10-Q 1 fbspra630201310-q.htm 10-Q FBSPRA 6.30.2013 10-Q


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 June 30, 2013

[   ]
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to ________
Commission File Number: 0-20632
FIRST BANKS, INC.
(Exact name of registrant as specified in its charter)
MISSOURI
43-1175538
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
135 North Meramec, Clayton, Missouri
63105
(Address of principal executive offices)
(Zip code)

(314) 854-4600
(Registrant’s telephone number, including area code)
__________________________
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 July 31, 2013
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 Operations
 
 
 
 
 
 
Consolidated Statements of Comprehensive Income (Loss)
 
 
 
 
 
 
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 6.
 
Exhibits
 
 
 
 
SIGNATURES



PART I – FINANCIAL INFORMATION
 
ITEM 1 – FINANCIAL STATEMENTS
 
FIRST BANKS, INC.
CONSOLIDATED BALANCE SHEETS – (UNAUDITED)
(dollars expressed in thousands, except share and per share data)
 
June 30, 2013
 
December 31, 2012
ASSETS
 
 
 
Cash and cash equivalents:
 
 
 
Cash and due from banks
$
92,406

 
114,841

Short-term investments
423,139

 
404,005

Total cash and cash equivalents
515,545

 
518,846

Investment securities:
 
 
 
Available for sale
1,704,262

 
2,043,727

Held to maturity (fair value of $787,791 and $637,024, respectively)
800,453

 
631,553

Total investment securities
2,504,715

 
2,675,280

Loans:
 
 
 
Commercial, financial and agricultural
593,403

 
610,301

Real estate construction and development
167,269

 
174,979

Real estate mortgage
1,996,817

 
2,060,131

Consumer and installment
18,159

 
19,262

Loans held for sale
45,239

 
66,133

Net deferred loan costs (fees)
62

 
(59
)
Total loans
2,820,949

 
2,930,747

Allowance for loan losses
(85,633
)
 
(91,602
)
Net loans
2,735,316

 
2,839,145

Federal Reserve Bank and Federal Home Loan Bank stock
27,674

 
27,329

Bank premises and equipment, net
126,310

 
127,520

Goodwill
107,267

 
125,267

Deferred income taxes
16,321

 
29,042

Other real estate and repossessed assets
78,152

 
91,995

Other assets
66,612

 
67,996

Assets of discontinued operations
39,006

 
6,706

Total assets
$
6,216,918

 
6,509,126

LIABILITIES
 
 
 
Deposits:
 
 
 
Noninterest-bearing demand
$
1,198,846

 
1,327,183

Interest-bearing demand
636,582

 
1,000,666

Savings and money market
1,892,903

 
1,880,271

Time deposits of $100 or more
380,192

 
460,791

Other time deposits
713,763

 
823,936

Total deposits
4,822,286

 
5,492,847

Other borrowings
35,228

 
26,025

Subordinated debentures
354,172

 
354,133

Deferred income taxes
23,754

 
36,182

Accrued expenses and other liabilities
159,996

 
144,269

Liabilities of discontinued operations
550,683

 
155,711

Total liabilities
5,946,119

 
6,209,167

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
293,563

 
291,757

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

 
17,343

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

 
5,915

Additional paid-in capital
12,480

 
12,480

Retained deficit
(174,974
)
 
(179,513
)
Accumulated other comprehensive income
9,603

 
45,259

Total First Banks, Inc. stockholders’ equity
176,993

 
206,304

Noncontrolling interest in subsidiary
93,806

 
93,655

Total stockholders’ equity
270,799

 
299,959

Total liabilities and stockholders’ equity
$
6,216,918

 
6,509,126

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

1


FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS – (UNAUDITED)
(dollars expressed in thousands, except share and per share data)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Interest income:
 
 
 
 
 
 
 
Interest and fees on loans
$
29,885

 
36,110

 
60,058

 
73,829

Investment securities
13,317

 
14,603

 
26,565

 
28,159

Federal Reserve Bank and Federal Home Loan Bank stock
307

 
223

 
610

 
560

Short-term investments
223

 
206

 
485

 
459

Total interest income
43,732

 
51,142

 
87,718

 
103,007

Interest expense:
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
Interest-bearing demand
74

 
104

 
150

 
213

Savings and money market
632

 
945

 
1,267

 
2,000

Time deposits of $100 or more
573

 
1,063

 
1,229

 
2,261

Other time deposits
978

 
1,800

 
2,081

 
3,885

Other borrowings
(15
)
 
20

 
(12
)
 
41

Subordinated debentures
3,733

 
3,683

 
7,409

 
7,369

Total interest expense
5,975

 
7,615

 
12,124

 
15,769

Net interest income
37,757

 
43,527

 
75,594

 
87,238

Provision for loan losses
—

 
—

 
—

 
2,000

Net interest income after provision for loan losses
37,757

 
43,527

 
75,594

 
85,238

Noninterest income:
 
 
 
 
 
 
 
Service charges on deposit accounts and customer service fees
8,607

 
9,200

 
16,921

 
17,975

Gain on loans sold and held for sale
1,572

 
3,595

 
3,125

 
5,983

Net gain (loss) on investment securities
345

 
(5
)
 
(71
)
 
517

Increase (decrease) in fair value of servicing rights
470

 
(1,981
)
 
624

 
(2,191
)
Loan servicing fees
1,776

 
1,910

 
3,493

 
3,918

Other
6,173

 
3,136

 
10,246

 
6,677

Total noninterest income
18,943

 
15,855

 
34,338

 
32,879

Noninterest expense:
 
 
 
 
 
 
 
Salaries and employee benefits
19,645

 
18,500

 
39,196

 
37,568

Occupancy, net of rental income
5,935

 
5,484

 
11,769

 
10,423

Furniture and equipment
2,538

 
2,663

 
5,121

 
5,250

Postage, printing and supplies
711

 
611

 
1,339

 
1,345

Information technology fees
5,270

 
5,865

 
10,555

 
11,911

Legal, examination and professional fees
1,497

 
2,929

 
3,160

 
5,446

Advertising and business development
584

 
435

 
1,016

 
970

FDIC insurance
1,838

 
3,075

 
3,720

 
6,305

Write-downs and expenses on other real estate and repossessed assets
1,259

 
4,732

 
2,770

 
8,282

Other
4,866

 
5,571

 
9,544

 
11,859

Total noninterest expense
44,143

 
49,865

 
88,190

 
99,359

Income from continuing operations before (benefit) provision for income taxes
12,557

 
9,517

 
21,742

 
18,758

(Benefit) provision for income taxes
(345
)
 
121

 
20

 
216

Net income from continuing operations, net of tax
12,902

 
9,396

 
21,722

 
18,542

Loss from discontinued operations, net of tax
(3,334
)
 
(2,273
)
 
(5,398
)
 
(4,581
)
Net income
9,568

 
7,123

 
16,324

 
13,961

Less: net income (loss) attributable to noncontrolling interest in subsidiary
105

 
(385
)
 
151

 
(445
)
Net income attributable to First Banks, Inc.
$
9,463

 
7,508

 
16,173

 
14,406

Preferred stock dividends declared and undeclared
4,947

 
4,690

 
9,828

 
9,317

Accretion of discount on preferred stock
908

 
883

 
1,806

 
1,767

Net income available to common stockholders
$
3,608

 
1,935

 
4,539

 
3,322

 
 
 
 
 
 
 
 
Basic and diluted earnings per common share from continuing operations
$
293.39

 
177.84

 
419.98

 
334.02

Basic and diluted loss per common share from discontinued operations
(140.90
)
 
(96.06
)
 
(228.14
)
 
(193.61
)
Basic and diluted earnings per common share
$
152.49

 
$
81.78

 
$
191.84

 
$
140.41

 
 
 
 
 
 
 
 
Weighted average shares of common stock outstanding
23,661

 
23,661

 
23,661

 
23,661

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

2


FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) – (UNAUDITED)
(dollars expressed in thousands)

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Net income
$
9,568

 
7,123

 
16,324

 
13,961

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Unrealized (losses) gains on available-for-sale investment securities, net of tax
(16,551
)
 
5,152

 
(18,803
)
 
11,870

Reclassification adjustment for available-for-sale investment securities (gains) losses included in net income, net of tax
(191
)
 
3

 
(186
)
 
(336
)
Amortization of net unrealized gain associated with reclassification of available-for-sale investment securities to held-to-maturity investment securities, net of tax
(431
)
 
—

 
(860
)
 
—

Amortization of net loss related to pension liability, net of tax
30

 
21

 
60

 
42

Reclassification adjustment for deferred tax asset valuation allowance on investment securities
(13,769
)
 
2,776

 
(15,915
)
 
6,211

Reclassification adjustment for deferred tax asset valuation allowance on pension liability
24

 
16

 
48

 
31

Other comprehensive (loss) income
(30,888
)
 
7,968

 
(35,656
)
 
17,818

Comprehensive (loss) income
(21,320
)
 
15,091

 
(19,332
)
 
31,779

Comprehensive income (loss) attributable to noncontrolling interest in subsidiary
105

 
(385
)
 
151

 
(445
)
Comprehensive (loss) income attributable to First Banks, Inc.
$
(21,425
)
 
15,476

 
(19,483
)
 
32,224

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



3


FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY – (UNAUDITED)
Six Months Ended June 30, 2013 and Year Ended December 31, 2012
(dollars expressed in thousands)
 
First Banks, Inc. Stockholders’ Equity
 
 
 
 
 
Preferred
Stock
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
(Deficit)
 
Accumulated
Other
Comprehensive
Income
 
Non-
controlling
Interest
 
Total
Stockholders’
Equity
Balance, December 31, 2011
$
318,609

 
5,915

 
12,480

 
(183,351
)
 
16,066

 
93,952

 
263,671

Net income
—

 
—

 
—

 
26,278

 
—

 
(297
)
 
25,981

Other comprehensive income
—

 
—

 
—

 
—

 
29,193

 
—

 
29,193

Accretion of discount on preferred stock
3,554

 
—

 
—

 
(3,554
)
 
—

 
—

 
—

Preferred stock dividends declared
—

 
—

 
—

 
(18,886
)
 
—

 
—

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

 
5,915

 
12,480

 
(179,513
)
 
45,259

 
93,655

 
299,959

Net income
—

 
—

 
—

 
16,173

 
—

 
151

 
16,324

Other comprehensive loss
—

 
—

 
—

 
—

 
(35,656
)
 
—

 
(35,656
)
Accretion of discount on preferred stock
1,806

 
—

 
—

 
(1,806
)
 
—

 
—

 
—

Preferred stock dividends declared
—

 
—

 
—

 
(9,828
)
 
—

 
—

 
(9,828
)
Balance, June 30, 2013
$
323,969

 
5,915

 
12,480

 
(174,974
)
 
9,603

 
93,806

 
270,799

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


4


FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS – (UNAUDITED)
(dollars expressed in thousands)
 
Six Months Ended
 
June 30,
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Net income attributable to First Banks, Inc.
$
16,173

 
14,406

Net income (loss) attributable to noncontrolling interest in subsidiary
151

 
(445
)
Less: net loss from discontinued operations
(5,398
)
 
(4,581
)
Net income from continuing operations
21,722

 
18,542

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization of bank premises and equipment
5,794

 
6,083

Amortization and accretion of investment securities
13,326

 
6,759

Originations of loans held for sale
(173,065
)
 
(191,526
)
Proceeds from sales of loans held for sale
190,182

 
179,001

Provision for loan losses
—

 
2,000

(Benefit) provision for current income taxes
(274
)
 
216

Provision for deferred income taxes
3,956

 
709

Decrease in deferred tax asset valuation allowance
(3,662
)
 
(709
)
Decrease in accrued interest receivable
8

 
2,247

Increase in accrued interest payable
7,068

 
5,765

Gain on loans sold and held for sale
(3,125
)
 
(5,983
)
Net loss (gain) on investment securities
71

 
(517
)
(Increase) decrease in fair value of servicing rights
(624
)
 
2,191

Write-downs on other real estate and repossessed assets
809

 
6,253

Other operating activities, net
5,759

 
5,447

Net cash provided by operating activities – continuing operations
67,945

 
36,478

Net cash used in operating activities – discontinued operations
(4,553
)
 
(4,352
)
Net cash provided by operating activities
63,392

 
32,126

Cash flows from investing activities:
 
 
 
Net cash paid for sale of assets and liabilities of discontinued operations, net of cash and cash equivalents sold
(115,044
)
 
—

Proceeds from sales of investment securities available for sale
118,583

 
207,619

Maturities of investment securities available for sale
243,019

 
390,460

Maturities of investment securities held to maturity
85,760

 
228

Purchases of investment securities available for sale
(306,063
)
 
(957,724
)
Purchases of investment securities held to maturity
(19,895
)
 
—

Net (purchases) redemptions of Federal Reserve Bank and Federal Home Loan Bank stock
(345
)
 
963

Proceeds from sales of commercial loans
6,681

 
18,283

Net decrease in loans
38,544

 
196,331

Recoveries of loans previously charged-off
7,785

 
14,917

Purchases of bank premises and equipment
(3,327
)
 
(3,342
)
Net proceeds from sales of other real estate and repossessed assets
20,535

 
26,548

Other investing activities, net
1,467

 
761

Net cash provided by (used in) investing activities – continuing operations
77,700

 
(104,956
)
Net cash provided by investing activities – discontinued operations
1,699

 
2,724

Net cash provided by (used in) investing activities
79,399

 
(102,232
)
Cash flows from financing activities:
 
 
 
(Decrease) increase in demand, savings and money market deposits
(4,681
)
 
20,208

Decrease in time deposits
(123,856
)
 
(129,577
)
Increase (decrease) in other borrowings
9,203

 
(13,235
)
Net cash used in financing activities – continuing operations
(119,334
)
 
(122,604
)
Net cash (used in) provided by financing activities – discontinued operations
(26,758
)
 
42,491

Net cash used in financing activities
(146,092
)
 
(80,113
)
Net decrease in cash and cash equivalents
(3,301
)
 
(150,219
)
Cash and cash equivalents, beginning of period
518,846

 
474,158

Cash and cash equivalents, end of period
$
515,545

 
323,939

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest on liabilities
$
5,056

 
10,004

Cash received for income taxes
(126
)
 
(12
)
Noncash investing and financing activities:
 
 
 
Reclassification of investment securities from available for sale to held to maturity
$
242,540

 
729,142

Loans transferred to other real estate and repossessed assets
5,221

 
12,948

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

5


FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 2012 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. 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 and six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.
Certain reclassifications of 2012 amounts have been made to conform to the 2013 presentation.
All financial information is reported on a continuing operations basis, unless otherwise noted. See Note 2 to the consolidated financial statements for a discussion regarding discontinued operations.
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 16 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: First Bank Business Capital, Inc.; FB Holdings, LLC (FB Holdings); Small Business Loan Source LLC; ILSIS, Inc.; FBIN, Inc.; SBRHC, Inc.; HVIIHC, Inc.; FBSA Missouri, Inc.; FBSA California, Inc.; NT Resolution Corporation; and LC Resolution Corporation. All of the subsidiaries are wholly owned as of June 30, 2013, except FB Holdings, which is 53.23% owned by First Bank and 46.77% owned by First Capital America, Inc. (FCA), a corporation owned and operated by the Company’s Chairman of the Board and members of his immediate family, including Mr. Michael Dierberg, Vice Chairman of the Company, as further described in Note 16 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 operations.
NOTE 2 – DISCONTINUED OPERATIONS
Discontinued Operations. The assets and liabilities associated with the transactions described (and defined) below were previously reported in the First Bank segment and were sold as part of the Company’s Capital Optimization Plan (Capital Plan). The Company applied discontinued operations accounting in accordance with ASC Topic 205-20, “Presentation of Financial Statements – Discontinued Operations,” to the assets and liabilities associated with the Association Bank Services line of business as of June 30, 2013, to the assets and liabilities associated with the Northern Florida Region as of December 31, 2012, and to the operations of First Bank’s Association Bank Services line of business and Northern Florida Region for the three and six months ended June 30, 2013 and 2012, as applicable. The Company did not allocate any consolidated interest that is not directly attributable to or related to discontinued operations. All financial information in the consolidated financial statements and notes to the consolidated financial statements is reported on a continuing operations basis, unless otherwise noted.
Association Bank Services. On May 13, 2013, First Bank entered into a Purchase and Assumption Agreement that provides for the sale of certain assets and the transfer of certain liabilities, primarily deposits, of First Bank's Association Bank Services (ABS) line of business, to Union Bank, N.A. (Union Bank), headquartered in San Francisco, California. ABS, headquartered in Vallejo, California, provides a full range of services to homeowners associations and community management companies. Under the terms of the agreement, Union Bank will assume approximately $550.6 million of deposits and will pay a premium on certain deposit accounts to be acquired in the transaction, which will be determined based on the average amount of certain deposits within ABS for the thirty (30) days prior to the closing date. Union Bank will also acquire certain assets, including loans of approximately $20.8 million at par value. Regulatory approval of the transaction was received on July 15, 2013, and subject to satisfaction of other customary closing conditions, the transaction is expected to close during the fourth quarter of 2013. The assets and liabilities associated with ABS are reflected in assets and liabilities of discontinued operations in the consolidated balance sheets as of June 30, 2013. First Bank expects to record a gain on the transaction of approximately $26.0 million, after the estimated write-off of goodwill of $18.0 million allocated to the ABS line of business.

6


Northern Florida Region. On November 21, 2012, First Bank entered into a Branch Purchase and Assumption Agreement that provided for the sale of certain assets and the transfer of certain liabilities associated with eight of First Bank’s retail branches located in Pinellas County, Florida to HomeBanc National Association (HomeBanc), headquartered in Lake Mary, Florida. The transaction was completed on April 19, 2013. Under the terms of the agreement, HomeBanc assumed $120.3 million of deposits, purchased the premises and equipment, and assumed the leases associated with these eight retail branches. The transaction resulted in a gain of $394,000, after the write-off of goodwill of $700,000 allocated to the Northern Florida Region, during the second quarter of 2013.
On April 5, 2013, First Bank closed its three remaining retail branches located in Hillsborough County and in Pasco County. The closure of these three remaining retail branches in the Northern Florida Region resulted in expense of $2.3 million during the second quarter of 2013 attributable to continuing obligations under facility leasing arrangements.
The eight branches sold and three branches closed during the second quarter of 2013 are collectively defined as the Northern Florida Region. The assets and liabilities associated with the Northern Florida Region are reflected in assets and liabilities of discontinued operations in the consolidated balance sheets as of December 31, 2012.
First Bank intends to continue to hold and operate its eight retail branches in the Manatee County communities of Bradenton, Palmetto and Longboat Key, Florida.
Assets and liabilities of discontinued operations at June 30, 2013 and December 31, 2012 were as follows:
 
June 30, 2013
 
December 31, 2012
 
Association Bank Services
 
Northern
Florida
 
(dollars expressed in thousands)
Cash and due from banks
$
—

 
1,139

Loans:
 
 
 
Commercial, financial and agricultural
20,741

 
—

Consumer and installment
326

 
—

Net deferred loan fees
(221
)
 
—

Total loans
20,846

 
—

Bank premises and equipment, net
92

 
4,837

Goodwill
18,000

 
700

Other assets
68

 
30

Assets of discontinued operations
$
39,006

 
6,706

Deposits:
 
 
 
Noninterest-bearing demand
$
132,689

 
12,488

Interest-bearing demand
336,416

 
10,480

Savings and money market
17,342

 
67,686

Time deposits of $100 or more
25,626

 
27,034

Other time deposits
38,554

 
37,964

Total deposits
550,627

 
155,652

Accrued expenses and other liabilities
56

 
59

Liabilities of discontinued operations
$
550,683

 
155,711


7


Loss from discontinued operations, net of tax, for the three months ended June 30, 2013 and 2012 was as follows:
 
Three Months Ended
 
Three Months Ended
 
June 30, 2013
 
June 30, 2012
 
Association Bank Services
 
Northern Florida
 
Total
 
Association Bank Services
 
Northern Florida
 
Total
 
 
 
(dollars expressed in thousands)
 
 
Interest income:
 
 
 
 
 
 
 
 
 
 
 
Interest and fees on loans
$
339

 
—

 
339

 
466

 
—

 
466

Interest expense:
 
 
 
 
 
 
 
 
 
 
 
Interest on deposits
82

 
41

 
123

 
123

 
263

 
386

Net interest income (loss)
257

 
(41
)
 
216

 
343

 
(263
)
 
80

Provision for loan losses
—

 
—

 
—

 
—

 
—

 
—

Net interest income (loss) after provision for loan losses
257

 
(41
)
 
216

 
343

 
(263
)
 
80

Noninterest income:
 
 
 
 
 
 
 
 
 
 
 
Service charges and customer service fees
16

 
30

 
46

 
24

 
118

 
142

Other
27

 
1

 
28

 
35

 
4

 
39

Total noninterest income
43

 
31

 
74

 
59

 
122

 
181

Noninterest expense:
 
 
 
 
 
 
 
 
 
 
 
Salaries and employee benefits
813

 
306

 
1,119

 
674

 
573

 
1,247

Occupancy, net of rental income
2

 
124

 
126

 
4

 
442

 
446

Furniture and equipment
9

 
1

 
10

 
21

 
75

 
96

FDIC insurance
205

 
—

 
205

 
306

 
99

 
405

Other
218

 
2,340

 
2,558

 
230

 
110

 
340

Total noninterest expense
1,247

 
2,771

 
4,018

 
1,235

 
1,299

 
2,534

Loss from operations of discontinued operations
(947
)
 
(2,781
)
 
(3,728
)
 
(833
)
 
(1,440
)
 
(2,273
)
Net gain on sale of discontinued operations
—

 
394

 
394

 
—

 
—

 
—

Benefit for income taxes
—

 
—

 
—

 
—

 
—

 
—

Net loss from discontinued operations, net of tax
$
(947
)
 
(2,387
)
 
(3,334
)
 
$
(833
)
 
(1,440
)
 
(2,273
)

Loss from discontinued operations, net of tax, for the six months ended June 30, 2013 and 2012 was as follows:
 
Six Months Ended
 
Six Months Ended
 
June 30, 2013
 
June 30, 2012
 
Association Bank Services
 
Northern Florida
 
Total
 
Association Bank Services
 
Northern Florida
 
Total
 
(dollars expressed in thousands)
Interest income:
 
 
 
 
 
 
 
 
 
 
 
Interest and fees on loans
$
704

 
—

 
704

 
942

 
—

 
942

Interest expense:
 
 
 
 
 
 
 
 
 
 
 
Interest on deposits
170

 
233

 
403

 
254

 
547

 
801

Net interest income (loss)
534

 
(233
)
 
301

 
688

 
(547
)
 
141

Provision for loan losses
—

 
—

 
—

 
—

 
—

 
—

Net interest income (loss) after provision for loan losses
534

 
(233
)
 
301

 
688

 
(547
)
 
141

Noninterest income:
 
 
 
 
 
 
 
 
 
 
 
Service charges and customer service fees
57

 
134

 
191

 
84

 
231

 
315

Other
53

 
4

 
57

 
55

 
6

 
61

Total noninterest income
110

 
138

 
248

 
139

 
237

 
376

Noninterest expense:
 
 
 
 
 
 
 
 
 
 
 
Salaries and employee benefits
1,456

 
885

 
2,341

 
1,339

 
1,163

 
2,502

Occupancy, net of rental income
4

 
579

 
583

 
6

 
884

 
890

Furniture and equipment
21

 
40

 
61

 
45

 
161

 
206

FDIC insurance
409

 
53

 
462

 
611

 
203

 
814

Other
442

 
2,452

 
2,894

 
486

 
200

 
686

Total noninterest expense
2,332

 
4,009

 
6,341

 
2,487

 
2,611

 
5,098

Loss from operations of discontinued operations
(1,688
)
 
(4,104
)
 
(5,792
)
 
(1,660
)
 
(2,921
)
 
(4,581
)
Net gain on sale of discontinued operations
—

 
394

 
394

 
—

 
—

 
—

Benefit for income taxes
—

 
—

 
—

 
—

 
—

 
—

Net loss from discontinued operations, net of tax
$
(1,688
)
 
(3,710
)
 
(5,398
)
 
(1,660
)
 
(2,921
)
 
(4,581
)


8


NOTE 3 – INVESTMENTS IN DEBT AND EQUITY SECURITIES
Securities Available for Sale. The amortized cost, contractual maturity, gross unrealized gains and losses and fair value of investment securities available for sale at June 30, 2013 and December 31, 2012 were as follows:
 
Maturity
 
Total Amortized Cost
 
Gross
 
 
 
Weighted Average Yield
 
1 Year
 
1-5
 
5-10
 
After
 
 
Unrealized
 
Fair
 
 
or Less
 
Years
 
Years
 
10 Years
 
 
Gains
 
Losses
 
Value
 
 
(dollars expressed in thousands)
June 30, 2013:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Carrying value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government sponsored agencies
$
—

 
48,874

 
17,036

 
209,330

 
275,240

 
2,174

 
(3,172
)
 
274,242

 
1.37
%
Residential mortgage-backed
50

 
23,841

 
141,120

 
1,027,212

 
1,192,223

 
17,652

 
(9,729
)
 
1,200,146

 
2.33

Commercial mortgage-backed
—

 
—

 
799

 
—

 
799

 
73

 
—

 
872

 
5.03

State and political subdivisions
1,323

 
3,067

 
201

 
28,463

 
33,054

 
113

 
(524
)
 
32,643

 
1.37

Corporate notes
4,941

 
135,506

 
49,737

 
—

 
190,184

 
5,507

 
(805
)
 
194,886

 
2.89

Equity investments
—

 
—

 
—

 
1,500

 
1,500

 
—

 
(27
)
 
1,473

 
2.25

Total
$
6,314

 
211,288

 
208,893

 
1,266,505

 
1,693,000

 
25,519

 
(14,257
)
 
1,704,262

 
2.22

Fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities
$
6,409

 
217,042

 
208,677

 
1,270,661

 
 
 
 
 
 
 
 
 
 
Equity securities
—

 
—

 
—

 
1,473

 
 
 
 
 
 
 
 
 
 
Total
$
6,409

 
217,042

 
208,677

 
1,272,134

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average yield
3.09
%
 
2.26
%
 
2.24
%
 
2.21
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Carrying value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government sponsored agencies
$
10,051

 
80,328

 
—

 
213,892

 
304,271

 
6,304

 
(146
)
 
310,429

 
1.42
%
Residential mortgage-backed
364

 
24,014

 
219,286

 
1,251,917

 
1,495,581

 
38,983

 
(497
)
 
1,534,067

 
2.32

Commercial mortgage-backed
—

 
—

 
806

 
—

 
806

 
109

 
—

 
915

 
4.86

State and political subdivisions
985

 
3,579

 
201

 
—

 
4,765

 
164

 
—

 
4,929

 
4.05

Corporate notes
—

 
137,090

 
49,704

 
—

 
186,794

 
6,192

 
(621
)
 
192,365

 
3.13

Equity investments
—

 
—

 
—

 
1,000

 
1,000

 
22

 
—

 
1,022

 
2.54

Total
$
11,400

 
245,011

 
269,997

 
1,466,809

 
1,993,217

 
51,774

 
(1,264
)
 
2,043,727

 
2.26

Fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities
$
11,476

 
251,558

 
275,251

 
1,504,420

 
 
 
 
 
 
 
 
 
 
Equity securities
—

 
—

 
—

 
1,022

 
 
 
 
 
 
 
 
 
 
Total
$
11,476

 
251,558

 
275,251

 
1,505,442

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average yield
2.01
%
 
2.17
%
 
2.65
%
 
2.21
%
 
 
 
 
 
 
 
 
 
 

9


Securities Held to Maturity. The amortized cost, contractual maturity, gross unrealized gains and losses and fair value of investment securities held to maturity at June 30, 2013 and December 31, 2012 were as follows:
 
Maturity
 
Total Amortized Cost
 
Gross
 
 
 
Weighted Average Yield
 
1 Year
 
1-5
 
5-10
 
After
 
 
Unrealized
 
Fair
 
 
or Less
 
Years
 
Years
 
10 Years
 
 
Gains
 
Losses
 
Value
 
 
(dollars expressed in thousands)
June 30, 2013:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Carrying value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government sponsored agencies
$
—

 
—

 
22,717

 
—

 
22,717

 
—

 
(59
)
 
22,658

 
1.41
%
Residential mortgage-backed
—

 
—

 
207,883

 
566,691

 
774,574

 
554

 
(13,147
)
 
761,981

 
1.81

State and political subdivisions
1,022

 
1,019

 
55

 
1,066

 
3,162

 
16

 
(26
)
 
3,152

 
2.08

Total
$
1,022

 
1,019

 
230,655

 
567,757

 
800,453

 
570

 
(13,232
)
 
787,791

 
1.80

Fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities
$
1,032

 
1,024

 
227,321

 
558,414

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average yield
2.91
%
 
3.28
%
 
1.60
%
 
1.87
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Carrying value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government sponsored agencies
$
—

 
—

 
52,582

 
—

 
52,582

 
269

 
—

 
52,851

 
1.63
%
Residential mortgage-backed
—

 
—

 
108,420

 
466,863

 
575,283

 
6,142

 
(614
)
 
580,811

 
1.82

State and political subdivisions
826

 
1,099

 
252

 
1,511

 
3,688

 
51

 
(377
)
 
3,362

 
1.89

Total
$
826

 
1,099

 
161,254

 
468,374

 
631,553

 
6,462

 
(991
)
 
637,024

 
1.80

Fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities
$
836

 
1,129

 
164,433

 
470,626

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average yield
2.56
%
 
3.40
%
 
1.77
%
 
1.81
%
 
 
 
 
 
 
 
 
 
 
Proceeds from sales of available-for-sale investment securities were $52.1 million and $118.6 million for the three and six months ended June 30, 2013, respectively, compared to $153.2 million and $207.6 million for the comparable periods in 2012. Gross realized gains and gross realized losses on investment securities for the three and six months ended June 30, 2013 and 2012 were as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
 
(dollars expressed in thousands)
Gross realized gains on sales of available-for-sale securities
$
346

 
370

 
692

 
892

Gross realized losses on sales of available-for-sale securities
—

 
(374
)
 
(354
)
 
(374
)
Other-than-temporary impairment
(1
)
 
(1
)
 
(409
)
 
(1
)
Net realized gain (loss) on investment securities
$
345

 
(5
)
 
(71
)
 
517

Other-than-temporary impairment for the six months ended June 30, 2013 includes impairment of $407,000 recorded during the first quarter of 2013 on a municipal investment security classified as held-to-maturity. Investment securities with a carrying value of $201.6 million and $257.6 million at June 30, 2013 and December 31, 2012, 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.
During the first quarter of 2013, the Company reclassified certain of its available-for-sale investment securities to held-to-maturity investment securities at their respective fair values, which totaled $242.5 million, in aggregate. The determination of the reclassification was made by management based on the Company’s current and expected future liquidity levels and the resulting intent to hold such investment securities to maturity. The net gross unrealized gain on these available-for-sale investment securities at the time of transfer of $5.0 million, in aggregate, was recorded as additional premium on the securities and is being amortized over the remaining lives of the respective securities, as further described in Note 10 to the consolidated financial statements.

10


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 June 30, 2013 and December 31, 2012, were as follows:
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
(dollars expressed in thousands)
June 30, 2013:
 
 
 
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government sponsored agencies
$
122,969

 
(2,643
)
 
19,624

 
(529
)
 
142,593

 
(3,172
)
Residential mortgage-backed
419,287

 
(9,660
)
 
3,144

 
(69
)
 
422,431

 
(9,729
)
State and political subdivisions
27,939

 
(524
)
 
—

 
—

 
27,939

 
(524
)
Corporate notes
26,509

 
(798
)
 
4,993

 
(7
)
 
31,502

 
(805
)
Equity investments
1,473

 
(27
)
 
—

 
—

 
1,473

 
(27
)
Total
$
598,177

 
(13,652
)
 
27,761

 
(605
)
 
625,938

 
(14,257
)
Held to maturity:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government sponsored agencies
$
22,658

 
(59
)
 
—

 
—

 
22,658

 
(59
)
Residential mortgage-backed
706,199

 
(13,147
)
 
—

 
—

 
706,199

 
(13,147
)
State and political subdivisions
1,040

 
(26
)
 
—

 
—

 
1,040

 
(26
)
Total
$
729,897

 
(13,232
)
 
—

 
—

 
729,897

 
(13,232
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012:
 
 
 
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government sponsored agencies
$
20,018

 
(146
)
 
—

 
—

 
20,018

 
(146
)
Residential mortgage-backed
125,449

 
(441
)
 
270

 
(56
)
 
125,719

 
(497
)
Corporate notes
—

 
—

 
17,675

 
(621
)
 
17,675

 
(621
)
Total
$
145,467

 
(587
)
 
17,945

 
(677
)
 
163,412

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

 
(614
)
 
—

 
—

 
66,011

 
(614
)
State and political subdivisions
1,133

 
(377
)
 
—

 
—

 
1,133

 
(377
)
Total
$
67,144

 
(991
)
 
—

 
—

 
67,144

 
(991
)
The Company does not believe the investment securities that were in an unrealized loss position at June 30, 2013 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 U.S. Government sponsored agencies for 12 months or more at June 30, 2013 included one security. The unrealized losses for residential mortgage-backed securities for 12 months or more at June 30, 2013 and December 31, 2012 included nine securities. The unrealized losses for corporate notes for 12 months or more at June 30, 2013 and December 31, 2012 included one and six securities, respectively.
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES
The following table summarizes the composition of the loan portfolio at June 30, 2013 and December 31, 2012:
 
June 30,
2013
 
December 31,
2012
 
(dollars expressed in thousands)
Commercial, financial and agricultural
$
593,403

 
610,301

Real estate construction and development
167,269

 
174,979

Real estate mortgage:
 
 
 
One-to-four-family residential
931,986

 
986,767

Multi-family residential
101,351

 
103,684

Commercial real estate
963,480

 
969,680

Consumer and installment
18,159

 
19,262

Loans held for sale
45,239

 
66,133

Net deferred loan costs (fees)
62

 
(59
)
Total loans
$
2,820,949

 
2,930,747


11


Aging of Loans. The following table presents the aging of loans by loan classification at June 30, 2013 and December 31, 2012:
 
30-59
Days
 
60-89
Days
 
Recorded
Investment
> 90 Days
Accruing
 
Nonaccrual
 
Total Past
Due
 
Current
 
Total Loans
 
(dollars expressed in thousands)
June 30, 2013:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
$
1,253

 
1,320

 
—

 
14,881

 
17,454

 
575,949

 
593,403

Real estate construction and development
120

 
75

 
—

 
28,305

 
28,500

 
138,769

 
167,269

Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank portfolio
1,438

 
491

 
—

 
6,051

 
7,980

 
93,100

 
101,080

Mortgage Division portfolio
4,977

 
2,940

 
—

 
19,377

 
27,294

 
460,510

 
487,804

Home equity
1,849

 
951

 
350

 
5,905

 
9,055

 
334,047

 
343,102

Multi-family residential
366

 
—

 
—

 
1,393

 
1,759

 
99,592

 
101,351

Commercial real estate
2,548

 
1,028

 
536

 
13,011

 
17,123

 
946,357

 
963,480

Consumer and installment
93

 
27

 
—

 
35

 
155

 
18,066

 
18,221

Loans held for sale
—

 
—

 
—

 
—

 
—

 
45,239

 
45,239

Total
$
12,644

 
6,832

 
886

 
88,958

 
109,320

 
2,711,629

 
2,820,949

December 31, 2012:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
$
1,180

 
322

 
—

 
19,050

 
20,552

 
589,749

 
610,301

Real estate construction and development
93

 
—

 
—

 
32,152

 
32,245

 
142,734

 
174,979

Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank portfolio
1,871

 
1,121

 
874

 
6,910

 
10,776

 
111,562

 
122,338

Mortgage Division portfolio
6,264

 
4,375

 
—

 
19,780

 
30,419

 
479,552

 
509,971

Home equity
2,494

 
1,221

 
216

 
8,671

 
12,602

 
341,856

 
354,458

Multi-family residential
—

 
629

 
—

 
6,761

 
7,390

 
96,294

 
103,684

Commercial real estate
66

 
693

 
—

 
16,520

 
17,279

 
952,401

 
969,680

Consumer and installment
174

 
43

 
—

 
28

 
245

 
18,958

 
19,203

Loans held for sale
—

 
—

 
—

 
—

 
—

 
66,133

 
66,133

Total
$
12,142

 
8,404

 
1,090

 
109,872

 
131,508

 
2,799,239

 
2,930,747

Under the Company’s loan policy, loans are placed on nonaccrual status once principal or interest payments become 90 days past due. However, individual loan officers may submit written requests for approval to continue the accrual of interest on loans that become 90 days past due. These requests may be submitted for approval consistent with the authority levels provided in the Company’s credit approval policies, and they are only granted if an expected near term future event, such as a pending renewal or expected payoff, exists at the time the loan becomes 90 days past due. If the expected near term future event does not occur as anticipated, the loan is then placed on nonaccrual status.
Credit Quality Indicators. The Company’s credit management policies and procedures focus on identifying, measuring and controlling credit exposure. These procedures employ a lender-initiated system of rating credits, which is ratified in the loan approval process and subsequently tested in internal credit reviews, external audits and regulatory bank examinations. The system requires the rating of all loans at the time they are originated or acquired, except for homogeneous categories of loans, such as residential real estate mortgage loans and consumer loans. These homogeneous loans are assigned an initial rating based on the Company’s experience with each type of loan. The Company adjusts the ratings of the homogeneous loans based on payment experience subsequent to their origination.
The Company includes adversely rated credits, including loans requiring close monitoring that would not normally be considered classified credits by the Company’s regulators, on its monthly loan watch list. Loans may be added to the Company’s watch list for reasons that are temporary and correctable, such as the absence of current financial statements of the borrower or a deficiency in loan documentation. Loans may also be added to the Company’s watch list whenever any adverse circumstance is detected which might affect the borrower’s ability to comply with the contractual terms of the loan. The delinquency of a scheduled loan payment, deterioration in the borrower’s financial condition identified in a review of periodic financial statements, a decrease in the value of the collateral securing the loan, or a change in the economic environment within which the borrower operates could initiate the addition of a loan to the Company’s watch list. Loans on the Company’s watch list require periodic detailed loan status reports prepared by the responsible officer which are discussed in formal meetings with credit review and credit administration staff members. Upgrades and downgrades of loan risk ratings may be initiated by the responsible loan officer. However, upgrades of risk ratings associated with significant credit relationships and/or problem credit relationships may only be made with the concurrence of appropriate regional credit officers.
Under the Company’s risk rating system, special mention loans are those loans that do not currently expose the Company to sufficient risk to warrant classification as substandard, troubled debt restructuring (TDR) or nonaccrual, but possess weaknesses

12


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 June 30, 2013 and December 31, 2012:
Commercial Loan Portfolio
Credit Exposure by Internally Assigned Credit Grade
Commercial
and
Industrial
 
Real Estate
Construction
and
Development
 
Multi-family
 
Commercial
Real Estate
 
Total
 
 
 
(dollars expressed in thousands)
 
 
June 30, 2013:
 
 
 
 
 
 
 
 
 
Pass
$
558,894

 
45,989

 
70,887

 
889,690

 
1,565,460

Special mention
11,645

 
3,769

 
363

 
31,513

 
47,290

Substandard
7,827

 
79,175

 
554

 
24,686

 
112,242

Performing troubled debt restructuring
156

 
10,031

 
28,154

 
4,580

 
42,921

Nonaccrual
14,881

 
28,305

 
1,393

 
13,011

 
57,590

Total
$
593,403

 
167,269

 
101,351

 
963,480

 
1,825,503

December 31, 2012:
 
 
 
 
 
 
 
 
 
Pass
$
572,248

 
45,356

 
67,690

 
858,101

 
1,543,395

Special mention
10,580

 
6,076

 
220

 
70,450

 
87,326

Substandard
8,423

 
81,364

 
773

 
13,868

 
104,428

Performing troubled debt restructuring
—

 
10,031

 
28,240

 
10,741

 
49,012

Nonaccrual
19,050

 
32,152

 
6,761

 
16,520

 
74,483

Total
$
610,301

 
174,979

 
103,684

 
969,680

 
1,858,644


One-to-Four-Family Residential Mortgage Bank and Home Equity Loan Portfolio
Credit Exposure by Internally Assigned Credit Grade
Bank
Portfolio
 
Home
Equity
 
Total
 
(dollars expressed in thousands)
June 30, 2013:
 
 
 
 
 
Pass
$
88,022

 
335,097

 
423,119

Special mention
6,302

 
350

 
6,652

Substandard
—

 
1,750

 
1,750

Performing troubled debt restructuring
705

 
—

 
705

Nonaccrual
6,051

 
5,905

 
11,956

Total
$
101,080

 
343,102

 
444,182

December 31, 2012:
 
 
 
 
 
Pass
$
107,625

 
342,321

 
449,946

Special mention
4,405

 
216

 
4,621

Substandard
1,787

 
3,250

 
5,037

Performing troubled debt restructuring
1,611

 
—

 
1,611

Nonaccrual
6,910

 
8,671

 
15,581

Total
$
122,338

 
354,458

 
476,796



13


One-to-Four-Family Residential Mortgage Division
and Consumer and Installment Loan Portfolio
Credit Exposure by Payment Activity
Mortgage
Division
Portfolio
 
Consumer
and
Installment
 
Total
 
(dollars expressed in thousands)
June 30, 2013:
 
 
 
 
 
Pass
$
388,678

 
18,186

 
406,864

Substandard
3,724

 
—

 
3,724

Performing troubled debt restructuring
76,025

 
—

 
76,025

Nonaccrual
19,377

 
35

 
19,412

Total
$
487,804

 
18,221

 
506,025

December 31, 2012:
 
 
 
 
 
Pass
$
405,270

 
19,175

 
424,445

Substandard
6,627

 
—

 
6,627

Performing troubled debt restructuring
78,294

 
—

 
78,294

Nonaccrual
19,780

 
28

 
19,808

Total
$
509,971

 
19,203

 
529,174

Impaired Loans. Loans deemed to be impaired include performing TDRs and nonaccrual loans. Impaired loans with outstanding balances equal to or greater than $500,000 are evaluated individually for impairment. For these loans, the Company measures the level of impairment based on the present value of the estimated projected cash flows or the estimated value of the collateral. If the current valuation is lower than the current book balance of the loan, the amount of the difference is evaluated for possible charge-off. In instances where management determines that a charge-off is not appropriate, a specific reserve is established for the individual loan in question. This specific reserve is included as a part of the overall allowance for loan losses.
The following tables present the recorded investment, unpaid principal balance, related allowance for loan losses, average recorded investment and interest income recognized while on impaired status for impaired loans without a related allowance for loan losses and for impaired loans with a related allowance for loan losses by loan classification at June 30, 2013 and December 31, 2012:
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance for
Loan Losses
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
(dollars expressed in thousands)
June 30, 2013:
 
 
 
 
 
 
 
 
 
With No Related Allowance Recorded:
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
$
5,105

 
8,560

 
—

 
5,614

 
1

Real estate construction and development
36,504

 
69,402

 
—

 
38,292

 
277

Real estate mortgage:
 
 
 
 
 
 
 
 
 
Bank portfolio
—

 
—

 
—

 
—

 
26

Mortgage Division portfolio
10,043

 
20,702

 
—

 
10,247

 
—

Home equity
625

 
632

 
—

 
753

 
—

Multi-family residential
28,597

 
28,863

 
—

 
32,141

 
616

Commercial real estate
12,074

 
18,107

 
—

 
15,909

 
213

Consumer and installment
—

 
—

 
—

 
—

 
—

 
92,948

 
146,266

 
—

 
102,956

 
1,133

With A Related Allowance Recorded:
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
9,932

 
25,534

 
383

 
10,923

 
—

Real estate construction and development
1,832

 
4,376

 
1,064

 
1,922

 
—

Real estate mortgage:
 
 
 
 
 
 
 
 
 
Bank portfolio
6,756

 
8,488

 
207

 
7,786

 
—

Mortgage Division portfolio
85,359

 
94,985

 
12,088

 
87,094

 
962

Home equity
5,280

 
6,142

 
1,181

 
6,362

 
—

Multi-family residential
950

 
954

 
753

 
1,068

 
—

Commercial real estate
5,517

 
8,136

 
730

 
7,269

 
13

Consumer and installment
35

 
35

 
2

 
28

 
—

 
115,661

 
148,650

 
16,408

 
122,452

 
975

Total:
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
15,037

 
34,094

 
383

 
16,537

 
1

Real estate construction and development
38,336

 
73,778

 
1,064

 
40,214

 
277

Real estate mortgage:
 
 
 
 
 
 
 
 
 
Bank portfolio
6,756

 
8,488

 
207

 
7,786

 
26

Mortgage Division portfolio
95,402

 
115,687

 
12,088

 
97,341

 
962

Home equity
5,905

 
6,774

 
1,181

 
7,115

 
—

Multi-family residential
29,547

 
29,817

 
753

 
33,209

 
616

Commercial real estate
17,591

 
26,243

 
730

 
23,178

 
226

Consumer and installment
35

 
35

 
2

 
28

 
—

 
$
208,609

 
294,916

 
16,408

 
225,408

 
2,108


14


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

 
24,287

 
—

 
12,369

 
215

Real estate construction and development
39,706

 
74,044

 
—

 
59,094

 
561

Real estate mortgage:
 
 
 
 
 
 
 
 
 
Bank portfolio
1,611

 
1,690

 
—

 
2,166

 
32

Mortgage Division portfolio
10,255

 
22,102

 
—

 
10,308

 
—

Home equity
1,382

 
1,507

 
—

 
1,232

 
—

Multi-family residential
33,709

 
37,206

 
—

 
13,682

 
280

Commercial real estate
18,808

 
24,279

 
—

 
35,959

 
1,160

Consumer and installment
—

 
—

 
—

 
—

 
—

 
111,922

 
185,115

 
—

 
134,810

 
2,248

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

 
19,255

 
676

 
24,157

 
—

Real estate construction and development
2,477

 
10,221

 
1,452

 
3,687

 
114

Real estate mortgage:
 
 
 
 
 
 
 
 
 
Bank portfolio
6,910

 
8,655

 
284

 
9,288

 
—

Mortgage Division portfolio
87,819

 
96,931

 
11,574

 
88,277

 
2,050

Home equity
7,289

 
8,188

 
1,784

 
6,500

 
—

Multi-family residential
1,292

 
1,403

 
1,138

 
524

 
—

Commercial real estate
8,453

 
12,909

 
1,043

 
16,161

 
11

Consumer and installment
28

 
28

 
1

 
51

 
—

 
126,867

 
157,590

 
17,952

 
148,645

 
2,175

Total:
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
19,050

 
43,542

 
676

 
36,526

 
215

Real estate construction and development
42,183

 
84,265

 
1,452

 
62,781

 
675

Real estate mortgage:
 
 
 
 
 
 
 
 
 
Bank portfolio
8,521

 
10,345

 
284

 
11,454

 
32

Mortgage Division portfolio
98,074

 
119,033

 
11,574

 
98,585

 
2,050

Home equity
8,671

 
9,695

 
1,784

 
7,732

 
—

Multi-family residential
35,001

 
38,609

 
1,138

 
14,206

 
280

Commercial real estate
27,261

 
37,188

 
1,043

 
52,120

 
1,171

Consumer and installment
28

 
28

 
1

 
51

 
—

 
$
238,789

 
342,705

 
17,952

 
283,455

 
4,423

Recorded investment represents the Company’s investment in its impaired loans reduced by cumulative charge-offs recorded against the allowance for loan losses on these same loans. At June 30, 2013 and December 31, 2012, the Company had recorded charge-offs of $86.3 million and $103.9 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 reduction 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 U.S. Treasury’s Home Affordable Modification Program (HAMP). HAMP gives qualifying homeowners an opportunity to refinance into more affordable monthly payments, with the U.S. Treasury compensating the Company for a portion of the reduction in monthly amounts due from borrowers participating in this program. At June 30, 2013 and December 31, 2012, the Company had $74.3 million and $75.7 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

15


loan to performing status based on the expectations that the borrower can adequately perform in accordance with the modified terms.
The determination of whether a modification should be classified as a TDR requires significant judgment after taking into consideration all facts and circumstances surrounding the transaction. No single characteristic or factor, taken alone, is determinative of whether a modification should be classified as a TDR. The fact that a single characteristic is present is not considered sufficient to overcome the preponderance of contrary evidence. Assuming all of the TDR criteria are met, the Company considers one or more of the following concessions to the loan terms to represent a TDR: (1) a reduction of the stated interest rate, (2) an extension of the maturity date or dates at a stated interest rate lower than the current market rate for a new loan with similar terms or (3) forgiveness of principal or accrued interest.
Loans renegotiated at a rate equal to or greater than that of a new loan with comparable risk at the time the contract is modified are excluded from TDR classification in the calendar years subsequent to the renegotiation if the loan is in compliance with the modified terms for at least six months.
The Company does not accrue interest on any TDRs unless it believes collection of all principal and interest under the modified terms is reasonably assured. Generally, six months of consecutive payment performance by the borrower under the restructured terms is required before a TDR is returned to accrual status. However, the period could vary depending upon the individual facts and circumstances of the loan. TDRs accruing interest are classified as performing TDRs. The following table presents the categories of performing TDRs as of June 30, 2013 and December 31, 2012:
 
June 30,
2013
 
December 31,
2012
 
(dollars expressed in thousands)
Performing Troubled Debt Restructurings:
 
 
 
Commercial, financial and agricultural
$
156

 
—

Real estate construction and development
10,031

 
10,031

Real estate mortgage:
 
 
 
One-to-four-family residential
76,730

 
79,905

Multi-family residential
28,154

 
28,240

Commercial real estate
4,580

 
10,741

Total performing troubled debt restructurings
$
119,651

 
128,917

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 June 30, 2013 and December 31, 2012:
 
June 30,
2013
 
December 31,
2012
 
(dollars expressed in thousands)
Nonperforming Troubled Debt Restructurings:
 
 
 
Commercial, financial and agricultural
$
984

 
1,004

Real estate construction and development
24,733

 
26,557

Real estate mortgage:
 
 
 
One-to-four-family residential
6,836

 
7,105

Multi-family residential
—

 
2,482

Commercial real estate
2,149

 
2,862

Total nonperforming troubled debt restructurings
$
34,702

 
40,010

Both performing and nonperforming TDRs are considered to be impaired loans. When an individual loan is determined to be a TDR, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral less applicable selling costs. The impairment amount is either charged off as a reduction to the allowance for loan losses or provided for as a specific reserve within the allowance for loan losses. The allowance for loan losses allocated to TDRs was $9.5 million at June 30, 2013 and December 31, 2012.

16


The following tables present loans classified as TDRs that were modified during the three and six months ended June 30, 2013 and 2012:
 
Three Months Ended June 30, 2013
 
Three Months Ended June 30, 2012
 
Number
of
Contracts
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
 
Number
of
Contracts
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
 
(dollars expressed in thousands)
Loan Modifications Classified as Troubled Debt Restructurings:
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
—
 
$
—

 
$
—

 
—
 
$
—

 
$
—

Real estate construction and development
—
 
—

 
—

 
—
 
—

 
—

Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
One-to-four-family residential
10
 
2,647

 
2,644

 
15
 
2,823

 
2,817

Commercial real estate
1
 
156

 
156

 
—
 
—

 
—

 
Six Months Ended June 30, 2013
 
Six Months Ended June 30, 2012
 
Number
of
Contracts
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
 
Number
of
Contracts
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
 
(dollars expressed in thousands)
Loan Modifications Classified as Troubled Debt Restructurings:
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
1
 
$
90

 
$
45

 
—
 
$
—

 
$
—

Real estate construction and development
—
 
—

 
—

 
2
 
803

 
390

Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
One-to-four-family residential
20
 
4,870

 
4,542

 
29
 
5,427

 
5,378

Commercial real estate
1
 
156

 
156

 
1
 
5,018

 
5,018

The following tables present TDRs that defaulted within 12 months of modification during the three and six months ended June 30, 2013 and 2012:
 
Three Months Ended
 
Three Months Ended
 
June 30, 2013
 
June 30, 2012
 
Number of
Contracts
 
Recorded
Investment
 
Number of
Contracts
 
Recorded
Investment
 
(dollars expressed in thousands)
Troubled Debt Restructurings That Subsequently Defaulted:
 
 
 
 
 
 
 
Real estate construction and development
—
 
$
—

 
3
 
$
1,364

Real estate mortgage:
 
 
 
 
 
 
 
One-to-four-family residential
13
 
2,525

 
16
 
3,587

 
Six Months Ended
 
Six Months Ended
 
June 30, 2013
 
June 30, 2012
 
Number of
Contracts
 
Recorded
Investment
 
Number of
Contracts
 
Recorded
Investment
 
(dollars expressed in thousands)
Troubled Debt Restructurings That Subsequently Defaulted:
 
 
 
 
 
 
 
Real estate construction and development
—
 
$
—

 
3
 
$
1,364

Real estate mortgage:
 
 
 
 
 
 
 
One-to-four-family residential
29
 
4,921

 
28
 
5,894

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.

17


Allowance for Loan Losses. Changes in the allowance for loan losses for the three and six months ended June 30, 2013 and 2012 were as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
 
(dollars expressed in thousands)
Balance, beginning of period
$
88,170

 
130,348

 
91,602

 
137,710

Loans charged-off
(6,871
)
 
(17,947
)
 
(13,754
)
 
(34,400
)
Recoveries of loans previously charged-off
4,334

 
7,826

 
7,785

 
14,917

Net loans charged-off
(2,537
)
 
(10,121
)
 
(5,969
)
 
(19,483
)
Provision for loan losses
—

 
—

 
—

 
2,000

Balance, end of period
$
85,633

 
120,227

 
85,633

 
120,227

The following table represents a summary of changes in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2013:
 
Commercial
and
Industrial
 
Real Estate
Construction
and
Development
 
One-to-
Four-Family
Residential
 
Multi-
Family
Residential
 
Commercial
Real Estate
 
Consumer
and
Installment
 
Total
 
(dollars expressed in thousands)
Three Months Ended June 30, 2013:
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
14,168

 
13,003

 
36,660

 
4,202

 
19,720

 
417

 
88,170

Charge-offs
(1,010
)
 
(166
)
 
(4,338
)
 
(159
)
 
(1,156
)
 
(42
)
 
(6,871
)
Recoveries
1,023

 
1,321

 
1,288

 
141

 
522

 
39

 
4,334

Provision (benefit) for loan losses
(215
)
 
(2,746
)
 
1,656

 
(62
)
 
1,487

 
(120
)
 
—

Ending balance
$
13,966

 
11,412

 
35,266

 
4,122

 
20,573

 
294

 
85,633

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2013:
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
13,572

 
14,434

 
38,897

 
4,252

 
20,048

 
399

 
91,602

Charge-offs
(1,686
)
 
(448
)
 
(8,727
)
 
(162
)
 
(2,633
)
 
(98
)
 
(13,754
)
Recoveries
2,090

 
1,716

 
2,519

 
141

 
1,240

 
79

 
7,785

Provision (benefit) for loan losses
(10
)
 
(4,290
)
 
2,577

 
(109
)
 
1,918

 
(86
)
 
—

Ending balance
$
13,966

 
11,412

 
35,266

 
4,122

 
20,573

 
294

 
85,633

The following table represents a summary of changes in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2012:
 
Commercial
and
Industrial
 
Real Estate
Construction
and
Development
 
One-to-
Four-Family
Residential
 
Multi-
Family
Residential
 
Commercial
Real Estate
 
Consumer
and
Installment
 
Total
 
(dollars expressed in thousands)
Three Months Ended June 30, 2012:
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
24,782

 
24,518

 
46,670

 
4,679

 
29,273

 
426

 
130,348

Charge-offs
(5,152
)
 
(3,339
)
 
(4,988
)
 
(237
)
 
(4,037
)
 
(194
)
 
(17,947
)
Recoveries
2,686

 
2,986

 
1,223

 
32

 
858

 
41

 
7,826

Provision (benefit) for loan losses
(301
)
 
(2,336
)
 
797

 
342

 
1,377

 
121

 
—

Ending balance
$
22,015

 
21,829

 
43,702

 
4,816

 
27,471

 
394

 
120,227

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2012:
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
27,243

 
24,868

 
50,864

 
4,851

 
29,448

 
436

 
137,710

Charge-offs
(10,233
)
 
(6,423
)
 
(8,916
)
 
(1,169
)
 
(7,390
)
 
(269
)
 
(34,400
)
Recoveries
5,744

 
3,719

 
2,475

 
43

 
2,846

 
90

 
14,917

Provision (benefit) for loan losses
(739
)
 
(335
)
 
(721
)
 
1,091

 
2,567

 
137

 
2,000

Ending balance
$
22,015

 
21,829

 
43,702

 
4,816

 
27,471

 
394

 
120,227


18


The following table represents a summary of the impairment method used by loan category at June 30, 2013 and December 31, 2012:
 
Commercial
and
Industrial
 
Real Estate
Construction
and
Development
 
One-to-
Four-Family
Residential
 
Multi-
Family
Residential
 
Commercial
Real Estate
 
Consumer
and
Installment
 
Total
 
(dollars expressed in thousands)
June 30, 2013:
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans individually evaluated for impairment
$
—

 
87

 
3,666

 
—

 
282

 
—

 
4,035

Impaired loans collectively evaluated for impairment
383

 
977

 
9,810

 
753

 
448

 
2

 
12,373

All other loans collectively evaluated for impairment
13,583

 
10,348

 
21,790

 
3,369

 
19,843

 
292

 
69,225

Total
$
13,966

 
11,412

 
35,266

 
4,122

 
20,573

 
294

 
85,633

Financing receivables:
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans individually evaluated for impairment
$
5,479

 
36,828

 
13,839

 
28,840

 
12,351

 
—

 
97,337

Impaired loans collectively evaluated for impairment
9,558

 
1,508

 
94,224

 
707

 
5,240

 
35

 
111,272

All other loans collectively evaluated for impairment
578,366

 
128,933

 
823,923

 
71,804

 
945,889

 
18,186

 
2,567,101

Total
$
593,403

 
167,269

 
931,986

 
101,351

 
963,480

 
18,221

 
2,775,710

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012:
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans individually evaluated for impairment
$
75

 
121

 
3,187

 
33

 
182

 
—

 
3,598

Impaired loans collectively evaluated for impairment
601

 
1,331

 
10,455

 
1,105

 
861

 
1

 
14,354

All other loans collectively evaluated for impairment
12,896

 
12,982

 
25,255

 
3,114

 
19,005

 
398

 
73,650

Total
$
13,572

 
14,434

 
38,897

 
4,252

 
20,048

 
399

 
91,602

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

 
39,155

 
16,843

 
34,636

 
20,965

 
—

 
119,483

Impaired loans collectively evaluated for impairment
11,166

 
3,028

 
98,423

 
365

 
6,296

 
28

 
119,306

All other loans collectively evaluated for impairment
591,251

 
132,796

 
871,501

 
68,683

 
942,419

 
19,175

 
2,625,825

Total
$
610,301

 
174,979

 
986,767

 
103,684

 
969,680

 
19,203

 
2,864,614


NOTE 5 – GOODWILL
Goodwill was $107.3 million and $125.3 million at June 30, 2013 and December 31, 2012, respectively. The Company allocated goodwill to the sale of the ABS line of business of $18.0 million, which is included in assets of discontinued operations at June 30, 2013. The Company allocated goodwill to the sale of the Northern Florida Region of $700,000, which was completed in April 2013 and is included in assets of discontinued operations at December 31, 2012. First Bank did not record goodwill impairment for the three or six months ended June 30, 2013 and 2012.
NOTE 6 – SERVICING RIGHTS
Mortgage Banking Activities. At June 30, 2013 and December 31, 2012, First Bank serviced mortgage loans for others totaling $1.30 billion and $1.27 billion, respectively. Changes in mortgage servicing rights for the three and six months ended June 30, 2013 and 2012 were as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
 
(dollars expressed in thousands)
Balance, beginning of period
$
10,652

 
9,713

 
9,152

 
9,077

Originated mortgage servicing rights
888

 
1,194

 
2,117

 
1,993

Change in fair value resulting from changes in valuation inputs or assumptions used in valuation model (1)
1,453

 
(1,316
)
 
2,307

 
(799
)
Other changes in fair value (2)
(652
)
 
(632
)
 
(1,235
)
 
(1,312
)
Balance, end of period
$
12,341

 
8,959

 
12,341

 
8,959

____________________
(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.

19


Other Servicing Activities. At June 30, 2013 and December 31, 2012, First Bank serviced United States Small Business Administration (SBA) loans for others totaling $147.1 million and $159.6 million, respectively. Changes in SBA servicing rights for the three and six months ended June 30, 2013 and 2012 were as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
 
(dollars expressed in thousands)
Balance, beginning of period
$
5,523

 
6,256

 
5,640

 
6,303

Originated SBA servicing rights
—

 
—

 
—

 
—

Change in fair value resulting from changes in valuation inputs or assumptions used in valuation model (1)
(58
)
 
142

 
(36
)
 
289

Other changes in fair value (2)
(273
)
 
(175
)
 
(412
)
 
(369
)
Balance, end of period
$
5,192

 
6,223

 
5,192

 
6,223

____________________
(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 7 – 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 June 30, 2013 and December 31, 2012:
 
 
 
Derivatives in Other Assets
 
Derivatives in Other Liabilities
 
Notional Amount
 
Fair Value Gain (Loss)
 
Fair Value Loss
 
June 30, 2013
 
December 31, 2012
 
June 30, 2013
 
December 31, 2012
 
June 30, 2013
 
December 31, 2012
 
(dollars expressed in thousands)
Derivative Instruments Not Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
Customer interest rate swap agreements
$
9,871

 
12,149

 
31

 
87

 
(31
)
 
(87
)
Interest rate lock commitments
38,384

 
59,932

 
68

 
1,837

 
—

 
—

Forward commitments to sell mortgage-backed securities
67,600

 
107,700

 
2,478

 
(305
)
 
—

 
—

Total
$
115,855

 
179,781

 
2,577

 
1,619

 
(31
)
 
(87
)
Customer Interest Rate Swap Agreements. First Bank offers interest rate swap agreements to certain customers to assist in hedging their risks of adverse changes in interest rates. First Bank serves as an intermediary between its customers and the financial markets. Each interest rate swap agreement between First Bank and its customers is offset by an interest rate swap agreement between First Bank and various counterparties. These interest rate swap agreements do not qualify for hedge accounting treatment. Changes in the fair value are recognized in noninterest income on a monthly basis. Each customer contract is paired with an offsetting contract, and as such, there is no significant impact to net income. The notional amount of these interest rate swap agreement contracts at June 30, 2013 and December 31, 2012 was $9.9 million and $12.1 million, respectively.
Interest Rate Lock Commitments / Forward Commitments to Sell Mortgage-Backed Securities. Derivative instruments issued by the Company consist of interest rate lock commitments to originate fixed-rate loans to be sold. Commitments to originate fixed-rate loans consist primarily of residential real estate loans. These net loan commitments and loans held for sale are hedged with forward contracts to sell mortgage-backed securities, which expire in September 2013. The fair value of the interest rate lock commitments, which is included in other assets in the consolidated balance sheets, was an unrealized gain of $68,000 and $1.8 million at June 30, 2013 and December 31, 2012, respectively. The fair value of the forward contracts to sell mortgage-backed securities, which is included in other assets in the consolidated balance sheets, was an unrealized gain of $2.5 million and an unrealized loss of $305,000 at June 30, 2013 and December 31, 2012, respectively. Changes in the fair value of interest rate lock commitments and forward commitments to sell mortgage-backed securities are recognized in noninterest income on a monthly basis.

20


The following table summarizes amounts included in the consolidated statements of operations for the three and six months ended June 30, 2013 and 2012 related to non-hedging derivative instruments:
Derivative Instruments Not Designated as Hedging Instruments:
Location of Gain (Loss) Recognized
in Operations on Derivatives
Amount of Gain (Loss) Recognized
in Operations on Derivatives
Three Months Ended
 
Six Months Ended
June 30,
 
June 30,
2013
 
2012
 
2013
 
2012
 
 
(dollars expressed in thousands)
Interest rate swap agreements
Other noninterest income
$
—

 
(2
)
 
—

 
(41
)
Customer interest rate swap agreements
Other noninterest income
—

 
—

 
—

 
3

Interest rate lock commitments
Gain on loans sold and held for sale
(1,047
)
 
1,582

 
(1,769
)
 
1,709

Forward commitments to sell mortgage-backed securities
Gain on loans sold and held for sale
2,543

 
(1,200
)
 
2,783

 
(428
)

NOTE 8 – NOTES PAYABLE AND OTHER BORROWINGS
Notes Payable. On March 20, 2013, the Company entered into a Revolving Credit Note and a Stock Pledge Agreement (the Credit Agreement) with Investors of America Limited Partnership (Investors of America, LP), as further described in Note 16 to the consolidated financial statements. The agreement provides for a $5.0 million secured revolving line of credit to be utilized for general working capital needs. This borrowing arrangement, which has a maturity date of March 31, 2014 and an interest rate of LIBOR plus 300 basis points, is intended to supplement, on a contingent basis, the parent company’s overall level of unrestricted cash to cover the parent company’s projected operating expenses should the parent company's existing cash resources become insufficient in the future. There have been no balances outstanding under the Credit Agreement since its inception.
Other Borrowings. Other borrowings were comprised solely of daily securities sold under agreement to repurchase of $35.2 million and $26.0 million at June 30, 2013 and December 31, 2012, respectively.
NOTE 9 – SUBORDINATED DEBENTURES
As of June 30, 2013, 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 following is a summary of the junior subordinated debentures issued to the Trusts in conjunction with the trust preferred securities offerings at June 30, 2013 and December 31, 2012:
Name of Trust
 
Issuance Date
 
Maturity Date
 
Call Date (1)
 
Interest Rate (2)
 
Trust Preferred Securities
 
Subordinated Debentures
 
 
 
 
 
 
 
 
 
 
(dollars expressed in thousands)
Variable Rate
 
 
 
 
 
 
 
 
 
 
 
 
First Bank Statutory Trust II
 
September 2004
 
September 20, 2034
 
September 20, 2009
 
205.0 bp
 
$
20,000

 
$
20,619

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

 
4,124

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

 
41,238

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

 
41,238

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

 
20,619

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

 
25,774

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

 
51,547

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

 
25,774

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

 
15,464

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

 
25,774

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

 
10,310

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

 
25,774

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

 
47,423

____________________
(1)
The junior subordinated debentures are callable at the option of the Company on the call date shown at 100% of the principal amount plus accrued and unpaid interest.
(2)
The interest rates paid on the trust preferred securities are based on either a variable rate or a fixed rate. The variable rate is based on the three-month LIBOR plus the basis point spread shown.
The Company’s distributions accrued on the junior subordinated debentures were $3.7 million and $7.4 million for the three and six months ended June 30, 2013, respectively, and $3.7 million and $7.3 million for the comparable periods in 2012, and are included in interest expense in the consolidated statements of operations. 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 11 to the consolidated financial statements.

21


On August 10, 2009, the Company announced the deferral of its regularly scheduled interest payments on its outstanding junior subordinated debentures relating to its $345.0 million of trust preferred securities beginning with the regularly scheduled quarterly interest payments that would otherwise have been made in September and October 2009. The terms of the junior subordinated debentures and the related trust indentures allow the Company to defer such payments of interest for up to 20 consecutive quarterly periods without triggering a payment default or penalty. Such payment default or penalty would likely have a material adverse effect on the Company’s business, financial condition and results of operations. The Company has deferred such payments for 16 quarterly periods as of June 30, 2013. The current 20 consecutive quarterly deferral period ends with the respective payment dates of the trust preferred securities in September and October 2014. During the deferral period, the respective trusts suspend the declaration and payment of dividends on the trust preferred securities. During the deferral period, the Company may not, among other things and with limited exceptions, pay cash dividends on or repurchase its common stock or preferred stock nor make any payment on outstanding debt obligations that rank equally with or junior to the junior subordinated debentures. Accordingly, the Company also suspended the payment of cash dividends on its outstanding common stock and preferred stock beginning with the regularly scheduled quarterly dividend payments on the preferred stock that would otherwise have been made in August and September 2009, as further described in Note 10 to the consolidated financial statements. The Company has deferred $49.9 million and $43.8 million of its regularly scheduled interest payments as of June 30, 2013 and December 31, 2012, respectively. In addition, the Company has accrued additional interest expense of $5.2 million and $3.9 million as of June 30, 2013 and December 31, 2012, respectively, on the regularly scheduled deferred interest payments based on the interest rate in effect for each junior subordinated note issuance in accordance with the respective terms of the underlying agreements.
Under its agreement with the Federal Reserve Bank of St. Louis (FRB), the Company agreed, among other things, to provide certain information to the FRB, including, but not limited to, prior notice regarding the issuance of additional trust preferred securities. The Company also agreed not to make any distributions of interest or other sums on its outstanding trust preferred securities without the prior approval of the FRB, as further described in Note 11 to the consolidated financial statements.

NOTE 10 – STOCKHOLDERS’ EQUITY
Common Stock. There is no established public trading market for the Company’s common stock. Various trusts, which were established by and are administered by and for the benefit of the Company’s Chairman of the Board and members of his immediate family (including Mr. Michael Dierberg, Vice Chairman of the Company), own all of the voting stock of the Company.
Preferred Stock. The Company has four classes of preferred stock outstanding. The Class A Convertible Adjustable Rate Preferred Stock, or Class A Preferred Stock, is convertible into shares of common stock at a rate based on the ratio of the par value of the preferred stock to the current market value of the common stock at the date of conversion, to be determined by independent appraisal at the time of conversion. Shares of Class A Preferred Stock may be redeemed by the Company at any time at 105.0% of par value. The Class B Non-Convertible Adjustable Rate Preferred Stock, or Class B Preferred Stock, may not be redeemed or converted. The holders of the Class A and Class B Preferred Stock have full voting rights. Dividends on the Class A and Class B Preferred Stock are adjustable quarterly based on the highest of the Treasury Bill Rate or the Ten Year Constant Maturity Rate for the two-week period immediately preceding the beginning of the quarter. This rate shall not be less than 6.0% nor more than 12.0% on the Class A Preferred Stock, or less than 7.0% nor more than 15.0% on the Class B Preferred Stock. Effective August 10, 2009, the Company suspended the declaration of dividends on its Class A and Class B Preferred Stock.
On December 31, 2008, the Company issued 295,400 shares of Class C Fixed Rate Cumulative Perpetual Preferred Stock (Class C Preferred Stock) and 14,770 shares of Class D Fixed Rate Cumulative Perpetual Preferred Stock (Class D Preferred Stock) to the United States Department of the Treasury (U.S. Treasury) in conjunction with the U.S. Treasury’s Troubled Asset Relief Program’s Capital Purchase Program (CPP). The Class C Preferred Stock has a par value of $1.00 per share and a liquidation preference of $1,000 per share. The holders of the Class C Preferred Stock have no voting rights except in certain limited circumstances. The Class C Preferred Stock carries an annual dividend rate equal to 5% for the first five years and the annual dividend rate increases to 9% per annum on and after February 15, 2014, payable quarterly in arrears beginning February 15, 2009. The Class D Preferred Stock has a par value of $1.00 per share and a liquidation preference of $1,000 per share. The holders of the Class D Preferred Stock have no voting rights except in certain limited circumstances. The Class D Preferred Stock carries an annual dividend rate equal to 9%, payable quarterly in arrears beginning February 15, 2009. The Class C Preferred Stock and the Class D Preferred Stock qualify as Tier 1 capital. Effective February 17, 2009, the Class C Preferred Stock and the Class D Preferred Stock may be redeemed at any time without penalty and without the need to raise new capital, subject to the U.S. Treasury’s consultation with the Company’s primary regulatory agency. The Class D Preferred Stock may not be redeemed until all of the outstanding shares of the Class C Preferred Stock have been redeemed. In addition, the U.S. Treasury has certain supervisory and oversight duties and responsibilities under the CPP and, pursuant to the terms of the agreement governing the issuance of the Class C Preferred Stock and the Class D Preferred Stock to the U.S. Treasury (Purchase Agreement), the U.S. Treasury is empowered to unilaterally amend any provision of the Purchase Agreement with the Company to the extent required to comply with any changes in applicable federal statutes. As a result of the Company’s deferral of dividends to the U.S. Treasury for an aggregate of six quarters, the U.S. Treasury had the right to elect two directors to the Company’s Board. On July 13, 2011, the U.S. Treasury elected two members to the Company’s Board of Directors.

22


On August 1, 2013, the U.S. Treasury closed its initial auction of the Class C Preferred Stock and the Class D Preferred Stock to unaffiliated third party investors in a private transaction. The preliminary results of the auction indicate the U.S. Treasury expects to sell approximately 96.0% of the Class C Preferred Stock and all of the Class D Preferred Stock, and the pending sale is expected to be completed on August 12, 2013. The Company will not receive any proceeds from the sale and the sale will have no effect on the terms of the outstanding Class C Preferred Stock and Class D Preferred Stock, including the Company's obligation to satisfy accrued and unpaid dividends prior to the payment of any dividend or other distribution to holders of junior or parity stock, including the Company's common stock, Class A Preferred Stock and Class B Preferred Stock, and an increase in the dividend rate from 5% to 9%, commencing with the dividend payment date of February 15, 2014. Further, the sale of the Class C Preferred Stock and the Class D Preferred Stock will have no effect on the Company's regulatory capital, financial condition or results of operations.
The Company allocated the total proceeds received under the CPP of $295.4 million to the Class C Preferred Stock and the Class D Preferred Stock based on the relative fair values of the respective classes of preferred stock at the time of issuance. The discount on the Class C Preferred Stock of $17.3 million is being accreted to retained earnings on a level-yield basis over five years. Accretion of the discount on the Class C Preferred Stock was $908,000 and $1.8 million for the three and six months ended June 30, 2013, respectively, compared to $883,000 and $1.8 million for the comparable periods in 2012.
The redemption of any issue of preferred stock requires the prior approval of the Federal Reserve. Furthermore, the Purchase Agreement that the Company entered into with the U.S. Treasury contains limitations on certain actions of the Company, including, but not limited to, payment of dividends and redemptions and acquisitions of the Company’s equity securities. In addition, the Company, under its agreement with the FRB, has agreed, among other things, to provide certain information to the FRB including, but not limited to, notice of plans to materially change its fundamental business and notice to raise additional equity capital. Furthermore, the Company agreed not to pay any dividends on its common or preferred stock without the prior approval of the FRB, as further described in Note 11 to the consolidated financial statements.
In conjunction with the deferral of its regularly scheduled interest payments on its outstanding junior subordinated debentures on August 10, 2009, as further described in Note 9 to the consolidated financial statements, the Company also began suspending the payment of cash dividends on its outstanding preferred stock beginning with the regularly scheduled quarterly dividend payments on the preferred stock that would otherwise have been made in August and September 2009. The Company has deferred such payments for 16 quarterly periods as of June 30, 2013. Consequently, the Company has suspended the declaration of dividends on its Class A and Class B preferred stock, but continues to declare and accumulate dividends on its Class C Preferred Stock and its Class D Preferred Stock. The Company has declared and deferred $64.4 million and $56.3 million of its regularly scheduled dividend payments on its Class C Preferred Stock and Class D Preferred Stock at June 30, 2013 and December 31, 2012, respectively, and has declared and accrued an additional $7.4 million and $5.6 million of cumulative dividends on such deferred dividend payments at June 30, 2013 and December 31, 2012, respectively.
During the first quarter of 2013, the Company reclassified certain of its available-for-sale investment securities to held-to-maturity investment securities at their respective fair values, which totaled $242.5 million, in aggregate, as further described in Note 3 to the consolidated financial statements. The gross unrealized gain on these available-for-sale investment securities at the time of transfer was $5.0 million. The unrealized gain included as a component of accumulated other comprehensive income was $2.8 million at the time of transfer, net of tax of $2.2 million. The fair value adjustment at the time of transfer of $5.0 million was recorded as additional premium on the investment securities, and is being amortized as an adjustment to interest income on investment securities over the remaining lives of the respective securities. The amortization of the unrealized gain reported in stockholders’ equity is also being amortized as an adjustment to interest income on investment securities over the remaining lives of the respective securities. Consequently, the combined amortization of the additional premium and the unrealized gain have no net impact on interest income on investment securities.

23


Accumulated Other Comprehensive Income. The following table summarizes changes in accumulated other comprehensive income, net of tax, by component, for the three and six months ended June 30, 2013:
 
Investment Securities
 
Defined Benefit Pension Plan
 
Deferred Tax Asset Valuation Allowance
 
Total
 
 
 
(dollars expressed in thousands)
 
Three Months Ended June 30, 2013:
 
 
 
 
 
 
 
Balance, beginning of period
$
32,510

 
(3,514
)
 
11,495

 
40,491

Other comprehensive income (loss) before reclassifications
(16,982
)
 
30

 
(13,745
)
 
(30,697
)
Amounts reclassified from accumulated other comprehensive income (loss)
(191
)
 
—

 
—

 
(191
)
Net current period other comprehensive income (loss)
(17,173
)
 
30

 
(13,745
)
 
(30,888
)
Balance, end of period
$
15,337

 
(3,484
)
 
(2,250
)
 
9,603

 
 
 
 
 
 
 
 
Six Months Ended June 30, 2013:
 
 
 
 
 
 
 
Balance, beginning of period
$
35,186

 
(3,544
)
 
13,617

 
45,259

Other comprehensive income (loss) before reclassifications
(19,663
)
 
60

 
(15,867
)
 
(35,470
)
Amounts reclassified from accumulated other comprehensive income (loss)
(186
)
 
—

 
—

 
(186
)
Net current period other comprehensive income (loss)
(19,849
)
 
60

 
(15,867
)
 
(35,656
)
Balance, end of period
$
15,337

 
(3,484
)
 
(2,250
)
 
9,603

The following table summarizes changes in accumulated other comprehensive income, net of tax, by component, for the three and six months ended June 30, 2012:
 
Investment Securities
 
Defined Benefit Pension Plan
 
Deferred Tax Asset Valuation Allowance
 
Total
 
 
 
(dollars expressed in thousands)
 
Three Months Ended June 30, 2012:
 
 
 
 
 
 
 
Balance, beginning of period
$
25,816

 
(2,612
)
 
2,712

 
25,916

Other comprehensive income (loss) before reclassifications
5,152

 
21

 
2,792

 
7,965

Amounts reclassified from accumulated other comprehensive income (loss)
3

 
—

 
—

 
3

Net current period other comprehensive income (loss)
5,155

 
21

 
2,792

 
7,968

Balance, end of period
$
30,971

 
(2,591
)
 
5,504

 
33,884

 
 
 
 
 
 
 
 
Six Months Ended June 30, 2012:
 
 
 
 
 
 
 
Balance, beginning of period
$
19,437

 
(2,633
)
 
(738
)
 
16,066

Other comprehensive income (loss) before reclassifications
11,870

 
42

 
6,242

 
18,154

Amounts reclassified from accumulated other comprehensive income (loss)
(336
)
 
—

 
—

 
(336
)
Net current period other comprehensive income (loss)
11,534

 
42

 
6,242

 
17,818

Balance, end of period
$
30,971

 
(2,591
)
 
5,504

 
33,884


NOTE 11 – REGULATORY CAPITAL AND OTHER REGULATORY MATTERS
Regulatory Capital. The Company and First Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the operations and financial condition of the Company and First Bank. Under these capital requirements, the Company and First Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and First Bank to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital to average assets.
The Company did not meet the minimum regulatory capital standards established for bank holding companies by the Federal Reserve at June 30, 2013 and December 31, 2012. The Company must maintain minimum total regulatory, Tier 1 regulatory and Tier 1 leverage ratios as set forth in the table below in order to meet the minimum capital adequacy standards.
First Bank was categorized as well capitalized at June 30, 2013 and December 31, 2012 under the prompt corrective action provisions of the regulatory capital standards. First Bank must maintain minimum total regulatory, Tier 1 regulatory and Tier 1 leverage ratios as set forth in the table below in order to be categorized as well capitalized. In addition, First Bank is currently required to maintain its Tier 1 capital to total assets ratio at no less than 7.00% in accordance with the provisions of its informal agreement entered into with the State of Missouri Division of Finance (MDOF), as further described below. First Bank’s Tier 1

24


capital to total assets ratio of 9.98% and 9.20% at June 30, 2013 and December 31, 2012, respectively, exceeded the 7.00% minimum level required under the terms of the informal agreement with the MDOF.
At June 30, 2013 and December 31, 2012, the Company and First Bank’s required and actual capital ratios were as follows:
 
 
 
 
 
 
 
 
 
 
 
To be Well
Capitalized
Under Prompt Corrective Action Provisions
 
Actual
 
For Capital Adequacy Purposes
 
 
June 30, 2013
 
December 31, 2012
 
Amount
 
Ratio
 
Amount
 
Ratio
 
(dollars expressed in thousands)
 
 
 
 
Total capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
First Banks, Inc.
$
112,256

 
3.10
%
 
$
93,542

 
2.57
%
 
8.0
%
 
N/A

First Bank
650,322

 
17.95

 
626,177

 
17.18

 
8.0

 
10.0
%
Tier 1 capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
First Banks, Inc.
56,128

 
1.55

 
46,771

 
1.28

 
4.0

 
N/A

First Bank
604,509

 
16.69

 
580,026

 
15.92

 
4.0

 
6.0

Tier 1 capital (to average assets):
 
 
 
 
 
 
 
 
 
 
 
First Banks, Inc.
56,128

 
0.92

 
46,771

 
0.73

 
4.0

 
N/A

First Bank
604,509

 
9.92

 
580,026

 
9.13

 
4.0

 
5.0

As noted above, the Company’s capital ratios are below the minimum regulatory capital standards established for bank holding companies, and therefore, the Company could be subject to additional actions by regulators that could have a direct material effect on the operations and financial condition of the Company and First Bank.
Regulatory Agreements. On March 24, 2010, the Company, SFC and First Bank entered into a Written Agreement (Agreement) with the FRB requiring the Company and First Bank to take certain steps intended to improve their overall financial condition. Pursuant to the Agreement, the Company prepared and filed with the FRB a number of specific plans designed to strengthen and/or address the following matters: (i) board oversight over the management and operations of the Company and First Bank; (ii) credit risk management practices; (iii) lending and credit administration policies and procedures; (iv) asset improvement; (v) capital; (vi) earnings and overall financial condition; and (vii) liquidity and funds management.
The Agreement requires, among other things, that the Company and First Bank obtain prior approval from the FRB in order to pay dividends. In addition, the Company must obtain prior approval from the FRB to: (i) take any other form of payment from First Bank representing a reduction in capital of First Bank; (ii) make any distributions of interest, principal or other sums on junior subordinated debentures or trust preferred securities; (iii) incur, increase or guarantee any debt; or (iv) purchase or redeem any shares of the Company’s stock. Pursuant to the terms of the Agreement, the Company and First Bank submitted a written plan to the FRB to maintain sufficient capital at the Company, on a consolidated basis, and at First Bank, on a standalone basis. In addition, the Agreement also provides that the Company and First Bank must notify the FRB if the regulatory capital ratios of either entity fall below those set forth in the capital plans that were accepted by the FRB, and specifically if First Bank falls below the criteria for being well capitalized under the regulatory framework for prompt corrective action. The Company must also notify the FRB before appointing any new directors or senior executive officers or changing the responsibilities of any senior executive officer position. The Agreement also requires the Company and First Bank to comply with certain restrictions regarding indemnification and severance payments. The Agreement is specifically enforceable by the FRB in court.
Prior to entering into the Agreement on March 24, 2010, the Company and First Bank had entered into a memorandum of understanding and an informal agreement, respectively, with the FRB and the MDOF. Each of the agreements were characterized by regulatory authorities as informal actions that were neither published nor made publicly available by the agencies and are used when circumstances warrant a milder form of action than a formal supervisory action, such as a written agreement or cease and desist order. The informal agreement with the MDOF is still in place and there have not been any modifications thereto since its inception in September 2008.
Under the terms of the prior memorandum of understanding with the FRB, the Company agreed, among other things, to provide certain information to the FRB including, but not limited to, financial performance updates, notice of plans to materially change its fundamental business and notice to issue trust preferred securities or raise additional equity capital. In addition, the Company agreed not to pay any dividends on its common or preferred stock or make any distributions of interest or other sums on its trust preferred securities without the prior approval of the FRB.
First Bank, under its informal agreement with the MDOF and the FRB, agreed to, among other things, prepare and submit plans and reports to the agencies regarding certain matters including, but not limited to, the performance of First Bank’s loan portfolio. In addition, First Bank agreed not to declare or pay any dividends or make certain other payments without the prior consent of the MDOF and the FRB and to maintain a Tier 1 capital to total assets ratio of no less than 7.00%.

25


While the Company and First Bank intend to take such actions as may be necessary to comply with the requirements of the Agreement with the FRB and informal agreement with the MDOF, there can be no assurance that the Company and First Bank will be able to comply fully with the requirements of the Agreement or that First Bank will be able to comply fully with the provisions of the informal agreement, that compliance with the Agreement and the informal agreement will not be more time consuming or more expensive than anticipated, that compliance with the Agreement and the informal agreement will enable the Company and First Bank to maintain profitable operations, or that efforts to comply with the Agreement and the informal agreement will not have adverse effects on the operations and financial condition of the Company or First Bank. If the Company or First Bank is unable to comply with the terms of the Agreement or the informal agreement, respectively, the Company and First Bank could become subject to various requirements limiting the ability to develop new business lines, mandating additional capital, and/or requiring the sale of certain assets and liabilities. Failure of the Company and First Bank to meet these conditions could lead to further enforcement action by the regulatory agencies. The terms of any such additional regulatory actions, orders or agreements could have a materially adverse effect on the Company’s business, financial condition or results of operations.
NOTE 12 – 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 use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
The following describes valuation methodologies used to measure financial assets and financial liabilities at fair value, as well as the general classification of such financial instruments pursuant to the valuation hierarchy:
Available-for-sale investment securities. Available-for-sale investment securities are recorded at fair value on a recurring basis. Available-for-sale investment securities included in Level 1 are valued using quoted market prices. Where quoted market prices are unavailable, the fair value included in Level 2 is based on quoted market prices of comparable instruments obtained from independent pricing vendors based on recent trading activity and other relevant information.
Loans held for sale. Mortgage loans held for sale are carried at fair value on a recurring basis. The determination of fair value is based on quoted market prices of comparable instruments obtained from independent pricing vendors based on recent trading activity and other relevant information. Other loans held for sale are carried at the lower of cost or market value, which is determined on an individual loan basis. The fair value is based on the prices secondary markets are offering for portfolios with similar characteristics. The Company classifies mortgage loans held for sale subjected to recurring fair value adjustments as recurring Level 2. The Company classifies other loans held for sale subjected to nonrecurring fair value adjustments as nonrecurring Level 2.
Impaired loans. The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans are considered impaired when, in the judgment of management based on current information and events, it is probable that payment of all amounts due under the contractual terms of the loan agreement will not be collected. Acquired impaired loans are classified as nonaccrual loans and are initially measured at fair value with no allocated allowance for loan losses. An allowance for loan losses is recorded to the extent there is further credit deterioration subsequent to the acquisition date. In accordance with ASC Topic 820, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. Once a loan is identified as impaired, management measures the impairment in accordance with ASC Topic 310-10-35, “Receivables.” Impairment is measured by reference to an observable market price, if one exists, the expected future cash flows of an impaired loan discounted at the loan’s effective interest rate, or the fair value of the collateral for a collateral-dependent loan. In most cases, the Company measures fair value based on the value of the collateral securing the loan. Collateral may be in the form of real estate or personal property, including equipment and inventory. The vast majority of the collateral is real estate. The value of the collateral is determined based on third party appraisals as well as internal estimates. These measurements are classified as nonrecurring Level 3.
Other real estate and repossessed assets. Certain other real estate and repossessed assets, upon initial recognition, are re-measured and reported at fair value through a charge-off to the allowance for loan losses based upon the estimated fair value of the other

26


real estate. The fair value of other real estate, upon initial recognition, is estimated using Level 3 inputs based on third party appraisals, and where applicable, discounted based on management’s judgment taking into account current market conditions, distressed or forced sale price comparisons and other factors in effect at the time of valuation. The Company classifies other real estate and repossessed assets subjected to nonrecurring fair value adjustments as Level 3.
Derivative instruments. Substantially all derivative instruments utilized by the Company are traded in over-the-counter markets where quoted market prices are not readily available. Derivative instruments utilized by the Company include interest rate swap agreements, interest rate lock commitments and forward commitments to sell mortgage-backed securities. For these derivative instruments, fair value is based on market observable inputs utilizing pricing systems and valuation models, and where applicable, the values are compared to the market values calculated independently by the respective counterparties. The Company classifies its derivative instruments as Level 2.
Servicing rights. The valuation of mortgage and SBA servicing rights is performed by an independent third party. The valuation models estimate the present value of estimated future net servicing income, using market-based discount rate assumptions, and utilize assumptions based on the predominant risk characteristics of the underlying loans, including principal balance, interest rate, weighted average life, and certain unobservable inputs, including cost to service, estimated prepayment speed rates and default rates. Changes in the fair value of servicing rights occur primarily due to the realization of expected cash flows, as well as changes in valuation inputs and assumptions. Significant increases (decreases) in any of the unobservable inputs would result in a significantly lower (higher) fair value of the servicing rights. The Company classifies its servicing rights as Level 3.
Nonqualified Deferred Compensation Plan. The Company’s nonqualified deferred compensation plan is recorded at fair value on a recurring basis. The unfunded plan allows participants to hypothetically invest in various specified investment options such as equity funds, international stock funds, capital appreciation funds, money market funds, bond funds, mid-cap value funds and growth funds. The nonqualified deferred compensation plan liability is valued based on quoted market prices of the underlying investments. The Company classifies its nonqualified deferred compensation plan liability as Level 1.

27


Items Measured on a Recurring Basis. Assets and liabilities measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012 are reflected in the following table:
 
Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Fair Value
 
(dollars expressed in thousands)
June 30, 2013:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Available-for-sale investment securities:
 
 
 
 
 
 
 
U.S. Government sponsored agencies
$
—

 
274,242

 
—

 
274,242

Residential mortgage-backed
—

 
1,200,146

 
—

 
1,200,146

Commercial mortgage-backed
—

 
872

 
—

 
872

State and political subdivisions
—

 
32,643

 
—

 
32,643

Corporate notes
—

 
194,886

 
—

 
194,886

Equity investments
1,473

 
—

 
—

 
1,473

Mortgage loans held for sale
—

 
45,239

 
—

 
45,239

Derivative instruments:
 
 
 
 
 
 
 
Customer interest rate swap agreements
—

 
31

 
—

 
31

Interest rate lock commitments
—

 
68

 
—

 
68

Forward commitments to sell mortgage-backed securities
—

 
2,478

 
—

 
2,478

Servicing rights
—

 
—

 
17,533

 
17,533

Total
$
1,473

 
1,750,605

 
17,533

 
1,769,611

Liabilities:
 
 
 
 
 
 
 
 Derivative instruments:
 
 
 
 
 
 
 
 Customer interest rate swap agreements
$
—

 
31

 
—

 
31

 Nonqualified deferred compensation plan
6,159

 
—

 
—

 
6,159

 Total
$
6,159

 
31

 
—

 
6,190

December 31, 2012:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Available-for-sale investment securities:
 
 
 
 
 
 
 
U.S. Government sponsored agencies
$
—

 
310,429

 
—

 
310,429

Residential mortgage-backed
—

 
1,534,067

 
—

 
1,534,067

Commercial mortgage-backed
—

 
915

 
—

 
915

State and political subdivisions
—

 
4,929

 
—

 
4,929

Corporate notes
—

 
192,365

 
—

 
192,365

Equity investments
1,022

 
—

 
—

 
1,022

Mortgage loans held for sale
—

 
66,133

 
—

 
66,133

Derivative instruments:
 
 
 
 
 
 
 
Customer interest rate swap agreements
—

 
87

 
—

 
87

Interest rate lock commitments
—

 
1,837

 
—

 
1,837

Forward commitments to sell mortgage-backed securities
—

 
(305
)
 
—

 
(305
)
Servicing rights
—

 
—

 
14,792

 
14,792

Total
$
1,022

 
2,110,457

 
14,792

 
2,126,271

Liabilities:
 
 
 
 
 
 
 
 Derivative instruments:
 
 
 
 
 
 
 
 Customer interest rate swap agreements
$
—

 
87

 
—

 
87

 Nonqualified deferred compensation plan
6,443

 
—

 
—

 
6,443

 Total
$
6,443

 
87

 
—

 
6,530

There were no transfers between Levels 1 and 2 of the fair value hierarchy for the three and six months ended June 30, 2013 and 2012.

28


The following table presents the changes in Level 3 assets measured on a recurring basis for the three and six months ended June 30, 2013 and 2012:
 
Servicing Rights
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
 
(dollars expressed in thousands)
Balance, beginning of period
$
16,175

 
15,969

 
14,792

 
15,380

Total gains or losses (realized/unrealized):
 
 
 
 
 
 
 
Included in earnings (1)
470

 
(1,981
)
 
624

 
(2,191
)
Included in other comprehensive income
—

 
—

 
—

 
—

Issuances
888

 
1,194

 
2,117

 
1,993

Transfers in and/or out of level 3
—

 
—

 
—

 
—

Balance, end of period
$
17,533

 
15,182

 
17,533

 
15,182

____________________
(1)
Gains or losses (realized/unrealized) are included in noninterest income in the consolidated statements of operations.
Items Measured on a Nonrecurring Basis. From time to time, the Company measures certain assets at fair value on a nonrecurring basis. These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis as of June 30, 2013 and December 31, 2012 are reflected in the following table:
 
Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Fair Value
 
(dollars expressed in thousands)
June 30, 2013:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Impaired loans:
 
 
 
 
 
 
 
Commercial, financial and agricultural
$
—

 
—

 
14,654

 
14,654

Real estate construction and development
—

 
—

 
37,272

 
37,272

Real estate mortgage:
 
 
 
 
 
 
 
Bank portfolio
—

 
—

 
6,549

 
6,549

Mortgage Division portfolio
—

 
—

 
83,314

 
83,314

Home equity
—

 
—

 
4,724

 
4,724

Multi-family residential
—

 
—

 
28,794

 
28,794

Commercial real estate
—

 
—

 
16,861

 
16,861

Consumer and installment
—

 
—

 
33

 
33

Other real estate and repossessed assets
—

 
—

 
78,152

 
78,152

Total
$
—

 
—

 
270,353

 
270,353

December 31, 2012:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Impaired loans:
 
 
 
 
 
 
 
Commercial, financial and agricultural
$
—

 
—

 
18,374

 
18,374

Real estate construction and development
—

 
—

 
40,731

 
40,731

Real estate mortgage:
 
 
 

 
 
 
 
Bank portfolio
—

 
—

 
8,237

 
8,237

Mortgage Division portfolio
—

 
—

 
86,500

 
86,500

Home equity
—

 
—

 
6,887

 
6,887

Multi-family residential
—

 
—

 
33,863

 
33,863

Commercial real estate
—

 
—

 
26,218

 
26,218

Consumer and installment
—

 
—

 
27

 
27

Other real estate and repossessed assets
—

 
—

 
91,995

 
91,995

Total
$
—

 
—

 
312,832

 
312,832

Non-Financial Assets and Non-Financial Liabilities. Certain non-financial assets measured at fair value on a nonrecurring basis include other real estate (upon initial recognition or subsequent impairment), non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, and intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment.
Other real estate and repossessed assets measured at fair value upon initial recognition totaled $5.2 million and $12.9 million for the six months ended June 30, 2013 and 2012, respectively. In addition to other real estate and repossessed assets measured at fair value upon initial recognition, the Company recorded write-downs to the balance of other real estate and repossessed assets of $551,000 and $809,000 to noninterest expense for the three and six months ended June 30, 2013, respectively, compared to $4.1

29


million and $6.3 million for the comparable periods in 2012. Other real estate and repossessed assets were $78.2 million at June 30, 2013, compared to $92.0 million at December 31, 2012.
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.
FRB and FHLB stock. The carrying values reported in the consolidated balance sheets for FRB and FHLB stock, which are carried at cost, represent redemption value and approximate fair value.
Assets of discontinued operations. The carrying values reported in the consolidated balance sheets for assets of discontinued operations approximate fair value. The Company classifies its assets of discontinued operations as Level 2.
Deposits. The fair value of deposits payable on demand with no stated maturity (i.e., noninterest-bearing and interest-bearing demand, and savings and money market accounts) is considered equal to their respective carrying amounts as reported in the consolidated balance sheets. The fair value of demand deposits does not include the benefit that results from the low-cost funding provided by deposit liabilities compared to the cost of borrowing funds in the market. The fair value disclosed for time deposits is estimated utilizing a discounted cash flow calculation that applies interest rates currently being offered on similar deposits to a schedule of aggregated monthly maturities of time deposits. If the estimated fair value is lower than the carrying value, the carrying value is reported as the fair value of time deposits. The Company classifies its time deposits as Level 3.
Other borrowings and accrued interest payable. The carrying values reported in the consolidated balance sheets for variable rate borrowings approximate fair value. The fair value of fixed rate borrowings is based on quoted market prices where available. If quoted market prices are not available, the fair value is based on discounting contractual maturities using an estimate of current market rates for similar instruments. The Company classifies its other borrowings, comprised of securities sold under agreement to repurchase, as Level 1. The carrying values reported in the consolidated balance sheets for accrued interest payable approximate fair value.
Subordinated debentures. The fair value of subordinated debentures is based on quoted market prices of comparable instruments. The Company classifies its subordinated debentures as Level 3.
Liabilities of discontinued operations. The fair value of liabilities of discontinued operations reflects the negotiated purchase price at which the liabilities could be exchanged in a transaction between willing parties, as further described in Note 2 to the consolidated financial statements. The Company classifies its liabilities of discontinued operations as Level 2.
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.

30


The estimated fair value of the Company’s financial instruments at June 30, 2013 were as follows:
 
June 30, 2013
 
 
 
Estimated Fair Value
 
Carrying
Value
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(dollars expressed in thousands)
Financial Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
515,545

 
515,545

 
—

 
—

 
515,545

Investment securities:
 
 
 
 
 
 
 
 
 
Available for sale
1,704,262

 
1,473

 
1,702,789

 
—

 
1,704,262

Held to maturity
800,453

 
—

 
787,791

 
—

 
787,791

Loans held for portfolio
2,690,077

 
—

 
—

 
2,493,483

 
2,493,483

Loans held for sale
45,239

 
—

 
45,239

 
—

 
45,239

FRB and FHLB stock
27,674

 
27,674

 
—

 
—

 
27,674

Derivative instruments
2,577

 
—

 
2,577

 
—

 
2,577

Accrued interest receivable
18,373

 
18,373

 
—

 
—

 
18,373

Assets of discontinued operations
39,006

 
—

 
39,006

 
—

 
39,006

Financial Liabilities:
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
Noninterest-bearing demand
$
1,198,846

 
1,198,846

 
—

 
—

 
1,198,846

Interest-bearing demand
636,582

 
636,582

 
—

 
—

 
636,582

Savings and money market
1,892,903

 
1,892,903

 
—

 
—

 
1,892,903

Time deposits
1,093,955

 
—

 
—

 
1,094,326

 
1,094,326

Other borrowings
35,228

 
35,228

 
—

 
—

 
35,228

Derivative instruments
31

 
—

 
31

 
—

 
31

Accrued interest payable
55,755

 
55,755

 
—

 
—

 
55,755

Subordinated debentures
354,172

 
—

 
—

 
267,253

 
267,253

Liabilities of discontinued operations
550,683

 
—

 
502,038

 
—

 
502,038

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

 
—

 
(2,779
)
 
(2,779
)
The estimated fair value of the Company’s financial instruments at December 31, 2012 were as follows:
 
December 31, 2012
 
 
 
Estimated Fair Value
 
Carrying
Value
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(dollars expressed in thousands)
Financial Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
518,846

 
518,846

 
—

 
—

 
518,846

Investment securities:
 
 
 
 
 
 
 
 
 
Available for sale
2,043,727

 
1,022

 
2,042,705

 
—

 
2,043,727

Held to maturity
631,553

 
—

 
637,024

 
—

 
637,024

Loans held for portfolio
2,773,012

 
—

 
—

 
2,572,256

 
2,572,256

Loans held for sale
66,133

 
—

 
66,133

 
—

 
66,133

FRB and FHLB stock
27,329

 
27,329

 
—

 
—

 
27,329

Derivative instruments
1,619

 
—

 
1,619

 
—

 
1,619

Accrued interest receivable
18,284

 
18,284

 
—

 
—

 
18,284

Assets of discontinued operations
6,706

 
—

 
6,706

 
—

 
6,706

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

 
1,327,183

 
—

 
—

 
1,327,183

Interest-bearing demand
1,000,666

 
1,000,666

 
—

 
—

 
1,000,666

Savings and money market
1,880,271

 
1,880,271

 
—

 
—

 
1,880,271

Time deposits
1,284,727

 
—

 
—

 
1,286,730

 
1,286,730

Other borrowings
26,025

 
26,025

 
—

 
—

 
26,025

Derivative instruments
87

 
—

 
87

 
—

 
87

Accrued interest payable
48,541

 
48,541

 
—

 
—

 
48,541

Subordinated debentures
354,133

 
—

 
—

 
254,984

 
254,984

Liabilities of discontinued operations
155,711

 
—

 
155,711

 
—

 
155,711

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

 
—

 
(2,779
)
 
(2,779
)


31


NOTE 13 – INCOME TAXES
The realization of the Company’s net deferred tax assets is based on the expectation of future taxable income and the utilization of tax planning strategies. The Company has a full valuation allowance against its net deferred tax assets at June 30, 2013 and December 31, 2012. The deferred tax asset valuation allowance was recorded in accordance with ASC Topic 740, “Income Taxes.” Under ASC Topic 740, the Company is required to assess whether it is “more likely than not” that some portion or all of its deferred tax assets will not be realized. Pursuant to ASC Topic 740, concluding that a deferred tax asset valuation allowance is not required is difficult when there is significant evidence which is objective and verifiable, such as the lack of recoverable taxes, excess of reversing deductible differences over reversing taxable differences and cumulative losses in recent years. If, in the future, the Company generates taxable income on a sustained basis, management may conclude the deferred tax asset valuation allowance is no longer required, which would result in the reversal of a portion or all of the deferred tax asset valuation allowance, which would be reflected as a benefit for income taxes in the consolidated statements of operations.
A summary of the Company’s deferred tax assets and deferred tax liabilities at June 30, 2013 and December 31, 2012 is as follows:
 
June 30, 2013
 
December 31, 2012
 
(dollars expressed in thousands)
Gross deferred tax assets
$
407,156

 
405,266

Valuation allowance
(390,835
)
 
(376,224
)
Deferred tax assets, net of valuation allowance
16,321

 
29,042

Deferred tax liabilities
23,754

 
36,182

Net deferred tax liabilities
$
(7,433
)
 
(7,140
)
The Company’s valuation allowance was $390.8 million and $376.2 million at June 30, 2013 and December 31, 2012, respectively. At June 30, 2013 and December 31, 2012, for federal income tax purposes, the Company had net operating loss carryforwards of approximately $611.0 million and $597.7 million, respectively. At June 30, 2013 and December 31, 2012, for state income tax purposes, the Company had net operating loss carryforwards of approximately $800.8 million and $786.4 million, respectively, and a related deferred tax asset of $68.4 million and $65.9 million, respectively.
At June 30, 2013 and December 31, 2012, the Company’s unrecognized tax benefits for uncertain tax positions, excluding interest and penalties, were $836,000 and $1.1 million, respectively. At June 30, 2013 and December 31, 2012, the total amount of unrecognized tax benefits that would affect the provision for income taxes, prior to the consideration of the deferred tax asset valuation allowance, was $551,000 and $740,000, respectively. It is the Company’s policy to separately disclose any interest or penalties arising from the application of federal or state income taxes. Interest related to unrecognized tax benefits is included in interest expense and penalties related to unrecognized tax benefits are included in noninterest expense. At June 30, 2013 and December 31, 2012, interest accrued for unrecognized tax positions was $121,000 and $116,000, respectively. The Company recorded a reduction of interest expense of $7,000 and interest expense of $5,000 related to unrecognized tax benefits for the three and six months ended June 30, 2013, respectively, compared to interest expense of $20,000 and $36,000 for the comparable periods in 2012. There were no penalties for uncertain tax positions accrued at June 30, 2013 and December 31, 2012, nor did the Company recognize any expense for penalties during the three and six months ended June 30, 2013 and 2012.
The Company continually evaluates the unrecognized tax benefits associated with its uncertain tax positions. It is reasonably possible that the remaining total unrecognized tax benefits as of June 30, 2013 could decrease by an additional $165,000 by December 31, 2013 as a result of the lapse of statutes of limitations or potential settlements with the federal and state taxing authorities, of which the impact to the provision for income taxes, prior to the consideration of the deferred tax asset valuation allowance, is estimated to be approximately $108,000. It is also reasonably possible that this decrease could be substantially offset by new matters arising during the same period.
The Company files consolidated and separate income tax returns in the U.S. federal jurisdiction and in various state jurisdictions. Management of the Company believes the accrual for tax liabilities is adequate for all open audit years based on its assessment of many factors, including past experience and interpretations of tax law applied to the facts of each matter. This assessment relies on estimates and assumptions. The Company’s federal income tax returns through 2008 have been examined by the IRS. Years subsequent to 2008 could contain matters that could be subject to differing interpretations of applicable tax laws and regulations as they relate to the amount, timing or inclusion of revenue and expenses. The Company has recorded a tax benefit only for those positions that meet the “more likely than not” standard. The Company’s current estimate of the resolution of various state examinations, none of which are in process, is reflected in accrued income taxes; however, final settlement of the examinations or changes in the Company’s estimate may result in future income tax expense or benefit.
The Company is no longer subject to U.S. federal and Illinois income tax examination for the years prior to 2009 and is no longer subject to California, Florida, Missouri and various other state income tax examination by the tax authorities for the years prior to 2008. The Company had a federal tax examination for tax years through 2008, which was closed during 2010, and a California tax examination for the 2004 and 2005 tax years, which was closed during 2008. An Illinois tax examination of the 2007 and 2008

32


tax years was completed during 2011 with no changes to the returns as originally filed. A California tax examination for the 2005 and 2006 tax years was completed during 2012 with no changes to the amended returns as filed. The Company is currently under examination of the 2007 and 2008 tax years for its Texas returns. While the statute of limitations for the 2008 tax year has expired for the majority of the states in which the Company is subject to income tax, the Company generated net operating loss carryforwards in 2008 which, if realized, are subject to examination in order to validate the net operating loss carryforward. Thus, while closed, the 2008 tax year for these states is still subject to examination. The statute of limitations will expire for 2008 when the statute of limitations expires for the year the net operating loss carryforward is realized.
NOTE 14 – EARNINGS (LOSS) PER COMMON SHARE
The following is a reconciliation of basic and diluted earnings (loss) per share (EPS) for the three and six months ended June 30, 2013 and 2012:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
 
(dollars in thousands, except share and per share data)
Basic:
 
 
 
 
 
 
 
Net income from continuing operations attributable to First Banks, Inc.
$
12,797

 
9,781

 
21,571

 
18,987

Preferred stock dividends declared and undeclared
(4,947
)
 
(4,690
)
 
(9,828
)
 
(9,317
)
Accretion of discount on preferred stock
(908
)
 
(883
)
 
(1,806
)
 
(1,767
)
Net income from continuing operations attributable to common stockholders
6,942

 
4,208

 
9,937

 
7,903

Net loss from discontinued operations attributable to common stockholders
(3,334
)
 
(2,273
)
 
(5,398
)
 
(4,581
)
Net income available to First Banks, Inc. common stockholders
$
3,608

 
1,935

 
4,539

 
3,322

 
 
 
 
 
 
 
 
Weighted average shares of common stock outstanding
23,661

 
23,661

 
23,661

 
23,661

 
 
 
 
 
 
 
 
Basic earnings per common share – continuing operations
$
293.39

 
177.84

 
419.98

 
334.02

Basic loss per common share – discontinued operations
$
(140.90
)
 
(96.06
)
 
(228.14
)
 
(193.61
)
Basic earnings per common share
$
152.49

 
81.78

 
191.84

 
140.41

 
 
 
 
 
 
 
 
Diluted:
 
 
 
 
 
 
 
Net income from continuing operations attributable to common stockholders
$
6,942

 
4,208

 
9,937

 
7,903

Net loss from discontinued operations attributable to common stockholders
(3,334
)
 
(2,273
)
 
(5,398
)
 
(4,581
)
Net income available to First Banks, Inc. common stockholders
3,608

 
1,935

 
4,539

 
3,322

Effect of dilutive securities – Class A convertible preferred stock
—

 
—

 
—

 
—

Diluted income available to First Banks, Inc. common stockholders
$
3,608

 
1,935

 
4,539

 
3,322

 
 
 
 
 
 
 
 
Weighted average shares of common stock outstanding
23,661

 
23,661

 
23,661

 
23,661

Effect of diluted securities – Class A convertible preferred stock
—

 
—

 
—

 
—

Weighted average diluted shares of common stock outstanding
23,661

 
23,661

 
23,661

 
23,661

 
 
 
 
 
 
 
 
Diluted earnings per common share – continuing operations
$
293.39

 
177.84

 
419.98

 
334.02

Diluted loss per common share – discontinued operations
$
(140.90
)
 
(96.06
)
 
(228.14
)
 
(193.61
)
Diluted earnings per common share
$
152.49

 
81.78

 
191.84

 
140.41


NOTE 15 – BUSINESS SEGMENT RESULTS
The Company’s business segment is First Bank. The reportable business segment is consistent with the management structure of the Company, First Bank and the internal reporting system that monitors performance. First Bank provides similar products and services in its defined geographic areas through its branch network. The products and services offered include a broad range of commercial and personal deposit products, including demand, savings, money market and time deposit accounts. In addition, First Bank markets combined basic services for various customer groups, including packaged accounts for more affluent customers, and sweep accounts, lock-box deposits and cash management products for commercial customers. First Bank also offers consumer and commercial loans. Consumer lending includes residential real estate, home equity and installment lending. Commercial lending includes commercial, financial and agricultural loans, real estate construction and development loans, commercial real estate loans and small business lending. Other financial services include mortgage banking, debit cards, brokerage services, internet banking, remote deposit, mobile banking, 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

33


banking and trust and private banking business units. The Company’s products and services are offered to customers primarily within its geographic areas, which include eastern Missouri, southern Illinois, southern and northern California, and Florida’s 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
 
June 30, 2013
 
December 31, 2012
 
June 30, 2013
 
December 31, 2012
 
June 30, 2013
 
December 31, 2012
 
(dollars expressed in thousands)
Balance sheet information:
 
 
 
 
 
 
 
 
 
 
 
Investment securities
$
2,504,715

 
2,675,280

 
—

 
—

 
2,504,715

 
2,675,280

Total loans
2,820,949

 
2,930,747

 
—

 
—

 
2,820,949

 
2,930,747

FRB and FHLB stock
27,674

 
27,329

 
—

 
—

 
27,674

 
27,329

Goodwill
107,267

 
125,267

 
—

 
—

 
107,267

 
125,267

Assets of discontinued operations
39,006

 
6,706

 
—

 
—

 
39,006

 
6,706

Total assets
6,202,250

 
6,495,226

 
14,668

 
13,900

 
6,216,918

 
6,509,126

Deposits
4,824,797

 
5,495,624

 
(2,511
)
 
(2,777
)
 
4,822,286

 
5,492,847

Other borrowings
35,228

 
26,025

 
—

 
—

 
35,228

 
26,025

Subordinated debentures
—

 
—

 
354,172

 
354,133

 
354,172

 
354,133

Liabilities of discontinued operations
550,683

 
155,711

 
—

 
—

 
550,683

 
155,711

Stockholders’ equity
739,406

 
751,252

 
(468,607
)
 
(451,293
)
 
270,799

 
299,959


 
First Bank
 
Corporate, Other and
Intercompany
Reclassifications
 
Consolidated Totals
 
Three Months Ended
 
Three Months Ended
 
Three Months Ended
 
June 30,
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
 
(dollars expressed in thousands)
Income statement information:
 
 
 
 
 
 
 
 
 
 
 
Interest income
$
43,732

 
51,142

 
—

 
—

 
43,732

 
51,142

Interest expense
2,244

 
3,934

 
3,731

 
3,681

 
5,975

 
7,615

Net interest income (loss)
41,488

 
47,208

 
(3,731
)
 
(3,681
)
 
37,757

 
43,527

Provision for loan losses
—

 
—

 
—

 
—

 
—

 
—

Net interest income (loss) after provision for loan losses
41,488

 
47,208

 
(3,731
)
 
(3,681
)
 
37,757

 
43,527

Noninterest income
18,831

 
15,746

 
112

 
109

 
18,943

 
15,855

Noninterest expense
44,025

 
49,497

 
118

 
368

 
44,143

 
49,865

Income (loss) from continuing operations before (benefit) provision for income taxes
16,294

 
13,457

 
(3,737
)
 
(3,940
)
 
12,557

 
9,517

(Benefit) provision for income taxes
(128
)
 
(351
)
 
(217
)
 
472

 
(345
)
 
121

Net income (loss) from continuing operations, net of tax
16,422

 
13,808

 
(3,520
)
 
(4,412
)
 
12,902

 
9,396

Loss from discontinued operations, net of tax
(3,334
)
 
(2,273
)
 
—

 
—

 
(3,334
)
 
(2,273
)
Net income (loss)
13,088

 
11,535

 
(3,520
)
 
(4,412
)
 
9,568

 
7,123

Net income (loss) attributable to noncontrolling interest in subsidiary
105

 
(385
)
 
—

 
—

 
105

 
(385
)
Net income (loss) attributable to First Banks, Inc.
$
12,983

 
11,920

 
(3,520
)
 
(4,412
)
 
9,463

 
7,508


34


 
First Bank
 
Corporate, Other and
Intercompany
Reclassifications
 
Consolidated Totals
 
Six Months Ended
 
Six Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
 
(dollars expressed in thousands)
Income statement information:
 
 
 
 
 
 
 
 
 
 
 
Interest income
$
87,718

 
102,986

 
—

 
21

 
87,718

 
103,007

Interest expense
4,717

 
8,405

 
7,407

 
7,364

 
12,124

 
15,769

Net interest income (loss)
83,001

 
94,581

 
(7,407
)
 
(7,343
)
 
75,594

 
87,238

Provision for loan losses
—

 
2,000

 
—

 
—

 
—

 
2,000

Net interest income (loss) after provision for loan losses
83,001

 
92,581

 
(7,407
)
 
(7,343
)
 
75,594

 
85,238

Noninterest income
34,115

 
32,698

 
223

 
181

 
34,338

 
32,879

Noninterest expense
87,888

 
98,650

 
302

 
709

 
88,190

 
99,359

Income (loss) from continuing operations before provision (benefit) for income taxes
29,228

 
26,629

 
(7,486
)
 
(7,871
)
 
21,742

 
18,758

Provision (benefit) for income taxes
20

 
(219
)
 
—

 
435

 
20

 
216

Net income (loss) from continuing operations, net of tax
29,208

 
26,848

 
(7,486
)
 
(8,306
)
 
21,722

 
18,542

Loss from discontinued operations, net of tax
(5,398
)
 
(4,581
)
 
—

 
—

 
(5,398
)
 
(4,581
)
Net income (loss)
23,810

 
22,267

 
(7,486
)
 
(8,306
)
 
16,324

 
13,961

Net income (loss) attributable to noncontrolling interest in subsidiary
151

 
(445
)
 
—

 
—

 
151

 
(445
)
Net income (loss) attributable to First Banks, Inc.
$
23,659

 
22,712

 
(7,486
)
 
(8,306
)
 
16,173

 
14,406


NOTE 16 – 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, provides information technology, item processing and various related services to the Company and First Bank. Fees paid under agreements with First Services were $4.9 million and $9.9 million for the three and six months ended June 30, 2013, respectively, and $5.5 million and $11.2 million for the comparable periods in 2012. First Services leases information technology and other equipment from First Bank. First Services paid First Bank rental fees for the use of such equipment of $293,000 and $537,000 during the three and six months ended June 30, 2013, respectively, and $351,000 and $701,000 for the comparable periods in 2012. In addition, First Services paid $436,000 and $871,000 for the three and six months ended June 30, 2013, respectively, and $462,000 and $924,000 for the comparable periods in 2012, 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, insurance services and vendor payment processing services. Fees accrued under the Affiliate Services Agreement by First Services were $45,000 and $91,000 for the three and six months ended June 30, 2013, respectively, and $44,000 and $89,000 for the comparable periods in 2012.
First Brokerage America, L.L.C. First Brokerage America, L.L.C. (First Brokerage), a limited liability company indirectly owned by the Company’s Chairman and members of his immediate family, including Mr. Michael Dierberg, Vice Chairman of the Company, received $1.2 million and $2.4 million for the three and six months ended June 30, 2013, respectively, and $1.2 million and $2.4 million for the comparable periods in 2012, in gross commissions paid by unaffiliated third-party companies. The commissions received primarily resulted from sales of annuities, securities and other insurance products to customers of First Bank. First Brokerage paid $131,000 and $245,000 for the three and six months ended June 30, 2013, respectively, and $130,000 and $225,000 for the comparable periods in 2012, to First Bank in rental payments for occupancy of certain First Bank premises from which brokerage business is conducted.
Dierbergs Markets, Inc. First Bank leases certain of its in-store branch offices and automated teller machine (ATM) sites from Dierbergs Markets, Inc., a grocery store chain headquartered in St. Louis, Missouri that is owned and operated by the brother of the Company’s Chairman and members of his immediate family. Total rent expense incurred by First Bank under the lease obligation contracts was $122,000 and $244,000 for the three and six months ended June 30, 2013, respectively, and $120,000 and $244,000 for the comparable periods in 2012.
First Capital America, Inc. / FB Holdings, LLC. The Company formed FB Holdings, a limited liability company organized in the state of Missouri, in May 2008. FB Holdings operates as a majority-owned subsidiary of First Bank and was formed for the primary purpose of holding and managing certain nonperforming loans and assets to allow the liquidation of such assets at a time that was more economically advantageous to First Bank and to permit an efficient vehicle for the investment of additional capital by the Company’s sole owner of its Class A and Class B preferred stock. First Bank contributed cash of $9.0 million and

35


nonperforming loans and assets with a fair value of approximately $133.3 million and FCA contributed cash of $125.0 million to FB Holdings during 2008. As a result, First Bank owned 53.23% and FCA owned the remaining 46.77% of FB Holdings as of June 30, 2013. The contribution of cash by FCA is reflected as a component of stockholders’ equity in the consolidated balance sheets and, consequently, increased the Company’s and First Bank’s regulatory capital ratios under then-existing regulatory guidelines, subject to certain limitations.
FB Holdings receives various services provided by First Bank, including loan servicing and special assets services as well as various other financial, legal, human resources and property management services. Fees paid under the agreement by FB Holdings to First Bank were $7,000 and $16,000 for the three and six months ended June 30, 2013, respectively, and $36,000 and $78,000 for the comparable periods in 2012.
Investors of America Limited Partnership. On March 20, 2013, the Company entered into a $5.0 million Credit Agreement with Investors of America, LP, as further described in Note 8 to the consolidated financial statements. Investors of America, LP is a Nevada limited partnership that was created by and for the benefit of the Company’s Chairman and members of his immediate family. There have been no balances outstanding under the Credit Agreement since its inception.
Loans to Directors and/or their Affiliates. First Bank has had in the past, and may have in the future, loan transactions in the ordinary course of business with its directors and/or their affiliates. These loan transactions have been made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unaffiliated persons and did not involve more than the normal risk of collectability or present other unfavorable features. Loans to directors, their affiliates and executive officers of the Company were $15.1 million and $9.1 million at June 30, 2013 and December 31, 2012, 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 and/or their Affiliates. Certain directors and/or their affiliates maintain funds on deposit with First Bank in the ordinary course of business. These deposit transactions include demand, savings and time accounts, and have been established on the same terms, including interest rates, as those prevailing at the time for comparable transactions with unaffiliated persons.
NOTE 17 – CONTINGENT LIABILITIES
In the ordinary course of business, the Company and its subsidiaries become involved in legal proceedings, including litigation arising out of the Company’s efforts to collect outstanding loans. It is not uncommon for collection efforts to lead to so-called “lender liability” suits in which borrowers may assert various claims against the Company. From time to time, the Company is party to other legal matters arising in the normal course of business. While some matters pending against the Company specify damages claimed by plaintiffs, others do not seek a specified amount of damages or are at very early stages of the legal process. The Company records a loss accrual for all legal matters for which it deems a loss is probable and can be reasonably estimated. Management, after consultation with legal counsel, believes the ultimate resolution of these existing proceedings is not reasonably likely to have a material adverse effect on the business, financial condition or results of operations of the Company and/or its subsidiaries and the range of possible additional loss in excess of amounts accrued is not material.
The Company and First Bank have entered into agreements with the FRB and MDOF, as further described in Note 11 to the consolidated financial statements.


36


ITEM 2 – MANAGEMENT’S 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, absent the successful completion of all or a significant portion of our Capital Plan, as further discussed under “Overview – Capital Plan;”
•
Our ability to maintain capital at levels necessary or desirable to support our operations;
•
The risks associated with implementing our business strategy, including our ability to preserve and access sufficient capital to continue to execute our strategy;
•
Regulatory actions that impact First Banks, Inc. and First Bank, including the regulatory agreements entered into among First Banks, Inc., First Bank, the Federal Reserve Bank of St. Louis and the State of Missouri Division of Finance, as further discussed under “Overview – Regulatory Agreements;”
•
Our ability to comply with the terms of an agreement with our regulators pursuant to which we have agreed to take certain corrective actions to improve our financial condition and results of operations;
•
The effects of and changes in trade and monetary and fiscal policies and laws, including, but not limited to, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the interest rate policies of the Federal Open Market Committee of the Federal Reserve Board of Governors and the U.S. Treasury’s Capital Purchase Program and Troubled Asset Relief Program authorized by the Emergency Economic Stabilization Act of 2008;
•
The risks associated with the high concentration of commercial real estate loans in our loan portfolio;
•
The decline in commercial and residential real estate sales volume and the likely potential for continuing lack of liquidity in the real estate markets;
•
The uncertainties in estimating the fair value of developed real estate and undeveloped land in light of reduced market demand for such assets and a general lack of liquidity in the real estate markets;
•
Negative developments and disruptions in the credit and lending markets, including the impact of the adverse credit crisis on our business and on the businesses of our customers as well as other banks and lending institutions with which we have commercial relationships;
•
The appropriateness of our allowance for loan losses to absorb the amount of actual losses inherent in our existing loan portfolio;
•
The accuracy of assumptions underlying the establishment of our allowance for loan losses and the estimation of values of collateral or cash flow projections and the potential resulting impact on the carrying value of various financial assets and liabilities;
•
Credit risks and risks from concentrations (by geographic area and by industry) within our loan portfolio including certain large individual loans;
•
Possible changes in the creditworthiness of customers and the possible impairment of collectability of loans;
•
Liquidity risks;
•
Inaccessibility of funding sources on the same or similar terms on which we have historically relied if we are unable to maintain sufficient capital ratios;
•
Implementation of the Basel III regulatory capital reforms and changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act will include significant changes to bank capital, leverage and liquidity requirements, as further discussed under “Overview – Basel III Regulatory Capital Reforms;”
•
The ability to successfully acquire low cost deposits or alternative funding;
•
The effects of increased Federal Deposit Insurance Corporation deposit insurance assessments;
•
The effects of the expiration of unlimited Federal Deposit Insurance Corporations deposit insurance on noninterest-bearing transaction accounts over the $250,000 maximum available to depositors;
•
Changes in consumer spending, borrowings and savings habits;
•
The ability of First Bank to pay dividends to its parent holding company;

37


•
Our ability to pay cash dividends on our preferred stock and interest on our junior subordinated debentures;
•
High unemployment and the resulting impact on our customers’ savings rates and their ability to service debt obligations;
•
Possible changes in interest rates may increase our funding costs and reduce earning asset yields, thus reducing our margins;
•
The impact of possible future goodwill and other material impairment charges;
•
The ability to attract and retain senior management experienced in the banking and financial services industry;
•
Changes in the economic environment, competition, or other factors that may influence loan demand, deposit flows, the quality of our loan portfolio and loan and deposit pricing;
•
The impact on our financial condition of unknown and/or unforeseen liabilities arising from legal or administrative proceedings;
•
The threat of future terrorist activities, existing and potential wars and/or military actions related thereto, and domestic responses to terrorism or threats of terrorism;
•
Possible changes in general economic and business conditions in the United States in general and particularly in the communities and market segments we serve;
•
Volatility and disruption in national and international financial markets;
•
Government intervention in the U.S. financial system;
•
The impact of laws and regulations applicable to us and changes therein;
•
The impact of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and other accounting standard setters;
•
The impact of litigation generally and specifically arising out of our efforts to collect outstanding customer loans;
•
Competitive conditions in the markets in which we conduct our operations, including competition from banking and non-banking companies with substantially greater resources than us, some of which may offer and develop products and services not offered by us;
•
Our ability to control the composition of our loan portfolio without adversely affecting interest income and credit default risk;
•
The geographic dispersion of our offices;
•
The impact our hedging activities may have on our operating results;
•
The highly regulated environment in which we operate; and
•
Our ability to respond to changes in technology or an interruption or breach in security of our information systems.
Actual events or our actual future results may differ materially from any forward-looking statement due to these and other risks, uncertainties and significant factors. For a discussion of these and other risk factors that may impact these forward-looking statements, please refer to our 2012 Annual Report on Form 10-K, as filed with the United States Securities and Exchange Commission on March 26, 2013. 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 specifically decline to undertake any obligation to publicly revise any forward-looking statements that have been made to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. We do not have a duty to and will not update these forward-looking statements. Readers of this 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.

OVERVIEW AND RECENT DEVELOPMENTS
We, or 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, or SFC, headquartered in St. Louis, Missouri, and SFC’s wholly owned subsidiary bank, First Bank, also headquartered in St. Louis, Missouri. First Bank operates through its branch banking offices and subsidiaries: First Bank Business Capital, Inc.; FB Holdings, LLC, or FB Holdings; Small Business Loan Source LLC, or SBLS LLC; ILSIS, Inc.; FBIN, Inc.; SBRHC, Inc.; HVIIHC, Inc.; FBSA Missouri, Inc.; FBSA California, Inc.; NT Resolution Corporation; and LC Resolution Corporation. First Bank’s subsidiaries are wholly owned at June 30, 2013 except for FB Holdings, which is 53.23% owned by First Bank and 46.77% owned by First Capital America, Inc., or FCA, a corporation owned and operated by the Company’s Chairman of the Board and members of his immediate family, including Mr. Michael Dierberg, Vice Chairman of the Company, as further described in Note 16 to our consolidated financial statements.
First Bank currently operates 131 branch banking offices in California, Florida, Illinois and Missouri. 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.

38


Discontinued Operations. The assets and liabilities associated with the transactions described (and defined) below were previously reported in the First Bank segment and were sold or will be sold as part of our Capital Optimization Plan, or Capital Plan. We have applied discontinued operations accounting in accordance with Accounting Standards Codification™, or ASC, Topic 205-20, “Presentation of Financial Statements - Discontinued Operations,” to the assets and liabilities associated with our Association Bank Services line of business as of June 30, 2013, to the assets and liabilities associated with our Northern Florida Region as of December 31, 2012, and to the operations of our Association Bank Services line of business and our Northern Florida Region for the three and six months ended June 30, 2013 and 2012, as applicable. All financial information in this Quarterly Report on Form 10-Q is reported on a continuing operations basis, unless otherwise noted. See Note 2 to our consolidated financial statements for further discussion regarding discontinued operations.
Association Bank Services. On May 13, 2013, First Bank entered into a Purchase and Assumption Agreement that provides for the sale of certain assets and the transfer of certain liabilities, primarily deposits, of First Bank's Association Bank Services, or ABS, line of business, to Union Bank, N.A., or Union Bank, headquartered in San Francisco, California, as further described in Note 2 to our consolidated financial statements. ABS, headquartered in Vallejo, California, provides a full range of services to homeowners associations and community management companies. Under the terms of the agreement, Union Bank will assume approximately $550.6 million of deposits and will pay a premium on certain deposit accounts to be acquired in the transaction, which will be determined based on the average amount of certain deposits within ABS for the thirty (30) days prior to the closing date. Union Bank will also acquire certain assets, including loans of approximately $20.8 million at par value. Regulatory approval of the transaction was received on July 15, 2013, and subject to satisfaction of other customary closing conditions, the transaction is expected to close during the fourth quarter of 2013. The assets and liabilities associated with ABS are reflected in assets and liabilities of discontinued operations in the consolidated balance sheets as of June 30, 2013. First Bank expects to record a gain on the transaction of approximately $26.0 million, after the estimated write-off of goodwill of $18.0 million allocated to the ABS line of business.
Northern Florida Region. On November 21, 2012, we entered into a Branch Purchase and Assumption Agreement that provided for the sale of certain assets and the transfer of certain liabilities associated with eight of our retail branches located in Pinellas County, Florida to HomeBanc National Association, or HomeBanc, headquartered in Lake Mary, Florida. The transaction was completed on April 19, 2013, as further described in Note 2 to our consolidated financial statements. Under the terms of the agreement, HomeBanc assumed approximately $120.3 million of deposits, purchased the premises and equipment, and assumed the leases associated with these eight retail branches. The transaction resulted in a gain of $394,000, after the write-off of goodwill of $700,000 allocated to the Northern Florida Region, during the second quarter of 2013.
Furthermore, on April 5, 2013, we closed our remaining three retail branches in Northern Florida, as further described in Note 2 to our consolidated financial statements. The closure of these three retail branches resulted in expense of $2.3 million during the second quarter of 2013 attributable to continuing obligations under facility leasing arrangements.
The eight branches sold and the three branches closed are collectively defined as the Northern Florida Region. The assets and liabilities associated with the Northern Florida Region were reflected in assets and liabilities of discontinued operations in the consolidated balance sheets as of December 31, 2012. We intend to continue to hold and operate our eight retail branches in the Manatee County communities of Bradenton, Palmetto and Longboat Key, Florida.
Sale of Class C Fixed Rate Cumulative Perpetual Preferred Stock and Class D Fixed Rate Cumulative Perpetual Preferred Stock by the United States Department of the Treasury. On August 1, 2013, the United States Department of the Treasury, or U.S. Treasury, closed its initial auction of our Class C Fixed Rate Cumulative Perpetual Preferred Stock, or Class C Preferred Stock, and our Class D Fixed Rate Cumulative Perpetual Preferred Stock, or Class D Preferred Stock, to unaffiliated third party investors in a private transaction. The preliminary results of the auction indicate that the U.S. Treasury expects to sell approximately 96.0% of our Class C Preferred Stock and all of our Class D Preferred Stock, and the pending sale is expected to be completed on August 12, 2013. The Company will not receive any proceeds from the sale and the sale will have no effect on the terms of the outstanding Class C Preferred Stock and Class D Preferred Stock, including the Company's obligation to satisfy accrued and unpaid dividends prior to the payment of any dividend or other distribution to holders of junior or parity stock, including the Company's common stock, Class A Convertible Adjustable Rate Preferred Stock and Class B Non-Convertible Adjustable Rate Preferred Stock, and an increase in the dividend rate from 5% to 9%, commencing with the dividend payment date of February 15, 2014. Further, the sale of the Class C Preferred Stock and the Class D Preferred Stock will have no effect on the Company's regulatory capital, financial condition or results of operations.
Final Basel III Capital Rule. On July 3, 2013, the Board of Governors of the Federal Reserve System, or Federal Reserve, adopted a final rule, Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Capital Adequacy, Transition Provisions, Prompt Corrective Action, Standardized Approach for Risk-weighted Assets, Market Discipline and Disclosure Requirements, Advanced Approaches Risk-Based Capital Rule, and Market Risk Capital Rule.” This final rule incorporates certain revisions to the Basel capital framework, including Basel III and other elements. The final rule increases risk-based capital requirements and makes selected changes to the calculation of risk-weighted assets. The final rule:

39


•
Includes a new minimum common equity Tier 1 capital ratio of 4.5% of risk-weighted assets and raises the minimum Tier 1 capital ratio from 4.0% to 6.0% of risk-weighted assets;
•
Requires 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 and certain discretionary bonus payments to executive officers;
•
Implements 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;
•
Increases risk-weightings for past-due loans, certain commercial real estate loans and some equity exposures;
•
Requires trust preferred securities and cumulative perpetual preferred stock to be phased out of Tier 1 capital for banks with assets greater than $15.0 billion as of December 31, 2009; and
•
Allows 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.
The final rule becomes effective for us on January 1, 2015. We are evaluating the impact the final Basel III capital rule may have on our regulatory capital levels and capital planning strategies.
Regulatory Agreements. On March 24, 2010, the Company, SFC and First Bank entered into a Written Agreement, or Agreement, with the Federal Reserve Bank of St. Louis, or FRB, requiring the Company and First Bank to take certain steps intended to improve their overall financial condition. Pursuant to the Agreement, the Company prepared and filed with the FRB a number of specific plans designed to strengthen and/or address the following matters: (i) board oversight over the management and operations of the Company and First Bank; (ii) credit risk management practices; (iii) lending and credit administration policies and procedures; (iv) asset improvement; (v) capital; (vi) earnings and overall financial condition; and (vii) liquidity and funds management.
The Agreement requires, among other things, that the Company and First Bank obtain prior approval from the FRB in order to pay dividends. In addition, the Company must obtain prior approval from the FRB to: (i) take any other form of payment from First Bank representing a reduction in capital of First Bank; (ii) make any distributions of interest, principal or other sums on junior subordinated debentures or trust preferred securities; (iii) incur, increase or guarantee any debt; or (iv) purchase or redeem any shares of the Company's stock. Pursuant to the terms of the Agreement, the Company and First Bank submitted a written plan to the FRB to maintain sufficient capital at the Company, on a consolidated basis, and at First Bank, on a standalone basis. In addition, the Agreement also provides that the Company and First Bank must notify the FRB if the regulatory capital ratios of either entity fall below those set forth in the capital plans that were accepted by the FRB, and specifically if First Bank falls below the criteria for being well capitalized under the regulatory framework for prompt corrective action. The Company must also notify the FRB before appointing any new directors or senior executive officers or changing the responsibilities of any senior executive officer position. The Agreement also requires the Company and First Bank to comply with certain restrictions regarding indemnification and severance payments. The Agreement is specifically enforceable by the FRB in court.
The Company and First Bank must furnish periodic progress reports to the FRB regarding compliance with the Agreement. As of the date of this filing, the Company and First Bank have provided progress reports and other reports, as required under the Agreement. The Company and First Bank have received, and may receive in the future, additional requests from the FRB regarding compliance with the Agreement, which may include, but are not limited to, updates and modifications to the Company's Asset Quality Improvement, Profit Improvement and Capital Plans. Management has responded promptly to any such requests and intends to do so in the future. The Agreement will remain in effect until stayed, modified, terminated or suspended by the FRB.
Prior to entering into the Agreement on March 24, 2010, the Company and First Bank had entered into a memorandum of understanding and an informal agreement, respectively, with the FRB and the State of Missouri Division of Finance, or the MDOF. Each of the agreements were characterized by regulatory authorities as informal actions that were neither published nor made publicly available by the agencies and are used when circumstances warrant a milder form of action than a formal supervisory action, such as a written agreement or cease and desist order. The informal agreement with the MDOF is still in place and there have not been any modifications thereto since its inception in September 2008.
Under the terms of the prior memorandum of understanding with the FRB, the Company agreed, among other things, to provide certain information to the FRB including, but not limited to, financial performance updates, notice of plans to materially change its fundamental business and notice to issue trust preferred securities or raise additional equity capital. In addition, the Company agreed not to pay any dividends on its common or preferred stock or make any distributions of interest or other sums on its trust preferred securities without the prior approval of the FRB.
First Bank, under its informal agreement with the MDOF and the FRB, agreed to, among other things, prepare and submit plans and reports to the agencies regarding certain matters including, but not limited to, the performance of First Bank's loan portfolio. In addition, First Bank agreed not to declare or pay any dividends or make certain other payments without the prior consent of

40


the MDOF and the FRB and to maintain a Tier 1 capital to total assets ratio of no less than 7.00%. As further described in Note 11 to our consolidated financial statements, First Bank's Tier 1 capital to total assets ratio was 9.98% at June 30, 2013.
While the Company and First Bank intend to take such actions as may be necessary to comply with the requirements of the Agreement with the FRB and informal agreement with the MDOF, there can be no assurance that the Company and First Bank will be able to comply fully with the requirements of the Agreement or that First Bank will be able to comply fully with the provisions of the informal agreement, that compliance with the Agreement and the informal agreement will not be more time consuming or more expensive than anticipated, that compliance with the Agreement and the informal agreement will enable the Company and First Bank to maintain profitable operations, or that efforts to comply with the Agreement and the informal agreement will not have adverse effects on the operations and financial condition of the Company or First Bank. If the Company or First Bank is unable to comply with the terms of the Agreement or the informal agreement, respectively, the Company and First Bank could become subject to various requirements limiting our ability to develop new business lines, mandating additional capital, and/or requiring the sale of certain assets and liabilities. Failure of the Company or First Bank to meet these conditions could lead to further enforcement action by the regulatory agencies. The terms of any such additional regulatory actions, orders or agreements could have a materially adverse effect on our business, financial condition or results of operations.
Capital Plan. We have been working since the beginning of 2008 to strengthen our capital ratios and improve our financial performance. Additionally, on August 10, 2009, we announced the adoption of our Capital Optimization Plan, designed to improve our capital ratios and financial performance through certain divestiture activities, asset reductions and expense reductions. We adopted our Capital Plan in order to, among other things, preserve our regulatory capital. A summary of the primary initiatives completed as of June 30, 2013 is shown in the table below. See Note 2 to our consolidated financial statements for a discussion of initiatives associated with our Capital Plan that were completed, or are in the process of completion, during the six months ended June 30, 2013 and 2012.
 
Gain (Loss)
on Sale
 
Decrease in
Intangible
Assets
 
Decrease in
Risk-Weighted
Assets
 
Total
Regulatory
Capital
Benefit (1)
 
(dollars expressed in thousands)
Sale of Northern Florida Region
$
394

 
700

 
3,400

 
1,400

Reduction in other risk-weighted assets
—

 
—

 
18,100

 
1,600

Total 2013 capital initiatives
$
394

 
700

 
21,500

 
3,000

 
 
 
 
 
 
 
 
Reduction in other risk-weighted assets
$
—

 
—

 
287,700

 
25,200

Total 2012 capital initiatives
$
—

 
—

 
287,700

 
25,200

 
 
 
 
 
 
 
 
Sale of remaining Northern Illinois Region
$
425

 
1,558

 
33,800

 
4,900

Sale of Edwardsville branch
263

 
500

 
1,400

 
900

Reduction in other risk-weighted assets
—

 
—

 
877,900

 
76,800

Total 2011 capital initiatives
$
688

 
2,058

 
913,100

 
82,600

 
 
 
 
 
 
 
 
Partial sale of Northern Illinois Region
$
6,355

 
9,683

 
141,800

 
28,500

Sale of Texas Region
4,984

 
19,962

 
116,300

 
35,100

Sale of Missouri Valley Partners, Inc.
(156
)
 
—

 
800

 
(100
)
Sale of Chicago Region
8,414

 
26,273

 
342,600

 
64,700

Sale of Lawrenceville branch
168

 
1,000

 
11,400

 
2,200

Reduction in other risk-weighted assets
—

 
—

 
2,111,400

 
184,700

Total 2010 capital initiatives
$
19,765

 
56,918

 
2,724,300

 
315,100

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

 
146,700

 
19,700

Sale of restaurant franchise loans
(1,149
)
 
—

 
64,400

 
4,500

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

 
119,300

 
4,300

Sale of Springfield branch
309

 
1,000

 
900

 
1,400

Sale of Adrian N. Baker & Company
120

 
13,013

 
1,300

 
13,200

Reduction in other risk-weighted assets
—

 
—

 
1,580,400

 
138,300

Total 2009 capital initiatives
$
(19,944
)
 
33,995

 
1,913,000

 
181,400

 
 
 
 
 
 
 
 
Total completed capital initiatives
$
903

 
93,671

 
5,859,600

 
607,300

____________________
(1)
Calculated as the sum of the gain (loss) on sale plus the reduction in intangible assets plus 8.75% of the reduction in risk-weighted assets.
In addition to the action items identified above with respect to our Capital Plan, we are also focused on the following actions which, if consummated, would further improve our regulatory capital ratios and/or result in a reduction of our risk-weighted assets:
•
Successful implementation of the action items contained within our Performance Enhancement Plan;
•
Reduction in the overall level of our nonperforming assets and potential problem loans;
•
Sale, merger or closure of individual branches or selected branch groupings; and

41


•
Exploration of possible capital planning strategies to increase the overall level of Tier 1 regulatory capital at our holding company.
We believe the successful completion of our Capital Plan would substantially improve our capital position. However, no assurance can be made that we will be able to successfully complete all, or any portion, of our Capital Plan, or that our Capital Plan will not be materially modified in the future. Our decision to implement the Capital Plan reflects the adverse effect that the severe downturn in the commercial and residential real estate markets has had on our financial condition and results of operations. If we are not able to successfully complete substantially all of our Capital Plan, our business, financial condition, including regulatory capital ratios, and results of operations may be materially and adversely affected and our ability to withstand continued adverse economic uncertainty could be threatened.
RESULTS OF OPERATIONS
Overview. We recorded net income, including discontinued operations, of $9.5 million and $16.2 million for the three and six months ended June 30, 2013, respectively, compared to $7.5 million and $14.4 million for the comparable periods in 2012. Our results of operations reflect the following:
•
Net interest income of $37.8 million and $75.6 million for the three and six months ended June 30, 2013, respectively, compared to $43.5 million and $87.2 million for the comparable periods in 2012, which contributed to a decline in our net interest margin to 2.61% and 2.60% for the three and six months ended June 30, 2013, respectively, compared to 2.84% and 2.86% for the comparable periods in 2012;
•
A provision for loan losses of zero for the three and six months ended June 30, 2013, compared to a provision for loan losses of zero and $2.0 million for the three and six months ended June 30, 2012;
•
Noninterest income of $18.9 million and $34.3 million for the three and six months ended June 30, 2013, respectively, compared to $15.9 million and $32.9 million for the comparable periods in 2012;
•
Noninterest expense of $44.1 million and $88.2 million for the three and six months ended June 30, 2013, respectively, compared to $49.9 million and $99.4 million for the comparable periods in 2012;
•
A benefit for income taxes of $345,000 for the three months ended June 30, 2013 and a provision for income taxes of $20,000 for the six months ended June 30, 2013, compared to a provision for income taxes of $121,000 and $216,000 for the comparable periods in 2012;
•
A net loss from discontinued operations, net of tax, of $3.3 million and $5.4 million for the three and six months ended June 30, 2013, respectively, compared to a net loss from discontinued operations, net of tax, of $2.3 million and $4.6 million for the comparable periods in 2012; and
•
Net income attributable to noncontrolling interest in subsidiary of $105,000 and $151,000 for the three and six months ended June 30, 2013, respectively, compared to a net loss attributable to noncontrolling interest in subsidiary of $385,000 and $445,000 for the comparable periods in 2012.

42


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 and six months ended June 30, 2013 and 2012:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
 
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Rate
 
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Rate
 
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Rate
 
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Rate
 
(dollars expressed in thousands)
ASSETS

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans (1)(2)(3)
$
2,803,647

 
29,898

 
4.28
 %
 
$
3,071,922

 
36,124

 
4.73
%
 
$
2,824,538

 
60,084

 
4.29
 %
 
$
3,127,778

 
73,859

 
4.75
%
Investment securities (3)
2,632,086

 
13,351

 
2.03

 
2,744,615

 
14,657

 
2.15

 
2,649,872

 
26,634

 
2.03

 
2,635,951

 
28,270

 
2.16

FRB and FHLB stock
27,593

 
307

 
4.46

 
26,115

 
223

 
3.43

 
27,537

 
610

 
4.47

 
26,453

 
560

 
4.26

Short-term investments
352,411

 
223

 
0.25

 
327,746

 
206

 
0.25

 
376,097

 
485

 
0.26

 
364,469

 
459

 
0.25

Total interest-earning assets
5,815,737

 
43,779

 
3.02

 
6,170,398

 
51,210

 
3.34

 
5,878,044

 
87,813

 
3.01

 
6,154,651

 
103,148

 
3.37

Nonearning assets
410,873

 
 
 
 
 
404,241

 
 
 
 
 
413,804

 
 
 
 
 
410,256

 
 
 
 
Assets of discontinued operations
41,567

 
 
 
 
 
50,343

 
 
 
 
 
44,021

 
 
 
 
 
51,109

 
 
 
 
Total assets
$
6,268,177

 
 
 
 
 
$
6,624,982

 
 
 
 
 
$
6,335,869

 
 
 
 
 
$
6,616,016

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand
$
640,108

 
74

 
0.05
 %
 
$
615,078

 
104

 
0.07
%
 
$
643,614

 
150

 
0.05
 %
 
$
609,351

 
213

 
0.07
%
Savings and money market
1,843,567

 
632

 
0.14

 
1,932,588

 
945

 
0.20

 
1,851,003

 
1,267

 
0.14

 
1,943,014

 
2,000

 
0.21

Time deposits of $100 or more
394,330

 
573

 
0.58

 
495,112

 
1,063

 
0.86

 
406,105

 
1,229

 
0.61

 
506,338

 
2,261

 
0.90

Other time deposits
730,940

 
978

 
0.54

 
883,738

 
1,800

 
0.82

 
747,172

 
2,081

 
0.56

 
906,300

 
3,885

 
0.86

Total interest-bearing deposits
3,608,945

 
2,257

 
0.25

 
3,926,516

 
3,912

 
0.40

 
3,647,894

 
4,727

 
0.26

 
3,965,003

 
8,359

 
0.42

Other borrowings
33,195

 
(15
)
 
(0.18
)
 
36,043

 
20

 
0.22

 
30,460

 
(12
)
 
(0.08
)
 
37,736

 
41

 
0.22

Subordinated debentures
354,162

 
3,733

 
4.23

 
354,086

 
3,683

 
4.18

 
354,153

 
7,409

 
4.22

 
354,077

 
7,369

 
4.19

Total interest-bearing liabilities
3,996,302

 
5,975

 
0.60

 
4,316,645

 
7,615

 
0.71

 
4,032,507

 
12,124

 
0.61

 
4,356,816

 
15,769

 
0.73

Noninterest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
1,197,165

 
 
 
 
 
1,172,937

 
 
 
 
 
1,176,567

 
 
 
 
 
1,144,499

 
 
 
 
Other liabilities
193,309

 
 
 
 
 
153,239

 
 
 
 
 
188,754

 
 
 
 
 
150,319

 
 
 
 
Liabilities of discontinued operations
588,776

 
 
 
 
 
702,762

 
 
 
 
 
643,224

 
 
 
 
 
691,214

 
 
 
 
Total liabilities
5,975,552

 
 
 
 
 
6,345,583

 
 
 
 
 
6,041,052

 
 
 
 
 
6,342,848

 
 
 
 
Stockholders’ equity
292,625

 
 
 
 
 
279,399

 
 
 
 
 
294,817

 
 
 
 
 
273,168

 
 
 
 
Total liabilities and stockholders’ equity
$
6,268,177

 
 
 
 
 
$
6,624,982

 
 
 
 
 
$
6,335,869

 
 
 
 
 
$
6,616,016

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
 
37,804

 
 
 
 
 
43,595

 
 
 
 
 
75,689

 
 
 
 
 
87,379

 
 
Interest rate spread
 
 
 
 
2.42

 
 
 
 
 
2.63

 
 
 
 
 
2.40

 
 
 
 
 
2.64

Net interest margin (4)
 
 
 
 
2.61
 %
 
 
 
 
 
2.84
%
 
 
 
 
 
2.60
 %
 
 
 
 
 
2.86
%
____________________
(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 $47,000 and $95,000 for the three and six months ended June 30, 2013, respectively, and $68,000 and $141,000 for the comparable periods in 2012.
(4)
Net interest margin is the ratio of net interest income (expressed on a tax-equivalent basis) to average interest-earning assets.
Our balance sheet is presently asset sensitive, and as such, our net interest margin has been negatively impacted by the low interest rate environment. Our asset-sensitive position, coupled with the level of our nonperforming assets, the increased level of average lower-yielding short-term investments and investment securities, the lower level of average loans and the additional interest expense accrued on our regularly scheduled deferred interest payments on our junior subordinated debentures has negatively impacted our net interest income and is expected to continue to impact the level of our net interest income in the future. We continue

43


our efforts to reduce nonperforming and potential problem loans and re-define our overall strategy and business plans with respect to our loan portfolio in light of ongoing changes in market conditions in our markets, focusing on loan growth initiatives to offset the impact of the decrease in nonaccrual loans, problem loans and other loan relationships.
Net interest income, expressed on a tax-equivalent basis, decreased to $37.8 million and $75.7 million for the three and six months ended June 30, 2013, respectively, compared to $43.6 million and $87.4 million for the comparable periods in 2012. Our net interest margin decreased 23 and 26 basis points to 2.61% and 2.60% for the three and six months ended June 30, 2013, respectively, from 2.84% and 2.86% for the comparable periods in 2012. We attribute the decrease in our net interest margin and net interest income for the three and six months ended June 30, 2013, as compared to the comparable periods in 2012, to a lower average balance of interest-earning assets in addition to a significant change in the mix of our interest-earning assets, which has shifted from loans to cash and cash equivalents and investment securities, and a decrease in the average yield on loans and investment securities, partially offset by a decrease in interest-bearing liabilities and the average rate paid on our interest-bearing liabilities. The average yield earned on our interest-earning assets decreased 32 and 36 basis points to 3.02% and 3.01% for the three and six months ended June 30, 2013, respectively, compared to 3.34% and 3.37% for the comparable periods in 2012, while the average rate paid on our interest-bearing liabilities decreased 11 and 12 basis points to 0.60% and 0.61% for the three and six months ended June 30, 2013, respectively, compared to 0.71% and 0.73% for the comparable periods in 2012. Average interest-earning assets decreased $354.7 million and $276.6 million to $5.82 billion and $5.88 billion for the three and six months ended June 30, 2013, respectively, compared to $6.17 billion and $6.15 billion for the comparable periods in 2012. Average interest-bearing liabilities decreased $320.3 million and $324.3 million to $4.00 billion and $4.03 billion for the three and six months ended June 30, 2013, respectively, compared to $4.32 billion and $4.36 billion for the comparable periods in 2012. Our net interest margin is expected to continue to remain at lower levels until loan balances stabilize and consistent loan demand returns within our core markets.
Interest income on our loan portfolio, expressed on a tax-equivalent basis, decreased $6.2 million and $13.8 million for the three and six months ended June 30, 2013, respectively, as compared to the comparable periods in 2012. Average loans decreased $268.3 million and $303.2 million to $2.80 billion and $2.82 billion for the three and six months ended June 30, 2013, respectively, from $3.07 billion and $3.13 billion for the comparable periods in 2012. The decrease in average loans primarily reflects a substantial level of loan payoffs and principal payments and the exit of certain of our problem credit relationships. The yield on our loan portfolio decreased 45 and 46 basis points to 4.28% and 4.29% for the three and six months ended June 30, 2013, respectively, from 4.73% and 4.75% for the comparable periods in 2012. 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. Furthermore, the yield on our loan portfolio continues to be adversely impacted by the higher levels of average nonaccrual loans, as further discussed under “—Loans and Allowance for Loan Losses.” Our nonaccrual loans decreased our average yield on loans by approximately 17 and 18 basis points for the three and six months ended June 30, 2013, respectively, compared to approximately 22 and 26 basis points for the comparable periods in 2012. We experienced an increase in new loan production volumes during the second quarter of 2013 and we continue to focus on loan growth initiatives to offset the impact of the decrease in nonaccrual loans, problem loans and other loan relationships in future periods.
Interest income on our investment securities, expressed on a tax-equivalent basis, decreased $1.3 million and $1.6 million for the three and six months ended June 30, 2013, respectively, as compared to the comparable periods in 2012. Average investment securities decreased $112.5 million for the three months ended June 30, 2013, as compared to the comparable period in 2012, and increased $13.9 million for the six months ended June 30, 2013, as compared to the comparable period in 2012. Our average investment securities decreased during the three months ended June 30, 2013 as a result of the sale of certain investment securities in anticipation of the expected sale of our ABS line of business during the fourth quarter of 2013. The yield earned on our investment securities portfolio decreased 12 and 13 basis points to 2.03% and 2.03% for the three and six months ended June 30, 2013, respectively, compared to 2.15% and 2.16% for the comparable periods in 2012, reflecting the market interest rate environment during the periods.
Interest income on our short-term investments increased $17,000 and $26,000 for the three and six months ended June 30, 2013, respectively, as compared to the comparable periods in 2012. Average short-term investments increased $24.7 million and $11.6 million for the three and six months ended June 30, 2013, respectively, as compared to the comparable periods in 2012. The increase in average short-term investments reflects the utilization of funds available from the decline in our loan portfolio and sales of investment securities to increase our liquidity position in anticipation of the expected sale of our ABS line of business during the fourth quarter of 2013, partially offset by a decline in average deposit balances. The yield on our short-term investments was 0.25% and 0.26% for the three and six months ended June 30, 2013, respectively, compared to 0.25% for the comparable periods in 2012, reflecting the investment of the majority of funds in our short-term investments in our correspondent bank account with the FRB, which currently earns 0.25%. The high level of short-term investments, while necessary to complete certain transactions associated with our Capital Plan and to maintain significant balance sheet liquidity in light of uncertain economic conditions, has negatively impacted our net interest margin and will negatively impact our net interest margin in future periods until we have the opportunity to further reduce our short-term investments through deployment of such funds into other higher-yielding assets.

44


Interest expense on our interest-bearing deposits decreased $1.7 million and $3.6 million for the three and six months ended June 30, 2013, respectively, as compared to the comparable periods in 2012. Average total deposits decreased $293.3 million and $285.0 million to $4.81 billion and $4.82 billion for the three and six months ended June 30, 2013, respectively, from $5.10 billion and $5.11 billion for the comparable periods in 2012. Average interest-bearing deposits decreased $317.6 million and $317.1 million for the three and six months ended June 30, 2013, respectively, as compared to the comparable periods in 2012. The decrease in average interest-bearing deposits primarily reflects anticipated reductions of higher rate certificates of deposit and promotional money market deposits, partially offset by organic growth in demand deposits through deposit development programs, including marketing campaigns and enhanced product and service offerings. The mix in our deposit portfolio volumes for the three and six months ended June 30, 2013, as compared to the comparable periods in 2012, primarily reflects a shift from time deposits and savings and money market deposits to interest-bearing and noninterest-bearing demand deposits. Decreases in our average time deposits, and savings and money market deposits of $259.4 million and $92.0 million, respectively, for the six months ended June 30, 2013, as compared to the comparable period in 2012, were partially offset by increases in average interest-bearing and noninterest-bearing demand deposits of $34.3 million and $32.1 million, respectively, for the six months ended June 30, 2013, as compared to the comparable period in 2012. The aggregate weighted average rate paid on our interest-bearing deposit portfolio decreased 15 and 16 basis points to 0.25% and 0.26% for the three and six months ended June 30, 2013, respectively, from 0.40% and 0.42% for the comparable periods in 2012, reflecting the re-pricing of certificate of deposit accounts to current market interest rates upon maturity and our efforts to reduce deposit costs across our deposit portfolio, in particular promotional money market deposits. The weighted average rate paid on our time deposit portfolio declined to 0.55% and 0.58% for the three and six months ended June 30, 2013, respectively, from 0.84% and 0.87% for the comparable periods in 2012; the weighted average rate paid on our savings and money market deposit portfolio declined to 0.14% for the three and six months ended June 30, 2013, from 0.20% and 0.21%, respectively, for the comparable periods in 2012; and the weighted average rate paid on our interest-bearing demand deposits declined to 0.05% for the three and six months ended June 30, 2013, from 0.07% for the comparable periods in 2012.
Interest expense on our other borrowings decreased $35,000 and $53,000 for the three and six months ended June 30, 2013, respectively, as compared to the comparable periods in 2012. Average other borrowings decreased $2.8 million and $7.3 million for the three and six months ended June 30, 2013, respectively, as compared to the comparable periods in 2012. Average other borrowings were comprised solely of daily repurchase agreements utilized by our commercial deposit customers as an alternative deposit product in connection with cash management activities. The aggregate weighted average rate paid on our other borrowings decreased 40 and 30 basis points for the three and six months ended June 30, 2013, respectively, as compared to the comparable periods in 2012. Interest expense on other borrowings also reflects the timing of interest accruals associated with uncertain tax positions.
Interest expense on our junior subordinated debentures increased $50,000 and $40,000 for the three and six months ended June 30, 2013, respectively, as compared to the comparable periods in 2012. Average junior subordinated debentures were $354.2 million for the three and six months ended June 30, 2013, compared to $354.1 million for the comparable periods in 2012. The aggregate weighted average rate paid on our junior subordinated debentures increased to 4.23% and 4.22% for the three and six months ended June 30, 2013, respectively, from 4.18% and 4.19% for the comparable periods in 2012. The aggregate weighted average rates reflect additional interest expense accrued on the regularly scheduled deferred interest payments on our junior subordinated debentures of $674,000 and $1.3 million for the three and six months ended June 30, 2013, respectively, compared to $486,000 and $926,000 for the comparable periods in 2012, as further discussed in Note 9 to our consolidated financial statements. The additional interest expense accrued on the regularly scheduled deferred interest payments increased the weighted average rate paid on our junior subordinated debentures by approximately 76 and 74 basis points for the three and six months ended June 30, 2013, respectively, compared to 55 and 53 basis points for the comparable periods in 2012. The increase in additional interest expense accrued on the regularly scheduled deferred interest payments was partially offset by a decline in LIBOR rates, as approximately 79.4% of our junior subordinated debentures are variable rate.
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 and six months ended June 30, 2013, as compared to the three and six months ended June 30, 2012. 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.

45


 
Increase (Decrease) Attributable to Change in:
 
Three Months Ended
June 30, 2013 Compared to 2012
 
Six Months Ended
June 30, 2013 Compared to 2012
 
Volume
 
Rate
 
Net Change
 
Volume
 
Rate
 
Net Change
 
(dollars expressed in thousands)
Interest earned on:
 
 
 
 
 
 
 
 
 
 
 
Loans (1) (2) (3)
$
(2,982
)
 
(3,244
)
 
(6,226
)
 
(6,893
)
 
(6,882
)
 
(13,775
)
Investment securities (3)
(607
)
 
(699
)
 
(1,306
)
 
101

 
(1,737
)
 
(1,636
)
FRB and FHLB stock
13

 
71

 
84

 
23

 
27

 
50

Short-term investments
17

 
—

 
17

 
12

 
14

 
26

Total interest income
(3,559
)
 
(3,872
)
 
(7,431
)
 
(6,757
)
 
(8,578
)
 
(15,335
)
Interest paid on:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand deposits
4

 
(34
)
 
(30
)
 
10

 
(73
)
 
(63
)
Savings and money market deposits
(42
)
 
(271
)
 
(313
)
 
(91
)
 
(642
)
 
(733
)
Time deposits
(456
)
 
(856
)
 
(1,312
)
 
(1,007
)
 
(1,829
)
 
(2,836
)
Other borrowings
(1
)
 
(34
)
 
(35
)
 
(7
)
 
(46
)
 
(53
)
Subordinated debentures
1

 
49

 
50

 
1

 
39

 
40

Total interest expense
(494
)
 
(1,146
)
 
(1,640
)
 
(1,094
)
 
(2,551
)
 
(3,645
)
Net interest income
$
(3,065
)
 
(2,726
)
 
(5,791
)
 
(5,663
)
 
(6,027
)
 
(11,690
)
____________________
(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%.
Net interest income, expressed on a tax-equivalent basis, decreased $5.8 million and $11.7 million for the three and six months ended June 30, 2013, respectively, as compared to the comparable periods in 2012, and reflects decreases due to volume of $3.1 million and $5.7 million, respectively, and decreases due to rate of $2.7 million and $6.0 million, respectively. The decrease in net interest income, expressed on a tax-equivalent basis, for the six months ended June 30, 2013, as compared to the comparable period in 2012, due to volume was primarily driven by a decrease in the volume of loans, partially offset by a decrease in the volume of interest-bearing deposits. The decrease in loans is further discussed under “—Loans and Allowance for Loan Losses.” The decrease in net interest income, expressed on a tax-equivalent basis, due to rate was primarily driven by a decrease in our loan and investment securities yields, reflective of overall market conditions and competition during these periods, partially offset by a decline in the cost of our interest-bearing deposits.
Provision for Loan Losses. We did not record a provision for loan losses for the three and six months ended June 30, 2013. We recorded a provision for loan losses of zero and $2.0 million for the three and six months ended June 30, 2012, respectively. The decrease in the provision for loan losses for the six months ended June 30, 2013, as compared to the comparable period in 2012, was primarily driven by the continued decrease in our overall level of nonaccrual loans and potential problem loans, a decrease in net loan charge-offs and less severe asset migration to classified asset categories during the first six months of 2013 than the migration levels experienced during the first six months of 2012, as further discussed under “—Loans and Allowance for Loan Losses.”
Our nonaccrual loans were $89.0 million at June 30, 2013, compared to $102.2 million at March 31, 2013, $109.9 million at December 31, 2012 and $150.4 million at June 30, 2012, reflecting a 40.8% decrease in nonaccrual loans year-over-year. The decrease in the overall level of nonaccrual loans was primarily driven by resolution of certain nonaccrual loans, gross loan charge-offs, and transfers to other real estate and repossessed assets exceeding net additions to nonaccrual loans, as further discussed under “—Loans and Allowance for Loan Losses,” and reflects our continued progress with respect to the implementation of our asset quality improvement initiatives, designed to reduce the overall balance of nonaccrual and other potential problem loans and assets.
Our net loan charge-offs decreased to $2.5 million and $6.0 million for the three and six months ended June 30, 2013, respectively, from $10.1 million and $19.5 million for the comparable periods in 2012. Our annualized net loan charge-offs were 0.36% and 0.43% of average loans for the three and six months ended June 30, 2013, respectively, compared to 1.33% and 1.25% of average loans for the comparable periods in 2012. Loan charge-offs were $6.9 million and $13.8 million for the three and six months ended June 30, 2013, respectively, compared to $17.9 million and $34.4 million for the comparable periods in 2012, and loan recoveries were $4.3 million and $7.8 million for the three and six months ended June 30, 2013, respectively, compared to $7.8 million and $14.9 million for the comparable periods in 2012.
Tables summarizing nonperforming assets, past due loans and charge-off and recovery experience are presented under “—Loans and Allowance for Loan Losses.”
Noninterest Income. Noninterest income increased $3.1 million and $1.5 million to $18.9 million and $34.3 million for the three and six months ended June 30, 2013, respectively, from $15.9 million and $32.9 million for the comparable periods in 2012. The

46


increase in our noninterest income was primarily attributable to increases in the fair value of servicing rights and other income, primarily reflecting increased net gains on sales of other real estate and repossessed assets, partially offset by lower service charges on deposit accounts and customer service fees, and lower gains on loans sold and held for sale. The following table summarizes noninterest income for the three and six months ended June 30, 2013 and 2012:
 
Three Months Ended
 
 
 
 
 
Six Months Ended
 
 
 
 
 
June 30,
 
Increase (Decrease)
 
June 30,
 
Increase (Decrease)
 
2013
 
2012
 
Amount
 
%
 
2013
 
2012
 
Amount
 
%
 
(dollars expressed in thousands)
Noninterest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service charges on deposit accounts and customer service fees
$
8,607

 
9,200

 
(593
)
 
(6.4
)%
 
$
16,921

 
17,975

 
(1,054
)
 
(5.9
)%
Gain on loans sold and held for sale
1,572

 
3,595

 
(2,023
)
 
(56.3
)
 
3,125

 
5,983

 
(2,858
)
 
(47.8
)
Net gain (loss) on investment securities
345

 
(5
)
 
350

 
NM
 
(71
)
 
517

 
(588
)
 
(113.7
)
Increase (decrease) in fair value of servicing rights
470

 
(1,981
)
 
2,451

 
123.7

 
624

 
(2,191
)
 
2,815

 
128.5

Loan servicing fees
1,776

 
1,910

 
(134
)
 
(7.0
)
 
3,493

 
3,918

 
(425
)
 
(10.8
)
Other
6,173

 
3,136

 
3,037

 
96.8

 
10,246

 
6,677

 
3,569

 
53.5

Total noninterest income
$
18,943

 
15,855

 
3,088

 
19.5

 
$
34,338

 
32,879

 
1,459

 
4.4

Service charges on deposit accounts and customer service fees decreased $593,000 and $1.1 million for the three and six months ended June 30, 2013, respectively, as compared to the comparable periods in 2012, primarily reflecting reduced non-sufficient funds and returned check fee income on retail and commercial accounts coupled with changes in our deposit mix and certain product modifications designed to enhance overall product offerings to our customer base during these periods.
Gains on residential mortgage loans sold and held for sale decreased $2.0 million and $2.9 million for the three and six months ended June 30, 2013, respectively, as compared to the comparable periods in 2012. The decrease was primarily attributable to a decline in loan production volume in our mortgage banking division as new interest rate lock commitments decreased to $102.3 million and $200.5 million for the three and six months ended June 30, 2013, respectively, as compared to $155.1 million and $288.0 million for the comparable periods in 2012.
We recorded net gains (losses) on investment securities of $345,000 and $(71,000) for the three and six months ended June 30, 2013, respectively, as compared to $(5,000) and $517,000 for the comparable periods in 2012. The net gain on investment securities for the second quarter of 2013 was attributable to the sale of certain investment securities in anticipation of the expected sale of our ABS line of business during the fourth quarter of 2013, as more fully described in Note 2 to our consolidated financial statements. We recorded other-than-temporary impairment of $407,000 during the first quarter of 2013 on a single municipal investment security classified as held-to-maturity. Proceeds from sales of available-for-sale investment securities were $52.1 million and $118.6 million for the three and six months ended June 30, 2013, respectively, as compared to $153.2 million and $207.6 million for the comparable periods in 2012.
Net gains (losses) associated with changes in the fair value of mortgage and SBA servicing rights increased to $470,000 and $624,000 for the three and six months ended June 30, 2013, respectively, from $(2.0) million and $(2.2) million for the comparable periods in 2012. The changes in the fair value of mortgage and SBA servicing rights during the periods primarily reflect changes in mortgage interest rates and the related changes in estimated prepayment speeds, as well as changes in cash flow assumptions underlying SBA loans serviced for others.
Loan servicing fees decreased $134,000 and $425,000 for the three and six months ended June 30, 2013, respectively, as compared to the comparable periods in 2012. Loan servicing fees are primarily comprised of fee income generated from the servicing of real estate mortgage loans owned by investors and originated by our mortgage banking division, as well as SBA loans originated to small business concerns, in addition to unused commitment fees received from lending customers. The level of such fees is primarily impacted by the balance of loans serviced and interest shortfall on serviced residential mortgage loans. Interest shortfall represents the difference between the interest collected from a loan servicing customer upon prepayment of the loan and the full month of interest that is required to be remitted to the security owner. The decrease in the level of loan servicing fees was associated with declining volumes of SBA loans serviced for others in addition to unused commitment fees associated with declining loan and unused commitment amounts.
Other income increased $3.0 million and $3.6 million for the three and six months ended June 30, 2013, respectively, as compared to the comparable periods in 2012. The increase in other income primarily reflects the following:
•
Net gains on sales of other real estate and repossessed assets of $3.7 million and $4.0 million for the three and six months ended June 30, 2013, respectively, including a gain of $2.7 million on the sale of a single property in the second quarter of 2013, as compared to net gains on sales of other real estate and repossessed assets of $356,000 and $283,000 for the comparable periods in 2012; and
•
Income of $1.2 million recognized on the call of an SBA loan securitization in the first quarter of 2013; partially offset by

47


•
The receipt of a litigation settlement of $561,000 in the first quarter of 2012; and
•
A gain on the sale of a CRA investment of $402,000 in the first quarter of 2012.
Noninterest Expense. Noninterest expense decreased $5.7 million and $11.2 million to $44.1 million and $88.2 million for the three and six months ended June 30, 2013, respectively, from $49.9 million and $99.4 million for the comparable periods in 2012. The decrease in our noninterest expense was primarily attributable to a lower level of expenses associated with our nonperforming assets and potential problem loans, decreased FDIC insurance expense and the implementation of certain measures intended to improve efficiency through the reduction of operating expenses, partially offset by an increase in salaries and employee benefits expenses. The following table summarizes noninterest expense for the three and six months ended June 30, 2013 and 2012:
 
Three Months Ended
 
 
 
 
 
Six Months Ended
 
 
 
 
 
June 30,
 
Increase (Decrease)
 
June 30,
 
Increase (Decrease)
 
2013
 
2012
 
Amount
 
%
 
2013
 
2012
 
Amount
 
%
 
(dollars expressed in thousands)
Noninterest expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries and employee benefits
$
19,645

 
18,500

 
1,145

 
6.2
 %
 
$
39,196

 
37,568

 
1,628

 
4.3
 %
Occupancy, net of rental income, and furniture and equipment
8,473

 
8,147

 
326

 
4.0

 
16,890

 
15,673

 
1,217

 
7.8

Postage, printing and supplies
711

 
611

 
100

 
16.4

 
1,339

 
1,345

 
(6
)
 
(0.4
)
Information technology fees
5,270

 
5,865

 
(595
)
 
(10.1
)
 
10,555

 
11,911

 
(1,356
)
 
(11.4
)
Legal, examination and professional fees
1,497

 
2,929

 
(1,432
)
 
(48.9
)
 
3,160

 
5,446

 
(2,286
)
 
(42.0
)
Advertising and business development
584

 
435

 
149

 
34.3

 
1,016

 
970

 
46

 
4.7

FDIC insurance
1,838

 
3,075

 
(1,237
)
 
(40.2
)
 
3,720

 
6,305

 
(2,585
)
 
(41.0
)
Write-downs and expenses on other real estate and repossessed assets
1,259

 
4,732

 
(3,473
)
 
(73.4
)
 
2,770

 
8,282

 
(5,512
)
 
(66.6
)
Other
4,866

 
5,571

 
(705
)
 
(12.7
)
 
9,544

 
11,859

 
(2,315
)
 
(19.5
)
Total noninterest expense
$
44,143

 
49,865

 
(5,722
)
 
(11.5
)
 
$
88,190

 
99,359

 
(11,169
)
 
(11.2
)
Salaries and employee benefits expense increased $1.1 million and $1.6 million for the three and six months ended June 30, 2013, respectively, as compared to the comparable periods in 2012. The overall increase in salaries and employee benefits expense reflects normal compensation increases and an increase in severance expense associated with certain initiatives in our Capital Plan, partially offset by a decline year-over-year in the overall level of our full-time equivalent employees, or FTEs. Our FTEs, excluding discontinued operations, were 1,146 at June 30, 2013, compared to 1,140 at December 31, 2012 and 1,163 at June 30, 2012, representing an increase of 0.5% and a decrease of 1.5%, respectively.
Occupancy, net of rental income, and furniture and equipment expense increased $326,000 and $1.2 million for the three and six months ended June 30, 2013, respectively, as compared to the comparable periods in 2012. The increase primarily resulted from a $787,000 decrease in rent expense during the first quarter of 2012 associated with the transfer of a lease obligation to an unaffiliated third party and the related reversal of the corresponding straight-line rent liability, in addition to accruals for future lease obligations associated with certain branch closures during the first six months of 2013.
Information technology fees decreased $595,000 and $1.4 million for the three and six months ended June 30, 2013, respectively, as compared to the comparable periods in 2012. The decrease in information technology fees is primarily due to the implementation of certain profit improvement initiatives and related fee reductions with First Services, L.P. As more fully described in Note 16 to our consolidated financial statements, First Services, L.P., a limited partnership indirectly owned by our Chairman and members of his immediate family, including Mr. Michael Dierberg, Vice Chairman of the Company, provides information technology and various operational support services to our subsidiaries and us. Information technology fees also include fees paid to outside servicers associated with our mortgage lending, trust and small business lending divisions as well as our payroll processing department.
Legal, examination and professional fees decreased $1.4 million and $2.3 million for the three and six months ended June 30, 2013, respectively, as compared to the comparable periods in 2012. The decrease in legal, examination and professional fees reflects a decline in legal expenses associated with loan collection activities, divestiture activities and litigation matters in comparison to the level of such expenses during the first six months of 2012. Despite the decline in legal fees, we anticipate legal, examination and professional fees will remain at higher-than-historical levels during 2013, primarily as a result of elevated levels of legal and professional fees associated with ongoing collection efforts on commercial and consumer problem loans, ongoing matters associated with our Capital Plan, and certain litigation matters.
FDIC insurance expense decreased $1.2 million and $2.6 million for the three and six months ended June 30, 2013, respectively, as compared to the comparable periods in 2012. The decrease in FDIC insurance expense is reflective of a reduction in our assessment rate, effective October 2, 2012, in addition to reduced deposit levels and total assets during the first six months of 2013, as compared to the comparable period in 2012.

48


Write-downs and expenses on other real estate and repossessed assets decreased $3.5 million and $5.5 million for the three and six months ended June 30, 2013, respectively, as compared to the comparable periods in 2012. Write-downs related to the re-valuation of certain other real estate properties and repossessed assets decreased $3.6 million and $5.4 million to $551,000 and $809,000 for the three and six months ended June 30, 2013, respectively, from $4.1 million and $6.3 million for the comparable periods in 2012. Other real estate and repossessed asset expenses, exclusive of write-downs, such as taxes, insurance, and repairs and maintenance, were $708,000 and $2.0 million for the three and six months ended June 30, 2013, respectively as compared to $617,000 and $2.0 million for the comparable periods in 2012. The balance of our other real estate and repossessed assets declined to $78.2 million at June 30, 2013, from $89.0 million, $92.0 million and $109.0 million at March 31, 2013, December 31, 2012 and June 30, 2012, respectively. The overall higher-than-historical level of expenses on other real estate and repossessed assets is associated with ongoing foreclosure activity, including current and delinquent real estate taxes paid on other real estate properties, as well as other property preservation related expenses. Although we continue to reduce the overall number and balance of other real estate properties and repossessed assets, we expect the level of write-downs and expenses on our other real estate and repossessed assets to continue to remain at elevated levels in the near term as a result of the high level of our other real estate and repossessed assets and the expected future transfer of certain of our nonaccrual loans into our other real estate portfolio.
Other expense decreased $705,000 and $2.3 million for the three and six months ended June 30, 2013, respectively, as compared to the comparable periods in 2012. Other expense encompasses numerous general and administrative expenses including communications, insurance, freight and courier services, correspondent bank charges, loan expenses, miscellaneous losses and recoveries, memberships and subscriptions, transfer agent fees, sales taxes, travel, meals and entertainment, overdraft losses and other nonrecurring expenses. The decrease in the overall level of other expense is reflective of the following:
•
Profit improvement initiatives and management's efforts to reduce overall expense levels;
•
Accruals and cash payments associated with certain litigation and other matters of $343,000 and $753,000 for the three and six months ended June 30, 2012;
•
Amortization expense and losses associated with CRA investments of $162,000 and $325,000 for the three and six months ended June 30, 2013, respectively, as compared to $162,000 and $846,000 (including a $500,000 valuation allowance on a CRA investment) for the comparable periods in 2012; and
•
Accruals and cash payments associated with repurchase losses in our Mortgage Division, resulting in expense of $427,000 and $852,000 for the three and six months ended June 30, 2013, respectively, as compared to $650,000 and $1.2 million for the comparable periods in 2012. We have sold significant amounts of residential mortgage loans directly to government-sponsored enterprises, Fannie Mae (FNMA) and Freddie Mac (FHLMC) (collectively, the GSEs), and to investors other than GSEs, as whole loans. In connection with these sales, we make or have made various representations and warranties, breaches of which may result in a requirement that we repurchase the mortgage loans, or otherwise make whole or provide other remedies to the counterparties. We have recorded an estimated liability related to possible mortgage repurchase losses of $2.3 million and $2.0 million as of June 30, 2013 and December 31, 2012, respectively. Our estimated liability for possible loss is based on then-currently available information and is dependent on various factors, including our historical claims and settlement experience, projections of future defaults, and significant judgment and assumptions that are subject to change. As such, the future possible loss related to our representations and warranties may materially change in the future based on factors beyond our control or if actual experiences are different from our assumptions, including, without limitation, estimated repurchase rates, economic conditions, estimated home prices, consumer and counterparty behavior, and a variety of other judgmental factors. Adverse developments with respect to one or more of the assumptions underlying the estimated liability and the corresponding estimated range of possible loss could result in significant increases to future provisions and/or the estimated range of possible loss. If future representations and warranties losses occur in excess of our recorded liability and estimated range of possible loss, such losses could have a material adverse effect on our cash flows, financial condition and results of operations; partially offset by
•
The write-down of a former branch facility of $150,000 during the first quarter of 2012.
(Benefit) Provision for Income Taxes. We recorded a benefit for income taxes of $345,000 for the three months ended June 30, 2013, compared to a provision for income taxes of $20,000 for the six months ended June 30, 2013. We recorded a provision for income taxes of $121,000 and $216,000 for the three and six months ended June 30, 2012, respectively. The provision (benefit) for income taxes during the three and six months ended June 30, 2013 and 2012 reflects the establishment of a full deferred tax asset valuation allowance during 2008 and the resulting inability to record tax benefits on our net loss in 2011 due to existing federal and state net operating loss carryforwards on which the realization of the related tax benefits is not presently “more likely than not,” as further described in Note 13 to our consolidated financial statements. The deferred tax asset valuation allowance was primarily established as a result of our three-year cumulative operating loss for the years ended December 31, 2008, 2007 and 2006, after considering all available objective evidence and potential tax planning strategies related to the amount of the deferred tax assets that are “more likely than not” to be realized. The benefit for income taxes of $345,000 for the second quarter of 2013 reflects various state income tax adjustments. Effective January 1, 2013, an increase in the blended state tax rate was applied to the deferred state tax assets and liabilities which resulted in an increase to the net state deferred tax liabilities during the first

49


quarter of 2013. A state income tax provision of $451,000, net of the federal benefit of $158,000, representing the effect of the change, was recognized in income from continuing operations during the first quarter of 2013.
Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expenses. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and results of recent operations. In projecting future taxable income, we begin with historical results adjusted for the results of discontinued operations and changes in accounting policies and incorporate assumptions including the amount of future state and federal pre-tax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts and future taxable income and are consistent with the plans and estimates we are using to manage the underlying business. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income (loss).
After analysis of all available positive and negative evidence, we believe it is reasonably possible to reverse a portion, or all, of our deferred tax asset valuation allowance in the future. Historical and forecasted positive evidence includes: pre-tax operating income for the six months ended June 30, 2013 and year ended December 31, 2012; forecasted cumulative pre-tax operating income for the three years ending December 31, 2013; continued improvement in asset quality metrics; and certain other relevant factors. Any determination to reverse a portion, or all, of our deferred tax asset valuation allowance would be subject to ongoing evaluation and discussions with our advisors and subject to changes in circumstances and then-current available information.
Loss from Discontinued Operations, Net of Tax. We recorded a loss from discontinued operations, net of tax, of $3.3 million and $5.4 million for the three and six months ended June 30, 2013, respectively, compared to a loss from discontinued operations, net of tax, of $2.3 million and $4.6 million for the comparable periods in 2012. The loss from discontinued operations, net of tax, for the three and six months ended June 30, 2013 and 2012 is reflective of the following:
•
A gain of $394,000 during the second quarter of 2013 associated with the sale of eight of our retail branches in our Northern Florida Region on April 19, 2013, after the write-off of goodwill of $700,000 allocated to the Northern Florida Region;
•
A loss of $2.3 million during the second quarter of 2013 related to the closure of three retail branches in our Northern Florida Region on April 5, 2013 that was attributable to continuing obligations under facility leasing arrangements; and
•
Other income (loss) from all discontinued operations during the respective periods, as further described in Note 2 to our consolidated financial statements.
Net Income (Loss) Attributable to Noncontrolling Interest in Subsidiary. Net income attributable to noncontrolling interest in subsidiary was $105,000 and $151,000 for the three and six months ended June 30, 2013, respectively, compared to net losses attributable to noncontrolling interest in subsidiary of $385,000 and $445,000 for the comparable periods in 2012, and was comprised of the noncontrolling interest in the net income (losses) of FB Holdings. The net income attributable to noncontrolling interest in subsidiary for the three and six months ended June 30, 2013, as compared to the net losses for the comparable periods in 2012, is primarily reflective of reduced expenses and write-downs on other real estate properties associated with the reduction of loans and other real estate balances held in FB Holdings. Noncontrolling interest in subsidiary is more fully described in Note 1 and Note 16 to our consolidated financial statements.
FINANCIAL CONDITION
Total assets decreased $292.2 million to $6.22 billion at June 30, 2013, from $6.51 billion at December 31, 2012. The decrease in our total assets was attributable to decreases in our cash and cash equivalents, investment securities portfolio, loan portfolio, bank premises and equipment, goodwill, deferred income taxes, and other real estate and repossessed assets; partially offset by an increase in assets of discontinued operations.
Cash and cash equivalents, which are comprised of cash and short-term investments, decreased $3.3 million to $515.5 million at June 30, 2013, from $518.8 million at December 31, 2012. The majority of funds in our short-term investments were maintained in our correspondent bank account with the FRB, as further discussed under “—Liquidity Management.” The decrease in our cash and cash equivalents was primarily attributable to the following:
•
A decrease in deposits of $120.0 million, exclusive of the reclassification of $550.6 million of deposits associated with our ABS line of business to liabilities of discontinued operations; and
•
The sale of eight of our Northern Florida retail branches on April 19, 2013, resulting in a cash outflow of $114.5 million; partially offset by:
•
A net decrease in our investment securities portfolio of $121.4 million, excluding the fair value adjustment on available-for-sale investment securities;
•
A decrease in loans of $70.0 million, exclusive of loan charge-offs, transfers of loans to other real estate and repossessed assets, and the reclassification of $20.8 million of loans associated with our ABS line of business to assets of discontinued operations;

50


•
Recoveries of loans previously charged off of $7.8 million;
•
Proceeds from the sales of other real estate and repossessed assets of $20.5 million;
•
A net increase in our other borrowings of $9.2 million, consisting of changes in our daily repurchase agreements utilized by customers as an alternative deposit product; and
•
Cash generated by operating earnings.
Investment securities decreased $170.6 million to $2.50 billion at June 30, 2013, from $2.68 billion at December 31, 2012. The decrease primarily reflects the sale of available-for-sale investment securities in anticipation of the expected sale of our ABS line of business during the fourth quarter of 2013, which is expected to result in a cash outflow of approximately $480.0 million. The decrease also reflects a decrease in the fair value adjustment of approximately $34.2 million on our available-for-sale investment securities resulting from an increase in market interest rates during the period in addition to net amortization. During the first quarter of 2013, we also reclassified certain of our available-for-sale investment securities to held-to-maturity investment securities at their respective fair values, which totaled $242.5 million in aggregate, as further described in Note 3 to our consolidated financial statements and under “— Liquidity Management.”
Loans, net of net deferred loan costs (fees), or total loans, decreased $109.8 million to $2.82 billion at June 30, 2013, from $2.93 billion at December 31, 2012. The decrease reflects the reclassification of $20.8 million of loans associated with our ABS line of business to assets of discontinued operations at June 30, 2013, as further discussed in Note 2 to our consolidated financial statements, gross loan charge-offs of $13.8 million, transfers of loans to other real estate and repossessed assets of $5.2 million, overall continued low loan demand within our markets, and other net loan activity of $70.0 million, including principal repayments and/or payoffs on nonperforming, potential problem and other loans as well as loan runoff in problem loans and loans in markets we previously exited, as further discussed under “— Loans and Allowance for Loan Losses.”
Bank premises and equipment, net of depreciation and amortization, decreased $1.2 million to $126.3 million at June 30, 2013, from $127.5 million at December 31, 2012. The decrease is primarily attributable to depreciation and amortization of $5.8 million, partially offset by net purchases of premises and equipment of $3.3 million.
Goodwill decreased $18.0 million to $107.3 million at June 30, 2013, from $125.3 million at December 31, 2012. The decrease reflects the allocation of $18.0 million of goodwill associated with our ABS line of business to assets of discontinued operations at June 30, 2013.
Other real estate and repossessed assets decreased $13.8 million to $78.2 million at June 30, 2013, from $92.0 million at December 31, 2012. The decrease in other real estate and repossessed assets was primarily attributable to the sale of other real estate properties and repossessed assets with a carrying value of $17.5 million at a net gain of $4.0 million, and write-downs of other real estate properties and repossessed assets of $809,000 primarily attributable to declining real estate values on certain properties. These decreases were partially offset by foreclosures and additions to other real estate and repossessed assets aggregating $5.2 million, as further discussed under “— Loans and Allowance for Loan Losses.”
Deferred income tax assets decreased $12.7 million to $16.3 million at June 30, 2013, from $29.0 million at December 31, 2012. The decrease primarily resulted from a decrease in deferred tax liabilities associated with the corresponding decrease in the fair value adjustment on our available-for-sale investment securities, as further discussed below, and a corresponding increase in the deferred tax asset valuation allowance.
Assets and liabilities of discontinued operations were $39.0 million and $550.7 million, respectively, at June 30, 2013 and represent the assets and liabilities of our ABS line of business expected to be sold during the fourth quarter of 2013. Assets and liabilities of discontinued operations were $6.7 million and $155.7 million, respectively, at December 31, 2012, and represent the assets and liabilities associated with our three Northern Florida Region branches closed on April 5, 2013 and our eight Northern Florida Region branches sold on April 19, 2013. See Note 2 to our consolidated financial statements for further discussion of discontinued operations.
Deposits decreased $670.6 million to $4.82 billion at June 30, 2013, from $5.49 billion at December 31, 2012. The decrease reflects the reclassification of $550.6 million of deposits associated with our ABS line of business to liabilities of discontinued operations at June 30, 2013, as further discussed in Note 2 to our consolidated financial statements. Exclusive of this transaction, total deposits decreased $120.0 million, which was primarily attributable to reductions of higher rate certificates of deposit and a decrease in demand deposits attributable to seasonal fluctuations, partially offset by an increase in savings and money market deposits. Time deposits and demand deposits decreased $126.6 million and $23.3 million, respectively, and savings and money market deposits increased $29.9 million.
Other borrowings, which are comprised of daily securities sold under agreements to repurchase (in connection with cash management activities of our commercial deposit customers), increased $9.2 million to $35.2 million at June 30, 2013, from $26.0 million at December 31, 2012, reflecting changes in customer balances associated with this product segment.
Deferred income tax liabilities decreased $12.4 million to $23.8 million at June 30, 2013, from $36.2 million at December 31, 2012. The decrease primarily resulted from a decrease in deferred tax liabilities associated with the corresponding decrease in the

51


fair value adjustment of our available-for-sale investment securities as a result of an increase in market interest rates during the six months ended June 30, 2013.
Accrued expenses and other liabilities increased $15.7 million to $160.0 million at June 30, 2013, from $144.3 million at December 31, 2012. The increase was primarily attributable to an increase of $9.8 million in dividends payable on our Class C Fixed Rate Cumulative Perpetual Preferred Stock, or Class C Preferred Stock, and our Class D Fixed Rate Cumulative Perpetual Preferred Stock, or Class D Preferred Stock, to $71.8 million at June 30, 2013, and an increase of $7.4 million in accrued interest payable on our junior subordinated debentures to $55.2 million at June 30, 2013, as further discussed in Notes 9 and 10 to our consolidated financial statements.
Stockholders' equity, including noncontrolling interest in subsidiary, decreased $29.2 million to $270.8 million at June 30, 2013, from $300.0 million at December 31, 2012. The decrease reflects a decrease in accumulated other comprehensive income of $35.6 million associated with a decrease in unrealized gains on available-for-sale investment securities, resulting from the increase in market interest rates experienced during the second quarter, and dividends declared of $9.8 million, partially offset by net income, including discontinued operations, of $16.2 million.
Loans and Allowance for Loan Losses
Loan Portfolio Composition. Total loans represented 45.4% of our assets as of June 30, 2013, compared to 45.0% of our assets at December 31, 2012. Total loans decreased $109.8 million to $2.82 billion at June 30, 2013 from $2.93 billion at December 31, 2012. The following table summarizes the composition of our loan portfolio by category at June 30, 2013 and December 31, 2012:
 
June 30, 2013
 
December 31, 2012
 
(dollars expressed in thousands)
Commercial, financial and agricultural
$
593,403

 
610,301

Real estate construction and development
167,269

 
174,979

Real estate mortgage:
 
 
 
One-to-four-family residential
931,986

 
986,767

Multi-family residential
101,351

 
103,684

Commercial real estate
963,480

 
969,680

Consumer and installment
18,159

 
19,262

Loans held for sale
45,239

 
66,133

Net deferred loan costs (fees)
62

 
(59
)
Total loans
$
2,820,949

 
2,930,747

The following table summarizes the composition of our loan portfolio by geographic region and/or business segment at June 30, 2013 and December 31, 2012:
 
June 30, 2013
 
December 31, 2012
 
(dollars expressed in thousands)
Mortgage Division
$
538,839

 
582,021

Florida
62,339

 
65,582

Northern California
376,094

 
383,519

Southern California
907,238

 
922,191

Chicago
104,089

 
122,508

Missouri
527,852

 
528,168

Texas
32,255

 
41,951

Northern and Southern Illinois
211,475

 
212,177

Other
60,768

 
72,630

Total
$
2,820,949

 
2,930,747

The net decrease in our loan portfolio during the first six months of 2013 primarily reflects the following:
•
A decrease of $16.9 million, or 2.8%, in our commercial, financial and agricultural portfolio, primarily attributable to the reclassification of $20.7 million of such loans associated with our ABS line of business to assets of discontinued operations at June 30, 2013; partially offset by new loan production within this portfolio segment;
•
A decrease of $7.7 million, or 4.4%, in our real estate construction and development portfolio, primarily attributable to our continued efforts to reduce the overall level of our special mention, potential problem and nonaccrual loans within this portfolio segment. The following table summarizes the composition of our real estate construction and development portfolio by region as of June 30, 2013 and December 31, 2012:

52


 
June 30, 2013
 
December 31, 2012
 
(dollars expressed in thousands)
Northern California
$
29,788

 
30,388

Southern California
98,261

 
88,893

Chicago
10,590

 
21,024

Missouri
6,633

 
9,791

Texas
8,740

 
9,927

Florida
435

 
378

Northern and Southern Illinois
6,649

 
8,260

Other
6,173

 
6,318

Total
$
167,269

 
174,979

We have reduced our exposure to our real estate construction and development portfolio over the past several years due primarily to weak economic conditions and declines in real estate values in certain of our market areas which resulted in higher levels of charge-offs and foreclosures during these periods. Of the remaining portfolio balance of $167.3 million, $28.3 million, or 16.9%, of these loans were on nonaccrual status as of June 30, 2013, including an $18.1 million loan in our Northern California region, and $79.2 million, or 47.3%, of these loans were considered potential problem loans, including a $66.4 million loan relationship in our Southern California region, as further discussed below;
•
A decrease of $54.8 million, or 5.6%, in our one-to-four-family residential real estate loan portfolio primarily attributable to gross loan charge-offs of $8.7 million, transfers to other real estate of $4.2 million and principal payments; partially offset by new loan production. The following table summarizes the composition of our one-to-four-family residential real estate loan portfolio as of June 30, 2013 and December 31, 2012:
 
June 30, 2013
 
December 31, 2012
 
(dollars expressed in thousands)
One-to-four-family residential real estate:
 
 
 
Bank portfolio
$
101,080

 
122,338

Mortgage Division portfolio, excluding Florida
409,875

 
427,759

Florida Mortgage Division portfolio
77,929

 
82,212

Home equity portfolio
343,102

 
354,458

Total
$
931,986

 
986,767

Our Bank portfolio consists of mortgage loans originated to customers from our retail branch banking network. The decrease in this portfolio of $21.3 million, or 17.4%, during the first six months of 2013 is primarily attributable to principal payments resulting from loan refinancings in the ongoing low, but recently increasing, mortgage interest rate environment. As of June 30, 2013, approximately $6.8 million, or 6.7%, of this portfolio is considered impaired, consisting of nonaccrual loans of $6.1 million and performing troubled debt restructurings, or performing TDRs, of $705,000.
Our Mortgage Division portfolio, excluding Florida, consists of both prime mortgage loans and Alt A and sub-prime mortgage loans that were originated prior to our discontinuation of Alt A and sub-prime loan products in 2007. The decrease in this portfolio of $17.9 million, or 4.2%, during the first six months of 2013 is primarily attributable to principal payments, gross loan charge-offs of $4.6 million and transfers to other real estate, partially offset by the addition of approximately $29.7 million of new loan production into this portfolio, consisting of jumbo adjustable rate and 10 and 15-year fixed rate mortgages. As of June 30, 2013, approximately $84.0 million, or 20.5%, of this portfolio is considered impaired, consisting of nonaccrual loans of $16.7 million and performing TDRs of $67.3 million, including loans modified in the Home Affordable Modification Program, or HAMP, of $61.6 million.
Our Florida Mortgage Division portfolio, the majority of which was acquired in November 2007 through our acquisition of Coast Bank, consists primarily of prime mortgage loans and Alt A mortgage loans. The decrease in this portfolio of $4.3 million, or 5.2%, is primarily attributable to principal payments, gross loan charge-offs of $1.1 million and transfers to other real estate. As of June 30, 2013, approximately $11.4 million, or 14.6%, of this portfolio is considered impaired, consisting of performing TDRs of $8.7 million, including loans modified in HAMP of $6.6 million, and nonaccrual loans of $2.7 million. Our Mortgage Division portfolio, excluding Florida, and our Florida Mortgage Division portfolio are collectively defined as our Mortgage Division portfolio unless otherwise noted.
Our home equity portfolio consists of loans originated to customers from our retail branch banking network. The decrease in this portfolio of $11.4 million, or 3.2%, during the first six months of 2013 is primarily attributable to principal payments, gross loan charge-offs of $2.0 million and ordinary and seasonal fluctuations experienced within this loan product type. As of June 30, 2013, approximately $5.9 million, or 1.7%, of this portfolio is on nonaccrual status;

53


•
A decrease of $2.3 million, or 2.3%, in our multi-family residential real estate portfolio. As of June 30, 2013, approximately $29.5 million, or 29.2%, of this portfolio is considered impaired, consisting of nonaccrual loans of $1.4 million and performing TDRs of $28.2 million, consisting solely of one loan relationship in our Chicago region (as further described below);
•
A decrease of $6.2 million, or 0.6%, in our commercial real estate portfolio primarily attributable low loan demand within our markets and our efforts to reduce the overall level of our special mention, potential problem and nonaccrual loans within this portfolio segment, including the payoff of a $5.2 million performing TDR in the second quarter of 2013. The following table summarizes the composition of our commercial real estate portfolio by loan type as of June 30, 2013 and December 31, 2012:
 
June 30, 2013
 
December 31, 2012
 
(dollars expressed in thousands)
Farmland
$
17,775

 
17,784

Owner occupied
522,619

 
552,983

Non-owner occupied
423,086

 
398,913

Total
$
963,480

 
969,680

•
A decrease of $1.1 million, or 5.7%, in our consumer and installment portfolio, primarily reflecting portfolio runoff and the reclassification of $326,000 of such loans associated with our ABS line of business to assets of discontinued operations at June 30, 2013; and
•
A decrease of $20.9 million, or 31.6%, in our loans held for sale portfolio primarily resulting from a decline in origination volumes and the timing of subsequent sales into the secondary mortgage market.
Nonperforming Assets. Nonperforming assets include nonaccrual loans and other real estate and repossessed assets. The following table presents the categories of nonperforming assets and certain ratios as of June 30, 2013 and December 31, 2012:
 
June 30, 2013
 
December 31, 2012
 
(dollars expressed in thousands)
Nonperforming Assets:
 
 
 
Nonaccrual loans:
 
 
 
Commercial, financial and agricultural
$
14,881

 
19,050

Real estate construction and development
28,305

 
32,152

One-to-four-family residential real estate:
 
 
 
Bank portfolio
6,051

 
6,910

Mortgage Division portfolio
19,377

 
19,780

Home equity portfolio
5,905

 
8,671

Multi-family residential
1,393

 
6,761

Commercial real estate
13,011

 
16,520

Consumer and installment
35

 
28

Total nonaccrual loans
88,958

 
109,872

Other real estate and repossessed assets
78,152

 
91,995

Total nonperforming assets
$
167,110

 
201,867

 
 
 
 
Total loans
$
2,820,949

 
2,930,747

 
 
 
 
Performing troubled debt restructurings
$
119,651

 
128,917

 
 
 
 
Loans past due 90 days or more and still accruing
$
886

 
1,090

 
 
 
 
Ratio of:
 
 
 
Allowance for loan losses to loans
3.04
%
 
3.13
%
Nonaccrual loans to loans
3.15

 
3.75

Allowance for loan losses to nonaccrual loans
96.26

 
83.37

Nonperforming assets to loans, other real estate and repossessed assets
5.76

 
6.68

Our nonperforming assets, consisting of nonaccrual loans, other real estate and repossessed assets, decreased $34.8 million, or 17.2%, to $167.1 million at June 30, 2013, from $201.9 million at December 31, 2012.
We attribute the $20.9 million, or 19.0%, net decrease in our nonaccrual loans during the first six months of 2013 to the following:
•
A decrease in nonaccrual loans of $4.2 million, or 21.9%, in our commercial, financial and agricultural portfolio;

54


•
A decrease in nonaccrual loans of $3.8 million, or 12.0%, in our real estate construction and development loan portfolio. Nonaccrual real estate construction and development loans at June 30, 2013 include a single loan in our Northern California region with a recorded investment of $18.1 million. Although the level of deterioration in this portfolio is slowing due in part to the decline in the total portfolio balance, as previously discussed, we continue to experience a high level of nonaccrual loans in this portfolio segment;
•
A decrease in nonaccrual loans of $4.0 million, or 11.4%, in our one-to-four-family residential real estate loan portfolio driven by gross loan charge-offs of $8.7 million, transfers to other real estate of $4.2 million and payments received, partially offset by additions to nonaccrual loans during the period;
•
A decrease in nonaccrual loans of $5.4 million, or 79.4%, in our multi-family residential loan portfolio, primarily reflecting a $2.5 million payoff on a nonperforming TDR during the second quarter of 2013; and
•
A decrease in nonaccrual loans of $3.5 million, or 21.2%, in our commercial real estate portfolio primarily driven by gross loan charge-offs of $2.6 million, transfers to other real estate of $1.1 million and payments received, partially offset by additions to nonaccrual loans during the period.
The decrease in other real estate and repossessed assets of $13.8 million, or 15.0%, during the first six months of 2013 was primarily driven by the sale of other real estate properties with an aggregate carrying value of $17.5 million at a net gain of $4.0 million and write-downs of other real estate and repossessed assets of $809,000 attributable to declining real estate values on certain properties, partially offset by foreclosures and other additions to other real estate aggregating $5.2 million. Of the $78.2 million of other real estate and repossessed assets at June 30, 2013, $8.3 million and $67.6 million consisted of properties with the most recent appraisal date being in 2013 and 2012, respectively. The remaining $2.3 million of other real estate and repossessed assets at June 30, 2013 consisted of properties with the most recent appraisal date being in 2011 and 2010 of $234,000 and $2.1 million, respectively.
The following table summarizes the composition of our nonperforming assets by region / business segment at June 30, 2013 and December 31, 2012:
 
June 30, 2013
 
December 31, 2012
 
(dollars expressed in thousands)
Mortgage Division
$
21,847

 
22,507

Florida
3,029

 
2,308

Northern California
22,253

 
25,661

Southern California
50,586

 
62,130

Chicago
7,999

 
18,126

Missouri
32,851

 
36,411

Texas
7,363

 
9,194

Northern and Southern Illinois
11,240

 
13,362

Other
9,942

 
12,168

Total nonperforming assets
$
167,110

 
201,867

During the first six months of 2013, we experienced a decline in nonperforming assets in all of our regions, with the exception of our Florida region. We have been successful in reducing our overall level of nonperforming assets as a result of the completion of several asset quality improvement initiatives.
As of June 30, 2013 and December 31, 2012, loans identified by management as TDRs aggregating $34.7 million and $40.0 million, respectively, were on nonaccrual status and were classified as nonperforming loans.
While we continue our efforts to reduce nonperforming and potential problem loans, we expect market conditions in certain of our geographic sectors to remain uncertain, which may continue to impact the overall level of our nonperforming and potential problem loans, loan charge-offs, provision for loan losses and other real estate and repossessed assets balances.

55


Performing Troubled Debt Restructurings. The following table presents the categories of performing TDRs as of June 30, 2013 and December 31, 2012:
 
June 30, 2013
 
December 31, 2012
 
(dollars expressed in thousands)
Commercial, financial and agricultural
$
156

 
—

Real estate construction and development
10,031

 
10,031

Real estate mortgage:
 
 
 
One-to-four-family residential
76,730

 
79,905

Multi-family residential
28,154

 
28,240

Commercial real estate
4,580

 
10,741

Total performing troubled debt restructurings
$
119,651

 
128,917

Performing TDRs decreased $9.3 million, or 7.2%, during the first six months of 2013, primarily attributable to the payoff of a $5.2 million commercial real estate loan in our Southern California region during the second quarter of 2013. Our multi-family residential performing TDRs include a single $28.2 million loan relationship in our Chicago region that was restructured during the fourth quarter of 2012. We are closely monitoring this loan relationship, and while facts and circumstances are subject to change in the future, the borrower continues to service this obligation in accordance with the existing terms and conditions of the restructured credit agreement as of June 30, 2013.
Potential Problem Loans. As of June 30, 2013 and December 31, 2012, loans aggregating $117.7 million and $116.1 million, respectively, which were not classified as nonperforming assets or performing TDRs, were identified by management as having potential credit problems, or potential problem loans. These loans are generally defined as loans having an internally assigned grade of substandard and loans in the Mortgage Division which are 30-89 days past due. The following table presents the categories of our potential problem loans as of June 30, 2013 and December 31, 2012:
 
June 30, 2013
 
December 31, 2012
 
(dollars expressed in thousands)
Commercial, financial and agricultural
$
7,827

 
8,423

Real estate construction and development
79,175

 
81,364

Real estate mortgage:
 
 
 
One-to-four-family residential
5,474

 
11,664

Multi-family residential
554

 
773

Commercial real estate
24,686

 
13,868

Total potential problem loans
$
117,716

 
116,092

Potential problem loans increased $1.6 million, or 1.4%, during the first six months of 2013. The increase in potential problem loans reflects the transfer of a $15.8 million commercial real estate loan in our Southern California region from special mention status to potential problem loans during the second quarter of 2013. This increase in potential problem loans is partially offset by transfers of certain potential problem loans to special mention status, transfers to nonaccrual status and payment activity. In addition to the $15.8 million commercial real estate loan included in potential problem loans at June 30, 2013, potential problem loans at June 30, 2013 also include a $66.4 million real estate construction and development credit relationship in our Southern California region. We are continuing to closely monitor this loan relationship. Based on recent valuations of the underlying collateral securing this loan relationship, we have determined that it is currently adequately secured. While facts and circumstances are subject to change in the future, the borrower continues to service this obligation in accordance with the existing terms and conditions of the credit agreement as of June 30, 2013.

56


The following table summarizes the composition of our potential problem loans by region / business segment at June 30, 2013 and December 31, 2012:
 
June 30, 2013
 
December 31, 2012
 
(dollars expressed in thousands)
Mortgage Division
$
3,724

 
6,627

Florida
2,341

 
4,443

Northern California
1,882

 
860

Southern California
96,297

 
88,690

Chicago
709

 
1,835

Missouri
5,545

 
7,391

Texas
803

 
842

Northern and Southern Illinois
3,530

 
4,775

Other
2,885

 
629

Total potential problem loans
$
117,716

 
116,092

During the first six months of 2013, we experienced a decline in potential problem loans in most of our regions, with the exception of a small increase our Northern California region and a $7.6 million increase in our Southern California region, primarily due to the addition of a $15.8 million commercial real estate loan as discussed above. Excluding this significant addition to potential problem loans during the second quarter of 2013, we have generally been successful in reducing the overall level of our potential problem loans as a result of the completion of several asset quality improvement initiatives.
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 weakened economic environment, our credit administration department and our internal credit review department are reviewing all loans with credit exposure over certain thresholds in loan portfolio segments in which we, or other financial institutions, have experienced significant loan charge-offs, such as real estate construction and development and one-to-four-family residential real estate loans, and on loan portfolio segments that appear to be most likely to generate additional loan charge-offs in the future, such as commercial real estate. We include adversely rated credits, including potential problem loans, on our monthly loan watch list. Loans on our watch list require regular detailed loan status reports prepared by the responsible officer which are discussed in formal meetings with internal credit review and credit administration staff members that are generally conducted on a quarterly basis. The primary purpose of these meetings is to closely monitor these loan relationships and further develop, modify and oversee appropriate action plans with respect to the ultimate and timely resolution of the individual loan relationships.
Each loan is assigned an FDIC collateral code at the time of origination which provides management with information regarding the nature and type of the underlying collateral supporting all individual loans, including potential problem loans. Upon identification of a potential problem loan, management makes a determination of the value of the underlying collateral via a third party appraisal and/or an assessment of value from our internal appraisal review department. The estimated value of the underlying collateral is a significant factor in the risk rating and allowance for loan losses allocation assigned to potential problem loans.
Potential problem loans are regularly evaluated for impaired loan status by lenders, the credit administration department and the internal credit review department. When management makes the determination that a loan should be considered impaired, an initial specific reserve is allocated to the impaired loan, if necessary, until the loan is charged down to the appraised value of the underlying collateral, typically within 30 to 90 days of becoming impaired. In the current economic environment, management typically utilizes appraisals performed no earlier than 180 days prior to the charge-off, and in most cases, appraisals utilized are dated within 60 days of the charge-off. As such, management typically addresses collateral shortfalls through charge-offs as opposed to recording specific reserves on individual loans. Once a loan is charged down to the appraised value of the underlying collateral, management regularly monitors the carrying value of the loan for any additional deterioration and records additional reserves or charge-offs as necessary. As a general guideline, management orders new appraisals on any impaired loan or other real estate property in which the most recent appraisal is more than 18 months old; however, management also orders new appraisals on impaired loans or other real estate properties if management determines new appraisals are prudent based on many different factors, such as a rapid change in market conditions in a particular region.
We continue our efforts to reduce nonperforming and potential problem loans and re-define our overall strategy and business plans with respect to our loan portfolio as deemed necessary in light of ongoing changes in market conditions in the markets in which we operate.

57


Allowance for Loan Losses. Our allowance for loan losses decreased to $85.6 million at June 30, 2013, from $91.6 million at December 31, 2012. The decrease in our allowance for loan losses of $6.0 million during the first six months of 2013 was primarily attributable to net charge-offs of $6.0 million, in addition to the decrease in nonaccrual loans of $20.9 million and the $109.8 million decrease in the overall level of our loan portfolio.
Our allowance for loan losses as a percentage of total loans was 3.04% and 3.13% at June 30, 2013 and December 31, 2012, respectively. The decrease in the allowance for loan losses as a percentage of total loans during the first six months of 2013 was primarily attributable to the decrease in our nonaccrual loans, which generally require a higher allowance for loan losses relative to the amount of the loans than the remainder of the loan portfolio, in addition to a decrease in our historical net loan charge-off experience as a result of declining charge-off levels during the first six months of 2013 and the year ended December 31, 2012.
Our allowance for loan losses as a percentage of nonaccrual loans was 96.26% and 83.37% at June 30, 2013 and December 31, 2012, respectively. The increase in the allowance for loan losses as a percentage of nonaccrual loans during the first six months of 2013 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.
The following table summarizes the changes in the allowance for loan losses for the three and six months ended June 30, 2013 and 2012:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
 
(dollars expressed in thousands)
Allowance for loan losses, beginning of period
$
88,170

 
130,348

 
91,602

 
137,710

Loans charged-off:
 
 
 
 
 
 
 
Commercial, financial and agricultural
(1,010
)
 
(5,152
)
 
(1,686
)
 
(10,233
)
Real estate construction and development
(166
)
 
(3,339
)
 
(448
)
 
(6,423
)
Real estate mortgage:
 
 
 
 
 
 
 
One-to-four-family residential loans:
 
 
 
 
 
 
 
Bank portfolio
(345
)
 
(854
)
 
(965
)
 
(1,442
)
Mortgage Division portfolio
(2,746
)
 
(2,452
)
 
(5,774
)
 
(4,643
)
Home equity portfolio
(1,247
)
 
(1,682
)
 
(1,988
)
 
(2,831
)
Multi-family residential loans
(159
)
 
(237
)
 
(162
)
 
(1,169
)
Commercial real estate loans
(1,156
)
 
(4,037
)
 
(2,633
)
 
(7,390
)
Consumer and installment
(42
)
 
(194
)
 
(98
)
 
(269
)
Total
(6,871
)
 
(17,947
)
 
(13,754
)
 
(34,400
)
Recoveries of loans previously charged-off:
 
 
 
 
 
 
 
Commercial, financial and agricultural
1,023

 
2,686

 
2,090

 
5,744

Real estate construction and development
1,321

 
2,986

 
1,716

 
3,719

Real estate mortgage:
 
 
 
 
 
 
 
One-to-four-family residential loans:
 
 
 
 
 
 
 
Bank portfolio
172

 
504

 
348

 
644

Mortgage Division portfolio
952

 
551

 
1,910

 
1,522

Home equity portfolio
164

 
168

 
261

 
309

Multi-family residential loans
141

 
32

 
141

 
43

Commercial real estate loans
522

 
858

 
1,240

 
2,846

Consumer and installment
39

 
41

 
79

 
90

Total
4,334

 
7,826

 
7,785

 
14,917

Net loans charged-off
(2,537
)
 
(10,121
)
 
(5,969
)
 
(19,483
)
Provision for loan losses
—

 
—

 
—

 
2,000

Allowance for loan losses, end of period
$
85,633

 
120,227

 
85,633

 
120,227

Our net loan charge-offs were $2.5 million and $6.0 million for the three and six months ended June 30, 2013, respectively, as compared to $10.1 million and $19.5 million for the comparable periods in 2012. Our annualized net loan charge-offs as a percentage of average loans were 0.36% and 0.43% for the three and six months ended June 30, 2013, respectively, compared to 1.33% and 1.25% for the comparable periods in 2012. During the first six months of 2013, as compared to the comparable period in 2012, we experienced a decrease in net loan charge-offs in all of our loan categories, with the exception of our Mortgage Division. The decrease in our overall net loan charge-off levels for the three and six months ended June 30, 2013, as compared to the comparable periods in 2012, is primarily attributable to the following:
•
A decrease in net loan charge-offs associated with our commercial, financial and agricultural portfolio of $2.5 million and $4.9 million for the three and six months ended June 30, 2013, respectively, as compared to the comparable periods in 2012. Net loan recoveries associated with this portfolio were $13,000 and $404,000 for the three and six months ended June 30, 2013, respectively, as compared to net loan charge-offs of $2.5 million and $4.5 million for the comparable periods in 2012;

58


•
A decrease in net loan charge-offs associated with our real estate construction and development portfolio of $1.5 million and $4.0 million for the three and six months ended June 30, 2013, respectively, as compared to the comparable periods in 2012. Net loan recoveries associated with this portfolio were $1.2 million and $1.3 million for the three and six months ended June 30, 2013, respectively, as compared to net loan charge-offs of $353,000 and $2.7 million for the comparable periods in 2012; and
•
A decrease in net loan charge-offs associated with our commercial real estate portfolio of $2.5 million and $3.2 million for the three and six months ended June 30, 2013, respectively, as compared to the comparable periods in 2012. Net loan charge-offs associated with this portfolio were $634,000 and $1.4 million for the three and six months ended June 30, 2013, respectively, as compared to net loan charge-offs of $3.2 million and $4.5 million for the comparable periods in 2012.
The following table summarizes the composition of our net loan charge-offs (recoveries) by region / business segment for the three and six months ended June 30, 2013 and 2012:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
 
(dollars expressed in thousands)
Mortgage Division
$
1,794

 
1,898

 
3,864

 
3,119

Florida
(1
)
 
(116
)
 
1,305

 
995

Northern California
(15
)
 
2,973

 
(102
)
 
3,111

Southern California
196

 
2,141

 
94

 
2,924

Chicago
128

 
386

 
317

 
(65
)
Missouri
639

 
793

 
720

 
4,600

Texas
(152
)
 
(516
)
 
(230
)
 
991

Northern and Southern Illinois
380

 
1,585

 
678

 
1,877

Other
(432
)
 
977

 
(677
)
 
1,931

Total net loan charge-offs
$
2,537

 
10,121

 
5,969

 
19,483

We continue to closely monitor our loan portfolio and address the ongoing challenges posed by the weakened economic environment that has directly impacted and continues to impact many of our market segments. Specifically, we continue to focus on loan portfolio segments in which we have experienced significant loan charge-offs, such as real estate construction and development and one-to-four-family residential, and on loan portfolio segments that could generate additional loan charge-offs in the future, such as commercial real estate and commercial and industrial. We consider these factors in our overall assessment of the adequacy of our allowance for loan losses.
Each month, the credit administration department provides management with detailed lists of loans on the watch list and summaries of the entire loan portfolio by risk rating. These are coupled with analyses of changes in the risk profile of the portfolio, changes in past-due and nonperforming loans and changes in watch list and classified loans over time. In this manner, we continually monitor the overall increases or decreases in the level of risk in our loan portfolio. Factors are applied to the loan portfolio for each category of loan risk to determine acceptable levels of allowance for loan losses. Furthermore, management has implemented additional procedures to analyze concentrations in our real estate portfolio in light of economic and market conditions. These procedures include enhanced reporting to track land, lot, construction and finished inventory levels within our real estate construction and development portfolio. In addition, a quarterly evaluation of each lending unit is performed based on certain factors, such as lending personnel experience, recent credit reviews, loan concentrations and other factors. Based on this evaluation, changes to the allowance for loan losses may be required due to the perceived risk of particular portfolios. In addition, management exercises a certain degree of judgment in its analysis of the overall adequacy of the allowance for loan losses. In its analysis, management considers the changes in the portfolio, including growth, composition, the ratio of net loans to total assets, and the economic conditions of the regions in which we operate. Based on this quantitative and qualitative analysis, adjustments are made to the allowance for loan losses. Such adjustments are reflected in our consolidated statements of operations.
We record charge-offs on nonperforming loans typically within 30 to 90 days of the credit relationship reaching nonperforming loan status. We measure impairment and the resulting charge-off amount based primarily on third party appraisals. As such, rather than carrying specific reserves on nonperforming loans, we generally recognize a loan loss through a charge to the allowance for loan losses once the credit relationship reaches nonperforming loan status.
The allocation of the allowance for loan losses by loan category is a result of the application of our risk rating system augmented by historical loss data by loan type and other qualitative analysis. Consequently, the distribution of the allowance for loan losses will change from period to period due to the following factors:
•
Changes in the aggregate loan balances by loan category;

59


•
Changes in the identified risk in individual loans in our loan portfolio over time, excluding those homogeneous categories of loans such as consumer and installment loans and residential real estate mortgage loans for which risk ratings are changed based on payment performance;
•
Changes in historical loss data as a result of recent charge-off experience by loan type; and
•
Changes in qualitative factors such as changes in economic conditions, the volume of nonaccrual and potential problem loans by loan category and geographical location, and changes in the value of the underlying collateral for collateral-dependent loans.
The following table is a summary of the allocation for loan losses to loans by category as of June 30, 2013 and December 31, 2012:
 
June 30, 2013
 
December 31, 2012
Commercial, financial and agricultural
2.35
%
 
2.22
%
Real estate construction and development
6.82

 
8.25

Real estate mortgage:
 
 
 
One-to-four-family residential loans
3.78

 
3.94

Multi-family residential loans
4.07

 
4.10

Commercial real estate loans
2.14

 
2.07

Consumer and installment
1.61

 
2.08

Total
3.04

 
3.13

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, potentially leading to increases or decreases in net interest income over time. Depending upon the direction and magnitude of interest rate movements and their effect on the specific components of our balance sheet, the effects on net interest income can be substantial. Consequently, it is critical that we establish effective control over our exposure to changes in interest rates. We strive to manage our interest rate risk by:
•
Maintaining an Asset Liability Committee, or ALCO, responsible to our Board of Directors and Executive Management, to review the overall interest rate risk management activity and approve actions taken to reduce risk;
•
Employing a financial simulation model to determine our exposure to changes in interest rates;
•
Coordinating the lending, investing and deposit-generating functions to control the assumption of interest rate risk; and
•
Utilizing various financial instruments, including derivatives, to offset inherent interest rate risk should it become excessive.
The objective of these procedures is to limit the adverse impact that changes in interest rates may have on our net interest income.
The ALCO has overall responsibility for the effective management of interest rate risk and the approval of policy guidelines. The ALCO includes our President and Chief Executive Officer, Chief Financial Officer, Controller, Chief Investment Officer, Chief Credit Officer, Chief Banking Officer, Executive Vice President of Retail Banking, Director of Risk Management and Audit, and certain other senior officers. The Asset Liability Management Group, which monitors interest rate risk, supports the ALCO, prepares analyses for review by the ALCO and implements actions that are either specifically directed by the ALCO or established by policy guidelines.
In managing sensitivity, we strive to reduce the adverse impact on earnings by managing interest rate risk within internal policy constraints. Our policy is to manage exposure to potential risks associated with changing interest rates by maintaining a balance sheet posture in which annual net interest income is not significantly impacted by reasonably possible near-term changes in interest rates. To measure the effect of interest rate changes, we project our net income over a two-year horizon on a pro forma basis. The analysis assumes various scenarios for increases and decreases in interest rates including both instantaneous and gradual, and parallel and non-parallel, shifts in the yield curve, in varying amounts. For purposes of arriving at reasonably possible near-term changes in interest rates, we include scenarios based on actual changes in interest rates, which have occurred over a two-year period, simulating both a declining and rising interest rate scenario.

60


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 5.7% of net interest income, based on assets and liabilities at June 30, 2013. At June 30, 2013, 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 the effect of significant declines in interest rates that began in late 2007 and continued throughout 2008 and 2009 to historically low levels that remain prevalent in the current marketplace, and the overall level of our nonperforming assets, has negatively impacted our net interest income and is expected to continue to impact the level of our net interest income throughout the near future.
We also prepare and review a more traditional interest rate sensitivity position in conjunction with the results of our simulation model. The following table presents the projected maturities and periods to repricing of our rate sensitive assets and liabilities as of June 30, 2013, adjusted to account for anticipated prepayments:
 
Three
Months or
Less
 
Over Three
through Six
Months
 
Over Six
through
Twelve
Months
 
Over One
through Five
Years
 
Over Five
Years
 
Total
 
(dollars expressed in thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Loans (1)
$
1,452,368

 
177,004

 
253,715

 
797,282

 
140,580

 
2,820,949

Investment securities
91,348

 
89,199

 
171,770

 
1,292,243

 
860,155

 
2,504,715

FRB and FHLB stock
27,674

 
—

 
—

 
—

 
—

 
27,674

Short-term investments
423,139

 
—

 
—

 
—

 
—

 
423,139

Total interest-earning assets
$
1,994,529

 
266,203

 
425,485

 
2,089,525

 
1,000,735

 
5,776,477

Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand deposits
$
235,536

 
146,414

 
95,487

 
70,024

 
89,121

 
636,582

Money market deposits
1,604,490

 
—

 
—

 
—

 
—

 
1,604,490

Savings deposits
49,030

 
40,378

 
34,610

 
49,030

 
115,365

 
288,413

Time deposits
295,922

 
266,339

 
272,203

 
259,402

 
89

 
1,093,955

Other borrowings
35,228

 
—

 
—

 
—

 
—

 
35,228

Subordinated debentures
282,481

 
—

 
—

 
—

 
71,691

 
354,172

Total interest-bearing liabilities
$
2,502,687

 
453,131

 
402,300

 
378,456

 
276,266

 
4,012,840

Interest-sensitivity gap:
 
 
 
 
 
 
 
 
 
 
 
Periodic
$
(508,158
)
 
(186,928
)
 
23,185

 
1,711,069

 
724,469

 
1,763,637

Cumulative
(508,158
)
 
(695,086
)
 
(671,901
)
 
1,039,168

 
1,763,637

 
 
Ratio of interest-sensitive assets to interest-sensitive liabilities:
 
 
 
 
 
 
 
 
 
 
 
Periodic
0.80

 
0.59

 
1.06

 
5.52

 
3.62

 
1.44

Cumulative
0.80

 
0.76

 
0.80

 
1.28

 
1.44

 
 
____________________
(1)
Loans are presented net of net deferred loan costs (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 $1.76 billion, or 28.4% of our total assets at June 30, 2013. We were in an overall liability-sensitive position on a cumulative basis through the twelve-month time horizon of $671.9 million, or 10.8% of our total assets at June 30, 2013.
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.

61


As previously discussed, we utilize derivative instruments to assist in our management of interest rate sensitivity by modifying the repricing, maturity and option characteristics of certain assets and liabilities. We also sell interest rate swap agreement contracts to certain customers who wish to modify their interest rate sensitivity. We offset the interest rate risk of these swap agreements by simultaneously purchasing matching interest rate swap agreement contracts with offsetting pay/receive rates from other financial institutions. Because of the matching terms of the offsetting contracts, the net effect of the changes in the fair value of the paired swaps is minimal.
The derivative instruments we held as of June 30, 2013 and December 31, 2012 are summarized as follows:
 
June 30, 2013
 
December 31, 2012
 
Notional
Amount
 
Credit
Exposure
 
Notional
Amount
 
Credit
Exposure
 
(dollars expressed in thousands)
Customer interest rate swap agreements
$
9,871

 
53

 
12,149

 
115

Interest rate lock commitments
38,384

 
68

 
59,932

 
1,837

Forward commitments to sell mortgage-backed securities
67,600

 
2,478

 
107,700

 
—

The notional amounts of our derivative instruments do not represent amounts exchanged by the parties and, therefore, are not a measure of our credit exposure through our use of these instruments. The credit exposure represents the loss we would incur in the event the counterparties failed completely to perform according to the terms of the derivative instruments and the collateral held to support the credit exposure was of no value.
Our derivative instruments are more fully described in Note 7 to our consolidated financial statements.
LIQUIDITY MANAGEMENT
First Bank. Our liquidity is the ability to maintain a cash flow that is adequate to fund operations, service debt obligations and meet obligations and other commitments on a timely basis. First Bank receives funds for liquidity from customer deposits, loan payments, maturities of loans and investments, sales of investments and earnings before provision for loan losses. In addition, we may avail ourselves of other sources of funds by issuing certificates of deposit in denominations of $100,000 or more (including certificates issued through the Certificate of Deposit Account Registry Service, or CDARS program), selling securities under agreements to repurchase, and utilizing borrowings from the FHLB, the FRB and other borrowings.
As a financial intermediary, we are subject to liquidity risk. We closely monitor our liquidity position through our Liquidity Management Committee and we continue to implement actions deemed necessary to maintain an appropriate level of liquidity in light of ongoing unstable market conditions, changes in loan funding needs, operating and debt service requirements, current deposit trends and events that may occur in conjunction with our Capital Plan. We continue to seek opportunities to improve our overall liquidity position, and we maintain an efficient collateral management process that allows us to maximize our overall collateral position related to our alternative borrowing sources. In conjunction with our liquidity management process, we analyze and manage short-term and long-term liquidity through an ongoing review of internal funding sources, projected cash flows from loans, securities and customer deposits, internal and competitor deposit pricing structures and maturity profiles of current borrowing sources. We utilize planning, management reporting and adverse stress scenarios to monitor sources and uses of funds on a daily basis to assess cash levels to ensure adequate funds are available to meet normal business operating requirements and to supplement liquidity needs to meet unusual demands for funds that may result from an unexpected change in customer deposit levels or potential planned or unexpected liquidity events that may arise from time to time.
First Bank continues to maintain a significant amount of available balance sheet liquidity to provide funds for future loan growth initiatives and in anticipation of the expected sale of our ABS line of business, which is expected to be completed during the fourth quarter of 2013 and require a cash outlay of approximately $480.0 million. Our cash and cash equivalents were $515.5 million and $518.8 million at June 30, 2013 and December 31, 2012, respectively. The majority of these funds were maintained in our correspondent bank account with the FRB. The decrease in our cash and cash equivalents of $3.3 million is further discussed under “— Financial Condition.”
Our unpledged investment securities decreased $159.1 million to $2.26 billion at June 30, 2013, from $2.42 billion at December 31, 2012, 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 $2.78 billion and $2.94 billion at June 30, 2013 and December 31, 2012, respectively. Our available liquidity of $2.78 billion represents 44.7% of total assets at June 30, 2013, in comparison to $2.94 billion, or 45.2% of total assets, at December 31, 2012. Our loan-to-deposit ratio increased to 58.5% at June 30, 2013 from 53.4% at December 31, 2012, primarily as a result of the reclassification of $550.6 million of deposits associated with our ABS line of business to liabilities of discontinued operations at June 30, 2013.
During the first quarter of 2013, we reclassified certain of our available-for-sale investment securities to held-to-maturity investment securities at their respective fair values, which totaled $242.5 million in aggregate, as further described in Note 3 to our consolidated

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financial statements. The net gross unrealized gain on these available-for-sale investment securities at the time of transfer was $5.0 million, in aggregate, and was recorded as additional premium on the investment securities and is being amortized over the remaining lives of the respective securities. The unrealized gain included as a component of accumulated other comprehensive income at the time of transfer was $2.8 million, in aggregate, net of tax of $2.2 million, in aggregate. The amortization of the unrealized gain reported in stockholders' equity is being amortized as an adjustment to interest income on investment securities over the remaining lives of the respective securities. Consequently, the combined amortization of the additional premium and the unrealized gain have no impact on interest income on investment securities. The determination of the reclassification was made by management based on our current and expected future liquidity levels and the resulting intent to hold those investment securities to maturity.
During the first six months of 2013, we reduced our aggregate funds acquired from other sources of funds by $71.4 million to $415.4 million at June 30, 2013, from $486.8 million at December 31, 2012. These other sources of funds include certificates of deposit of $100,000 or more and other borrowings, which are comprised of daily securities sold under agreements to repurchase. The decrease was attributable to a reduction in certificates of deposit of $100,000 or more of $80.6 million, partially offset by an increase in our daily repurchase agreements of $9.2 million. The reduction in certificates of deposit of $100,000 or more was primarily attributable to a planned reduction of higher rate, single-service certificate of deposit relationships. The following table presents the maturity structure of these other sources of funds at June 30, 2013:
 
Certificates of
Deposit of
$100,000 or More
 
Other
Borrowings
 
Total
 
(dollars expressed in thousands)
Three months or less
$
105,289

 
35,228

 
140,517

Over three months through six months
98,490

 
—

 
98,490

Over six months through twelve months
85,842

 
—

 
85,842

Over twelve months
90,571

 
—

 
90,571

Total
$
380,192

 
35,228

 
415,420

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 $322.7 million and $344.0 million at June 30, 2013 and December 31, 2012, 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 June 30, 2013 or December 31, 2012.
First Bank also has a borrowing relationship with the FHLB. First Bank's borrowing capacity through its relationship with the FHLB was approximately $360.0 million and $363.2 million at June 30, 2013 and December 31, 2012, 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 June 30, 2013 or December 31, 2012.
As a means of further contingency funding, First Bank may use broker dealers to acquire deposits to fund both short-term and long-term funding needs, including brokered money market accounts, and has available funding, subject to certain limits, through the CDARS program. Exclusive of the CDARS program, First Bank does not currently utilize broker dealers to acquire deposits.
We believe First Bank has sufficient liquidity to meet its current and future near-term liquidity needs; however, no assurance can be made that First Bank's liquidity position will not be materially, adversely affected in the future.
First Banks, Inc. First Banks, Inc. is a separate and distinct legal entity from its subsidiaries. The Company's liquidity position is affected by dividends received from its subsidiaries and the amount of cash and other liquid assets on hand, payment of interest and dividends on debt and equity instruments issued by the Company (all of which are presently suspended or deferred), capital contributions the Company makes into its subsidiaries, any redemption of debt for cash issued by the Company, and proceeds the Company raises through the issuance of debt and/or equity instruments, if any. The Company's unrestricted cash totaled $2.5 million and $2.7 million at June 30, 2013 and December 31, 2012, respectively.
On March 20, 2013, the Company entered into a Revolving Credit Note and a Stock Pledge Agreement with Investors of America Limited Partnership, or Investors of America, LP, as further described in Note 8 and Note 16 to our consolidated financial statements. The agreement provides for a $5.0 million secured revolving line of credit to be utilized for general working capital needs and replaced a previous credit agreement that matured on December 31, 2012. This borrowing arrangement, which has a maturity date of March 31, 2014 and an interest rate of LIBOR plus 300 basis points, is intended to supplement, on a contingent basis, the parent company's overall level of unrestricted cash to cover the parent company's projected operating expenses should the parent company's existing cash resources become insufficient in the future. There have been no balances outstanding under this borrowing arrangement since its inception.

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We cannot be assured 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.
Additional long-term funding is provided by our junior subordinated debentures, as further described in Note 9 to our consolidated financial statements. As of June 30, 2013, we had 13 affiliated Delaware or Connecticut statutory and business trusts that were created for the sole purpose of issuing trust preferred securities. The sole assets of the statutory and business trusts are our junior subordinated debentures.
We agreed, among other things, not to pay any dividends on our common or preferred stock or make any distributions of interest or other sums on our trust preferred securities without the prior approval of the FRB, as previously discussed under “Overview —Regulatory Agreements.”
In August 2009, we announced the deferral of our regularly scheduled interest payments on our outstanding junior subordinated debentures relating to our $345.0 million of trust preferred securities beginning with the regularly scheduled quarterly interest payments that would otherwise have been made in September and October 2009. The terms of the junior subordinated debentures and the related trust indentures allow us to defer such payments of interest for up to 20 consecutive quarterly periods without triggering a payment default or penalty. Such payment default or penalty would likely have a material adverse effect on our business, financial condition and results of operations. The Company has deferred such payments for 16 quarterly periods as of June 30, 2013. During the deferral period, we may not, among other things and with limited exceptions, pay cash dividends on or repurchase our common stock or preferred stock nor make any payment on outstanding debt obligations that ranks equally with or junior to our junior subordinated debentures. Accordingly, we also suspended the payment of cash dividends on our outstanding common stock and preferred stock beginning with the regularly scheduled quarterly dividend payments on our preferred stock that would otherwise have been made in August and September 2009, as further described in Note 10 to our consolidated financial statements.
The Company's financial position may be adversely affected if it experiences increased liquidity needs if any of the following events occur:
•
First Bank continues to be unable or prohibited by its regulators to pay a dividend to the Company sufficient to satisfy the Company's operating cash flow needs. The Company's ability to receive future dividends from First Bank to assist the Company in meeting its operating requirements, both on a short-term and long-term basis, is currently subject to regulatory approval, as further described above and under “Overview —Regulatory Agreements;”
•
We deem it advisable, or are required by regulatory authorities, to use cash maintained by the Company to support the capital position of First Bank;
•
First Bank fails to remain “well-capitalized” and, accordingly, First Bank is required to pledge additional collateral against its borrowings and is unable to do so. As discussed above, First Bank has no outstanding borrowings at June 30, 2013, with the exception of $35.2 million of daily repurchase agreements utilized by customers as an alternative deposit product, and has substantial borrowing capacity through its relationships with the FHLB and the FRB, as previously discussed; or
•
The Company has difficulty raising cash through the future issuance of debt or equity instruments or by accessing additional sources of credit.
The Company's financial flexibility may be severely constrained if we are unable to maintain our access to funding or if adequate financing on terms acceptable to us is not available in the marketplace. If we are required to rely more heavily on more expensive funding sources to support our business, our revenues may not increase proportionately to cover our costs. In this case, our operating margins would likely be materially adversely affected. A lack of liquidity and/or cost-effective funding alternatives could materially adversely affect our business, financial condition and results of operations.

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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 June 30, 2013 were as follows:
 
Less Than 1
Year
 
1-3 Years
 
3-5 Years
 
Over 5 Years
 
Total (1)
 
(dollars expressed in thousands)
Operating leases (2)
$
9,018

 
13,074

 
7,424

 
12,052

 
41,568

Certificates of deposit (3)
833,470

 
226,034

 
34,362

 
89

 
1,093,955

Other borrowings
35,228

 
—

 
—

 
—

 
35,228

Subordinated debentures (4)
—

 
—

 
—

 
354,172

 
354,172

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

 
—

 
—

 
310,170

 
310,170

Other contractual obligations
388

 
7

 
—

 
—

 
395

Total
$
878,104

 
239,115

 
41,786

 
676,483

 
1,835,488

____________________
(1)
Amounts exclude ASC Topic 740 unrecognized tax liabilities of $836,000 and related accrued interest expense of $121,000 for which the timing of payment of such liabilities cannot be reasonably estimated as of June 30, 2013.
(2)
Amounts exclude the related accrued interest expense on certificates of deposit of $401,000 as of June 30, 2013.
(3)
Amounts exclude the accrued interest expense on junior subordinated debentures and the accrued dividends declared on preferred stock issued under the CPP of $55.2 million and $71.8 million, respectively, as of June 30, 2013. As further described under “Overview – Regulatory Agreements,” we currently may not make any distributions of interest or other sums on our junior subordinated debentures and related underlying trust preferred securities without the prior approval of the FRB.
(4)
Represents amounts payable upon redemption of the Class C Preferred Stock and the Class D Preferred Stock issued under the CPP of $295.4 million and $14.8 million, respectively.
EFFECTS OF NEW ACCOUNTING STANDARDS
In July 2012, the FASB issued ASU 2012-02 - Intangibles - Goodwill and Other (Topic 350) -Testing Indefinite-Lived Intangible Assets for Impairment. The provisions of this ASU permit an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform a quantitative impairment test in accordance with Subtopic 350-30, Intangibles - Goodwill and Other - General Intangibles Other Than Goodwill. This ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. We adopted the requirements of this ASU on January 1, 2013, 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 October 2012, the FASB issued ASU 2012-06 - Business Combinations (Topic 805) - Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution (a consensus of the FASB Emerging Issues Task Force). This ASU clarifies the applicable guidance for subsequently measuring an indemnification asset recognized as a result of a government-assisted acquisition of a financial institution. Under this ASU, when a reporting entity recognizes an indemnification asset as a result of a government-assisted acquisition of a financial institution and, subsequently, a change in the cash flows expected to be collected on the indemnification asset occurs (as a result of a change in cash flows expected to be collected on the assets subject to indemnification), the reporting entity should subsequently account for the change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value should be limited to the contractual term of the indemnification agreement (that is, the lesser of the term of the indemnification agreement and the remaining life of the indemnified assets). This ASU is effective for interim and annual periods beginning after December 15, 2012, and is required to be applied prospectively. We adopted the requirements of this ASU on January 1, 2013, 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 February 2013, the FASB issued ASU 2013-02 - Comprehensive Income (ASC Topic 220) - Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This ASU requires an entity to provide, either on the face of the statement where net income is presented or in the notes to financial statements, information about the amounts reclassified out of accumulated other comprehensive income by component. An entity is required to include significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. Amounts not required under GAAP to be reclassified in their entirety to net income are required to be cross-referenced to other disclosures required under GAAP that provide additional detail on those amounts. The amendments of this ASU are effective for interim and annual periods beginning after December 15, 2012, and are required to be applied prospectively. We adopted the requirements of this ASU on January 1, 2013, which did not have a material impact on our consolidated financial statements or results of operations or the disclosures presented in our consolidated financial statements.

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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 60 through 62 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 its 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.

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 17, Contingent Liabilities, to our consolidated financial statements appearing elsewhere in this report and is incorporated herein by reference.
In the ordinary course of business, we and our subsidiaries become involved in legal proceedings, including litigation arising out of our efforts to collect outstanding loans. It is not uncommon for collection efforts to lead to so-called “lender liability” suits in which borrowers may assert various claims against us. From time to time, we are party to other legal matters arising in the normal course of business. While some matters pending against us specify damages claimed by plaintiffs, others do not seek a specified amount of damages or are at very early stages of the legal process. We record a loss accrual for all legal matters for which we deem a loss is probable and can be reasonably estimated. We are not presently party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business, financial condition or results of operations.
The Company and First Bank entered into agreements with the FRB and MDOF, as further described under “Item 2 —Management’s Discussion and Analysis of Financial Condition and Results of Operations —Regulatory Agreements” and in Note 11 to our consolidated financial statements.

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, 2012 for a discussion of these risks.


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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
 
Purchase and Assumption Agreement by and among First Bank and Union Bank, N.A., dated May 13, 2013 – 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 June 30, 2013, formatted in XBRL interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Comprehensive Income (Loss); (iv) Consolidated Statements of Changes in Stockholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements – furnished herewith.


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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: August 9, 2013

FIRST BANKS, INC.
   
By: 
/s/ 
Terrance M. McCarthy
 
 
Terrance M. McCarthy
 
 
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)


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