REGULATORY CAPITAL AND OTHER REGULATORY MATTERS

Regulatory Capital. The Company and First Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain actions by regulators that, if undertaken, could have a direct material effect on the operations and financial condition of the Company and First Bank. Under these capital requirements, the Company and First Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and First Bank to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital to average assets, or Tier1 leverage ratio.

The Company was categorized as adequately capitalized under minimum regulatory capital standards established for bank holding companies by the Federal Reserve at March 31, 2014 and December 31, 2013. The Company must maintain minimum total capital, Tier 1 capital 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 March 31, 2014 and December 31, 2013 under the prompt corrective action provisions of the regulatory capital standards. First Bank must maintain minimum total capital, Tier 1 capital and Tier 1 leverage ratios as set forth in the table below in order to be categorized as well capitalized.

At March 31, 2014 and December 31, 2013, the Company's 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
	March 31, 2014				December 31, 2013
	Amount		Ratio		Amount		Ratio
	(dollars expressed in thousands)
Total capital (to risk-weighted assets):
First Banks, Inc.	$	425,829	11.73	%	$	405,856	11.13	%	8.0	%	N/A
First Bank ⁽¹⁾	679,594		18.70		734,535		20.12		8.0		10.0	%
Tier 1 capital (to risk-weighted assets):
First Banks, Inc.	253,332		6.98		239,868		6.58		4.0		N/A
First Bank ⁽¹⁾	633,700		17.43		688,427		18.86		4.0		6.0
Tier 1 capital (to average assets):
First Banks, Inc.	253,332		4.51		239,868		4.12		4.0		N/A
First Bank ⁽¹⁾	633,700		11.30		688,427		11.77		4.0		5.0

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(1)	The reduction in First Bank's regulatory capital ratios during the first quarter of 2014 primarily resulted from the payment of a $70 million dividend to the Company, as further described below.

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. The FRB has complete discretion to grant any such approval and therefore, it is not known whether the FRB will approve any request. On January 31, 2014, the Company received regulatory approval from the FRB, which granted First Bank the authority to pay a dividend to the Company, and the authority to the Company to utilize such funds, for the sole purpose of paying the accumulated deferred interest payments on the Company's outstanding junior subordinated debentures issued in connection with the Company's trust preferred securities. In February 2014, First Bank paid a dividend of $70.0 million to the Company and the Company notified the trustees of the trust preferred securities of its intention to pay all cumulative interest that had been deferred on the junior subordinated debentures relating to its trust preferred securities, on the regularly scheduled quarterly payment dates in March and April, 2014, as further described in Note 7 to the consolidated financial statements.

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 although First Bank was notified, as of October 16, 2013, by the FRB that such restriction is no longer applicable to First Bank. The Agreement is specifically enforceable by the FRB in court.

The description of the Agreement above represents a summary and is qualified in its entirety by the full text of the Agreement which is incorporated herein by reference to Exhibit 10.19 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the United States Securities and Exchange Commission on March 25, 2010.

Prior to entering into the Agreement on March 24, 2010, the Company and First Bank had entered into a memorandum of understanding and an informal agreement, respectively, with the FRB and the Missouri Division of Finance (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 memorandum of understanding with the FRB was replaced and superseded by the Agreement. The informal agreement with the MDOF, dated September 18, 2008, was terminated effective September 11, 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, there can be no assurance that the Company and First Bank will be able to comply fully with the requirements of the Agreement, that compliance with the Agreement will not be more time consuming or more expensive than anticipated, that compliance with the Agreement will enable the Company and First Bank to maintain profitable operations, or that efforts to comply with the 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, the Company and First Bank could become subject to various requirements limiting the ability to develop new business lines, mandating additional capital, and/or requiring the sale of certain assets and liabilities. Failure of the Company or First Bank to meet these conditions could lead to further enforcement action by the regulatory agencies. The terms of any such additional regulatory actions, orders or agreements could have a materially adverse effect on the Company’s business, financial condition or results of operations.

Basel III Regulatory Capital Reforms. In July, 2013, the Federal Reserve approved revisions to the capital adequacy guidelines and prompt corrective action rules that implement the revised standards of the Basel Committee on Banking Supervision, commonly called Basel III, and address relevant provisions of the Dodd-Frank Act. “Basel III” refers to two consultative documents released by the Basel Committee on Banking Supervision in December 2009, the rules text released in December 2010, and loss absorbency rules issued in January 2011, which include significant changes to bank capital, leverage and liquidity requirements. The 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, 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:


•	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. Institutions that do not maintain the capital conservation buffer are precluded from: (1) paying dividends and making certain other capital distributions; (2) making interest payments on trust preferred securities (unless the non-payment of interest would otherwise trigger an event of default); and (3) making certain discretionary bonus payments to executive officers. The capital conservation buffer is measured relative to risk-weighted assets and will be phased in over a four-year period beginning on January 1, 2016 with an initial requirement of 0.625% above the minimum capital requirement. The capital conservation buffer subsequently increases to 1.25%, 1.875% and 2.5% on January 1, 2017, 2018 and 2019, respectively;


•	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 calculation of common equity Tier 1 capital is different from the calculation of common equity under GAAP. Most significantly for the Company, the Company's net deferred tax assets, which are included in the calculation of common equity under GAAP, will be substantially phased out over time from the required calculation of common equity Tier 1 capital for regulatory purposes. The net deferred tax assets attributable to net operating loss and tax credit carryforwards, which comprised over 88.0% of the Company's net deferred tax assets as of March 31, 2014, are scheduled to be phased out entirely from inclusion in the calculation of common equity Tier 1 capital in 2018. The Company is in the process of more fully evaluating the impact the final Basel III capital rules may have on its regulatory capital levels and capital planning strategies.

In light of the Company's current capital and the future changes in the calculation of regulatory capital as a result of Basel III, absent a substantial increase in qualifying common equity, the Company is not likely to meet the common equity Tier 1 requirement as it will be calculated in 2015, or to meet the common equity Tier 1 requirement as it will be calculated in 2016 when the capital conservation buffer goes into effect. The inability to remain adequately capitalized under the new Basel III capital requirements could materially adversely impact the Company's financial condition, results of operations, and ability to grow. In addition, the inability to meet the capital conservation buffer would preclude the Company from making dividend payments on capital stock and interest payments on trust preferred securities absent a waiver of the Basel III rules by the Federal Reserve when the capital conservation rules become applicable to the Company in 2016.