News Column

First Banks Reports 4Q 2013 Results

February 12, 2014

First Banks, Inc., the holding company of First Bank, announced earnings of $219.7 million for the three months ended Dec. 31, 2013, as compared to $3.4 million for the three months ended Dec. 31, 2012.

In a release on Feb. 7, the Company said that for the year ended Dec. 31, 2013, the Company recorded earnings of $241.7 million, as compared to $26.3 million for the year ended Dec. 31, 2012.

Net income for the fourth quarter of 2013 reflects an income tax benefit of $288.2 million primarily resulting from the reversal of substantially all of the Company's valuation allowance against its net deferred tax assets, a gain on sale of First Bank's Association Bank Services line of business of $28.6 million and the recognition of goodwill impairment of $107.3 million, as further discussed below.

Terrance McCarthy, President and Chief Executive Officer of the Company, said, "Our fourth quarter results reflect the culmination of our significant progress over the last two years in restoring profitability and significantly improving our asset quality and regulatory capital ratios. Because of this progress, we were able to reverse substantially all of the valuation allowance against our deferred tax assets which, combined with the sale of our Association Bank Services line of business, significantly improved the Company's capital position during the quarter. We are very pleased to have positioned the Company to allow the recapture of its deferred tax assets. While the operating environment remains very challenging and competitive, we have significantly improved our financial performance in 2013."

Net Interest Income:

Net interest income was $36.8 million for the fourth quarter of 2013, in comparison to $36.7 million for the third quarter of 2013 and $41.1 million for the fourth quarter of 2012.

The net interest margin was 2.57 percent for the fourth quarter of 2013, in comparison to 2.50 percent for the third quarter of 2013 and 2.68 percent for the fourth quarter of 2012. The increase in net interest margin, as compared to the third quarter of 2013, primarily reflects a reduction in the average balance of low-yielding cash and cash equivalents as a result of the sale of our Association Bank Services line of business in the fourth quarter of 2013, and an increase in the average yield on investment securities. The decline in net interest margin, as compared to the fourth quarter of 2012, primarily resulted from the change in the mix of our interest- earning assets, which have shifted from loans and investment securities to low-yielding cash and cash equivalents, and a decrease in the average yield on loans due to the low interest rate environment during these periods. This decrease was partially offset by a decrease in the cost of interest-bearing deposits resulting from the continued change in the mix of our average deposits and the continued re-pricing of certificates of deposit to current market interest rates upon maturity.

Provision for Loan Losses:

We recorded a negative provision for loan losses of $5.0 million for the fourth quarter of 2013 primarily as a result of the continued decline in nonaccrual loans, in addition to net recoveries of $1.8 million during the fourth quarter of 2013. The provision for loan losses was zero for the third quarter of 2013 and the fourth quarter of 2012. Net loan charge-offs were $1.4 million for the third quarter of 2013 and $22.6 million for the fourth quarter of 2012. Nonaccrual loans decreased $18.2 million, or 25.6 percent, during the fourth quarter of 2013 to $53.0 million at Dec. 31, 2013, compared to $71.1 million at Sept. 30, 2013 and $109.9 million at Dec. 31, 2012, representing a 51.8 percent decrease in nonaccrual loans year-over-year.

Noninterest Income:

Noninterest income was $43.9 million for the fourth quarter of 2013, in comparison to $15.6 million for the third quarter of 2013 and $16.6 million for the fourth quarter of 2012. Noninterest income for the fourth quarter of 2013 includes a gain of $28.6 million related to the sale of First Bank's Association Bank Services line of business in November 2013, after the write-off of goodwill of $18.0 million allocated to the transaction.

Net (losses) gains associated with changes in the fair value of mortgage and SBA servicing rights were $(468,000), $283,000 and $(867,000) for the fourth quarter of 2013, the third quarter of 2013 and the fourth quarter of 2012, respectively, primarily reflecting changes in mortgage interest rates and the related changes in estimated prepayment speeds during these time periods.

The gain on sale of residential mortgage loans was $602,000, $1.3 million and $2.6 million for the fourth quarter of 2013, the third quarter of 2013 and the fourth quarter of 2012, respectively, primarily reflecting declines in loan production volumes in our mortgage banking division as new interest rate lock commitments decreased to $48.4 million for the fourth quarter of 2013, from $67.7 million for the third quarter of 2013 and $149.9 million for the fourth quarter of 2012.

Net gains on sales of other real estate and repossessed assets were $1.2 million for the fourth quarter of 2013, in comparison to $795,000 for the third quarter of 2013 and $1.2 million for the fourth quarter of 2012.

Noninterest Expense:

Noninterest expense was $154.2 million for the fourth quarter of 2013, in comparison to $46.5 million for the third quarter of 2013 and $54.6 million for the fourth quarter of 2012. Excluding goodwill impairment, which is further discussed below, noninterest expense was $46.9 million for the fourth quarter of 2013.

We recorded goodwill impairment of $107.3 million during the fourth quarter of 2013 related to the increase in carrying value of our single reporting unit as a result of the reversal of substantially all of the valuation allowance against our deferred tax assets.

Write-downs and expenses on other real estate properties and repossessed assets were $940,000, $2.0 million and $7.5 million for the fourth quarter of 2013, the third quarter of 2013 and the fourth quarter of 2012, respectively, primarily reflecting write-downs on certain other real estate properties of $172,000, $1.4 million and $6.6 million, respectively, resulting from a decline in the fair value of certain properties upon periodic re-valuation. The overall reduction in these expenses in the fourth quarter of 2013, as compared to the fourth quarter of 2012, is reflective of the continued reduction in the overall number and balance of other real estate properties and repossessed assets.

Noninterest expense during the fourth quarter of 2012 includes a $2.3 million fair value adjustment on bank-owned facilities of eight of the Company's Florida branches previously reported as discontinued operations that were reclassified to continuing operations during the fourth quarter of 2012.

Provision for Income Taxes:

The Company recorded a benefit for income taxes of $288.2 million, $65,000 and $217,000 for the fourth quarter of 2013, the third quarter of 2013 and the fourth quarter of 2012, respectively. During the fourth quarter of 2013, the Company reversed substantially all of its valuation allowance against its net deferred tax assets, previously established in 2008. We concluded that, as of Dec. 31, 2013, it was more likely than not that substantially all of our deferred tax assets would be realized in future years. This conclusion was primarily based on eight consecutive quarters of profitability, in addition to the significant improvement in our asset quality and regulatory capital ratios over the last few years.

Cash and Cash Equivalents:

Cash and cash equivalents were $190.4 million at Dec. 31, 2013, compared to $714.2 million at Sept. 30, 2013 and $520.0 million at Dec. 31, 2012. The decrease in cash and cash equivalents during the fourth quarter of 2013 reflects the sale of our Association Bank Services line of business in the fourth quarter of 2013, which resulted in a cash outflow of $487.7 million during the fourth quarter of 2013.

Investment Securities:

Investment securities were $2.35 billion at Dec. 31, 2013, compared to $2.37 billion at Sept. 30, 2013 and $2.68 billion at Dec. 31, 2012. The Company continues to maintain a high level of investment securities in an effort to support future loan growth opportunities.

Loans:

Loans, net of deferred loan fees, were $2.86 billion at Dec. 31, 2013, compared to $2.81 billion at Sept. 30, 2013 and $2.93 billion at Dec. 31, 2012. The Company recorded loan growth during the fourth quarter of 2013 as a result of growth in commercial real estate and commercial and industrial production volumes, partially offset by the sale of $20.8 million of loans at par value associated with First Bank's Association Bank Services line of business in November 2013.

Deposits:

Deposits were $4.81 billion at Dec. 31, 2013, in comparison to $5.38 billion at Sept. 30, 2013 and $5.65 billion at Dec. 31, 2012. The sale of the First Bank's Association Bank Services line of business in November 2013 resulted in a decrease in deposits of $572.1 million during the fourth quarter of 2013. The sale of eight branches in First Bank'sNorthern Florida Region in April 2013 resulted in a decrease in deposits of $120.3 million during the second quarter of 2013.

Stockholders' Equity:

Stockholders' equity, including noncontrolling interest in subsidiary, was $488.3 million at Dec. 31, 2013, in comparison to $269.1 million at Sept. 30, 2013 and $300.0 million at Dec. 31, 2012. The increase during the fourth quarter of 2013 primarily reflects net income of $219.7 million for the fourth quarter of 2013. Accumulated other income declined $37.8 million during 2013 to $7.5 million at Dec. 31, 2013, as compared to $45.3 million at Dec. 31, 2012, primarily due to a decrease in unrealized gains on available-for-sale investment securities resulting from an increase in market interest rates during 2013.

Asset Quality:

The Company reduced its overall level of nonperforming assets by $26.3 million, or 18.0 percent, during the fourth quarter of 2013, and $82.2 million, or 40.7 percent, year-over-year. The Company reduced its ratio of nonaccrual loans to total loans to 1.85 percent at Dec. 31, 2013, from 2.53 percent at Sept. 30, 2013 and 3.75 percent at Dec. 31, 2012. The allowance for loan losses as a percentage of nonaccrual loans increased to 153.02 percent at Dec. 31, 2013, as compared to 118.48 percent at Sept. 30, 2013 and 83.37 percent at Dec. 31, 2012.

Regulatory Capital:

First Bank's and First Banks, Inc.'s regulatory capital ratios increased during the fourth quarter of 2013, reflecting significant improvement in each of the regulatory capital ratios, as a result of the reversal of substantially all of our valuation allowance against our deferred tax assets and the gain on the sale of our Association Bank Services line of business. The recognition of goodwill impairment had no impact on our regulatory capital ratios. First Bank is considered well capitalized under the prompt corrective action provisions of the regulatory capital standards and First Banks, Inc. is considered adequately capitalized under the regulatory capital standards established for bank holding companies.

Corporate Transactions:

On November 22, 2013, First Bank completed the sale of certain assets and the transfer of certain liabilities of its Association Bank Services line of business, to Union Bank, N.A., headquartered in San Francisco, which resulted in a gain of $28.6 million, after the write-off of goodwill allocated to the transaction of $18.0 million. First Bank's Association Bank Services line of business, headquartered in Vallejo, Calif., provided a full range of services to homeowners associations and community management companies. In conjunction with this transaction, Union Bank assumed $572.1 million of deposits, as well as certain other liabilities, and purchased approximately $20.8 million of loans at par value.

Junior Subordinated Debentures:

On Jan. 31, the Company received regulatory approval from the Federal Reserve Bank of St. Louis, subject to certain conditions, which grants First Bank the authority to pay a dividend to the Company, and grants 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. Subject to those certain conditions, the Company intends to make payment of such accumulated deferred interest on the regularly scheduled quarterly payment dates in March and April. The Company and First Bank must receive approval from the FRB prior to making any future interest payments on the Company's outstanding junior subordinated debentures. The Company is unable to predict whether or when the FRB will grant approval to the Company to make any such future interest payments.

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