SUBSCRIBE TO TMCnet
TMCnet - World's Largest Communications and Technology Community

TMCNet:  FIRST BANKS, INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

[August 13, 2014]

FIRST BANKS, INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) 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 customers 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 customer loans; 33--------------------------------------------------------------------------------• 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. 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 June 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 130 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 six months ended June 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, Advanced Approaches Risk-Based Capital Rule, and Market Risk Capital Rule, incorporates certain revisions to the Basel capital 34 -------------------------------------------------------------------------------- framework, including Basel III and other elements. The final rule increases risk-based capital requirements and makes selected changes to the calculation of risk-weighted assets. The final rule: • Includes a new minimum common equity Tier 1 capital ratio of 4.5% of risk-weighted assets and raises the minimum Tier 1 capital ratio from 4.0% to 6.0% of risk-weighted assets; • Requires institutions to maintain a capital conservation buffer composed of common equity Tier 1 capital of 2.5% above the minimum risk-based capital requirements. Institutions that do not maintain the capital conservation buffer are precluded from: (1) paying dividends and making certain other capital distributions; (2) making interest payments on trust preferred securities (unless the non-payment of interest would otherwise trigger an event of default); and (3) making certain discretionary bonus payments to executive officers. The capital conservation buffer is measured relative to risk-weighted assets and will be phased in over a four-year period beginning on January 1, 2016 with an initial requirement of 0.625% above the minimum capital requirement. The capital conservation buffer subsequently increases to 1.25%, 1.875% and 2.5% on January 1, 2017, 2018 and 2019, respectively; • Implements new constraints on the inclusion of minority interests, mortgage servicing assets, deferred tax assets and certain investments in the capital of unconsolidated financial institutions in Tier 1 capital; • Increases risk-weightings for past-due loans, certain commercial real estate loans and some equity exposures; • Requires trust preferred securities and cumulative perpetual preferred stock to be phased out of Tier 1 capital for banks with assets greater than $15.0 billion as of December 31, 2009; and • Allows non-advanced banking organizations, such as us, a one-time option to filter certain accumulated other comprehensive income components, such as unrealized gains and losses on available-for-sale investment securities, out of regulatory capital.

The calculation of common equity Tier 1 capital is different from the calculation of common equity under 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 June 30, 2014 was $71.8 million, which includes net deferred tax assets of $275.7 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 June 30, 2014, the Company's common equity Tier 1 capital as of June 30, 2014 using the rules applicable in 2016 would be negative $98.5 million, or $170.3 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 June 30, 2014, are scheduled to be phased out entirely from inclusion in the calculation of common equity Tier 1 capital in 2018. 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 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.

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 35 -------------------------------------------------------------------------------- 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 OF OPERATIONS Overview. We recorded net income of $5.2 million and $10.6 million for the three and six months ended June 30, 2014, respectively, compared to $9.5 million and $16.2 million for the comparable periods in 2013. Our net income reflects the following: • Net interest income of $37.5 million and $73.9 million for the three and six months ended June 30, 2014, respectively, compared to $37.8 million and $75.6 million for the comparable periods in 2013, and an increase in our net interest margin to 2.85% and 2.81% for the three and six months ended June 30, 2014, respectively, compared to 2.61% and 2.60% for the comparable periods in 2013; • A provision for loan losses of zero for each of the three and six months ended June 30, 2014 and 2013; • Noninterest income of $14.2 million and $28.9 million for the three and six months ended June 30, 2014, respectively, compared to $18.9 million and $34.3 million for the comparable periods in 2013; • Noninterest expense of $43.6 million and $86.3 million for the three and six months ended June 30, 2014, respectively, compared to $44.1 million and $88.2 million for the comparable periods in 2013; • A provision for income taxes of $2.9 million and $5.8 million for the three and six months ended June 30, 2014, respectively, compared to a benefit for income taxes of $345,000 for the three months ended June 30, 2013 and a provision for income taxes of $20,000 for the six months ended June 30, 2013; • A net loss from discontinued operations, net of tax, of $3.3 million and $5.4 million for the three and six months ended June 30, 2013, respectively; and 36--------------------------------------------------------------------------------• Net income attributable to noncontrolling interest in subsidiary of $1,000 and a net loss attributable to noncontrolling interest in subsidiary $54,000 for the three and six months ended June 30, 2014, respectively, compared to net income attributable to noncontrolling interest in subsidiary of $105,000 and $151,000 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 six months ended June 30, 2014 and 2013: Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013 Interest Interest Interest Interest Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate Balance Expense Rate (dollars expressed in thousands) ASSETS: Interest-earning assets: Loans (1)(2)(3) $ 2,935,163 30,191 4.13 % $ 2,803,647 29,898 4.28 % $ 2,906,318 59,282 4.11 % $ 2,824,538 60,084 4.29 % Investment securities (3) 2,110,914 11,924 2.27 2,632,086 13,351 2.03 2,166,563 24,580 2.29 2,649,872 26,634 2.03 FRB and FHLB stock 31,103 360 4.64 27,593 307 4.46 30,694 718 4.72 27,537 610 4.47 Short-term investments 216,364 142 0.26 352,411 223 0.25 202,843 262 0.26 376,097 485 0.26 Total interest-earning assets 5,293,544 42,617 3.23 5,815,737 43,779 3.02 5,306,418 84,842 3.22 5,878,044 87,813 3.01 Nonearning assets 585,060 410,873 582,798 413,804 Assets of discontinued operations - 41,567 - 44,021 Total assets $ 5,878,604 $ 6,268,177 $ 5,889,216 $ 6,335,869 LIABILITIES AND STOCKHOLDERS' EQUITY: Interest-bearing liabilities: Interest-bearing deposits: Interest-bearing demand $ 683,764 87 0.05 % $ 640,108 74 0.05 % $ 679,417 169 0.05 % $ 643,614 150 0.05 % Savings and money market 1,853,153 769 0.17 1,843,567 632 0.14 1,848,375 1,513 0.17 1,851,003 1,267 0.14 Time deposits of $100 or more 378,130 483 0.51 394,330 573 0.58 388,800 969 0.50 406,105 1,229 0.61 Other time deposits 627,943 695 0.44 730,940 978 0.54 636,864 1,417 0.45 747,172 2,081 0.56 Total interest-bearing deposits 3,542,990 2,034 0.23 3,608,945 2,257 0.25 3,553,456 4,068 0.23 3,647,894 4,727 0.26 Other borrowings 45,115 2 0.02 33,195 (15 ) (0.18 ) 42,492 6 0.03 30,460 (12 ) (0.08 ) Subordinated debentures 354,239 3,027 3.43 354,162 3,733 4.23 354,229 6,838 3.89 354,153 7,409 4.22 Total interest-bearing liabilities 3,942,344 5,063 0.52 3,996,302 5,975 0.60 3,950,177 10,912 0.56 4,032,507 12,124 0.61 Noninterest-bearing liabilities: Demand deposits 1,269,818 1,197,165 1,257,169 1,176,567 Other liabilities 163,534 193,309 182,962 188,754 Liabilities of discontinued operations - 588,776 - 643,224 Total liabilities 5,375,696 5,975,552 5,390,308 6,041,052 Stockholders' equity 502,908 292,625 498,908 294,817 Total liabilities and stockholders' equity $ 5,878,604 $ 6,268,177 $ 5,889,216 $ 6,335,869 Net interest income 37,554 37,804 73,930 75,689 Interest rate spread 2.71 2.42 2.66 2.40 Net interest margin (4) 2.85 % 2.61 % 2.81 % 2.60 % ____________________(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 $30,000 and $66,000 for the three and six months ended June 30, 2014, respectively, and $47,000 and $95,000 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.

37-------------------------------------------------------------------------------- Our balance sheet is presently asset sensitive, and as such, 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.

Net interest income, expressed on a tax-equivalent basis, decreased to $37.6 million and $73.9 million for the three and six months ended June 30, 2014, respectively, compared to $37.8 million and $75.7 million for the comparable periods in 2013. Our net interest margin increased 24 and 21 basis points to 2.85% and 2.81% for the three and six months ended June 30, 2014, respectively, from 2.61% and 2.60% for the comparable periods in 2013.

We attribute the increase in our net interest margin for the three and six months ended June 30, 2014, as compared to the comparable periods in 2013, to an increase in the average yield on investment securities, a decrease in the cost of interest-bearing deposits and a reduction in our average short-term investments, partially offset by a decrease in the average yield on loans. We attribute the decrease in our net interest income for the three and six months ended June 30, 2014, as compared to the comparable periods 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. While improved from the three and six months ended June 30, 2013, our net interest margin is expected to continue to remain at lower-than-historical levels until loan balances become a higher percentage of our interest-earning assets.

Interest income on our loan portfolio, expressed on a tax-equivalent basis, increased $293,000 for the three months ended June 30, 2014, as compared to the comparable period in 2013, and decreased $802,000 for the six months ended June 30, 2014, as compared to the comparable period in 2013. Average loans increased $131.5 million and $81.8 million to $2.94 billion and $2.91 billion for the three and six months ended June 30, 2014, respectively, as compared to $2.80 billion and $2.82 billion for the comparable periods in 2013, while the yield on our loan portfolio decreased 15 and 18 basis points to 4.13% and 4.11% for the three and six months ended June 30, 2014, respectively, from 4.28% and 4.29% for the comparable periods in 2013. The increase in average loans primarily reflects continued growth in our production loan volumes, particularly in our commercial, financial and agricultural and commercial real estate portfolios, partially offset by loan payoffs and principal payments and the exit of certain of our problem credit relationships. 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.

Interest income on our investment securities, expressed on a tax-equivalent basis, decreased $1.4 million and $2.1 million for the three and six months ended June 30, 2014, respectively, as compared to the comparable periods in 2013. Average investment securities decreased $521.2 million and $483.3 million for the three and six months ended June 30, 2014, respectively, as compared to the comparable periods in 2013. The yield earned on our investment securities portfolio increased 24 and 26 basis points to 2.27% and 2.29% for the three and six months ended June 30, 2014, respectively, as compared to 2.03% for the three and six months ended June 30, 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 $81,000 and $223,000 for the three and six months ended June 30, 2014, respectively, as compared to the comparable periods in 2013. Average short-term investments decreased $136.0 million and $173.3 million for the three and six months ended June 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 0.26% for the three and six months ended June 30, 2014, compared to 0.25% and 0.26% for the comparable periods in 2013, reflecting the investment of the majority of funds in our short-term investments in our correspondent bank account with the FRB, which currently earns 0.25%.

Interest expense on our interest-bearing deposits decreased $223,000 and $659,000 for the three and six months ended June 30, 2014, respectively, as compared to the comparable periods in 2013. Average total deposits increased $6.7 million to $4.81 billion for the three months ended June 30, 2014, from $4.81 billion for the comparable period in 2013, whereas, average total deposits decreased $13.8 million to $4.81 billion for the six months ended June 30, 2014, from $4.82 billion for the comparable period in 2013. Average interest-bearing deposits decreased $66.0 million and $94.4 million, respectively, and average noninterest-bearing deposits increased $72.7 million and $80.6 million, respectively, for the three and six months ended June 30, 2014, as compared to the comparable periods in 2013. The decrease in average interest-bearing deposits for the three and six months ended June 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 demand deposits through deposit development programs, including marketing campaigns and enhanced product and service offerings. The mix in our deposit portfolio volumes for the six months ended June 30, 2014, as 38 -------------------------------------------------------------------------------- compared to the comparable period in 2013, primarily reflects a shift from time deposits and savings and money market deposits to interest-bearing and noninterest-bearing demand deposits. Decreases in our average time deposits, and savings and money market deposits, of $127.6 million and $2.6 million, respectively, for the six months ended June 30, 2014, as compared to the comparable period in 2013, were partially offset by increases in our average interest-bearing and noninterest-bearing demand deposits of $35.8 million and $80.6 million, respectively, for the six months ended June 30, 2014, as compared to the comparable period in 2013. The aggregate weighted average rate paid on our interest-bearing deposit portfolio decreased two and three basis points to 0.23% for the three and six months ended June 30, 2014, from 0.25% and 0.26% for the three and six months ended June 30, 2013, respectively, primarily reflecting the re-pricing of certificate of deposit accounts to current market interest rates upon maturity. The weighted average rate paid on our time deposit portfolio declined eight and 11 basis points to 0.47% for the three and six months ended June 30, 2014, from 0.55% and 0.58% for the three and six months ended June 30, 2013, respectively.

Interest expense on our junior subordinated debentures decreased $706,000 and $571,000 for the three and six months ended June 30, 2014, respectively, as compared to the comparable periods in 2013. The aggregate weighted average rate paid on our junior subordinated debentures decreased to 3.43% and 3.89% for the three and six months ended June 30, 2014, respectively, from 4.23% and 4.22% 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 45 basis points for the six months ended June 30, 2014, as compared to 76 and 74 basis points for the three and six months ended June 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 six months ended June 30, 2014, as compared to the three and six months ended June 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 Six Months Ended June 30, 2014 Compared to 2013 June 30, 2014 Compared to 2013 Volume Rate Net Change Volume Rate Net Change (dollars expressed in thousands) Interest earned on: Loans (1) (2) (3) $ 1,368 (1,075 ) 293 1,731 (2,533 ) (802 ) Investment securities (3) (2,866 ) 1,439 (1,427 ) (5,221 ) 3,167 (2,054 ) FRB and FHLB stock 40 13 53 73 35 108 Short-term investments (89 ) 8 (81 ) (223 ) - (223 ) Total interest income (1,547 ) 385 (1,162 ) (3,640 ) 669 (2,971 ) Interest paid on: Interest-bearing demand deposits 13 - 13 19 - 19 Savings and money market deposits 3 134 137 (2 ) 248 246 Time deposits (157 ) (216 ) (373 ) (340 ) (584 ) (924 ) Other borrowings (4 ) 21 17 (3 ) 21 18 Subordinated debentures 1 (707 ) (706 ) 2 (573 ) (571 ) Total interest expense (144 ) (768 ) (912 ) (324 ) (888 ) (1,212 ) Net interest income $ (1,403 ) 1,153 (250 ) (3,316 ) 1,557 (1,759 ) ____________________(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 did not record a provision for loan losses for the three and six months ended June 30, 2014 and 2013, which was attributable to the continued improvement in our overall asset quality levels, as further discussed under "-Loans and Allowance for Loan Losses." Our nonaccrual loans were $48.0 million at June 30, 2014, compared to $53.8 million at March 31, 2014, $53.0 million at December 31, 2013 and $89.0 million at June 30, 2013, reflecting a 46.1% decrease in nonaccrual loans year-over-year. The decrease in the overall level of nonaccrual loans at June 30, 2014, as compared to June 30, 2013, was primarily driven by the resolution of certain 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.

Our net loan charge-offs decreased to $1.8 million and $3.0 million for the three and six months ended June 30, 2014, respectively, from $2.5 million and $6.0 million for the comparable periods in 2013. Our annualized net loan charge-offs were 0.25% and 0.21% of average loans for the three and six months ended June 30, 2014, respectively, compared to 0.36% and 0.43% for the comparable periods in 2013. Loan charge-offs were $6.2 million and $9.7 million for the three and six months ended June 30, 2014, respectively, compared to $6.9 million and $13.8 million for the comparable periods in 2013, and loan recoveries were $4.4 million and $6.7 39 -------------------------------------------------------------------------------- million for the three and six months ended June 30, 2014, respectively, compared to $4.3 million and $7.8 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 $4.7 million and $5.4 million to $14.2 million and $28.9 million for the three and six months ended June 30, 2014, respectively, from $18.9 million and $34.3 million for the comparable periods in 2013. The decrease in our noninterest income for the first six 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 six months ended June 30, 2014 and 2013: Three Months Ended Six Months Ended June 30, Increase (Decrease) June 30, Increase (Decrease) 2014 2013 Amount % 2014 2013 Amount % (dollars expressed in thousands) Noninterest income: Service charges on deposit accounts and customer service fees $ 8,667 8,607 60 0.7 % $ 17,000 16,921 79 0.5 % Gain on loans sold and held for sale 1,554 1,572 (18 ) (1.1 ) 2,419 3,125 (706 ) (22.6 ) Net (loss) gain on investment securities (1 ) 345 (346 ) (100.3 ) 1,279 (71 ) 1,350 1,901.4 Net gain on sale of other real estate 692 3,658 (2,966 ) (81.1 ) 1,134 4,024 (2,890 ) (71.8 ) (Decrease) increase in fair value of servicing rights (901 ) 470 (1,371 ) (291.7 ) (1,133 ) 624 (1,757 ) (281.6 ) Loan servicing fees 1,664 1,776 (112 ) (6.3 ) 3,375 3,493 (118 ) (3.4 ) Other 2,539 2,515 24 1.0 4,815 6,222 (1,407 ) (22.6 ) Total noninterest income $ 14,214 18,943 (4,729 ) (25.0 ) $ 28,889 34,338 (5,449 ) (15.9 ) The decrease in gains on residential mortgage loans sold and held for sale 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 $83.9 million and $131.8 million for the three and six months ended June 30, 2014, respectively, from $102.3 million and $200.5 million for the comparable periods in 2013. The decline in loan production volume during the periods was associated with a decrease in refinancing activity in our mortgage banking division during the periods.

Net gains on investment securities for the six months ended June 30, 2014 reflect the sale of certain investment securities during the first quarter of 2014 to fund loan growth and other corporate transactions. Net (losses) gains on investment securities for the three and six months ended June 30, 2013 reflect the sale of certain investment securities in anticipation of corporate transactions and 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 $9.0 million at a net gain of $1.1 million during the six months ended June 30, 2014, as compared to sales of other real estate properties with an aggregate carrying value of $16.5 million at a net gain of $4.0 million during the six months ended June 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.

The decrease in other income for the six months ended June 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 decreased $555,000 and $1.9 million to $43.6 million and $86.3 million for the three and six months ended June 30, 2014, respectively, from $44.1 million and $88.2 million for the comparable periods in 2013. The decrease in our noninterest expense for the first six months of 2014 was primarily attributable to a lower level of expenses associated with our nonperforming assets and potential problem loans, in addition to decreased FDIC insurance expense, 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 six months ended June 30, 2014 and 2013: 40 -------------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30, Increase (Decrease) June 30, Increase (Decrease) 2014 2013 Amount % 2014 2013 Amount % (dollars expressed in thousands) Noninterest expense: Salaries and employee benefits $ 20,383 19,645 738 3.8 % $ 40,265 39,196 1,069 2.7 % Occupancy, net of rental income, and furniture and equipment 8,122 8,473 (351 ) (4.1 ) 16,266 16,890 (624 ) (3.7 ) Postage, printing and supplies 554 711 (157 ) (22.1 ) 1,193 1,339 (146 ) (10.9 ) Information technology fees 5,874 5,270 604 11.5 11,484 10,555 929 8.8 Legal, examination and professional fees 1,447 1,497 (50 ) (3.3 ) 2,738 3,160 (422 ) (13.4 ) Advertising and business development 650 584 66 11.3 1,272 1,016 256 25.2 FDIC insurance 1,241 1,838 (597 ) (32.5 ) 2,505 3,720 (1,215 ) (32.7 ) Write-downs and expenses on other real estate 639 1,259 (620 ) (49.2 ) 1,338 2,770 (1,432 ) (51.7 ) Other 4,678 4,866 (188 ) (3.9 ) 9,275 9,544 (269 ) (2.8 ) Total noninterest expense $ 43,588 44,143 (555 ) (1.3 ) $ 86,336 88,190 (1,854 ) (2.1 ) 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, partially offset by a decrease in benefits expenses, including medical claims and prescription expenses. We had 1,158 and 1,147 full-time equivalent employees at June 30, 2014 and December 31, 2013, respectively, compared to 1,146 at June 30, 2013, excluding discontinued operations.

The decrease in occupancy, net of rental income, and furniture and equipment expense reflects a decrease in rent expense associated with branch facilities that were closed during the first and second quarters of 2013.

The increase in information technology fees was associated with a planned investment in the expansion of certain of our information technology and security 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 six months ended June 30, 2014, in comparison to the level of such expenses for the three and six months ended June 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 reflects a reduction in the overall number and balance of our other real estate, which decreased to $59.2 million at June 30, 2014, from $61.5 million, $66.7 million and $78.2 million at March 31, 2014, December 31, 2013 and June 30, 2013, respectively. Other real estate expenses, exclusive of write-downs, such as taxes, insurance, and repairs and maintenance, decreased $169,000 and $820,000 to $539,000 and $1.1 million for the three and six months ended June 30, 2014, respectively, from $708,000 and $2.0 million for the comparable periods in 2013.

Write-downs related to the re-valuation of certain other real estate properties decreased $451,000 and $612,000 to $100,000 and $197,000 for the three and six months ended June 30, 2014, respectively, from $551,000 and $809,000 for the comparable periods in 2013.

Provision for Income Taxes. We recorded a provision for income taxes of $2.9 million and $5.8 million for the three and six months ended June 30, 2014, respectively, as compared to a benefit for income taxes of $345,000 for the three months ended June 30, 2013 and a provision for income taxes of $20,000 for the six months ended June 30, 2013. 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.

FINANCIAL CONDITION Total assets decreased $36.6 million to $5.88 billion at June 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 cash and cash equivalents and our loan portfolio, as further described below.

Cash and cash equivalents, which are comprised of cash and short-term investments, increased $96.9 million to $287.4 million at June 30, 2014, from $190.4 million at December 31, 2013. The majority 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 $229.4 million, excluding amortization and the fair value adjustment on available-for-sale investment securities; • A net increase in our daily securities sold under agreements to repurchase of $14.4 million, consisting of changes in our daily repurchase agreements utilized by customers as an alternative deposit product; • Sales of other real estate resulting in the receipt of cash proceeds from these sales of $10.1 million; 41--------------------------------------------------------------------------------• Recoveries of loans previously charged off of $6.7 million; and • Cash generated by operating earnings; partially offset by • An increase in loans of $107.6 million, exclusive of loan charge-offs and transfers of loans to other real estate; • A decrease in deposits of $7.9 million; • 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 $228.2 million to $2.12 billion at June 30, 2014, from $2.35 billion at December 31, 2013. The decrease primarily reflects proceeds from sales of available-for-sale investment securities of $166.3 million and proceeds from maturities and/or calls of investment securities of $129.2 million. 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.

The decrease in investment securities is partially offset by purchases of investment securities of $64.9 million and an increase in the fair value adjustment on our available-for-sale investment securities of $13.9 million resulting from a decrease in market interest rates during the period.

Loans, net of net deferred loan fees, or total loans, increased $95.0 million to $2.95 billion at June 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 and our real estate mortgage portfolios, which increased $39.0 million and $52.5 million, respectively.

Deposits decreased $7.9 million to $4.81 billion at June 30, 2014, from $4.81 billion at December 31, 2013. The decrease reflects reductions of certificates of deposit and savings and money market deposits of $64.5 million and $348,000, respectively, partially offset by growth in demand deposits of $57.0 million attributable to seasonal fluctuations.

Daily securities sold under agreements to repurchase (in connection with cash management activities of our commercial deposit customers) increased $14.4 million to $57.6 million at June 30, 2014, from $43.1 million at December 31, 2013, reflecting changes in customer balances associated with this product segment.

Accrued expenses and other liabilities decreased $82.1 million to $109.0 million at June 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 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.

Loans and Allowance for Loan Losses Loan Portfolio Composition. Total loans represented 50.2% of our assets as of June 30, 2014, compared to 48.3% of our assets at December 31, 2013. Total loans increased $95.0 million to $2.95 billion at June 30, 2014 from $2.86 billion at December 31, 2013. The following table summarizes the composition of our loan portfolio by category at June 30, 2014 and December 31, 2013: June 30, December 31, 2014 2013 (dollars expressed in thousands) Commercial, financial and agricultural $ 639,741 600,704 Real estate construction and development 123,509 121,662 Real estate mortgage: One-to-four-family residential 936,580 921,488 Multi-family residential 116,815 121,304 Commercial real estate 1,090,146 1,048,234 Consumer and installment 18,501 18,681 Loans held for sale 27,576 25,548 Net deferred loan fees (749 ) (526 ) Total loans $ 2,952,119 2,857,095 42-------------------------------------------------------------------------------- The following table summarizes the composition of our loan portfolio by geographic region and/or business segment at June 30, 2014 and December 31, 2013: June 30, December 31, 2014 2013 (dollars expressed in thousands) Southern California $ 1,000,994 968,241 Missouri 624,969 565,043 Mortgage Banking Division 518,426 513,225 Northern California 381,862 361,895 Northern and Southern Illinois 229,628 224,664 Chicago 82,967 91,048 Florida 52,995 58,525 Texas 14,064 23,705 Other 46,214 50,749 Total loans $ 2,952,119 2,857,095 The net increase in our loan portfolio during the first six months of 2014 primarily reflects the following: • An increase of $39.0 million, or 6.5%, in our commercial, financial and agricultural portfolio, primarily attributable to an increase in new loan production within this portfolio segment; • An increase of $15.1 million, or 1.6%, in our one-to-four-family residential real estate loan portfolio, primarily attributable to 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 June 30, 2014 and December 31, 2013: June 30, December 31, 2014 2013 (dollars expressed in thousands) One-to-four-family residential real estate: Residential mortgage $ 572,547 572,164 Home equity 364,033 349,324 Total $ 936,580 921,488 • A decrease of $4.5 million, or 3.7%, in our multi-family residential real estate loan portfolio, attributable to principal payments and payoffs on existing loans exceeding new loan production and loan charge-offs of $3.1 million during the second quarter of 2014; and • An increase of $41.9 million, or 4.0%, 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 June 30, 2014 and December 31, 2013: June 30, December 31, 2014 2013 (dollars expressed in thousands) Commercial real estate: Owner occupied $ 593,689 568,035 Non-owner occupied 474,421 461,573 Farmland 22,036 18,626 Total $ 1,090,146 1,048,234 43-------------------------------------------------------------------------------- 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 June 30, 2014 and December 31, 2013: June 30, December 31, 2014 2013 (dollars expressed in thousands) Nonperforming Assets: Nonaccrual loans: Commercial, financial and agricultural $ 12,339 10,523 Real estate construction and development 4,242 4,914 One-to-four-family residential real estate: Residential mortgage 17,173 20,063 Home equity 7,011 7,361 Multi-family residential 1,164 1,793 Commercial real estate 6,036 8,283 Consumer and installment 13 19 Total nonaccrual loans 47,978 52,956 Other real estate 59,235 66,702 Total nonperforming assets $ 107,213 119,658 Total loans $ 2,952,119 2,857,095 Performing troubled debt restructurings $ 106,884 110,627 Loans past due 90 days or more and still accruing $ 1,102 424 Ratio of: Allowance for loan losses to loans 2.64 % 2.84 % Nonaccrual loans to loans 1.63 1.85 Allowance for loan losses to nonaccrual loans 162.61 153.02 Nonperforming assets to loans and other real estate 3.56 4.09 Our nonperforming assets decreased $12.4 million, or 10.4%, to $107.2 million at June 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 $5.0 million, or 9.4%, during the first six months of 2014, primarily in our residential mortgage and commercial real estate loan portfolios, reflects the resolution of certain nonaccrual loans as a result of payoffs and the sale of nonaccrual loans, in addition to gross loan charge-offs and transfers to other real estate. As of June 30, 2014 and December 31, 2013, loans identified by management as performing troubled debt restructurings, or TDRs, aggregating $9.4 million and $10.6 million, respectively, were on nonaccrual status and were classified as nonperforming loans. The decrease in other real estate of $7.5 million, or 11.2%, during the first six months of 2014 was primarily driven by sales of other real estate properties, including a single property with a carrying value of $3.0 million.

Performing Troubled Debt Restructurings. The following table presents the categories of performing TDRs as of June 30, 2014 and December 31, 2013: June 30, December 31, 2014 2013 (dollars expressed in thousands) Real estate mortgage: One-to-four-family residential $ 77,465 78,153 Multi-family residential 24,970 27,955 Commercial real estate 4,449 4,519 Total performing troubled debt restructurings $ 106,884 110,627 The decrease in performing TDRs of $3.7 million, or 3.4%, during the first six months of 2014 reflects a decrease in all of our performing TDR loan categories.

Our multi-family residential performing TDRs at June 30, 2014 consist of a single $25.0 million loan relationship in our Chicago region that was restructured during the fourth quarter of 2012. We are closely monitoring this loan relationship, and while facts and circumstances are subject to change in the future, the borrower continued to service this obligation in accordance with the existing terms and conditions of the restructured credit agreement as of June 30, 2014.

44 -------------------------------------------------------------------------------- Potential Problem Loans. As of June 30, 2014 and December 31, 2013, loans aggregating $105.0 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 June 30, 2014 and December 31, 2013: June 30, December 31, 2014 2013 (dollars expressed in thousands) Commercial, financial and agricultural $ 12,223 14,727 Real estate construction and development 73,146 73,390 Real estate mortgage: One-to-four-family residential 8,927 8,707 Multi-family residential 611 555 Commercial real estate 9,883 11,999 Consumer and installment 160 126 Total potential problem loans $ 104,950 109,504 Potential problem loans decreased $4.6 million, or 4.2%, during the first six months of 2014. Potential problem loans at June 30, 2014 include a $60.5 million real estate construction and development credit relationship in our Southern California region, which was subsequently reduced to $19.2 million as a result of a refinancing of a substantial portion of the credit relationship through an independent third party financial institution.

Our credit risk management policies and procedures, as further described under "-Allowance for Loan Losses," focus on identifying potential problem loans.

Potential problem loans may be identified by the assigned lender, the credit administration department or the internal credit review department.

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

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

Potential problem loans are regularly evaluated for impaired loan status by lenders, the credit administration department and the internal credit review department. When management makes the determination that a loan should be considered impaired, an initial specific reserve is allocated to the impaired loan, if necessary, until the loan is charged down to the appraised value of the underlying collateral, typically within 30 to 90 days of becoming impaired.

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 $78.0 million at June 30, 2014, from $81.0 million at December 31, 2013. The decrease in our allowance for loan losses during the first six months of 2014 was attributable to net loan charge-offs of $3.0 million.

45 -------------------------------------------------------------------------------- Our allowance for loan losses as a percentage of total loans was 2.64% and 2.84% at June 30, 2014 and December 31, 2013, respectively. The decrease in the allowance for loan losses as a percentage of total loans during the first six months of 2014 was primarily attributable to the decrease in our nonaccrual and potential problem loans, which generally require a higher allowance for loan losses relative to the amount of the loans than the remainder of the loan portfolio, in addition to a decrease in our historical net loan charge-off experience as a result of declining charge-off levels during the first six months of 2014 and the year ended December 31, 2013, as compared to previous periods.

Our allowance for loan losses as a percentage of nonaccrual loans was 162.61% and 153.02% at June 30, 2014 and December 31, 2013, respectively. The increase in the allowance for loan losses as a percentage of nonaccrual loans during the first six months of 2014 was primarily attributable to the decrease in nonaccrual loans, a portion of which did not carry a specific allowance for loan losses as these loans had been charged down to the estimated fair value of the related collateral less estimated costs to sell.

The following table summarizes the changes in the allowance for loan losses for the three and six months ended June 30, 2014 and 2013: Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 (dollars expressed in thousands) Allowance for loan losses, beginning of period $ 79,831 88,170 81,033 91,602 Loans charged-off: Commercial, financial and agricultural (994 ) (1,010 ) (2,616 ) (1,686 ) Real estate construction and development (35 ) (166 ) (65 ) (448 ) Real estate mortgage: One-to-four-family residential: Residential mortgage (2,065 ) (3,091 ) (3,156 ) (6,739 ) Home equity (136 ) (1,247 ) (471 ) (1,988 ) Multi-family residential (2,952 ) (159 ) (3,084 ) (162 ) Commercial real estate (21 ) (1,156 ) (209 ) (2,633 ) Consumer and installment (37 ) (42 ) (86 ) (98 ) Total (6,240 ) (6,871 ) (9,687 ) (13,754 ) Recoveries of loans previously charged-off: Commercial, financial and agricultural 1,263 1,023 2,015 2,090 Real estate construction and development 756 1,321 1,356 1,716 Real estate mortgage: One-to-four-family residential: Residential mortgage 1,355 1,124 1,937 2,258 Home equity 123 164 332 261 Multi-family residential loans 2 141 9 141 Commercial real estate loans 915 522 972 1,240 Consumer and installment 13 39 51 79 Total 4,427 4,334 6,672 7,785 Net loans charged-off (1,813 ) (2,537 ) (3,015 ) (5,969 ) Provision for loan losses - - - -Allowance for loan losses, end of period $ 78,018 85,633 78,018 85,633 Our net loan charge-offs decreased to $1.8 million and $3.0 million for the three and six months ended June 30, 2014, respectively, from $2.5 million and $6.0 million for the comparable periods in 2013. Our annualized net loan charge-offs as a percentage of average loans were 0.25% and 0.21% for the three and six months ended June 30, 2014, respectively, compared to 0.36% and 0.43% for the comparable periods in 2013. Net loan charge-offs associated with our multi-family residential real estate loan portfolio were $3.0 million and $3.1 million for the three and six months ended June 30, 2014, respectively, as compared to $18,000 and $21,000 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 has implemented additional procedures to analyze concentrations in our real estate portfolio in light of economic and market conditions. These procedures include enhanced reporting to track land, lot, construction and finished inventory levels within our real estate construction and development portfolio. In addition, a quarterly evaluation of each lending unit is performed based on certain factors, such as lending personnel experience, recent credit reviews, loan concentrations and other factors. Based on this evaluation, changes to the allowance for loan losses may be required due to the perceived risk of particular portfolios. In addition, management exercises a certain degree of judgment in its analysis of the overall adequacy of the allowance for loan losses. In its analysis, management considers the changes in the portfolio, including growth, composition, the ratio of net loans to total assets, and the 46 -------------------------------------------------------------------------------- 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 June 30, 2014 and December 31, 2013: June 30, December 31, 2014 2013 Commercial, financial and agricultural 2.15 % 2.23 % Real estate construction and development 5.34 6.09 Real estate mortgage: One-to-four-family residential 3.11 3.54 Multi-family residential 6.31 4.33 Commercial real estate 1.91 2.10 Consumer and installment 1.96 1.68 Total 2.64 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.

INTEREST RATE RISK MANAGEMENT The maintenance of a satisfactory level of net interest income is a primary factor in our ability to achieve acceptable income levels. However, the maturity and repricing characteristics of our loan and investment portfolios may differ significantly from those within our deposit structure. The nature of the loan and deposit markets within which we operate, and our objectives for business development within those markets at any point in time, influence these characteristics. In addition, the ability of borrowers to repay loans and the possibility of depositors withdrawing funds prior to stated maturity dates introduces divergent option characteristics that fluctuate as interest rates change. These factors cause various elements of our balance sheet to react in different manners and at different times relative to changes in interest rates, 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.

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, and certain other senior officers. The Asset Liability 47 -------------------------------------------------------------------------------- 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 June 30, 2014. At June 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 the effect of significant declines in interest rates that began in late 2007 and continued throughout 2008 and 2009 to historically low levels that remain prevalent in the current marketplace, has negatively impacted our net interest income and is expected to continue to impact the level of our net interest income throughout the near future.

We also prepare and review a more traditional interest rate sensitivity position in conjunction with the results of our simulation model. The following table presents the projected maturities and periods to repricing of our rate sensitive assets and liabilities as of June 30, 2014, adjusted to account for anticipated prepayments: Over Six Three Over Three through Over One Months or through Six Twelve through Five Over Five Less Months Months Years Years Total (dollars expressed in thousands) Interest-earning assets: Loans (1) $ 1,422,271 153,240 265,031 918,631 192,946 2,952,119 Investment securities 90,188 92,532 158,009 1,235,478 547,571 2,123,778 FRB and FHLB stock 30,388 - - - - 30,388 Short-term investments 168,575 - - - - 168,575 Total interest-earning assets $ 1,711,422 245,772 423,040 2,154,109 740,517 5,274,860 Interest-bearing liabilities: Interest-bearing demand deposits $ 251,719 156,475 102,049 74,836 95,245 680,324 Money market deposits 1,553,953 - - - - 1,553,953 Savings deposits 49,369 40,657 34,849 49,370 116,164 290,409 Time deposits 247,978 217,347 277,530 238,725 22 981,602 Securities sold under agreements to repurchase 57,572 - - - - 57,572 Subordinated debentures 282,481 - - - 71,767 354,248 Total interest-bearing liabilities $ 2,443,072 414,479 414,428 362,931 283,198 3,918,108 Interest-sensitivity gap: Periodic $ (731,650 ) (168,707 ) 8,612 1,791,178 457,319 1,356,752 Cumulative (731,650 ) (900,357 ) (891,745 ) 899,433 1,356,752 Ratio of interest-sensitive assets to interest-sensitive liabilities: Periodic 0.70 0.59 1.02 5.94 2.61 1.35 Cumulative 0.70 0.68 0.73 1.25 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.

A significant variance in actual results from one or more of these assumptions could materially affect the results reflected in the foregoing table.

48 -------------------------------------------------------------------------------- We were in an overall asset-sensitive position of $1.36 billion, or 23.1% of our total assets at June 30, 2014. We were in an overall liability-sensitive position on a cumulative basis through the twelve-month time horizon of $891.7 million, or 15.2% of our total assets at June 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 customers who wish to modify their interest rate sensitivity. There were no interest rate swap agreement contracts outstanding at June 30, 2014 and December 31, 2013. Our derivative instruments are more fully described in Note 6 to our consolidated financial statements.

LIQUIDITY MANAGEMENT First Bank. Our liquidity is the ability to maintain a cash flow that is adequate to fund operations, service debt obligations and meet obligations and other commitments on a timely basis. First Bank receives funds for liquidity from customer deposits, loan payments, maturities of loans and investments, sales of investments and earnings before provision for loan losses. In addition, we may avail ourselves of other sources of funds by issuing certificates of deposit in denominations of $100,000 or more (including certificates issued through the Certificate of Deposit Account Registry Service, or CDARS program), selling securities under agreements to repurchase, and utilizing borrowings from the FHLB, the FRB and other borrowings.

As a financial intermediary, we are subject to liquidity risk. We closely monitor our liquidity position through our Liquidity Management Committee and we continue to implement actions deemed necessary to maintain an appropriate level of liquidity in light of ongoing 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 customer deposits, internal and competitor deposit pricing structures and maturity profiles of current borrowing sources. We utilize planning, management reporting and adverse stress scenarios to monitor sources and uses of funds on a daily basis to assess cash levels to ensure adequate funds are available to meet normal business operating requirements and to supplement liquidity needs to meet unusual demands for funds that may result from an unexpected change in customer deposit levels or potential planned or unexpected liquidity events that may arise from time to time.

Our cash and cash equivalents were $287.4 million and $190.4 million at June 30, 2014 and December 31, 2013, respectively. The majority of these funds were maintained in our correspondent bank account with the FRB. The increase in our cash and cash equivalents of $96.9 million is further discussed under "- Financial Condition." Our unpledged investment securities decreased $232.3 million to $1.79 billion at June 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 $2.07 billion and $2.21 billion at June 30, 2014 and December 31, 2013, respectively.

Our available liquidity of $2.07 billion represents 35.2% of total assets at June 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 61.4% at June 30, 2014 from 59.4% at December 31, 2013.

During the first six months of 2014, we reduced our aggregate funds acquired from other sources of funds by $9.2 million to $423.0 million at June 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 $23.6 million, partially offset by an increase in our daily repurchase agreements of $14.4 million. The following table presents the maturity structure of these other sources of funds at June 30, 2014: Certificates of Deposit of Other $100,000 or More Borrowings Total (dollars expressed in thousands) Three months or less $ 95,657 57,572 153,229 Over three months through six months 76,087 - 76,087 Over six months through twelve months 101,602 - 101,602 Over twelve months 92,073 - 92,073 Total $ 365,419 57,572 422,991 49-------------------------------------------------------------------------------- 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 $317.6 million and $283.9 million at June 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 June 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 $373.6 million and $379.1 million at June 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 June 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 June 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 $10.0 million at June 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 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.

50 -------------------------------------------------------------------------------- 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, as further described in Note 8 to our consolidated financial statements. 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 June 30, 2014. As such, the aggregate amount of these deferred and accrued dividend payments was $77.8 million at June 30, 2014.

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 June 30, 2014, with the exception of $57.6 million of daily repurchase agreements utilized by customers as an alternative deposit product, and has substantial borrowing capacity through its relationships with the FHLB and the FRB, as previously discussed; or • The Company has difficulty raising cash through the future issuance of debt or equity instruments or by accessing additional sources of credit, 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 June 30, 2014 were as follows: Less Than 1 Year 1-3 Years 3-5 Years Over 5 Years Total (1) (dollars expressed in thousands) Operating leases $ 8,190 12,749 6,128 10,440 37,507 Certificates of deposit (2) 742,063 197,087 42,430 22 981,602 Securities sold under agreements to repurchase 57,572 - - - 57,572 Subordinated debentures (3) - - - 354,248 354,248 Class C Preferred Stock and Class D Preferred Stock (3) (4) - - - 312,743 312,743 Other contractual obligations 359 4 - - 363 Total $ 808,184 209,840 48,558 677,453 1,744,035 ____________________(1) Amounts exclude ASC Topic 740 unrecognized tax liabilities of $868,000 and related accrued interest expense of $169,000 for which the timing of payment of such liabilities cannot be reasonably estimated as of June 30, 2014.

(2) Amounts exclude the related accrued interest expense on certificates of deposit of $331,000 as of June 30, 2014.

(3) Amounts exclude the accrued interest expense on junior subordinated debentures of $346,000 as of June 30, 2014, accrued dividends declared on preferred stock of $77.8 million and undeclared dividends of $18.6 million as of June 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.

EFFECTS OF NEW ACCOUNTING STANDARDS 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., 51-------------------------------------------------------------------------------- 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.

[ Back To Technology News's Homepage ]

OTHER NEWS PROVIDERS







Technology Marketing Corporation

800 Connecticut Ave, 1st Floor East, Norwalk, CT 06854 USA
Ph: 800-243-6002, 203-852-6800
Fx: 203-866-3326

General comments: tmc@tmcnet.com.
Comments about this site: webmaster@tmcnet.com.

STAY CURRENT YOUR WAY

© 2014 Technology Marketing Corporation. All rights reserved | Privacy Policy