First Banks (FBSPRA) 10-Q 2014 Q3 Quarterly report

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 September 30, 2014
[   ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to ________

Commission File Number: 001-31610

FIRST BANKS, INC.

(Exact name of registrant as specified in its charter)

MISSOURI	43-1175538
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
135 North Meramec, Clayton, Missouri	63105
(Address of principal executive offices)	(Zip code)

(314) 854-4600

(Registrant’s telephone number, including area code)

__________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

þ Yes      o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

þ Yes      o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o
Non-accelerated filer þ (Do not check if a smaller reporting company)	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes      þ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Shares Outstanding at October 31, 2014
Common Stock, $250.00 par value	23,661

FIRSTBANKS,INC.

TABLE OFCONTENTS

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Consolidated Balance Sheets	1
	Consolidated Statements of Income	2
	Consolidated Statements of Comprehensive Income (Loss)	3
	Consolidated Statements of Changes in Stockholders’ Equity	4
	Consolidated Statements of Cash Flows	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	52
Item 4.	Controls and Procedures	52
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	53
Item 1A.	Risk Factors	53
Item 6.	Exhibits	54
SIGNATURES		55

PARTI–FINANCIALINFORMATION

ITEM1–FINANCIALSTATEMENTS

FIRSTBANKS,INC.

CONSOLIDATEDBALANCESHEETS

(dollars in thousands, except share and per share data)	September 30, 2014			December 31, 2013
	(Unaudited)
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	91,877		92,369
Short-term investments	171,589			98,066
Total cash and cash equivalents	263,466			190,435
Investment securities:
Available for sale	1,461,552			1,611,745
Held to maturity (fair value of $658,343 and $719,183, respectively)	667,831			740,186
Total investment securities	2,129,383			2,351,931
Loans:
Commercial, financial and agricultural	645,862			600,704
Real estate construction and development	75,609			121,662
Real estate mortgage	2,213,321			2,091,026
Consumer and installment	16,840			18,681
Loans held for sale	28,866			25,548
Net deferred loan fees	(921		)	(526	)
Total loans	2,979,577			2,857,095
Allowance for loan losses	(74,694		)	(81,033	)
Net loans	2,904,883			2,776,062
Federal Reserve Bank and Federal Home Loan Bank stock	30,623			27,357
Bank premises and equipment, net	122,080			124,328
Deferred income taxes	318,897			315,881
Other real estate	55,709			66,702
Other assets	61,774			66,287
Total assets	$	5,886,815		5,918,983
LIABILITIES
Deposits:
Noninterest-bearing demand	$	1,302,622		1,243,545
Interest-bearing demand	693,670			679,527
Savings and money market	1,883,993			1,844,710
Time deposits of $100 or more	352,323			389,056
Other time deposits	594,322			657,057
Total deposits	4,826,930			4,813,895
Securities sold under agreements to repurchase	42,682			43,143
Subordinated debentures	354,267			354,210
Deferred income taxes	44,067			28,397
Accrued expenses and other liabilities	110,176			191,082
Total liabilities	5,378,122			5,430,727
STOCKHOLDERS’ EQUITY
First Banks, Inc. stockholders’ equity:
Preferred stock:
Class A convertible, adjustable rate, $20.00 par value, 750,000 shares authorized, 641,082 shares issued and outstanding	12,822			12,822
Class B adjustable rate, $1.50 par value, 200,000 shares authorized, 160,505 shares issued and outstanding	241			241
Class C fixed rate, cumulative, perpetual, $1.00 par value, 295,400 shares authorized, issued and outstanding	295,400			295,400
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 earnings	59,397			42,719
Accumulated other comprehensive income	11,347			7,502
Total First Banks, Inc. stockholders’ equity	414,945			394,422
Noncontrolling interest in subsidiary	93,748			93,834
Total stockholders’ equity	508,693			488,256
Total liabilities and stockholders’ equity	$	5,886,815		5,918,983

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

1

FIRSTBANKS,INC.

CONSOLIDATEDSTATEMENTS OF INCOME–(UNAUDITED)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(dollars in thousands, except share and per share data)	2014			2013		2014		2013
Interest income:
Interest and fees on loans	$	29,437		28,859		88,698		88,917
Investment securities	11,972			12,858		36,507		39,423
Federal Reserve Bank and Federal Home Loan Bank stock	362			303		1,080		913
Short-term investments	174			346		436		831
Total interest income	41,945			42,366		126,721		130,084
Interest expense:
Deposits:
Interest-bearing demand	97			83		266		233
Savings and money market	822			675		2,335		1,942
Time deposits of $100 or more	471			529		1,440		1,758
Other time deposits	661			860		2,078		2,941
Other borrowings	(1		)	1		5		(11	)
Subordinated debentures	3,048			3,804		9,886		11,213
Total interest expense	5,098			5,952		16,010		18,076
Net interest income	36,847			36,414		110,711		112,008
(Benefit) provision for loan losses	(5,000		)	—		(5,000	)	—
Net interest income after (benefit) provision for loan losses	41,847			36,414		115,711		112,008
Noninterest income:
Service charges on deposit accounts and customer service fees	8,948			8,788		25,948		25,709
Gain on loans sold and held for sale	1,393			1,314		3,812		4,439
Net (loss) gain on investment securities	(1		)	108		1,278		37
Net gain on sale of other real estate	148			795		1,282		4,819
(Decrease) increase in fair value of servicing rights	(501		)	283		(1,634	)	907
Loan servicing fees	1,627			1,740		5,002		5,233
Other	2,460			2,501		7,275		8,723
Total noninterest income	14,074			15,529		42,963		49,867
Noninterest expense:
Salaries and employee benefits	20,922			19,777		61,187		58,973
Occupancy, net of rental income	5,809			5,602		17,072		17,371
Furniture and equipment	2,674			2,463		7,677		7,584
Postage, printing and supplies	558			533		1,751		1,872
Information technology fees	5,775			5,365		17,259		15,920
Legal, examination and professional fees	1,528			1,610		4,266		4,770
Advertising and business development	803			663		2,075		1,679
FDIC insurance	1,254			1,852		3,759		5,572
Write-downs and expenses on other real estate	2,068			1,966		3,406		4,736
Other	5,308			5,474		14,583		15,018
Total noninterest expense	46,699			45,305		133,035		133,495
Income from continuing operations before provision (benefit) for income taxes	9,222			6,638		25,639		28,380
Provision (benefit) for income taxes	3,212			(65	)	9,047		(45	)
Net income from continuing operations, net of tax	6,010			6,703		16,592		28,425
Loss from discontinued operations, net of tax	—			(881	)	—		(6,279	)
Net income	6,010			5,822		16,592		22,146
Less: net (loss) income attributable to noncontrolling interest in subsidiary	(32		)	(38	)	(86	)	113
Net income attributable to First Banks, Inc.	$	6,042		5,860		16,678		22,033
Preferred stock dividends declared	—			5,013		—		14,841
Accretion of discount on preferred stock	—			919		—		2,725
Net income (loss) available to common stockholders	$	6,042		(72	)	16,678		4,467
Basic earnings per common share from continuing operations	$	255.34		34.19		704.88		454.17
Diluted earnings per common share from continuing operations	$	222.43		34.19		604.22		454.17
Basic earnings (loss) per common share	$	255.34		(3.04	)	704.88		188.80
Diluted earnings (loss) per common share	$	222.43		(3.04	)	604.22		188.80
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

FIRSTBANKS,INC.

CONSOLIDATEDSTATEMENTS OFCOMPREHENSIVEINCOME (LOSS) –(UNAUDITED)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(dollars in thousands)	2014			2013		2014		2013
Net income	$	6,010		5,822		16,592		22,146
Other comprehensive (loss) income:
Unrealized (losses) gains on available-for-sale investment securities, net of tax	(3,161		)	(896	)	5,742		(19,699	)
Reclassification adjustment for available-for-sale investment securities gains included in net income, net of tax	—			(60	)	(752	)	(246	)
Amortization of net unrealized gain associated with reclassification of available-for-sale investment securities to held-to-maturity investment securities, net of tax	(405		)	(467	)	(1,208	)	(1,327	)
Amortization of net loss related to pension liability, net of tax	21			30		63		90
Reclassification adjustment for deferred tax asset valuation allowance on investment securities	—			(1,141	)	—		(17,056	)
Reclassification adjustment for deferred tax asset valuation allowance on pension liability	—			24		—		72
Other comprehensive (loss) income	(3,545		)	(2,510	)	3,845		(38,166	)
Comprehensive income (loss)	2,465			3,312		20,437		(16,020	)
Comprehensive (loss) income attributable to noncontrolling interest in subsidiary	(32		)	(38	)	(86	)	113
Comprehensive income (loss) attributable to First Banks, Inc.	$	2,497		3,350		20,523		(16,133	)

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

3

FIRSTBANKS,INC.

CONSOLIDATEDSTATEMENTS OFCHANGES INSTOCKHOLDERS’EQUITY–(UNAUDITED)

Nine Months EndedSeptember 30, 2014 and 2013

	First Banks, Inc. Stockholders’ Equity
(dollars in thousands)	Preferred Stock		Common Stock	Additional Paid-In Capital	Retained Earnings (Deficit)		Accumulated Other Comprehensive Income		Non- controlling Interest		Total Stockholders’ Equity
Balance, December 31, 2012	$	322,163	5,915	12,480	(179,513	)	45,259		93,655		299,959
Net income	—		—	—	22,033		—		113		22,146
Other comprehensive loss	—		—	—	—		(38,166	)	—		(38,166	)
Accretion of discount on preferred stock	2,725		—	—	(2,725	)	—		—		—
Preferred stock dividends declared	—		—	—	(14,841	)	—		—		(14,841	)
Balance, September 30, 2013	$	324,888	5,915	12,480	(175,046	)	7,093		93,768		269,098
Balance, December 31, 2013	$	325,806	5,915	12,480	42,719		7,502		93,834		488,256
Net income	—		—	—	16,678		—		(86	)	16,592
Other comprehensive income	—		—	—	—		3,845		—		3,845
Balance, September 30, 2014	$	325,806	5,915	12,480	59,397		11,347		93,748		508,693

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

4

FIRSTBANKS,INC.

CONSOLIDATEDSTATEMENTS OFCASHFLOWS–(UNAUDITED)

	Nine Months Ended
	September 30,
(dollars in thousands)	2014			2013
Cash flows from operating activities:
Net income attributable to First Banks, Inc.	$	16,678		22,033
Net (loss) income attributable to noncontrolling interest in subsidiary	(86		)	113
Less: net loss from discontinued operations, net of tax	—			(6,279	)
Net income from continuing operations, net of tax	16,592			28,425
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization of bank premises and equipment	8,736			8,710
Amortization and accretion of investment securities	16,968			19,692
Originations of loans held for sale	(163,826		)	(233,259	)
Proceeds from sales of loans held for sale	162,818			272,245
(Benefit) provision for loan losses	(5,000		)	—
Provision (benefit) for current income taxes	655			(248	)
Provision for deferred income taxes	8,392			6,715
Decrease in deferred tax asset valuation allowance	—			(6,512	)
Decrease in accrued interest receivable	2,398			714
(Decrease) increase in accrued interest payable	(62,552		)	10,763
Gain on loans sold and held for sale	(3,812		)	(4,439	)
Net gain on investment securities	(1,278		)	(37	)
Decrease (increase) in fair value of servicing rights	1,634			(907	)
Write-downs on other real estate	1,814			2,230
Other operating activities, net	2,933			4,426
Net cash (used in) provided by operating activities – continuing operations	(13,528		)	108,518
Net cash used in operating activities – discontinued operations	—			(5,422	)
Net cash (used in) provided by operating activities	(13,528		)	103,096
Cash flows from investing activities:
Net cash paid for sale of assets and liabilities of discontinued operations, net of cash and cash equivalents sold	(15,467		)	(115,044	)
Proceeds from sales of investment securities available for sale	166,320			143,675
Maturities of investment securities available for sale	137,444			314,707
Maturities of investment securities held to maturity	59,344			117,859
Purchases of investment securities available for sale	(147,180		)	(306,063	)
Purchases of investment securities held to maturity	(2,641		)	(21,473	)
Net (purchases) redemptions of Federal Reserve Bank and Federal Home Loan Bank stock	(3,266		)	192
Proceeds from sales of commercial loans	5,532			7,681
Purchase of one-to-four-family residential real estate loans	(52,658		)	—
Net (increase) decrease in loans	(92,715		)	43,401
Recoveries of loans previously charged-off	10,582			13,469
Purchases of bank premises and equipment	(6,946		)	(4,882	)
Net proceeds from sales of other real estate	14,457			25,557
Other investing activities, net	1,179			3,601
Net cash provided by investing activities – continuing operations	73,985			222,680
Net cash provided by investing activities – discontinued operations	—			2,168
Net cash provided by investing activities	73,985			224,848
Cash flows from financing activities:
Increase (decrease) in deposits	13,035			(115,401	)
(Decrease) increase in securities sold under agreements to repurchase	(461		)	11,052
Net cash provided by (used in) financing activities – continuing operations	12,574			(104,349	)
Net cash used in financing activities – discontinued operations	—			(28,286	)
Net cash provided by (used in) financing activities	12,574			(132,635	)
Net increase in cash and cash equivalents	73,031			195,309
Cash and cash equivalents, beginning of period	190,435			518,846
Cash and cash equivalents, end of period	$	263,466		714,155
Supplemental disclosures of cash flow information:
Cash paid for interest on liabilities	$	78,562		7,313
Cash paid (received) for income taxes	448			(213	)
Noncash investing and financing activities:
Reclassification of investment securities from available for sale to held to maturity	$	—		242,540
Loans transferred to other real estate	5,239			8,217

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

5

FIRSTBANKS,INC.

NOTES TOCONSOLIDATEDFINANCIALSTATEMENTS (UNAUDITED)

NOTE1–BASIS OFPRESENTATION

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 2013 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 nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. Certain reclassifications of 2013 amounts have been made to conform to the 2014 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 14 to the consolidated financial statements. All significant intercompany accounts and transactions have been eliminated.

The Company operates through its wholly owned subsidiary bank holding company, The San Francisco Company (SFC), headquartered in St. Louis, Missouri, and SFC’s wholly owned subsidiary bank, First Bank, also headquartered in St. Louis, Missouri. First Bank operates through its branch banking offices and subsidiaries. All of the subsidiaries are wholly owned as of September 30, 2014 except FB Holdings, LLC (FB Holdings), which is 53.23% owned by First Bank and 46.77% owned by First Capital America, Inc. (FCA), a corporation owned and operated by the Company’s Chairman of the Board and members of his immediate family, including Mr. Michael Dierberg, Vice Chairman of the Company, and Ms. Ellen Dierberg Milne, Director of the Company, as further described in Note 14 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 (loss) income attributable to noncontrolling interest in subsidiary” in the consolidated statements of income.

NOTE2–DISCONTINUEDOPERATIONS

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 operations of First Bank’s Association Bank Services line of business and Northern Florida Region for the three and nine months ended September 30, 2013. 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 provided 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, previously headquartered in Vallejo, California, provided a full range of services to homeowners associations and community management companies. The transaction was completed on November 22, 2013. Under the terms of the agreement, Union Bank assumed $572.1 million of deposits, as well as certain other liabilities, and paid a premium on certain deposit accounts acquired in the transaction. Union Bank also purchased certain assets, including $20.8 million of loans, at par value. The transaction resulted in a gain of $28.6 million, after the write-off of goodwill of $18.0 million allocated to the transaction in the fourth quarter of 2013.

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 $408,000, after the write-off of goodwill of $700,000 allocated to the Northern Florida Region, primarily 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. First Bank presently continues to operate its remaining eight retail branches in Manatee County’s communities of Bradenton, Palmetto and Longboat Key, Florida.

Losses from discontinued operations, net of tax, for the three and nine months ended September 30, 2013 were as follows:

	Three Months Ended						Nine Months Ended
	September 30, 2013						September 30, 2013
(dollars in thousands)	Association Bank Services			Northern Florida	Total		Association Bank Services		Northern Florida		Total
Interest income:
Interest and fees on loans	$	332		—	332		1,036		—		1,036
Interest expense:
Interest on deposits	78			—	78		248		233		481
Net interest income (loss)	254			—	254		788		(233	)	555
Provision for loan losses	—			—	—		—		—		—
Net interest income (loss) after provision for loan losses	254			—	254		788		(233	)	555
Noninterest income:
Service charges and customer service fees	17			—	17		74		134		208
Other	28			—	28		81		4		85
Total noninterest income	45			—	45		155		138		293
Noninterest expense:
Salaries and employee benefits	753			—	753		2,209		885		3,094
Occupancy, net of rental income	1			—	1		5		579		584
Furniture and equipment	13			—	13		34		40		74
FDIC insurance	194			—	194		603		53		656
Other	233			—	233		675		2,452		3,127
Total noninterest expense	1,194			—	1,194		3,526		4,009		7,535
Loss from operations of discontinued operations	(895		)	—	(895	)	(2,583	)	(4,104	)	(6,687	)
Net gain on sale of discontinued operations	—			14	14		—		408		408
Benefit for income taxes	—			—	—		—		—		—
Net (loss) income from discontinued operations, net of tax	$	(895	)	14	(881	)	(2,583	)	(3,696	)	(6,279	)

7

NOTE3–INVESTMENTS INDEBT ANDEQUITYSECURITIES

Securities Available for Sale. The amortized cost, contractual maturity, gross unrealized gains and losses and fair value of investment securities available for sale at September 30, 2014 and December 31, 2013 were as follows:

	Maturity									Total Amortized Cost	Gross				Weighted Average Yield
	1 Year			1-5		5-10		After			Unrealized			Fair
(dollars in thousands)	or Less			Years		Years		10 Years			Gains	Losses		Value
September 30, 2014:
Carrying value:
U.S. Government sponsored agencies	$	8,355		29,981		20,125		155,035		213,496	3,989	(292	)	217,193	1.33	%
Residential mortgage-backed	270			65,773		43,199		914,904		1,024,146	14,034	(10,613	)	1,027,567	2.37
Commercial mortgage-backed	—			782		—		—		782	55	—		837	4.95
State and political subdivisions	1,612			838		—		28,387		30,837	74	—		30,911	1.15
Corporate notes	11,961			109,536		57,998		—		179,495	4,345	(505	)	183,335	2.81
Equity investments	—			—		—		1,750		1,750	—	(41	)	1,709	2.10
Total	$	22,198		206,910		121,322		1,100,076		1,450,506	22,497	(11,451	)	1,461,552	2.25
Fair value:
Debt securities	$	22,430		211,554		121,748		1,104,111
Equity securities	—			—		—		1,709
Total	$	22,430		211,554		121,748		1,105,820
Weighted average yield	2.54		%	2.27	%	2.27	%	2.23	%
December 31, 2013:
Carrying value:
U.S. Government sponsored agencies	$	8,450		40,243		88,666		135,679		273,038	3,525	(664	)	275,899	1.34	%
Residential mortgage-backed	—			43,943		115,731		951,454		1,111,128	12,873	(18,214	)	1,105,787	2.32
Commercial mortgage-backed	—			—		793		—		793	63	—		856	4.94
State and political subdivisions	1,369			2,035		200		28,432		32,036	81	(560	)	31,557	1.26
Corporate notes	4,980			140,575		45,132		—		190,687	5,777	(261	)	196,203	2.69
Equity investments	—			—		—		1,500		1,500	—	(57	)	1,443	2.17
Total	$	14,799		226,796		250,522		1,117,065		1,609,182	22,319	(19,756	)	1,611,745	2.18
Fair value:
Debt securities	$	14,927		233,338		250,860		1,111,177
Equity securities	—			—		—		1,443
Total	$	14,927		233,338		250,860		1,112,620
Weighted average yield	2.17		%	2.23	%	1.81	%	2.24	%

Securities Held to Maturity. The amortized cost, contractual maturity, gross unrealized gains and losses and fair value of investment securities held to maturity at September 30, 2014 and December 31, 2013 were as follows:

	Maturity									Total Amortized Cost	Gross				Weighted Average Yield
	1 Year			1-5		5-10		After			Unrealized			Fair
(dollars in thousands)	or Less			Years		Years		10 Years			Gains	Losses		Value
September 30, 2014:
Carrying value:
U.S. Government sponsored agencies	$	—		—		11,713		—		11,713	—	(77	)	11,636	1.22	%
Residential mortgage-backed	—			133,567		52,574		467,145		653,286	1,247	(10,580	)	643,953	1.89
State and political subdivisions	521			820		489		1,002		2,832	1	(79	)	2,754	1.84
Total	$	521		134,387		64,776		468,147		667,831	1,248	(10,736	)	658,343	1.88
Fair value:
Debt securities	$	521		133,995		64,713		459,114
Weighted average yield	2.62		%	1.88	%	1.12	%	1.98	%
December 31, 2013:
Carrying value:
U.S. Government sponsored agencies	$	—		—		16,119		—		16,119	—	(153	)	15,966	1.14	%
Residential mortgage-backed	—			16,327		182,933		522,504		721,764	441	(21,206	)	700,999	1.88
State and political subdivisions	640			575		55		1,033		2,303	2	(87	)	2,218	1.93
Total	$	640		16,902		199,107		523,537		740,186	443	(21,446	)	719,183	1.86
Fair value:
Debt securities	$	642		16,926		195,647		505,968
Weighted average yield	3.32		%	2.20	%	1.53	%	1.97	%

8

Proceeds from sales of available-for-sale investment securities were zero and $166.3 million for the three and nine months ended September 30, 2014, respectively, compared to $25.1 million and $143.7 million for the comparable periods in 2013. Gross realized gains and gross realized losses on investment securities for the three and nine months ended September 30, 2014 and 2013 were as follows:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(dollars in thousands)	2014			2013		2014		2013
Gross realized gains on sales of available-for-sale securities	$	—		110		2,010		802
Gross realized losses on sales of available-for-sale securities	—			—		(730	)	(354	)
Other-than-temporary impairment	(1		)	(2	)	(2	)	(411	)
Net realized (loss) gain on investment securities	$	(1	)	108		1,278		37

Other-than-temporary impairment for the nine months ended September 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 $311.4 million and $283.7 million at September 30, 2014 and December 31, 2013, respectively, were pledged in connection with deposits of public and trust funds, securities sold under agreements to repurchase and for other purposes as required by law.

Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2014 and December 31, 2013, were as follows:

	Less Than 12 Months				12 Months or More			Total
(dollars in thousands)	Fair Value		Unrealized Losses		Fair Value	Unrealized Losses		Fair Value	Unrealized Losses
September 30, 2014:
Available for sale:
U.S. Government sponsored agencies	$	24,573	(273	)	14,707	(19	)	39,280	(292	)
Residential mortgage-backed	179,472		(1,076	)	259,445	(9,537	)	438,917	(10,613	)
Corporate notes	12,079		(421	)	9,916	(84	)	21,995	(505	)
Equity investments	1,709		(41	)	—	—		1,709	(41	)
Total	$	217,833	(1,811	)	284,068	(9,640	)	501,901	(11,451	)
Held to maturity:
U.S. Government sponsored agencies	$	11,636	(77	)	—	—		11,636	(77	)
Residential mortgage-backed	179,822		(1,651	)	342,062	(8,929	)	521,884	(10,580	)
State and political subdivisions	512		(3	)	926	(76	)	1,438	(79	)
Total	$	191,970	(1,731	)	342,988	(9,005	)	534,958	(10,736	)
December 31, 2013:
Available for sale:
U.S. Government sponsored agencies	$	16,005	(664	)	—	—		16,005	(664	)
Residential mortgage-backed	511,617		(18,119	)	5,473	(95	)	517,090	(18,214	)
State and political subdivisions	27,872		(560	)	—	—		27,872	(560	)
Corporate notes	9,959		(41	)	4,780	(220	)	14,739	(261	)
Equity investments	1,443		(57	)	—	—		1,443	(57	)
Total	$	566,896	(19,441	)	10,253	(315	)	577,149	(19,756	)
Held to maturity:
U.S. Government sponsored agencies	$	15,966	(153	)	—	—		15,966	(153	)
Residential mortgage-backed	644,700		(20,759	)	10,527	(447	)	655,227	(21,206	)
State and political subdivisions	946		(87	)	—	—		946	(87	)
Total	$	661,612	(20,999	)	10,527	(447	)	672,139	(21,446	)

The Company does not believe the investment securities that were in an unrealized loss position at September 30, 2014 and December 31, 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 investment securities for 12 months or more at September 30, 2014 and December 31, 2013 included 52 and 12 securities, respectively.

9

NOTE4–LOANS ANDALLOWANCE FORLOANLOSSES

The following table summarizes the composition of the loan portfolio at September 30, 2014 and December 31, 2013:

(dollars in thousands)	September 30, 2014			December 31, 2013
Commercial, financial and agricultural	$	645,862		600,704
Real estate construction and development	75,609			121,662
Real estate mortgage:
One-to-four-family residential	997,581			921,488
Multi-family residential	126,310			121,304
Commercial real estate	1,089,430			1,048,234
Consumer and installment	16,840			18,681
Loans held for sale	28,866			25,548
Net deferred loan fees	(921		)	(526	)
Total loans	$	2,979,577		2,857,095

Aging of Loans. The following table presents the aging of loans by loan classification at September 30, 2014 and December 31, 2013:

(dollars in thousands)	30-59 Days		60-89 Days	Recorded Investment > 90 Days Accruing	Nonaccrual	Total Past Due	Current	Total Loans
September 30, 2014:
Commercial, financial and agricultural	$	506	661	197	11,508	12,872	632,990	645,862
Real estate construction and development	—		178	—	4,191	4,369	71,240	75,609
Real estate mortgage:
Residential mortgage	3,770		1,320	252	15,326	20,668	600,629	621,297
Home equity	1,087		123	320	6,979	8,509	367,775	376,284
Multi-family residential	—		—	—	726	726	125,584	126,310
Commercial real estate	916		51	—	9,127	10,094	1,079,336	1,089,430
Consumer and installment and net deferred loan fees	57		52	26	4	139	15,780	15,919
Loans held for sale	—		—	—	—	—	28,866	28,866
Total	$	6,336	2,385	795	47,861	57,377	2,922,200	2,979,577
December 31, 2013:
Commercial, financial and agricultural	$	447	394	80	10,523	11,444	589,260	600,704
Real estate construction and development	—		—	—	4,914	4,914	116,748	121,662
Real estate mortgage:
Residential mortgage	4,262		2,637	162	20,063	27,124	545,040	572,164
Home equity	2,256		963	182	7,361	10,762	338,562	349,324
Multi-family residential	—		—	—	1,793	1,793	119,511	121,304
Commercial real estate	1,423		391	—	8,283	10,097	1,038,137	1,048,234
Consumer and installment and net deferred loan fees	87		39	—	19	145	18,010	18,155
Loans held for sale	—		—	—	—	—	25,548	25,548
Total	$	8,475	4,424	424	52,956	66,279	2,790,816	2,857,095

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

10

payment, deterioration in the borrower’s financial condition identified in a review of periodic financial statements, a decrease in the value of the collateral securing the loan, or a change in the economic environment within which the borrower operates could initiate the addition of a loan to the Company’s watch list. Loans on the Company’s watch list require periodic detailed loan status reports prepared by the responsible officer which are discussed in formal meetings with credit review and credit administration staff members. Upgrades and downgrades of loan risk ratings may be initiated by the responsible loan officer. However, upgrades of risk ratings associated with significant credit relationships and/or problem credit relationships may only be made with the concurrence of appropriate regional credit officers.

Under the Company’s risk rating system, special mention loans are those loans that do not currently expose the Company to sufficient risk to warrant classification as substandard, troubled debt restructuring (TDR) or nonaccrual, but possess weaknesses that deserve management’s close attention. Substandard loans include those loans characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. A loan is classified as a TDR when a borrower is experiencing financial difficulties that lead to the restructuring of a loan, and the Company grants concessions to the borrower in the restructuring that it would not otherwise consider. Loans classified as TDRs which are accruing interest are classified as performing TDRs. Loans classified as TDRs which are not accruing interest are classified as nonperforming TDRs and are included with all other nonaccrual loans for presentation purposes. Loans classified as nonaccrual have all the weaknesses inherent in those loans classified as substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of the currently existing facts, conditions and values, highly questionable and improbable. Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans.

The following tables present the credit exposure of the loan portfolio by internally assigned credit grade and payment activity as of September 30, 2014 and December 31, 2013:

Commercial Loan Portfolio Credit Exposure by Internally Assigned Credit Grade (dollars in thousands)	Commercial and Industrial		Real Estate Construction and Development	Multi-family	Commercial Real Estate	Total
September 30, 2014:
Pass	$	598,309	70,735	93,829	1,048,210	1,811,083
Special mention	20,532		141	6,278	23,075	50,026
Substandard	15,226		178	610	4,591	20,605
Performing troubled debt restructuring	287		364	24,867	4,427	29,945
Nonaccrual	11,508		4,191	726	9,127	25,552
Total	$	645,862	75,609	126,310	1,089,430	1,937,211
December 31, 2013:
Pass	$	559,243	42,429	91,001	1,001,719	1,694,392
Special mention	16,211		929	—	21,714	38,854
Substandard	14,727		73,390	555	11,999	100,671
Performing troubled debt restructuring	—		—	27,955	4,519	32,474
Nonaccrual	10,523		4,914	1,793	8,283	25,513
Total	$	600,704	121,662	121,304	1,048,234	1,891,904

Consumer Loan Portfolio Credit Exposure by Payment Activity (dollars in thousands)	Residential Mortgage		Home Equity	Consumer and Installment and Net Deferred Loan Fees	Total
September 30, 2014:
Pass	$	523,867	367,775	15,781	907,423
Substandard	4,380		1,530	134	6,044
Performing troubled debt restructuring	77,724		—	—	77,724
Nonaccrual	15,326		6,979	4	22,309
Total	$	621,297	376,284	15,919	1,013,500
December 31, 2013:
Pass	$	468,642	338,562	18,010	825,214
Substandard	5,306		3,401	126	8,833
Performing troubled debt restructuring	78,153		—	—	78,153
Nonaccrual	20,063		7,361	19	27,443
Total	$	572,164	349,324	18,155	939,643

11

Impaired Loans. Loans deemed to be impaired include performing TDRs and nonaccrual loans. Impaired loans with outstanding balances equal to or greater than $500,000 are evaluated individually for impairment. For these loans, the Company measures the level of impairment based on the present value of the estimated projected cash flows, or if the impaired loans are collateral dependent, the estimated value of the collateral, less applicable selling costs. If the current valuation is lower than the current book balance of the loan, the amount of the difference is evaluated for possible charge-off. In instances where management determines that a charge-off is not appropriate, a specific reserve is established for the individual loan in question. This specific reserve is included as a part of the overall allowance for loan losses.

The following tables present the recorded investment, unpaid principal balance, related allowance for loan losses, average recorded investment and interest income recognized while on impaired status for impaired loans without a related allowance for loan losses and for impaired loans with a related allowance for loan losses by loan classification at September 30, 2014 and December 31, 2013:

(dollars in thousands)	Recorded Investment		Unpaid Principal Balance	Related Allowance for Loan Losses	Average Recorded Investment	Interest Income Recognized
September 30, 2014:
With No Related Allowance Recorded:
Commercial, financial and agricultural	$	5,157	6,777	—	5,212	—
Real estate construction and development	2,869		12,389	—	2,890	—
Real estate mortgage:
Residential mortgage	—		—	—	—	—
Home equity	—		—	—	—	—
Multi-family residential	—		—	—	—	—
Commercial real estate	4,681		5,168	—	4,330	87
Consumer and installment	—		—	—	—	—
	12,707		24,334	—	12,432	87
With A Related Allowance Recorded:
Commercial, financial and agricultural	6,638		20,579	598	6,708	2
Real estate construction and development	1,686		4,356	231	1,698	12
Real estate mortgage:
Residential mortgage	93,050		110,018	7,905	96,014	1,561
Home equity	6,979		7,898	1,396	7,112	—
Multi-family residential	25,593		28,602	3,188	27,737	857
Commercial real estate	8,873		11,356	2,162	8,209	20
Consumer and installment	4		4	—	12	—
	142,823		182,813	15,480	147,490	2,452
Total:
Commercial, financial and agricultural	11,795		27,356	598	11,920	2
Real estate construction and development	4,555		16,745	231	4,588	12
Real estate mortgage:
Residential mortgage	93,050		110,018	7,905	96,014	1,561
Home equity	6,979		7,898	1,396	7,112	—
Multi-family residential	25,593		28,602	3,188	27,737	857
Commercial real estate	13,554		16,524	2,162	12,539	107
Consumer and installment	4		4	—	12	—
	$	155,530	207,147	15,480	159,922	2,539

12

(dollars in thousands)	Recorded Investment		Unpaid Principal Balance	Related Allowance for Loan Losses	Average Recorded Investment	Interest Income Recognized
December 31, 2013:
With No Related Allowance Recorded:
Commercial, financial and agricultural	$	3,119	4,342	—	4,270	1
Real estate construction and development	3,172		12,931	—	17,152	418
Real estate mortgage:
Residential mortgage	—		—	—	—	—
Home equity	596		632	—	564	—
Multi-family residential	443		709	—	474	—
Commercial real estate	6,884		9,221	—	11,636	273
Consumer and installment	—		—	—	—	—
	14,214		27,835	—	34,096	692
With A Related Allowance Recorded:
Commercial, financial and agricultural	7,404		21,565	497	10,136	—
Real estate construction and development	1,742		4,326	294	9,419	—
Real estate mortgage:
Residential mortgage	98,216		118,305	9,740	102,775	2,043
Home equity	6,765		7,637	1,472	6,406	—
Multi-family residential	29,305		29,322	2,438	31,377	1,226
Commercial real estate	5,918		9,468	990	10,003	26
Consumer and installment	19		19	—	22	—
	149,369		190,642	15,431	170,138	3,295
Total:
Commercial, financial and agricultural	10,523		25,907	497	14,406	1
Real estate construction and development	4,914		17,257	294	26,571	418
Real estate mortgage:
Residential mortgage	98,216		118,305	9,740	102,775	2,043
Home equity	7,361		8,269	1,472	6,970	—
Multi-family residential	29,748		30,031	2,438	31,851	1,226
Commercial real estate	12,802		18,689	990	21,639	299
Consumer and installment	19		19	—	22	—
	$	163,583	218,477	15,431	204,234	3,987

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 September 30, 2014 and December 31, 2013, the Company had recorded charge-offs of $51.6 million and $54.9 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 reductions in interest rates, changes in payments and maturity date extensions. Although the Company does not have formal, standardized loan modification programs for its commercial or consumer loan portfolios, it addresses loan modifications on a case-by-case basis and also participates in the United States Department of the Treasury's (U.S. Treasury) Home Affordable Modification Program (HAMP). HAMP gives qualifying homeowners an opportunity to refinance into more affordable monthly payments, with the U.S. Treasury compensating the Company for a portion of the reduction in monthly amounts due from borrowers participating in this program. At September 30, 2014 and December 31, 2013, the Company had $73.4 million and $75.3 million, respectively, of modified loans in the HAMP program.

For a loan modification to be classified as a TDR, all of the following conditions must be present: (1) the borrower is experiencing financial difficulty, (2) the Company makes a concession to the original contractual loan terms and (3) the Company would not consider the concessions but for economic or legal reasons related to the borrower’s financial difficulty. Modifications of loan terms to borrowers experiencing financial difficulty are made in an attempt to protect as much of the investment in the loan as possible. These modifications are generally made to either prevent a loan from becoming nonaccrual or to return a nonaccrual loan to performing status based on the expectations that the borrower can adequately perform in accordance with the modified terms.

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

13

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 September 30, 2014 and December 31, 2013:

(dollars in thousands)	September 30, 2014		December 31, 2013
Performing Troubled Debt Restructurings:
Commercial, financial and agricultural	$	287	—
Real estate construction and development	364		—
Real estate mortgage:
One-to-four-family residential	77,724		78,153
Multi-family residential	24,867		27,955
Commercial real estate	4,427		4,519
Total performing troubled debt restructurings	$	107,669	110,627

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 September 30, 2014 and December 31, 2013:

(dollars in thousands)	September 30, 2014		December 31, 2013
Nonperforming Troubled Debt Restructurings:
Commercial, financial and agricultural	$	456	711
Real estate construction and development	3,479		3,605
Real estate mortgage:
One-to-four-family residential	4,145		6,266
Total nonperforming troubled debt restructurings	$	8,080	10,582

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 $8.6 million and $9.1 million at September 30, 2014 and December 31, 2013, respectively.

14

The following tables present loans classified as TDRs that were modified during the three and nine months ended September 30, 2014 and 2013:

	Three Months Ended September 30, 2014					Three Months Ended September 30, 2013
(dollars in thousands)	Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Loan Modifications Classified as Troubled Debt Restructurings:
Commercial, financial and agricultural	1	$	287	$	287	—	$	—	$	—
Real estate mortgage:
One-to-four-family residential	14	2,167		2,095		15	3,405		3,095

	Nine Months Ended September 30, 2014					Nine Months Ended September 30, 2013
(dollars in thousands)	Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Loan Modifications Classified as Troubled Debt Restructurings:
Commercial, financial and agricultural	1	$	287	$	287	2	$	246	$	201
Real estate mortgage:
One-to-four-family residential	41	6,214		5,429		35	8,275		7,637

The following tables present TDRs that defaulted within 12 months of modification during the three and nine months ended September 30, 2014 and 2013:

	Three Months Ended			Three Months Ended
	September 30, 2014			September 30, 2013
(dollars in thousands)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Troubled Debt Restructurings That Subsequently Defaulted:
Commercial, financial and agricultural	—	$	—	1	$	156
Real estate mortgage:
One-to-four-family residential	2	183		1	110

	Nine Months Ended			Nine Months Ended
	September 30, 2014			September 30, 2013
(dollars in thousands)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Troubled Debt Restructurings That Subsequently Defaulted:
Commercial, financial and agricultural	—	$	—	1	$	156
Real estate mortgage:
One-to-four-family residential	8	1,385		2	193

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.

15

Allowance for Loan Losses. Changes in the allowance for loan losses for the three and nine months ended September 30, 2014 and 2013 were as follows:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(dollars in thousands)	2014			2013		2014		2013
Balance, beginning of period	$	78,018		85,633		81,033		91,602
Loans charged-off	(2,234		)	(7,040	)	(11,921	)	(20,794	)
Recoveries of loans previously charged-off	3,910			5,684		10,582		13,469
Net loan recoveries (charge-offs)	1,676			(1,356	)	(1,339	)	(7,325	)
(Benefit) provision for loan losses	(5,000		)	—		(5,000	)	—
Balance, end of period	$	74,694		84,277		74,694		84,277

The following table represents a summary of changes in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2014:

(dollars in thousands)	Commercial and Industrial			Real Estate Construction and Development		One-to- Four-Family Residential		Multi- Family Residential		Commercial Real Estate		Consumer and Installment		Total
Three Months Ended September 30, 2014:
Allowance for loan losses:
Beginning balance	$	13,731		6,600		29,145		7,374		20,820		348		78,018
Charge-offs	(399		)	(2	)	(1,316	)	(71	)	(436	)	(10	)	(2,234	)
Recoveries	1,763			114		938		114		946		35		3,910
(Benefit) provision for loan losses	(1,236		)	(3,979	)	335		340		(415	)	(45	)	(5,000	)
Ending balance	$	13,859		2,733		29,102		7,757		20,915		328		74,694
Nine Months Ended September 30, 2014:
Allowance for loan losses:
Beginning balance	$	13,401		7,407		32,619		5,249		22,052		305		81,033
Charge-offs	(3,015		)	(67	)	(4,943	)	(3,155	)	(645	)	(96	)	(11,921	)
Recoveries	3,778			1,470		3,207		123		1,918		86		10,582
(Benefit) provision for loan losses	(305		)	(6,077	)	(1,781	)	5,540		(2,410	)	33		(5,000	)
Ending balance	$	13,859		2,733		29,102		7,757		20,915		328		74,694

The following table represents a summary of changes in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2013:

(dollars in thousands)	Commercial and Industrial			Real Estate Construction and Development		One-to- Four-Family Residential		Multi- Family Residential		Commercial Real Estate		Consumer and Installment		Total
Three Months Ended September 30, 2013:
Allowance for loan losses:
Beginning balance	$	13,966		11,412		35,266		4,122		20,573		294		85,633
Charge-offs	(2,241		)	—		(2,256	)	—		(2,488	)	(55	)	(7,040	)
Recoveries	1,773			2,557		879		—		443		32		5,684
Provision (benefit) for loan losses	526			(4,967	)	824		39		3,551		27		—
Ending balance	$	14,024		9,002		34,713		4,161		22,079		298		84,277
Nine Months Ended September 30, 2013:
Allowance for loan losses:
Beginning balance	$	13,572		14,434		38,897		4,252		20,048		399		91,602
Charge-offs	(3,927		)	(448	)	(10,983	)	(162	)	(5,121	)	(153	)	(20,794	)
Recoveries	3,863			4,273		3,398		141		1,683		111		13,469
Provision (benefit) for loan losses	516			(9,257	)	3,401		(70	)	5,469		(59	)	—
Ending balance	$	14,024		9,002		34,713		4,161		22,079		298		84,277

16

The following table represents a summary of the impairment method used by loan category at September 30, 2014 and December 31, 2013:

(dollars in thousands)	Commercial and Industrial		Real Estate Construction and Development	One-to- Four-Family Residential	Multi- Family Residential	Commercial Real Estate	Consumer and Installment and Net Deferred Loans Fees	Total
September 30, 2014:
Allowance for loan losses:
Impaired loans individually evaluated for impairment	$	—	—	1,198	1,891	1,475	—	4,564
Impaired loans collectively evaluated for impairment	598		231	8,103	1,297	687	—	10,916
All other loans collectively evaluated for impairment	13,261		2,502	19,801	4,569	18,753	328	59,214
Total allowance for loan losses	$	13,859	2,733	29,102	7,757	20,915	328	74,694
Loans:
Impaired loans individually evaluated for impairment	$	5,512	2,869	8,764	24,900	9,176	—	51,221
Impaired loans collectively evaluated for impairment	6,283		1,686	91,265	693	4,378	4	104,309
All other loans collectively evaluated for impairment	634,067		71,054	897,552	100,717	1,075,876	15,915	2,795,181
Total loans	$	645,862	75,609	997,581	126,310	1,089,430	15,919	2,950,711
December 31, 2013:
Allowance for loan losses:
Impaired loans individually evaluated for impairment	$	—	62	2,275	1,034	385	—	3,756
Impaired loans collectively evaluated for impairment	497		232	8,937	1,404	605	—	11,675
All other loans collectively evaluated for impairment	12,904		7,113	21,407	2,811	21,062	305	65,602
Total allowance for loan losses	$	13,401	7,407	32,619	5,249	22,052	305	81,033
Loans:
Impaired loans individually evaluated for impairment	$	3,480	3,440	12,276	28,641	9,168	—	57,005
Impaired loans collectively evaluated for impairment	7,043		1,474	93,301	1,107	3,634	19	106,578
All other loans collectively evaluated for impairment	590,181		116,748	815,911	91,556	1,035,432	18,136	2,667,964
Total loans	$	600,704	121,662	921,488	121,304	1,048,234	18,155	2,831,547

NOTE5–SERVICINGRIGHTS

Mortgage Banking Activities. At September 30, 2014 and December 31, 2013, the Company serviced mortgage loans for others totaling $1.35 billion and $1.33 billion, respectively. Changes in mortgage servicing rights for the three and nine months ended September 30, 2014 and 2013 were as follows:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(dollars in thousands)	2014			2013		2014		2013
Balance, beginning of period	$	14,103		12,341		14,211		9,152
Originated mortgage servicing rights	770			942		1,802		3,059
Purchased mortgage servicing rights	53			—		84		—
Change in fair value resulting from changes in valuation inputs or assumptions used in valuation model (1)	124			1,160		(185	)	3,467
Other changes in fair value (2)	(432		)	(593	)	(1,294	)	(1,828	)
Balance, end of period	$	14,618		13,850		14,618		13,850

____________________

(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.

17

Other Servicing Activities. At September 30, 2014 and December 31, 2013, the Company serviced United States Small Business Administration (SBA) loans for others totaling $119.8 million and $139.1 million, respectively. Changes in SBA servicing rights for the three and nine months ended September 30, 2014 and 2013 were as follows:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(dollars in thousands)	2014			2013		2014		2013
Balance, beginning of period	$	4,681		5,192		4,643		5,640
Originated SBA servicing rights	—			—		—		—
Change in fair value resulting from changes in valuation inputs or assumptions used in valuation model (1)	107			(127	)	458		(163	)
Other changes in fair value (2)	(300		)	(157	)	(613	)	(569	)
Balance, end of period	$	4,488		4,908		4,488		4,908

____________________

(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.

NOTE6–DERIVATIVEINSTRUMENTS

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 September 30, 2014 and December 31, 2013:

(dollars in thousands)				Derivatives in Other Assets
	Notional Amount			Fair Value Gain (Loss)
	September 30, 2014		December 31, 2013	September 30, 2014		December 31, 2013
Derivative Instruments Not Designated as Hedging Instruments:
Interest rate lock commitments	$	17,800	14,237	378		217
Forward commitments to sell mortgage-backed securities	33,200		29,100	(150	)	296
Total	$	51,000	43,337	228		513

Interest Rate Lock Commitments / Forward Commitments to Sell Mortgage-Backed Securities. Derivative instruments issued by the Company consist of interest rate lock commitments to originate fixed-rate loans to be sold. Commitments to originate fixed-rate loans consist primarily of residential real estate loans. These interest rate lock commitments and loans held for sale are hedged with forward contracts to sell mortgage-backed securities, which expire in December 2014.

The following table summarizes amounts included in the consolidated statements of income for the three and nine months ended September 30, 2014 and 2013 related to non-hedging derivative instruments:

(dollars in thousands)	Location of Gain (Loss) Recognized in Operations on Derivatives	Amount of Gain (Loss) Recognized in Operations on Derivatives
		Three Months Ended					Nine Months Ended
		September 30,					September 30,
		2014			2013		2014		2013
Derivative Instruments Not Designated as Hedging Instruments:
Interest rate lock commitments	Gain on loans sold and held for sale	$	(157	)	675		161		(1,094	)
Forward commitments to sell mortgage-backed securities	Gain on loans sold and held for sale	291			(3,115	)	(446	)	(332	)

NOTE7–SUBORDINATEDDEBENTURES

As of September 30, 2014, the Company had 13 affiliated Delaware or Connecticut statutory and business trusts (collectively, the Trusts) that were created for the sole purpose of issuing trust preferred securities. The trust preferred securities were issued in private placements, with the exception of First Preferred Capital Trust IV, which was issued in a publicly underwritten offering.

The Company’s distributions accrued on the junior subordinated debentures were $3.0 million and $9.8 million for the three and nine months ended September 30, 2014, respectively, and $3.8 million and $11.2 million for the comparable periods in 2013, and are included in interest expense in the consolidated statements of income. The structure of the trust preferred securities currently satisfies the regulatory requirements for inclusion, subject to certain limitations, in the Company’s capital base, as further discussed in Note 9 to the consolidated financial statements.

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In August 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. The Company had deferred such payments for 18 quarterly periods as of December 31, 2013. The Company had deferred $56.0 million of its regularly scheduled interest payments as of December 31, 2013. In addition, the Company had accrued additional interest expense of $6.7 million as of December 31, 2013 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. During a deferral period, the respective trusts suspend the declaration and payment of dividends on the trust preferred securities.

During a deferral period, the Company may not, among other things and with limited exceptions, pay cash dividends on or repurchase its common stock or preferred stock nor make any payment on outstanding debt obligations that rank equally with or junior to the junior subordinated debentures. 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 8 to the consolidated financial statements.

Under its previous Written Agreement with the Federal Reserve Bank of St. Louis (FRB), which was terminated on May 19, 2014, 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 9 to the consolidated financial statements.

On January 31, 2014, the Company received regulatory approval from the FRB under the then-existing Written Agreement, subject to certain conditions, 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. The aggregate amount owed on all of the junior subordinated debentures relating to the trust preferred securities at the respective March and April, 2014 payments totaled $66.4 million. On March 14, 2014, the Company paid interest on the junior subordinated debentures of $66.4 million to the respective trustees, which was subsequently distributed to the trust preferred securities holders on the respective interest payment dates in March and April, 2014. Since that time, the Company has continued to pay interest on its junior subordinated debentures to the respective trustees on the regularly scheduled quarterly payment dates. Such interest payments have been funded through additional dividends from First Bank.

Without the payment of dividends from First Bank, the Company currently lacks the source of income and the liquidity to make future interest payments on the junior subordinated debentures associated with its trust preferred securities. Given restrictions placed upon First Bank, including regulatory restrictions, it may not be able to provide the Company with dividends in an amount sufficient to pay the future interest on the trust preferred securities. In such case, the Company would have to pursue alternative funding sources, but there can be no assurance that the Company will be able to identify and obtain alternative funding due to the uncertainty that such alternative funding sources would be available to the Company on terms and conditions that are acceptable to the Company. The Company has the ability to enter into future deferral periods of up to 20 consecutive quarterly periods without triggering a payment default or penalty.

NOTE8–STOCKHOLDERS’EQUITY

Common Stock. There is no established public trading market for the Company’s common stock. Various trusts, which were established by and are administered by and for the benefit of the Company’s Chairman of the Board and members of his immediate family (including Mr. Michael Dierberg, Vice Chairman of the Company, and Ms. Ellen Dierberg Milne, Director of the Company), own all of the voting stock of the Company.

Preferred Stock. The Company has four classes of preferred stock outstanding. On February 15, 2014, the annual dividend rate on the Class C Fixed Rate Cumulative Perpetual Preferred Stock (Class C Preferred Stock) increased from 5% to 9%.

The Company suspended the payment of cash dividends on its outstanding common stock and preferred stock beginning with the regularly scheduled quarterly dividend payments on the preferred stock that would otherwise have been made in August and September, 2009. The Company has declared and accrued $68.4 million of its regularly scheduled dividend payments on its Class C Preferred Stock and Class D Fixed Rate Cumulative Perpetual Preferred Stock (Class D Preferred Stock) at September 30, 2014 and December 31, 2013, and has accrued an additional $9.4 million of cumulative dividends on such deferred dividend payments at September 30, 2014 and December 31, 2013. As such, the aggregate amount of these deferred and accrued dividend payments was $77.8 million at September 30, 2014 and December 31, 2013.

19

The Company ceased declaring dividends on its Class C Preferred Stock and Class D Preferred Stock during the fourth quarter of 2013. Previously, the Company had declared and accrued dividends on its Class C Preferred Stock and Class D Preferred Stock quarterly throughout the deferral period. If the Company had continued to declare and accrue dividends on its Class C Preferred Stock and Class D Preferred Stock during the fourth quarter of 2013 and the nine months ended September 30, 2014, the Company would have accrued an additional $4.1 million and $23.8 million, respectively, of dividend payments, and the Company's aggregate deferred and accrued dividend payments would have been $105.7 million at September 30, 2014. The Company will continue to evaluate whether declaring dividends on its Class C Preferred Stock and Class D Preferred Stock is appropriate in future periods. The Company's cessation of declaring and accruing dividends on its Class C Preferred Stock and Class D Preferred Stock did not have any effect on the terms of the outstanding Class C Preferred Stock and Class D Preferred Stock, including the Company's obligations thereunder.

Accumulated Other Comprehensive Income (Loss). The following table summarizes changes in accumulated other comprehensive income (loss), net of tax, by component, for the three and nine months ended September 30, 2014:

(dollars in thousands)	Investment Securities			Defined Benefit Pension Plan		Total
Three Months Ended September 30, 2014:
Balance, beginning of period	$	17,499		(2,607	)	14,892
Other comprehensive income (loss) before reclassifications	(3,566		)	21		(3,545	)
Amounts reclassified from accumulated other comprehensive income	—			—		—
Net current period other comprehensive income (loss)	(3,566		)	21		(3,545	)
Balance, end of period	$	13,933		(2,586	)	11,347
Nine Months Ended September 30, 2014:
Balance, beginning of period	$	10,151		(2,649	)	7,502
Other comprehensive income before reclassifications	4,534			63		4,597
Amounts reclassified from accumulated other comprehensive income	(752		)	—		(752	)
Net current period other comprehensive income	3,782			63		3,845
Balance, end of period	$	13,933		(2,586	)	11,347

The following table summarizes changes in accumulated other comprehensive income (loss), net of tax, by component, for the three and nine months ended September 30, 2013:

(dollars in thousands)	Investment Securities			Defined Benefit Pension Plan		Deferred Tax Asset Valuation Allowance		Total
Three Months Ended September 30, 2013:
Balance, beginning of period	$	15,337		(3,484	)	(2,250	)	9,603
Other comprehensive income (loss) before reclassifications	(1,363		)	30		(1,117	)	(2,450	)
Amounts reclassified from accumulated other comprehensive income	(60		)	—		—		(60	)
Net current period other comprehensive income (loss)	(1,423		)	30		(1,117	)	(2,510	)
Balance, end of period	$	13,914		(3,454	)	(3,367	)	7,093
Nine Months Ended September 30, 2013:
Balance, beginning of period	$	35,186		(3,544	)	13,617		45,259
Other comprehensive income (loss) before reclassifications	(21,026		)	90		(16,984	)	(37,920	)
Amounts reclassified from accumulated other comprehensive income	(246		)	—		—		(246	)
Net current period other comprehensive income (loss)	(21,272		)	90		(16,984	)	(38,166	)
Balance, end of period	$	13,914		(3,454	)	(3,367	)	7,093

NOTE9–REGULATORYCAPITAL 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.

20

The Company was categorized as adequately capitalized under minimum regulatory capital standards established for bank holding companies by the Federal Reserve at September 30, 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 September 30, 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 September 30, 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
	September 30, 2014				December 31, 2013
(dollars in thousands)	Amount		Ratio		Amount		Ratio
Total capital (to risk-weighted assets):
First Banks, Inc.	$	458,806	12.39	%	$	405,856	11.13	%	8.0	%	N/A
First Bank (1)	687,643		18.56		734,535		20.12		8.0		10.0	%
Tier 1 capital (to risk-weighted assets):
First Banks, Inc.	274,767		7.42		239,868		6.58		4.0		N/A
First Bank (1)	640,940		17.30		688,427		18.86		4.0		6.0
Tier 1 capital (to average assets):
First Banks, Inc.	274,767		4.86		239,868		4.12		4.0		N/A
First Bank (1)	640,940		11.37		688,427		11.77		4.0		5.0

____________________

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

Regulatory Agreements. On May 19, 2014, the FRB terminated the Written Agreement (Written Agreement), dated March 24, 2010, by and among the Company, SFC, First Bank and the FRB. The Written Agreement previously required the Company and First Bank to take certain steps intended to improve their overall financial condition, as previously described in "Item 1. – Business – Supervision and Regulation —Regulatory Agreements" in the Company's Annual Report on Form 10-K as of and for the year ended December 31, 2013. Pursuant to the Written 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 Written Agreement required, among other things, that the Company and First Bank obtain prior approval from the FRB to pay dividends. In addition, the Company was required to 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 had complete discretion to grant any such approval. On January 31, 2014, the Company received regulatory approval from the FRB under the former Written Agreement, 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 subsequently paid interest on the junior subordinated debentures of $66.4 million, as further described in Note 7 to the consolidated financial statements.

On May 19, 2014, the Company and its Board of Directors entered into a Memorandum of Understanding (MOU) with the FRB. The MOU is characterized by regulatory authorities as an informal action that is neither published nor made publicly available by the FRB and is used when circumstances warrant a milder form of action than a formal supervisory action. Under the terms of the MOU, the Company agreed, among other things, to provide certain information to the FRB including, but not limited to, progress of achieving its Capital Plan, notice of plans to materially change its Capital Plan, parent company cash flow plans and summaries of nonperforming asset classifications. In addition, the Company agreed not to do any of the following without the prior approval of the FRB: (i) declare or pay any dividends on its common or preferred stock; (ii) incur or guarantee any debt; (iii) redeem any of the Company's outstanding common or preferred stock; and (iv) cause First Bank to pay dividends in excess of its earnings or make a capital distribution that would cause First Bank's Tier 1 Leverage Ratio to fall below 9.0%. The FRB has complete discretion to grant any such approval and therefore, it is not known whether the FRB would approve any such request.

While the Company intends to take such actions as may be necessary to comply with the requirements of the MOU with the FRB, there can be no assurance that such efforts will not have adverse effects on the operations and financial condition of the Company

21

or First Bank. If the Company fails to comply with the terms of the MOU, further enforcement action could be taken by the FRB which could have a materially adverse effect on the Company's business, financial condition or results of operations.

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 (unless a waiver is granted by the Federal Reserve); and (2) making certain discretionary bonus payments to executive officers (unless a waiver is granted by the Federal Reserve). In addition, such institutions may be precluded from making interest payments on trust preferred securities (unless the non-payment of interest would otherwise trigger an event of default or a waiver is granted by the Federal Reserve). 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 September 30, 2014, are scheduled to be phased out entirely from inclusion in the calculation of common equity Tier 1 capital in 2019. The Company is continuing to evaluate 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 may preclude the Company from making 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 and it is not known whether the Federal Reserve would grant such a waiver.

NOTE10–FAIRVALUEDISCLOSURES

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:

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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. Certain other real estate, upon initial recognition, is re-measured and reported at fair value through a charge-off to the allowance for loan losses based upon the estimated fair value of the other real estate. The fair value of other real estate, upon initial recognition, is estimated using Level 3 inputs based on third party appraisals, and where applicable, discounted based on management’s judgment taking into account current market conditions, distressed or forced sale price comparisons and other factors in effect at the time of valuation. The Company classifies other real estate subjected to nonrecurring fair value adjustments as Level 3.

Derivative instruments. Substantially all derivative instruments utilized by the Company are traded in over-the-counter markets where quoted market prices are not readily available. Derivative instruments utilized by the Company 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.

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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.

Items Measured on a Recurring Basis. Assets and liabilities measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013 are reflected in the following table:

	Fair Value Measurements
(dollars in thousands)	Level 1		Level 2		Level 3	Fair Value
September 30, 2014:
Assets:
Available-for-sale investment securities:
U.S. Government sponsored agencies	$	—	217,193		—	217,193
Residential mortgage-backed	—		1,027,567		—	1,027,567
Commercial mortgage-backed	—		837		—	837
State and political subdivisions	—		30,911		—	30,911
Corporate notes	—		183,335		—	183,335
Equity investments	1,709		—		—	1,709
Mortgage loans held for sale	—		28,866		—	28,866
Derivative instruments:
Interest rate lock commitments	—		378		—	378
Forward commitments to sell mortgage-backed securities	—		(150	)	—	(150	)
Servicing rights	—		—		19,106	19,106
Total	$	1,709	1,488,937		19,106	1,509,752
Liabilities:
Nonqualified deferred compensation plan	$	6,575	—		—	6,575
Total	$	6,575	—		—	6,575
December 31, 2013:
Assets:
Available-for-sale investment securities:
U.S. Government sponsored agencies	$	—	275,899		—	275,899
Residential mortgage-backed	—		1,105,787		—	1,105,787
Commercial mortgage-backed	—		856		—	856
State and political subdivisions	—		31,557		—	31,557
Corporate notes	—		196,203		—	196,203
Equity investments	1,443		—		—	1,443
Mortgage loans held for sale	—		25,548		—	25,548
Derivative instruments:
Interest rate lock commitments	—		217		—	217
Forward commitments to sell mortgage-backed securities	—		296		—	296
Servicing rights	—		—		18,854	18,854
Total	$	1,443	1,636,363		18,854	1,656,660
Liabilities:
Nonqualified deferred compensation plan	$	6,641	—		—	6,641
Total	$	6,641	—		—	6,641

There were no transfers between Levels 1 and 2 of the fair value hierarchy for the three and nine months ended September 30, 2014 and 2013.

The following table presents the changes in Level 3 assets measured on a recurring basis for the three and nine months ended September 30, 2014 and 2013:

	Servicing Rights
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(dollars in thousands)	2014			2013	2014		2013
Balance, beginning of period	$	18,784		17,533	18,854		14,792
Total gains or losses (realized/unrealized):
Included in earnings (1)	(501		)	283	(1,634	)	907
Included in other comprehensive income	—			—	—		—
Issuances	770			942	1,802		3,059
Purchases	53			—	84		—
Transfers in and/or out of level 3	—			—	—		—
Balance, end of period	$	19,106		18,758	19,106		18,758

____________________

(1) Gains or losses (realized/unrealized) are included in noninterest income in the consolidated statements of income.

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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 September 30, 2014 and December 31, 2013 are reflected in the following table:

	Fair Value Measurements
(dollars in thousands)	Level 1		Level 2	Level 3	Fair Value
September 30, 2014:
Assets:
Impaired loans	$	—	—	140,050	140,050
Other real estate	—		—	55,709	55,709
Total	$	—	—	195,759	195,759
December 31, 2013:
Assets:
Impaired loans	$	—	—	148,152	148,152
Other real estate	—		—	66,702	66,702
Total	$	—	—	214,854	214,854

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 measured at fair value upon initial recognition totaled $5.2 million and $8.2 million for the nine months ended September 30, 2014 and 2013, respectively. In addition to other real estate measured at fair value upon initial recognition, the Company recorded write-downs to the balance of other real estate of $1.6 million and $1.8 million to noninterest expense for the three and nine months ended September 30, 2014, respectively, compared to $1.4 million and $2.2 million for the comparable periods in 2013.

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.

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.

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Other borrowings and accrued interest payable. The carrying values reported in the consolidated balance sheets for variable rate borrowings approximate fair value. The fair value of fixed rate borrowings is based on quoted market prices where available. If quoted market prices are not available, the fair value is based on discounting contractual maturities using an estimate of current market rates for similar instruments. The Company classifies its other borrowings, comprised of securities sold under agreements to repurchase, as Level 1. The carrying values reported in the consolidated balance sheets for accrued interest payable approximate fair value.

Subordinated debentures. The fair value of subordinated debentures is based on quoted market prices of comparable instruments. The Company classifies its subordinated debentures as Level 3.

Off-Balance Sheet Financial Instruments. The fair value of commitments to extend credit, standby letters of credit and financial guarantees is based on estimated probable credit losses. The Company classifies its off-balance sheet financial instruments as Level 3.

The estimated fair value of the Company’s financial instruments at September 30, 2014 was as follows:

	September 30, 2014
	Carrying Value		Estimated Fair Value
(dollars in thousands)			Level 1	Level 2	Level 3	Total
Financial Assets:
Cash and cash equivalents	$	263,466	263,466	—	—	263,466
Investment securities:
Available for sale	1,461,552		1,709	1,459,843	—	1,461,552
Held to maturity	667,831		—	658,343	—	658,343
Loans held for portfolio	2,876,017		—	—	2,768,334	2,768,334
Loans held for sale	28,866		—	28,866	—	28,866
FRB and FHLB stock	30,623		30,623	—	—	30,623
Derivative instruments	228		—	228	—	228
Accrued interest receivable	15,400		15,400	—	—	15,400
Financial Liabilities:
Deposits	$	4,826,930	3,880,285	—	945,991	4,826,276
Securities sold under agreements to repurchase	42,682		42,682	—	—	42,682
Accrued interest payable	789		789	—	—	789
Subordinated debentures	354,267		—	—	302,041	302,041
Liability for Off-Balance Sheet Financial Instruments:
Commitments to extend credit, standby letters of credit and financial guarantees	$	2,430	—	—	2,430	2,430

The estimated fair value of the Company’s financial instruments at December 31, 2013 was as follows:

	December 31, 2013
	Carrying Value		Estimated Fair Value
(dollars in thousands)			Level 1	Level 2	Level 3	Total
Financial Assets:
Cash and cash equivalents	$	190,435	190,435	—	—	190,435
Investment securities:
Available for sale	1,611,745		1,443	1,610,302	—	1,611,745
Held to maturity	740,186		—	719,183	—	719,183
Loans held for portfolio	2,750,514		—	—	2,562,160	2,562,160
Loans held for sale	25,548		—	25,548	—	25,548
FRB and FHLB stock	27,357		27,357	—	—	27,357
Derivative instruments	513		—	513	—	513
Accrued interest receivable	17,798		17,798	—	—	17,798
Financial Liabilities:
Deposits	$	4,813,895	3,767,782	—	1,046,485	4,814,267
Securities sold under agreements to repurchase	43,143		43,143	—	—	43,143
Accrued interest payable	63,341		63,341	—	—	63,341
Subordinated debentures	354,210		—	—	242,678	242,678
Liability for Off-Balance Sheet Financial Instruments:
Commitments to extend credit, standby letters of credit and financial guarantees	$	2,715	—	—	2,715	2,715

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NOTE11–INCOMETAXES

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 previously had a full valuation allowance against its net deferred tax assets. 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.

In evaluating the ability to recover deferred tax assets within the jurisdiction from which they arise, the Company considers 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, the Company begins with historical results adjusted for the results of discontinued operations and changes in accounting policies and incorporates 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 management uses to manage the underlying business.

After analysis of all available positive and negative evidence, the Company reversed substantially all of its valuation allowance against its net deferred tax assets, which was reflected as a benefit for income taxes in the consolidated statements of income and as an adjustment to accumulated other comprehensive income during the fourth quarter of 2013. The Company concluded that, as of December 31, 2013, it was more likely than not that substantially all of its net deferred tax assets would be realized in future years. This conclusion was primarily based on projected future taxable income, in addition to cumulative earnings resulting from eight consecutive quarters of profitability (excluding the goodwill impairment charge recognized during the fourth quarter of 2013), significant improvement in asset quality metrics and certain other relevant factors. If the Company’s estimate of realizability of its net deferred tax assets changes in the future, an adjustment to the valuation allowance would be recorded, which would either increase or decrease income tax expense in such period.

The valuation allowance reserves for certain state net operating loss carryforwards, federal and state tax credits and capital loss carryovers which are projected to expire prior to their utilization, based upon projected taxable income at December 31, 2013. The Company has reserved for this benefit in its valuation allowance but will continue to evaluate the potential future utilization of these items and will record an adjustment to the valuation allowance in the period a change is warranted.

A summary of the Company’s deferred tax assets and deferred tax liabilities at September 30, 2014 and December 31, 2013 is as follows:

(dollars in thousands)	September 30, 2014			December 31, 2013
Gross deferred tax assets	$	363,148		359,261
Unrecognized tax benefits for uncertain tax positions	(871		)	—
Valuation allowance	(43,380		)	(43,380	)
Deferred tax assets, net of valuation allowance	318,897			315,881
Deferred tax liabilities	44,067			28,397
Net deferred tax assets	$	274,830		287,484

At September 30, 2014 and December 31, 2013, for federal income tax purposes, the Company had net operating loss carryforwards of approximately $545.5 million and $571.8 million, respectively. For state income tax purposes, the Company had net operating loss carryforwards of approximately $792.9 million and $785.4 million at September 30, 2014 and December 31, 2013, respectively, and a related deferred tax asset of $66.9 million and $66.6 million, respectively.

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NOTE12–EARNINGS(LOSS)PERCOMMONSHARE

The following is a reconciliation of basic and diluted earnings (loss) per share (EPS) for the three and nine months endedSeptember 30, 2014 and 2013:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(dollars in thousands, except share and per share data)	2014		2013		2014	2013
Basic:
Net income from continuing operations attributable to First Banks, Inc.	$	6,042	6,741		16,678	28,312
Preferred stock dividends declared	—		(5,013	)	—	(14,841	)
Accretion of discount on preferred stock	—		(919	)	—	(2,725	)
Net income from continuing operations attributable to common stockholders	6,042		809		16,678	10,746
Net loss from discontinued operations attributable to common stockholders	—		(881	)	—	(6,279	)
Net income (loss) available to First Banks, Inc. common stockholders	$	6,042	(72	)	16,678	4,467
Weighted average shares of common stock outstanding	23,661		23,661		23,661	23,661
Basic earnings per common share – continuing operations	$	255.34	34.19		704.88	454.17
Basic loss per common share – discontinued operations	$	—	(37.23	)	—	(265.37	)
Basic earnings (loss) per common share	$	255.34	(3.04	)	704.88	188.80
Diluted:
Net income from continuing operations attributable to common stockholders	$	6,042	809		16,678	10,746
Net loss from discontinued operations attributable to common stockholders	—		(881	)	—	(6,279	)
Net income (loss) available to First Banks, Inc. common stockholders	6,042		(72	)	16,678	4,467
Effect of dilutive securities – Class A convertible preferred stock	—		—		—	—
Diluted income (loss) available to First Banks, Inc. common stockholders	$	6,042	(72	)	16,678	4,467
Weighted average shares of common stock outstanding	23,661		23,661		23,661	23,661
Effect of dilutive securities – Class A convertible preferred stock	3,501		—		3,942	—
Weighted average diluted shares of common stock outstanding	27,162		23,661		27,603	23,661
Diluted earnings per common share – continuing operations	$	222.43	34.19		604.22	454.17
Diluted loss per common share – discontinued operations	$	—	(37.23	)	—	(265.37	)
Diluted earnings (loss) per common share	$	222.43	(3.04	)	604.22	188.80

NOTE13–BUSINESSSEGMENTRESULTS

The Company’s business segment is First Bank. The reportable business segment is consistent with the management structure of the Company, First Bank and the internal reporting system that monitors performance. First Bank provides similar products and services in its defined geographic areas through its branch network. The products and services offered include a broad range of commercial and personal deposit products, including demand, savings, money market and time deposit accounts. In addition, First Bank markets combined basic services for various client groups, including packaged accounts for more affluent clients, and sweep accounts, lock-box deposits and cash management products for commercial clients. First Bank also offers consumer and commercial loans. Consumer lending includes residential real estate, home equity and installment lending. Commercial lending includes commercial, financial and agricultural loans, real estate construction and development loans, commercial real estate loans and small business lending. Other financial services include mortgage banking, debit cards, brokerage services, internet banking, remote deposit, mobile banking, ATMs, telephone banking, safe deposit boxes, and trust and private banking services. The revenues generated by First Bank and its subsidiaries consist primarily of interest income generated from the loan and investment security portfolios, service charges and fees generated from deposit products and services, and fees generated by the Company’s mortgage banking and trust and private banking business units. The Company’s products and services are offered to clients primarily within its geographic areas, which include eastern Missouri, southern Illinois, southern and northern California, and Florida’s Bradenton, Palmetto and Longboat Key communities. Certain loan products are available nationwide.

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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				ConsolidatedTotals
(dollars in thousands)	September 30, 2014		December 31, 2013	September 30, 2014		December 31, 2013		September 30, 2014	December 31, 2013
Balance sheet information:
Investment securities	$	2,129,383	2,351,931	—		—		2,129,383	2,351,931
Total loans	2,979,577		2,857,095	—		—		2,979,577	2,857,095
FRB and FHLB stock	30,623		27,357	���		—		30,623	27,357
Total assets	5,834,780		5,865,160	52,035		53,823		5,886,815	5,918,983
Deposits	4,843,161		4,815,792	(16,231	)	(1,897	)	4,826,930	4,813,895
Securities sold under agreements to repurchase	42,682		43,143	—		—		42,682	43,143
Subordinated debentures	—		—	354,267		354,210		354,267	354,210
Stockholders’ equity	875,145		931,561	(366,452	)	(443,305	)	508,693	488,256

	First Bank					Corporate, Other and Intercompany Reclassifications				Consolidated Totals
	Three Months Ended					Three Months Ended				Three Months Ended
	September 30,					September 30,				September 30,
(dollars in thousands)	2014			2013		2014		2013		2014		2013
Income statement information:
Interest income	$	41,945		42,366		—		—		41,945		42,366
Interest expense	2,056			2,149		3,042		3,803		5,098		5,952
Net interest income (loss)	39,889			40,217		(3,042	)	(3,803	)	36,847		36,414
(Benefit) provision for loan losses	(5,000		)	—		—		—		(5,000	)	—
Net interest income (loss) after (benefit) provision for loan losses	44,889			40,217		(3,042	)	(3,803	)	41,847		36,414
Noninterest income	13,982			15,414		92		115		14,074		15,529
Noninterest expense	46,551			44,994		148		311		46,699		45,305
Income (loss) from continuing operations before provision (benefit) for income taxes	12,320			10,637		(3,098	)	(3,999	)	9,222		6,638
Provision (benefit) for income taxes	4,296			(64	)	(1,084	)	(1	)	3,212		(65	)
Net income (loss) from continuing operations, net of tax	8,024			10,701		(2,014	)	(3,998	)	6,010		6,703
Loss from discontinued operations, net of tax	—			(881	)	—		—		—		(881	)
Net income (loss)	8,024			9,820		(2,014	)	(3,998	)	6,010		5,822
Net loss attributable to noncontrolling interest in subsidiary	(32		)	(38	)	—		—		(32	)	(38	)
Net income (loss) attributable to First Banks, Inc.	$	8,056		9,858		(2,014	)	(3,998	)	6,042		5,860

	First Bank					Corporate, Other and Intercompany Reclassifications				Consolidated Totals
	Nine Months Ended					Nine Months Ended				Nine Months Ended
	September 30,					September 30,				September 30,
(dollars in thousands)	2014			2013		2014		2013		2014		2013
Income statement information:
Interest income	$	126,691		130,084		30		—		126,721		130,084
Interest expense	6,148			6,866		9,862		11,210		16,010		18,076
Net interest income (loss)	120,543			123,218		(9,832	)	(11,210	)	110,711		112,008
(Benefit) provision for loan losses	(5,000		)	—		—		—		(5,000	)	—
Net interest income (loss) after (benefit) provision for loan losses	125,543			123,218		(9,832	)	(11,210	)	115,711		112,008
Noninterest income	42,665			49,529		298		338		42,963		49,867
Noninterest expense	133,151			132,882		(116	)	613		133,035		133,495
Income (loss) from continuing operations before provision (benefit) for income taxes	35,057			39,865		(9,418	)	(11,485	)	25,639		28,380
Provision (benefit) for income taxes	10,317			(44	)	(1,270	)	(1	)	9,047		(45	)
Net income (loss) from continuing operations, net of tax	24,740			39,909		(8,148	)	(11,484	)	16,592		28,425
Loss from discontinued operations, net of tax	—			(6,279	)	—		—		—		(6,279	)
Net income (loss)	24,740			33,630		(8,148	)	(11,484	)	16,592		22,146
Net (loss) income attributable to noncontrolling interest in subsidiary	(86		)	113		—		—		(86	)	113
Net income (loss) attributable to First Banks, Inc.	$	24,826		33,517		(8,148	)	(11,484	)	16,678		22,033

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NOTE14–TRANSACTIONSWITHRELATEDPARTIES

First Services, L.P. First Services, L.P. (First Services), a limited partnership indirectly owned by the Company’s Chairman and members of his immediate family, including Mr. Michael Dierberg, Vice Chairman of the Company, and Ms. Ellen Dierberg Milne, Director of the Company, provides information technology, item processing and various related services to the Company and First Bank. Fees paid under agreements with First Services were $5.4 million and $16.2 million for the three and nine months ended September 30, 2014, respectively, and $5.1 million and $15.0 million for the comparable periods in 2013. 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 $403,000 and $1.2 million for the three and nine months ended September 30, 2014, respectively, and $283,000 and $820,000 for the comparable periods in 2013. In addition, First Services paid $435,000 and $1.3 million for the three and nine months ended September 30, 2014, respectively, and $435,000 and $1.3 million for the comparable periods in 2013, in rental payments to First Bank for occupancy of certain First Bank premises from which business is conducted.

First Services has an Affiliate Services Agreement with the Company and First Bank that relates to various services provided to First Services, including certain human resources, payroll, employee benefit and training services, accounting services, insurance services, vendor payment processing services and advisory services. Fees accrued under the Affiliate Services Agreement by First Services were $60,000 and $180,000 for the three and nine months ended September 30, 2014, respectively, and $46,000 and $137,000 for the comparable periods in 2013.

First Brokerage America, L.L.C. First Brokerage America, L.L.C. (First Brokerage), a limited liability company indirectly owned by the Company’s Chairman and members of his immediate family, including Mr. Michael Dierberg, Vice Chairman of the Company, and Ms. Ellen Dierberg Milne, Director of the Company, received approximately $1.2 million and $3.5 million for the three and nine months ended September 30, 2014, respectively, and $943,000 and $3.4 million for the comparable periods in 2013, in gross commissions paid by unaffiliated third-party companies. The commissions received primarily resulted from sales of annuities, securities and other insurance products to clients of First Bank. First Brokerage paid approximately $113,000 and $355,000 for the three and nine months ended September 30, 2014, respectively, and $98,000 and $343,000 for the comparable periods in 2013, 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 $126,000 and $378,000 for the three and nine months ended September 30, 2014, respectively, and $124,000 and $368,000 for the comparable periods in 2013.

First Capital America, Inc. / FB Holdings, LLC. The Company formed FB Holdings, a limited liability company organized in the state of Missouri, in May 2008. FB Holdings operates as a majority-owned subsidiary of First Bank and was formed for the primary purpose of holding and managing certain nonperforming loans and assets and to permit an efficient vehicle for the investment of additional capital by the Company’s sole owner of its Class A and Class B preferred stock. First Bank owned 53.23% and FCA, a corporation owned by the Company’s Chairman and members of his immediate family, including Mr. Michael Dierberg, Vice Chairman of the Company, and Ms. Ellen Dierberg Milne, Director of the Company, owned the remaining 46.77% of FB Holdings as of September 30, 2014. FCA's ownership in FB Holdings is reflected as a component of stockholders’ equity in the consolidated balance sheets.

Investors of America Limited Partnership. 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). 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, including Mr. Michael Dierberg, Vice Chairman of the Company, and Ms. Ellen Dierberg Milne, Director of the Company. The Credit Agreement provided for a $5.0 million secured revolving line of credit to be utilized for general working capital needs. This borrowing arrangement, which matured on March 31, 2014, had an interest rate of LIBOR plus 300 basis points. There were no balances outstanding under the Credit Agreement from its origination date through its maturity date.

Loans to Directors, Executive Officers and/or their Affiliates. First Bank has had in the past, and may have in the future, loan transactions in the ordinary course of business with its directors, executive officers and/or their affiliates. 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 $14.9 million and $12.0 million at September 30, 2014 and December 31, 2013, 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.

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Depositary Accounts of Directors, Executive Officers and/or their Affiliates. Certain directors, executive officers and/or their affiliates maintain funds on deposit with First Bank in the ordinary course of business. These deposit transactions include demand, savings and time accounts, and have been established on the same terms, including interest rates, as those prevailing at the time for comparable transactions with unaffiliated persons.

NOTE15–CONTINGENTLIABILITIES

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 entered into an MOU with the FRB, dated May 19, 2014. Additionally, on May 19, 2014, the FRB terminated the Written Agreement, dated March 24, 2010, by and among the Company, SFC, First Bank and the FRB. These agreements are further described in Note 9 to the consolidated financial statements.

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ITEM2–MANAGEMENT’SDISCUSSION ANDANALYSIS OFFINANCIALCONDITION ANDRESULTS OFOPERATIONS

Forward-Looking Statements and Factors that Could Affect Future Results

The discussion set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations contains certain forward-looking statements with respect to our financial condition, results of operations and business. Generally, forward-looking statements may be identified through the use of words such as: “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” or words of similar meaning or future or conditional terms such as: “will,” “would,” “should,” “could,” “may,” “likely,” “probably,” or “possibly.” Examples of forward-looking statements include, but are not limited to, estimates or projections with respect to our future financial condition and earnings, including the ability of the Company to remain profitable, and expected or anticipated revenues with respect to our results of operations and our business. These forward-looking statements are subject to certain risks and uncertainties, not all of which can be predicted or anticipated. Factors that may cause our actual results to differ materially from those contemplated by the forward-looking statements herein include market conditions as well as conditions affecting the banking industry generally and factors having a specific impact on us, including but not limited to, the following factors whose order is not indicative of likelihood or significance of impact:

• Our ability to raise sufficient capital and/or maintain capital at levels necessary or desirable to support our operations;

• The risks associated with implementing our business strategy;

• Regulatory actions that impact First Banks, Inc. and First Bank, including our ability to comply with the terms of the Memorandum of Understanding entered into between First Banks, Inc. and the Federal Reserve Bank of St. Louis, as further discussed under “Overview and Recent Developments – Regulatory Agreements;”

• The effects of and changes in trade and monetary and fiscal policies and laws;

• The appropriateness of our allowance for loan losses to absorb the amount of actual losses inherent in our existing loan portfolio;

• The accuracy of assumptions underlying the establishment of our allowance for loan losses and the estimation of values of collateral or cash flow projections and the potential resulting impact on the carrying value of various financial assets and liabilities;

• Credit risks and risks from concentrations (by geographic area and by industry) within our loan portfolio including certain large individual loans;

• Possible changes in the creditworthiness of clients and the possible impairment of collectability of loans;

• Our ability to maintain an appropriate level of liquidity to fund operations, service debt obligations and meet obligations and other commitments;

• Implementation of the Basel III regulatory capital reforms and changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act will include significant changes to bank capital, leverage and liquidity requirements, as further discussed under “Overview – Basel III Regulatory Capital Reforms;”

• The ability of First Bank to pay dividends to its parent holding company;

• Our ability to pay cash dividends on our preferred stock and interest on our junior subordinated debentures;

• Possible changes in interest rates may increase our funding costs and reduce earning asset yields, thus reducing our margins;

• The ability to attract and retain senior management experienced in the banking and financial services industry;

• The ability to successfully acquire low cost deposits or alternative funding;

• Changes in consumer spending, borrowing and savings habits;

• Changes in the economic environment, competition, or other factors that may influence loan demand, deposit flows, the quality of our loan portfolio and loan and deposit pricing;

• The impact on our financial condition of unknown and/or unforeseen liabilities arising from legal or administrative proceedings;

• The threat of future terrorist activities, existing and potential wars and/or military actions related thereto, and domestic responses to terrorism or threats of terrorism;

• Possible changes in general economic and business conditions in the United States in general and particularly in the communities and market segments we serve;

• Volatility and disruption in national and international financial markets;

• Government intervention in the U.S. financial system;

• The impact of laws and regulations applicable to us and changes therein;

• The impact of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and other accounting standard setters;

• The impact of litigation generally and specifically arising out of our efforts to collect outstanding client loans;

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• Competitive conditions in the markets in which we conduct our operations, including competition from banking and non-banking companies with substantially greater resources than us, some of which may offer and develop products and services not offered by us;

• Our ability to control the composition of our loan portfolio without adversely affecting interest income and credit default risk;

• The geographic dispersion of our offices;

• The highly regulated environment in which we operate; and

• Our ability to respond to changes in technology or an interruption or breach in security of our information systems.

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 2013 Annual Report on Form 10-K, as filed with the United States Securities and Exchange Commission on March 25, 2014, and Item 1A of Part II of this Report. We wish to caution readers of this Quarterly Report on Form 10-Q that the foregoing list of important factors may not be all-inclusive and we specifically decline to undertake any obligation to publicly revise any forward-looking statements that have been made to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. We do not have a duty to and do not undertake any obligation to update these forward-looking statements. Readers of this Quarterly Report on Form 10-Q should therefore consider these risks and uncertainties in evaluating forward-looking statements and should not place undue reliance on these statements.

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’s subsidiaries are wholly owned at September 30, 2014 except for FB Holdings, LLC, or 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, and Ms. Ellen Dierberg Milne, Director of the Company, as further described in Note 14 to our consolidated financial statements.

First Bank currently operates 129 branch banking offices in eastern Missouri, southern Illinois, southern and northern California, and Florida's Bradenton, Palmetto and Longboat Key communities. Through First Bank, we offer a broad range of financial services, including commercial and personal deposit products, commercial and consumer lending, and many other financial products and services.

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 our Capital Optimization Plan, or Capital Plan:

• 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, on November 22, 2013; and

• 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 on April 19, 2013 and the closure of First Bank's remaining three retail branches in the Northern Florida region on April 5, 2013. The eight branches sold and the three branches closed are collectively defined as the Northern Florida Region.

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 operations of our ABS line of business and our Northern Florida Region for the three and nine months ended September 30, 2013. 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 information regarding discontinued 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,

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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 (unless a waiver is granted by the Federal Reserve); and (2) making certain discretionary bonus payments to executive officers (unless a waiver is granted by the Federal Reserve). In addition, such institutions may be precluded from making interest payments on trust preferred securities (unless the non-payment of interest would otherwise trigger an event of default or a waiver is granted by the Federal Reserve). 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 U.S. generally accepted accounting principles, or 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. To illustrate the difference between common equity under GAAP and common equity Tier 1 capital for regulatory purposes, the Company’s common equity under GAAP as of September 30, 2014 was $77.8 million, which includes net deferred tax assets of $274.8 million. In 2016, the majority of the Company’s net deferred tax assets will be excluded from the regulatory calculation of common equity Tier 1 capital due to the phase in requirements of the Basel III rules. As a direct result of this exclusion and the phase in of other required changes in the regulatory calculation of common equity Tier 1 capital, if, hypothetically, the Company were to apply the regulatory capital rules applicable in 2016 as of September 30, 2014, the Company’s common equity Tier 1 capital as of September 30, 2014 using the rules applicable in 2016 would be negative $91.6 million, or $169.4 million less than the Company’s common equity under GAAP. 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 September 30, 2014, are scheduled to be phased out entirely from inclusion in the calculation of common equity Tier 1 capital in 2019. We are continuing to evaluate the impact the final Basel III capital rules may have on our regulatory capital levels and capital planning strategies.

In light of the Company’s current capital position 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 our 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 may preclude the Company from making 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 and it is not known whether the Federal Reserve would grant such a waiver.

See further information regarding these matters under “Item 1A – Risk Factors.”

Dividend from First Bank and Payment of Interest on Junior Subordinated Debentures.On January 31, 2014, the Company received regulatory approval from the Federal Reserve Bank of St. Louis, or FRB, under the then-existing Written Agreement and subject to certain conditions, 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.

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In March 2014, the Company paid interest on all of the junior subordinated debentures of $66.4 million to the respective trustees, which was subsequently distributed to the trust preferred securities holders on the respective interest payment dates in March and April, 2014, as further described in Note 7 to our consolidated financial statements. Since that time, the Company has continued to pay interest on its junior subordinated debentures to the respective trustees on the regularly scheduled quarterly payment dates. Such interest payments have been funded through additional dividends from First Bank.

Regulatory Agreements. On May 19, 2014, the FRB terminated the Written Agreement, or Written Agreement, dated March 24, 2014, by and among the Company, SFC, First Bank and the FRB. The Written Agreement previously required the Company and First Bank to take certain steps intended to improve their overall financial condition, as previously described in "Item 1. – Business – Supervision and Regulation —Regulatory Agreements" in the Company's Annual Report on Form 10-K as of and for the year ended December 31, 2013. Pursuant to the Written 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 Written Agreement required, among other things, that the Company and First Bank obtain prior approval from the FRB to pay dividends. In addition, the Company was required to 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 had complete discretion to grant any such approval. On January 31, 2014, the Company received regulatory approval from the FRB under the former Written Agreement, subject to certain conditions, which granted First Bank the authority to pay a dividend to the Company, and 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, as previously described above.

On May 19, 2014, the Company entered into a Memorandum of Understanding, or MOU, with the FRB. The MOU is characterized by regulatory authorities as an informal action that is neither published nor made publicly available by the FRB and is used when circumstances warrant a milder form of action than a formal supervisory action. Under the terms of the MOU, the Company agreed, among other things, to provide certain information to the FRB including, but not limited to, progress of achieving its Capital Plan, notice of plans to materially change its Capital Plan, parent company cash flow plans and summaries of nonperforming asset classifications. In addition, the Company agreed not to do any of the following without the prior approval of the FRB: (i) declare or pay any dividends on its common or preferred stock; (ii) incur or guarantee any debt; (iii) redeem any of the Company's outstanding common or preferred stock; and (iv) cause First Bank to pay dividends in excess of its earnings or make a capital distribution that would cause First Bank's Tier 1 Leverage Ratio to fall below 9.0%. The FRB has complete discretion to grant any such approval and therefore, it is not known whether the FRB would approve any such request.

While the Company intends to take such actions as may be necessary to comply with the requirements of the MOU with the FRB, there can be no assurance that such efforts will not have adverse effects on the operations and financial condition of the Company or First Bank. If the Company fails to comply with the terms of the MOU, further enforcement action could be taken by the FRB which could have a materially adverse effect on the Company's business, financial condition or results of operations.

RESULTS OFOPERATIONS

Overview. We recorded net income of $6.0 million and $16.7 million for the three and nine months ended September 30, 2014, respectively, compared to $5.9 million and $22.0 million for the comparable periods in 2013. Our net income reflects the following:

• Net interest income of $36.8 million and $110.7 million for the three and nine months ended September 30, 2014, respectively, compared to $36.4 million and $112.0 million for the comparable periods in 2013, and an increase in our net interest margin to 2.74% and 2.79% for the three and nine months ended September 30, 2014, respectively, compared to 2.49% and 2.56% for the comparable periods in 2013;

• A negative provision for loan losses of $5.0 million for the three and nine months ended September 30, 2014, compared to zero for the three and nine months ended September 30, 2013;

• Noninterest income of $14.1 million and $43.0 million for the three and nine months ended September 30, 2014, respectively, compared to $15.5 million and $49.9 million for the comparable periods in 2013;

• Noninterest expense of $46.7 million and $133.0 million for the three and nine months ended September 30, 2014, respectively, compared to $45.3 million and $133.5 million for the comparable periods in 2013;

• A provision for income taxes of $3.2 million and $9.0 million for the three and nine months ended September 30, 2014, respectively, compared to a benefit for income taxes of $65,000 and $45,000 for the comparable periods in 2013;

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• A net loss from discontinued operations, net of tax, of $881,000 and $6.3 million for the three and nine months ended September 30, 2013, respectively; and

• A net loss attributable to noncontrolling interest in subsidiary of $32,000 and $86,000 for the three and nine months ended September 30, 2014, respectively, compared to a net loss attributable to noncontrolling interest in subsidiary of $38,000 and net income attributable to noncontrolling interest in subsidiary of $113,000 for the comparable periods in 2013.

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 nine months ended September 30, 2014 and 2013:

	Three Months Ended September 30,											Nine Months Ended September 30,
	2014						2013					2014					2013
(dollars in thousands)	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
ASSETS:
Interest-earning assets:
Loans (1)(2)(3)	$	2,927,233	29,446		3.99	%	$	2,807,856	28,871	4.08	%	$	2,913,366	88,728	4.07	%	$	2,818,916	88,955		4.22	%
Investment securities (3)	2,133,243		11,992		2.23		2,428,050		12,892	2.11		2,155,334		36,572	2.27		2,575,119		39,526		2.05
FRB and FHLB stock	30,554		362		4.70		27,382		303	4.39		30,647		1,080	4.71		27,484		913		4.44
Short-term investments	253,227		174		0.27		539,438		346	0.25		219,822		436	0.27		431,143		831		0.26
Total interest-earning assets	5,344,257		41,974		3.12		5,802,726		42,412	2.90		5,319,169		126,816	3.19		5,852,662		130,225		2.97
Nonearning assets	583,009						391,396					582,870					406,253
Assets of discontinued operations	—						39,467					—					42,486
Total assets	$	5,927,266					$	6,233,589				$	5,902,039				$	6,301,401
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand	$	701,038	97		0.05	%	$	671,924	83	0.05	%	$	686,703	266	0.05	%	$	653,154	233		0.05	%
Savings and money market	1,872,384		822		0.17		1,862,525		675	0.14		1,856,466		2,335	0.17		1,854,886		1,942		0.14
Time deposits of $100 or more	362,200		471		0.52		376,061		529	0.56		379,836		1,440	0.51		395,980		1,758		0.59
Other time deposits	605,119		661		0.43		697,117		860	0.49		626,166		2,078	0.44		730,303		2,941		0.54
Total interest-bearing deposits	3,540,741		2,051		0.23		3,607,627		2,147	0.24		3,549,171		6,119	0.23		3,634,323		6,874		0.25
Other borrowings	49,333		(1	)	(0.01	)	35,758		1	0.01		44,797		5	0.01		32,246		(11	)	(0.05	)
Subordinated debentures	354,258		3,048		3.41		354,181		3,804	4.26		354,239		9,886	3.73		354,162		11,213		4.23
Total interest-bearing liabilities	3,944,332		5,098		0.51		3,997,566		5,952	0.59		3,948,207		16,010	0.54		4,020,731		18,076		0.60
Noninterest-bearing liabilities:
Demand deposits	1,312,597						1,221,751					1,275,848					1,191,794
Other liabilities	161,512						188,649					175,734					188,719
Liabilities of discontinued operations	—						558,532					—					614,684
Total liabilities	5,418,441						5,966,498					5,399,789					6,015,928
Stockholders’ equity	508,825						267,091					502,250					285,473
Total liabilities and stockholders’ equity	$	5,927,266					$	6,233,589				$	5,902,039				$	6,301,401
Net interest income			36,876						36,460					110,806					112,149
Interest rate spread					2.61					2.31					2.65						2.37
Net interest margin (4)					2.74	%				2.49	%				2.79	%					2.56	%

____________________

(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 $29,000 and $95,000 for the three and nine months ended September 30, 2014, respectively, and $46,000 and $141,000 for the comparable periods in 2013.

(4) Net interest margin is the ratio of net interest income (expressed on a tax-equivalent basis) to average interest-earning assets.

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Our balance sheet is presently asset sensitive, and as such, exclusive of recent improvement over 2013 levels, our net interest margin has been negatively impacted by the low interest rate environment as our loan portfolio re-prices on an immediate basis; whereas we are unable to immediately re-price our deposit portfolio to current market interest rates, thereby resulting in a compression of our net interest margin. Our asset-sensitive position, coupled with the high level of short-term investments and investment securities as a percentage of our interest-earning assets 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 our efforts to 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, as further described below.

Net interest income, expressed on a tax-equivalent basis, was $36.9 million and $110.8 million for the three and nine months ended September 30, 2014, respectively, as compared to $36.5 million and $112.1 million for the comparable periods in 2013. Our net interest margin increased 25 and 23 basis points to 2.74% and 2.79% for the three and nine months ended September 30, 2014, respectively, from 2.49% and 2.56% for the comparable periods in 2013.

We attribute the increase in our net interest margin for the three and nine months ended September 30, 2014, as compared to the comparable periods in 2013, to a change in the mix of our interest-earning assets to reflect loan growth and a decline in our lower-yielding cash and cash equivalents, in addition to an increase in the average yield on investment securities and a decrease in the cost of our interest-bearing liabilities, partially offset by a decrease in the average yield on our loan portfolio. We attribute the decrease in our net interest income for the nine months ended September 30, 2014, as compared to the comparable period in 2013, to a lower average balance of interest-earning assets, primarily resulting from the sale of our ABS line of business in November 2013. The increase in our net interest income for the three months ended September 30, 2014, as compared to the comparable period in 2013, is primarily attributable to an increase in our average loan portfolio and a decrease in interest expense on our junior subordinated debentures.

Interest income on our loan portfolio, expressed on a tax-equivalent basis, increased $575,000 for the three months ended September 30, 2014, as compared to the comparable period in 2013, and decreased $227,000 for the nine months ended September 30, 2014, as compared to the comparable period in 2013. Average loans increased $119.4 million and $94.5 million to $2.93 billion and $2.91 billion for the three and nine months ended September 30, 2014, respectively, as compared to $2.81 billion and $2.82 billion for the comparable periods in 2013, while the yield on our loan portfolio decreased nine and 15 basis points to 3.99% and 4.07% for the three and nine months ended September 30, 2014, respectively, from 4.08% and 4.22% for the comparable periods in 2013. The increase in average loans primarily reflects continued growth in our production loan volumes, partially offset by the exit of certain of our problem credit relationships, as further discussed under “—Loans and Allowance for Loan Losses.” The yield on our loan portfolio continues to be adversely impacted by the lower levels of prime and LIBOR interest rates, as a significant portion of our loan portfolio is priced to these indices, as well as significant competitive pressure on interest rates throughout our markets regarding new loan originations.

Interest income on our investment securities, expressed on a tax-equivalent basis, decreased $900,000 and $3.0 million for the three and nine months ended September 30, 2014, respectively, as compared to the comparable periods in 2013. Average investment securities decreased $294.8 million and $419.8 million for the three and nine months ended September 30, 2014, respectively, as compared to the comparable periods in 2013. The yield earned on our investment securities portfolio increased 12 and 22 basis points to 2.23% and 2.27% for the three and nine months ended September 30, 2014, respectively, as compared to 2.11% and 2.05% for the comparable periods in 2013. During 2013, we reinvested proceeds from sales and maturities of certain investment securities into cash and cash equivalents to build liquidity in anticipation of the sale of our ABS line of business, which was completed in November 2013. During the first quarter of 2014, we sold certain investment securities to fund loan growth and to pay all of the cumulative deferred interest on our junior subordinated debentures relating to the Company's trust preferred securities in March 2014. We continue to maintain a high level of investment securities in an effort to support future loan growth opportunities.

Interest income on our short-term investments decreased $172,000 and $395,000 for the three and nine months ended September 30, 2014, respectively, as compared to the comparable periods in 2013. Average short-term investments decreased $286.2 million and $211.3 million for the three and nine months ended September 30, 2014, respectively, as compared to the comparable periods in 2013. During 2013, we utilized funds available from sales and maturities of investment securities to increase our liquidity position for the sales of our ABS line of business during the fourth quarter of 2013 and our Northern Florida Region during the second quarter of 2013. The yield on our short-term investments was 0.27% for the three and nine months ended September 30, 2014, compared to 0.25% and 0.26% for the three and nine months ended September 30, 2013, respectively, reflecting the investment of a significant portion of funds in our short-term investments in our correspondent bank account with the FRB, which currently earns 0.25%.

Interest expense on our interest-bearing deposits decreased $96,000 and $755,000 for the three and nine months ended September 30, 2014, respectively, as compared to the comparable periods in 2013. Average total deposits increased $24.0 million to $4.85 billion for the three months ended September 30, 2014, from $4.83 billion for the comparable period in 2013, whereas, average total deposits decreased $1.1 million to $4.83 billion for the nine months ended September 30, 2014, from $4.83 billion for the comparable period in 2013. Average interest-bearing deposits decreased $66.9 million and $85.2 million, respectively, and average

37

noninterest-bearing deposits increased $90.8 million and $84.1 million, respectively, for the three and nine months ended September 30, 2014, as compared to the comparable periods in 2013. The decrease in average interest-bearing deposits for the three and nine months ended September 30, 2014, as compared to the comparable periods in 2013, primarily reflects anticipated reductions of higher rate certificates of deposit, partially offset by organic growth in interest-bearing demand deposits through deposit development programs, including marketing campaigns and enhanced product and service offerings. The mix in our deposit portfolio volumes for the nine months ended September 30, 2014, as compared to the comparable period in 2013, primarily reflects a shift from time deposits to interest-bearing and noninterest-bearing demand deposits. Decreases in our average time deposits of $120.3 million were partially offset by increases in our average interest-bearing and noninterest-bearing demand deposits of $33.5 million and $84.1 million, respectively, for the nine months ended September 30, 2014, as compared to the comparable period in 2013. The aggregate weighted average rate paid on our interest-bearing deposit portfolio decreased one and two basis points to 0.23% for the three and nine months ended September 30, 2014, from 0.24% and 0.25% for the three and nine months ended September 30, 2013, respectively. The weighted average rate paid on our time deposit portfolio declined five and nine basis points to 0.46% and 0.47% for the three and nine months ended September 30, 2014, respectively, from 0.51% and 0.56% for the comparable periods in 2013, primarily reflecting the re-pricing of certificate of deposit accounts to current market interest rates upon maturity.

Interest expense on our junior subordinated debentures decreased $756,000 and $1.3 million for the three and nine months ended September 30, 2014, respectively, as compared to the comparable periods in 2013. The aggregate weighted average rate paid on our junior subordinated debentures decreased to 3.41% and 3.73% for the three and nine months ended September 30, 2014, respectively, from 4.26% and 4.23% for the comparable periods in 2013. The aggregate weighted average rates reflect additional interest expense accrued on the regularly scheduled deferred interest payments on our junior subordinated debentures until March 2014, when we paid all of the cumulative deferred interest, as further discussed in Note 7 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 30 basis points for the nine months ended September 30, 2014, as compared to 82 and 76 basis points for the three and nine months ended September 30, 2013, respectively.

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 nine months ended September 30, 2014, as compared to the three and nine months ended September 30, 2013. The change in interest due to the combined rate/volume variance has been allocated to rate and volume changes in proportion to the dollar amounts of the change in each.

	Increase (Decrease) Attributable to Change in:
	Three Months Ended September 30, 2014 Compared to 2013							Nine Months Ended September 30, 2014 Compared to 2013
(dollars in thousands)	Volume			Rate		Net Change		Volume		Rate		Net Change
Interest earned on:
Loans (1) (2) (3)	$	1,217		(642	)	575		2,959		(3,186	)	(227	)
Investment securities (3)	(1,613		)	713		(900	)	(6,892	)	3,938		(2,954	)
FRB and FHLB stock	37			22		59		109		58		167
Short-term investments	(197		)	25		(172	)	(426	)	31		(395	)
Total interest income	(556		)	118		(438	)	(4,250	)	841		(3,409	)
Interest paid on:
Interest-bearing demand deposits	14			—		14		33		—		33
Savings and money market deposits	4			143		147		2		391		393
Time deposits	(129		)	(128	)	(257	)	(471	)	(710	)	(1,181	)
Other borrowings	—			(2	)	(2	)	(3	)	19		16
Subordinated debentures	1			(757	)	(756	)	2		(1,329	)	(1,327	)
Total interest expense	(110		)	(744	)	(854	)	(437	)	(1,629	)	(2,066	)
Net interest income	$	(446	)	862		416		(3,813	)	2,470		(1,343	)

____________________

(1) For purposes of these computations, nonaccrual loans are included in the average loan amounts.

(2) Interest income on loans includes loan fees.

(3) Information is presented on a tax-equivalent basis assuming a tax rate of 35%.

Provision for Loan Losses. We recorded a negative provision for loan losses of $5.0 million for the three and nine months ended September 30, 2014. We primarily attribute the negative provision for loan losses to the aggregate payoff of $54.1 million of potential problem real estate construction and development loans in a single credit relationship in our Southern California region and an upgrade of a related credit from potential problem to pass classification, in addition to net loan recoveries of $1.7 million recorded for the third quarter of 2014. We did not record a provision for loan losses for the three and nine months ended September 30, 2013, which was attributable to the continued improvement in our overall asset quality levels, as further discussed under “—Loans and Allowance for Loan Losses.”

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Our potential problem loans were $26.6 million at September 30, 2014, compared to $105.0 million at June 30, 2014, $109.5 million at December 31, 2014 and $109.6 million at September 30, 2013, reflecting a 75.7% decrease in potential problem loans year-over-year. Our nonaccrual loans were $47.9 million at September 30, 2014, compared to $48.0 million at June 30, 2014, $53.0 million at December 31, 2013 and $71.1 million at September 30, 2013, reflecting a 32.7% decrease in nonaccrual loans year-over-year. The decrease in the overall level of potential problem loans and nonaccrual loans at September 30, 2014, as compared to September 30, 2013, was primarily driven by the resolution of certain potential problem and nonaccrual loans, 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.

We recorded net loan recoveries of $1.7 million for the three months ended September 30, 2014 and net loan charge-offs $1.3 million for the nine months ended September 30, 2014, compared to net loan charge-offs of $1.4 million and $7.3 million for the three and nine months ended September 30, 2013, respectively. Our annualized net loan (recoveries) charge-offs were (0.23)% and 0.06% of average loans for the three and nine months ended September 30, 2014, respectively, compared to 0.19% and 0.35% for the comparable periods in 2013. Loan charge-offs were $2.2 million and $11.9 million for the three and nine months ended September 30, 2014, respectively, compared to $7.0 million and $20.8 million for the comparable periods in 2013, and loan recoveries were $3.9 million and $10.6 million for the three and nine months ended September 30, 2014, respectively, compared to $5.7 million and $13.5 million for the comparable periods in 2013.

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 decreased $1.5 million and $6.9 million to $14.1 million and $43.0 million for the three and nine months ended September 30, 2014, respectively, from $15.5 million and $49.9 million for the comparable periods in 2013. The decrease in our noninterest income for the first nine months of 2014, as compared to the comparable period in 2013, was primarily attributable to reduced gains on loans sold and held for sale, reduced net gains on sale of other real estate, decreases in the fair value of servicing rights and a decline in other income, partially offset by increased net gains on investment securities. The following table summarizes noninterest income for the three and nine months ended September 30, 2014 and 2013:

	Three Months Ended								Nine Months Ended
	September 30,				Increase (Decrease)				September 30,				Increase (Decrease)
(dollars in thousands)	2014			2013	Amount		%		2014			2013	Amount		%
Noninterest income:
Service charges on deposit accounts and customer service fees	$	8,948		8,788	160		1.8	%	$	25,948		25,709	239		0.9	%
Gain on loans sold and held for sale	1,393			1,314	79		6.0		3,812			4,439	(627	)	(14.1	)
Net (loss) gain on investment securities	(1		)	108	(109	)	(100.9	)	1,278			37	1,241		3,354.1
Net gain on sale of other real estate	148			795	(647	)	(81.4	)	1,282			4,819	(3,537	)	(73.4	)
(Decrease) increase in fair value of servicing rights	(501		)	283	(784	)	(277.0	)	(1,634		)	907	(2,541	)	(280.2	)
Loan servicing fees	1,627			1,740	(113	)	(6.5	)	5,002			5,233	(231	)	(4.4	)
Other	2,460			2,501	(41	)	(1.6	)	7,275			8,723	(1,448	)	(16.6	)
Total noninterest income	$	14,074		15,529	(1,455	)	(9.4	)	$	42,963		49,867	(6,904	)	(13.8	)

The decrease in gains on residential mortgage loans sold and held for sale for the nine months ended September 30, 2014, as compared to the comparable period in 2013, was primarily attributable to a decline in loan production volumes in our mortgage banking division during the periods as new interest rate lock commitments decreased to $205.1 million for the nine months ended September 30, 2014, from $268.2 million for the comparable period in 2013. The decline in loan production volume was primarily associated with a decrease in refinancing activity in our mortgage banking division during the periods. New interest rate lock commitments increased to $73.3 million for the three months ended September 30, 2014, from $67.7 million for the comparable period in 2013, resulting in an increase in gains on residential mortgage loans sold and held for sale for the three months ended September 30, 2014, as compared to the comparable period in 2013.

Net gains on investment securities for the nine months ended September 30, 2014 reflect the sale of certain investment securities during the first quarter of 2014 to fund loan growth and other corporate transactions. Net gains on investment securities for the nine months ended September 30, 2013 reflect net gains on the sale of certain investment securities in anticipation of corporate transactions, partially offset by other-than-temporary impairment of $407,000 during the first quarter of 2013 on a single municipal investment security classified as held-to-maturity.

The decrease in net gains on sales of other real estate reflects sales of other real estate properties with an aggregate carrying value of $13.2 million at a net gain of $1.3 million during the nine months ended September 30, 2014, as compared to sales of other real estate properties with an aggregate carrying value of $20.8 million at a net gain of $4.8 million during the nine months ended September 30, 2013, including a gain of $2.7 million on the sale of a single property in the second quarter of 2013.

The decrease in the fair value of mortgage and SBA servicing rights primarily reflects changes in mortgage interest rates and the related changes in estimated prepayment speeds during the periods, as well as changes in cash flow assumptions underlying SBA loans serviced for others.

39

The decrease in other income for the nine months ended September 30, 2014, as compared to the comparable period in 2013, was primarily attributable to income of $1.2 million recognized on the call of an SBA loan securitization in the first quarter of 2013.

Noninterest Expense. Noninterest expense increased $1.4 million to $46.7 million for the three months ended September 30, 2014, from $45.3 million for the comparable period in 2013, and decreased $460,000 to $133.0 million for the nine months ended September 30, 2014, from $133.5 million for the comparable period in 2013. The decrease in our noninterest expense for the first nine months of 2014, as compared to the comparable period in 2013, was primarily attributable to decreased FDIC insurance expense and a lower level of expenses associated with our nonperforming assets and potential problem loans, partially offset by an increase in salaries and employee benefits expenses and information technology fees. The following table summarizes noninterest expense for the three and nine months ended September 30, 2014 and 2013:

	Three Months Ended							Nine Months Ended
	September 30,			Increase (Decrease)				September 30,			Increase (Decrease)
(dollars in thousands)	2014		2013	Amount		%		2014		2013	Amount		%
Noninterest expense:
Salaries and employee benefits	$	20,922	19,777	1,145		5.8	%	$	61,187	58,973	2,214		3.8	%
Occupancy, net of rental income, and furniture and equipment	8,483		8,065	418		5.2		24,749		24,955	(206	)	(0.8	)
Postage, printing and supplies	558		533	25		4.7		1,751		1,872	(121	)	(6.5	)
Information technology fees	5,775		5,365	410		7.6		17,259		15,920	1,339		8.4
Legal, examination and professional fees	1,528		1,610	(82	)	(5.1	)	4,266		4,770	(504	)	(10.6	)
Advertising and business development	803		663	140		21.1		2,075		1,679	396		23.6
FDIC insurance	1,254		1,852	(598	)	(32.3	)	3,759		5,572	(1,813	)	(32.5	)
Write-downs and expenses on other real estate	2,068		1,966	102		5.2		3,406		4,736	(1,330	)	(28.1	)
Other	5,308		5,474	(166	)	(3.0	)	14,583		15,018	(435	)	(2.9	)
Total noninterest expense	$	46,699	45,305	1,394		3.1		$	133,035	133,495	(460	)	(0.3	)

The increase in salaries and employee benefits expense reflects normal compensation increases, increases in staffing levels in certain key revenue-generating functions and an increase in incentive compensation. We had 1,163 and 1,147 full-time equivalent employees at September 30, 2014 and December 31, 2013, respectively, compared to 1,134 at September 30, 2013, excluding discontinued operations.

The increase in information technology fees was associated with a planned investment in the expansion of certain of our information technology programs resulting in an increase in the fees paid to First Services, L.P, a limited partnership indirectly owned by our Chairman and members of his immediate family, as more fully described in Note 14 to our consolidated financial statements.

The decrease in legal, examination and professional fees reflects a decline in legal expenses associated with loan collection activities, divestiture activities and litigation matters for the three and nine months ended September 30, 2014, in comparison to the level of such expenses for the three and nine months ended September 30, 2013.

The decrease in FDIC insurance expense is primarily reflective of a reduction in our assessment rate, effective October 2013.

The decrease in write-downs and expenses on other real estate for the nine months ended September 30, 2014, as compared to the comparable period in 2013, reflects a reduction in the overall number and balance of our other real estate, which decreased to $55.7 million at September 30, 2014, from $59.2 million, $66.7 million and $74.8 million at June 30, 2014, December 31, 2013 and September 30, 2013, respectively. Other real estate expenses, exclusive of write-downs, such as taxes, insurance, and repairs and maintenance, decreased $94,000 and $914,000 to $451,000 and $1.6 million for the three and nine months ended September 30, 2014, respectively, from $545,000 and $2.5 million for the comparable periods in 2013. Write-downs related to the re-valuation of certain other real estate properties decreased $416,000 to $1.8 million for the nine months ended September 30, 2014, from $2.2 million for the comparable period in 2013, and increased $196,000 to $1.6 million for the three months ended September 30, 2014, from $1.4 million for the comparable period in 2013.

Provision for Income Taxes. We recorded a provision for income taxes of $3.2 million and $9.0 million for the three and nine months ended September 30, 2014, respectively, as compared to a benefit for income taxes of $65,000 and $45,000 for the three and nine months ended September 30, 2013. During the fourth quarter of 2013, we reversed substantially all of the valuation allowance against our net deferred tax assets, previously established in 2008. As such, interim periods beginning January 1, 2014 reflect the initial periods in which a provision for income taxes is recorded in the statements of income without a related deferred tax asset valuation allowance.

40

FINANCIALCONDITION

Total assets decreased$32.2 million to $5.89 billion at September 30, 2014, from $5.92 billion at December 31, 2013. The decrease in our total assets was primarily attributable to a decrease in our investment securities portfolio, partially offset by an increase in our loan portfolio and cash and cash equivalents, as further described below.

Cash and cash equivalents, which are comprised of cash and short-term investments, increased$73.0 million to $263.5 million at September 30, 2014, from $190.4 million at December 31, 2013. A significant portion of funds in our short-term investments are maintained in our correspondent bank account with the FRB, as further discussed under “—Liquidity Management.” The increase in our cash and cash equivalents was primarily attributable to the following:

• A net decrease in our investment securities portfolio of $212.0 million, excluding amortization and the fair value adjustment on available-for-sale investment securities;

• An increase in deposits of $13.0 million;

• Sales of other real estate resulting in the receipt of cash proceeds from these sales of $14.5 million;

• Recoveries of loans previously charged off of $10.6 million; and

• Cash generated by operating earnings; partially offset by

• An increase in loans of $139.6 million, exclusive of loan charge-offs and transfers of loans to other real estate, as further discussed below;

• The payment of $66.4 million of cumulative deferred interest payments on our junior subordinated debentures in March 2014, which was distributed to the trust preferred securities holders on the respective interest payment dates in March and April, 2014; and

• A payment of $15.5 million in January 2014 associated with the final settlement amount paid to Union Bank in conjunction with the sale of our ABS line of business in November 2013.

Investment securities decreased$222.5 million to $2.13 billion at September 30, 2014, from $2.35 billion at December 31, 2013. We sold certain investment securities during the first quarter of 2014 to fund loan growth and other corporate transactions, including the payment of all of the cumulative deferred interest on our junior subordinated debentures relating to the Company's trust preferred securities in March 2014.

Loans, net of net deferred loan fees, or total loans, increased$122.5 million to $2.98 billion at September 30, 2014, from $2.86 billion at December 31, 2013. The increase primarily reflects new loan production as a result of successful efforts to expand existing loan relationships and develop new loan relationships, specifically in our commercial, financial and agricultural portfolio, which increased $45.2 million, and our real estate mortgage portfolio, which increased $122.3 million. These increases were partially offset by a reduction in our real estate construction and development portfolio of $46.1 million, primarily attributable to the payoff of an aggregate of $54.1 million of potential problem construction loans in a single credit relationship in the third quarter of 2014.

Other real estate decreased $11.0 million to $55.7 million at September 30, 2014, from $66.7 million at December 31, 2013. The decrease primarily reflects sales of other real estate properties of $13.2 million and write-downs of $1.8 primarily attributable to declining real estate values on certain properties, partially offset by additions to other real estate of $5.2 million.

Deposits increased$13.0 million to $4.83 billion at September 30, 2014, from $4.81 billion at December 31, 2013. The increase reflects growth in demand and savings and money market deposits of $73.2 million and $39.3 million, respectively, partially offset by a decrease in certificates of deposit of $99.5 million.

Daily securities sold under agreements to repurchase (in connection with cash management activities of our commercial deposit clients) decreased to $42.7 million at September 30, 2014, from $43.1 million at December 31, 2013, reflecting changes in client balances associated with this product segment.

Accrued expenses and other liabilities decreased$80.9 million to $110.2 million at September 30, 2014, from $191.1 million at December 31, 2013. The decrease was primarily attributable to a decrease of $62.5 million in accrued interest payable on our junior subordinated debentures primarily associated with the payment of all of the cumulative deferred interest on our junior subordinated debentures relating to the Company's trust preferred securities in March 2014, as further described in Note 7 to our consolidated financial statements. The decrease was also attributable to the final settlement amount of $15.5 million paid to Union Bank in January 2014 in conjunction with the sale of our ABS line of business in November 2013.

41

Loans and Allowance for Loan Losses

Loan Portfolio Composition. Total loans represented 50.6% of our assets as of September 30, 2014, compared to 48.3% of our assets at December 31, 2013. Total loans increased$122.5 million to $2.98 billion at September 30, 2014 from $2.86 billion at December 31, 2013. The following table summarizes the composition of our loan portfolio by category at September 30, 2014 and December 31, 2013:

(dollars in thousands)	September 30, 2014			December 31, 2013
Commercial, financial and agricultural	$	645,862		600,704
Real estate construction and development	75,609			121,662
Real estate mortgage:
One-to-four-family residential	997,581			921,488
Multi-family residential	126,310			121,304
Commercial real estate	1,089,430			1,048,234
Consumer and installment	16,840			18,681
Loans held for sale	28,866			25,548
Net deferred loan fees	(921		)	(526	)
Total loans	$	2,979,577		2,857,095

The following table summarizes the composition of our loan portfolio by geographic region and/or business segment at September 30, 2014 and December 31, 2013:

(dollars in thousands)	September 30, 2014		December 31, 2013
Southern California	$	952,442	968,241
Missouri	653,091		565,043
Mortgage Banking Division	576,183		513,225
Northern California	382,120		361,895
Northern and Southern Illinois	230,555		224,664
Chicago	78,291		91,048
Florida	50,837		58,525
Texas	13,614		23,705
Other	42,444		50,749
Total loans	$	2,979,577	2,857,095

The net increase in our loan portfolio during the first nine months of2014 primarily reflects the following:

• An increase of $45.2 million, or 7.5%, in our commercial, financial and agricultural portfolio, primarily attributable to an increase in new loan production within this portfolio segment;

• A decrease of $46.1 million, or 37.9%, in our real estate construction and development portfolio, primarily as a result of the payoff of an aggregate of $54.1 million of potential problem loans in a single credit relationship in our Southern California region during the third quarter of 2014;

• An increase of $76.1 million, or 8.3%, in our one-to-four-family residential real estate loan portfolio, primarily attributable to the purchase of $52.7 million of performing one-to-four-family residential real estate loans from another financial institution in August 2014 and new loan production within our home equity portfolio. The following table summarizes the composition of our one-to-four-family residential real estate loan portfolio as of September 30, 2014 and December 31, 2013:

(dollars in thousands)	September 30, 2014		December 31, 2013
One-to-four-family residential real estate:
Residential mortgage	$	621,297	572,164
Home equity	376,284		349,324
Total	$	997,581	921,488

• An increase of $5.0 million, or 4.1%, in our multi-family residential real estate loan portfolio, attributable to new loan production exceeding principal payments, payoffs on existing loans and loan charge-offs of $3.2 million; and

• An increase of $41.2 million, or 3.9%, in our commercial real estate portfolio, primarily attributable to new loan production within this portfolio segment. The following table summarizes the composition of our commercial real estate portfolio by loan type as of September 30, 2014 and December 31, 2013:

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(dollars in thousands)	September 30, 2014		December 31, 2013
Commercial real estate:
Owner occupied	$	600,691	568,035
Non-owner occupied	465,330		461,573
Farmland	23,409		18,626
Total	$	1,089,430	1,048,234

Nonperforming Assets. Nonperforming assets consist of nonaccrual loans and other real estate. The following table presents the categories of nonperforming assets and certain ratios as of September 30, 2014 and December 31, 2013:

(dollars in thousands)	September 30, 2014			December 31, 2013
Nonperforming Assets:
Nonaccrual loans:
Commercial, financial and agricultural	$	11,508		10,523
Real estate construction and development	4,191			4,914
One-to-four-family residential real estate:
Residential mortgage	15,326			20,063
Home equity	6,979			7,361
Multi-family residential	726			1,793
Commercial real estate	9,127			8,283
Consumer and installment	4			19
Total nonaccrual loans	47,861			52,956
Other real estate	55,709			66,702
Total nonperforming assets	$	103,570		119,658
Total loans	$	2,979,577		2,857,095
Performing troubled debt restructurings	$	107,669		110,627
Loans past due 90 days or more and still accruing	$	795		424
Ratio of:
Allowance for loan losses to loans	2.51		%	2.84	%
Nonaccrual loans to loans	1.61			1.85
Allowance for loan losses to nonaccrual loans	156.06			153.02
Nonperforming assets to loans and other real estate	3.41			4.09

Our nonperforming assets decreased$16.1 million, or 13.4%, to $103.6 million at September 30, 2014, from $119.7 million at December 31, 2013, reflecting a decrease in both nonaccrual loans and other real estate.

The decrease in our nonaccrual loans of $5.1 million, or 9.6%, during the first nine months of2014 reflects the resolution of certain nonaccrual loans, including a $4.7 million decrease in nonaccrual loans in our residential mortgage loan portfolio. As of September 30, 2014 and December 31, 2013, loans identified by management as troubled debt restructurings, or TDRs, aggregating $8.1 million and $10.6 million, respectively, were on nonaccrual status and were classified as nonperforming loans. The decrease in other real estate of $11.0 million, or 16.5%, during the first nine months of2014 was primarily driven by sales of other real estate properties of $13.2 million and write-downs of $1.8 primarily attributable to declining real estate values on certain properties, partially offset by additions to other real estate of $5.2 million.

Performing Troubled Debt Restructurings. The following table presents the categories of performing TDRs as of September 30, 2014 and December 31, 2013:

(dollars in thousands)	September 30, 2014		December 31, 2013
Commercial, financial and agricultural	$	287	—
Real estate construction and development	364		—
Real estate mortgage:
One-to-four-family residential	77,724		78,153
Multi-family residential	24,867		27,955
Commercial real estate	4,427		4,519
Total performing troubled debt restructurings	$	107,669	110,627

Our multi-family residential performing TDRs of $24.9 million at September 30, 2014 consist of a single 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 continued to service this obligation in accordance with the existing terms and conditions of the restructured credit agreement as of September 30, 2014.

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Potential Problem Loans. As of September 30, 2014 and December 31, 2013, loans aggregating $26.6 million and $109.5 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 commercial loans having an internally assigned grade of substandard and consumer loans which are greater than 30 days past due. The following table presents the categories of our potential problem loans as of September 30, 2014 and December 31, 2013:

(dollars in thousands)	September 30, 2014		December 31, 2013
Commercial, financial and agricultural	$	15,226	14,727
Real estate construction and development	178		73,390
Real estate mortgage:
One-to-four-family residential	5,910		8,707
Multi-family residential	610		555
Commercial real estate	4,591		11,999
Consumer and installment	134		126
Total potential problem loans	$	26,649	109,504

Potential problem loans decreased$82.9 million, or 75.7%, during the first nine months of2014. The significant decrease in our potential problem loans was primarily attributable to the payoff of an aggregate of $54.1 million of potential problem loans in a single credit relationship in our Southern California region during the third quarter of 2014. In addition, primarily as a result of this transaction, the single $19.0 million remaining loan related to this credit relationship was upgraded to a pass classification during the third quarter of 2014.

Our credit risk management policies and procedures, as further described under “—Allowance for Loan Losses,” focus on identifying potential problem loans. Potential problem loans may be identified by the assigned lender, the credit administration department or the internal credit review department. Specifically, the originating loan officers have primary responsibility for monitoring and overseeing their respective credit relationships, including, but not limited to: (a) periodic reviews of financial statements; (b) periodic site visits to inspect and evaluate loan collateral; (c) ongoing communication with primary borrower representatives; and (d) appropriately monitoring and adjusting the risk rating of the respective credit relationships should ongoing conditions or circumstances associated with the relationship warrant such adjustments. In addition, in the current economic environment, our credit administration department and our internal credit review department are reviewing a number of loans with varying credit exposure in which we, or other financial institutions, have experienced significant loan charge-offs, such as real estate construction and development and one-to-four-family residential real estate loans, and on loan portfolio segments that appear to be most likely to generate additional loan charge-offs in the future. We include adversely rated credits, including potential problem loans, on our monthly loan watch list. Loans on our watch list require regular detailed loan status reports prepared by the responsible officer which are discussed in formal meetings with internal credit review and credit administration staff members that are generally conducted on a quarterly basis. The primary purpose of these meetings is to closely monitor these loan relationships and further develop, modify and oversee appropriate action plans with respect to the ultimate and timely resolution of the individual loan relationships.

Each loan is assigned an FDIC collateral code at the time of origination which provides management with information regarding the nature and type of the underlying collateral supporting all individual loans, including potential problem loans. Upon identification of a potential problem loan, management makes a determination of the value of the underlying collateral via a third party appraisal and/or an assessment of value from our internal appraisal review department. The estimated value of the underlying collateral is a significant factor in the risk rating and allowance for loan losses allocation assigned to potential problem loans.

Potential problem loans are regularly evaluated for impaired loan status by lenders, the credit administration department and the internal credit review department. When management makes the determination that a loan should be considered impaired, an initial specific reserve is allocated to the impaired loan, if necessary, until the loan is charged down to the appraised value of the underlying collateral, typically within 30 to 90 days of becoming impaired. Management typically utilizes appraisals performed no earlier than 180 days prior to the charge-off, and in most cases, appraisals utilized are dated within 60 days of the charge-off. As such, management typically addresses collateral shortfalls through charge-offs as opposed to recording specific reserves on individual loans. Once a loan is charged down to the appraised value of the underlying collateral, management regularly monitors the carrying value of the loan for any additional deterioration and records additional reserves or charge-offs as necessary. As a general guideline, management orders new appraisals on any impaired loan or other real estate property in which the most recent appraisal is more than 18 months old; however, management also orders new appraisals on impaired loans or other real estate properties if management determines new appraisals are prudent based on many different factors, such as a rapid change in market conditions in a particular region.

Allowance for Loan Losses. Our allowance for loan losses decreased to $74.7 million at September 30, 2014, from $81.0 million at December 31, 2013. The decrease in our allowance for loan losses during the first nine months of2014 was attributable to a negative provision for loan losses of $5.0 million and net loan charge-offs of $1.3 million. We primarily attribute the negative

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provision for loan losses of $5.0 million for the three and nine months ended September 30, 2014 to the payoff of an aggregate of $54.1 million of potential problem real estate construction and development loans in a single credit relationship in our Southern California region and an upgrade of a related credit from potential problem to pass classification, in addition to net loan recoveries of $1.7 million during the third quarter of 2014.

Our allowance for loan losses as a percentage of total loans was 2.51% and 2.84% at September 30, 2014 and December 31, 2013, respectively. The decrease in the allowance for loan losses as a percentage of total loans during the first nine months of2014 was primarily attributable to the decrease in our potential problem loans and 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 nine months of2014 and the year ended December 31, 2013, as compared to previous periods.

Our allowance for loan losses as a percentage of nonaccrual loans was 156.06% and 153.02% at September 30, 2014 and December 31, 2013, respectively. The increase in the allowance for loan losses as a percentage of nonaccrual loans during the first nine months of2014 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 nine months ended September 30, 2014 and 2013:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(dollars in thousands)	2014			2013		2014		2013
Allowance for loan losses, beginning of period	$	78,018		85,633		81,033		91,602
Loans charged-off:
Commercial, financial and agricultural	(399		)	(2,241	)	(3,015	)	(3,927	)
Real estate construction and development	(2		)	—		(67	)	(448	)
Real estate mortgage:
One-to-four-family residential:
Residential mortgage	(1,152		)	(1,825	)	(4,308	)	(8,564	)
Home equity	(164		)	(431	)	(635	)	(2,419	)
Multi-family residential	(71		)	—		(3,155	)	(162	)
Commercial real estate	(436		)	(2,488	)	(645	)	(5,121	)
Consumer and installment	(10		)	(55	)	(96	)	(153	)
Total	(2,234		)	(7,040	)	(11,921	)	(20,794	)
Recoveries of loans previously charged-off:
Commercial, financial and agricultural	1,763			1,773		3,778		3,863
Real estate construction and development	114			2,557		1,470		4,273
Real estate mortgage:
One-to-four-family residential:
Residential mortgage	805			778		2,742		3,036
Home equity	133			101		465		362
Multi-family residential	114			—		123		141
Commercial real estate	946			443		1,918		1,683
Consumer and installment	35			32		86		111
Total	3,910			5,684		10,582		13,469
Net loan recoveries (charge-offs)	1,676			(1,356	)	(1,339	)	(7,325	)
(Benefit) provision for loan losses	(5,000		)	—		(5,000	)	—
Allowance for loan losses, end of period	$	74,694		84,277		74,694		84,277

We recorded net loan recoveries of $1.7 million for the three months ended September 30, 2014 and net loan charge-offs of $1.3 million for the nine months ended September 30, 2014, compared to net loan charge-offs of $1.4 million and $7.3 million for the three and nine months ended September 30, 2013, respectively. Our annualized net loan (recoveries) charge-offs as a percentage of average loans were (0.23)% and 0.06% for the three and nine months ended September 30, 2014, respectively, compared to 0.19% and 0.35% for the comparable periods in 2013.

Each month, the credit administration department provides management with detailed lists of loans on the watch list and summaries of the entire loan portfolio by risk rating. These are coupled with analyses of changes in the risk profile of the portfolio, changes in past-due and nonperforming loans and changes in watch list and classified loans over time. In this manner, we continually monitor the overall increases or decreases in the level of risk in our loan portfolio. Factors are applied to the loan portfolio for each category of loan risk to determine acceptable levels of allowance for loan losses. Furthermore, management continuously monitors and analyzes concentrations in our real estate portfolio. These procedures include enhanced reporting to track land, lot, construction and finished inventory levels within our real estate construction and development portfolio. In addition, a quarterly evaluation of each lending unit is performed based on certain factors, such as lending personnel experience, recent credit reviews, loan concentrations and other factors. Based on this evaluation, changes to the allowance for loan losses may be required due to

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the perceived risk of particular portfolios. In addition, management exercises a certain degree of judgment in its analysis of the overall adequacy of the allowance for loan losses. In its analysis, management considers the changes in the portfolio, including growth, composition, the ratio of net loans to total assets, and the economic conditions of the regions in which we operate. Based on this quantitative and qualitative analysis, adjustments are made to the allowance for loan losses. Such adjustments are reflected in our consolidated statements of income.

We record charge-offs on nonperforming loans typically within 30 to 90 days of the credit relationship reaching nonperforming loan status. We measure impairment and the resulting charge-off amount based primarily on third party appraisals. As such, rather than carrying specific reserves on nonperforming loans, we generally recognize a loan loss through a charge to the allowance for loan losses once the credit relationship reaches nonperforming loan status.

The allocation of the allowance for loan losses by loan category is a result of the application of our risk rating system augmented by historical loss data by loan type and other qualitative analysis. Consequently, the distribution of the allowance for loan losses will change from period to period due to the following factors:

• Changes in the aggregate loan balances by loan category;

• Changes in the identified risk in individual loans in our loan portfolio over time, excluding those homogeneous categories of loans such as consumer and installment loans and residential real estate mortgage loans for which risk ratings are changed based on payment performance;

• Changes in historical loss data as a result of recent charge-off experience by loan type; and

• Changes in qualitative factors such as changes in economic conditions, the volume of nonaccrual and potential problem loans by loan category and geographical location, and changes in the value of the underlying collateral for collateral-dependent loans.

The following table is a summary of the ratio of the allocated allowance for loan losses to loans by category as of September 30, 2014 and December 31, 2013:

	September 30, 2014		December 31, 2013
Commercial, financial and agricultural	2.15	%	2.23	%
Real estate construction and development	3.61		6.09
Real estate mortgage:
One-to-four-family residential	2.92		3.54
Multi-family residential	6.14		4.33
Commercial real estate	1.92		2.10
Consumer and installment	2.06		1.68
Total	2.51		2.84

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.

INTERESTRATERISKMANAGEMENT

The maintenance of a satisfactory level of net interest income is a primary factor in our ability to achieve acceptable income levels. However, the maturity and repricing characteristics of our loan and investment portfolios may differ significantly from those within our deposit structure. The nature of the loan and deposit markets within which we operate, and our objectives for business development within those markets at any point in time, influence these characteristics. In addition, the ability of borrowers to repay loans and the possibility of depositors withdrawing funds prior to stated maturity dates introduces divergent option characteristics that fluctuate as interest rates change. These factors cause various elements of our balance sheet to react in different manners and at different times relative to changes in interest rates, typically leading to increases or decreases in net interest income over time. Depending upon the direction and magnitude of interest rate movements and their effect on the specific components of our balance sheet, the effects on net interest income can be substantial. Consequently, it is critical that we establish effective control over our exposure to changes in interest rates. We strive to manage our interest rate risk by:

• Maintaining an Asset Liability Committee, 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.

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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, Director of Risk Management and Audit, Director of Retail Banking, and certain other senior officers. The Asset Liability Management Group, which monitors interest rate risk, supports the ALCO, prepares analyses for review by the ALCO and implements actions that are either specifically directed by the ALCO or established by policy guidelines.

In managing sensitivity, we strive to reduce the adverse impact on earnings by managing interest rate risk within internal policy constraints. Our policy is to manage exposure to potential risks associated with changing interest rates by maintaining a balance sheet posture in which annual net interest income is not significantly impacted by reasonably possible near-term changes in interest rates. To measure the effect of interest rate changes, we project our net income over a two-year horizon on a pro forma basis. The analysis assumes various scenarios for increases and decreases in interest rates including both instantaneous and gradual, and parallel and non-parallel, shifts in the yield curve, in varying amounts. For purposes of arriving at reasonably possible near-term changes in interest rates, we include scenarios based on actual changes in interest rates, which have occurred over a two-year period, simulating both a declining and rising interest rate scenario.

We are “asset-sensitive,” indicating that our assets would generally re-price with changes in interest rates more rapidly than our liabilities, and our simulation model indicates a loss of projected net interest income should interest rates decline. While a decline in interest rates of less than 50 basis points was projected to have a relatively minimal impact on our net interest income, an instantaneous parallel decline in the interest yield curve of 50 basis points indicates a pre-tax projected loss of approximately 5.1% of net interest income, based on assets and liabilities at September 30, 2014. At September 30, 2014, we remain in an asset-sensitive position and thus, remain subject to a higher level of risk in a declining interest rate environment. Although we do not anticipate that instantaneous shifts in the yield curve as projected in our simulation model are likely, these are indications of the effects that changes in interest rates would have over time. Our asset-sensitive position, coupled with historically low interest rate levels, has negatively impacted our net interest income and is expected to continue to impact the level of our net interest income throughout the near future.

We also prepare and review a more traditional interest rate sensitivity position in conjunction with the results of our simulation model. The following table presents the projected maturities and periods to repricing of our rate sensitive assets and liabilities as of September 30, 2014, adjusted to account for anticipated prepayments:

(dollars in thousands)	Three Months or Less			Over Three through Six Months		Over Six through Twelve Months		Over One through Five Years	Over Five Years	Total
Interest-earning assets:
Loans (1)	$	1,379,428		167,542		287,357		947,158	198,092	2,979,577
Investment securities	100,109			84,141		171,069		1,235,134	538,930	2,129,383
FRB and FHLB stock	30,623			—		—		—	—	30,623
Short-term investments	171,589			—		—		—	—	171,589
Total interest-earning assets	$	1,681,749		251,683		458,426		2,182,292	737,022	5,311,172
Interest-bearing liabilities:
Interest-bearing demand deposits	$	256,658		159,544		104,050		76,304	97,114	693,670
Money market deposits	1,593,083			—		—		—	—	1,593,083
Savings deposits	49,455			40,727		34,909		49,455	116,364	290,910
Time deposits	263,719			204,349		249,928		228,629	20	946,645
Securities sold under agreements to repurchase	42,682			—		—		—	—	42,682
Subordinated debentures	282,481			—		—		—	71,786	354,267
Total interest-bearing liabilities	$	2,488,078		404,620		388,887		354,388	285,284	3,921,257
Interest-sensitivity gap:
Periodic	$	(806,329	)	(152,937	)	69,539		1,827,904	451,738	1,389,915
Cumulative	(806,329		)	(959,266	)	(889,727	)	938,177	1,389,915
Ratio of interest-sensitive assets to interest-sensitive liabilities:
Periodic	0.68			0.62		1.18		6.16	2.58	1.35
Cumulative	0.68			0.67		0.73		1.26	1.35

____________________

(1) Loans are presented net of net deferred loan fees.

Management made certain assumptions in preparing the foregoing table. These assumptions included:

• Loans will repay at projected repayment rates;

• Mortgage-backed securities, included in investment securities, will repay at projected repayment rates;

• Interest-bearing demand accounts and savings deposits will behave in a projected manner with regard to their interest rate sensitivity; and

• Fixed maturity deposits will not be withdrawn prior to maturity.

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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 $1.39 billion, or 23.6% of our total assets at September 30, 2014. We were in an overall liability-sensitive position on a cumulative basis through the twelve-month time horizon of $889.7 million, or 15.1% of our total assets at September 30, 2014.

The interest-sensitivity position is one of several measurements of the impact of interest rate changes on net interest income. Its usefulness in assessing the effect of potential changes in net interest income varies with the constant change in the composition of our assets and liabilities and changes in interest rates. For this reason, we place greater emphasis on our simulation model for monitoring our interest rate risk exposure.

In the past, we have utilized derivative instruments to assist in our management of interest rate sensitivity by modifying the repricing, maturity and option characteristics of certain assets and liabilities. We may also sell interest rate swap agreement contracts to certain clients who wish to modify their interest rate sensitivity. There were no interest rate swap agreement contracts outstanding at September 30, 2014 and December 31, 2013. Our derivative instruments are more fully described in Note 6 to our consolidated financial statements.

LIQUIDITYMANAGEMENT

First Bank. Our liquidity is the ability to maintain a cash flow that is adequate to fund operations, service debt obligations and meet obligations and other commitments on a timely basis. First Bank receives funds for liquidity from client deposits, loan payments, maturities of loans and investments, sales of investments and earnings before provision for loan losses. In addition, we may avail ourselves of other sources of funds by issuing certificates of deposit in denominations of $100,000 or more (including certificates issued through the Certificate of Deposit Account Registry Service, 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 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 analyze and manage short-term and long-term liquidity through an ongoing review of internal funding sources, projected cash flows from loans, securities and client deposits, internal and competitor deposit pricing structures and maturity profiles of current borrowing sources. We utilize planning, management reporting and adverse stress scenarios to monitor sources and uses of funds on a daily basis to assess cash levels to ensure adequate funds are available to meet normal business operating requirements and to supplement liquidity needs to meet unusual demands for funds that may result from an unexpected change in client deposit levels or potential planned or unexpected liquidity events that may arise from time to time.

Our cash and cash equivalents were $263.5 million and $190.4 million at September 30, 2014 and December 31, 2013, respectively. A significant portion of these funds were maintained in our correspondent bank account with the FRB. The increase in our cash and cash equivalents of $73.0 million is further discussed under “— Financial Condition.”

Our unpledged investment securities decreased$239.5 million to $1.78 billion at September 30, 2014, from $2.02 billion at December 31, 2013, 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 $2.04 billion and $2.21 billion at September 30, 2014 and December 31, 2013, respectively. Our available liquidity of $2.04 billion represents 34.7% of total assets at September 30, 2014, in comparison to $2.21 billion, or 37.3% of total assets, at December 31, 2013. Our loan-to-deposit ratio increased to 61.7% at September 30, 2014 from 59.4% at December 31, 2013.

During the first nine months of2014, we reduced our aggregate funds acquired from other sources of funds by $37.2 million to $395.0 million at September 30, 2014, from $432.2 million at December 31, 2013. 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 $36.7 million and in our daily repurchase agreements of $461,000. The following table presents the maturity structure of these other sources of funds at September 30, 2014:

(dollars in thousands)	Certificates of Deposit of $100,000 or More		Other Borrowings	Total
Three months or less	$	97,186	42,682	139,868
Over three months through six months	74,538		—	74,538
Over six months through twelve months	95,573		—	95,573
Over twelve months	85,026		—	85,026
Total	$	352,323	42,682	395,005

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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 $271.3 million and $283.9 million at September 30, 2014 and December 31, 2013, 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 September 30, 2014 or December 31, 2013.

First Bank also has a borrowing relationship with the FHLB. First Bank's borrowing capacity through its relationship with the FHLB was approximately $388.2 million and $379.1 million at September 30, 2014 and December 31, 2013, 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 September 30, 2014 or December 31, 2013.

As a means of further contingency funding, First Bank may use broker dealers to acquire deposits to fund both short-term and long-term funding needs, including brokered money market accounts, and has available funding, subject to certain limits, through the CDARS program. First Bank had $4.9 million of time deposits through the CDARS program and $5.2 million of brokered money market accounts at September 30, 2014. Exclusive of the CDARS program and brokered money market accounts, First Bank does not generally utilize broker dealers to acquire deposits.

We believe First Bank has sufficient liquidity to meet its current and future near-term liquidity needs; however, no assurance can be made that First Bank's liquidity position will not be materially, adversely affected in the future.

First Banks, Inc. First Banks, Inc. is a separate and distinct legal entity from its subsidiaries. The Company's liquidity position is affected by dividends received from its subsidiaries and the amount of cash and other liquid assets on hand, payment of interest on trust preferred securities and other debt instruments issued by the Company, dividends paid on common and preferred stock (all of which are presently suspended or deferred), capital contributions the Company makes into its subsidiaries, any redemption of debt for cash issued by the Company, and proceeds the Company raises through the issuance of debt and/or equity instruments, if any. The Company's unrestricted cash totaled $16.2 million at September 30, 2014, as compared to $1.9 million at December 31, 2013.

We cannot pay any dividends on our common or preferred stock without the prior approval of the FRB, as previously discussed under “Overview and Recent Developments —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. The Company had deferred such payments for 18 quarterly periods as of December 31, 2013. These deferred payments aggregated $62.7 million at December 31, 2013.

On January 31, 2014, the Company received regulatory approval from the FRB under the former Written Agreement, subject to certain conditions, 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 our trust preferred securities, on the regularly scheduled quarterly payment dates in March and April, 2014. The aggregate amount owed on all of the junior subordinated debentures relating to our trust preferred securities at the respective March and April, 2014 payment dates was $66.4 million. On March 14, 2014, the Company paid interest on the junior subordinated debentures of $66.4 million to the respective trustees, which was subsequently distributed to the trust preferred securities holders on the respective interest payment dates in March and April, 2014, as further described under “Overview and Recent Developments —Dividend from First Bank and Payment of Interest on Junior Subordinated Debentures” and in Note 7 to our consolidated financial statements. Subsequent to this payment, the Company has the ability to enter into future deferral periods of up to 20 consecutive quarterly periods without triggering a payment default or penalty. However, since that time, the Company has continued to pay interest on its junior subordinated debentures to the respective trustees on the regularly scheduled quarterly payment dates. Such interest payments have been funded through additional dividends from First Bank.

Without the payment of dividends from First Bank, the Company currently lacks the source of income and the liquidity to make future interest payments on the subordinated debentures associated with its trust preferred securities. Given restrictions placed upon First Bank, including regulatory restrictions, it may not be able to provide the Company with dividends in an amount sufficient to pay the interest on the trust preferred securities. In such case, the Company would have to pursue alternative funding sources, but there can be no assurance that the Company will be able to identify and obtain alternative funding due to the uncertainty of our ability to access future liquidity through debt markets. The Company's ability to access debt markets on terms satisfactory to

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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.

During the period of deferral of interest on our regularly scheduled interest payments on our outstanding junior subordinated debentures relating to our $345.0 million of trust preferred securities, we were not allowed to, among other things and with limited exceptions, pay cash dividends on or repurchase our common stock or preferred stock or make any payment on outstanding debt obligations that rank 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. We have deferred and accrued $68.4 million of regularly scheduled dividend payments on our Class C Preferred Stock and Class D Preferred Stock, and have accrued an additional $9.4 million of cumulative dividends on such deferred dividend payments at September 30, 2014. As such, the aggregate amount of these deferred and accrued dividend payments was $77.8 million at September 30, 2014. If we had continued to declare and accrue dividends on our Class C Preferred Stock and Class D Preferred Stock during the fourth quarter of 2013 and the nine months ended September 30, 2014, we would have accrued an additional $4.1 million and $23.8 million, respectively, of dividend payments, and our aggregate deferred and accrued dividend payments would have been $105.7 million at September 30, 2014, as further described in Note 8 to our consolidated financial statements.

The Company's financial position will be adversely affected if it experiences increased liquidity needs and any of the following events occur:

• First Bank is unable or prohibited by its regulators to pay future dividends to the Company sufficient to satisfy the Company's operating cash flow needs. The Company's ability to receive future dividends from First Bank to assist the Company in meeting its operating requirements, both on a short-term and long-term basis, is currently subject to certain restrictions, as further described above and under “Overview and Recent Developments —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 September 30, 2014, with the exception of $42.7 million of daily repurchase agreements utilized by clients as an alternative deposit product, and has substantial borrowing capacity through its relationships with the FHLB and the FRB, as previously discussed; or

• The Company has difficulty raising cash through the future issuance of debt or equity instruments or by accessing additional sources of credit, as further described above.

The Company's financial flexibility will be severely constrained if we are unable to maintain our access to funding or if adequate financing on terms acceptable to us is not available in the marketplace. If we are required to rely more heavily on more expensive funding sources to support our business, our revenues may not increase proportionately to cover our costs. In this case, our operating margins would be materially adversely affected. A lack of liquidity and/or cost-effective funding alternatives could lead to the Company's inability to meet its financial commitments and related contractual obligations associated with its junior subordinated debentures, which would have a material adverse effect on our business, financial condition and results of operations.

Other Commitments and Contractual Obligations. We have entered into long-term leasing arrangements and other commitments and contractual obligations in conjunction with our ongoing operating activities. The required payments under such leasing arrangements, other commitments and contractual obligations at September 30, 2014 were as follows:

(dollars in thousands)	Less Than 1 Year		1-3 Years	3-5 Years	Over 5 Years	Total (1)
Operating leases	$	8,060	12,625	5,995	9,950	36,630
Certificates of deposit (2)	717,299		189,966	39,360	20	946,645
Securities sold under agreements to repurchase	42,682		—	—	—	42,682
Subordinated debentures (3)	—		—	—	354,267	354,267
Class C Preferred Stock and Class D Preferred Stock (3) (4)	—		—	—	312,743	312,743
Other contractual obligations	234		3	—	—	237
Total	$	768,275	202,594	45,355	676,980	1,693,204

____________________

(1) Amounts exclude ASC Topic 740 unrecognized tax liabilities of $871,000 and related accrued interest expense of $182,000 for which the timing of payment of such liabilities cannot be reasonably estimated as of September 30, 2014.

(2) Amounts exclude the related accrued interest expense on certificates of deposit of $325,000 as of September 30, 2014.

(3) Amounts exclude the accrued interest expense on junior subordinated debentures of $359,000 as of September 30, 2014, accrued dividends declared on preferred stock of $77.8 million and undeclared dividends of $27.9 million as of September 30, 2014.

(4) Represents liquidation preference amounts payable upon redemption of the Class C Preferred Stock and the Class D Preferred Stock of $295.4 million and $17.3 million, respectively.

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EFFECTS OFNEWACCOUNTINGSTANDARDS

In July 2013, the FASB issued ASU 2013-11 - Income Taxes (Topic 740) - Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. As a result of applying this ASU, an unrecognized tax benefit is presented as a reduction of a deferred tax asset for a net operating loss or other tax credit carry-forward when settlement in this manner is available under the tax law. The assessment of whether settlement is available under the tax law is based on facts and circumstances as of the balance sheet reporting date and does not consider future events (i.e., upcoming expiration of related net operating loss carry-forwards). This classification does not affect an entity’s analysis of the realization of its deferred tax assets. This ASU is effective for interim and annual periods beginning after December 15, 2013. We adopted the requirements of this ASU on January 1, 2014, 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 January 2014, the FASB issued ASU 2014-01 - Investments - Equity Method and Joint Ventures (Topic 323) - Accounting for Investments in Qualified Affordable Housing Projects. This ASU provides guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for low-income housing tax credit. The amendments in this ASU permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The amendments require new recurring disclosures about all investments in qualified affordable housing projects irrespective of the method used to account for the investments. This ASU is effective for interim and annual periods beginning after December 15, 2014. Early adoption is permitted. We are currently evaluating the requirements of this ASU to determine the impact on our consolidated financial statements and results of operations and the disclosures to be presented in our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09 - Revenue from Contracts with Customers (Topic 606). The core principle of this ASU is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU identifies a five-step model and related application guidance which will replace most existing revenue recognition guidance. This ASU is effective for interim and annual periods beginning after December 15, 2016. An entity may choose to adopt the ASU either retrospectively or through a cumulative effect adjustment as of the beginning of the first period for which it applies the new guidance. Early adoption is not permitted. We are currently evaluating the requirements of this ASU to determine the method of adoption and the impact on our consolidated financial statements and results of operations and the disclosures to be presented in our consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15 - Presentation of Financial Statements - Going Concern (Subtopic 205-40) - Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. The ASU describes how an entity's management should evaluate for each annual and interim reporting period whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued and sets disclosure requirements about how this information should be communicated. This ASU is effective for the annual period after December 15, 2016, and for interim and annual periods thereafter. Early adoption is not permitted. We are currently evaluating the requirements of this ASU to determine the impact on the disclosures to be presented in our consolidated financial statements.

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ITEM3–QUANTITATIVE ANDQUALITATIVEDISCLOSURES ABOUTMARKETRISK

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 46 through 48 of this report.

ITEM4–CONTROLS ANDPROCEDURES

The Company’s management, including our President and Chief Executive Officer and our Chief Financial Officer, have evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or the Exchange Act), as of the end of the period covered by this report. Based on such evaluation, our President and Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective as of that date to provide reasonable assurance that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its President and Chief Executive Officer and its Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM1–LEGALPROCEEDINGS

The information required by this item is set forth in Part I, Item 1 – Financial Statements, under Note 15, Contingent Liabilities, to our consolidated financial statements appearing elsewhere in this report and is incorporated herein by reference.

In the ordinary course of business, we and our subsidiaries become involved in legal proceedings, including litigation arising out of our efforts to collect outstanding loans. It is not uncommon for collection efforts to lead to so-called “lender liability” suits in which borrowers may assert various claims against us. From time to time, we are party to other legal matters arising in the normal course of business. While some matters pending against us specify damages claimed by plaintiffs, others do not seek a specified amount of damages or are at very early stages of the legal process. We record a loss accrual for all legal matters for which we deem a loss is probable and can be reasonably estimated. We are not presently party to any legal proceedings the resolution of which we believe is reasonably likely to have a material adverse effect on our business, financial condition or results of operations.

The Company entered into an MOU with the FRB, dated May 19, 2014, as further described under “Item 2. —Management’s Discussion and Analysis of Financial Condition and Results of Operations —Regulatory Agreements” and in Note 9 to our consolidated financial statements. On May 19, 2014, the FRB terminated the Written Agreement, dated March 24, 2010, by and among the Company, SFC, First Bank and the FRB.

ITEM1A–RISKFACTORS

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, 2013 and the additional risk factors, as described below, for a discussion of these risks.

The Company's common equity calculated under U.S. generally accepted accounting principles is likely to diverge from the Company's common equity Tier 1 Capital as calculated for regulatory purposes. As further described under “Item 2. —Management’s Discussion and Analysis of Financial Condition and Results of Operations —Overview and Recent Developments – Basel III Regulatory Capital Reforms,” the Federal Reserve, in July, 2013, promulgated regulations that will impose a new common equity Tier 1 capital requirement that will apply to the Company beginning on January 1, 2015. Absent a substantial increase in qualifying common equity, the Company is not likely to meet the common equity Tier 1 capital requirement as it will be calculated in 2015, or to meet the common equity Tier 1 capital 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 our financial condition, results of operations, ability to grow, and could prohibit the payment of dividends on our capital stock and interest on our junior subordinated debentures (and the related trust preferred securities).

The Company’s ability to increase its common equity Tier 1 capital is constrained by the Company’s private ownership structure. As previously described above, absent a substantial increase in qualifying common equity, the Company is not likely to meet the common equity Tier 1 capital requirement as it will be calculated in 2015, or to meet the common equity Tier 1 capital requirement as it will be calculated in 2016 when the capital conservation buffer goes into effect. All of the Company’s common stock is held by trusts created by and for the benefit of Mr. James F. Dierberg and members of his immediate family. The Company cannot issue a meaningful number of additional shares of common stock without an amendment of the Company’s Articles of Incorporation which would require the approval of the holders of common stock. Such holders have indicated their intention to maintain the Company as a privately held institution. Furthermore, applicable law would require continued control of an amount of the Company's capital stock that, in the aggregate, represents 50% of the Company's value by the current holders of the Company’s common stock, Class A Preferred Stock and Class B Preferred Stock in order to avoid limitations on the use of the Company's deferred tax assets. For these reasons, the Company’s ability to substantially increase its common equity Tier 1 capital in order to meet the new Basel III requirements by the time the new rules first become applicable to the Company in 2015 or by the time the capital conservation buffer goes into effect in 2016 is more limited than it otherwise might be for a publicly traded company with widely dispersed ownership.

The Company’s ability to pay dividends on its capital stock may be limited under the terms of the Company’s debt. As of September 30, 2014, the Company had $345.0 million of junior subordinated debentures issued in connection with its outstanding trust preferred securities, as further described in Note 7 to the consolidated financial statements. Payments of principal and interest on the junior subordinated debentures (and the related payments on the trust preferred securities) are conditionally guaranteed by the Company. The rights of the holders of the Company’s junior subordinated debentures are senior in ranking to the rights of the holders of the Company’s common stock and preferred stock. As a result, the Company may only pay dividends on its common stock or preferred stock if the payments on its junior subordinated debentures (and the related trust preferred securities) are current and, in the event of its bankruptcy, dissolution or liquidation, the holders of the Company’s junior subordinated debentures must be satisfied before any distributions can be made to its stockholders.

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Holders of the Company’s Common Stock, Class A Preferred Stock and Class B Preferred Stock may have interests that are different from the holders of the Company’s Class C Preferred Stock and Class D Preferred Stock. The holders of the Company’s Class C Preferred Stock and Class D Preferred Stock have limited voting rights. All of the Company’s Common Stock and Class A Preferred Stock and Class B Preferred Stock are held by trusts established by and administered by and for the benefit of Mr. James F. Dierberg and members of his immediate family. The holders of the Company’s Common Stock and Class A Preferred Stock and Class B Preferred Stock may have different interests from the holders of the Company’s Class C Preferred Stock and Class D Preferred Stock and could vote, or not vote, to approve transactions that may be considered desirable by the holders of the Company’s Class C Preferred Stock and Class D Preferred Stock.

ITEM6–EXHIBITS

The exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K.

Exhibit Number	Description
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 September 30, 2014, formatted in XBRL interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income (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: November 13, 2014

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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