GOODWILL

Goodwill was zero and $125.3 million at December 31, 2013 and 2012, respectively. First Bank recorded goodwill impairment of $107.3 million for the year ended December 31, 2013, as further discussed below. First Bank did not record goodwill impairment for the years ended December 31, 2012 and 2011. Amortization of intangible assets was $3.0 million for the year ended December 31, 2011. Core deposit intangibles became fully amortized in 2011. Changes in the carrying amount of goodwill for the years ended December 31, 2013 and 2012 were as follows:



	2013			2012
	(dollars expressed in thousands)
Balance, beginning of year	$	125,267		125,267
Goodwill impairment	(107,267		)	—
Goodwill allocated to sale transaction ⁽¹⁾	(18,000		)	—
Balance, end of year	$	—		125,267


(1)	Goodwill allocated to sale transaction during 2013 pertains to the sale of First Bank's ABS line of business in November 2013, as further discussed in Note 2 to the consolidated financial statements.

The Company allocated goodwill of $18.0 million to the sale of the ABS line of business, as discussed in Note 2 to the consolidated financial statements, based on the relative fair value of the ABS line of business and the portion of the First Bank segment that will be retained.

The Company’s annual measurement date for its goodwill impairment test is December 31. The Company operates as a single reporting unit. The Company engaged an independent valuation firm to assist management in computing the fair value estimate for the impairment assessment by utilizing two separate valuation methodologies and applying a weighted average to each methodology in order to determine the fair value of the reporting unit. The two separate valuation methodologies utilized in the valuation of the Company’s implied goodwill were the “Income Approach” and the “Market Approach.”

Income Approach – The Income Approach indicates the fair market value of the common stock of a business based on the present value of the cash flows that the business can be expected to generate in the future. This approach is generally considered to be the most theoretically correct method of valuation since it explicitly considers the future benefits associated with owning the business. The Income Approach is typically applied using the Discounted Cash Flow Method. The Discounted Cash Flow Method is comprised of four steps:


1.	Project future cash flows for a certain discrete projection period;


2.	Discount these cash flows to present value at a rate of return that considers the relative risk of achieving the cash flows and the time value of money;


3.	Estimate the residual value of cash flows subsequent to the discrete projection period; and


4.	Combine the present value of the residual cash flows with the discrete projection period cash flows to indicate the fair market value of invested capital on a marketable basis.

Any interest-bearing debt (or non-operating assets) is then subtracted (or added) to arrive at the fair market value of equity of the business.

Market Approach – The Market Approach uses the price at which shares of similar companies are traded or exchanged to estimate the fair market value of the company’s equity. The advantage of the Market Approach is that it is believed to reflect the effect of most of the principal valuation factors identified in the Discounted Cash Flow Method discussed above. Market prices of publicly traded companies and actual merger and acquisition transactions are believed to incorporate the effects on value of earnings, cash generation, and stockholders’ equity while also recognizing general economic conditions, the position of the industry in the economy, and the position of the company in its industry. Within the Market Approach, two valuation methods are commonly used: the Publicly Traded Guideline Company Method and the Recent Transactions Method. The Publicly Traded Guideline Company Method consists of identifying similar public companies and developing multiples of the total capitalization of each similar public company to certain income statement and/or balance sheet items. These multiples are then weighted and applied to similar income statement and balance sheet items of the Company. The Recent Transactions Method is based on actual prices paid in mergers and acquisitions for similar public and private companies. Ratios of the total purchase price paid to certain income statement and/or balance sheet items are generally developed for each comparable transaction if the data is available. These ratios are then applied to similar income statement and balance sheet items of the Company.

For purposes of completing the Company’s annual goodwill impairment test, the specific valuation methodologies utilized were the following:


•	The Income Approach utilizing the Discounted Cash Flow Method; and

•

The Market Approach utilizing (i) the Publicly Traded Guideline Company Method, focusing on a comparison of publicly-traded financial institutions as guideline companies based on size, geography and performance metrics, including the average price to tangible book value of comparable businesses, and (ii) the Recent Transactions Method, focusing on recent transactions and key transaction metrics, including price to the last-twelve-months earnings multiples.

As of December 31, 2013, the Income Approach utilizing the Discounted Cash Flow Method and applying a discount rate of 16.0% to the projected cash flows was weighted at 60.0% and each of the two Market Approaches was weighted at 20.0%. The Market Approach was given a relatively lower weighting primarily as a result of a price to the last-twelve-months earnings multiples to being applied to longer-term projected future earnings.

Taking into account the independent third party valuation performed as of December 31, 2013, as well as the reversal of substantially all of the Company's deferred tax asset valuation allowance during the fourth quarter of 2013, as further described in Note 17 to the consolidated financial statements, the Company concluded that the carrying value of its reporting unit exceeded its estimated fair value by approximately $119.5 million at December 31, 2013. Consequently, the results of Step 1 of the two-step goodwill impairment test required the Company to proceed to Step 2 of the goodwill impairment test. The Company engaged the same independent valuation firm to assist management in computing the fair value of the reporting unit’s assets and liabilities in order to determine the implied fair value of the reporting unit’s goodwill at December 31, 2013, as required by Step 2 of the two-step goodwill impairment test.

Step 2 of the goodwill impairment test compared the implied fair value of goodwill with the carrying value of goodwill. The implied fair value of goodwill is determined in the same manner as the determination of the amount of goodwill recognized in a business combination. The fair value of a reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. The fair value allocated to all of the assets and liabilities of the reporting unit requires significant judgment, especially for those assets and liabilities that are not measured on a recurring basis such as certain types of loans. The excess of the estimated fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill.

The material assumptions utilized in the annual goodwill impairment testing for purposes of calculating the implied fair value of the reporting unit’s goodwill at December 31, 2013 were as follows:

•

Determination of the estimated fair value of loans – The estimated fair value assigned to loans significantly affected the determination of the implied fair value of the reporting unit’s goodwill at December 31, 2013. The implied fair value of a reporting unit’s goodwill will generally increase if the estimated fair value of the reporting unit’s loans is less than the carrying value of the reporting unit’s loans. The estimated fair value of the reporting unit’s loans was derived from discounted cash flow analyses. Loans were grouped into loan pools based on similar characteristics such as maturity, payment type and payment frequency, and rate type and underlying index. These cash flow calculations include assumptions for prepayment estimates over the loan’s remaining life, considerations for the current interest rate environment compared to the weighted average rate of the loan portfolio, a credit risk component based on the historical and expected performance of each loan portfolio stratum and a liquidity adjustment related to the current market environment. The estimated fair value of loans held for portfolio was $188.4 million less than the carrying value at December 31, 2013.

•

Determination of the estimated fair value of deposits, including the core deposit intangible – The estimated fair value assigned to the core deposit intangible, or the reporting unit’s deposit base, also significantly affected the determination of the implied fair value of the reporting unit’s goodwill at December 31, 2013. The implied fair value of a reporting unit’s goodwill will generally decrease by the estimated fair value assigned to the reporting unit’s core deposit intangible. The estimated fair value of the core deposit intangible was derived from discounted cash flow analyses with considerations for estimated deposit runoff, cost of the deposit base, interest costs, net maintenance costs and the cost of alternative funds. The resulting estimate of the fair value of the core deposit intangible represents the present value of the difference in cash flows between maintaining the existing deposits and obtaining alternative funds over the life of the deposit base.

Taking into account the results of the goodwill impairment analyses performed for the year ended December 31, 2013, the Company recorded goodwill impairment of $107.3 million for the year ended December 31, 2013, primarily reflecting the increase in carrying value of the Company as a result of the reversal of substantially all of the Company's valuation allowance against its deferred tax assets during the fourth quarter of 2013, as further described in Note 17 to the consolidated financial statements.

As of December 31, 2012, the Income Approach utilizing the Discounted Cash Flow Method and applying a discount rate of 15.0% to the projected cash flows was weighted at 60.0% and each of the two Market Approaches was weighted at 20.0%.

Taking into account the independent third party valuation performed as of December 31, 2012, the Company concluded that the estimated fair value of its reporting unit exceeded its carrying value by approximately $42.9 million at December 31, 2012. As such, the results of Step 1 of the two-step goodwill impairment test, as further described in Note 1 to the consolidated financial statements, did not require the Company to proceed to Step 2 of the goodwill impairment test, and accordingly, the Company did not record goodwill impairment for the year ended December 31, 2012.