Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - FIRST BANKS, INCFinancial_Report.xls
EX-32.2 - EXHIBIT 32.2 - FIRST BANKS, INCfbspra-ex322_2015331x10q.htm
EX-31.1 - EXHIBIT 31.1 - FIRST BANKS, INCfbspra-ex311_2015331x10q.htm
EX-31.2 - EXHIBIT 31.2 - FIRST BANKS, INCfbspra-ex312_2015331x10q.htm
EX-10.1 - EXHIBIT 10.1 - FIRST BANKS, INCfbspra-ex101_2015331x10q.htm
EX-32.1 - EXHIBIT 32.1 - FIRST BANKS, INCfbspra-ex321_2015331x10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X]
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2015
 
[   ]
 
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: 001-31610
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)
__________________________
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.
þ Yes      o 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
þ Yes      o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
Accelerated filer o
 
Non-accelerated filer þ (Do not check if a smaller reporting company)
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes      þ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Shares Outstanding at May 14, 2015
Common Stock, $250.00 par value
 
23,661




FIRST BANKS, INC.
TABLE OF CONTENTS
 
 
 
Page
PART I.
 
FINANCIAL INFORMATION
 
 
 
 
 
Item 1.
 
Financial Statements:
 
 
 
 
 
 
 
Consolidated Balance Sheets
 
 
 
 
 
 
Consolidated Statements of Income
 
 
 
 
 
 
Consolidated Statements of Comprehensive Income
 
 
 
 
 
 
Consolidated Statements of Changes in Stockholders’ Equity
 
 
 
 
 
 
Consolidated Statements of Cash Flows
 
 
 
 
 
 
Notes to Consolidated Financial Statements
 
 
 
 
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
Item 3.
 
Quantitative and Qualitative Disclosures about Market Risk
 
 
 
 
Item 4.
 
Controls and Procedures
 
 
 
 
PART II.
 
OTHER INFORMATION
 
 
 
 
 
Item 1.
 
Legal Proceedings
 
 
 
 
Item 1A.
 
Risk Factors
 
 
 
 
Item 5.
 
Other Information
 
 
 
 
Item 6.
 
Exhibits
 
 
 
 
SIGNATURES




PART I FINANCIAL INFORMATION
 
ITEM 1 FINANCIAL STATEMENTS
 
FIRST BANKS, INC.
CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share and per share data)
March 31,
2015
 
December 31,
2014
 
(Unaudited)
 
 
ASSETS
 
 
 
Cash and cash equivalents:
 
 
 
Cash and due from banks
$
97,255

 
100,349

Short-term investments
133,480

 
105,053

Total cash and cash equivalents
230,735

 
205,402

Investment securities:
 
 
 
Available for sale
1,554,442

 
1,445,689

Held to maturity (fair value of $597,341 and $614,272, respectively)
595,335

 
618,148

Total investment securities
2,149,777

 
2,063,837

Loans:
 
 
 
Commercial, financial and agricultural
700,183

 
695,267

Real estate construction and development
110,705

 
89,851

Real estate mortgage
2,319,175

 
2,315,186

Consumer and installment
20,956

 
18,950

Net deferred loan fees
(1,277
)
 
(1,422
)
Total loans held for portfolio
3,149,742

 
3,117,832

Loans held for sale
43,655

 
31,411

Total loans
3,193,397

 
3,149,243

Allowance for loan losses
(64,142
)
 
(66,874
)
Net loans
3,129,255

 
3,082,369

Federal Reserve Bank and Federal Home Loan Bank stock
30,348

 
30,458

Bank premises and equipment, net
117,803

 
123,016

Deferred income taxes
310,698

 
312,575

Other real estate
15,227

 
55,666

Other assets
62,787

 
62,196

Total assets
$
6,046,630

 
5,935,519

LIABILITIES
 
 
 
Deposits:
 
 
 
Noninterest-bearing deposits
$
1,386,562

 
1,303,519

Interest-bearing deposits
3,585,527

 
3,545,985

Total deposits
4,972,089

 
4,849,504

Securities sold under agreements to repurchase
51,032

 
64,875

Subordinated debentures
354,305

 
354,286

Deferred income taxes
43,558

 
40,728

Accrued expenses and other liabilities
106,275

 
113,682

Total liabilities
5,527,259

 
5,423,075

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
295

 
295

Class D fixed rate, cumulative, perpetual, $1.00 par value, 14,770 shares authorized, issued and outstanding
15

 
15

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

 
5,915

Additional paid-in capital
324,913

 
324,913

Retained earnings
67,048

 
64,374

Accumulated other comprehensive income
14,355

 
10,111

Total First Banks, Inc. stockholders’ equity
425,604

 
418,686

Noncontrolling interest in subsidiary
93,767

 
93,758

Total stockholders’ equity
519,371

 
512,444

Total liabilities and stockholders’ equity
$
6,046,630

 
5,935,519

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

1



FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 
Three Months Ended
 
March 31,
(dollars in thousands)
2015
 
2014
Interest income:
 
 
 
Interest and fees on loans
$
30,003

 
29,079

Investment securities
11,178

 
12,632

Federal Reserve Bank and Federal Home Loan Bank stock
360

 
358

Short-term investments
125

 
120

Total interest income
41,666

 
42,189

Interest expense:
 
 
 
Deposits
2,051

 
2,034

Other borrowings
13

 
4

Subordinated debentures
3,015

 
3,811

Total interest expense
5,079

 
5,849

Net interest income
36,587

 
36,340

Provision for loan losses

 

Net interest income after provision for loan losses
36,587

 
36,340

Noninterest income:
 
 
 
Service charges on deposit accounts and client service fees
8,104

 
8,333

Gain on loans sold and held for sale
2,837

 
865

Net gain on investment securities
43

 
1,280

Net gain on sale of other real estate
4,992

 
442

Decrease in fair value of servicing rights
(1,472
)
 
(232
)
Loan servicing fees
1,580

 
1,711

Other
2,044

 
1,886

Total noninterest income
18,128

 
14,285

Noninterest expense:
 
 
 
Salaries and employee benefits
22,903

 
19,882

Occupancy, net of rental income
5,396

 
5,784

Furniture and equipment
3,304

 
2,360

Postage, printing and supplies
583

 
639

Information technology fees
5,346

 
5,220

Legal, examination and professional fees
907

 
1,291

Advertising and business development
687

 
622

FDIC insurance
945

 
1,264

Write-downs and expenses on other real estate
232

 
699

Other
10,116

 
4,597

Total noninterest expense
50,419

 
42,358

Income before provision for income taxes
4,296

 
8,267

Provision for income taxes
1,613

 
2,917

Net income
2,683

 
5,350

Less: net income (loss) attributable to noncontrolling interest in subsidiary
9

 
(55
)
Net income attributable to First Banks, Inc.
$
2,674

 
5,405

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

2



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


 
Three Months Ended
 
March 31,
(dollars in thousands)
2015
 
2014
Net income
$
2,683

 
5,350

Other comprehensive income (loss):
 
 
 
Unrealized gains on securities:
 
 
 
Unrealized gains on available-for-sale investment securities
7,949

 
8,217

Reclassification adjustment for available-for-sale investment securities gains included in net income
(43
)
 
(1,280
)
Amortization of net unrealized gain associated with transfer of available-for-sale investment securities to held-to-maturity investment securities
(746
)
 
(683
)
Income tax effect
(2,948
)
 
(2,575
)
Changes in unrealized gains on securities, net of tax
4,212

 
3,679

Defined benefit pension plans:
 
 
 
Reclassification adjustment for amortization of net actuarial loss on pension plan
55

 
35

Income tax effect
(23
)
 
(14
)
Changes in defined benefit pension plans, net of tax
32

 
21

Other comprehensive income
4,244

 
3,700

Comprehensive income
6,927

 
9,050

Net income (loss) attributable to noncontrolling interest in subsidiary
9

 
(55
)
Comprehensive income attributable to First Banks, Inc.
$
6,918

 
9,105

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



3



FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (UNAUDITED)
Three Months Ended March 31, 2015 and 2014


 
First Banks, Inc. Stockholders’ Equity
 
 
 
 
(dollars in thousands)
Preferred
Stock
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Non-
controlling
Interest
 
Total
Stockholders’
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2013
$
13,373

 
5,915

 
324,913

 
42,719

 
7,502

 
93,834

 
488,256

Net income

 

 

 
5,405

 

 
(55
)
 
5,350

Other comprehensive income

 

 

 

 
3,700

 

 
3,700

Balance, March 31, 2014
$
13,373

 
5,915

 
324,913

 
48,124

 
11,202

 
93,779

 
497,306

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2014
$
13,373

 
5,915

 
324,913

 
64,374

 
10,111

 
93,758

 
512,444

Net income

 

 

 
2,674

 

 
9

 
2,683

Other comprehensive income

 

 

 

 
4,244

 

 
4,244

Balance, March 31, 2015
$
13,373

 
5,915

 
324,913

 
67,048

 
14,355

 
93,767

 
519,371

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


4



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

 
Three Months Ended
 
March 31,
(dollars in thousands)
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
2,683

 
5,350

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Depreciation and amortization of bank premises and equipment
2,897

 
2,921

Amortization and accretion of investment securities
5,574

 
5,799

Originations of loans held for sale
(86,557
)
 
(35,414
)
Proceeds from sales of loans held for sale
76,049

 
40,278

Provision for current income taxes
1

 
283

Provision for deferred income taxes
1,612

 
2,634

(Increase) decrease in accrued interest receivable
(803
)
 
1,711

Decrease in accrued interest payable
(1
)
 
(62,685
)
Gain on loans sold and held for sale
(2,837
)
 
(865
)
Net gain on investment securities
(43
)
 
(1,280
)
Decrease in fair value of servicing rights
1,472

 
232

Write-downs on other real estate
109

 
97

Other operating activities, net
(6,657
)
 
(156
)
Net cash used in operating activities
(6,501
)
 
(41,095
)
Cash flows from investing activities:
 
 
 
Net cash paid for sale of assets and liabilities of discontinued operations, net of cash and cash equivalents sold

 
(15,467
)
Proceeds from sales of investment securities available for sale
44,768

 
166,320

Maturities of investment securities available for sale
47,113

 
44,399

Maturities of investment securities held to maturity
19,371

 
17,783

Purchases of investment securities available for sale
(193,538
)
 
(250
)
Purchases of investment securities held to maturity
(2,025
)
 
(1,429
)
Net redemptions (purchases) of Federal Reserve Bank and Federal Home Loan Bank stock
110

 
(4,791
)
Proceeds from sales of commercial loans
1,804

 

Net increase in loans
(38,099
)
 
(41,400
)
Purchases of bank premises and equipment
(2,188
)
 
(1,923
)
Net proceeds from sales of other real estate
45,658

 
5,876

Other investing activities, net
118

 
671

Net cash (used in) provided by investing activities
(76,908
)
 
169,789

Cash flows from financing activities:
 
 
 
Increase in deposits
122,585

 
28,536

Decrease in securities sold under agreements to repurchase
(13,843
)
 
(6,430
)
Net cash provided by financing activities
108,742

 
22,106

Net increase in cash and cash equivalents
25,333

 
150,800

Cash and cash equivalents, beginning of period
205,402

 
190,435

Cash and cash equivalents, end of period
$
230,735

 
341,235

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest on liabilities
$
5,080

 
68,534

Cash paid for income taxes
2

 
257

Noncash investing and financing activities:
 
 
 
Loans transferred to other real estate
$
459

 
1,031

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

5



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

NOTE 1 BASIS OF PRESENTATION
Basis of Presentation. The consolidated financial statements of First Banks, Inc. and subsidiaries (“the Company”) are unaudited and should be read in conjunction with the consolidated financial statements contained in the Company’s 2014 Annual Report on Form 10-K. The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and conform to predominant practices within the banking industry. Certain disclosures pertaining to companies whose common stock is not publicly traded have been omitted from the Company’s financial statements in accordance with GAAP requirements. 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. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation of the results of operations for the interim periods presented herein, have been included. Operating results for the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. Certain reclassifications of 2014 amounts have been made to conform to the 2015 presentation. All financial information is reported on a continuing operations basis.
Principles of Consolidation. The consolidated financial statements include the accounts of the parent company and its subsidiaries, giving effect to the noncontrolling interest in subsidiary, as more fully described below and in Note 11 to the consolidated financial statements. All significant intercompany accounts and transactions have been eliminated.
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. All of the subsidiaries are wholly owned as of March 31, 2015 except FB Holdings, LLC (“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, and Ms. Ellen Dierberg Milne, Director of the Company, as further described in Note 11 to the consolidated financial statements. FB Holdings is included in the consolidated financial statements and the noncontrolling ownership interest is 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, is reported as “net income (loss) attributable to noncontrolling interest in subsidiary” in the consolidated statements of income.


6



NOTE 2 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 March 31, 2015 and December 31, 2014 were as follows:
 
Maturity
 
Total Amortized Cost
 
Gross
 
 
 
Weighted Average Yield
 
1 Year
 
1-5
 
5-10
 
After
 
 
Unrealized
 
Fair
 
(dollars in thousands)
or Less
 
Years
 
Years
 
10 Years
 
 
Gains
 
Losses
 
Value
 
March 31, 2015:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Carrying value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government sponsored agencies
$

 
29,904

 
20,114

 
201,168

 
251,186

 
2,093

 
(727
)
 
252,552

 
1.45
%
Residential mortgage-backed

 
65,101

 
79,250

 
895,399

 
1,039,750

 
18,814

 
(2,308
)
 
1,056,256

 
2.38

Commercial mortgage-backed

 
775

 

 

 
775

 
63

 

 
838

 
4.95

State and political subdivisions
511

 
569

 

 
28,356

 
29,436

 
26

 
(268
)
 
29,194

 
1.04

Corporate notes
38,640

 
67,069

 
81,388

 
24,449

 
211,546

 
2,870

 
(799
)
 
213,617

 
2.55

Equity investments

 

 

 
2,000

 
2,000

 

 
(15
)
 
1,985

 
2.14

Total
$
39,151

 
163,418

 
180,752

 
1,151,372

 
1,534,693

 
23,866

 
(4,117
)
 
1,554,442

 
2.23

Fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities
$
39,606

 
166,357

 
184,307

 
1,162,187

 
 
 
 
 
 
 
 
 
 
Equity securities

 

 

 
1,985

 
 
 
 
 
 
 
 
 
 
Total
$
39,606

 
166,357

 
184,307

 
1,164,172

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average yield
2.57
%
 
1.96
%
 
2.58
%
 
2.20
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Carrying value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government sponsored agencies
$

 
29,942

 
20,119

 
180,098

 
230,159

 
2,129

 
(557
)
 
231,731

 
1.39
%
Residential mortgage-backed
269

 
65,433

 
48,174

 
885,896

 
999,772

 
14,189

 
(6,117
)
 
1,007,844

 
2.39

Commercial mortgage-backed

 
779

 

 

 
779

 
58

 

 
837

 
4.95

State and political subdivisions
863

 
571

 

 
28,371

 
29,805

 
33

 
(223
)
 
29,615

 
1.05

Corporate notes
27,382

 
72,959

 
70,990

 

 
171,331

 
2,759

 
(395
)
 
173,695

 
2.75

Equity investments

 

 

 
2,000

 
2,000

 

 
(33
)
 
1,967

 
2.15

Total
$
28,514

 
169,684

 
139,283

 
1,096,365

 
1,433,846

 
19,168

 
(7,325
)
 
1,445,689

 
2.25

Fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities
$
28,901

 
172,561

 
140,717

 
1,101,543

 
 
 
 
 
 
 
 
 
 
Equity securities

 

 

 
1,967

 
 
 
 
 
 
 
 
 
 
Total
$
28,901

 
172,561

 
140,717

 
1,103,510

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average yield
2.64
%
 
1.97
%
 
2.58
%
 
2.23
%
 
 
 
 
 
 
 
 
 
 
Securities Held to Maturity. The amortized cost, contractual maturity, gross unrealized gains and losses and fair value of investment securities held to maturity at March 31, 2015 and December 31, 2014 were as follows:
 
Maturity
 
Total Amortized Cost
 
Gross
 
 
 
Weighted Average Yield
 
1 Year
 
1-5
 
5-10
 
After
 
 
Unrealized
 
Fair
 
(dollars in thousands)
or Less
 
Years
 
Years
 
10 Years
 
 
Gains
 
Losses
 
Value
 
March 31, 2015:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Carrying value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government sponsored agencies
$

 

 
10,001

 

 
10,001

 
64

 

 
10,065

 
1.29
%
Residential mortgage-backed

 
103,224

 
48,400

 
429,339

 
580,963

 
4,013

 
(1,984
)
 
582,992

 
1.89

State and political subdivisions
561

 
660

 
2,189

 
961

 
4,371

 
1

 
(88
)
 
4,284

 
1.78

Total
$
561

 
103,884

 
60,590

 
430,300

 
595,335

 
4,078

 
(2,072
)
 
597,341

 
1.88

Fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities
$
561

 
104,797

 
61,100

 
430,883

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average yield
3.07
%
 
1.93
%
 
1.25
%
 
1.95
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Carrying value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government sponsored agencies
$

 

 
10,725

 

 
10,725

 
42

 

 
10,767

 
1.25
%
Residential mortgage-backed

 
105,660

 
50,512

 
448,905

 
605,077

 
1,931

 
(5,782
)
 
601,226

 
1.86

State and political subdivisions
561

 
335

 
489

 
961

 
2,346

 
1

 
(68
)
 
2,279

 
1.68

Total
$
561

 
105,995

 
61,726

 
449,866

 
618,148

 
1,974

 
(5,850
)
 
614,272

 
1.85

Fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities
$
561

 
106,147

 
62,000

 
445,564

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average yield
3.07
%
 
1.88
%
 
1.13
%
 
1.94
%
 
 
 
 
 
 
 
 
 
 

7



Proceeds from sales of available-for-sale investment securities were $44.8 million and $166.3 million for the three months ended March 31, 2015 and 2014, respectively. Gross realized gains and gross realized losses on investment securities for the three months ended March 31, 2015 and 2014 were as follows:
 
Three Months Ended
 
March 31,
(dollars in thousands)
2015
 
2014
Gross realized gains on sales of available-for-sale securities
$
560

 
2,010

Gross realized losses on sales of available-for-sale securities
(517
)
 
(730
)
Net realized gain on investment securities
$
43

 
1,280

Residential and commercial mortgage-backed securities are primarily issued by U.S. government sponsored enterprises and U.S. government agencies. Investment securities with a carrying value of $366.4 million and $349.0 million at March 31, 2015 and December 31, 2014, 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.
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 March 31, 2015 and December 31, 2014, were as follows:
 
Less Than 12 Months
 
12 Months or More
 
Total
(dollars in thousands)
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
March 31, 2015:
 
 
 
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government sponsored agencies
$
86,684

 
(592
)
 
14,600

 
(135
)
 
101,284

 
(727
)
Residential mortgage-backed
66,185

 
(252
)
 
117,535

 
(2,056
)
 
183,720

 
(2,308
)
State and political subdivisions
28,087

 
(268
)
 

 

 
28,087

 
(268
)
Corporate notes
20,274

 
(756
)
 
4,957

 
(43
)
 
25,231

 
(799
)
Equity investments
1,985

 
(15
)
 

 

 
1,985

 
(15
)
Total
$
203,215

 
(1,883
)
 
137,092

 
(2,234
)
 
340,307

 
(4,117
)
Held to maturity:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
$
100,000

 
(386
)
 
119,905

 
(1,598
)
 
219,905

 
(1,984
)
State and political subdivisions
2,643

 
(27
)
 
899

 
(61
)
 
3,542

 
(88
)
Total
$
102,643

 
(413
)
 
120,804

 
(1,659
)
 
223,447

 
(2,072
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014:
 
 
 
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government sponsored agencies
$
79,207

 
(427
)
 
14,600

 
(130
)
 
93,807

 
(557
)
Residential mortgage-backed
204,378

 
(1,154
)
 
191,644

 
(4,963
)
 
396,022

 
(6,117
)
State and political subdivisions
28,148

 
(223
)
 

 

 
28,148

 
(223
)
Corporate notes
9,650

 
(350
)
 
4,955

 
(45
)
 
14,605

 
(395
)
Equity investments
1,967

 
(33
)
 

 

 
1,967

 
(33
)
Total
$
323,350

 
(2,187
)
 
211,199

 
(5,138
)
 
534,549

 
(7,325
)
Held to maturity:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
$
28,371

 
(112
)
 
325,820

 
(5,670
)
 
354,191

 
(5,782
)
State and political subdivisions
641

 
(3
)
 
896

 
(65
)
 
1,537

 
(68
)
Total
$
29,012

 
(115
)
 
326,716

 
(5,735
)
 
355,728

 
(5,850
)
The Company does not believe the investment securities that were in an unrealized loss position at March 31, 2015 and December 31, 2014 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 First Bank 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 investment securities for 12 months or more at March 31, 2015 and December 31, 2014 included 27 and 47 securities, respectively.

8



NOTE 3 LOANS AND ALLOWANCE FOR LOAN LOSSES
The following table summarizes the composition of the loan portfolio at March 31, 2015 and December 31, 2014:
(dollars in thousands)
March 31,
2015
 
December 31,
2014
Commercial, financial and agricultural
$
700,183

 
695,267

Real estate construction and development
110,705

 
89,851

Real estate mortgage:
 
 
 
One-to-four-family residential
1,030,088

 
1,016,710

Multi-family residential
114,288

 
115,434

Commercial real estate
1,174,799

 
1,183,042

Consumer and installment
20,956

 
18,950

Net deferred loan fees
(1,277
)
 
(1,422
)
Total loans held for portfolio
3,149,742

 
3,117,832

Loans held for sale
43,655

 
31,411

Total loans
$
3,193,397

 
3,149,243

Aging of Loans. The following table presents the aging of loans by loan classification at March 31, 2015 and December 31, 2014:
(dollars in thousands)
30-59
Days
 
60-89
Days
 
Recorded
Investment
> 90 Days
Accruing
 
Nonaccrual
 
Total Past
Due
 
Current
 
Total Loans
March 31, 2015:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
$
59

 
227

 

 
7,240

 
7,526

 
692,657

 
700,183

Real estate construction and development
781

 
102

 

 
3,308

 
4,191

 
106,514

 
110,705

Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
3,014

 
952

 
15

 
10,911

 
14,892

 
613,181

 
628,073

Home equity
810

 
374

 

 
6,337

 
7,521

 
394,494

 
402,015

Multi-family residential

 

 

 
18,994

 
18,994

 
95,294

 
114,288

Commercial real estate
1,201

 
32

 

 
4,046

 
5,279

 
1,169,520

 
1,174,799

Consumer and installment and net deferred loan fees
100

 
18

 

 
4

 
122

 
19,557

 
19,679

Loans held for sale

 

 

 

 

 
43,655

 
43,655

Total
$
5,965

 
1,705

 
15

 
50,840

 
58,525

 
3,134,872

 
3,193,397

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
$
132

 
430

 
54

 
9,486

 
10,102

 
685,165

 
695,267

Real estate construction and development
431

 

 

 
3,393

 
3,824

 
86,027

 
89,851

Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
2,690

 
986

 
35

 
13,890

 
17,601

 
603,567

 
621,168

Home equity
1,857

 
334

 
72

 
6,831

 
9,094

 
386,448

 
395,542

Multi-family residential

 

 

 
19,731

 
19,731

 
95,703

 
115,434

Commercial real estate
196

 
54

 

 
4,122

 
4,372

 
1,178,670

 
1,183,042

Consumer and installment and net deferred loan fees
136

 
33

 
2

 
23

 
194

 
17,334

 
17,528

Loans held for sale

 

 

 

 

 
31,411

 
31,411

Total
$
5,442

 
1,837

 
163

 
57,476

 
64,918

 
3,084,325

 
3,149,243

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 and regulatory bank examinations. The system 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

9



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 March 31, 2015 and December 31, 2014:
Commercial Loan Portfolio
Credit Exposure by Internally Assigned Credit Grade
(dollars in thousands)
Commercial
and
Industrial
 
Real Estate
Construction
and
Development
 
Multi-family
 
Commercial
Real Estate
 
Total
March 31, 2015:
 
 
 
 
 
 
 
 
 
Pass
$
663,849

 
106,986

 
88,787

 
1,145,244

 
2,004,866

Special mention
16,359

 
92

 
5,870

 
17,700

 
40,021

Substandard
12,463

 

 
637

 
7,809

 
20,909

Performing troubled debt restructuring
272

 
319

 

 

 
591

Nonaccrual
7,240

 
3,308

 
18,994

 
4,046

 
33,588

Total
$
700,183

 
110,705

 
114,288

 
1,174,799

 
2,099,975

December 31, 2014:
 
 
 
 
 
 
 
 
 
Pass
$
653,951

 
85,973

 
89,148

 
1,147,824

 
1,976,896

Special mention
18,713

 
143

 
5,945

 
20,691

 
45,492

Substandard
12,833

 

 
610

 
6,640

 
20,083

Performing troubled debt restructuring
284

 
342

 

 
3,765

 
4,391

Nonaccrual
9,486

 
3,393

 
19,731

 
4,122

 
36,732

Total
$
695,267

 
89,851

 
115,434

 
1,183,042

 
2,083,594



Consumer Loan Portfolio
Credit Exposure by Payment Activity
(dollars in thousands)
Residential Mortgage
 
Home
Equity
 
Consumer and Installment and Net Deferred Loan Fees
 
Total
March 31, 2015:
 
 
 
 
 
 
 
Pass
$
537,729

 
394,494

 
19,557

 
951,780

Substandard
1,893

 
1,184

 
118

 
3,195

Performing troubled debt restructuring
77,540

 

 

 
77,540

Nonaccrual
10,911

 
6,337

 
4

 
17,252

Total
$
628,073

 
402,015

 
19,679

 
1,049,767

December 31, 2014:
 
 
 
 
 
 
 
Pass
$
528,388

 
386,448

 
17,334

 
932,170

Substandard
2,662

 
2,263

 
171

 
5,096

Performing troubled debt restructuring
76,228

 

 

 
76,228

Nonaccrual
13,890

 
6,831

 
23

 
20,744

Total
$
621,168

 
395,542

 
17,528

 
1,034,238


10



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 if the impaired loans are collateral dependent, the estimated value of the collateral, less applicable selling costs. 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 March 31, 2015 and December 31, 2014:
(dollars in thousands)
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance for
Loan Losses
 
Average
Recorded
Investment
 
Interest
Income
Recognized
March 31, 2015:
 
 
 
 
 
 
 
 
 
With No Related Allowance Recorded:
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
$
2,505

 
3,401

 

 
2,881

 

Real estate construction and development
2,622

 
12,318

 

 
2,661

 

Real estate mortgage:
 
 
 
 
 
 
 
 
 
Residential mortgage

 

 

 

 

Home equity

 

 

 

 

Multi-family residential
18,675

 
24,647

 

 
19,038

 

Commercial real estate

 

 

 

 

Consumer and installment

 

 

 

 

 
23,802

 
40,366

 

 
24,580

 

With A Related Allowance Recorded:
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
5,007

 
7,754

 
479

 
5,760

 
3

Real estate construction and development
1,005

 
3,259

 
231

 
1,020

 
4

Real estate mortgage:
 
 
 
 
 
 
 
 
 
Residential mortgage
88,451

 
104,415

 
6,976

 
89,285

 
521

Home equity
6,337

 
7,487

 
1,267

 
6,584

 

Multi-family residential
319

 
3,185

 
1,212

 
325

 

Commercial real estate
4,046

 
5,813

 
258

 
5,967

 

Consumer and installment
4

 
4

 

 
14

 
5

 
105,169

 
131,917

 
10,423

 
108,955

 
533

Total:
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
7,512

 
11,155

 
479

 
8,641

 
3

Real estate construction and development
3,627

 
15,577

 
231

 
3,681

 
4

Real estate mortgage:
 
 
 
 
 
 
 
 
 
Residential mortgage
88,451

 
104,415

 
6,976

 
89,285

 
521

Home equity
6,337

 
7,487

 
1,267

 
6,584

 

Multi-family residential
18,994

 
27,832

 
1,212

 
19,363

 

Commercial real estate
4,046

 
5,813

 
258

 
5,967

 

Consumer and installment
4

 
4

 

 
14

 
5

 
$
128,971

 
172,283

 
10,423

 
133,535

 
533


11



(dollars in thousands)
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance for
Loan Losses
 
Average
Recorded
Investment
 
Interest
Income
Recognized
December 31, 2014:
 
 
 
 
 
 
 
 
 
With No Related Allowance Recorded:
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
$
1,937

 
2,911

 

 
2,278

 

Real estate construction and development
2,626

 
12,333

 

 
3,106

 

Real estate mortgage:
 
 
 
 
 
 
 
 
 
Residential mortgage

 

 

 

 

Home equity

 

 

 

 

Multi-family residential
19,050

 
24,759

 

 
25,234

 
959

Commercial real estate
4,119

 
4,190

 

 
6,063

 
116

Consumer and installment

 

 

 

 

 
27,732

 
44,193

 

 
36,681

 
1,075

With A Related Allowance Recorded:
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
7,833

 
22,089

 
1,626

 
9,212

 
6

Real estate construction and development
1,109

 
3,403

 
219

 
1,312

 
17

Real estate mortgage:
 
 
 
 
 
 
 
 
 
Residential mortgage
90,118

 
106,163

 
7,639

 
94,835

 
2,082

Home equity
6,831

 
7,988

 
1,366

 
7,056

 

Multi-family residential
681

 
3,581

 
1,157

 
902

 

Commercial real estate
3,768

 
5,619

 
463

 
5,546

 
21

Consumer and installment
23

 
23

 
1

 
14

 

 
110,363

 
148,866

 
12,471

 
118,877

 
2,126

Total:
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
9,770

 
25,000

 
1,626

 
11,490

 
6

Real estate construction and development
3,735

 
15,736

 
219

 
4,418

 
17

Real estate mortgage:
 
 
 
 
 
 
 
 
 
Residential mortgage
90,118

 
106,163

 
7,639

 
94,835

 
2,082

Home equity
6,831

 
7,988

 
1,366

 
7,056

 

Multi-family residential
19,731

 
28,340

 
1,157

 
26,136

 
959

Commercial real estate
7,887

 
9,809

 
463

 
11,609

 
137

Consumer and installment
23

 
23

 
1

 
14

 

 
$
138,095

 
193,059

 
12,471

 
155,558

 
3,201

Recorded investment represents the Company’s investment in its impaired loans (excluding accrued interest receivable and fees) reduced by cumulative charge-offs recorded against the allowance for loan losses on these same loans. At March 31, 2015 and December 31, 2014, the Company had recorded charge-offs of $43.3 million and $55.0 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.
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 reductions in interest rates, changes in payments and maturity date extensions. Although the Company does not have formal, 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 United States Department of the Treasury’s (“U.S. Treasury”) 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 March 31, 2015 and December 31, 2014, the Company had $72.8 million and $72.7 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.

12



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 March 31, 2015 and December 31, 2014:
(dollars in thousands)
March 31,
2015
 
December 31,
2014
Performing Troubled Debt Restructurings:
 
 
 
Commercial, financial and agricultural
$
272

 
284

Real estate construction and development
319

 
342

Real estate mortgage:
 
 
 
One-to-four-family residential
77,540

 
76,228

Commercial real estate

 
3,765

Total performing troubled debt restructurings
$
78,131

 
80,619

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 March 31, 2015 and December 31, 2014:
(dollars in thousands)
March 31,
2015
 
December 31,
2014
Nonperforming Troubled Debt Restructurings:
 
 
 
Commercial, financial and agricultural
$
35

 
243

Real estate construction and development
2,784

 
2,788

Real estate mortgage:
 
 
 
One-to-four-family residential
3,378

 
4,003

Multi-family residential
18,676

 
19,050

Commercial real estate
371

 
371

Total nonperforming troubled debt restructurings
$
25,244

 
26,455

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 $5.8 million and $6.1 million at March 31, 2015 and December 31, 2014, respectively.
The following table presents loans classified as TDRs that were modified during the three months ended March 31, 2015 and 2014:
 
Three Months Ended March 31, 2015
 
Three Months Ended March 31, 2014
(dollars in thousands)
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
Loan Modifications Classified as Troubled Debt Restructurings:
 
 
 
 
 
 
 
 
 
 
 
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
One-to-four-family residential
6
 
$
1,723

 
$
1,640

 
15
 
$
2,580

 
$
2,157

 

13



The following table presents TDRs that defaulted within 12 months of modification during the three months ended March 31, 2015 and 2014:
 
Three Months Ended
 
Three Months Ended
 
March 31, 2015
 
March 31, 2014
(dollars in thousands)
Number of
Contracts
 
Recorded
Investment
 
Number of
Contracts
 
Recorded
Investment
Troubled Debt Restructurings That Subsequently Defaulted:
 
 
 
 
 
 
 
Real estate mortgage:
 
 
 
 
 
 
 
One-to-four-family residential
 
$

 
1
 
$
438

 
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. The following table represents a summary of changes in the allowance for loan losses by portfolio segment for the three months ended March 31, 2015 and 2014:
(dollars in thousands)
Commercial
and
Industrial
 
Real Estate
Construction
and
Development
 
One-to-
Four-Family
Residential
 
Multi-
Family
Residential
 
Commercial
Real Estate
 
Consumer
and
Installment
 
Total
Three Months Ended March 31, 2015:
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
12,574

 
3,490

 
24,055

 
5,630

 
20,983

 
142

 
66,874

Charge-offs
(2,987
)
 
(40
)
 
(1,163
)
 
(189
)
 
(343
)
 
(22
)
 
(4,744
)
Recoveries
1,244

 
164

 
500

 
56

 
21

 
27

 
2,012

Provision (benefit) for loan losses
1,501

 
(860
)
 
(906
)
 
77

 
225

 
(37
)
 

Ending balance
$
12,332

 
2,754

 
22,486

 
5,574

 
20,886

 
110

 
64,142

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2014:
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
13,401

 
7,407

 
32,619

 
5,249

 
22,052

 
305

 
81,033

Charge-offs
(1,622
)
 
(30
)
 
(1,426
)
 
(132
)
 
(188
)
 
(49
)
 
(3,447
)
Recoveries
752

 
600

 
791

 
7

 
57

 
38

 
2,245

Provision (benefit) for loan losses
1,340

 
(891
)
 
(764
)
 
145

 
122

 
48

 

Ending balance
$
13,871

 
7,086

 
31,220

 
5,269

 
22,043

 
342

 
79,831

 
The following table represents a summary of the impairment method used by loan category at March 31, 2015 and December 31, 2014:
(dollars in thousands)
Commercial
and
Industrial
 
Real Estate
Construction
and
Development
 
One-to-
Four-Family
Residential
 
Multi-
Family
Residential
 
Commercial
Real Estate
 
Consumer
and
Installment and Net Deferred Loan Fees
 
Total
March 31, 2015:
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans individually evaluated for impairment
$

 

 
918

 

 

 

 
918

Impaired loans collectively evaluated for impairment
479

 
231

 
7,325

 
1,212

 
258

 

 
9,505

All other loans collectively evaluated for impairment
11,853

 
2,523

 
14,243

 
4,362

 
20,628

 
110

 
53,719

Total allowance for loan losses
$
12,332

 
2,754

 
22,486

 
5,574

 
20,886

 
110

 
64,142

Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans individually evaluated for impairment
$
2,505

 
2,622

 
6,899

 
18,676

 

 

 
30,702

Impaired loans collectively evaluated for impairment
5,007

 
1,005

 
87,889

 
318

 
4,046

 
4

 
98,269

All other loans collectively evaluated for impairment
692,671

 
107,078

 
935,300

 
95,294

 
1,170,753

 
19,675

 
3,020,771

Total loans
$
700,183

 
110,705

 
1,030,088

 
114,288

 
1,174,799

 
19,679

 
3,149,742

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014:
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans individually evaluated for impairment
$
1,053

 

 
1,184

 

 

 

 
2,237

Impaired loans collectively evaluated for impairment
573

 
219

 
7,821

 
1,157

 
463

 
1

 
10,234

All other loans collectively evaluated for impairment
10,948

 
3,271

 
15,050

 
4,473

 
20,520

 
141

 
54,403

Total allowance for loan losses
$
12,574

 
3,490

 
24,055

 
5,630

 
20,983

 
142

 
66,874

Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans individually evaluated for impairment
$
4,712

 
2,626

 
7,388

 
19,050

 
3,765

 

 
37,541

Impaired loans collectively evaluated for impairment
5,058

 
1,109

 
89,561

 
681

 
4,122

 
23

 
100,554

All other loans collectively evaluated for impairment
685,497

 
86,116

 
919,761

 
95,703

 
1,175,155

 
17,505

 
2,979,737

Total loans
$
695,267

 
89,851

 
1,016,710

 
115,434

 
1,183,042

 
17,528

 
3,117,832


14




NOTE 4 SERVICING RIGHTS
Mortgage Banking Activities. At March 31, 2015 and December 31, 2014, the Company serviced mortgage loans for others totaling $1.38 billion and $1.37 billion, respectively. Changes in mortgage servicing rights for the three months ended March 31, 2015 and 2014 were as follows:
 
Three Months Ended
 
March 31,
(dollars in thousands)
2015
 
2014
Balance, beginning of period
$
14,012

 
14,211

Originated mortgage servicing rights
822

 
455

Purchased mortgage servicing rights
39

 

Change in fair value resulting from changes in valuation inputs or assumptions used in valuation model (1)
(831
)
 
151

Other changes in fair value (2)
(561
)
 
(422
)
Balance, end of period
$
13,481

 
14,395

____________________
(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 March 31, 2015 and December 31, 2014, the Company serviced United States Small Business Administration (“SBA”) loans for others totaling $105.0 million and $114.4 million, respectively. Changes in SBA servicing rights for the three months ended March 31, 2015 and 2014 were as follows:
 
Three Months Ended
 
March 31,
(dollars in thousands)
2015
 
2014
Balance, beginning of period
$
4,001

 
4,643

Originated SBA servicing rights

 

Change in fair value resulting from changes in valuation inputs or assumptions used in valuation model (1)
133

 
175

Other changes in fair value (2)
(213
)
 
(136
)
Balance, end of period
$
3,921

 
4,682

____________________
(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 5 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 March 31, 2015 and December 31, 2014:

(dollars in thousands)
 
 
Derivatives in Other Assets
Notional Amount
 
Fair Value Gain (Loss)
March 31,
2015
 
December 31, 2014
 
March 31,
2015
 
December 31, 2014
Derivative Instruments Not Designated as Hedging Instruments:
 
 
 
 
 
 
 
Interest rate lock commitments
$
43,610

 
20,762

 
1,268

 
580

Forward commitments to sell mortgage-backed securities
71,600

 
38,300

 
(284
)
 
(294
)
Total
$
115,210

 
59,062

 
984

 
286

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 interest rate lock commitments and loans held for sale are hedged with forward contracts to sell mortgage-backed securities, which expire in June 2015. The fair value of the interest rate lock commitments and forward contracts to sell mortgage-backed securities are included in other assets in the consolidated balance sheets. 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.

15



The following table summarizes amounts included in the consolidated statements of income for the three months ended March 31, 2015 and 2014 related to non-hedging derivative instruments:

(dollars in thousands)
 
Location of Gain (Loss) Recognized
in Operations on Derivatives
 
Amount of Gain (Loss) Recognized
in Operations on Derivatives
 
Three Months Ended
 
March 31,
 
2015
 
2014
Derivative Instruments Not Designated as Hedging Instruments:
 
 
 
 
 
 
Interest rate lock commitments
 
Gain on loans sold and held for sale
 
$
688

 
115

Forward commitments to sell mortgage-backed securities
 
Gain on loans sold and held for sale
 
10

 
(282
)
NOTE 6 SUBORDINATED DEBENTURES
As of March 31, 2015, 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’s distributions accrued on the junior subordinated debentures were $3.0 million and $3.8 million for the three months ended March 31, 2015 and 2014, respectively, and are included in interest expense in the consolidated statements of income. The structure of the trust preferred securities currently satisfies the regulatory requirements for inclusion, subject to certain limitations, in the Company’s capital base, as further discussed in Note 8 to the consolidated financial statements.
The terms of the junior subordinated debentures and the related trust indentures allow the Company to defer payments of interest for up to 20 consecutive quarterly periods without triggering a payment default or penalty. Such interest payments are primarily funded through dividends from First Bank. In addition, during a 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. In March 2014, the Company paid all of the cumulative deferred interest on its junior subordinated debentures (which had been deferred for 18 quarterly periods), which was subsequently distributed to the trust preferred securities holders on the respective interest payment dates in March and April, 2014. Since that time, the Company has continued to pay interest on its junior subordinated debentures to the respective trustees on the regularly scheduled quarterly payment dates.
Under its Memorandum of Understanding (“MOU”) with the Federal Reserve Bank of St. Louis (“FRB”), as further discussed in Note 8 to the consolidated financial statements, First Bank has agreed not to declare or pay any dividends, without the prior consent of the FRB, that would cause First Bank to pay dividends in excess of its earnings or make a capital distribution that would cause First Bank's Tier 1 Leverage Ratio to fall below 9.0%. Furthermore, pursuant to Missouri Revised Statutes, First Bank is required to obtain approval from the Missouri Division of Finance (“MDOF”) prior to paying any dividends to the Company, as further described in Note 8 to the consolidated financial statements. The Company is unable to predict whether or when the FRB and/or the MDOF will grant such consent in the future.
Without the payment of dividends from First Bank, the Company currently lacks the source of income and the liquidity to make future interest payments on the junior subordinated debentures associated with its trust preferred securities. Given restrictions placed upon First Bank, including regulatory restrictions, it may not be able to provide the Company with dividends in an amount sufficient to pay the future interest on the trust preferred securities. In such case, the Company would have to pursue alternative funding sources, but there can be no assurance that the Company will be able to identify and obtain alternative funding due to the uncertainty that such alternative funding sources would be available to the Company on terms and conditions that are acceptable to the Company.
NOTE 7 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, and Ms. Ellen Dierberg Milne, Director of the Company), own all of the voting stock of the Company other than the Class C Preferred Stock and Class D Preferred Stock (as defined below) that have limited voting rights.
Preferred Stock. The Company has four classes of preferred stock outstanding.
The Company 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. The Company has declared and accrued $68.4 million of its regularly scheduled dividend payments on its Class C Fixed Rate Cumulative Perpetual Preferred Stock (“Class C Preferred Stock”) and Class D Fixed Rate Cumulative Perpetual Preferred Stock (“Class D Preferred Stock”) at March 31, 2015 and December 31, 2014, and has accrued an additional $9.4 million

16



of cumulative dividends on such deferred dividend payments at March 31, 2015 and December 31, 2014. As such, the aggregate amount of these deferred and accrued dividend payments was $77.8 million at March 31, 2015 and December 31, 2014.
The Company ceased declaring dividends on its Class C Preferred Stock and Class D Preferred Stock during the fourth quarter of 2013. Previously, the Company had declared and accrued dividends on its Class C Preferred Stock and Class D Preferred Stock quarterly throughout the deferral period. If the Company had continued to declare and accrue dividends on its Class C Preferred Stock and Class D Preferred Stock from the fourth quarter of 2013 and forward, the Company would have accrued an additional $46.9 million of dividend payments (including $9.6 million of dividend payments that would have been declared and accrued for the three months ended March 31, 2015), and the Company’s aggregate deferred and accrued dividend payments would have been $124.7 million and $115.1 million at March 31, 2015 and December 31, 2014, respectively. The Company will continue to evaluate whether declaring dividends on its Class C Preferred Stock and Class D Preferred Stock is appropriate in future periods. The Company’s cessation of declaring and accruing dividends on its Class C Preferred Stock and Class D Preferred Stock did not have any effect on the terms of the outstanding Class C Preferred Stock and Class D Preferred Stock, including the Company’s obligations thereunder.
Accumulated Other Comprehensive Income (Loss). The following table summarizes changes in accumulated other comprehensive income (loss), net of tax, by component, for the three months ended March 31, 2015 and 2014:
(dollars in thousands)
Investment Securities
 
Defined Benefit Pension Plan
 
Total
Three Months Ended March 31, 2015:
 
 
 
 
 
Balance, beginning of period
$
14,051

 
(3,940
)
 
10,111

Other comprehensive income before reclassifications
4,237

 

 
4,237

Amounts reclassified from accumulated other comprehensive income
(25
)
 
32

 
7

Net current period other comprehensive income
4,212

 
32

 
4,244

Balance, end of period
$
18,263

 
(3,908
)
 
14,355

 
 
 
 
 
 
Three Months Ended March 31, 2014:
 
 
 
 
 
Balance, beginning of period
$
10,151

 
(2,649
)
 
7,502

Other comprehensive income before reclassifications
4,432

 

 
4,432

Amounts reclassified from accumulated other comprehensive income
(753
)
 
21

 
(732
)
Net current period other comprehensive income
3,679

 
21

 
3,700

Balance, end of period
$
13,830

 
(2,628
)
 
11,202

 
NOTE 8 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 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 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 capital, Tier 1 capital and common equity Tier 1 capital to risk-weighted assets (as defined in the regulations), and of Tier 1 capital to average assets (“Tier1 leverage ratio”).
In July 2013, the federal bank regulators approved final rules (the “Final Capital Rules”) implementing the Basel III framework as well as certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Final Capital Rules also substantially revise the risk-based capital requirements applicable to bank holding companies and their depository institution subsidiaries, including the Company and First Bank, as compared to the general risk-based capital rules (the “General Risk-Based Capital Rules”). The Final Capital Rules revise the components of capital and address other issues affecting the numerator in regulatory capital ratios. The Final Capital Rules also address asset risk weights and other issues affecting the denominator in regulatory capital ratios and replace the existing general risk-weighting approach based on Basel I with a more risk-sensitive approach. The Final Capital Rules became effective for the Company and First Bank on January 1, 2015 (subject to a phase-in period for certain provisions). The calculation of common equity Tier 1 capital is different from the calculation of common equity under GAAP. Most significantly for the Company, the Company's net deferred tax assets, which are included in the calculation of common equity under GAAP, will be substantially phased out over time from the required calculation of common equity Tier 1 capital for regulatory purposes. The net deferred tax assets attributable to net operating loss and tax credit carryforwards, which comprised over 91.8% of the Company's net deferred tax assets as of March 31, 2015, are scheduled to be phased out entirely from inclusion in the calculation of common equity Tier 1 capital in 2018. In addition, the inclusion of trust preferred securities eligible for Tier 1 capital is more limited under the Final Capital Rules.

17



The Company must maintain minimum total capital, Tier 1 capital, common equity Tier 1 capital and Tier 1 leverage ratios as set forth in the table below in order to meet the minimum capital adequacy standards. The Company was categorized as adequately capitalized under minimum regulatory capital standards established for bank holding companies by the Federal Reserve at December 31, 2014. The Company was not categorized as adequately capitalized under minimum regulatory capital standards established for bank holding companies by the Federal Reserve at March 31, 2015 as a result of not meeting the required common equity Tier 1 requirement under the Final Capital Rules.
First Bank was categorized as well capitalized at March 31, 2015 and December 31, 2014 under the prompt corrective action provisions of the regulatory capital standards. First Bank must maintain minimum total capital, Tier 1 capital, common equity Tier 1 capital and Tier 1 leverage ratios as set forth in the table below in order to be categorized as well capitalized.
At March 31, 2015 and December 31, 2014, the Company’s and First Bank’s required and actual capital ratios were as follows:
 
 
 
 
 
 
 
 
 
Final Capital Rules
(Effective January 1, 2015)
 
General Risk-Based
Capital Rules
(Prior to January 1, 2015)
 
 
 
 
 
 
 
 
 
 
 
To be Well
Capitalized
Under Prompt Corrective Action Provisions
 
 
 
To be Well
Capitalized
Under Prompt Corrective Action Provisions
 
Actual
 
For Capital Adequacy Purposes
 
 
For Capital Adequacy Purposes
 
 
March 31, 2015
 
December 31, 2014
(dollars in thousands)
Amount
 
Ratio
 
Amount
 
Ratio
Total capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
First Banks, Inc.
$
582,115

 
14.88
 %
 
$
475,312

 
12.25
%
 
8.0
%
 
N/A

 
8.0
%
 
N/A

First Bank
660,631

 
16.80

 
691,350

 
17.81

 
8.0

 
10.0
%
 
8.0

 
10.0
%
Tier 1 capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
First Banks, Inc.
283,962

 
7.26

 
284,396

 
7.33

 
6.0

 
N/A

 
4.0

 
N/A

First Bank
612,837

 
15.59

 
642,593

 
16.55

 
6.0

 
8.0

 
4.0

 
6.0

Common equity Tier 1 capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
First Banks, Inc.
(44,624
)
 
(1.14
)
 
N/A

 
N/A

 
4.5

 
N/A

 
N/A

 
N/A

First Bank
612,837

 
15.59

 
N/A

 
N/A

 
4.5

 
6.5

 
N/A

 
N/A

Tier 1 capital (to average assets):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
First Banks, Inc.
283,962

 
5.02

 
284,396

 
5.01

 
4.0

 
N/A

 
4.0

 
N/A

First Bank
612,837

 
10.78

 
642,593

 
11.35

 
4.0

 
5.0

 
4.0

 
5.0

Regulatory Agreements. On May 19, 2014, the Company entered into an MOU with the FRB. The MOU is characterized by regulatory authorities as an informal action that is neither published nor made publicly available by the FRB and is used when circumstances warrant a milder form of action than a formal supervisory action. Under the terms of the MOU, the Company agreed, among other things, to provide certain information to the FRB including, but not limited to, progress of achieving its Capital Plan, notice of plans to materially change its Capital Plan, parent company cash flow plans and summaries of nonperforming asset classifications. In addition, the Company agreed not to do any of the following without the prior approval of the FRB: (i) declare or pay any dividends on its common or preferred stock; (ii) incur or guarantee any debt; (iii) redeem any of the Company's outstanding common or preferred stock; and (iv) cause First Bank to pay dividends in excess of its earnings or make a capital distribution that would cause First Bank's Tier 1 Leverage Ratio to fall below 9.0%. The FRB has complete discretion to grant any such approval and therefore, it is not known whether the FRB would approve any such request.
While the Company intends to take such actions as may be necessary to comply with the requirements of the MOU with the FRB, there can be no assurance that such efforts will not have adverse effects on the operations and financial condition of the Company or First Bank. If the Company fails to comply with the terms of the MOU, further enforcement action could be taken by the FRB which could have a materially adverse effect on the Company's business, financial condition or results of operations.
NOTE 9 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 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

18



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. 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. Certain other real estate, upon initial recognition, is 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 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 currently include 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 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.

19



Items Measured on a Recurring Basis. Assets and liabilities measured at fair value on a recurring basis as of March 31, 2015 and December 31, 2014 are reflected in the following table:
 
Fair Value Measurements
(dollars in thousands)
Level 1
 
Level 2
 
Level 3
 
Fair Value
March 31, 2015:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Available-for-sale investment securities:
 
 
 
 
 
 
 
U.S. Government sponsored agencies
$

 
252,552

 

 
252,552

Residential mortgage-backed

 
1,056,256

 

 
1,056,256

Commercial mortgage-backed

 
838

 

 
838

State and political subdivisions

 
29,194

 

 
29,194

Corporate notes

 
213,617

 

 
213,617

Equity investments
1,985

 

 

 
1,985

Mortgage loans held for sale

 
43,655

 

 
43,655

Derivative instruments:
 
 
 
 
 
 
 
Interest rate lock commitments

 
1,268

 

 
1,268

Forward commitments to sell mortgage-backed securities

 
(284
)
 

 
(284
)
Servicing rights

 

 
17,402

 
17,402

Total
$
1,985

 
1,597,096

 
17,402

 
1,616,483

December 31, 2014:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Available-for-sale investment securities:
 
 
 
 
 
 
 
U.S. Government sponsored agencies
$

 
231,731

 

 
231,731

Residential mortgage-backed

 
1,007,844

 

 
1,007,844

Commercial mortgage-backed

 
837

 

 
837

State and political subdivisions

 
29,615

 

 
29,615

Corporate notes

 
173,695

 

 
173,695

Equity investments
1,967

 

 

 
1,967

Mortgage loans held for sale

 
31,411

 

 
31,411

Derivative instruments:
 
 
 
 
 
 
 
Interest rate lock commitments

 
580

 

 
580

Forward commitments to sell mortgage-backed securities

 
(294
)
 

 
(294
)
Servicing rights

 

 
18,013

 
18,013

Total
$
1,967

 
1,475,419

 
18,013

 
1,495,399

There were no transfers between Levels 1 and 2 of the fair value hierarchy for the three months ended March 31, 2015 and 2014.
The following table presents the changes in Level 3 assets measured on a recurring basis for the three months ended March 31, 2015 and 2014:
 
Servicing Rights
 
Three Months Ended
 
March 31,
(dollars in thousands)
2015
 
2014
Balance, beginning of period
$
18,013

 
18,854

Total gains or losses (realized/unrealized):
 
 
 
Included in earnings (1)
(1,472
)
 
(232
)
Included in other comprehensive income

 

Issuances
822

 
455

Purchases
39

 

Transfers in and/or out of level 3

 

Balance, end of period
$
17,402

 
19,077

____________________
(1)
Gains or losses (realized/unrealized) are included in noninterest income in the consolidated statements of income.
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 March 31, 2015 and December 31, 2014 are reflected in the following table:

20



 
Fair Value Measurements
(dollars in thousands)
Level 1
 
Level 2
 
Level 3
 
Fair Value
March 31, 2015:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Impaired loans:
 
 
 
 
 
 


Commercial, financial and agricultural
$

 

 
7,033

 
7,033

Real estate construction and development

 

 
3,396

 
3,396

Real estate mortgage:
 
 
 
 
 
 
 
Residential mortgage

 

 
81,475

 
81,475

Home equity

 

 
5,070

 
5,070

Multi-family residential

 

 
17,782

 
17,782

Commercial real estate

 

 
3,788

 
3,788

Consumer and installment

 

 
4

 
4

Other real estate

 

 
15,227

 
15,227

Total
$

 

 
133,775

 
133,775

December 31, 2014:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Impaired loans:
 
 
 
 
 
 
 
Commercial, financial and agricultural
$

 

 
8,144

 
8,144

Real estate construction and development

 

 
3,516

 
3,516

Real estate mortgage:
 
 
 
 
 
 
 
Residential mortgage

 

 
82,479

 
82,479

Home equity

 

 
5,465

 
5,465

Multi-family residential

 

 
18,574

 
18,574

Commercial real estate

 

 
7,424

 
7,424

Consumer and installment

 

 
22

 
22

Other real estate

 

 
55,666

 
55,666

Total
$

 

 
181,290

 
181,290

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) and other non-financial long-lived assets measured at fair value for impairment assessment.
Other real estate measured at fair value upon initial recognition totaled $459,000 and $1.0 million for the three months ended March 31, 2015 and 2014, respectively. In addition to other real estate measured at fair value upon initial recognition, the Company recorded write-downs to the balance of other real estate of $109,000 and $97,000 to noninterest expense for the three months ended March 31, 2015 and 2014, respectively.
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. 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.
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

21



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 agreements 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.
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 March 31, 2015 was as follows:
 
March 31, 2015
 
Carrying
Value
 
Estimated Fair Value
(dollars in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
230,735

 
230,735

 

 

 
230,735

Investment securities:
 
 
 
 
 
 
 
 
 
Available for sale
1,554,442

 
1,985

 
1,552,457

 

 
1,554,442

Held to maturity
595,335

 

 
597,341

 

 
597,341

Loans held for portfolio
3,085,600

 

 

 
3,096,743

 
3,096,743

Loans held for sale
43,655

 

 
43,655

 

 
43,655

Derivative instruments
984

 

 
984

 

 
984

Accrued interest receivable
15,867

 
15,867

 

 

 
15,867

Financial Liabilities:
 
 
 
 
 
 
 
 
 
Deposits
$
4,972,089

 
4,049,806

 

 
921,817

 
4,971,623

Securities sold under agreements to repurchase
51,032

 
51,032

 

 

 
51,032

Accrued interest payable
830

 
830

 

 

 
830

Subordinated debentures
354,305

 

 

 
270,473

 
270,473

Liability for Off-Balance Sheet Financial Instruments:
 
 
 
 
 
 
 
 
 
Commitments to extend credit, standby letters of credit and financial guarantees
$
12

 

 

 
12

 
12

The estimated fair value of the Company’s financial instruments at December 31, 2014 was as follows:
 
December 31, 2014
 
Carrying
Value
 
Estimated Fair Value
(dollars in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
205,402

 
205,402

 

 

 
205,402

Investment securities:
 
 
 
 
 
 
 
 
 
Available for sale
1,445,689

 
1,967

 
1,443,722

 

 
1,445,689

Held to maturity
618,148

 

 
614,272

 

 
614,272

Loans held for portfolio
3,050,958

 

 

 
2,937,948

 
2,937,948

Loans held for sale
31,411

 

 
31,411

 

 
31,411

Derivative instruments
286

 

 
286

 

 
286

Accrued interest receivable
15,064

 
15,064

 

 

 
15,064

Financial Liabilities:
 
 
 
 
 
 
 
 
 
Deposits
$
4,849,504

 
3,923,627

 

 
924,955

 
4,848,582

Securities sold under agreements to repurchase
64,875

 
64,875

 

 

 
64,875

Accrued interest payable
831

 
831

 

 

 
831

Subordinated debentures
354,286

 

 

 
303,191

 
303,191

Liability for Off-Balance Sheet Financial Instruments:
 
 
 
 
 
 
 
 
 
Commitments to extend credit, standby letters of credit and financial guarantees
$
12

 

 

 
12

 
12



22



NOTE 10 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 client groups, including packaged accounts for more affluent clients, and sweep accounts, lock-box deposits and cash management products for commercial clients. 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, mobile banking, automated teller machine (“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 clients primarily within its geographic areas, which include eastern Missouri, southern Illinois, southern and northern California, and Florida’s Bradenton, Palmetto and Longboat Key communities. 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. The business segment results are summarized as follows:
 
First Bank
 
Corporate, Other and
Intercompany
Reclassifications
 
Consolidated Totals
(dollars in thousands)
March 31,
2015
 
December 31,
2014
 
March 31,
2015
 
December 31,
2014
 
March 31,
2015
 
December 31,
2014
Balance sheet information:
 
 
 
 
 
 
 
 
 
 
 
Investment securities
$
2,149,777

 
2,063,837

 

 

 
2,149,777

 
2,063,837

Total loans
3,193,397

 
3,149,243

 

 

 
3,193,397

 
3,149,243

FRB and FHLB stock
30,348

 
30,458

 

 

 
30,348

 
30,458

Total assets
5,992,340

 
5,882,222

 
54,290

 
53,297

 
6,046,630

 
5,935,519

Deposits
4,997,353

 
4,871,140

 
(25,264
)
 
(21,636
)
 
4,972,089

 
4,849,504

Securities sold under agreements to repurchase
51,032

 
64,875

 

 

 
51,032

 
64,875

Subordinated debentures

 

 
354,305

 
354,286

 
354,305

 
354,286

Stockholders’ equity
872,736

 
871,301

 
(353,365
)
 
(358,857
)
 
519,371

 
512,444

 
First Bank
 
Corporate, Other and
Intercompany
Reclassifications
 
Consolidated Totals
 
Three Months Ended
 
Three Months Ended
 
Three Months Ended
 
March 31,
 
March 31,
 
March 31,
(dollars in thousands)
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Income statement information:
 
 
 
 
 
 
 
 
 
 
 
Interest income
$
41,666

 
42,189

 

 

 
41,666

 
42,189

Interest expense
2,075

 
2,051

 
3,004

 
3,798

 
5,079

 
5,849

Net interest income (loss)
39,591

 
40,138

 
(3,004
)
 
(3,798
)
 
36,587

 
36,340

Provision for loan losses

 

 

 

 

 

Net interest income (loss) after provision for loan losses
39,591

 
40,138

 
(3,004
)
 
(3,798
)
 
36,587

 
36,340

Noninterest income
18,037

 
14,169

 
91

 
116

 
18,128

 
14,285

Noninterest expense
50,243

 
42,603

 
176

 
(245
)
 
50,419

 
42,358

Income (loss) before provision (benefit) for income taxes
7,385

 
11,704

 
(3,089
)
 
(3,437
)
 
4,296

 
8,267

Provision (benefit) for income taxes
2,694

 
4,120

 
(1,081
)
 
(1,203
)
 
1,613

 
2,917

Net income (loss)
4,691

 
7,584

 
(2,008
)
 
(2,234
)
 
2,683

 
5,350

Net income (loss) attributable to noncontrolling interest in subsidiary
9

 
(55
)
 

 

 
9

 
(55
)
Net income (loss) attributable to First Banks, Inc.
$
4,682

 
7,639

 
(2,008
)
 
(2,234
)
 
2,674

 
5,405

 
NOTE 11 TRANSACTIONS WITH RELATED PARTIES
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, and Ms. Ellen Dierberg Milne, Director of the Company, provides information technology, item processing and various related services to the Company and First Bank. Fees charged by First Services to First Bank (net of payments from First Services to First Bank for rental of information technology and other equipment) were $5.0 million and $4.9 million for the three months ended March 31, 2015 and 2014,

23



respectively. In addition, First Services paid $435,000 for the three months ended March 31, 2015 and 2014 in rental payments to First Bank for occupancy of certain First Bank premises from which business is conducted.
First Services has an Affiliate Services Agreement with the Company and First Bank that relates to various services provided to First Services, including certain human resources, payroll, employee benefit and training services, accounting services, insurance services, vendor payment processing services and advisory services. Fees incurred under the Affiliate Services Agreement by First Services were $54,000 and $60,000 for the three months ended March 31, 2015 and 2014, 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, and Ms. Ellen Dierberg Milne, Director of the Company, received approximately $1.0 million for the three months ended March 31, 2015 and 2014, 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 clients of First Bank. First Brokerage paid approximately $117,000 and $93,000 for the three months ended March 31, 2015 and 2014, 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 ATM sites from Dierbergs Markets, Inc., a grocery store chain headquartered in St. Louis, Missouri that is owned and operated by the brother of the Company’s Chairman and members of his immediate family. Total rent expense incurred by First Bank under the lease obligation contracts was $128,000 and $126,000 for the three months ended March 31, 2015 and 2014, 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 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 owned 53.23% 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, and Ms. Ellen Dierberg Milne, Director of the Company, owned the remaining 46.77% of FB Holdings as of March 31, 2015. FCA’s ownership in FB Holdings is reflected as a component of stockholders’ equity in the consolidated balance sheets.
Loans to Directors, Executive Officers 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, executive officers and/or their affiliates. Loans to directors, their affiliates and executive officers of the Company were $9.2 million and $28.8 million at March 31, 2015 and December 31, 2014, 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.
Depositary Accounts of Directors, Executive Officers and/or their Affiliates. Certain directors, executive officers 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.
NOTE 12 CONTINGENT LIABILITIES
Litigation Matters. 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.
Regulatory Matters. The Company entered into an MOU with the FRB, dated May 19, 2014. This agreement is further described in Note 8 to the consolidated financial statements.


24



ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements and Factors that Could Affect Future Results
The discussion set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 and/or maintain capital at levels necessary or desirable to support our operations;
The risks associated with implementing our business strategy;
Regulatory actions that impact First Banks, Inc. and First Bank, including our ability to comply with the terms of the Memorandum of Understanding entered into between First Banks, Inc. and the Federal Reserve Bank of St. Louis, as further discussed under “Overview and Recent Developments – Regulatory Agreements;”
The effects of and changes in trade and monetary and fiscal policies and laws;
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;
Weakness in the residential real estate market and the potential impact on the value of collateral securing residential real estate loans held or originated for sale;
Credit risks associated with our home equity loan portfolio upon commencement of the loan amortization period;
Possible changes in the creditworthiness of clients and the possible impairment of collectability of loans;
Our ability to maintain an appropriate level of liquidity to fund operations, service debt obligations and meet obligations and other commitments;
Implementation of the Basel III regulatory capital reforms and changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act includes significant changes to bank capital, leverage and liquidity requirements, as further discussed under “Overview and Recent Developments – Capital Adequacy Requirements;”
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;
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;
Possible changes in interest rates may increase our funding costs and reduce earning asset yields, thus reducing our margins;
The ability to attract and retain senior management experienced in the banking and financial services industry;
The ability to successfully acquire low cost deposits or alternative funding;
Changes in consumer spending, borrowing and savings habits;
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;

25



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 client 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 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, including potential cyber attacks.
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 our 2014 Annual Report on Form 10-K, as filed with the United States Securities and Exchange Commission on March 24, 2015. We wish to caution readers of this Quarterly Report on Form 10-Q 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 do not undertake any obligation to update these forward-looking statements. Readers of this Quarterly Report on Form 10-Q should therefore consider these risks and uncertainties in evaluating forward-looking statements and should not place undue reliance on these statements.


26



OVERVIEW AND RECENT DEVELOPMENTS
We (“the Company”), are 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 (“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’s subsidiaries are wholly owned at March 31, 2015 except for FB Holdings, LLC (“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, and Ms. Ellen Dierberg Milne, Director of the Company, as further described in Note 11 to our consolidated financial statements.
First Bank currently operates 129 branch banking offices in eastern Missouri, southern Illinois, southern and northern California, and Florida’s Bradenton, Palmetto and Longboat Key communities. 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.
All financial information in this Quarterly Report on Form 10-Q is reported on a continuing operations basis.
Capital Adequacy Requirements. The Company and First Bank are each required to comply with applicable capital adequacy standards established by the Board of Governors of the Federal Reserve System (“Federal Reserve”). The current risk-based capital standards applicable to the Company and First Bank, parts of which are currently in the process of being phased-in, are based on the December 2010 final capital framework for strengthening international capital standards, known as Basel III, of the Basel Committee on Banking Supervision (“the Basel Committee”). Prior to January 1, 2015, the risk-based capital standards applicable to the Company and First Bank (“the General Risk-Based Capital Rules”) were based on the 1988 Capital Accord, known as Basel I, of the Basel Committee.
General Risk-Based Capital Rules (Effective Prior to January 1, 2015). The General Risk-Based Capital rules were intended to make regulatory capital requirements sensitive to differences in credit and market risk profiles among banks and bank holding companies, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items were assigned to weighted risk categories. Capital was classified as Tier 1 (or core) capital or Tier 2 (or supplementary) capital depending on its characteristics. Under the General Risk-Based Capital Rules, Tier 1 capital included common equity, retained earnings, qualifying noncumulative perpetual preferred stock (including related surplus), non-controlling interests in equity accounts of consolidated subsidiaries, and a limited amount of certain restricted core capital elements (including subordinated debt and related trust preferred securities), less goodwill, most intangible assets and certain other assets, and Tier 2 capital included qualifying subordinated debt, qualifying mandatorily convertible debt securities, perpetual preferred stock not included in the definition of Tier 1 capital, a limited amount of certain restricted core capital elements not eligible for inclusion in Tier 1 capital (including subordinated debt and related trust preferred securities), and a limited amount of the allowance for loan losses.
Under the General Risk-Based Capital Rules, the Company and First Bank were each required to maintain Tier 1 capital and Total capital (that is, the sum of Tier 1 and Tier 2 capital) equal to at least 4.0% and 8.0%, respectively, of total risk-weighted assets (including certain off-balance sheet items, such as unfunded loan commitments greater than one year and standby letters of credit).
In addition to the General Risk-Based Capital Rules, we were 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 (“Leverage Ratio”). Applicable requirements provided 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%.
First Bank was categorized as well capitalized at December 31, 2014 under the prompt corrective action provisions of the General Risk-Based Capital Rules. The Company was categorized as adequately capitalized under the regulatory capital standards established for bank holding companies by the Federal Reserve at December 31, 2014, as further described in Note 8 to our consolidated financial statements.
Basel III and the Final Capital Rules (Effective January 1, 2015). In July 2013, the federal bank regulators approved final rules (“the Final Capital Rules”) implementing the Basel III framework as well as certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). The Final Capital Rules also substantially revise the risk-based capital requirements applicable to bank holding companies and their depository institution subsidiaries, including the Company and First Bank, as compared to the General Risk-Based Capital Rules. The Final Capital Rules revise the components of capital and address other issues affecting the numerator in regulatory capital ratios. The Final Capital Rules also address asset risk weights and other issues affecting the denominator in regulatory capital ratios and replace the existing general risk-weighting approach based on Basel I with a more risk-sensitive approach. The Final Capital Rules became effective for the Company and First Bank on January 1, 2015 (subject to a phase-in period for certain provisions). The Final Capital Rules:

27



Include a new minimum common equity Tier 1 capital ratio of 4.5% of risk-weighted assets and raise the minimum Tier 1 capital ratio from 4.0% to 6.0% of risk-weighted assets;
Require institutions to maintain a capital conservation buffer composed of common equity Tier 1 capital of 2.5% above the minimum risk-based capital requirements in order to avoid limitations on capital distributions, including dividend payments (unless a waiver is granted by the Federal Reserve) and certain discretionary bonus payments to executive officers (unless a waiver is granted by the Federal Reserve). In addition, institutions that do not maintain the required capital conservation buffer may also be limited in their ability to make payments on trust preferred securities. The capital conservation buffer is measured relative to risk-weighted assets and will be phased in over a four-year period beginning on January 1, 2016 with an initial requirement of 0.625%, that subsequently increases to 1.25%, 1.875% and 2.5% on January 1, 2017, 2018 and 2019, respectively;
Implement new constraints on the inclusion of minority interests, mortgage servicing assets, deferred tax assets and certain investments in the capital of unconsolidated financial institutions in Tier 1 capital;
Increase risk-weightings for past-due loans, certain commercial real estate loans and some equity exposures; and
Allow non-advanced banking organizations, such as us, a one-time option to filter certain accumulated other comprehensive income components, such as unrealized gains and losses on available-for-sale investment securities, out of regulatory capital. We exercised the option to filter these items out of regulatory capital during the first quarter of 2015.
The Final Capital Rules revise the capital levels for depository institutions under the prompt corrective action regulations for depository institutions.
First Bank was categorized as well capitalized at March 31, 2015 under the prompt corrective action provisions of the regulatory capital standards. The Company was not categorized as adequately capitalized under minimum regulatory capital standards established for bank holding companies by the Federal Reserve at March 31, 2015 as a result of not meeting the required common equity Tier 1 requirement under the Final Capital Rules, as further described below and in Note 8 to our consolidated financial statements.
The calculation of common equity Tier 1 capital is different from the calculation of common equity under U.S. generally accepted accounting principles (“GAAP”). Most significantly for the Company, the Company's net deferred tax assets, which are included in the calculation of common equity under GAAP, will be substantially phased out over time from the required calculation of common equity Tier 1 capital for regulatory purposes. The net deferred tax assets attributable to net operating loss and tax credit carryforwards, which comprised over 91.8% of the Company's net deferred tax assets as of March 31, 2015, are scheduled to be substantially phased out of the calculation of common equity Tier 1 capital in 2018. In addition, the inclusion of trust preferred securities eligible for Tier 1 capital is more limited under the Final Capital Rules. The Company did not meet the common equity Tier 1 requirement at March 31, 2015, and absent a substantial increase in qualifying common equity, the Company will not meet the common equity Tier 1 requirement under the Final Capital Rules in the future. The inability to be categorized as adequately capitalized under the Final Capital Rules could materially adversely impact our financial condition, results of operations, ability to grow, and ability to make dividend payments and interest payments on capital stock and trust preferred securities. For additional information regarding the Final Capital Rules, see Note 8 to our consolidated financial statements.

RESULTS OF OPERATIONS
Executive Summary. We recorded net income of $2.7 million for the three months ended March 31, 2015, compared to $5.4 million for the comparable period in 2014.
Our net interest margin decreased four basis points to 2.73% for the three months ended March 31, 2015, from 2.77% for the comparable period in 2014.
Net interest income, expressed on a tax-equivalent basis, was $36.6 million for the three months ended March 31, 2015, as compared to $36.4 million for the comparable period in 2014.
We did not record a provision for loan losses for the three months ended March 31, 2015 and 2014.
Noninterest income increased $3.8 million, or 26.9%, to $18.1 million for the three months ended March 31, 2015, from $14.3 million for the comparable period in 2014.
Noninterest expense increased $8.1 million, or 19.0%, to $50.4 million for the three months ended March 31, 2015, from $42.4 million for the comparable period in 2014.

28



Total assets increased $111.1 million to $6.05 billion at March 31, 2015, from $5.94 billion at December 31, 2014.
Total loans increased $44.2 million to $3.19 billion at March 31, 2015, from $3.15 billion at December 31, 2014.
Investment securities increased $85.9 million to $2.15 billion at March 31, 2015, from $2.06 billion at December 31, 2014.
Deposits increased $122.6 million to $4.97 billion at March 31, 2015, from $4.85 billion at December 31, 2014.
Nonperforming assets, comprised of other real estate and nonaccrual loans, decreased $47.1 million, or 41.6%, to $66.1 million at March 31, 2015, from $113.1 million at December 31, 2014. Other real estate decreased $40.4 million, or 72.6%, to $15.2 million at March 31, 2015, from $55.7 million at December 31, 2014, primarily driven by the sale of a single property in our Southern California region in January 2015 with a carrying value of $37.6 million at a net gain of $4.6 million.
On March 6, 2015, First Bank entered into a Branch Purchase and Assumption Agreement with Bank of Stockton that provides for the sale of certain assets and the transfer of certain liabilities of First Bank’s two branch banking office located in Napa and Brentwood, California. Under the terms of the agreement, Bank of Stockton is to assume approximately $43 million of deposits associated with these branches. Bank of Stockton is also expected to purchase approximately $7 million of loans as well as certain other assets, including premises and equipment, associated with these branches. The transaction, which is subject to regulatory approvals and certain closing conditions, is expected to be completed during the third quarter of 2015 and, based on current deposit levels and terms of the agreement, result in a gain of approximately $1.7 million.
Net Interest Income and Average Balance Sheets. The primary source of our income is net interest income. The following table sets forth, on a tax-equivalent basis, certain information on a continuing operations 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 three months ended March 31, 2015 and 2014:
 
Three Months Ended March 31,
 
2015
 
2014
(dollars in thousands)
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Rate
 
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Rate
ASSETS:
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Loans (1)(2)(3)
$
3,148,465

 
30,011

 
3.87
%
 
$
2,877,153

 
29,091

 
4.10
%
Investment securities (3)
2,074,537

 
11,193

 
2.19

 
2,222,831

 
12,656

 
2.31

FRB and FHLB stock
30,404

 
360

 
4.80

 
30,280

 
358

 
4.79

Short-term investments
182,075

 
125

 
0.28

 
189,171

 
120

 
0.26

Total interest-earning assets
5,435,481

 
41,689

 
3.11

 
5,319,435

 
42,225

 
3.22

Nonearning assets
561,552

 
 
 
 
 
580,512

 
 
 
 
Total assets
$
5,997,033

 
 
 
 
 
$
5,899,947

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand
$
717,288

 
91

 
0.05
%
 
$
675,021

 
82

 
0.05
%
Savings and money market
1,913,978

 
881

 
0.19

 
1,843,543

 
744

 
0.16

Time deposits of $100 or more
370,219

 
480

 
0.53

 
399,589

 
486

 
0.49

Other time deposits
561,449

 
599

 
0.43

 
645,885

 
722

 
0.45

Total interest-bearing deposits
3,562,934

 
2,051

 
0.23

 
3,564,038

 
2,034

 
0.23

Other borrowings
54,426

 
13

 
0.10

 
39,839

 
4

 
0.04

Subordinated debentures
354,296

 
3,015

 
3.45

 
354,220

 
3,811

 
4.36

Total interest-bearing liabilities
3,971,656

 
5,079

 
0.52

 
3,958,097

 
5,849

 
0.60

Noninterest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
1,349,236

 
 
 
 
 
1,244,380

 
 
 
 
Other liabilities
157,184

 
 
 
 
 
202,606

 
 
 
 
Total liabilities
5,478,076

 
 
 
 
 
5,405,083

 
 
 
 
Stockholders’ equity
518,957

 
 
 
 
 
494,864

 
 
 
 
Total liabilities and stockholders’ equity
$
5,997,033

 
 
 
 
 
$
5,899,947

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
 
36,610

 
 
 
 
 
36,376

 
 
Interest rate spread
 
 
 
 
2.59

 
 
 
 
 
2.62

Net interest margin (4)
 
 
 
 
2.73
%
 
 
 
 
 
2.77
%
____________________
(1)
For purposes of these computations, nonaccrual loans are included in the average loan amounts.
(2)
Interest income on loans includes loan fees.
(3)
Information is presented on a tax-equivalent basis assuming a tax rate of 35%. The tax-equivalent adjustments were $23,000 and $36,000 for the three months ended March 31, 2015 and 2014, respectively.
(4)
Net interest margin is the ratio of net interest income (expressed on a tax-equivalent basis) to average interest-earning assets.

29



Our balance sheet is presently asset sensitive, 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. As such, the low interest rate environment has resulted in a compression of our net interest margin. Our asset-sensitive position, coupled with the high level of lower-yielding short-term investments and investment securities as a percentage of our interest-earning assets has negatively impacted our net interest income. We continue our efforts to re-define our overall strategy and business plans with respect to our loan portfolio, focusing on loan growth initiatives to redeploy available funds into higher-yielding assets, as further discussed below.
Net interest income, expressed on a tax-equivalent basis, was $36.6 million for the three months ended March 31, 2015, as compared to $36.4 million for the comparable period in 2014. Our net interest margin decreased four basis points to 2.73% for the three months ended March 31, 2015, from 2.77% for the comparable period in 2014.
We attribute the decrease in our net interest margin for the three months ended March 31, 2015, as compared to the comparable period in 2014, to a decrease in the average yield on loans due to the lower interest rate environment and competitive markets with respect to loan originations, coupled with a lower yield earned on our investment securities for the three months ended March 31, 2015, as compared to the comparable period in 2014, partially offset by a reduction in the weighted average rate paid on our junior subordinated debentures. The average yield earned on our interest-earning assets decreased 11 basis points to 3.11% for the three months ended March 31, 2015, from 3.22% for the comparable period in 2014, while the average rate paid on our interest-bearing liabilities decreased eight basis points to 0.52% for the three months ended March 31, 2015, from 0.60% for the comparable period in 2014. Average interest-earning assets increased $116.0 million and average interest-bearing liabilities increased $13.6 million for the three months ended March 31, 2015, as compared to the comparable period in 2014.
Interest income on our loan portfolio, expressed on a tax-equivalent basis, increased $920,000 for the three months ended March 31, 2015, as compared to the comparable period in 2014. Average loans increased $271.3 million to $3.15 billion for the three months ended March 31, 2015, as compared to $2.88 billion for the comparable period in 2014, while the yield on our loan portfolio decreased 23 basis points to 3.87% for the three months ended March 31, 2015, from 4.10% for the comparable period in 2014. The increase in average loans primarily reflects continued growth in our loan production volumes. The yield on our loan portfolio continues to be adversely impacted by the lower levels of prime and LIBOR interest rates, as a significant portion of our loan portfolio is priced to these indices, as well as significant competitive pressure on interest rates on new loan originations throughout our markets. However, continued growth in loan volumes is expected to positively impact the level of earnings on our loan portfolio in the future.
Interest income on our investment securities, expressed on a tax-equivalent basis, decreased $1.5 million for the three months ended March 31, 2015, as compared to the comparable period in 2014. Average investment securities decreased $148.3 million for the three months ended March 31, 2015, as compared to the comparable period in 2014. The yield earned on our investment securities portfolio decreased 12 basis points to 2.19% for the three months ended March 31, 2015, from 2.31% for the comparable period in 2014, primarily reflecting the continued low interest rate environment. While our investment securities have declined to fund loan growth initiatives, we continue to maintain a high level of investment securities in an effort to support future loan growth opportunities.
Interest expense on our interest-bearing deposits increased $17,000 for the three months ended March 31, 2015, as compared to the comparable period in 2014. Average interest-bearing deposits decreased $1.1 million for the three months ended March 31, 2015, as compared to the comparable period in 2014. The decrease in average interest-bearing deposits for the three months ended March 31, 2015, as compared to the comparable period in 2014, reflects a decrease in average time deposits of $113.8 million, partially offset by organic growth in demand deposits and money market deposits of $112.7 million through deposit development programs, including marketing campaigns and enhanced product and service offerings. The mix in our deposit portfolio volumes for the three months ended March 31, 2015, as compared to the comparable period in 2014, primarily reflects a shift from time deposits to interest-bearing and noninterest-bearing demand and savings and money market deposits. The aggregate weighted average rate paid on our interest-bearing deposit portfolio remained unchanged at 0.23% for the three months ended March 31, 2015 and 2014. The weighted average rate paid on our time deposit portfolio remained unchanged at 0.47% for the three months ended March 31, 2015 and 2014; the weighted average rate paid on our savings and money market deposit portfolio increased three basis points to 0.19% for the three months ended March 31, 2015, from 0.16% for the comparable period in 2014; and the weighted average rate paid on our interest-bearing demand deposits remained unchanged at 0.05% for the three months ended March 31, 2015 and 2014.
Interest expense on our junior subordinated debentures decreased $796,000 for the three months ended March 31, 2015, as compared to the comparable period in 2014. The aggregate weighted average rate paid on our junior subordinated debentures decreased to 3.45% for the three months ended March 31, 2015, from 4.36% for the comparable period in 2014. The aggregate weighted average rates reflect additional interest expense accrued on the regularly scheduled deferred interest payments on our junior subordinated debentures until March 2014, when we paid all of the cumulative deferred interest. The additional interest expense accrued on the regularly scheduled deferred interest payments increased the weighted average rate paid on our junior subordinated debentures by 91 basis points for the three months ended March 31, 2014. The aggregate weighted average rates are also impacted by changes in LIBOR rates, as approximately 79.4% of our junior subordinated debentures are variable rate. In connection with our ongoing

30



efforts to reduce interest and non-interest expense and to the extent we have the capital capacity to do so, we may from time to time consider the potential redemption of one or more series of our trust preferred securities including those that are publicly held.
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, for the three months ended March 31, 2015, as compared to the three months ended March 31, 2014. 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:
 
Three Months Ended
March 31, 2015 Compared to 2014
(dollars in thousands)
Volume
 
Rate
 
Net Change
Interest earned on:
 
 
 
 
 
Loans (1) (2) (3)
$
2,623

 
(1,703
)
 
920

Investment securities (3)
(823
)
 
(640
)
 
(1,463
)
FRB and FHLB stock
1

 
1

 
2

Short-term investments
(4
)
 
9

 
5

Total interest income
1,797

 
(2,333
)
 
(536
)
Interest paid on:
 
 
 
 
 
Interest-bearing demand deposits
9

 

 
9

Savings and money market deposits
23

 
114

 
137

Time deposits
(129
)
 

 
(129
)
Other borrowings
2

 
7

 
9

Subordinated debentures
1

 
(797
)
 
(796
)
Total interest expense
(94
)
 
(676
)
 
(770
)
Net interest income
$
1,891

 
(1,657
)
 
234

____________________
(1)
For purposes of these computations, nonaccrual loans are included in the average loan amounts.
(2)
Interest income on loans includes loan fees.
(3)
Information is presented on a tax-equivalent basis assuming a tax rate of 35%.
Provision for Loan Losses. We did not record a provision for loan losses for the three months ended March 31, 2015 and 2014, which was attributable to the continued improvement in our overall asset quality levels, as further discussed under “—Loans and Allowance for Loan Losses.”
Our potential problem loans were $24.1 million at March 31, 2015, compared to $25.2 million at December 31, 2014 and $101.8 million at March 31, 2014, reflecting a 76.3% decrease in potential problem loans year-over-year. Our nonaccrual loans were $50.8 million at March 31, 2015, compared to $57.5 million at December 31, 2014 and $53.8 million at March 31, 2014, reflecting a 5.5% decrease in nonaccrual loans year-over-year. The decrease in the overall level of potential problem loans and nonaccrual loans at March 31, 2015, as compared to March 31, 2014, was primarily driven by the resolution of certain potential problem and nonaccrual loans, and reflects our continued progress with respect to the successful implementation of initiatives designed to reduce the overall balance of nonaccrual and other potential problem loans and assets.
We recorded net loan charge-offs of $2.7 million for the three months ended March 31, 2015, compared to $1.2 million for the comparable period in 2014. Our annualized net loan charge-offs were 0.35% and 0.17% of average loans for the three months ended March 31, 2015 and 2014, respectively. Loan charge-offs were $4.7 million and $3.4 million for the three months ended March 31, 2015 and 2014, respectively, and loan recoveries were $2.0 million and $2.2 million for the three months ended March 31, 2015 and 2014, respectively.
Tables summarizing nonperforming assets, past due loans and charge-off and recovery experience are presented under “—Loans and Allowance for Loan Losses.”

31



Noninterest Income. Noninterest income increased $3.8 million, or 26.9%, to $18.1 million for the three months ended March 31, 2015, from $14.3 million for the comparable period in 2014. The increase in our noninterest income was primarily attributable to an increase in gains on loans sold and held for sale and gains on sale of other real estate, partially offset by a decline in net gains on investment securities and declines in the fair value of servicing rights. The following table summarizes noninterest income for the three months ended March 31, 2015 and 2014:
 
Three Months Ended
 
 
 
 
 
March 31,
 
Increase (Decrease)
(dollars in thousands)
2015
 
2014
 
Amount
 
%
Noninterest income:
 
 
 
 
 
 
 
Service charges on deposit accounts and client service fees
$
8,104

 
8,333

 
(229
)
 
(2.7
)%
Gain on loans sold and held for sale
2,837

 
865

 
1,972

 
228.0

Net gain on investment securities
43

 
1,280

 
(1,237
)
 
(96.6
)
Net gain on sale of other real estate
4,992

 
442

 
4,550

 
1,029.4

Decrease in fair value of servicing rights
(1,472
)
 
(232
)
 
(1,240
)
 
(534.5
)
Loan servicing fees
1,580

 
1,711

 
(131
)
 
(7.7
)
Other
2,044

 
1,886

 
158

 
8.4

Total noninterest income
$
18,128

 
14,285

 
3,843

 
26.9

The increase in gains on residential mortgage loans sold and held for sale for the three months ended March 31, 2015, as compared to the comparable period in 2014, was primarily attributable to an increase in loan production volumes in our mortgage banking division during the periods, as new interest rate lock commitments increased to $122.7 million for the three months ended March 31, 2015, from $47.9 million for the comparable period in 2014. The increase in loan production volume was primarily associated with an increase in refinancing activity in our mortgage banking division.
Net gains on investment securities for the three months ended March 31, 2015 reflect the sale of certain investment securities to fund loan growth and for other asset-liability management purposes. Net gains on investment securities for the three months ended March 31, 2014 reflect the sale of certain investment securities to fund loan growth and other corporate transactions.
The increase in net gains on sales of other real estate reflects sales of other real estate properties with an aggregate carrying value of $40.7 million at a net gain of $5.0 million for the three months ended March 31, 2015, including the sale of a single property in our Southern California region in January 2015 with a carrying value of $37.6 million at a net gain of $4.6 million.
The decrease in the fair value of mortgage and SBA servicing rights for the three months ended March 31, 2015, as compared to the comparable period in 2014, primarily reflects changes in mortgage interest rates and the related changes in estimated prepayment speeds during the periods, as well as changes in cash flow assumptions underlying SBA loans serviced for others.
Noninterest Expense. Noninterest expense increased $8.1 million, or 19.0%, to $50.4 million for the three months ended March 31, 2015, from $42.4 million for the comparable period in 2014. The increase in our noninterest expense was primarily attributable to an increase in salaries and employee benefits expenses and other expenses. The following table summarizes noninterest expense for the three months ended March 31, 2015 and 2014:
 
Three Months Ended
 
 
 
 
 
March 31,
 
Increase (Decrease)
(dollars in thousands)
2015
 
2014
 
Amount
 
%
Noninterest expense:
 
 
 
 
 
 
 
Salaries and employee benefits
$
22,903

 
19,882

 
3,021

 
15.2
 %
Occupancy, net of rental income, and furniture and equipment
8,700

 
8,144

 
556

 
6.8

Postage, printing and supplies
583

 
639

 
(56
)
 
(8.8
)
Information technology fees
5,346

 
5,220

 
126

 
2.4

Legal, examination and professional fees
907

 
1,291

 
(384
)
 
(29.7
)
Advertising and business development
687

 
622

 
65

 
10.5

FDIC insurance
945

 
1,264

 
(319
)
 
(25.2
)
Write-downs and expenses on other real estate
232

 
699

 
(467
)
 
(66.8
)
Other
10,116

 
4,597

 
5,519

 
120.1

Total noninterest expense
$
50,419

 
42,358

 
8,061

 
19.0

The increase in salaries and employee benefits expense for the three months ended March 31, 2015, as compared to the comparable period in 2014, reflects normal compensation increases, increases in staffing levels in certain key revenue-generating functions and an increase in incentive compensation.
The increase in occupancy, net of rental income, and furniture and equipment expense for the three months ended March 31, 2015, as compared to the comparable period in 2014, primarily resulted from increased technology equipment and software expenditures associated with technology initiatives intended to support revenue growth.
The decrease in write-downs and expenses on other real estate for the three months ended March 31, 2015, as compared to the comparable period in 2014, reflects a reduction in the balance of our other real estate, most significantly the sale of a single property

32



in our Southern California region, as previously discussed, and expenses associated with this property during the periods. Other real estate decreased to $15.2 million at March 31, 2015, from $55.7 million and $61.5 million at December 31, 2014 and March 31, 2014, respectively. Other real estate expenses, exclusive of write-downs, such as taxes, insurance, and repairs and maintenance, decreased $479,000 to $123,000 for the three months ended March 31, 2015, from $602,000 for the comparable period in 2014. Write-downs related to the re-valuation of certain other real estate properties increased $12,000 to $109,000 for the three months ended March 31, 2015, from $97,000 for the comparable period in 2014.
The increase in other expense for the three months ended March 31, 2015, as compared to the comparable period in 2014, was primarily attributable to losses incurred on three bank facilities of $5.7 million, in aggregate. First, we recorded a loss of $2.9 million on a multi-tenant facility to record the facility at fair value less estimated selling costs. This facility served as a former bank branch and office location for Company personnel and we made the decision during the first quarter of 2015 to market the facility for sale. Next, we recorded a loss of $1.6 million on an owned facility built with the intention of starting a de novo branch. We made the decision during the first quarter of 2015 to market the facility for sale, and as such, recorded a write-down on the facility to fair value less estimated selling costs. Finally, we recorded a lease adjustment of $1.2 million related to a land lease entered into with the intent of opening a de novo branch. We made the decision during the first quarter of 2015 to market this land for sublease.
Provision for Income Taxes. We recorded a provision for income taxes of $1.6 million for the three months ended March 31, 2015, as compared to $2.9 million for the comparable period in 2014. The effective tax rate was 37.5% for the three months ended March 31, 2015, as compared to 35.3% for the comparable period in 2014.
FINANCIAL CONDITION
Total assets increased $111.1 million to $6.05 billion at March 31, 2015, from $5.94 billion at December 31, 2014. The increase in our total assets primarily reflects an increase in our investment securities portfolio, our loan portfolio and our cash and cash equivalents, partially offset by a reduction in other real estate, as further described below.
Cash and cash equivalents, which are comprised of cash and short-term investments, increased $25.3 million to $230.7 million at March 31, 2015, from $205.4 million at December 31, 2014. A significant portion of funds in our short-term investments are maintained in our correspondent bank account with the Federal Reserve Bank of St. Louis (“FRB”), as further discussed under “—Liquidity Management.” The increase in our cash and cash equivalents was primarily attributable to the following:
An increase in deposits of $122.6 million;
Sales of other real estate resulting in cash proceeds from these sales of $45.7 million, as further discussed below; and
Cash generated by operating earnings; partially offset by
A net increase in our investment securities portfolio of $84.4 million, excluding amortization and the fair value adjustment on available-for-sale investment securities;
An increase in loans of $49.4 million, exclusive of loan charge-offs and transfers of loans to other real estate, as further discussed below; and
A net decrease in our securities sold under agreements to repurchase of $13.8 million.
Investment securities increased $85.9 million to $2.15 billion at March 31, 2015, from $2.06 billion at December 31, 2014. Funds available from an increase in deposits were utilized to fund loan growth and purchase investment securities. The net increase in investment securities also reflects an increase of $7.9 million in the fair value adjustment on our available-for-sale investment securities resulting from a decrease in market interest rates during the first three months of 2015. We continue to maintain a high level of investment securities in an effort to support future loan growth opportunities, maximize our net interest income and net interest margin, and maintain appropriate liquidity levels and appropriate diversification within our investment securities portfolio.
Loans, net of net deferred loan fees (“Total Loans”), increased $44.2 million to $3.19 billion at March 31, 2015, from $3.15 billion at December 31, 2014. The increase primarily reflects new loan production as a result of successful efforts to expand existing loan relationships and develop new loan relationships. We have several strategic initiatives in place related to loan growth throughout 2015.
Other real estate decreased $40.4 million to $15.2 million at March 31, 2015, from $55.7 million at December 31, 2014. The decrease primarily reflects sales of other real estate properties of $40.7 million at a net gain of $5.0 million, including the sale of a single property in our Southern California region in January 2015 with a carrying value of $37.6 million at a net gain of $4.6 million.

33



Deposits increased $122.6 million to $4.97 billion at March 31, 2015, from $4.85 billion at December 31, 2014. The increase reflects growth in demand and savings and money market deposits of $92.7 million and $33.5 million, respectively, partially offset by a decrease in certificates of deposit of $3.6 million. The following table summarizes the composition of our deposit portfolio at March 31, 2015 and December 31, 2014:
(dollars in thousands)
March 31,
2015
 
December 31,
2014
Noninterest-bearing demand
$
1,386,562

 
1,303,519

Interest-bearing demand
720,598

 
710,958

Savings and money market
1,942,646

 
1,909,150

Time deposits of $100 or more
370,283

 
354,717

Other time deposits
552,000

 
571,160

Total deposits
$
4,972,089

 
4,849,504

Daily securities sold under agreements to repurchase (in connection with cash management activities of our commercial deposit clients) decreased $13.8 million to $51.0 million at March 31, 2015, from $64.9 million at December 31, 2014, reflecting changes in client balances associated with this product segment.
Loans and Allowance for Loan Losses
Loan Portfolio Composition. The following table summarizes the composition of our loan portfolio by category at March 31, 2015 and December 31, 2014:
(dollars in thousands)
March 31,
2015
 
December 31,
2014
Commercial, financial and agricultural
$
700,183

 
695,267

Real estate construction and development
110,705

 
89,851

Real estate mortgage:
 
 
 
One-to-four-family residential real estate:
 
 
 
Residential mortgage
628,073

 
621,168

Home equity
402,015

 
395,542

Multi-family residential
114,288

 
115,434

Commercial real estate
1,174,799

 
1,183,042

Consumer and installment
20,956

 
18,950

Loans held for sale
43,655

 
31,411

Net deferred loan fees
(1,277
)
 
(1,422
)
Total loans
$
3,193,397

 
3,149,243

The following table summarizes the composition of our loan portfolio by geographic region and/or business segment at March 31, 2015 and December 31, 2014:
(dollars in thousands)
March 31,
2015
 
December 31,
2014
Southern California
$
1,086,642

 
1,020,118

Missouri
690,008

 
713,543

Mortgage Banking Division
603,080

 
586,177

Northern California
443,659

 
438,918

Northern and Southern Illinois
210,337

 
222,935

Chicago
62,801

 
65,411

Florida
49,925

 
51,459

Texas
10,847

 
12,509

Other
36,098

 
38,173

Total loans
$
3,193,397

 
3,149,243

Total loans represented 52.8% of our assets as of March 31, 2015, compared to 53.1% of our assets at December 31, 2014. Total loans increased $44.2 million to $3.19 billion at March 31, 2015, from $3.15 billion at December 31, 2014. The increase in our loan portfolio during the first three months of 2015 primarily reflects new loan production as a result of successful efforts to expand existing loan relationships and develop new loan relationships. We have several strategic initiatives in place related to loan growth throughout 2015.

34



Nonperforming Assets. Nonperforming assets consist of nonaccrual loans and other real estate. The following table presents the categories of nonperforming assets and certain ratios as of March 31, 2015 and December 31, 2014:
(dollars in thousands)
March 31,
2015
 
December 31,
2014
Nonperforming Assets:
 
 
 
Nonaccrual loans:
 
 
 
Commercial, financial and agricultural
$
7,240

 
9,486

Real estate construction and development
3,308

 
3,393

One-to-four-family residential real estate:
 
 
 
Residential mortgage
10,911

 
13,890

Home equity
6,337

 
6,831

Multi-family residential
18,994

 
19,731

Commercial real estate
4,046

 
4,122

Consumer and installment
4

 
23

Total nonaccrual loans
50,840

 
57,476

Other real estate
15,227

 
55,666

Total nonperforming assets
$
66,067

 
113,142

 
 
 
 
Total loans
$
3,193,397

 
3,149,243

 
 
 
 
Performing troubled debt restructurings
$
78,131

 
80,619

 
 
 
 
Loans past due 90 days or more and still accruing
$
15

 
163

 
 
 
 
Ratio of:
 
 
 
Allowance for loan losses to loans
2.01
%
 
2.12
%
Nonaccrual loans to loans
1.59

 
1.83

Allowance for loan losses to nonaccrual loans
126.16

 
116.35

Nonperforming assets to loans and other real estate
2.06

 
3.53

Our nonperforming assets decreased $47.1 million, or 41.6%, to $66.1 million at March 31, 2015, from $113.1 million at December 31, 2014, reflecting a decrease in both other real estate and nonaccrual loans.
The decrease in other real estate of $40.4 million, or 72.6%, during the first three months of 2015 was primarily driven by sales of other real estate properties with an aggregate carrying value of $40.7 million at a net gain of $5.0 million, including the sale of a single property in our Southern California region in January 2015 with a carrying value of $37.6 million at a net gain of $4.6 million.
The decrease in our nonaccrual loans of $6.6 million, or 11.5%, during the first three months of 2015 reflects the resolution of certain nonaccrual loans resulting in a reduction in the level of nonaccrual loans in all of our loan categories. Nonaccrual loans at March 31, 2015 and December 31, 2014 include a single multi-family residential loan relationship in our Chicago region of $18.7 million and $19.1 million, respectively.
As of March 31, 2015 and December 31, 2014, loans identified by management as troubled debt restructurings (“TDRs”) aggregating $25.2 million and $26.5 million, respectively, were on nonaccrual status and were classified as nonperforming loans.
Performing Troubled Debt Restructurings. Our performing TDRs decreased $2.5 million, or 3.1%, to $78.1 million at March 31, 2015, from $80.6 million at December 31, 2014. The majority of our performing TDRs are comprised of one-to-four-family residential loans, which totaled $77.5 million and $76.2 million at March 31, 2015 and December 31, 2014, respectively. TDRs in the Home Affordable Modification Program (“HAMP”) totaled $70.1 million at March 31, 2015.
Potential Problem Loans. As of March 31, 2015 and December 31, 2014, loans aggregating $24.1 million and $25.2 million, respectively, which were not classified as nonperforming assets or performing TDRs, were identified by management as having potential credit problems (“Potential Problem Loans”). These loans are generally defined as commercial loans having an internally assigned grade of substandard and consumer loans which are greater than 30 days past due. Potential problem loans decreased $1.1 million, or 4.3%, during the first three months of 2015. The following table presents the categories of our potential problem loans as of March 31, 2015 and December 31, 2014:
(dollars in thousands)
March 31,
2015
 
December 31,
2014
Commercial, financial and agricultural
$
12,463

 
12,833

Real estate mortgage:
 
 
 
One-to-four-family residential
3,077

 
4,925

Multi-family residential
637

 
610

Commercial real estate
7,809

 
6,640

Consumer and installment
118

 
171

Total potential problem loans
$
24,104

 
25,179


35



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 economic environment, our credit administration department and our internal credit review department are reviewing a number of loans with varying credit exposure 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. 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 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. 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.
Allowance for Loan Losses. Our allowance for loan losses decreased to $64.1 million at March 31, 2015, from $66.9 million at December 31, 2014. The decrease in our allowance for loan losses during the first three months of 2015 was attributable to net loan charge-offs of $2.7 million.
Our allowance for loan losses as a percentage of total loans was 2.01% and 2.12% at March 31, 2015 and December 31, 2014, respectively. The decrease in the allowance for loan losses as a percentage of total loans during the first three months of 2015 was primarily attributable to the decrease in our nonaccrual loans and potential problem loans, in addition to a continuing decrease in our historical net loan charge-off experience during the first three months of 2015.
Our allowance for loan losses as a percentage of nonaccrual loans was 126.16% and 116.35% at March 31, 2015 and December 31, 2014, respectively. The increase in the allowance for loan losses as a percentage of nonaccrual loans during the first three months of 2015 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.

36



The following table summarizes the changes in the allowance for loan losses for the three months ended March 31, 2015 and 2014:
 
Three Months Ended
 
March 31,
(dollars in thousands)
2015
 
2014
Allowance for loan losses, beginning of period
$
66,874

 
81,033

Loans charged-off:
 
 
 
Commercial, financial and agricultural
(2,987
)
 
(1,622
)
Real estate construction and development
(40
)
 
(30
)
Real estate mortgage:
 
 
 
One-to-four-family residential:
 
 
 
Residential mortgage
(1,032
)
 
(1,091
)
Home equity
(131
)
 
(335
)
Multi-family residential
(189
)
 
(132
)
Commercial real estate
(343
)
 
(188
)
Consumer and installment
(22
)
 
(49
)
Total
(4,744
)
 
(3,447
)
Recoveries of loans previously charged-off:
 
 
 
Commercial, financial and agricultural
1,244

 
752

Real estate construction and development
164

 
600

Real estate mortgage:
 
 
 
One-to-four-family residential:
 
 
 
Residential mortgage
358

 
582

Home equity
142

 
209

Multi-family residential
56

 
7

Commercial real estate
21

 
57

Consumer and installment
27

 
38

Total
2,012

 
2,245

Net loan charge-offs
(2,732
)
 
(1,202
)
Provision for loan losses

 

Allowance for loan losses, end of period
$
64,142

 
79,831

We recorded net loan charge-offs of $2.7 million for the three months ended March 31, 2015, compared to $1.2 million for the comparable period in 2014. The increase in our net loan charge-offs for the first quarter of 2015, as compared to the first quarter of 2014, primarily reflects an increase in net loan charge-offs associated with our commercial, financial and agricultural portfolio. Our annualized net loan charge-offs as a percentage of average loans were 0.35% for the three months ended March 31, 2015, compared to 0.17% for the comparable period in 2014.
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 continuously monitors and analyzes concentrations in our real estate portfolio. 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 income.
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;

37



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.
The following table is a summary of the ratio of the allocated allowance for loan losses to loans by category as of March 31, 2015 and December 31, 2014:
 
March 31,
2015
 
December 31,
2014
Commercial, financial and agricultural
1.76
%
 
1.81
%
Real estate construction and development
2.49

 
3.88

Real estate mortgage:
 
 
 
One-to-four-family residential
2.18

 
2.37

Multi-family residential
4.88

 
4.88

Commercial real estate
1.78

 
1.77

Consumer and installment
0.56

 
0.81

Total
2.01

 
2.12

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, including loan growth in certain portfolio segments.
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, typically 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 (“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, Director of Risk Management and Audit, Director of Retail Banking, 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 4.9%

38



of net interest income, based on assets and liabilities at March 31, 2015. At March 31, 2015, 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 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 historically low interest rate levels, 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 March 31, 2015, adjusted to account for anticipated prepayments:
(dollars in thousands)
Three
Months or
Less
 
Over Three
through Six
Months
 
Over Six
through
Twelve
Months
 
Over One
through Five
Years
 
Over Five
Years
 
Total
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Loans (1)
$
1,548,017

 
165,718

 
292,839

 
946,434

 
240,389

 
3,193,397

Investment securities
102,579

 
106,011

 
199,373

 
1,170,403

 
571,411

 
2,149,777

FRB and FHLB stock
30,348

 

 

 

 

 
30,348

Short-term investments
133,480

 

 

 

 

 
133,480

Total interest-earning assets
$
1,814,424

 
271,729

 
492,212

 
2,116,837

 
811,800

 
5,507,002

Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand deposits
$
266,620

 
165,738

 
108,090

 
79,266

 
100,884

 
720,598

Money market deposits
1,632,829

 

 

 

 

 
1,632,829

Savings deposits
52,669

 
43,374

 
37,178

 
52,669

 
123,927

 
309,817

Time deposits
239,703

 
183,047

 
262,190

 
237,285

 
58

 
922,283

Securities sold under agreements to repurchase
51,032

 

 

 

 

 
51,032

Subordinated debentures
282,480

 

 

 

 
71,825

 
354,305

Total interest-bearing liabilities
$
2,525,333

 
392,159

 
407,458

 
369,220

 
296,694

 
3,990,864

Interest-sensitivity gap:
 
 
 
 
 
 
 
 
 
 
 
Periodic
$
(710,909
)
 
(120,430
)
 
84,754

 
1,747,617

 
515,106

 
1,516,138

Cumulative
(710,909
)
 
(831,339
)
 
(746,585
)
 
1,001,032

 
1,516,138

 
 
Ratio of interest-sensitive assets to interest-sensitive liabilities:
 
 
 
 
 
 
 
 
 
 
 
Periodic
0.72

 
0.69

 
1.21

 
5.73

 
2.74

 
1.38

Cumulative
0.72

 
0.72

 
0.78

 
1.27

 
1.38

 
 
____________________
(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 $1.52 billion, or 25.1% of our total assets at March 31, 2015. We were in an overall liability-sensitive position on a cumulative basis through the twelve-month time horizon of $746.6 million, or 12.3% of our total assets at March 31, 2015.
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.
In the past, we have utilized 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 may also sell interest rate swap agreement contracts to certain clients who wish to modify their interest rate sensitivity. There were no interest rate swap agreement contracts outstanding at March 31, 2015 and December 31, 2014. Our derivative instruments are more fully described in Note 5 to our consolidated financial statements.

39



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 client 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 (“CDARS program”)), selling securities under agreements to repurchase, and utilizing borrowings from the Federal Home Loan Bank of Des Moines (“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 market conditions, changes in loan funding needs, operating and debt service requirements, current deposit trends and events that may occur in conjunction with changes in our business strategy. 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 client 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 client deposit levels or potential planned or unexpected liquidity events that may arise from time to time.
Our cash and cash equivalents were $230.7 million and $205.4 million at March 31, 2015 and December 31, 2014, respectively. A significant portion of these funds were maintained in our correspondent bank account with the FRB. The increase in our cash and cash equivalents of $25.3 million is further discussed under “— Financial Condition.”
Our unpledged investment securities increased $74.6 million to $1.76 billion at March 31, 2015, from $1.68 billion at December 31, 2014, and are mostly comprised of highly liquid and readily marketable available-for-sale investment securities. The combined level of cash and cash equivalents and unpledged investment securities provided us with total available liquidity of $1.99 billion and $1.89 billion at March 31, 2015 and December 31, 2014, respectively. Our available liquidity of $1.99 billion represents 32.9% of total assets at March 31, 2015, in comparison to $1.89 billion, or 31.8% of total assets, at December 31, 2014. Our loan-to-deposit ratio decreased to 64.2% at March 31, 2015 from 64.9% at December 31, 2014.
During the first three months of 2015, we increased our aggregate funds acquired from other sources of funds to $421.3 million at March 31, 2015, from $419.6 million at December 31, 2014. 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 increase was attributable to an increase in certificates of deposit of $100,000 or more of $15.6 million, partially offset by a decrease in daily repurchase agreements of $13.8 million. The following table presents the maturity structure of these other sources of funds at March 31, 2015:
(dollars in thousands)
Certificates of
Deposit of
$100,000 or More
 
Other
Borrowings
 
Total
Three months or less
$
93,378

 
51,032

 
144,410

Over three months through six months
76,339

 

 
76,339

Over six months through twelve months
106,375

 

 
106,375

Over twelve months
94,191

 

 
94,191

Total
$
370,283

 
51,032

 
421,315

In addition to these sources of funds, First Bank has established a borrowing relationship with the FRB. First Bank’s borrowing capacity through its relationship with the FRB was approximately $263.8 million and $256.6 million at March 31, 2015 and December 31, 2014, respectively. This borrowing relationship, which is secured primarily by commercial loans, provides an additional liquidity facility that may be utilized for contingency liquidity purposes. First Bank did not have any FRB borrowings outstanding at March 31, 2015 or December 31, 2014.
First Bank also has a borrowing relationship with the FHLB. First Bank’s borrowing capacity through its relationship with the FHLB was approximately $434.2 million and $396.9 million at March 31, 2015 and December 31, 2014, respectively. 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. First Bank did not have any FHLB advances outstanding at March 31, 2015 or December 31, 2014.
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. First Bank had $3.4 million and $4.0 million of time deposits through the CDARS program at March 31, 2015 and December 31, 2014, respectively, and $5.2 million of brokered money market accounts at March 31, 2015 and

40



December 31, 2014. Exclusive of the CDARS program and brokered money market accounts, First Bank does not generally 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 on trust preferred securities and other debt instruments issued by the Company, dividends paid on common and preferred stock (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 $25.2 million and $21.6 million at March 31, 2015 and December 31, 2014, respectively.
We cannot pay any dividends on our common or preferred stock without the prior approval of the FRB, as further described in Note 8 to our consolidated financial statements under “—Regulatory Agreements.”
The Company paid all of the cumulative deferred interest on its junior subordinated debentures (which had been deferred for 18 quarterly periods) in March 2014, which was subsequently distributed to the trust preferred securities holders on the respective interest payment dates in March and April, 2014. Since that time, the Company has continued to pay interest on its junior subordinated debentures to the respective trustees on the regularly scheduled quarterly payment dates. Under the terms of our junior subordinated debentures and the related trust indentures, we have the ability to enter into deferral periods of up to 20 consecutive quarterly periods without triggering a payment default or penalty. Such interest payments are primarily funded through dividends from First Bank. Pursuant to Missouri Revised Statutes, First Bank is required to obtain approval from the Missouri Division of Finance (“MDOF”) prior to paying any dividends to us. The MDOF has complete discretion to grant any such approval and therefore, it is not known whether the MDOF will approve any such future requests. See Note 6 to our consolidated financial statements for further discussion regarding our junior subordinated debentures relating to our trust preferred securities.
Without the payment of dividends from First Bank, the Company currently lacks the source of income and the liquidity to make future interest payments on the subordinated debentures associated with its trust preferred securities. Given restrictions placed upon First Bank, including regulatory restrictions, it may not be able to provide the Company with dividends in an amount sufficient to pay the interest on the trust preferred securities. In such case, the Company would have to pursue alternative funding sources, but there can be no assurance that the Company will be able to identify and obtain alternative funding due to the uncertainty of our ability to access future liquidity through debt markets. The Company’s ability to access debt markets on terms satisfactory to us will depend on our financial performance and conditions in the capital markets, economic conditions and a number of other factors, many of which are outside of our control.
We 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. We have deferred and accrued $68.4 million of regularly scheduled dividend payments on our Class C Preferred Stock and Class D Preferred Stock, and have accrued an additional $9.4 million of cumulative dividends on such deferred dividend payments at March 31, 2015. As such, the aggregate amount of these deferred and accrued dividend payments was $77.8 million at March 31, 2015. If we had continued to declare and accrue dividends on our Class C Preferred Stock and Class D Preferred Stock from the fourth quarter of 2013 and forward, we would have accrued an additional $46.9 million of dividend payments (including $9.6 million of dividend payments that would have been declared and accrued for the three months ended March 31, 2015), and our aggregate deferred and accrued dividend payments would have been $124.7 million at March 31, 2015, as further described in Note 7 to our consolidated financial statements.
The Company’s financial position will be adversely affected if it experiences increased liquidity needs and any of the following events occur:
First Bank is unable or prohibited by its regulators to pay future dividends 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 certain restrictions, as further described in Note 8 to our consolidated financial statements;
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 March 31, 2015, with the exception of $51.0 million of daily repurchase agreements utilized by clients as an alternative deposit product, and has substantial borrowing capacity through its relationships with the FHLB and the FRB, as previously discussed; or

41



The Company has difficulty raising cash through the future issuance of debt or equity instruments or by accessing additional sources of credit, as further described above.
The Company’s financial flexibility will 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 be materially adversely affected. A lack of liquidity and/or cost-effective funding alternatives could lead to the Company’s inability to meet its financial commitments and related contractual obligations associated with its junior subordinated debentures, which would have a material adverse effect on 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 March 31, 2015 were as follows:
(dollars in thousands)
Less Than 1
Year
 
1-3 Years
 
3-5 Years
 
Over 5 Years
 
Total
Operating leases
$
7,844

 
11,572

 
5,656

 
8,887

 
33,959

Certificates of deposit (1)
684,064

 
203,451

 
34,710

 
58

 
922,283

Securities sold under agreements to repurchase
51,032

 

 

 

 
51,032

Subordinated debentures (2)

 

 

 
354,305

 
354,305

Class C Preferred Stock and Class D Preferred Stock (2) (3)

 

 

 
312,743

 
312,743

Other contractual obligations
184

 
1

 

 

 
185

Total
$
743,124

 
215,024

 
40,366

 
675,993

 
1,674,507

____________________
(1)
Amounts exclude the related accrued interest expense on certificates of deposit of $333,000 as of March 31, 2015.
(2)
Amounts exclude the accrued interest expense on junior subordinated debentures of $366,000 as of March 31, 2015, accrued dividends declared on preferred stock of $77.8 million and undeclared dividends of $46.9 million as of March 31, 2015.
(3)
Represents liquidation preference amounts payable upon redemption of the Class C Preferred Stock and the Class D Preferred Stock of $295.4 million and $17.3 million, respectively.
EFFECTS OF NEW ACCOUNTING STANDARDS
In January 2014, the FASB issued ASU 2014-01 - Investments - Equity Method and Joint Ventures (Topic 323) - Accounting for Investments in Qualified Affordable Housing Projects. This ASU provides guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for low-income housing tax credit. The amendments in this ASU permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The amendments require new recurring disclosures about all investments in qualified affordable housing projects irrespective of the method used to account for the investments. This ASU is effective for interim and annual periods beginning after December 15, 2014. Early adoption is permitted. We adopted the requirements of this ASU on January 1, 2015, 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.
In May 2014, the FASB issued ASU 2014-09 - Revenue from Contracts with Customers (Topic 606). The core principle of this ASU is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU identifies a five-step model and related application guidance which will replace most existing revenue recognition guidance. This ASU is effective for interim and annual periods beginning after December 15, 2016. An entity may choose to adopt the ASU either retrospectively or through a cumulative effect adjustment as of the beginning of the first period for which it applies the new guidance. Early adoption is not permitted. We are currently evaluating the requirements of this ASU to determine the method of adoption and the impact on our consolidated financial statements and results of operations and the disclosures to be presented in our consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15 - Presentation of Financial Statements - Going Concern (Subtopic 205-40) - Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. The ASU describes how an entity's management should evaluate for each annual and interim reporting period whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued and sets disclosure requirements about how this information should be communicated. This ASU was initially effective for the annual period after December 15, 2016, and for interim and annual periods thereafter. The FASB recently proposed a one-year deferral of the effective date of this ASU, although the proposed deferral has not yet been

42



finalized. Early adoption is not permitted. We are currently evaluating the requirements of this ASU to determine the impact on the disclosures to be presented in our consolidated financial statements.

ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The quantitative and qualitative disclosures about market risk are included under “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations — Interest Rate Risk Management,” appearing on pages 38 through 39 of this report.

ITEM 4 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 Securities Exchange Act of 1934, or 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 that date 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 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 its 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 to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.




43



PART II – OTHER INFORMATION

ITEM 1 LEGAL PROCEEDINGS
The information required by this item is set forth in Part I, Item 1 – Financial Statements, under Note 12, 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 is reasonably likely to have a material adverse effect on our business, financial condition or results of operations.
On May 19, 2014, the Company entered into a Memorandum of Understanding (“MOU”) with the FRB. The MOU is characterized by regulatory authorities as an informal action that is neither published nor made publicly available by the FRB and is used when circumstances warrant a milder form of action than a formal supervisory action. See Note 8 to our consolidated financial statements for further discussion regarding the terms of the MOU. While the Company intends to take such actions as may be necessary to comply with the requirements of the MOU, there can be no assurance that such efforts will not have adverse effects on the operations and financial condition of the Company or First Bank. If the Company fails to comply with the terms of the MOU, further enforcement action could be taken by the FRB which could have a materially adverse effect on the Company's business, financial condition or results of operations.

ITEM 1A RISK FACTORS
Readers of our Quarterly Report on Form 10-Q should consider certain risk factors in conjunction with the other information included in this Quarterly Report on Form 10-Q. Refer to “Item 1A — Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014 for a discussion of these risks.

ITEM 5 OTHER INFORMATION
On May 13, 2015, the Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”) approved certain amendments to the First Banks, Inc. Partners in Performance Plan (the “PiP Plan”). Pursuant to the PiP Plan, as previously disclosed, the value of a unit granted thereunder (“Unit”) is initially computed by subtracting the Base Pretax Net Income from the Company’s Pretax Net Income (as such terms are defined in the PiP Plan) for the applicable two-year vesting period, dividing the difference by one hundred million ($100,000,000), adding $1.00 and rounding the resulting sum to the nearest cent ($0.01). Notwithstanding the results of the initial calculation of the Unit value, the Unit value would not be less than $0.80 nor more than $1.40 and the value of any Unit that vests as a result of death, Disability or Retirement would be $1.00. As amended, the PiP Plan provides that the value of a Unit is initially computed by subtracting the Base Pretax Net Income from the First Bank Pretax Net Income (as such terms are defined in the PiP Plan) for the applicable two-year vesting period, dividing the difference by one hundred million ($100,000,000), adding $1.00 and rounding the resulting sum to the nearest cent ($0.01). Notwithstanding the results of the initial calculation of the Unit value, the Unit value shall not be less than $0.70 nor more than $1.40 and the value of any Unit that vests as a result of death, Disability or Retirement will be $1.00.
The summary of the amendment to the PiP Plan is qualified in its entirety by reference to the full text of plan, as amended, a copy of which is attached as Exhibit 10.1 and incorporated herein by reference.


44



ITEM 6 EXHIBITS
The exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K.
Exhibit Number
 
Description
10.1*
 
First Banks, Inc. Partners in Performance Plan, as amended – 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.
 
 
 
101
 
Financial information from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2015, formatted in XBRL interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Changes in Stockholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements – furnished herewith.
 
 
 
*
 
Exhibits designated by an asterisk in the Index to Exhibits relate to management contracts and/or compensatory plans or arrangements.


45



SIGNATURES
Pursuant to the requirements 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.
Date: May 14, 2015

FIRST BANKS, INC.
 
By: 
/s/ 
Timothy J. Lathe
 
 
Timothy J. Lathe
 
 
President and Chief Executive Officer
 
 
(Principal Executive Officer)
 
By: 
/s/ 
Lisa K. Vansickle
 
 
Lisa K. Vansickle
 
 
Executive Vice President and Chief Financial Officer
 
 
(Principal Financial and Accounting Officer)


46