinative of whether a modification should be classified as a TDR. The fact that a single characteristic is present is not considered sufficient to overcome the preponderance of contrary evidence. Assuming all of the TDR criteria are met, the Company considers one or more of the following concessions to the loan terms to represent a TDR: (1) a reduction of the stated interest rate, (2) an extension of the maturity date or dates at a stated interest rate lower than the current market rate for a new loan with similar terms or (3) forgiveness of principal or accrued interest.
Loans renegotiated at a rate equal to or greater than that of a new loan with comparable risk at the time the contract is modified are excluded from TDR classification in the calendar years subsequent to the renegotiation if the loan is in compliance with the modified terms for at least six months.
The Company does not accrue interest on any TDRs unless it believes collection of all principal and interest under the modified terms is reasonably assured. Generally, six months of consecutive payment performance by the borrower under the restructured terms is required before a TDR is returned to accrual status. However, the period could vary depending upon the individual facts and circumstances of the loan. TDRs accruing interest are classified as performing TDRs. The following table presents the categories of performing TDRs as of December 31, 2012 and 2011:
 
2012
 
2011
 
(dollars expressed in thousands)
Performing Troubled Debt Restructurings:
 
 
 
Commercial, financial and agricultural
$
—

 
4,264

Real estate construction and development
10,031

 
12,014

Real estate mortgage:
 
 
 
One-to-four-family residential
79,905

 
82,629

Multi-family residential
28,240

 
3,166

Commercial real estate
10,741

 
24,369

Total
$
128,917

 
126,442

The Company does not accrue interest on TDRs which have been modified for a period less than six months or are not in compliance with the modified terms. These loans are considered nonperforming TDRs and are included with other nonaccrual loans for classification purposes. The following table presents the categories of loans considered nonperforming TDRs as of December 31, 2012 and 2011:
 
2012
 
2011
 
(dollars expressed in thousands)
Nonperforming Troubled Debt Restructurings:
 
 
 
Commercial, financial and agricultural
$
1,004

 
1,344

Real estate construction and development
26,557

 
25,603

Real estate mortgage:
 
 
 
One-to-four-family residential
7,105

 
6,205

Multi-family residential
2,482

 
—

Commercial real estate
2,862

 
7,605

Total
$
40,010

 
40,757


104
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

Both performing and nonperforming TDRs are considered to be impaired loans. When an individual loan is determined to be a TDR, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral less applicable selling costs. The impairment amount is either charged off as a reduction to the allowance for loan losses or provided for as a specific reserve within the allowance for loan losses. The allowance for loan losses allocated to TDRs was $9.5 million and $12.8 million at December 31, 2012 and 2011, respectively.
The following tables present loans classified as TDRs that were modified during the years ended December 31, 2012 and 2011:
 
2012
 
2011
 
Number
of
Contracts
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
 
Number
of
Contracts
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
 
(dollars expressed in thousands)
Loan Modifications as Troubled Debt Restructurings:
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
2

 
$
1,108

 
$
873

 
3

 
$
1,945

 
$
1,945

Real estate construction and development
4

 
6,263

 
5,670

 
8

 
42,784

 
38,166

Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
One-to-four-family residential
50

 
9,049

 
8,992

 
118

 
23,607

 
22,377

Multi-family residential
2

 
28,280

 
28,280

 
1

 
4,964

 
3,209

Commercial real estate
3

 
9,965

 
9,965

 
5

 
34,113

 
26,890

The following tables present TDRs that defaulted within 12 months of modification during the years ended December 31, 2012 and 2011:
 
2012
 
2011
 
Number of
Contracts
 
Recorded
Investment
 
Number of
Contracts
 
Recorded
Investment
 
(dollars expressed in thousands)
Troubled Debt Restructurings That Subsequently Defaulted:
 
 
 
 
 
 
 
Commercial, financial and agricultural
—

 
$
—

 
—

 
$
—

Real estate construction and development
3

 
1,364

 
1

 
460

Real estate mortgage:
 
 
 
 
 
 
 
One-to-four-family residential
57

 
12,437

 
45

 
9,523

Multi-family residential
—

 
—

 
—

 
—

Commercial real estate
—

 
—

 
1

 
1,144

Upon default of a TDR, which is considered to be 90 days or more past due under the modified terms, impairment is measured based on the fair value of the underlying collateral less applicable selling costs. The impairment amount is either charged off as a reduction to the allowance for loan losses or provided for as a specific reserve within the allowance for loan losses.
Allowance for Loan Losses. Changes in the allowance for loan losses for the years ended December 31, 2012, 2011 and 2010 were as follows:
 
2012
 
2011
 
2010
 
(dollars expressed in thousands)
Balance, beginning of year
$
137,710

 
201,033

 
266,448

Allowance for loan losses allocated to loans sold
—

 
—

 
(321
)
 
137,710

 
201,033

 
266,127

Loans charged-off
(78,070
)
 
(154,627
)
 
(331,196
)
Recoveries of loans previously charged-off
29,962

 
22,304

 
52,102

Net loans charged-off
(48,108
)
 
(132,323
)
 
(279,094
)
Provision for loan losses
2,000

 
69,000

 
214,000

Balance, end of year
$
91,602

 
137,710

 
201,033


105
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

The following table represents a summary of changes in the allowance for loan losses by portfolio segment for the years ended December 31, 2012 and 2011:
 
Commercial
and
Industrial
 
Real Estate
Construction
and
Development
 
One-to-
Four-Family
Residential
 
Multi-
Family
Residential
 
Commercial
Real Estate
 
Consumer
and
Installment
 
Total
 
(dollars expressed in thousands)
Year Ended December 31, 2012:
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
27,243

 
24,868

 
50,864

 
4,851

 
29,448

 
436

 
137,710

Charge-offs
(17,410
)
 
(12,244
)
 
(21,814
)
 
(2,435
)
 
(23,856
)
 
(311
)
 
(78,070
)
Recoveries
12,886

 
5,659

 
5,188

 
44

 
5,982

 
203

 
29,962

Provision (benefit) for loan losses
(9,147
)
 
(3,849
)
 
4,659

 
1,792

 
8,474

 
71

 
2,000

Ending balance
$
13,572

 
14,434

 
38,897

 
4,252

 
20,048

 
399

 
91,602

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended December 31, 2011:
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
28,000

 
58,439

 
60,762

 
5,158

 
47,880

 
794

 
201,033

Charge-offs
(46,256
)
 
(35,459
)
 
(31,355
)
 
(3,126
)
 
(37,974
)
 
(457
)
 
(154,627
)
Recoveries
6,962

 
6,694

 
3,985

 
562

 
3,787

 
314

 
22,304

Provision (benefit) for loan losses
38,537

 
(4,806
)
 
17,472

 
2,257

 
15,755

 
(215
)
 
69,000

Ending balance
$
27,243

 
24,868

 
50,864

 
4,851

 
29,448

 
436

 
137,710

The following table represents a summary of the impairment method used by loan category at December 31, 2012 and 2011:
 
Commercial
and
Industrial
 
Real Estate
Construction
and
Development
 
One-to-
Four-Family
Residential
 
Multi-
Family
Residential
 
Commercial
Real Estate
 
Consumer
and
Installment
 
Total
 
(dollars expressed in thousands)
Ending Balance at December 31, 2012:
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans individually evaluated for impairment
$
75

 
121

 
3,187

 
33

 
182

 
—

 
3,598

Impaired loans collectively evaluated for impairment
601

 
1,331

 
10,455

 
1,105

 
861

 
1

 
14,354

All other loans collectively evaluated for impairment
12,896

 
12,982

 
25,255

 
3,114

 
19,005

 
398

 
73,650

Total
$
13,572

 
14,434

 
38,897

 
4,252

 
20,048

 
399

 
91,602

Financing receivables:
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans individually evaluated for impairment
$
7,884

 
39,155

 
16,843

 
34,636

 
20,965

 
—

 
119,483

Impaired loans collectively evaluated for impairment
11,166

 
3,028

 
98,423

 
365

 
6,296

 
28

 
119,306

All other loans collectively evaluated for impairment
591,251

 
132,796

 
871,501

 
68,683

 
942,419

 
19,175

 
2,625,825

Total
$
610,301

 
174,979

 
986,767

 
103,684

 
969,680

 
19,203

 
2,864,614

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending Balance at December 31, 2011:
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans individually evaluated for impairment
$
4,276

 
1,752

 
3,170

 
110

 
2,430

 
—

 
11,738

Impaired loans collectively evaluated for impairment
1,199

 
1,680

 
14,338

 
225

 
1,445

 
4

 
18,891

All other loans collectively evaluated for impairment
21,768

 
21,436

 
33,356

 
4,516

 
25,573

 
432

 
107,081

Total
$
27,243

 
24,868

 
50,864

 
4,851

 
29,448

 
436

 
137,710

Financing receivables:
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans individually evaluated for impairment
$
40,527

 
76,475

 
16,836

 
11,141

 
64,190

 
—

 
209,169

Impaired loans collectively evaluated for impairment
19,077

 
6,783

 
104,201

 
—

 
7,441

 
22

 
137,524

All other loans collectively evaluated for impairment
665,591

 
166,729

 
781,401

 
116,215

 
1,153,907

 
22,632

 
2,906,475

Total
$
725,195

 
249,987

 
902,438

 
127,356

 
1,225,538

 
22,654

 
3,253,168



106
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

NOTE 5 – BANK PREMISES AND EQUIPMENT, NET
Bank premises and equipment, net of accumulated depreciation and amortization, were comprised of the following at December 31, 2012 and 2011:
 
2012
 
2011
 
(dollars expressed in thousands)
Land
$
33,324

 
34,211

Buildings and improvements
134,428

 
136,728

Furniture, fixtures and equipment
99,116

 
102,776

Leasehold improvements
12,014

 
12,012

Construction in progress
1,878

 
672

Total
280,760

 
286,399

Accumulated depreciation and amortization
(153,240
)
 
(149,200
)
Bank premises and equipment, net
$
127,520

 
137,199

The Company capitalized interest cost of $31,000, $23,000 and $42,000 during the years ended December 31, 2012, 2011 and 2010, respectively.
Depreciation and amortization expense for the years ended December 31, 2012, 2011 and 2010 was $12.1 million, $13.4 million and $16.5 million, respectively.
The Company leases land, office properties and equipment under operating leases. Certain of the leases contain renewal options and escalation clauses. Total rent expense was $11.5 million, $13.0 million and $14.5 million for the years ended December 31, 2012, 2011 and 2010, respectively. Future minimum lease payments under non-cancellable operating leases extend through 2027 as follows:
 
(dollars expressed in thousands)
Year ending December 31 (1):
 
2013
$
8,979

2014
7,330

2015
5,550

2016
4,766

2017
2,913

Thereafter
12,765

Total future minimum lease payments
$
42,303

 
(1)
Amounts exclude future minimum lease payments under non-cancellable operating leases associated with assets and liabilities of discontinued operations of $1.0 million, $1.1 million, $1.0 million, $900,000 and $900,000 for the years ended December 31, 2013, 2014, 2015, 2016 and 2017, respectively, and $2.9 million thereafter, or a total of $7.8 million.
The Company also leases to unrelated parties a portion of its banking facilities. Rental income associated with these leases was $4.1 million, $4.4 million and $5.3 million for the years ended December 31, 2012, 2011 and 2010, respectively.
NOTE 6 – GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets, net of amortization, were comprised of goodwill of $125.3 million at December 31, 2012 and 2011. First Bank did not record goodwill impairment for the years ended December 31, 2012, 2011 and 2010. Amortization of intangible assets was zero, $3.0 million and $3.3 million for the years ended December 31, 2012, 2011 and 2010, respectively. Core deposit intangibles became fully amortized in 2011. Changes in the carrying amount of goodwill for the years ended December 31, 2012 and 2011 were as follows:
 
2012
 
2011
 
(dollars expressed in thousands)
Balance, beginning of year
$
125,267

 
125,967

Goodwill allocated to discontinued operations (1)
—

 
(700
)
Balance, end of year
$
125,267

 
125,267

 
(1)
Goodwill allocated to discontinued operations during 2011 pertains to the Florida Region, as further discussed in Note 2 to the consolidated financial statements.

107
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

The Company allocated goodwill to the various sale transactions, as discussed in Note 2 to the consolidated financial statements, based on the relative fair values of the business and operations to be disposed of and the portion of the First Bank segment that will be retained. The Company allocated goodwill to the sale of the Florida Region of $700,000, which is included in assets of discontinued operations at December 31, 2012 and 2011.
The Company’s annual measurement date for its goodwill impairment test is December 31. The Company operates as a single reporting unit. The Company engaged an independent valuation firm to assist management in computing the fair value estimate for the impairment assessment by utilizing two separate valuation methodologies and applying a weighted average to each methodology in order to determine the fair value of the reporting unit. The two separate valuation methodologies utilized in the valuation of the Company’s implied goodwill were the “Income Approach” and the “Market Approach.”
Income Approach – The Income Approach indicates the fair market value of the common stock of a business based on the present value of the cash flows that the business can be expected to generate in the future. This approach is generally considered to be the most theoretically correct method of valuation since it explicitly considers the future benefits associated with owning the business. The Income Approach is typically applied using the Discounted Cash Flow Method. The Discounted Cash Flow Method is comprised of four steps:
1.
Project future cash flows for a certain discrete projection period;
2.
Discount these cash flows to present value at a rate of return that considers the relative risk of achieving the cash flows and the time value of money;
3.
Estimate the residual value of cash flows subsequent to the discrete projection period; and
4.
Combine the present value of the residual cash flows with the discrete projection period cash flows to indicate the fair market value of invested capital on a marketable basis.
Any interest-bearing debt (or non-operating assets) is then subtracted (or added) to arrive at the fair market value of equity of the business.
Market Approach – The Market Approach uses the price at which shares of similar companies are traded or exchanged to estimate the fair market value of the company’s equity. The advantage of the Market Approach is that it is believed to reflect the effect of most of the principal valuation factors identified in the Discounted Cash Flow Method discussed above. Market prices of publicly traded companies and actual merger and acquisition transactions are believed to incorporate the effects on value of earnings, cash generation, and stockholders’ equity while also recognizing general economic conditions, the position of the industry in the economy, and the position of the company in its industry. Within the Market Approach, two valuation methods are commonly used: the Publicly Traded Guideline Company Method and the Recent Transactions Method. The Publicly Traded Guideline Company Method consists of identifying similar public companies and developing multiples of the total capitalization of each similar public company to certain income statement and/or balance sheet items. These multiples are then weighted and applied to similar income statement and balance sheet items of the Company. The Recent Transactions Method is based on actual prices paid in mergers and acquisitions for similar public and private companies. Ratios of the total purchase price paid to certain income statement and/or balance sheet items are generally developed for each comparable transaction if the data is available. These ratios are then applied to similar income statement and balance sheet items of the Company.
For purposes of completing the Company’s annual goodwill impairment test, the specific valuation methodologies utilized were the following:
•
The Income Approach utilizing the Discounted Cash Flow Method; and
•
The Market Approach utilizing (i) the Publicly Traded Guideline Company Method, focusing on a comparison of publicly-traded financial institutions as guideline companies based on size, geography and performance metrics, including the average price to tangible book value of comparable businesses, and (ii) the Recent Transactions Method, focusing on recent transactions and key transaction metrics, including price to the last-twelve-months earnings multiples.
As of December 31, 2012, the Income Approach utilizing the Discounted Cash Flow Method and applying a discount rate of 15.0% to the projected cash flows was weighted at 60.0% and each of the two Market Approaches was weighted at 20.0%. The Market Approach was given a relatively lower weighting primarily as a result of the Company’s previous lack of profitability, which required price to the last-twelve-months earnings multiples to be applied to longer-term projected future earnings.
Taking into account the independent third party valuation performed as of December 31, 2012, the Company concluded that the estimated fair value of its reporting unit exceeded its carrying value by approximately $42.9 million at December 31, 2012. As such, the results of Step 1 of the two-step goodwill impairment test, as further described in Note 1 to the consolidated financial statements, did not require the Company to proceed to Step 2 of the goodwill impairment test, and accordingly, the Company did not record goodwill impairment for the year ended December 31, 2012.

108
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

As of December 31, 2011, the Income Approach utilizing the Discounted Cash Flow Method and applying a discount rate of 23.0% to the projected cash flows was weighted at 60.0% and each of the two Market Approaches was weighted at 20.0%. The Market Approach was given a relatively lower weighting primarily as a result of the Company’s previous lack of profitability, which required price to the last-twelve-months earnings multiples to be applied to longer-term projected future earnings.
Taking into account the independent third party valuation performed as of December 31, 2011, the Company concluded that the carrying value of its reporting unit exceeded its estimated fair value by approximately $35.5 million at December 31, 2011. Consequently, the results of Step 1 of the two-step goodwill impairment test required the Company to proceed to Step 2 of the goodwill impairment test, as further described below.
Because the carrying value of the reporting unit exceeded the estimated fair value at December 31, 2011, the Company engaged the same independent valuation firm to assist management in computing the fair value of the reporting unit’s assets and liabilities in order to determine the implied fair value of the reporting unit’s goodwill at December 31, 2011, as required by Step 2 of the two-step goodwill impairment test.
Step 2 of the goodwill impairment test compared the implied fair value of goodwill with the carrying value of goodwill. The implied fair value of goodwill is determined in the same manner as the determination of the amount of goodwill recognized in a business combination. The fair value of a reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. The fair value allocated to all of the assets and liabilities of the reporting unit requires significant judgment, especially for those assets and liabilities that are not measured on a recurring basis such as certain types of loans. The excess of the estimated fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill.
The material assumptions utilized in the annual goodwill impairment testing for purposes of calculating the implied fair value of the reporting unit’s goodwill at December 31, 2011 were as follows:
•
Determination of the estimated fair value of loans – The estimated fair value assigned to loans significantly affected the determination of the implied fair value of the reporting unit’s goodwill at December 31, 2011. The implied fair value of a reporting unit’s goodwill will generally increase if the estimated fair value of the reporting unit’s loans is less than the carrying value of the reporting unit’s loans. The estimated fair value of the reporting unit’s loans was derived from discounted cash flow analyses. Loans were grouped into loan pools based on similar characteristics such as maturity, payment type and payment frequency, and rate type and underlying index. These cash flow calculations include assumptions for prepayment estimates over the loan’s remaining life, considerations for the current interest rate environment compared to the weighted average rate of the loan portfolio, a credit risk component based on the historical and expected performance of each loan portfolio stratum and a liquidity adjustment related to the current market environment. The estimated fair value of loans held for portfolio was $303.6 million less than the carrying value at December 31, 2011. To the extent any of these assumptions change in the future, the implied fair value of the reporting unit’s goodwill could change materially. A decrease in the discount rate utilized in deriving the estimated fair value of the reporting unit’s loans would decrease the implied fair value of goodwill.
•
Determination of the estimated fair value of deposits, including the core deposit intangible – The estimated fair value assigned to the core deposit intangible, or the reporting unit’s deposit base, also significantly affected the determination of the implied fair value of the reporting unit’s goodwill at December 31, 2011. The implied fair value of a reporting unit’s goodwill will generally decrease by the estimated fair value assigned to the reporting unit’s core deposit intangible. The estimated fair value of the core deposit intangible was derived from discounted cash flow analyses with considerations for estimated deposit runoff, cost of the deposit base, interest costs, net maintenance costs and the cost of alternative funds. The resulting estimate of the fair value of the core deposit intangible represents the present value of the difference in cash flows between maintaining the existing deposits and obtaining alternative funds over the life of the deposit base. There were no significant changes in the estimate of fair value of the core deposit intangible at December 31, 2011 as compared to December 31, 2010. To the extent any of these assumptions used to determine the estimated fair value of the core deposit intangible change in the future, the implied fair value of the reporting unit’s goodwill could change materially.
Management then compared the implied fair value of the reporting unit’s goodwill, taking into account the analyses of the independent valuation firm, of $231.2 million as of December 31, 2011 with its carrying value of $125.3 million as of December 31, 2011. Taking into account the results of the goodwill impairment analyses performed for the year ended December 31, 2011, the Company did not record goodwill impairment for the year ended December 31, 2011, primarily reflecting the estimated discount on loans held for portfolio (i.e. excess of carrying value over estimated fair value) exceeding the amount by which the carrying value of the reporting unit exceeded its fair value.

109
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

The Company believes the estimates and assumptions utilized in the annual goodwill impairment tests are reasonable. However, further deterioration in the outlook for credit quality or other factors could impact the estimated fair value of the reporting unit as determined under Step 1 of the goodwill impairment test. A decrease in the estimated fair value of the reporting unit would decrease the implied fair value of goodwill as further determined under Step 2 of the goodwill impairment test.
Due to the current economic environment and the uncertainties regarding the impact on the Company, there can be no assurance that the Company’s estimates and assumptions made for the purposes of the goodwill impairment testing will prove to be accurate predictions in the future. Adverse changes in the economic environment, the Company’s operations, or other factors could result in a decline in the implied fair value of the reporting unit, which could result in the recognition of future goodwill impairment that may materially affect the carrying value of the reporting unit’s assets and its related operating results.
NOTE 7 – SERVICING RIGHTS
Mortgage Banking Activities. At December 31, 2012 and 2011, the Company serviced mortgage loans for others totaling $1.27 billion and $1.25 billion, respectively. Borrowers’ escrow balances held by the Company on such loans were $7.9 million and $8.0 million at December 31, 2012 and 2011, respectively. Changes in mortgage servicing rights for the years ended December 31, 2012 and 2011 were as follows:
 
2012
 
2011
 
(dollars expressed in thousands)
Balance, beginning of year
$
9,077

 
12,150

Originated mortgage servicing rights
4,887

 
3,450

Change in fair value resulting from changes in valuation inputs or assumptions used in valuation model (1)
(2,089
)
 
(4,280
)
Other changes in fair value (2)
(2,723
)
 
(2,243
)
Balance, end of year
$
9,152

 
9,077

 
(1)
The change in fair value resulting from changes in valuation inputs or assumptions used in valuation model primarily reflects the change in discount rates and prepayment speed assumptions, primarily due to changes in interest rates.
(2)
Other changes in fair value reflect changes due to the collection/realization of expected cash flows over time.
Other Servicing Activities. At December 31, 2012 and 2011, the Company serviced SBA loans for others totaling $159.6 million and $178.5 million, respectively. Changes in SBA servicing rights for the years ended December 31, 2012 and 2011 were as follows:
 
2012
 
2011
 
(dollars expressed in thousands)
Balance, beginning of year
$
6,303

 
7,432

Originated SBA servicing rights
—

 
—

Change in fair value resulting from changes in valuation inputs or assumptions used in valuation model (1)
434

 
150

Other changes in fair value (2)
(1,097
)
 
(1,279
)
Balance, end of year
$
5,640

 
6,303

 
(1)
The change in fair value resulting from changes in valuation inputs or assumptions used in valuation model primarily reflects the change in discount rates and prepayment speed assumptions, primarily due to changes in interest rates.
(2)
Other changes in fair value reflect changes due to the collection/realization of expected cash flows over time.

NOTE 8 – DERIVATIVE INSTRUMENTS
The Company utilizes derivative instruments to assist in the management of interest rate sensitivity by modifying the repricing, maturity and option characteristics of certain assets and liabilities. The following table summarizes derivative instruments held by the Company, their notional amount, estimated fair values and their location in the consolidated balance sheets at December 31, 2012 and 2011:

110
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

 
 
 
Derivatives in Other Assets
 
Derivatives in Other Liabilities
 
Notional Amount
 
Fair Value Gain (Loss)
 
Fair Value Loss
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
 
(dollars expressed in thousands)
Derivative Instruments not Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap agreements
$
—

 
50,000

 
—

 
—

 
—

 
(807
)
Customer interest rate swap agreements
12,149

 
47,240

 
87

 
370

 
(87
)
 
(307
)
Interest rate lock commitments
59,932

 
38,985

 
1,837

 
1,381

 
—

 
—

Forward commitments to sell mortgage-backed securities
107,700

 
58,800

 
(305
)
 
(729
)
 
—

 
—

Total
$
179,781

 
195,025

 
1,619

 
1,022

 
(87
)
 
(1,114
)
The notional amounts of derivative instruments do not represent amounts exchanged by the parties and, therefore, are not a measure of the Company’s credit exposure through its use of these instruments. Credit exposure on interest rate swaps, which represents the loss the Company would incur in the event the counterparties failed completely to perform according to the terms of the derivative instruments and the collateral held to support the credit exposure was of no value, is limited to the net fair value and related accrued interest receivable reduced by the amount of collateral pledged by the counterparty. The Company had not pledged any assets as collateral in connection with its interest rate swap agreements at December 31, 2012 and 2011. Collateral requirements are monitored on a daily basis and adjusted as necessary.
For the year ended December 31, 2010, the Company realized net interest income of $5.7 million on its derivative instruments. The Company also recorded net losses on derivative instruments, which are included in noninterest income in the statements of operations, of $40,000, $193,000 and $2.9 million for the years ended December 31, 2012, 2011 and 2010, respectively.
Interest Rate Swap Agreements. The Company entered into certain interest rate swap agreements with the objective of stabilizing the long-term cost of capital and cash flow and, accordingly, net interest expense on junior subordinated debentures to the respective call dates of certain junior subordinated debentures. The terms of the swap agreements provided for the Company to pay and receive interest on a quarterly basis. The amount receivable and payable by the Company under these swap agreements was $36,000 and $72,000, respectively, at December 31, 2011.
The maturity dates, notional amounts, interest rates paid and received and fair value of the Company’s interest rate swap agreements as of December 31, 2011 were as follows:
Maturity Date
 
Notional Amount
 
Interest Rate Paid
 
Interest Rate Received
 
Fair Value
 
 
(dollars expressed in thousands)
December 31, 2011:
 
 
 
 
 
 
 
 
March 30, 2012
 
$
25,000

 
4.71
%
 
2.19
%
 
$
(159
)
December 15, 2012
 
25,000

 
5.57

 
2.80

 
(648
)
 
 
$
50,000

 
5.14

 
2.50

 
$
(807
)
Customer Interest Rate Swap Agreements. First Bank offers interest rate swap agreements to certain customers to assist in hedging their risks of adverse changes in interest rates. First Bank serves as an intermediary between its customers and the financial markets. Each interest rate swap agreement between First Bank and its customers is offset by an interest rate swap agreement between First Bank and various counterparties. These interest rate swap agreements do not qualify for hedge accounting treatment. Changes in the fair value of customer interest rate swap agreements are recognized in noninterest income on a monthly basis. Each customer contract is paired with an offsetting contract, and as such, there is no significant impact to net income (loss). The notional amount of these interest rate swap agreement contracts at December 31, 2012 and 2011 was $12.1 million and $47.2 million, respectively.
Interest Rate Lock Commitments / Forward Commitments to Sell Mortgage-Backed Securities. Derivative instruments issued by the Company consist of interest rate lock commitments to originate fixed-rate loans to be sold. Commitments to originate fixed-rate loans consist primarily of residential real estate loans. These net loan commitments and loans held for sale are hedged with forward contracts to sell mortgage-backed securities, which expire in March 2013. The fair value of the interest rate lock commitments, which is included in other assets in the consolidated balance sheets, was an unrealized gain of $1.8 million and $1.4 million at December 31, 2012 and 2011, respectively. The fair value of the forward contracts to sell mortgage-backed securities, which is included in other assets in the consolidated balance sheets, was an unrealized loss of $305,000 and $729,000 at December 31, 2012 and 2011, respectively. Changes in the fair value of interest rate lock commitments and forward commitments to sell mortgage-backed securities are recognized in noninterest income on a monthly basis.

111
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

The following table summarizes amounts included in the consolidated statements of operations for the years ended December 31, 2012, 2011 and 2010 related to interest rate swap agreements designated as cash flow hedges:
Derivative Instruments Designated as Hedging Instruments:
2012
 
2011
 
2010
 
(dollars expressed in thousands)
Interest Rate Swap Agreements - Loans:
 
 
 
 
 
Interest and fees on loans
$
—

 
—

 
5,745

The Company previously had interest rate swap agreements designated as cash flow hedges with a contractual maturity date of September 20, 2010. These interest rate swap agreements were terminated in December 2008, and as a result, the unrealized gain at the date of termination of $20.8 million was being amortized as an increase to interest and fees on loans in the consolidated statements of operations over the remaining terms of the respective interest rate swap agreements, which had contractual maturity dates through September 2010. The amount of the pre-tax gain amortized as an increase to interest and fees on loans was $5.7 million for the year ended December 31, 2010.
The following table summarizes amounts included in the consolidated statements of operations for the years December 31, 2012, 2011 and 2010 related to non-hedging derivative instruments:
Derivative Instruments Not Designated as Hedging Instruments:
Location of Gain (Loss) Recognized
in Operations on Derivatives
Amount of Gain (Loss) Recognized
in Operations on Derivatives
2012
 
2011
 
2010
 
 
(dollars expressed in thousands)
Interest rate swap agreements – subordinated debentures
Other noninterest income
$
(43
)
 
(194
)
 
(2,929
)
Customer interest rate swap agreements
Other noninterest income
3

 
1

 
4

Interest rate lock commitments
Gain on loans sold and held for sale
456

 
1,105

 
(93
)
Forward commitments to sell mortgage-backed securities
Gain on loans sold and held for sale
424

 
(2,267
)
 
891


NOTE 9 – MATURITIES OF TIME DEPOSITS
A summary of maturities of time deposits of $100,000 or more and other time deposits as of December 31, 2012 is as follows:
 
Time Deposits of
$100,000 or More
 
Other
Time Deposits
 
Total
 
(dollars expressed in thousands)
Year ending December 31:
 
 
 
 
 
2013
$
371,325

 
655,484

 
1,026,809

2014
62,251

 
117,272

 
179,523

2015
16,883

 
33,957

 
50,840

2016
4,026

 
5,574

 
9,600

2017
6,306

 
11,548

 
17,854

Thereafter
—

 
101

 
101

Total
$
460,791

 
823,936

 
1,284,727


NOTE 10 – OTHER BORROWINGS
Other borrowings were comprised solely of daily securities sold under agreement to repurchase of $26.0 million and $51.2 million at December 31, 2012 and 2011, respectively. First Bank had no outstanding FHLB advances as of and for the years ended December 31, 2012 and 2011.
The average balance of other borrowings was $33.0 million and $47.0 million, and the maximum month-end balance of other borrowings was $57.7 million and $59.6 million for the years ended December 31, 2012 and 2011, respectively.
The average rates paid on other borrowings during the years ended December 31, 2012, 2011 and 2010 were (0.05)%, 0.03% and 1.52%, respectively. The negative average rate paid on other borrowings during the year ended December 31, 2012 resulted from the reversal of accrued interest related to unrecognized tax benefits associated with FASB Interpretation No. 48, as more fully discussed in Note 17 to the consolidated financial statements. Interest expense on securities sold under agreements to repurchase was $33,000, $82,000 and $3.6 million for the years ended December 31, 2012, 2011 and 2010, respectively. Interest expense on FHLB advances was $5.4 million for the year ended December 31, 2010.

112
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

NOTE 11 – NOTES PAYABLE
On March 24, 2011, the Company entered into a Revolving Credit Note and a Stock Pledge Agreement (the Credit Agreement) with Investors of America Limited Partnership (Investors of America, LP), a Nevada limited partnership created by and for the benefit of the Company’s Chairman and members of his immediate family, as further described in Note 20 to the consolidated financial statements. The Credit Agreement provided for a $5.0 million secured revolving line of credit to be utilized for general working capital needs. This borrowing arrangement, which had an interest rate of the London Interbank Offered Rate (LIBOR) plus 300 basis points, was intended to supplement, if necessary, the parent company’s overall level of unrestricted cash to cover the parent company’s projected operating expenses. There were no balances outstanding under this Credit Agreement during the period from its inception in March 2011 to its maturity date on December 31, 2012.
On March 20, 2013, the Company entered into a new Revolving Credit Note and a Stock Pledge Agreement (the New Credit Agreement) with Investors of America LP, as further described in Note 25 to our consolidated financial statements. The agreement provides for a $5.0 million secured revolving line of credit to be utilized for general working capital needs. This borrowing arrangement, which has a maturity date of March 31, 2014 and an interest rate of LIBOR plus 300 basis points, is intended to supplement, on a contingent basis, the parent company’s overall level of unrestricted cash to cover the parent company’s projected operating expenses should the parent company’s existing cash resources become insufficient in the future.
NOTE 12 – SUBORDINATED DEBENTURES
As of December 31, 2012, the Company had 13 affiliated Delaware or Connecticut statutory and business trusts (collectively, the Trusts) that were created for the sole purpose of issuing trust preferred securities. The trust preferred securities were issued in private placements, with the exception of First Preferred Capital Trust IV, which was issued in a publicly underwritten offering. The Company owns all of the common securities of the Trusts. The sole assets of the statutory and business trusts are the Company's junior subordinated debentures. The gross proceeds of the offerings were used by the Trusts to purchase variable rate or fixed rate junior subordinated debentures from the Company. In connection with the issuance of the trust preferred securities, the Company made certain guarantees and commitments that, in the aggregate, constitute a full and unconditional guarantee by the Company of the obligations of the Trusts under the trust preferred securities. The following is a summary of the junior subordinated debentures issued to the Trusts in conjunction with the trust preferred securities offerings at December 31, 2012 and 2011:
Name of Trust
 
Issuance Date
 
Maturity Date
 
Call Date (1)
 
Interest Rate (2)
 
Trust Preferred Securities
 
Subordinated Debentures
 
 
 
 
 
 
 
 
 
 
(dollars expressed in thousands)
Variable Rate
 
 
 
 
 
 
 
 
 
 
 
 
First Bank Statutory Trust II
 
September 2004
 
September 20, 2034
 
September 20, 2009
 
+205.0
bp
$
20,000

 
$
20,619

Royal Oaks Capital Trust I
 
October 2004
 
January 7, 2035
 
January 7, 2010
 
+240.0
bp
4,000

 
4,124

First Bank Statutory Trust III
 
November 2004
 
December 15, 2034
 
December 15, 2009
 
+218.0
bp
40,000

 
41,238

First Bank Statutory Trust IV
 
March 2006
 
March 15, 2036
 
March 15, 2011
 
+142.0
bp
40,000

 
41,238

First Bank Statutory Trust V
 
April 2006
 
June 15, 2036
 
June 15, 2011
 
+145.0
bp
20,000

 
20,619

First Bank Statutory Trust VI
 
June 2006
 
July 7, 2036
 
July 7, 2011
 
+165.0
bp
25,000

 
25,774

First Bank Statutory Trust VII
 
December 2006
 
December 15, 2036
 
December 15, 2011
 
+185.0
bp
50,000

 
51,547

First Bank Statutory Trust VIII
 
February 2007
 
March 30, 2037
 
March 30, 2012
 
+161.0
bp
25,000

 
25,774

First Bank Statutory Trust X
 
August 2007
 
September 15, 2037
 
September 15, 2012
 
+230.0
bp
15,000

 
15,464

First Bank Statutory Trust IX
 
September 2007
 
December 15, 2037
 
December 15, 2012
 
+225.0
bp
25,000

 
25,774

First Bank Statutory Trust XI
 
September 2007
 
December 15, 2037
 
December 15, 2012
 
+285.0
bp
10,000

 
10,310

Fixed Rate
 
 
 
 
 
 
 
 
 
 
 
 
First Bank Statutory Trust
 
March 2003
 
March 20, 2033
 
March 20, 2008
 
8.10%
 
25,000

 
25,774

First Preferred Capital Trust IV
 
April 2003
 
June 30, 2033
 
June 30, 2008
 
8.15%
 
46,000

 
47,423

 
(1)
The junior subordinated debentures are callable at the option of the Company on the call date shown at 100% of the principal amount plus accrued and unpaid interest.
(2)
The interest rates paid on the trust preferred securities are based on either a variable rate or a fixed rate. The variable rate is based on the three-month LIBOR plus the basis point spread shown.
The Company’s distributions accrued on the junior subordinated debentures were $14.8 million, $13.5 million and $12.9 million for the years ended December 31, 2012, 2011 and 2010, respectively, and are included in interest expense in the consolidated statements of operations. Deferred issuance costs associated with the Company’s junior subordinated debentures are included as a reduction of junior subordinated debentures in the consolidated balance sheets and are amortized on a straight-line basis to the maturity date of the respective junior subordinated debentures. The structure of the trust preferred securities currently satisfies the

113
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

regulatory requirements for inclusion, subject to certain limitations, in the Company’s capital base, as further discussed in Note 14 to the consolidated financial statements.
In August 2009, the Company announced the deferral of its regularly scheduled interest payments on its outstanding junior subordinated debentures relating to its $345.0 million of trust preferred securities beginning with the regularly scheduled quarterly interest payments that would otherwise have been made in September and October 2009. The terms of the junior subordinated debentures and the related trust indentures allow the Company to defer such payments of interest for up to 20 consecutive quarterly periods without triggering a payment default or penalty. Such payment default or penalty would likely have a material adverse effect on the Company’s business, financial condition or results of operations. The Company has deferred such payments for 14 quarterly periods as of December 31, 2012. The current 20 consecutive quarterly deferral period ends with the respective payment dates of the trust preferred securities in September and October 2014. During the deferral period, the respective trusts will suspend the declaration and payment of dividends on the trust preferred securities. During the deferral period, the Company may not, among other things and with limited exceptions, pay cash dividends on or repurchase its common stock or preferred stock nor make any payment on outstanding debt obligations that rank equally with or junior to the junior subordinated debentures. Accordingly, the Company also suspended the payment of cash dividends on its outstanding common stock and preferred stock beginning with the regularly scheduled quarterly dividend payments on the preferred stock that would otherwise have been made in August and September 2009, as further described in Note 13 to the consolidated financial statements. The Company has deferred $43.8 million and $31.0 million of its regularly scheduled interest payments as of December 31, 2012 and 2011, respectively. In addition, the Company has accrued additional interest expense of $3.9 million and $1.9 million as of December 31, 2012 and 2011, respectively, on the regularly scheduled deferred interest payments based on the interest rate in effect for each junior subordinated note issuance in accordance with the respective terms of the underlying agreements.
Under its agreement with the FRB, the Company agreed, among other things, to provide certain information to the FRB, including, but not limited to, prior notice regarding the issuance of additional trust preferred securities. The Company also agreed not to make any distributions of interest or other sums on its outstanding trust preferred securities without the prior approval of the FRB, as further described in Note 14 to the consolidated financial statements.
On January 26, 2011, the Company, the holder of 100% of the outstanding common stock of First Preferred Capital Trust IV (the Trust), successfully completed a consent solicitation from the holders of the 8.15% cumulative trust preferred securities of the Trust, and entered into certain amendments that were approved in the consent solicitation. The Company solicited the consents in order to increase its capital planning flexibility under the terms of the documents and the provisions of the indentures, guarantee agreements and trust agreements relating to the Company’s other tranches of trust preferred securities. The amendments provide an opportunity for the Company to seek to improve its capital position and decrease its level of indebtedness during a period in which it is deferring interest payments in accordance with the terms of the indenture.
NOTE 13 – STOCKHOLDERS’ EQUITY
Common Stock. There is no established public trading market for the Company’s common stock. Various trusts, which were established by and are administered by and for the benefit of the Company’s Chairman of the Board and members of his immediate family (including Mr. Michael Dierberg, Vice Chairman of the Company), own all of the voting stock of the Company.
Preferred Stock. The Company has four classes of preferred stock outstanding. The Class A preferred stock is convertible into shares of common stock at a rate based on the ratio of the par value of the preferred stock to the current market value of the common stock at the date of conversion, to be determined by independent appraisal at the time of conversion. Shares of Class A preferred stock may be redeemed by the Company at any time at 105.0% of par value. The Class B preferred stock may not be redeemed or converted. The holders of the Class A and Class B preferred stock have full voting rights. Dividends on the Class A and Class B preferred stock are adjustable quarterly based on the highest of the Treasury Bill Rate or the Ten Year Constant Maturity Rate for the two-week period immediately preceding the beginning of the quarter. This rate shall not be less than 6.0% nor more than 12.0% on the Class A preferred stock, or less than 7.0% nor more than 15.0% on the Class B preferred stock. Effective August 10, 2009, the Company suspended the declaration of dividends on its Class A and Class B preferred stock.
On December 31, 2008, the Company issued 295,400 shares of Class C Fixed Rate Cumulative Perpetual Preferred Stock (Class C Preferred Stock) and 14,770 shares of Class D Fixed Rate Cumulative Perpetual Preferred Stock (Class D Preferred Stock) to the United States Department of the Treasury (U.S. Treasury) in conjunction with the U.S. Treasury’s Troubled Asset Relief Program’s Capital Purchase Program (CPP). The Class C Preferred Stock has a par value of $1.00 per share and a liquidation preference of $1,000 per share. The holders of the Class C Preferred Stock have no voting rights except in certain limited circumstances. The Class C Preferred Stock carries an annual dividend rate equal to 5% for the first five years and the annual dividend rate increases to 9% per annum on and after February 15, 2014, payable quarterly in arrears beginning February 15, 2009. The Class D Preferred Stock has a par value of $1.00 per share and a liquidation preference of $1,000 per share. The holders

114
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

of the Class D Preferred Stock have no voting rights except in certain limited circumstances. The Class D Preferred Stock carries an annual dividend rate equal to 9%, payable quarterly in arrears beginning February 15, 2009. The Class C Preferred Stock and the Class D Preferred Stock qualify as Tier 1 capital. Effective February 17, 2009, the Class C Preferred Stock and the Class D Preferred Stock may be redeemed at any time without penalty and without the need to raise new capital, subject to the U.S. Treasury’s consultation with the Company’s primary regulatory agency. The Class D Preferred Stock may not be redeemed until all of the outstanding shares of the Class C Preferred Stock have been redeemed. In addition, the U.S. Treasury has certain supervisory and oversight duties and responsibilities under the CPP and, pursuant to the terms of the agreement governing the issuance of the Class C Preferred Stock and the Class D Preferred Stock to the U.S. Treasury (Purchase Agreement), the U.S. Treasury is empowered to unilaterally amend any provision of the Purchase Agreement with the Company to the extent required to comply with any changes in applicable federal statutes. As a result of the Company’s deferral of dividends to the U.S. Treasury for an aggregate of six quarters, the U.S. Treasury had the right to elect two directors to the Company’s Board. On July 13, 2011, the U.S. Treasury elected two members to the Company’s Board of Directors.
The Company allocated the total proceeds received under the CPP of $295.4 million to the Class C Preferred Stock and the Class D Preferred Stock based on the relative fair values of the respective classes of preferred stock at the time of issuance. The discount on the Class C Preferred Stock of $17.3 million is being accreted to retained earnings on a level-yield basis over five years. Accretion of the discount on the Class C Preferred Stock was $3.6 million, $3.5 million and $3.4 million for the years ended December 31, 2012, 2011 and 2010, respectively.
The redemption of any issue of preferred stock requires the prior approval of the Federal Reserve. Furthermore, the Purchase Agreement that the Company entered into with the U.S. Treasury contains limitations on certain actions of the Company, including, but not limited to, payment of dividends and redemptions and acquisitions of the Company’s equity securities. In addition, the Company, under its agreement with the FRB, has agreed, among other things, to provide certain information to the FRB including, but not limited to, notice of plans to materially change its fundamental business and notice to raise additional equity capital. Furthermore, the Company agreed not to pay any dividends on its common or preferred stock without the prior approval of the FRB, as further described in Note 14 to the consolidated financial statements.
In conjunction with the deferral of its regularly scheduled interest payments on its outstanding junior subordinated debentures on August 10, 2009, as further described in Note 12 to the consolidated financial statements, the Company also began suspending the payment of cash dividends on its outstanding preferred stock beginning with the regularly scheduled quarterly dividend payments on the preferred stock that would otherwise have been made in August and September 2009. The Company has deferred such payments for 14 quarterly periods as of December 31, 2012. Consequently, the Company has suspended the declaration of dividends on its Class A and Class B preferred stock, but continues to declare and accumulate dividends on its Class C Preferred Stock and its Class D Preferred Stock. The Company has declared and deferred $56.3 million and $40.2 million of its regularly scheduled dividend payments on its Class C Preferred Stock and Class D Preferred Stock at December 31, 2012 and 2011, respectively, and has declared and accrued an additional $5.6 million and $2.8 million of cumulative dividends on such deferred dividend payments at December 31, 2012 and 2011, respectively.
On June 30, 2012, the Company reclassified certain of its available-for-sale investment securities to held-to-maturity investment securities at their respective fair values, which totaled $729.1 million, in aggregate, as further described in Note 3 to the consolidated financial statements. The gross unrealized gain on these available-for-sale investment securities at the time of transfer was $11.7 million. The unrealized gain included as a component of accumulated other comprehensive income was $6.8 million at June 30, 2012, net of tax of $4.9 million. The fair value adjustment at the time of transfer of $11.7 million was recorded as additional premium on the investment securities, and is being amortized as an adjustment to interest income on investment securities over the remaining lives of the respective securities. The amortization of the unrealized gain reported in stockholders’ equity is also being amortized as an adjustment to interest income on investment securities over the remaining lives of the respective securities. Consequently, the combined amortization of the additional premium and the unrealized gain have no net impact on interest income on investment securities.
Other comprehensive income of $29.2 million, $18.4 million and $146,000, as presented in the consolidated statements of changes in stockholders’ equity, is reflected net of income tax expense (benefit) of $8.0 million, $10.1 million and $(2.3) million for the years ended December 31, 2012, 2011 and 2010, respectively.
NOTE 14 – REGULATORY CAPITAL AND OTHER REGULATORY MATTERS
Regulatory Capital. The Company and First Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the operations and financial condition of the Company and First Bank. Under these capital requirements, the Company and First Bank must meet specific capital guidelines

115
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and First Bank to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital to average assets.
The Company did not meet the minimum regulatory capital standards established for bank holding companies by the Federal Reserve at December 31, 2012 and 2011. The Company must maintain minimum total regulatory, Tier 1 regulatory and Tier 1 leverage ratios as set forth in the table below in order to meet the minimum capital adequacy standards.
First Bank was categorized as well capitalized at December 31, 2012 and 2011 under the prompt corrective action provisions of the regulatory capital standards. First Bank must maintain minimum total regulatory, Tier 1 regulatory and Tier 1 leverage ratios as set forth in the table below in order to be categorized as well capitalized. In addition, First Bank is currently required to maintain its Tier 1 capital to total assets ratio at no less than 7.00% in accordance with the provisions of its informal agreement entered into with the State of Missouri Division of Finance (MDOF), as further described below. First Bank’s Tier 1 capital to total assets ratio of 9.20% and 8.37% at December 31, 2012 and 2011, respectively, exceeded the 7.00% minimum level required under the terms of the informal agreement with the MDOF.
At December 31, 2012 and 2011, the Company and First Bank’s required and actual capital ratios were as follows:
 
Actual
 
For Capital Adequacy Purposes
 
To be Well
Capitalized
Under
Prompt Corrective Action Provisions
 
2012
 
2011
 
Amount
 
Ratio
 
Amount
 
Ratio
 
(dollars expressed in thousands)
 
 
 
 
Total capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
First Banks, Inc.
$
93,542

 
2.57
%
 
$
73,830

 
1.88
%
 
8.0%
 
N/A
First Bank
626,177

 
17.18

 
588,860

 
14.98

 
8.0
 
10.0%
Tier 1 capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
First Banks, Inc.
46,771

 
1.28

 
36,915

 
0.94

 
4.0
 
N/A
First Bank
580,026

 
15.92

 
538,592

 
13.70

 
4.0
 
6.0
Tier 1 capital (to average assets):
 
 
 
 
 
 
 
 
 
 
 
First Banks, Inc.
46,771

 
0.73

 
36,915

 
0.56

 
4.0
 
N/A
First Bank
580,026

 
9.13

 
538,592

 
8.19

 
4.0
 
5.0
As noted above, the Company’s capital ratios are below the minimum regulatory capital standards established for bank holding companies, and therefore, the Company could be subject to additional actions by regulators that could have a direct material effect on the operations and financial condition of the Company and First Bank.
Regulatory Agreements. On March 24, 2010, the Company, SFC and First Bank entered into a Written Agreement (Agreement) with the FRB requiring the Company and First Bank to take certain steps intended to improve their overall financial condition. Pursuant to the Agreement, the Company prepared and filed with the FRB a number of specific plans designed to strengthen and/or address the following matters: (i) board oversight over the management and operations of the Company and First Bank; (ii) credit risk management practices; (iii) lending and credit administration policies and procedures; (iv) asset improvement; (v) capital; (vi) earnings and overall financial condition; and (vii) liquidity and funds management.
The Agreement requires, among other things, that the Company and First Bank obtain prior approval from the FRB in order to pay dividends. In addition, the Company must obtain prior approval from the FRB to: (i) take any other form of payment from First Bank representing a reduction in capital of First Bank; (ii) make any distributions of interest, principal or other sums on junior subordinated debentures or trust preferred securities; (iii) incur, increase or guarantee any debt; or (iv) purchase or redeem any shares of the Company’s stock. Pursuant to the terms of the Agreement, the Company and First Bank submitted a written plan to the FRB to maintain sufficient capital at the Company, on a consolidated basis, and at First Bank, on a standalone basis. In addition, the Agreement also provides that the Company and First Bank must notify the FRB if the regulatory capital ratios of either entity fall below those set forth in the capital plans that were accepted by the FRB, and specifically if First Bank falls below the criteria for being well capitalized under the regulatory framework for prompt corrective action. The Company must also notify the FRB before appointing any new directors or senior executive officers or changing the responsibilities of any senior executive officer

116
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

position. The Agreement also requires the Company and First Bank to comply with certain restrictions regarding indemnification and severance payments. The Agreement is specifically enforceable by the FRB in court.
The Company and First Bank must furnish periodic progress reports to the FRB regarding compliance with the Agreement. As of the date of this filing, the Company and First Bank have provided progress reports and other reports, as required under the Agreement. The Company and First Bank have received, and may receive in the future, additional requests from the FRB regarding compliance with the Agreement, which may include, but are not limited to, updates and modifications to the Company’s Asset Quality Improvement, Profit Improvement and Capital Plans. Management has responded promptly to any such requests and intends to do so in the future. The Agreement will remain in effect until stayed, modified, terminated or suspended by the FRB.
The description of the Agreement above represents a summary and is qualified in its entirety by the full text of the Agreement which is incorporated herein by reference to Exhibit 10.19 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the United States Securities and Exchange Commission on March 25, 2010.
Prior to entering into the Agreement on March 24, 2010, the Company and First Bank had entered into a memorandum of understanding and an informal agreement, respectively, with the FRB and the MDOF. Each of the agreements were characterized by regulatory authorities as informal actions that were neither published nor made publicly available by the agencies and are used when circumstances warrant a milder form of action than a formal supervisory action, such as a written agreement or cease and desist order. The informal agreement with the MDOF is still in place and there have not been any modifications thereto since its inception in September 2008.
Under the terms of the prior memorandum of understanding with the FRB, the Company agreed, among other things, to provide certain information to the FRB including, but not limited to, financial performance updates, notice of plans to materially change its fundamental business and notice to issue trust preferred securities or raise additional equity capital. In addition, the Company agreed not to pay any dividends on its common or preferred stock or make any distributions of interest or other sums on its trust preferred securities without the prior approval of the FRB.
First Bank, under its informal agreement with the MDOF and the FRB, agreed to, among other things, prepare and submit plans and reports to the agencies regarding certain matters including, but not limited to, the performance of First Bank’s loan portfolio. In addition, First Bank agreed not to declare or pay any dividends or make certain other payments without the prior consent of the MDOF and the FRB and to maintain a Tier 1 capital to total assets ratio of no less than 7.00%.
While the Company and First Bank intend to take such actions as may be necessary to comply with the requirements of the Agreement with the FRB and informal agreement with the MDOF, there can be no assurance that the Company and First Bank will be able to comply fully with the requirements of the Agreement or that First Bank will be able to comply fully with the provisions of the informal agreement, that compliance with the Agreement and the informal agreement will not be more time consuming or more expensive than anticipated, that compliance with the Agreement and the informal agreement will enable the Company and First Bank to maintain profitable operations, or that efforts to comply with the Agreement and the informal agreement will not have adverse effects on the operations and financial condition of the Company or First Bank. If the Company or First Bank is unable to comply with the terms of the Agreement or the informal agreement, respectively, the Company and First Bank could become subject to various requirements limiting the ability to develop new business lines, mandating additional capital, and/or requiring the sale of certain assets and liabilities. Failure of the Company or First Bank to meet these conditions could lead to further enforcement action by the regulatory agencies. The terms of any such additional regulatory actions, orders or agreements could have a materially adverse effect on the Company’s business, financial condition or results of operations.
Capital Plan. On August 10, 2009, the Company announced the adoption of a Capital Plan designed to improve its regulatory capital ratios and financial performance through certain divestiture activities, asset reductions and other profit improvement initiatives. The Capital Plan was adopted in order to, among other things, preserve and enhance the Company’s regulatory capital.
The successful completion of all or any portion of the Capital Plan is not assured, and no assurance can be made that the Capital Plan will not be materially modified in the future. The decision to implement the Capital Plan reflects the adverse effect that the severe downturn in the commercial and residential real estate markets has had on the Company’s financial condition and results of operations. If the Company is not able to complete substantially all of the Capital Plan, its business, financial condition, including regulatory capital ratios, and results of operations may be materially and adversely affected and its ability to withstand continued adverse economic conditions could be threatened.
NOTE 15 – FAIR VALUE DISCLOSURES
In accordance with ASC Topic 820, “Fair Value Measurements and Disclosures,” financial assets and financial liabilities that are measured at fair value subsequent to initial recognition are grouped into three levels of inputs or assumptions that market participants

117
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

would use in pricing the asset or liability, including assumptions about risk and the reliability of assumptions used to determine fair value. The three input levels of the valuation hierarchy are as follows:
Level 1 Inputs –
Valuation is based on quoted prices in active markets for identical instruments in active markets.
Level 2 Inputs –
Valuation is based on quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 Inputs –
Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
The following describes valuation methodologies used to measure financial assets and financial liabilities at fair value, as well as the general classification of such financial instruments pursuant to the valuation hierarchy:
Available-for-sale investment securities. Available-for-sale investment securities are recorded at fair value on a recurring basis. Available-for-sale investment securities included in Level 1 are valued using quoted market prices. Where quoted market prices are unavailable, the fair value included in Level 2 is based on quoted market prices of comparable instruments obtained from independent pricing vendors based on recent trading activity and other relevant information.
Loans held for sale. Mortgage loans held for sale are carried at fair value on a recurring basis. The determination of fair value is based on quoted market prices of comparable instruments obtained from independent pricing vendors based on recent trading activity and other relevant information. Other loans held for sale are carried at the lower of cost or market value, which is determined on an individual loan basis. The fair value is based on the prices secondary markets are offering for portfolios with similar characteristics. The Company classifies mortgage loans held for sale subjected to recurring fair value adjustments as recurring Level 2. The Company classifies other loans held for sale subjected to nonrecurring fair value adjustments as nonrecurring Level 2.
Impaired loans. The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans are considered impaired when, in the judgment of management based on current information and events, it is probable that payment of all amounts due under the contractual terms of the loan agreement will not be collected. Acquired impaired loans are classified as nonaccrual loans and are initially measured at fair value with no allocated allowance for loan losses. An allowance for loan losses is recorded to the extent there is further credit deterioration subsequent to the acquisition date. In accordance with ASC Topic 820, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. Once a loan is identified as impaired, management measures the impairment in accordance with ASC Topic 310-10-35, “Receivables.” Impairment is measured by reference to an observable market price, if one exists, the expected future cash flows of an impaired loan discounted at the loan’s effective interest rate, or the fair value of the collateral for a collateral-dependent loan. In most cases, the Company measures fair value based on the value of the collateral securing the loan. Collateral may be in the form of real estate or personal property, including equipment and inventory. The vast majority of the collateral is real estate. The value of the collateral is determined based on third party appraisals as well as internal estimates. These measurements are classified as nonrecurring Level 3.
Other real estate and repossessed assets. Certain other real estate and repossessed assets, upon initial recognition, are re-measured and reported at fair value through a charge-off to the allowance for loan losses based upon the estimated fair value of the other real estate. The fair value of other real estate, upon initial recognition, is estimated using Level 3 inputs based on third party appraisals, and where applicable, discounted based on management’s judgment taking into account current market conditions, distressed or forced sale price comparisons and other factors in effect at the time of valuation. The Company classifies other real estate and repossessed assets subjected to nonrecurring fair value adjustments as Level 3.
Derivative instruments. Substantially all derivative instruments utilized by the Company are traded in over-the-counter markets where quoted market prices are not readily available. Derivative instruments utilized by the Company include interest rate swap agreements, interest rate lock commitments and forward commitments to sell mortgage-backed securities. For these derivative instruments, fair value is based on market observable inputs utilizing pricing systems and valuation models, and where applicable, the values are compared to the market values calculated independently by the respective counterparties. The Company classifies its derivative instruments as Level 2.
Servicing rights. The valuation of mortgage and SBA servicing rights is performed by an independent third party. The valuation models estimate the present value of estimated future net servicing income, using market-based discount rate assumptions, and utilize assumptions based on the predominant risk characteristics of the underlying loans, including principal balance, interest rate, weighted average life, and certain unobservable inputs, including cost to service, estimated prepayment speed rates and default

118
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

rates. Changes in the fair value of servicing rights occur primarily due to the realization of expected cash flows, as well as changes in valuation inputs and assumptions. Significant increases (decreases) in any of the unobservable inputs would result in a significantly lower (higher) fair value of the servicing rights. The Company classifies its servicing rights as Level 3.
Nonqualified Deferred Compensation Plan. The Company’s nonqualified deferred compensation plan is recorded at fair value on a recurring basis. The unfunded plan allows participants to hypothetically invest in various specified investment options such as equity funds, international stock funds, capital appreciation funds, money market funds, bond funds, mid-cap value funds and growth funds. The nonqualified deferred compensation plan liability is valued based on quoted market prices of the underlying investments. The Company classifies its nonqualified deferred compensation plan liability as Level 1.
Items Measured on a Recurring Basis. Assets and liabilities measured at fair value on a recurring basis as of December 31, 2012 and 2011 are reflected in the following table:
 
Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Fair Value
 
(dollars expressed in thousands)
December 31, 2012:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Available-for-sale investment securities:
 
 
 
 
 
 
 
U.S. Government sponsored agencies
$
—

 
310,429

 
—

 
310,429

Residential mortgage-backed
—

 
1,534,067

 
—

 
1,534,067

Commercial mortgage-backed
—

 
915

 
—

 
915

State and political subdivisions
—

 
4,929

 
—

 
4,929

Corporate notes
—

 
192,365

 
—

 
192,365

Equity investments
1,022

 
—

 
—

 
1,022

Mortgage loans held for sale
—

 
66,133

 
—

 
66,133

Derivative instruments:
 
 
 
 
 
 
 
Customer interest rate swap agreements
—

 
87

 
—

 
87

Interest rate lock commitments
—

 
1,837

 
—

 
1,837

Forward commitments to sell mortgage-backed securities
—

 
(305
)
 
—

 
(305
)
Servicing rights
—

 
—

 
14,792

 
14,792

Total
$
1,022

 
2,110,457

 
14,792

 
2,126,271

Liabilities:
 
 
 
 
 
 
 
 Derivative instruments:
 
 
 
 
 
 
 
 Interest rate swap agreements
$
—

 
—

 
—

 
—

 Customer interest rate swap agreements
—

 
87

 
—

 
87

 Nonqualified deferred compensation plan
6,443

 
—

 
—

 
6,443

 Total
$
6,443

 
87

 
—

 
6,530

December 31, 2011:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 Available-for-sale investment securities:
 
 
 
 
 
 
 
U.S. Government sponsored agencies
$
—

 
341,817

 
—

 
341,817

Residential mortgage-backed
—

 
1,924,920

 
—

 
1,924,920

Commercial mortgage-backed
—

 
910

 
—

 
910

State and political subdivisions
—

 
5,410

 
—

 
5,410

Corporate notes
—

 
183,813

 
—

 
183,813

Equity investments
1,017

 
—

 
—

 
1,017

Mortgage loans held for sale
—

 
31,111

 
—

 
31,111

Derivative instruments:
 
 
 
 
 
 

Customer interest rate swap agreements
—

 
370

 
—

 
370

Interest rate lock commitments
—

 
1,381

 
—

 
1,381

Forward commitments to sell mortgage-backed securities
—

 
(729
)
 
—

 
(729
)
Servicing rights
—

 
—

 
15,380

 
15,380

Total
$
1,017

 
2,489,003

 
15,380

 
2,505,400

Liabilities:
 
 
 
 
 
 
 
Derivative instruments:
 
 
 
 
 
 
 
Interest rate swap agreements
$
—

 
807

 
—

 
807

Customer interest rate swap agreements
—

 
307

 
—

 
307

Nonqualified deferred compensation plan
6,531

 
—

 
—

 
6,531

Total
$
6,531

 
1,114

 
—

 
7,645

There were no transfers between Levels 1 and 2 of the fair value hierarchy for the years ended December 31, 2012 and 2011.

119
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

The following table presents the changes in Level 3 assets measured on a recurring basis for the years ended December 31, 2012 and 2011:
 
Servicing Rights
 
2012
 
2011
 
(dollars expressed in thousands)
Balance, beginning of year
$
15,380

 
19,582

Total gains or losses (realized/unrealized):
 
 
 
Included in earnings (1)
(5,475
)
 
(7,652
)
Included in other comprehensive income (loss)
—

 
—

Issuances
4,887

 
3,450

Transfers in and/or out of level 3
—

 
—

Balance, end of year
$
14,792

 
15,380

 
(1)
Gains or losses (realized/unrealized) are included in noninterest income in the consolidated statements of operations.
Items Measured on a Nonrecurring Basis. From time to time, the Company measures certain assets at fair value on a nonrecurring basis. These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis as of December 31, 2012 and 2011 are reflected in the following table:
 
Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Fair Value
 
(dollars expressed in thousands)
December 31, 2012:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Impaired loans:
 
 
 
 
 
 
 
Commercial, financial and agricultural
$
—

 
—

 
18,374

 
18,374

Real estate construction and development
—

 
—

 
40,731

 
40,731

Real estate mortgage:
 
 
 
 
 
 
 
Bank portfolio
—

 
—

 
8,237

 
8,237

Mortgage Division portfolio
—

 
—

 
86,500

 
86,500

Home equity portfolio
—

 
—

 
6,887

 
6,887

Multi-family residential
—

 
—

 
33,863

 
33,863

Commercial real estate
—

 
—

 
26,218

 
26,218

Consumer and installment
—

 
—

 
27

 
27

Other real estate and repossessed assets
—

 
—

 
91,995

 
91,995

Total
$
—

 
—

 
312,832

 
312,832

December 31, 2011:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Impaired loans:
 
 
 
 
 
 
 
Commercial, financial and agricultural
$
—

 
—

 
54,129

 
54,129

Real estate construction and development
—

 
—

 
79,826

 
79,826

Real estate mortgage:
 
 


 
 
 
 
Bank portfolio
—

 
—

 
13,894

 
13,894

Mortgage Division portfolio
—

 
—

 
84,083

 
84,083

Home equity portfolio
—

 
—

 
5,552

 
5,552

Multi-family residential
—

 
—

 
10,806

 
10,806

Commercial real estate
—

 
—

 
67,756

 
67,756

Consumer and installment
—

 
—

 
18

 
18

Other real estate and repossessed assets
—

 
—

 
129,896

 
129,896

Total
$
—

 
—

 
445,960


445,960

Non-Financial Assets and Non-Financial Liabilities. Certain non-financial assets measured at fair value on a nonrecurring basis include other real estate (upon initial recognition or subsequent impairment), non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, and intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment.

120
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

Other real estate and repossessed assets measured at fair value upon initial recognition totaled $24.2 million, $69.9 million and $158.9 million for the years ended December 31, 2012, 2011 and 2010, respectively. In addition to other real estate and repossessed assets measured at fair value upon initial recognition, the Company recorded write-downs to the balance of other real estate and repossessed assets of $14.5 million, $16.9 million and $34.7 million to noninterest expense for the years ended December 31, 2012, 2011 and 2010, respectively. Other real estate and repossessed assets were $92.0 million at December 31, 2012 compared to $129.9 million at December 31, 2011.
Fair Value of Financial Instruments. The fair value of financial instruments is management’s estimate of the values at which the instruments could be exchanged in a transaction between willing parties. These estimates are subjective and may vary significantly from amounts that would be realized in actual transactions. In addition, other significant assets are not considered financial assets including deferred income tax assets, bank premises and equipment and goodwill and other intangible assets. Furthermore, the income taxes that would be incurred if the Company were to realize any of the unrealized gains or unrealized losses indicated between the estimated fair values and corresponding carrying values could have a significant effect on the fair value estimates and have not been considered in any of the estimates.
The following summarizes the methods and assumptions used in estimating the fair value of all other financial instruments:
Cash and cash equivalents and accrued interest receivable. The carrying values reported in the consolidated balance sheets approximate fair value.
Held-to-maturity investment securities. The fair value of held-to-maturity investment securities is based on quoted market prices where available. If quoted market prices are not available, the fair value is based on quoted market prices of comparable instruments. The Company classifies its held-to-maturity investment securities as Level 2.
Loans. The fair value of loans held for portfolio uses an exit price concept and reflects discounts the Company believes are consistent with liquidity discounts in the market place. Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial and industrial, real estate construction and development, commercial real estate, one-to-four-family residential real estate, home equity and consumer and installment. The fair value of loans is estimated by discounting the future cash flows, utilizing assumptions for prepayment estimates over the loans’ remaining life and considerations for the current interest rate environment compared to the weighted average rate of the loan portfolio. The fair value analysis also includes other assumptions to estimate fair value, intended to approximate those factors a market participant would use in an orderly transaction, with adjustments for discount rates, interest rates, liquidity, and credit spreads, as appropriate. The Company classifies its loans held for portfolio as Level 3.
FRB and FHLB stock. The carrying values reported in the consolidated balance sheets for FRB and FHLB stock, which are carried at cost, represent redemption value and approximate fair value.
Assets of discontinued operations. The carrying values reported in the consolidated balance sheets for assets of discontinued operations approximate fair value. The Company classifies its assets of discontinued operations as Level 2.
Deposits. The fair value of deposits payable on demand with no stated maturity (i.e., noninterest-bearing and interest-bearing demand, and savings and money market accounts) is considered equal to their respective carrying amounts as reported in the consolidated balance sheets. The fair value of demand deposits does not include the benefit that results from the low-cost funding provided by deposit liabilities compared to the cost of borrowing funds in the market. The fair value disclosed for time deposits is estimated utilizing a discounted cash flow calculation that applies interest rates currently being offered on similar deposits to a schedule of aggregated monthly maturities of time deposits. If the estimated fair value is lower than the carrying value, the carrying value is reported as the fair value of time deposits. The Company classifies its time deposits as Level 3.
Other borrowings and accrued interest payable. The carrying values reported in the consolidated balance sheets for variable rate borrowings approximate fair value. The fair value of fixed rate borrowings is based on quoted market prices where available. If quoted market prices are not available, the fair value is based on discounting contractual maturities using an estimate of current market rates for similar instruments. The Company classifies its other borrowings, comprised of securities sold under agreement to repurchase, as Level 1. The carrying values reported in the consolidated balance sheets for accrued interest payable approximate fair value.
Subordinated debentures. The fair value of subordinated debentures is based on quoted market prices of comparable instruments. The Company classifies its subordinated debentures as Level 3.
Liabilities of discontinued operations. The fair value of liabilities of discontinued operations reflects the negotiated purchase price at which the liabilities could be exchanged in a transaction between willing parties, as further described in Note 2 to the consolidated financial statements. The Company classifies its liabilities of discontinued operations as Level 2.

121
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

Off-Balance Sheet Financial Instruments. The fair value of commitments to extend credit, standby letters of credit and financial guarantees is based on estimated probable credit losses. The Company classifies its off-balance sheet financial instruments as Level 3.
The estimated fair value of the Company’s financial instruments at December 31, 2012 and 2011 were as follows:

 
December 31, 2012
 
December 31, 2011
 
Carrying
Value
 
Estimated Fair Value
 
Carrying
Value
 
Estimated
Fair Value
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
(dollars expressed in thousands)
Financial Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
518,846

 
518,846

 
—

 
—

 
518,846

 
473,140

 
473,140

Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale
2,043,727

 
1,022

 
2,042,705

 
—

 
2,043,727

 
2,457,887

 
2,457,887

Held to maturity
631,553

 
—

 
637,024

 
—

 
637,024

 
12,817

 
13,424

Loans held for portfolio
2,773,012

 
—

 
—

 
2,572,256

 
2,572,256

 
3,115,458

 
2,811,866

Loans held for sale
66,133

 
—

 
66,133

 
—

 
66,133

 
31,111

 
31,111

FRB and FHLB stock
27,329

 
27,329

 
—

 
—

 
27,329

 
27,078

 
27,078

Derivative instruments
1,619

 
—

 
1,619

 
—

 
1,619

 
1,022

 
1,022

Accrued interest receivable
18,284

 
18,284

 
—

 
—

 
18,284

 
21,050

 
21,050

Assets of discontinued operations
6,706

 
—

 
6,706

 
—

 
6,706

 
6,913

 
6,913

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing demand
$
1,327,183

 
1,327,183

 
—

 
—

 
1,327,183

 
1,225,622

 
1,225,622

Interest-bearing demand
1,000,666

 
1,000,666

 
—

 
—

 
1,000,666

 
899,114

 
899,114

Savings and money market
1,880,271

 
1,880,271

 
—

 
—

 
1,880,271

 
1,964,905

 
1,964,905

Time deposits
1,284,727

 
—

 
—

 
1,286,730

 
1,286,730

 
1,533,414

 
1,536,824

Other borrowings
26,025

 
26,025

 
—

 
—

 
26,025

 
51,170

 
51,170

Derivative instruments
87

 
—

 
87

 
—

 
87

 
1,114

 
1,114

Accrued interest payable
48,541

 
48,541

 
—

 
—

 
48,541

 
34,343

 
34,343

Subordinated debentures
354,133

 
—

 
—

 
254,984

 
254,984

 
354,057

 
204,502

Liabilities of discontinued operations
155,711

 
—

 
155,711

 
—

 
155,711

 
174,737

 
174,737

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Off-Balance Sheet Financial Instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commitments to extend credit, standby letters of credit and financial guarantees
$
(2,779
)
 
—

 
—

 
(2,779
)
 
(2,779
)
 
(2,785
)
 
(2,785
)

NOTE 16 – CREDIT COMMITMENTS
The Company is a party to commitments to extend credit and commercial and standby letters of credit in the normal course of business to meet the financing needs of its customers. These instruments involve, in varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The interest rate risk associated with these credit commitments relates primarily to the commitments to originate fixed-rate loans. As more fully described in Note 8 to the consolidated financial statements, the interest rate risk of the commitments to originate fixed-rate loans has been hedged with forward commitments to sell mortgage-backed securities. The credit risk amounts are equal to the contractual amounts, assuming the amounts are fully advanced and the collateral or other security is of no value. The Company uses the same credit policies in granting commitments and conditional obligations as it does for on-balance sheet items.
Commitments to extend fixed and variable rate credit, and commercial and standby letters of credit, at December 31, 2012 and 2011 were as follows:
 
December 31,
 
2012
 
2011
 
(dollars expressed in thousands)
Commitments to extend credit
$
667,215

 
683,186

Commercial and standby letters of credit
59,075

 
65,993

Total
$
726,290

 
749,179


122
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant, equipment, income-producing commercial properties or single-family residential properties. In the event of nonperformance, the Company may obtain and liquidate the collateral to recover amounts paid under its guarantees on these financial instruments.
Commercial and standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Most letters of credit extend for less than one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Upon issuance of the commitments, the Company typically holds marketable securities, certificates of deposit, inventory, real property or other assets as collateral supporting those commitments for which collateral is deemed necessary. The standby letters of credit at December 31, 2012 expire, at various dates, within five years.
Standby letters of credit issued by the FHLB on First Bank’s behalf were $25.0 million and $28.6 million at December 31, 2012 and 2011, respectively.
The reserve for letters of credit and unfunded loan commitments was $2.8 million at December 31, 2012 and 2011.
NOTE 17 – INCOME TAXES
The (benefit) provision for income taxes from continuing operations for the years ended December 31, 2012, 2011 and 2010 consists of the following:
 
2012
 
2011
 
2010
 
(dollars expressed in thousands)
Current (benefit) provision for income taxes:
 
 
 
 
 
Federal
$
—

 
902

 
(366
)
State
(32
)
 
(721
)
 
(71
)
 
(32
)
 
181

 
(437
)
Deferred benefit for income taxes:
 
 
 
 
 
Federal
5,615

 
(16,129
)
 
(56,871
)
State
1,023

 
(7,392
)
 
(13,974
)
 
6,638

 
(23,521
)
 
(70,845
)
(Decrease) increase in deferred tax asset valuation allowance
(6,745
)
 
12,686

 
75,396

Total
$
(139
)
 
(10,654
)
 
4,114

The effective rates of federal income taxes for the years ended December 31, 2012, 2011 and 2010 differ from the federal statutory rates of taxation as follows:
 
Years Ended December 31,
 
2012
 
2011
 
2010
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
(dollars expressed in thousands)
Income (loss) from continuing operations before benefit (provision) for income taxes and noncontrolling interest in loss of subsidiaries
$
31,365

 
 
 
$
(48,295
)
 
 
 
$
(197,699
)
 
 
Provision (benefit) for income taxes calculated at federal statutory income tax rates
$
10,978

 
35.0
 %
 
$
(16,904
)
 
35.0
 %
 
$
(69,195
)
 
35.0
 %
Effects of differences in tax reporting:
 
 
 
 
 
 
 
 
 
 
 
Tax-exempt interest income, net of tax preference adjustment
(135
)
 
(0.4
)
 
(203
)
 
0.4

 
(308
)
 
0.2

State income taxes
645

 
2.1

 
(4,800
)
 
9.9

 
(9,125
)
 
4.6

Bank owned life insurance, net of premium
11

 
—

 
10

 
—

 
3,144

 
(1.6
)
Noncontrolling investment in flow-through entity
104

 
0.3

 
1,033

 
(2.1
)
 
2,280

 
(1.2
)
Amortization of intangibles
—

 
—

 
175

 
(0.3
)
 
350

 
(0.2
)
(Decrease) increase in deferred tax asset valuation allowance, net of federal benefit
(11,811
)
 
(37.7
)
 
20,614

 
(42.7
)
 
70,668

 
(35.8
)
Reclassification of deferred tax asset valuation allowance from accumulated other comprehensive income to provision for income taxes
—

 
—

 
(10,466
)
 
21.7

 
6,816

 
(3.4
)
Expiration of net operating loss carryforwards
643

 
2.1

 
34

 
—

 
5

 
—

Other, net
(574
)
 
(1.8
)
 
(147
)
 
0.2

 
(521
)
 
0.3

(Benefit) provision for income taxes
$
(139
)
 
(0.4
)%
 
$
(10,654
)
 
22.1
 %
 
$
4,114

 
(2.1
)%

123
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2012 and 2011 were as follows:
 
December 31,
 
2012
 
2011
 
(dollars expressed in thousands)
Deferred tax assets:
 
 
 
Federal net operating loss carryforwards
$
209,190

 
188,726

State net operating loss carryforwards
65,882

 
58,326

Allowance for loan losses
37,825

 
56,649

Loans held for sale
2,032

 
1,745

Alternative minimum and general business tax credits
19,146

 
17,326

Interest on nonaccrual loans
12,551

 
15,359

Deferred compensation
3,573

 
3,593

Core deposit intangibles
2,706

 
3,111

Partnership and corporate investments
7,908

 
12,052

Deferred loan charge-offs and other fraud losses
4,341

 
13,875

Other real estate and repossessed assets
22,666

 
22,665

Accrued contingent liabilities
2,870

 
3,632

Depreciation on bank premises and equipment
1,202

 
486

State taxes
682

 
—

Other
12,692

 
13,205

Gross deferred tax assets
405,266

 
410,750

Valuation allowance
(376,224
)
 
(391,629
)
Deferred tax assets, net of valuation allowance
29,042

 
19,121

Deferred tax liabilities:
 
 
 
Servicing rights
2,632

 
2,418

Net fair value adjustment for available-for-sale investment securities
21,214

 
10,466

Deferred gain on reclassification of investment securities from available for sale to held to maturity
4,265

 
—

Equity investments
5,364

 
5,366

State taxes
—

 
4,577

Net deferred loan fees
1,903

 
2,779

Other
804

 
655

Deferred tax liabilities
36,182

 
26,261

Net deferred tax liabilities
$
(7,140
)
 
(7,140
)
The realization of the Company’s net deferred tax assets is based on the expectation of future taxable income and the utilization of tax planning strategies. The Company has a full valuation allowance against its net deferred tax assets at December 31, 2012 and 2011. The deferred tax asset valuation allowance was recorded in accordance with ASC Topic 740, “Income Taxes.” Under ASC Topic 740, the Company is required to assess whether it is “more likely than not” that some portion or all of its deferred tax assets will not be realized. Pursuant to ASC Topic 740, concluding that a deferred tax asset valuation allowance is not required is difficult when there is significant evidence which is objective and verifiable, such as the lack of recoverable taxes, excess of reversing deductible differences over reversing taxable differences and cumulative losses in recent years. If, in the future, the Company generates taxable income on a sustained basis, management may conclude the deferred tax asset valuation allowance is no longer required, which would result in the reversal of a portion or all of the deferred tax asset valuation allowance, which would be reflected as a benefit for income taxes in the consolidated statements of operations.
Changes in the deferred tax asset valuation allowance for the years ended December 31, 2012, 2011 and 2010 were as follows:
 
2012
 
2011
 
2010
 
(dollars expressed in thousands)
Balance, beginning of year
$
391,629

 
370,125

 
295,067

Reversal of deferred tax asset valuation allowance to provision for income taxes
(643
)
 
(115
)
 
(1,189
)
(Decrease) increase in deferred tax asset valuation allowance to provision for income taxes
(468
)
 
31,621

 
73,928

(Decrease) increase in deferred tax asset valuation allowance to accumulated other comprehensive income (loss)
(14,294
)
 
(10,002
)
 
2,319

Balance, end of year
$
376,224

 
391,629

 
370,125

At December 31, 2012 and 2011, the Company’s unrecognized tax benefits for uncertain tax positions, excluding interest and penalties, were $1.1 million and $1.2 million, respectively. A reconciliation of the beginning and ending balance of these unrecognized tax benefits for the years ended December 31, 2012 and 2011 is as follows:

124
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

 
2012
 
2011
 
(dollars expressed in thousands)
Balance, beginning of year
$
1,194

 
1,276

Additions:
 
 
 
Tax positions taken during the current year
217

 
232

Tax positions taken during the prior year
—

 
—

Reductions:
 
 
 
Tax positions taken during the prior year
(14
)
 
(8
)
Allocated to discontinued operations
—

 
—

Lapse of statute of limitations
(271
)
 
(306
)
Balance, end of year
$
1,126

 
1,194

At December 31, 2012 and 2011, the total amount of unrecognized tax benefits that would affect the provision for income taxes, prior to the consideration of the deferred tax asset valuation allowance, was $740,000 and $784,000, respectively. It is the Company’s policy to separately disclose any interest or penalties arising from the application of federal or state income taxes. Interest related to unrecognized tax benefits is included in interest expense and penalties related to unrecognized tax benefits are included in noninterest expense. At December 31, 2012 and 2011, interest accrued for uncertain tax positions was $116,000 and $136,000, respectively. The Company recorded a reduction to interest expense of $20,000, $44,000 and $1.0 million related to unrecognized tax benefits for the years ended December 31, 2012, 2011 and 2010, respectively. There were no penalties for uncertain tax positions accrued at December 31, 2012 and 2011, nor did the Company recognize any expense for such penalties in 2012, 2011 and 2010.
The Company continually evaluates the unrecognized tax benefits associated with its uncertain tax positions. It is reasonably possible that the total unrecognized tax benefits as of December 31, 2012 could decrease by approximately $234,000 by December 31, 2013 as a result of the lapse of statutes of limitations or potential settlements with the federal and state taxing authorities, of which the impact to the provision for income taxes, prior to the consideration of the deferred tax asset valuation allowance, is estimated to be approximately $153,000. It is also reasonably possible that this decrease could be substantially offset by new matters arising during the same period.
The Company files consolidated and separate income tax returns in the U.S. federal jurisdiction and in various state jurisdictions. Management of the Company believes the accrual for tax liabilities is adequate for all open audit years based on its assessment of many factors, including past experience and interpretations of tax law applied to the facts of each matter. This assessment relies on estimates and assumptions. The Company’s federal income tax returns through 2008 have been examined by the IRS. Years subsequent to 2008 could contain matters that could be subject to differing interpretations of applicable tax laws and regulations as they relate to the amount, timing or inclusion of revenue and expenses. The Company has recorded a tax benefit only for those positions that meet the “more likely than not” standard. The Company’s current estimate of the resolution of various state examinations, none of which are in process, is reflected in accrued income taxes; however, final settlement of the examinations or changes in the Company’s estimate may result in future income tax expense or benefit.
The Company is no longer subject to U.S. federal and Illinois income tax examination for the years prior to 2009 and is no longer subject to California, Florida, Missouri and various other state income tax examination by the tax authorities for the years prior to 2008. The Company had a federal tax examination for tax years through 2008, which was closed during 2010, and a California tax examination for the 2004 and 2005 tax years, which was closed during 2008. An Illinois tax examination of the 2007 and 2008 tax years was completed during 2011 with no changes to the returns as originally filed. A California tax examination for the 2005 and 2006 tax years was completed during 2012 with no changes to the amended returns as filed. The Company is currently under examination of the 2007 and 2008 tax years for its Texas returns. While the statute of limitations for the 2008 tax year has expired for the majority of the states in which the Company is subject to income tax, the Company generated net operating loss carryforwards in 2008 which, if realized, are subject to examination in order to validate the net operating loss carryforward. Thus, while closed, the 2008 tax year for these states is still subject to examination. The statute of limitations will expire for 2008 when the statute of limitations expires for the year the net operating loss carryforward is realized.
The Company recorded a benefit for income taxes of $10.5 million during the year ended December 31, 2011 related to an intraperiod tax allocation between other comprehensive income and loss from continuing operations, primarily driven by market appreciation in the Company’s investment securities portfolio.
The Company had an accumulated other comprehensive loss of $6.8 million related to the establishment of a deferred tax asset valuation allowance regarding the unrealized gain on certain interest rate swap agreements that were designated as cash flow hedges on certain loans, as further described in Note 8 to the consolidated financial statements. In the third quarter of 2010, the Company recorded a provision for incomes taxes of $6.8 million related to the expiration of the amortization period of the unrealized gain on the interest rate swap agreements with a corresponding increase to accumulated other comprehensive income.

125
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

At December 31, 2012 and 2011, the accumulation of prior years’ earnings representing tax bad debt deductions was $29.8 million. If these tax bad debt reserves were charged for losses other than bad debt losses, the Company would be required to recognize taxable income in the amount of the charge. It is not contemplated that such tax-restricted retained earnings will be used in a manner that would create federal income tax liabilities.
At December 31, 2012 and 2011, for federal income tax purposes, the Company had net operating loss carryforwards of approximately $597.7 million and $539.2 million, respectively. At December 31, 2012, the Company’s federal net operating loss carryforwards expire as follows:
 
(dollars expressed in thousands)
Year ending December 31:
 
2013 – 2016
$
—

2017 – 2020
5,256

2021 – 2026
43,105

2028 – 2032
549,325

Total
$
597,686

At December 31, 2012 and 2011, for state income tax purposes, the Company had net operating loss carryforwards of approximately $786.4 million and $702.8 million, respectively, and a related deferred tax asset of $65.9 million and $58.3 million, respectively. The state net operating loss carryforwards are primarily from the states of California, Florida, Illinois and Missouri and expire from 2019 to 2032.
NOTE 18 – EARNINGS (LOSS) PER COMMON SHARE
The following is a reconciliation of basic and diluted income (loss) per share for the years ended December 31, 2012, 2011 and 2010:
 
Years Ended December 31,
 
2012
 
2011
 
2010
 
(dollars in thousands, except share and per share data)
Basic:
 
 
 
 
 
Net income (loss) from continuing operations attributable to First Banks, Inc.
$
31,801

 
(34,691
)
 
(195,299
)
Preferred stock dividends declared and undeclared
(18,886
)
 
(17,908
)
 
(16,980
)
Accretion of discount on preferred stock
(3,554
)
 
(3,466
)
 
(3,381
)
Net income (loss) from continuing operations attributable to common stockholders
9,361

 
(56,065
)
 
(215,660
)
Net (loss) income from discontinued operations attributable to common stockholders
(5,523
)
 
(6,459
)
 
3,562

Net income (loss) available to First Banks, Inc. common stockholders
$
3,838

 
(62,524
)
 
(212,098
)
 
 
 
 
 
 
Weighted average shares of common stock outstanding
23,661

 
23,661

 
23,661

 
 
 
 
 
 
Basic earnings (loss) per common share – continuing operations
$
395.64

 
(2,369.48
)
 
(9,114.61
)
Basic (loss) earnings per common share – discontinued operations
$
(233.42
)
 
(272.98
)
 
150.54

Basic earnings (loss) per common share
$
162.22

 
(2,642.46
)
 
(8,964.07
)
 
 
 
 
 
 
Diluted:
 
 
 
 
 
Net income (loss) from continuing operations attributable to common stockholders
$
9,361

 
(56,065
)
 
(215,660
)
Net (loss) income from discontinued operations attributable to common stockholders
(5,523
)
 
(6,459
)
 
3,562

Net income (loss) available to First Banks, Inc. common stockholders
3,838

 
(62,524
)
 
(212,098
)
Effect of dilutive securities – Class A convertible preferred stock
—

 
—

 
—

Diluted income (loss) available to First Banks, Inc. common stockholders
$
3,838

 
(62,524
)
 
(212,098
)
 
 
 
 
 
 
Weighted average shares of common stock outstanding
23,661

 
23,661

 
23,661

Effect of dilutive securities – Class A convertible preferred stock
—

 
—

 
—

Weighted average diluted shares of common stock outstanding
23,661

 
23,661

 
23,661

 
 
 
 
 
 
Diluted earnings (loss) per common share – continuing operations
$
395.64

 
(2,369.48
)
 
(9,114.61
)
Diluted (loss) earnings per common share – discontinued operations
$
(233.42
)
 
(272.98
)
 
150.54

Diluted earnings (loss) per common share
$
162.22

 
(2,642.46
)
 
(8,964.07
)

126
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

NOTE 19 – BUSINESS SEGMENT RESULTS
The Company’s business segment is First Bank. The reportable business segment is consistent with the management structure of the Company, First Bank and the internal reporting system that monitors performance. First Bank provides similar products and services in its defined geographic areas through its branch network. The products and services offered include a broad range of commercial and personal deposit products, including demand, savings, money market and time deposit accounts. In addition, First Bank markets combined basic services for various customer groups, including packaged accounts for more affluent customers, and sweep accounts, lock-box deposits and cash management products for commercial customers. First Bank also offers consumer and commercial loans. Consumer lending includes residential real estate, home equity and installment lending. Commercial lending includes commercial, financial and agricultural loans, real estate construction and development loans, commercial real estate loans and small business lending. Other financial services include mortgage banking, debit cards, brokerage services, internet banking, remote deposit, ATMs, telephone banking, safe deposit boxes, and trust and private banking services. The revenues generated by First Bank and its subsidiaries consist primarily of interest income generated from the loan and investment security portfolios, service charges and fees generated from deposit products and services, and fees generated by the Company’s mortgage banking and trust and private banking business units. The Company’s products and services are offered to customers primarily within its geographic areas, which include eastern Missouri, southern Illinois, southern and northern California, and Florida’s Manatee, Pinellas, Hillsborough and Pasco counties. Certain loan products are available nationwide.
The business segment results are consistent with the Company’s internal reporting system and, in all material respects, with GAAP and practices predominant in the banking industry. Such principles and practices are summarized in Note 1 to the consolidated financial statements. The business segment results are summarized as follows:
 
First Bank
 
Corporate, Other and Intercompany Reclassifications
 
Consolidated Totals
 
2012
 
2011
 
2010
 
2012
 
2011
 
2010
 
2012
 
2011
 
2010
 
(dollars expressed in thousands)
Balance sheet information:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities
$
2,675,280

 
2,470,704

 
1,483,659

 
—

 
—

 
—

 
2,675,280

 
2,470,704

 
1,483,659

Loans, net of net deferred loan fees
2,930,747

 
3,284,279

 
4,492,284

 
—

 
—

 
—

 
2,930,747

 
3,284,279

 
4,492,284

FRB and FHLB stock
27,329

 
27,078

 
30,121

 
—

 
—

 
—

 
27,329

 
27,078

 
30,121

Goodwill and other intangible assets
125,267

 
125,267

 
129,054

 
—

 
—

 
—

 
125,267

 
125,267

 
129,054

Assets held for sale
—

 
—

 
2,266

 
—

 
—

 
—

 
—

 
—

 
2,266

Assets of discontinued operations
6,706

 
6,913

 
43,532

 
—

 
—

 
—

 
6,706

 
6,913

 
43,532

Total assets
6,495,226

 
6,593,515

 
7,361,706

 
13,900

 
15,398

 
16,422

 
6,509,126

 
6,608,913

 
7,378,128

Deposits
5,495,624

 
5,625,889

 
6,462,068

 
(2,777
)
 
(2,834
)
 
(3,653
)
 
5,492,847

 
5,623,055

 
6,458,415

Other borrowings
26,025

 
51,170

 
31,761

 
—

 
—

 
—

 
26,025

 
51,170

 
31,761

Subordinated debentures
—

 
—

 
—

 
354,133

 
354,057

 
353,981

 
354,133

 
354,057

 
353,981

Liabilities held for sale
—

 
—

 
23,406

 
—

 
—

 
—

 
—

 
—

 
23,406

Liabilities of discontinued operations
155,711

 
174,737

 
94,184

 
—

 
—

 
—

 
155,711

 
174,737

 
94,184

Stockholders’ equity
751,252

 
680,625

 
693,458

 
(451,293
)
 
(416,954
)
 
(386,163
)
 
299,959

 
263,671

 
307,295




127
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

 
First Bank
 
Corporate, Other and Intercompany Reclassifications
 
Consolidated Totals
 
2012
 
2011
 
2010
 
2012
 
2011
 
2010
 
2012
 
2011
 
2010
 
(dollars expressed in thousands)
Income statement information:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
$
202,444

 
233,211

 
312,333

 
121

 
85

 
135

 
202,565

 
233,296

 
312,468

Interest expense
15,250

 
30,927

 
63,027

 
14,838

 
13,612

 
12,993

 
30,088

 
44,539

 
76,020

Net interest income (loss)
187,194

 
202,284

 
249,306

 
(14,717
)
 
(13,527
)
 
(12,858
)
 
172,477

 
188,757

 
236,448

Provision for loan losses
2,000

 
69,000

 
214,000

 
—

 
—

 
—

 
2,000

 
69,000

 
214,000

Net interest income (loss) after provision for loan losses
185,194

 
133,284

 
35,306

 
(14,717
)
 
(13,527
)
 
(12,858
)
 
170,477

 
119,757

 
22,448

Noninterest income
65,801

 
61,975

 
78,453

 
405

 
219

 
39

 
66,206

 
62,194

 
78,492

Amortization of intangible assets
—

 
3,024

 
3,292

 
—

 
—

 
—

 
—

 
3,024

 
3,292

Other noninterest expense
203,808

 
227,600

 
294,708

 
1,510

 
(378
)
 
639

 
205,318

 
227,222

 
295,347

Income (loss) from continuing operations before provision (benefit) for income taxes
47,187

 
(35,365
)
 
(184,241
)
 
(15,822
)
 
(12,930
)
 
(13,458
)
 
31,365

 
(48,295
)
 
(197,699
)
Provision (benefit) for income taxes
230

 
(10,608
)
 
4,286

 
(369
)
 
(46
)
 
(172
)
 
(139
)
 
(10,654
)
 
4,114

Net income (loss) from continuing operations, net of tax
46,957

 
(24,757
)
 
(188,527
)
 
(15,453
)
 
(12,884
)
 
(13,286
)
 
31,504

 
(37,641
)
 
(201,813
)
(Loss) income from discontinued operations, net of tax
(5,523
)
 
(6,459
)
 
3,562

 
—

 
—

 
—

 
(5,523
)
 
(6,459
)
 
3,562

Net income (loss)
41,434

 
(31,216
)
 
(184,965
)
 
(15,453
)
 
(12,884
)
 
(13,286
)
 
25,981

 
(44,100
)
 
(198,251
)
Net loss attributable to noncontrolling interest in subsidiary
(297
)
 
(2,950
)
 
(6,514
)
 
—

 
—

 
—

 
(297
)
 
(2,950
)
 
(6,514
)
Net income (loss) attributable to First Banks, Inc.
$
41,731

 
(28,266
)
 
(178,451
)
 
(15,453
)
 
(12,884
)
 
(13,286
)
 
26,278

 
(41,150
)
 
(191,737
)

NOTE 20 – TRANSACTIONS WITH RELATED PARTIES
Outside of normal customer relationships, no directors or officers of the Company, no shareholders holding over 5% of the Company’s voting securities and no corporations or firms with which such persons or entities are associated currently maintain or have maintained, since the beginning of the last full fiscal year, any significant business or personal relationships with the Company or its subsidiaries, other than that which arises by virtue of such position or ownership interest in the Company or its subsidiaries, except as described in the following paragraphs.
First Services, L.P. First Services, L.P. (First Services), a limited partnership indirectly owned by the Company’s Chairman and members of his immediate family, including Mr. Michael Dierberg, Vice Chairman of the Company, provides information technology, item processing and various related services to the Company and First Bank. Fees paid under agreements with First Services were $21.1 million, $24.5 million and $26.2 million for the years ended December 31, 2012, 2011 and 2010, respectively. First Services leases information technology and other equipment from First Bank. First Services paid First Bank rental fees for the use of such equipment of $1.3 million, $1.9 million and $2.5 million during the years ended December 31, 2012, 2011 and 2010, respectively. In addition, First Services paid $1.8 million, $1.8 million and $1.9 million for the years ended December 31, 2012, 2011 and 2010, respectively, in rental payments to First Bank for occupancy of certain First Bank premises from which business is conducted.
First Services entered into an Affiliate Services Agreement with the Company and First Bank effective January 2009. The Affiliate Services Agreement relates to various services provided to First Services, including certain human resources, payroll, employee benefit and training services, accounting services, insurance services and vendor payment processing services. Fees accrued under the Affiliate Services Agreement by First Services were $183,000, $177,000 and $157,000 for the years ended December 31, 2012, 2011 and 2010, respectively.
First Brokerage America, L.L.C. First Brokerage America, L.L.C. (First Brokerage), a limited liability company indirectly owned by the Company’s Chairman and members of his immediate family, including Mr. Michael Dierberg, Vice Chairman of the Company, received approximately $4.3 million, $5.3 million and $5.0 million for the years ended December 31, 2012, 2011 and 2010, respectively, in gross commissions paid by unaffiliated third-party companies. The commissions received primarily resulted from sales of annuities, securities and other insurance products to customers of First Bank. First Brokerage paid approximately $401,000, $491,000 and $312,000 for the years ended December 31, 2012, 2011 and 2010, respectively, to First Bank in rental payments for occupancy of certain First Bank premises from which brokerage business is conducted.
Dierbergs Markets, Inc. First Bank leases certain of its in-store branch offices and automated teller machine (ATM) sites from Dierbergs Markets, Inc., a grocery store chain headquartered in St. Louis, Missouri that is owned and operated by the brother of

128
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

the Company’s Chairman and members of his immediate family. Total rent expense incurred by First Bank under the lease obligation contracts was $498,000, $474,000 and $462,000 for the years ended December 31, 2012, 2011 and 2010, respectively.
First Capital America, Inc. / FB Holdings, LLC. The Company formed FB Holdings, a limited liability company organized in the state of Missouri, in May 2008. FB Holdings operates as a majority-owned subsidiary of First Bank and was formed for the primary purpose of holding and managing certain nonperforming loans and assets to allow the liquidation of such assets at a time that is more economically advantageous to First Bank and to permit an efficient vehicle for the investment of additional capital by the Company’s sole owner of its Class A and Class B preferred stock. First Bank contributed cash of $9.0 million and nonperforming loans and assets with a fair value of approximately $133.3 million and FCA, a corporation owned by the Company’s Chairman and members of his immediate family, including Mr. Michael Dierberg, Vice Chairman of the Company, contributed cash of $125.0 million to FB Holdings during 2008. As a result, First Bank owned 53.23% and FCA owned the remaining 46.77% of FB Holdings as of December 31, 2012. The contribution of cash by FCA is reflected as a component of stockholders’ equity in the consolidated balance sheets and, consequently, increased the Company’s and First Bank’s regulatory capital ratios under then-existing regulatory guidelines, subject to certain limitations.
FB Holdings receives various services provided by First Bank, including loan servicing and special assets services as well as various other financial, legal, human resources and property management services. Fees paid under the agreement by FB Holdings to First Bank were $124,000, $194,000 and $321,000 for the years ended December 31, 2012, 2011 and 2010, respectively.
Investors of America Limited Partnership. In March 2011, the Company entered into a $5.0 million Credit Agreement with Investors of America, LP, as further described in Note 11 to the consolidated financial statements. Investors of America, LP is a Nevada limited partnership that was created by and for the benefit of the Company’s Chairman and members of his immediate family, including Mr. Michael Dierberg, Vice Chairman of the Company. There were no balances outstanding under this Credit Agreement during the period from its inception in March 2011 to its maturity date on December 31, 2012.
On March 20, 2013, the Company entered into a New Credit Agreement with Investors of America, LP, as further described in Note 25 to the consolidated financial statements.
Loans to Directors and/or their Affiliates. First Bank has had in the past, and may have in the future, loan transactions in the ordinary course of business with its directors and/or their affiliates. These loan transactions have been made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unaffiliated persons and, except as described below, did not involve more than the normal risk of collectability or present other unfavorable features. Loans to directors, their affiliates and executive officers of the Company were $9.1 million and $23.4 million at December 31, 2012 and 2011, respectively. First Bank does not extend credit to its officers or to officers of the Company, except extensions of credit secured by mortgages on personal residences, loans to purchase automobiles, personal credit card accounts and deposit account overdraft protection under a plan whereby a credit limit has been established in accordance with First Bank’s standard credit criteria.
Loans to directors, their affiliates and executive officers of the Company at December 31, 2011 included a $15.6 million multi-family real estate loan to a limited liability company which was 50% owned by the brother-in-law of Mr. Douglas H. Yaeger, a director of the Company. The loan had been paid as agreed and was not reported as past due, nonaccrual or restructured as of December 31, 2011. However, based on current economic and financial considerations, management had classified this loan as special mention in the Company’s loan watch list as of December 31, 2011. On September 28, 2012, the then current balance of $15.4 million was repaid in full.
Loans to directors, their affiliates and executive officers of the Company at December 31, 2011 also included two credit relationships aggregating $1.2 million to companies which were approximately 16% owned by the brother-in-law of Mr. Yaeger, including a $328,000 credit relationship that was 60 - 89 days past due. Both loans had been classified by management as problem loans in the Company’s loan watch list as of December 31, 2011 and were subsequently placed on nonaccrual status during 2012. On December 14, 2012, First Bank sold these nonaccrual loans for an aggregate purchase price of $785,000 to a company partially owned by the brother-in-law of Mr. Yaeger.
Depositary Accounts of Directors and/or their Affiliates. Certain directors and/or their affiliates maintain funds on deposit with First Bank in the ordinary course of business. These deposit transactions include demand, savings and time accounts, and have been established on the same terms, including interest rates, as those prevailing at the time for comparable transactions with unaffiliated persons.

129
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

NOTE 21 – EMPLOYEE BENEFITS
401(k) Plan. The Company’s 401(k) plan is a self-administered savings and incentive plan covering substantially all employees. Employer match contributions are determined annually under the plan by the Company’s Board of Directors. Employee contributions were limited to $17,000 of gross compensation for 2012. Total employer contributions under the plan were $2.3 million, $2.3 million and zero for the years ended December 31, 2012, 2011 and 2010, respectively. The plan assets are held and managed under a trust agreement with First Bank’s trust department.
Nonqualified Deferred Compensation Plan. The Company’s nonqualified deferred compensation plan (the NQDC Plan), which covers a select group of employees, is administered by an independent third party. The NQDC Plan is exempt from the participation, vesting, funding and fiduciary requirements of the Employee Retirement Income Security Act of 1974. Although the NQDC Plan allows the Company to credit the accounts of any participant with discretionary contributions, no such discretionary contributions have been made since the NQDC Plan’s inception. Participants may contribute from 1% to 25% of their salary and up to 100% of their bonuses on a pre-tax basis. The Company elected to suspend the availability of deferrals under the NQDC Plan for the years ended December 31, 2011 and 2010 but reinstated the availability of such deferrals beginning in January 2012.
Balances outstanding under the NQDC Plan, which are reflected in accrued and other liabilities in the consolidated balance sheets, were $6.4 million and $6.5 million at December 31, 2012 and 2011, respectively. The Company recognized salaries and employee benefits expense related to the NQDC Plan of $614,000 and $685,000 for the years ended December 31, 2012 and 2010, respectively, resulting from net earnings incurred by participants on the underlying investments in the plan. The Company recognized a decrease in salaries and employee benefits expense related to the NQDC Plan of $64,000 for the year ended December 31, 2011 resulting from net losses incurred by participants on the underlying investments in the plan.
Noncontributory Defined Benefit Pension Plan. The Company has a noncontributory defined benefit pension plan covering certain current and former employees of a bank holding company acquired by the Company in 1994 and subsequently merged with and into the Company on December 31, 2002. The Company discontinued the accumulation of benefits under the Plan in 1994, and as such, there is no longer any service cost being accrued by Plan participants.
A summary of the Plan’s change in the projected benefit obligation and change in the fair value of Plan assets for the years ended December 31, 2012 and 2011 and amounts recognized in the Company’s consolidated balance sheets as of December 31, 2012 and 2011 is as follows:
 
2012
 
2011
 
(dollars expressed in thousands)
Change in Projected Benefit Obligation:
 
 
 
Projected benefit obligation at beginning of year
$
12,467

 
12,334

Interest cost
516

 
587

Actuarial loss
1,765

 
970

Benefit payments
(761
)
 
(1,424
)
Projected benefit obligation at end of year
$
13,987

 
12,467

Change in Fair Value of Plan Assets:
 
 
 
Fair value at beginning of year
$
8,848

 
9,210

Actual return on plan assets
666

 
774

Employer contributions
666

 
288

Benefit payments
(761
)
 
(1,424
)
Fair value at end of year
$
9,419

 
8,848

Amount Recognized in Consolidated Balance Sheets:
 
 
 
Accrued pension liability
$
4,568

 
3,619

Amounts Recognized in Accumulated Other Comprehensive Income:
 
 
 
Loss
$
(5,940
)
 
(4,370
)
Deferred tax liability
2,396

 
1,737

Loss, net of tax
$
(3,544
)
 
(2,633
)
The Company’s accrued pension liability of $4.6 million and $3.6 million at December 31, 2012 and 2011, respectively, represents the difference between the fair value of the Plan assets and the projected benefit obligation of the Plan, and is reflected in accrued expenses and other liabilities in the consolidated balance sheets.

130
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

The following table reflects the weighted average assumptions used to determine the net periodic benefit cost for the years ended December 31, 2012 and 2011:
 
2012
 
2011
Discount rate
4.28
%
 
4.93
%
Expected long-term rate of return on Plan assets
7.00

 
7.00

The discount rate used to determine benefit obligations was 3.31% and 4.28% for the years ended December 31, 2012 and 2011, respectively.
A summary of the components of net periodic benefit cost for the years ended December 31, 2012 and 2011 is as follows:
 
2012
 
2011
 
(dollars expressed in thousands)
Interest cost
$
516

 
587

Expected return on Plan assets
(617
)
 
(625
)
Amortization of net actuarial loss
145

 
109

Net periodic benefit cost
$
44

 
71

Amounts recognized in accumulated other comprehensive income consist of:
 
2012
 
2011
 
(dollars expressed in thousands)
Net loss
$
1,715

 
821

Amortization of net actuarial loss
(145
)
 
(109
)
Total recognized in accumulated other comprehensive income
$
1,570

 
712

The Plan’s investment strategy is focused on maximizing asset returns. The target allocations for Plan assets are 52% fixed income, 40% equity securities and 8% cash. Asset allocations can fluctuate between acceptable ranges commensurate with market volatility. Debt securities include U.S. Treasuries, investment-grade corporate bonds of companies from diversified industries and mortgage-backed securities. Equity securities primarily include investments in large capitalization companies located in the United States.
The fair value of Plan assets at December 31, 2012 and 2011 was comprised of the following:
 
Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Fair Value
 
(dollars expressed in thousands)
Plan Assets - December 31, 2012:
 
 
 
 
 
 
 
Cash and cash equivalents
$
361

 
—

 
—

 
361

Equity securities
—

 
3,959

 
—

 
3,959

Debt securities
—

 
4,603

 
—

 
4,603

Other
—

 
496

 
—

 
496

Total
$
361

 
9,058

 
—

 
9,419

Plan Assets - December 31, 2011:
 
 
 
 
 
 
 
Cash and cash equivalents
$
287

 
—

 
—

 
287

Equity securities
—

 
3,635

 
—

 
3,635

Debt securities
—

 
4,463

 
—

 
4,463

Other
—

 
463

 
—

 
463

Total
$
287

 
8,561

 
—

 
8,848

Equity and debt securities included in Level 1 are valued using quoted market prices. Where quoted market prices are unavailable, the fair value of equity and debt securities included in Level 2 is based on quoted market prices of comparable instruments obtained from independent pricing vendors based on recent trading activity and other relevant information.

131
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

The Company expects to contribute $360,000 to the Plan in 2013. Pension benefit payments are expected to be paid to Plan participants by the Plan as follows:
 
(dollars expressed in thousands)
Year ending December 31:
 
2013
$
821

2014
834

2015
849

2016
849

2017
844

2018 – 2022
4,256


NOTE 22 – DISTRIBUTION OF EARNINGS OF FIRST BANK
First Bank is restricted by various state and federal regulations as to the amount of dividends that are available for payment to the Company. Under the most restrictive of these requirements, the payment of dividends is limited in any calendar year to the net profit of the current year combined with the retained net profits of the preceding two years. Permission must be obtained for dividends exceeding these amounts. Based on the current level of earnings, permission must be obtained for any payment of dividends from First Bank to the Company. Furthermore, First Bank, under its agreement with the MDOF and the FRB, has agreed, among other things, not to declare or pay any dividends or make certain other payments without the prior consent of the MDOF and the FRB, as further described in Note 14 to the consolidated financial statements.
NOTE 23 – PARENT COMPANY ONLY FINANCIAL INFORMATION
Condensed balance sheets of First Banks, Inc. as of December 31, 2012 and 2011 and condensed statements of operations and cash flows for the years ended December 31, 2012, 2011 and 2010 are shown below:
CONDENSED BALANCE SHEETS
 
December 31,
 
2012
 
2011
 
(dollars expressed in thousands)
Assets
 
 
 
Cash deposited in First Bank (unrestricted cash)
$
2,744

 
2,801

Cash deposited in unaffiliated financial institution (restricted cash)
—

 
2,008

Total cash
2,744

 
4,809

Investment in common securities - TRuPS
10,678

 
10,678

Investment in subsidiaries
657,838

 
586,899

Other assets
3,583

 
3,067

Total assets
$
674,843

 
605,453

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Subordinated debentures
$
354,133

 
354,057

Derivative instruments
—

 
807

Accrued interest payable
47,878

 
33,179

Dividends payable
61,931

 
43,045

Accrued expenses and other liabilities
4,597

 
4,646

Total liabilities
468,539

 
435,734

First Banks, Inc. stockholders’ equity
206,304

 
169,719

Total liabilities and stockholders’ equity
$
674,843

 
605,453




132
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

CONDENSED STATEMENTS OF OPERATIONS
 
Years Ended December 31,
 
2012
 
2011
 
2010
 
(dollars expressed in thousands)
Income:
 
 
 
 
 
Management fees from subsidiaries
$
3

 
28

 
193

Net loss on derivative instruments
(43
)
 
(194
)
 
(2,929
)
Other
578

 
509

 
3,123

Total income
538

 
343

 
387

Expense:
 
 
 
 
 
Interest
14,847

 
13,623

 
13,012

Other
1,506

 
(374
)
 
809

Total expense
16,353

 
13,249

 
13,821

Loss before benefit for income taxes and equity in undistributed earnings (losses) of subsidiaries
(15,815
)
 
(12,906
)
 
(13,434
)
Benefit for income taxes
(348
)
 
(46
)
 
(171
)
Loss before equity in undistributed earnings (losses) of subsidiaries
(15,467
)
 
(12,860
)
 
(13,263
)
Equity in undistributed earnings (losses) of subsidiaries
41,745

 
(28,290
)
 
(178,474
)
Net income (loss) attributable to First Banks, Inc.
$
26,278

 
(41,150
)
 
(191,737
)

CONDENSED STATEMENTS OF CASH FLOWS
 
Years Ended December 31,
 
2012
 
2011
 
2010
 
(dollars expressed in thousands)
Cash flows from operating activities:
 
 
 
 
 
Net income (loss) attributable to First Banks, Inc.
$
26,278

 
(41,150
)
 
(191,737
)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
 
 
 
 
 
Net (income) loss of subsidiaries
(41,745
)
 
28,290

 
178,474

Other, net
15,410

 
12,042

 
6,012

Net cash used in operating activities
(57
)
 
(818
)
 
(7,251
)
Cash flows from investing activities:
 
 
 
 
 
Decrease in available-for-sale investment securities
—

 
—

 
3,570

Net cash provided by investing activities
—

 
—

 
3,570

Cash flows from financing activities:
 
 
 
 
 
Capital contributions to subsidiaries
—

 
—

 
(100
)
Payment of preferred stock dividends
—

 
—

 
—

Net cash used in financing activities
—

 
—

 
(100
)
Net decrease in unrestricted cash
(57
)
 
(818
)
 
(3,781
)
Unrestricted cash, beginning of year
2,801

 
3,619

 
7,400

Unrestricted cash, end of year
$
2,744

 
2,801

 
3,619

Noncash investing activities:
 
 
 
 
 
Cash paid for interest
$
—

 
—

 
—

The parent company’s unrestricted cash was $2.7 million and $2.8 million at December 31, 2012 and 2011, respectively. The parent company’s restricted cash of $2.0 million at December 31, 2011 was returned in February 2012, thereby increasing the parent company’s unrestricted cash. On March 24, 2011, the Company entered into a Credit Agreement that provided for a $5.0 million secured revolving line of credit to be utilized for general working capital needs, as further described in Note 11 and Note 20 to the consolidated financial statements. There were no balances outstanding under the Credit Agreement during the period from its inception in March 2011 to its maturity date on December 31, 2012. On March 20, 2013, the Company entered into a New Credit Agreement that provides for a $5.0 million secured revolving line of credit to be utilized for general working capital needs, as further described in Note 25 to the consolidated financial statements. This borrowing arrangement is intended to supplement, on a contingent basis, the parent company’s overall level of unrestricted cash to cover the parent company’s projected operating expenses should the parent company's existing cash resources become insufficient in the future.
The Company’s obligations related to interest payments on its outstanding junior subordinated debentures relating to its $345.0 million of trust preferred securities and dividends on Class C Preferred Stock and Class D Preferred Stock have been deferred.

133
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

The Company has until September 2014 to pay the cumulative deferred interest payments on its outstanding junior subordinated debentures without triggering a payment default or penalty. Such payment default or penalty would likely have a material adverse effect on the Company’s business, financial condition and/or results of operations.
NOTE 24 – CONTINGENT LIABILITIES
In the ordinary course of business, the Company and its subsidiaries become involved in legal proceedings, including litigation arising out of the Company’s efforts to collect outstanding loans. It is not uncommon for collection efforts to lead to so-called “lender liability” suits in which borrowers may assert various claims against the Company. From time to time, the Company is party to other legal matters arising in the normal course of business. While some matters pending against the Company specify damages claimed by plaintiffs, others do not seek a specified amount of damages or are at very early stages of the legal process. The Company records a loss accrual for all legal matters for which it deems a loss is probable and can be reasonably estimated. Management, after consultation with legal counsel, believes the ultimate resolution of these existing proceedings is not reasonably likely to have a material adverse effect on the business, financial condition or results of operations of the Company and/or its subsidiaries and the range of possible additional loss in excess of amounts accrued is not material.
The Company and First Bank have entered into agreements with the FRB and MDOF, as further described in Note 14 to the consolidated financial statements.
NOTE 25 – SUBSEQUENT EVENTS
On March 20, 2013, the Company entered into a New Credit Agreement with Investors of America, LP, as further described in Note 11 to our consolidated financial statements. The agreement provides for a $5.0 million secured revolving line of credit to be utilized for general working capital needs. This borrowing arrangement, which has a maturity date of March 31, 2014 and an interest rate of LIBOR plus 300 basis points, is intended to supplement, on a contingent basis, the parent company’s overall level of unrestricted cash to cover the parent company’s projected operating expenses should the parent company’s existing cash resources become insufficient in the future.

134
FIRST BANKS, INC.
QUARTERLY CONDENSED FINANCIAL DATA — UNAUDITED
 


 
2012 Quarter Ended
 
March 31
 
June 30
 
September 30
 
December 31
 
(dollars expressed in thousands, except per share data)
Interest income
$
52,341

 
51,608

 
50,536

 
48,080

Interest expense
8,285

 
7,738

 
7,314

 
6,751

Net interest income
44,056

 
43,870

 
43,222

 
41,329

Provision for loan losses
2,000

 
—

 
—

 
—

Net interest income after provision for loan losses
42,056

 
43,870

 
43,222

 
41,329

Noninterest income
17,104

 
15,914

 
16,696

 
16,492

Noninterest expense
50,746

 
51,100

 
50,016

 
53,456

Income from continuing operations before provision (benefit) for income taxes
8,414

 
8,684

 
9,902

 
4,365

Provision (benefit) for income taxes
95

 
121

 
(138
)
 
(217
)
Net income from continuing operations, net of tax
8,319

 
8,563

 
10,040

 
4,582

Loss from discontinued operations before benefit for income taxes
(1,481
)
 
(1,440
)
 
(1,351
)
 
(1,251
)
Benefit for income taxes
—

 
—

 
—

 
—

Loss from discontinued operations, net of tax
(1,481
)
 
(1,440
)
 
(1,351
)
 
(1,251
)
Net income
6,838

 
7,123

 
8,689

 
3,331

Less: net (loss) income attributable to noncontrolling interest in subsidiary
(60
)
 
(385
)
 
216

 
(68
)
Net income attributable to First Banks, Inc.
$
6,898

 
7,508

 
8,473

 
3,399

Basic and diluted earnings (loss) per common share:
 
 
 
 
 
 
 
Earnings (loss) per common share from continuing operations
$
121.23

 
142.63

 
176.57

 
(44.79
)
Loss per common share from discontinued operations
$
(62.60
)
 
(60.85
)
 
(57.09
)
 
(52.88
)
Earnings (loss) per common share
$
58.63

 
81.78

 
119.48

 
(97.67
)


 
2011 Quarter Ended
 
March 31
 
June 30
 
September 30
 
December 31
 
(dollars expressed in thousands, except per share data)
Interest income
$
62,169

 
58,997

 
56,701

 
55,429

Interest expense
13,092

 
11,840

 
10,458

 
9,149

Net interest income
49,077

 
47,157

 
46,243

 
46,280

Provision for loan losses
10,000

 
23,000

 
19,000

 
17,000

Net interest income after provision for loan losses
39,077

 
24,157

 
27,243

 
29,280

Noninterest income
14,120

 
15,196

 
16,979

 
15,899

Noninterest expense
57,462

 
55,917

 
56,785

 
60,082

Loss from continuing operations before provision (benefit) for income taxes
(4,265
)
 
(16,564
)
 
(12,563
)
 
(14,903
)
Provision (benefit) for income taxes
52

 
72

 
(11,581
)
 
803

Net loss from continuing operations, net of tax
(4,317
)
 
(16,636
)
 
(982
)
 
(15,706
)
Loss from discontinued operations before benefit for income taxes
(1,766
)
 
(1,340
)
 
(1,760
)
 
(1,593
)
Benefit for income taxes
—

 
—

 
—

 
—

Loss from discontinued operations, net of tax
(1,766
)
 
(1,340
)
 
(1,760
)
 
(1,593
)
Net loss
(6,083
)
 
(17,976
)
 
(2,742
)
 
(17,299
)
Less: net income (loss) attributable to noncontrolling interest in subsidiary
65

 
(927
)
 
(668
)
 
(1,420
)
Net loss attributable to First Banks, Inc.
$
(6,148
)
 
(17,049
)
 
(2,074
)
 
(15,879
)
Basic and diluted loss per common share:
 
 
 
 
 
 
 
Loss per common share from continuing operations
$
(406.77
)
 
(888.37
)
 
(240.62
)
 
(833.72
)
Loss per common share from discontinued operations
$
(74.64
)
 
(56.63
)
 
(74.39
)
 
(67.32
)
Loss per common share
$
(481.41
)
 
(945.00
)
 
(315.01
)
 
(901.04
)



135
FIRST BANKS, INC.
INVESTOR INFORMATION
 


FIRST BANKS, INC. TRUST PREFERRED SECURITIES
The preferred securities of First Preferred Capital Trust IV are traded on the New York Stock Exchange with the ticker symbol “FBSPrA.” The preferred securities of First Preferred Capital Trust IV are represented by a global security that has been deposited with and registered in the name of The Depository Trust Company, New York, New York (DTC). The beneficial ownership interests of these preferred securities are recorded through the DTC book-entry system. The high and low preferred securities prices and the dividends declared for 2012 and 2011 are summarized as follows:
First Preferred Capital Trust IV (Issue Date – April 2003) – FBSPrA
 
2012
 
Distributions Declared (1)
 
2011
 
Distributions Declared (1)
 
High
 
Low
 
 
High
 
Low
 
First quarter
$
18.18

 
9.90

 
$
0.509375

 
$
14.20

 
9.72

 
$
0.509375

Second quarter
21.40

 
16.75

 
0.509375

 
13.25

 
10.27

 
0.509375

Third quarter
23.65

 
18.81

 
0.509375

 
12.00

 
7.20

 
0.509375

Fourth quarter
24.48

 
22.70

 
0.509375

 
9.85

 
6.70

 
0.509375

 
 
 
 
 
$
2.037500

 
 
 
 
 
$
2.037500

 
(1)
Amounts exclude the additional accrued interest on any cumulative unpaid dividends following the announcement of the deferral of such dividend payments in August 2009.

FOR INFORMATION CONCERNING FIRST BANKS, INC., PLEASE CONTACT:
Terrance M. McCarthy
President and Chief Executive Officer
135 North Meramec
Mail Code – M1-821-014
Clayton, Missouri 63105
Telephone – (314) 854-4600
www.firstbanks.com 
Lisa K. Vansickle
Executive Vice President and Chief Financial Officer
135 North Meramec
Mail Code – M1-821-014
Clayton, Missouri 63105
Telephone – (314) 854-4600
www.firstbanks.com 

TRANSFER AGENT:
Computershare Investor Services, LLC
2 North LaSalle Street
Chicago, Illinois 60602
Telephone – (312) 588-4990www.computershare.com
 




136


SIGNATURES
     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
FIRST BANKS, INC.
 
 
 
 
 
By: 
/s/ 
Terrance M. McCarthy
 
 
 
Terrance M. McCarthy
 
 
 
President and Chief Executive Officer
 
 
 
(Principal Executive Officer)
Date: March 26, 2013
     Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
Signatures
Title
Date
 
/s/ James F. Dierberg
Chairman of the Board of Directors
March 26, 2013
James F. Dierberg
 
 
 
/s/ Michael J. Dierberg
Vice Chairman of the Board of Directors
March 26, 2013
Michael J. Dierberg
 
 
 
/s/ Terrance M. McCarthy
Director and President
March 26, 2013
Terrance M. McCarthy
and Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
/s/ Allen H. Blake
Director
March 26, 2013
Allen H. Blake
 
 
 
/s/ James A. Cooper
Director
March 26, 2013
James A. Cooper
 
 
 
/s/ John S. Poelker
Director
March 26, 2013
John S. Poelker
 
 
 
/s/ Guy Rounsaville, Jr.
Director
March 26, 2013
Guy Rounsaville, Jr.
 
 
 
/s/ David L. Steward
Director
March 26, 2013
David L. Steward
 
 
 
/s/ Douglas H. Yaeger
Director
March 26, 2013
Douglas H. Yaeger
 
 
 
/s/ Lisa K. Vansickle
Executive Vice President
March 26, 2013
Lisa K. Vansickle
and Chief Financial Officer
 
 
(Principal Financial and Accounting Officer)
 

137


INDEX TO EXHIBITS
Exhibit Number
 
Description
3.1
 
Restated Articles of Incorporation of the Company, as amended (incorporated herein by reference to Exhibit 3(i) to the Company’s Annual Report on Form 10-K for the year ended December 31, 1993).
 
 
 
3.2
 
Certificate of Designation of First Banks, Inc. with respect to Class C Fixed Rate Cumulative Perpetual Preferred Stock dated as of December 24, 2008 (incorporated herein by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K dated December 31, 2008).
 
 
 
3.3
 
Certificate of Designation of First Banks, Inc. with respect to Class D Fixed Rate Cumulative Perpetual Preferred Stock dated as of December 24, 2008 (incorporated herein by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K dated December 31, 2008).
 
 
 
3.4
 
By-Laws of the Company (incorporated herein by reference to Exhibit 3.2 to Amendment No. 2 to the Company’s Registration Statement on Form S-1, File No. 33-50576, dated September 15, 1992).
 
 
 
4.1
 
Instruments defining the rights of security holders, including indentures. The registrant hereby agrees to furnish to the Commission upon request copies of instruments defining the rights of holders of long-term debt of the registrant and its consolidated subsidiaries; no issuance of debt exceeds 10% of the assets of the registrant and its subsidiaries on a consolidated basis.
 
 
 
4.2
 
Warrant to Purchase Shares of First Banks, Inc. Class D Fixed Rate Cumulative Perpetual Preferred Stock dated as of December 31, 2008 (incorporated herein by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K dated December 31, 2008).
 
 
 
10.1
 
Shareholders’ Agreement by and among James F. Dierberg II and Mary W. Dierberg, Trustees under the Living Trust of James F. Dierberg II, dated July 24, 1989, Michael James Dierberg and Mary W. Dierberg, Trustees under the Living Trust of Michael James Dierberg, dated July 24, 1989; Ellen C. Dierberg and Mary W. Dierberg, Trustees under the Living Trust of Ellen C. Dierberg dated July 17, 1992, and First Banks, Inc. (incorporated herein by reference to Exhibit 10.3 to the Company’s Registration Statement on Form S-1, File No 33-50576, dated August 6, 1992).
 
 
 
10.2
 
Comprehensive Banking System License and Service Agreement dated as of July 24, 1991, by and between the Company and FiServ CIR, Inc. (incorporated herein by reference to Exhibit 10.4 to the Company’s Registration Statement on Form S-1, File No. 33-50576, dated August 6, 1992).
 
 
 
10.3
 
AFS Customer Agreement by and between First Banks, Inc. and Advanced Financial Solutions, Inc., dated  January 29, 2004 (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004).
 
 
 
10.4
 
Management Services Agreement by and between First Banks, Inc. and First Bank, dated February 28, 2004 (incorporated herein by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004).
 
 
 
10.5
 
Service Agreement by and between First Services, L.P. and First Banks, Inc., dated May 1, 2004 (incorporated herein by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).
 
 
 
10.6
 
Service Agreement by and between First Services, L.P. and First Bank, dated May 1, 2004 (incorporated herein by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).
 
 
 
10.7
 
Service Agreement by and between First Banks, Inc. and First Services, L.P., dated May 1, 2004 (incorporated herein by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).
 
10.8*
 
First Banks, Inc. Nonqualified Deferred Compensation Plan, as amended (incorporated herein by reference to Exhibit 5.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008).
 
 
 
10.9
     
Letter Agreement including the Securities Purchase Agreement – Standard Terms incorporated therein, between First Banks, Inc. and the United States Department of the Treasury, dated as of December 31, 2008 (as amended by the Side Letter Agreement between First Banks, Inc. and the United States Department of the Treasury, dated as of December 31, 2008, and included herein as Exhibit 10.10) (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated December 31, 2008).
 
 
 
10.10
 
Side Letter Agreement between First Banks, Inc. and the United States Department of the Treasury, dated as of December 31, 2008 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated December 31, 2008).
 
 
 

138


10.11
 
Written Agreement by and among First Banks, Inc., The San Francisco Company, First Bank and the Federal Reserve Bank of St. Louis, dated as of March 24, 2010 (incorporated herein by reference to Exhibit 10.19 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009).
 
 
 
10.12
 
Revolving Credit Note, dated as of March 24, 2011, by and between First Banks, Inc. and Investors of America Limited Partnership (incorporated herein by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010).
 
 
 
10.13
 
Stock Pledge Agreement, dated as of March 24, 2011, by and between First Banks, Inc. and Investors of America Limited Partnership (incorporated herein by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010).
 
 
  
10.14*
 
First Bank Salary Phantom Stock Plan and Form of Phantom Unit Award Agreement (incorporated herein by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011).
 
 
  
10.15
 
Revolving Credit Note, dated as of March 20, 2013, by and between First Banks, Inc. and Investors of America Limited Partnership – filed herewith.
 
 
 
10.16
 
Stock Pledge Agreement, dated as of March 20, 2013, by and between First Banks, Inc. and Investors of America Limited Partnership – filed herewith.
 
 
 
10.17*
 
Form of TARP Restricted Employee Agreement executed annually by each executive officer named in the Company’s Annual report on Form 10-K – filed herewith.
 
 
 
14.1
 
Code of Ethics for Principal Executive Officer and Financial Professionals, as amended (incorporated herein by reference to Exhibit 14.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008).
 
 
 
21.1
 
Subsidiaries of the Company – filed herewith.
 
31.1
 
Rule 13a-14(a) / 15d-14(a) Certifications of Chief Executive Officer – filed herewith.
 
31.2
 
Rule 13a-14(a) / 15d-14(a) Certifications of Chief Financial Officer – filed herewith.
 
32.1
 
Section 1350 Certifications of Chief Executive Officer – furnished herewith.
 
32.2
 
Section 1350 Certifications of Chief Financial Officer – furnished herewith.
 
99.1
 
EESA Section 111(b)(4) Certification of Chief Executive Officer – furnished herewith.
 
99.2
 
EESA Section 111(b)(4) Certification of Chief Financial Officer – furnished herewith.
 
101
 
Financial information from the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, formatted in XBRL interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Changes in Stockholders’ Equity (iv) Consolidated Statements of Comprehensive Income (Loss); (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements – furnished herewith.
 
 
 
+
 
Pursuant to Item 601(b)(2), the registrant undertakes to furnish supplementally a copy of any omitted schedule to the Securities and Exchange Commission upon request.
 
 
 
*
 
Exhibits designated by an asterisk in the Index to Exhibits relate to management contracts and/or compensatory plans or arrangements.

139