NOTE 5 – GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets, net of amortization, were comprised of the following at June 30, 2011 and December 31, 2010:

	June 30, 2011				December 31, 2010
	Gross				Gross
	Carrying		Accumulated		Carrying	Accumulated
	Amount		Amortization		Amount	Amortization
	(dollars expressed in thousands)
Amortized intangible assets:
Core deposit intangibles (1)	$	17,074	(15,586	)	20,594	(17,507	)

Unamortized intangible assets:
Goodwill (2)	$	125,967			125,967

____________________

(1)		The gross carrying amount and accumulated amortization for core deposit intangibles at December 31, 2010 have been reduced by $617,000 and $559,000, respectively, or a net of $58,000, related to discontinued operations, as further described in Note 2 to the consolidated financial statements.
(2)		Goodwill at December 31, 2010 has been reduced by $2.0 million, related to discontinued operations and assets held for sale, as further described below and in Note 2 to the consolidated financial statements.

The Company allocated goodwill to the sales of the remaining branches in the Northern Illinois Region and the Edwardsville Branch of $1.5 million and $500,000, respectively, based on the relative fair values of the operations disposed of during 2011 and the portion of the First Bank segment that will be retained. The allocation of goodwill to the sale of the remaining branches in the Northern Illinois Region reduced the gain on sale of discontinued operations during the three and six months ended June 30, 2011. The allocation of goodwill to the sale of the Edwardsville Branch reduced other income during the three and six months ended June 30, 2011. The Company did not allocate any goodwill to the sale of the San Jose Branch.

Core deposit intangibles of $58,000 related to the sale of the remaining branches in the Northern Illinois Region were included in assets of discontinued operations at December 31, 2010 and reduced the gain on sale of discontinued operations during the three and six months ended June 30, 2011.

Amortization of intangible assets was $800,000 and $1.6 million for the three and six months ended June 30, 2011, respectively, compared to $800,000 and $1.7 million for the comparable periods in 2010. Amortization of core deposit intangibles has been estimated in the following table.

	(dollars expressed in
	thousands)
Year ending December 31:
2011 remaining	$	1,024
2012		464
Total	$	1,488

Changes in the carrying amount of goodwill for the three and six months ended June 30, 2011 and 2010 were as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2011		2010		2011	2010
	(dollars expressed in thousands)
Balance, beginning of period	$	125,967	136,967		125,967	136,967
Goodwill allocated to discontinued operations (1)		—	(9,000	)	—	(9,000	)
Balance, end of period	$	125,967	127,967		125,967	127,967

____________________

(1)

Goodwill allocated to discontinued operations pertains to the partial sale of the Northern Illinois Region, as further described in Note 2 to the consolidated financial statements.

The Company’s annual measurement date for its goodwill impairment test is December 31. The Company engaged an independent valuation firm to assist in computing the fair value estimate for the impairment assessment by utilizing two separate valuation methodologies and applying a weighted average to each methodology in order to determine fair value for its single reporting unit, First Bank. The valuation methodologies utilized a comparison of the average price to book value of comparable businesses and a discounted cash flow valuation technique. Taking into account this independent third party valuation, the Company concluded that the carrying value of its single reporting unit exceeded its estimated fair value at December 31, 2010.

Because the carrying value of the Company’s reporting unit exceeded the estimated fair value at December 31, 2010, the Company engaged the same independent valuation firm to assist in computing the fair value of First Bank’s assets and liabilities in order to determine the implied fair value of First Bank’s goodwill at December 31, 2010. Management compared the implied fair value of First Bank’s goodwill, as determined by the independent valuation firm, with its carrying value. Taking into account the results of the goodwill impairment analysis performed for the year ended December 31, 2010, First Bank did not record goodwill impairment.

As a result of continued adversity in the Company’s business climate, the Company performed an interim period goodwill impairment analysis as of June 30, 2011, engaging the same independent valuation firm that assisted in the preparation of the analysis as of December 31, 2010. The Step 1 analysis of the interim goodwill impairment test indicated the carrying amount of the Company’s single reporting unit exceeded the estimated fair value. Therefore, Step 2 testing was required. The Company determined, as a result of the Step 2 analysis, that the goodwill assigned to the Company’s single reporting unit was not impaired as of June 30, 2011.

The Company believes the estimates and assumptions utilized in the goodwill impairment test are reasonable. However, further deterioration in the outlook for credit quality or other factors could impact the estimated fair value of the single reporting unit as determined under Step 1 of the goodwill impairment test. A decrease in the estimated fair value of the reporting unit would decrease the implied fair value of goodwill as further determined under Step 2 of the goodwill impairment test. Step 2 of the goodwill impairment test compared the implied fair value of goodwill with the carrying value of goodwill. The implied fair value of goodwill is determined in the same manner as the determination of the amount of goodwill recognized in a business combination. The fair value of a reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. The fair value allocated to all of the assets and liabilities of the reporting unit requires significant judgment, especially for those assets and liabilities that are not measured on a recurring basis such as certain types of loans. The excess of the estimated fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill.

The estimated fair value assigned to loans significantly affected the determination of the implied fair value of First Bank’s goodwill at June 30, 2011 and December 31, 2010. The implied fair value of a reporting unit’s goodwill will generally increase if the estimated fair value of the reporting unit’s loans is less than the carrying value of the reporting unit’s loans. The estimated fair value of the reporting unit’s loans was derived from discounted cash flow analyses. Loans were grouped into loan pools based on similar characteristics such as maturity, payment type and payment frequency, and rate type and underlying index. These cash flow calculations include assumptions for prepayment estimates over the loan’s remaining life, considerations for the current interest rate environment compared to the weighted average rate of the loan portfolio, a credit risk component based on the historical and expected performance of each loan portfolio stratum and a liquidity adjustment related to the current market environment. To the extent any of these assumptions change in the future, the implied fair value of the reporting unit’s goodwill could change materially. A decrease in the discount rate utilized in deriving the estimated fair value of the reporting unit’s loans would decrease the implied fair value of goodwill.

The estimated fair value assigned to the core deposit intangible, or First Bank’s deposit base, also significantly affected the determination of the implied fair value of First Bank’s goodwill at June 30, 2011 and December 31, 2010. The implied fair value of a reporting unit’s goodwill will generally decrease by the estimated fair value assigned to the reporting unit’s core deposit intangible. The estimated fair value of the core deposit intangible was derived from discounted cash flow analyses with considerations for estimated deposit runoff, cost of the deposit base, interest costs, net maintenance costs and the cost of alternative funds. The resulting estimate of the fair value of the core deposit intangible represents the present value of the difference in cash flows between maintaining the existing deposits and obtaining alternative funds over the life of the deposit base. To the extent any of these assumptions used to determine the estimated fair value of the core deposit intangible change in the future, the implied fair value of the reporting unit’s goodwill could change materially.

Due to the recent economic environment and the uncertainties regarding the impact on First Bank, there can be no assurance that the Company’s estimates and assumptions made for the purposes of the goodwill impairment testing will prove to be accurate predictions in the future. Adverse changes in the economic environment, First Bank’s operations, or other factors could result in a decline in the implied fair value of First Bank, which could result in the recognition of future goodwill impairment that may materially affect the carrying value of First Bank’s assets and its related operating results.