UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
[   ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to ________

Commission File Number: 0-20632

FIRST BANKS, INC.

(Exact name of registrant as specified in its charter)

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

(314) 854-4600

(Registrant’s telephone number, including area code)

__________________________

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

þ Yes      o No

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

þ Yes      o No

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

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

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

o Yes      þ No

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

Class	Shares Outstanding at October 31, 2012
Common Stock, $250.00 par value	23,661

FIRSTBANKS,INC.

TABLE OFCONTENTS

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Consolidated Balance Sheets	1
	Consolidated Statements of Operations	2
	Consolidated Statements of Comprehensive Income (Loss)	3
	Consolidated Statements of Changes in Stockholders’ Equity	4
	Consolidated Statements of Cash Flows	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	43
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	76
Item 4.	Controls and Procedures	76
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	76
Item 1A.	Risk Factors	76
Item 6.	Exhibits	77
SIGNATURES		78

PARTI–FINANCIALINFORMATION

ITEM1–FINANCIALSTATEMENTS

FIRSTBANKS,INC.

CONSOLIDATEDBALANCESHEETS–(UNAUDITED)

(dollars expressed in thousands, except share and per share data)

	September 30, 2012			December 31, 2011
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	95,571		100,693
Short-term investments	193,435			371,318
Total cash and cash equivalents	289,006			472,011
Investment securities:
Available for sale	2,081,535			2,457,887
Held to maturity (fair value of $687,433 and $13,424, respectively)	682,748			12,817
Total investment securities	2,764,283			2,470,704
Loans:
Commercial, financial and agricultural	625,402			725,130
Real estate construction and development	204,822			249,987
Real estate mortgage	2,173,574			2,255,332
Consumer and installment	18,752			23,333
Loans held for sale	58,241			31,111
Net deferred loan fees	(360		)	(942	)
Total loans	3,080,431			3,283,951
Allowance for loan losses	(114,202		)	(137,710	)
Net loans	2,966,229			3,146,241
Federal Reserve Bank and Federal Home Loan Bank stock	26,712			27,078
Bank premises and equipment, net	121,713			127,868
Goodwill and other intangible assets	121,967			121,967
Deferred income taxes	26,967			19,121
Other real estate and repossessed assets	110,353			129,896
Other assets	65,694			73,018
Assets of discontinued operations	20,203			21,009
Total assets	$	6,513,127		6,608,913
LIABILITIES
Deposits:
Noninterest-bearing demand	$	1,272,660		1,209,759
Interest-bearing demand	931,511			884,168
Savings and money market	1,835,525			1,893,560
Time deposits of $100 or more	463,752			521,674
Other time deposits	829,180			942,669
Total deposits	5,332,628			5,451,830
Other borrowings	28,370			50,910
Subordinated debentures	354,114			354,057
Deferred income taxes	34,107			26,261
Accrued expenses and other liabilities	138,727			115,902
Liabilities of discontinued operations	326,146			346,282
Total liabilities	6,214,092			6,345,242
STOCKHOLDERS’ EQUITY
First Banks, Inc. stockholders’ equity:
Preferred stock:
Class A convertible, adjustable rate, $20.00 par value, 750,000 shares authorized, 641,082 shares issued and outstanding	12,822			12,822
Class B adjustable rate, $1.50 par value, 200,000 shares authorized, 160,505 shares issued and outstanding	241			241
Class C fixed rate, cumulative, perpetual, $1.00 par value, 295,400 shares authorized, issued and outstanding	290,863			288,203
Class D fixed rate, cumulative, perpetual, $1.00 par value, 14,770 shares authorized, issued and outstanding	17,343			17,343
Common stock, $250.00 par value, 25,000 shares authorized, 23,661 shares issued and outstanding	5,915			5,915
Additional paid-in capital	12,480			12,480
Retained deficit	(177,202		)	(183,351	)
Accumulated other comprehensive income	42,850			16,066
Total First Banks, Inc. stockholders’ equity	205,312			169,719
Noncontrolling interest in subsidiary	93,723			93,952
Total stockholders’ equity	299,035			263,671
Total liabilities and stockholders’ equity	$	6,513,127		6,608,913

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

1

FIRSTBANKS,INC.

CONSOLIDATEDSTATEMENTS OFOPERATIONS–(UNAUDITED)

(dollars expressed in thousands, except share and per share data)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2012			2011		2012		2011
Interest income:
Interest and fees on loans	$	34,874		43,098		109,641		143,010
Investment securities	15,235			12,911		43,394		32,410
Federal Reserve Bank and Federal Home Loan Bank stock	290			340		850		1,075
Short-term investments	137			347		596		1,359
Total interest income	50,536			56,696		154,481		177,854
Interest expense:
Deposits:
Interest-bearing demand	140			240		420		803
Savings and money market	754			1,854		2,616		6,584
Time deposits of $100 or more	911			1,683		3,109		6,214
Other time deposits	1,522			2,800		5,274		10,056
Other borrowings	16			36		57		102
Subordinated debentures	3,747			3,408		11,116		10,076
Total interest expense	7,090			10,021		22,592		33,835
Net interest income	43,446			46,675		131,889		144,019
Provision for loan losses	—			19,000		2,000		52,000
Net interest income after provision for loan losses	43,446			27,675		129,889		92,019
Noninterest income:
Service charges on deposit accounts and customer service fees	8,877			9,904		26,511		29,003
Gain on loans sold and held for sale	4,325			2,520		10,308		3,928
Net gain on investment securities	789			4,165		1,306		5,282
Decrease in fair value of servicing rights	(2,417		)	(4,370	)	(4,608	)	(6,739	)
Loan servicing fees	1,741			2,035		5,659		6,404
Other	3,176			2,491		9,894		7,744
Total noninterest income	16,491			16,745		49,070		45,622
Noninterest expense:
Salaries and employee benefits	18,990			19,557		56,797		58,407
Occupancy, net of rental income	5,735			5,691		15,780		17,645
Furniture and equipment	2,605			2,716		7,777		8,773
Postage, printing and supplies	641			695		2,055		2,211
Information technology fees	5,219			6,452		17,130		19,560
Legal, examination and professional fees	2,240			2,828		7,700		9,095
Amortization of intangible assets	—			712		—		2,278
Advertising and business development	522			459		1,569		1,386
FDIC insurance	3,322			3,550		10,037		12,212
Write-downs and expenses on other real estate and repossessed assets	2,922			2,551		11,204		12,970
Other	6,861			10,548		18,849		22,467
Total noninterest expense	49,057			55,759		148,898		167,004
Income (loss) from continuing operations before (benefit) provision for income taxes	10,880			(11,339	)	30,061		(29,363	)
(Benefit) provision for income taxes	(138		)	(11,581	)	78		(11,457	)
Net income (loss) from continuing operations, net of tax	11,018			242		29,983		(17,906	)
Loss from discontinued operations, net of tax	(2,329		)	(2,984	)	(7,333	)	(8,895	)
Net income (loss)	8,689			(2,742	)	22,650		(26,801	)
Less: net income (loss) attributable to noncontrolling interest in subsidiary	216			(668	)	(229	)	(1,530	)
Net income (loss) attributable to First Banks, Inc.	$	8,473		(2,074	)	22,879		(25,271	)
Preferred stock dividends declared and undeclared	4,753			4,506		14,070		13,341
Accretion of discount on preferred stock	893			874		2,660		2,593
Net income (loss) available to common stockholders	$	2,827		(7,454	)	6,149		(41,205	)
Basic and diluted earnings (loss) per common share from continuing operations	$	217.91		(188.89	)	569.81		(1,365.48	)
Basic and diluted loss per common share from discontinued operations	$	(98.43	)	(126.12	)	(309.92	)	(375.94	)
Basic and diluted earnings (loss) per common share	$	119.48		(315.01	)	259.89		(1,741.42	)
Weighted average shares of common stock outstanding	23,661			23,661		23,661		23,661

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

2

FIRSTBANKS,INC.

CONSOLIDATEDSTATEMENTS OFCOMPREHENSIVEINCOME (LOSS)–(UNAUDITED)

(dollars expressed in thousands)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2012			2011		2012		2011
Net income (loss)	$	8,689		(2,742	)	22,650		(26,801	)
Other comprehensive income (loss):
Unrealized gains on available-for-sale investment securities, net of tax	2,740			5,644		14,610		29,024
Reclassification adjustment for available-for-sale investment securities gains included in net income (loss), net of tax	(422		)	(2,708	)	(758	)	(3,427	)
Amortization of net unrealized gain associated with reclassification of available-for-sale investment securities to held-to-maturity investment securities, net of taxes	(474		)	—		(474	)	—
Reclassification adjustment for deferred tax asset valuation allowance on investment securities	7,086			(10,002	)	13,297		2,200
Amortization of net loss related to pension liability, net of tax	21			15		63		47
Reclassification adjustment for deferred tax asset valuation allowance on pension liability	15			12		46		35
Other comprehensive income (loss)	8,966			(7,039	)	26,784		27,879
Comprehensive income (loss)	17,655			(9,781	)	49,434		1,078
Comprehensive income (loss) attributable to noncontrolling interest in subsidiary	216			(668	)	(229	)	(1,530	)
Comprehensive income (loss) attributable to First Banks, Inc.	$	17,439		(9,113	)	49,663		2,608

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

3

FIRSTBANKS,INC.

CONSOLIDATEDSTATEMENTS OFCHANGES INSTOCKHOLDERS’EQUITY–(UNAUDITED)

Nine Months EndedSeptember 30, 2012 and Year Ended December 31, 2011

(dollars expressed in thousands)

	First Banks, Inc. Stockholders’ Equity
	Preferred Stock		Common Stock	Additional Paid-In Capital	Retained Earnings (Deficit)		Accumulated Other Comprehensive Income (Loss)		Non- controlling Interest		Total Stockholders’ Equity
Balance, December 31, 2010	$	315,143	5,915	12,480	(120,827	)	(2,318	)	96,902		307,295
Net loss	—		—	—	(41,150	)	—		(2,950	)	(44,100	)
Other comprehensive income	—		—	—	—		18,384		—		18,384
Accretion of discount on preferred stock	3,466		—	—	(3,466	)	—		—		—
Preferred stock dividends declared	—		—	—	(17,908	)	—		—		(17,908	)
Balance, December 31, 2011	318,609		5,915	12,480	(183,351	)	16,066		93,952		263,671
Net income	—		—	—	22,879		—		(229	)	22,650
Other comprehensive income	—		—	—	—		26,784		—		26,784
Accretion of discount on preferred stock	2,660		—	—	(2,660	)	—		—		—
Preferred stock dividends declared	—		—	—	(14,070	)	—		—		(14,070	)
Balance, September 30, 2012	$	321,269	5,915	12,480	(177,202	)	42,850		93,723		299,035

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

4

FIRSTBANKS,INC.

CONSOLIDATEDSTATEMENTS OFCASHFLOWS–(UNAUDITED)

(dollars expressed in thousands)

	Nine Months Ended
	September 30,
	2012			2011
Cash flows from operating activities:
Net income (loss) attributable to First Banks, Inc.	$	22,879		(25,271	)
Net loss attributable to noncontrolling interest in subsidiary	(229		)	(1,530	)
Less: net loss from discontinued operations	(7,333		)	(8,895	)
Net income (loss) from continuing operations	29,983			(17,906	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization of bank premises and equipment	8,885			9,995
Amortization of intangible assets	—			2,278
Amortization and accretion of investment securities	11,471			8,286
Originations of loans held for sale	(325,844		)	(177,527	)
Proceeds from sales of loans held for sale	305,523			199,224
Provision for loan losses	2,000			52,000
Provision for current income taxes	78			455
Provision (benefit) for deferred income taxes	5,864			(12,177	)
(Decrease) increase in deferred tax asset valuation allowance	(5,864		)	265
Decrease in accrued interest receivable	1,511			2,790
Increase in accrued interest payable	8,953			5,466
Gain on loans sold and held for sale	(10,308		)	(3,928	)
Net gain on investment securities	(1,306		)	(5,282	)
Decrease in fair value of servicing rights	4,608			6,739
Write-downs on other real estate and repossessed assets	7,939			8,410
Other operating activities, net	9,819			17,467
Net cash provided by operating activities – continuing operations	53,312			96,555
Net cash used in operating activities – discontinued operations	(6,671		)	(7,881	)
Net cash provided by operating activities	46,641			88,674
Cash flows from investing activities:
Net cash paid for sale of assets and liabilities of discontinued operations, net of cash and cash equivalents sold	—			(51,339	)
Cash paid for sale of branches, net of cash and cash equivalents sold	—			(16,256	)
Proceeds from sales of investment securities available for sale	315,238			283,713
Maturities of investment securities available for sale	576,635			197,721
Maturities of investment securities held to maturity	57,531			538
Purchases of investment securities available for sale	(1,226,473		)	(1,372,074	)
Purchases of investment securities held to maturity	—			(3,450	)
Net redemptions of Federal Reserve Bank and Federal Home Loan Bank stock	366			2,864
Proceeds from sales of commercial loans	20,386			65,867
Cash paid for purchase of one-to-four-family residential real estate loans	(141,048		)	—
Net decrease in loans	276,703			732,727
Recoveries of loans previously charged-off	22,819			16,928
Purchases of bank premises and equipment	(3,934		)	(3,825	)
Net proceeds from sales of other real estate and repossessed assets	33,837			57,619
Other investing activities, net	216			145
Net cash used in investing activities – continuing operations	(67,724		)	(88,822	)
Net cash provided by investing activities – discontinued operations	104			2,737
Net cash used in investing activities	(67,620		)	(86,085	)
Cash flows from financing activities:
Increase (decrease) in demand, savings and money market deposits	52,209			(57,693	)
Decrease in time deposits	(171,411		)	(406,225	)
(Decrease) increase in other borrowings	(22,540		)	21,311
Net cash used in financing activities – continuing operations	(141,742		)	(442,607	)
Net cash used in financing activities – discontinued operations	(20,284		)	(57,110	)
Net cash used in financing activities	(162,026		)	(499,717	)
Net decrease in cash and cash equivalents	(183,005		)	(497,128	)
Cash and cash equivalents, beginning of period	472,011			995,758
Cash and cash equivalents, end of period	$	289,006		498,630
Supplemental disclosures of cash flow information:
Cash paid for interest on liabilities	$	13,639		28,369
Cash received for income taxes	(458		)	(99	)
Noncash investing and financing activities:
Reclassification of investment securities from available for sale to held to maturity	$	729,142		—
Loans transferred to other real estate and repossessed assets	21,788			52,597

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

5

FIRSTBANKS,INC.

NOTES TOCONSOLIDATEDFINANCIALSTATEMENTS

NOTE1–BASIS OFPRESENTATION

The consolidated financial statements of First Banks, Inc. and subsidiaries (the Company) are unaudited and should be read in conjunction with the consolidated financial statements contained in the Company’s 2011 Annual Report on Form 10-K. The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and conform to predominant practices within the banking industry. Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare the consolidated financial statements in conformity with GAAP. Actual results could differ from those estimates. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation of the results of operations for the interim periods presented herein, have been included. Operating results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

Certain reclassifications of 2011 amounts have been made to conform to the 2012 presentation, including the reclassification of the Company’s investment in the common securities of its various affiliated statutory and business trusts (collectively, the Trusts) that were created for the sole purpose of issuing trust preferred securities, as further described in Note 9 to the consolidated financial statements. The investment in the common securities of the Trusts was reclassified from available-for-sale investment securities to other assets and the dividend income accrued on the common securities of the Trusts was reclassified from interest income on investment securities to other income. The reclassifications were applied retrospectively to all periods presented.

All financial information is reported on a continuing operations basis, unless otherwise noted. See Note 2 to the consolidated financial statements for a discussion regarding discontinued operations.

Principles of Consolidation. The consolidated financial statements include the accounts of the parent company and its subsidiaries, giving effect to the noncontrolling interest in subsidiary, as more fully described below and in Note 16 to the consolidated financial statements. All significant intercompany accounts and transactions have been eliminated.

The Company operates through its wholly owned subsidiary bank holding company, The San Francisco Company (SFC), headquartered in St. Louis, Missouri, and SFC’s wholly owned subsidiary bank, First Bank, also headquartered in St. Louis, Missouri. First Bank operates through its branch banking offices and subsidiaries: First Bank Business Capital, Inc.; FB Holdings, LLC (FB Holdings); Small Business Loan Source LLC; ILSIS, Inc.; FBIN, Inc.; SBRHC, Inc.; HVIIHC, Inc.; FBSA Missouri, Inc.; FBSA California, Inc.; NT Resolution Corporation; and LC Resolution Corporation. All of the subsidiaries are wholly owned as of September 30, 2012, except FB Holdings, which is 53.23% owned by First Bank and 46.77% owned by First Capital America, Inc. (FCA), a corporation owned and operated by the Company’s Chairman of the Board and members of his immediate family, including Mr. Michael Dierberg, Vice Chairman of the Company, as further described in Note 16 to the consolidated financial statements. FB Holdings is included in the consolidated financial statements and the noncontrolling ownership interest is reported as a component of stockholders’ equity in the consolidated balance sheets as “noncontrolling interest in subsidiary” and the earnings or loss, net of tax, attributable to the noncontrolling ownership interest, is reported as “net income (loss) attributable to noncontrolling interest in subsidiary” in the consolidated statements of operations.

NOTE2–DISCONTINUEDOPERATIONS

Discontinued Operations. The assets and liabilities associated with the transactions described (and defined) below were previously reported in the First Bank segment and were sold, or are expected to be sold, as part of the Company’s Capital Optimization Plan (Capital Plan). The Company applied discontinued operations accounting in accordance with ASC Topic 205-20, “Presentation of Financial Statements – Discontinued Operations,” to the assets and liabilities associated with the Florida Region as of September 30, 2012 and December 31, 2011, and to the operations of First Bank’s 19 Florida retail branches and three of First Bank’s Northern Illinois retail branches for the three and nine months ended September 30, 2012 and 2011, as applicable. The Company did not allocate any consolidated interest that is not directly attributable to or related to discontinued operations. All financial information in the consolidated financial statements and notes to the consolidated financial statements is reported on a continuing operations basis, unless otherwise noted.

Florida Region. On January 25, 2012, First Bank entered into a Branch Purchase and Assumption Agreement to sell certain assets and transfer certain liabilities associated with First Bank’s Florida franchise (Florida Region) to an unaffiliated financial institution. Under the terms of the agreement, the unaffiliated financial institution was to assume approximately $345.3 million of deposits associated with First Bank’s 19 Florida retail branches for a premium of 2.3%. The unaffiliated financial institution was also expected to purchase premises and equipment and assume the leases associated with the Florida Region at a discount of $1.2 million. The agreement was subject to several closing conditions. The potential buyer failed to meet certain conditions and First

6

Bank exercised its right to terminate the agreement on April 4, 2012. Under the terms of the agreement, First Bank received an escrow deposit from the potential buyer upon the termination of the agreement that was more than sufficient to offset First Bank’s expenses associated with the proposed transaction. The assets and liabilities associated with the Florida Region are reflected in assets and liabilities of discontinued operations in the consolidated balance sheet as of September 30, 2012 and December 31, 2011. The Company continued to apply discontinued operations accounting to the assets and liabilities and related operations of the Florida Region as of September 30, 2012 and for the three and nine months ended September 30, 2012 and 2011 as it continues to actively market the Florida Region for sale.

Northern Illinois Region. On December 21, 2010, First Bank entered into a Branch Purchase and Assumption Agreement with United Community Bank (United Community) that provided for the sale of certain assets and the transfer of certain liabilities associated with First Bank’s three retail branches in Pittsfield, Roodhouse and Winchester, Illinois (Northern Illinois Region) to United Community. The transaction was completed on May 13, 2011. Under the terms of the agreement, United Community assumed $92.2 million of deposits associated with these branches for a weighted average premium of approximately 2.4%, or $2.2 million. United Community also purchased $37.5 million of loans as well as certain other assets at par value, including premises and equipment, associated with these branches. The transaction resulted in a gain of $425,000, after the write-off of goodwill and intangible assets of $1.6 million allocated to the Northern Illinois Region, during the second quarter of 2011.

Assets and liabilities of discontinued operations at September 30, 2012 and December 31, 2011 were as follows:

	September 30, 2012		December 31, 2011
	Florida		Florida
	(dollars expressed in thousands)
Cash and due from banks	$	2,016	2,147
Loans:
Commercial, financial and agricultural	—		65
Consumer and installment, net of net deferred loan fees	—		263
Total loans	—		328
Bank premises and equipment, net	14,149		14,496
Goodwill and other intangible assets	4,000		4,000
Other assets	38		38
Assets of discontinued operations	$	20,203	21,009
Deposits:
Noninterest-bearing demand	$	28,325	24,966
Interest-bearing demand	26,134		23,144
Savings and money market	147,008		158,328
Time deposits of $100 or more	46,681		48,613
Other time deposits	77,526		90,823
Total deposits	325,674		345,874
Other borrowings	188		272
Accrued expenses and other liabilities	284		136
Liabilities of discontinued operations	$	326,146	346,282

7

Loss from discontinued operations, net of tax, for the three months ended September 30, 2012 and 2011 was as follows:

	Three Months Ended			Three Months Ended
	September 30, 2012			September 30, 2011
	Florida			Florida		Northern Illinois	Total
	(dollars expressed in thousands)
Interest income:
Interest and fees on loans	$	—		5		—	5
Interest expense:
Interest on deposits	446			948		—	948
Net interest loss	(446		)	(943	)	—	(943	)
Provision for loan losses	—			—		—	—
Net interest loss after provision for loan losses	(446		)	(943	)	—	(943	)
Noninterest income:
Service charges and customer service fees	299			332		—	332
Other	10			5		—	5
Total noninterest income	309			337		—	337
Noninterest expense:
Salaries and employee benefits	1,100			1,139		—	1,139
Occupancy, net of rental income	633			646		—	646
Furniture and equipment	111			159		—	159
Legal, examination and professional fees	3			5		—	5
Amortization of intangible assets	—			16		—	16
FDIC insurance	197			231		—	231
Other	148			182		—	182
Total noninterest expense	2,192			2,378		—	2,378
Loss from operations of discontinued operations	(2,329		)	(2,984	)	—	(2,984	)
Benefit for income taxes	—			—		—	—
Net loss from discontinued operations, net of tax	$	(2,329	)	(2,984	)	—	(2,984	)

8

Loss from discontinued operations, net of tax, for the nine months ended September 30, 2012 and 2011 was as follows:

	Nine Months Ended			Nine Months Ended
	September 30, 2012			September 30, 2011
	Florida			Florida		Northern Illinois	Total
	(dollars expressed in thousands)
Interest income:
Interest and fees on loans	$	4		13		895	908
Interest expense:
Interest on deposits	1,514			3,331		261	3,592
Net interest (loss) income	(1,510		)	(3,318	)	634	(2,684	)
Provision for loan losses	—			—		—	—
Net interest (loss) income after provision for loan losses	(1,510		)	(3,318	)	634	(2,684	)
Noninterest income:
Service charges and customer service fees	955			969		259	1,228
Loan servicing fees	—			—		5	5
Other	30			16		—	16
Total noninterest income	985			985		264	1,249
Noninterest expense:
Salaries and employee benefits	3,363			3,454		357	3,811
Occupancy, net of rental income	1,901			1,899		68	1,967
Furniture and equipment	395			578		29	607
Legal, examination and professional fees	28			20		6	26
Amortization of intangible assets	—			49		—	49
FDIC insurance	601			707		100	807
Other	520			551		67	618
Total noninterest expense	6,808			7,258		627	7,885
(Loss) income from operations of discontinued operations	(7,333		)	(9,591	)	271	(9,320	)
Net gain on sale of discontinued operations	—			—		425	425
Benefit for income taxes	—			—		—	—
Net (loss) income from discontinued operations, net of tax	$	(7,333	)	(9,591	)	696	(8,895	)

9

NOTE3–INVESTMENTS INDEBT ANDEQUITYSECURITIES

Securities Available for Sale. The amortized cost, contractual maturity, gross unrealized gains and losses and fair value of investment securities available for sale at September 30, 2012 and December 31, 2011 were as follows:

	Maturity									Total	Gross				Weighted
	1 Year			1-5		5-10		After		Amortized	Unrealized			Fair	Average
	or Less			Years		Years		10 Years		Cost	Gains	Losses		Value	Yield
	(dollars expressed in thousands)
September 30, 2012:
Carrying value:
U.S. Government sponsored agencies	$	10,097		80,584		—		215,021		305,702	2,940	(370	)	308,272	1.51	%
Residential mortgage-backed	565			23,879		226,893		1,285,694		1,537,031	41,486	(1,773	)	1,576,744	2.42
Commercial mortgage-backed	—			—		809		—		809	115	—		924	5.03
State and political subdivisions	305			4,261		201		—		4,767	190	—		4,957	4.03
Corporate notes	—			136,872		49,688		—		186,560	4,590	(1,544	)	189,606	3.19
Equity investments	—			—		—		1,000		1,000	32	—		1,032	2.56
Total	$	10,967		245,596		277,591		1,501,715		2,035,869	49,353	(3,687	)	2,081,535	2.36
Fair value:
Debt securities	$	11,077		250,816		278,875		1,539,735
Equity securities	—			—		—		1,032
Total	$	11,077		250,816		278,875		1,540,767
Weighted average yield	1.89		%	2.24	%	2.61	%	2.34	%
December 31, 2011:
Carrying value:
U.S. Government sponsored agencies	$	1,000		231,691		107,019		—		339,710	2,107	—		341,817	1.75	%
Residential mortgage-backed	—			2,726		64,309		1,821,209		1,888,244	36,908	(232	)	1,924,920	2.27
Commercial mortgage-backed	—			—		818		—		818	92	—		910	4.86
State and political subdivisions	310			4,088		786		—		5,184	226	—		5,410	4.00
Corporate notes	—			122,941		65,088		5,000		193,029	—	(9,216	)	183,813	3.28
Equity investments	—			—		—		1,000		1,000	17	—		1,017	2.83
Total	$	1,310		361,446		238,020		1,827,209		2,427,985	39,350	(9,448	)	2,457,887	2.28
Fair value:
Debt securities	$	1,314		357,194		236,824		1,861,538
Equity securities	—			—		—		1,017
Total	$	1,314		357,194		236,824		1,862,555
Weighted average yield	2.93		%	2.07	%	2.56	%	2.28	%

10

Securities Held to Maturity. The amortized cost, contractual maturity, gross unrealized gains and losses and fair value of investment securities held to maturity at September 30, 2012 and December 31, 2011 were as follows:

	Maturity									Total	Gross				Weighted
	1 Year			1-5		5-10		After		Amortized	Unrealized			Fair	Average
	or Less			Years		Years		10 Years		Cost	Gains	Losses		Value	Yield
	(dollars expressed in thousands)
September 30, 2012:
Carrying value:
U.S. Government sponsored agencies	$	—		—		57,726		—		57,726	219	—		57,945	1.65	%
Residential mortgage-backed	—			—		108,792		511,146		619,938	5,105	(401	)	624,642	1.84
State and political subdivisions	1,370			1,926		253		1,535		5,084	64	(302	)	4,846	4.18
Total	$	1,370		1,926		166,771		512,681		682,748	5,388	(703	)	687,433	1.84
Fair value:
Debt securities	$	1,373		1,973		169,607		514,480
Weighted average yield	2.54		%	3.04	%	1.83	%	1.84	%
December 31, 2011:
Carrying value:
Residential mortgage-backed	$	—		—		728		615		1,343	116	—		1,459	5.06	%
Commercial mortgage-backed	—			6,310		—		—		6,310	447	—		6,757	5.16
State and political subdivisions	1,372			2,004		254		1,534		5,164	44	—		5,208	4.20
Total	$	1,372		8,314		982		2,149		12,817	607	—		13,424	4.76
Fair value:
Debt securities	$	1,387		8,768		1,056		2,213
Weighted average yield	2.55		%	4.67	%	4.60	%	6.61	%

Proceeds from sales of available-for-sale investment securities were $107.6 million and $315.2 million for the three and nine months ended September 30, 2012, respectively, compared to $156.2 million and $283.7 million for the comparable periods in 2011. Gross realized gains and gross realized losses on investment securities for the three and nine months ended September 30, 2012 and 2011were as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012			2011	2012		2011
	(dollars expressed in thousands)
Gross realized gains on sales of available-for-sale securities	$	790		4,165	1,682		5,285
Gross realized losses on sales of available-for-sale securities	—			—	(374	)	(1	)
Other-than-temporary impairment	(1		)	—	(2	)	(2	)
Net realized gain on investment securities	$	789		4,165	1,306		5,282

Investment securities with a carrying value of $295.8 million and $228.9 million at September 30, 2012 and December 31, 2011, respectively, were pledged in connection with deposits of public and trust funds, securities sold under agreements to repurchase and for other purposes as required by law.

On June 30, 2012, the Company reclassified certain of its available-for-sale investment securities to held-to-maturity investment securities at their respective fair values, which totaled $729.1 million, in aggregate. The determination of the reclassification was made by management based on the Company’s current and expected future liquidity levels and the resulting intent to hold such investment securities to maturity. The net gross unrealized gain on these available-for-sale investment securities at the time of transfer of $11.7 million, in aggregate, was recorded as additional premium on the securities and is being amortized over the remaining lives of the respective securities, as further described in Note 10 to the consolidated financial statements.

11

Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2012 and December 31, 2011 were as follows:

	Less than 12 months				12 months or more			Total
	Fair Value		Unrealized Losses		Fair Value	Unrealized Losses		Fair Value	Unrealized Losses
	(dollars expressed in thousands)
September 30, 2012:
Available for sale:
U.S. Government sponsored agencies	$	47,167	(370	)	—	—		47,167	(370	)
Residential mortgage-backed	133,667		(1,720	)	283	(53	)	133,950	(1,773	)
Corporate notes	14,677		(323	)	41,709	(1,221	)	56,386	(1,544	)
Total	$	195,511	(2,413	)	41,992	(1,274	)	237,503	(3,687	)
Held to maturity:
Residential mortgage-backed	$	58,818	(401	)	—	—		58,818	(401	)
State and political subdivisions	1,232		(302	)	—	—		1,232	(302	)
Total	$	60,050	(703	)	—	—		60,050	(703	)
December 31, 2011:
Available for sale:
Residential mortgage-backed	$	67,395	(126	)	22,349	(106	)	89,744	(232	)
Corporate notes	173,813		(9,216	)	—	—		173,813	(9,216	)
Total	$	241,208	(9,342	)	22,349	(106	)	263,557	(9,448	)

The Company does not believe the investment securities that were in an unrealized loss position at September 30, 2012 and December 31, 2011 are other-than-temporarily impaired. The unrealized losses on the investment securities were primarily attributable to fluctuations in interest rates. It is expected that the securities would not be settled at a price less than the amortized cost. Because the decline in fair value is attributable to changes in interest rates and not credit loss, and because the Company does not intend to sell these investments and it is more likely than not that First Bank will not be required to sell these securities before the anticipated recovery of the remaining amortized cost basis or maturity, these investments are not considered other-than-temporarily impaired. The unrealized losses for residential mortgage-backed securities for 12 months or more at September 30, 2012 and December 31, 2011 included nine and 11 securities, respectively. The unrealized losses for corporate notes for 12 months or more at September 30, 2012 included 10 securities.

NOTE4–LOANS ANDALLOWANCE FORLOANLOSSES

The following table summarizes the composition of the loan portfolio at September 30, 2012 and December 31, 2011:

	September 30, 2012			December 31, 2011
	(dollars expressed in thousands)
Commercial, financial and agricultural	$	625,402		725,130
Real estate construction and development	204,822			249,987
Real estate mortgage:
One-to-four-family residential	1,008,918			902,438
Multi-family residential	103,880			127,356
Commercial real estate	1,060,776			1,225,538
Consumer and installment	18,752			23,333
Loans held for sale	58,241			31,111
Net deferred loan fees	(360		)	(942	)
Loans, net of net deferred loan fees	$	3,080,431		3,283,951

12

Aging of Loans. The following table presents the aging of loans by loan classification at September 30, 2012 and December 31, 2011:

	30-59 Days		60-89 Days	Recorded Investment > 90 Days Accruing	Nonaccrual	Total Past Due	Current	Total Loans
	(dollars expressed in thousands)
September 30, 2012:
Commercial, financial and agricultural	$	1,001	515	59	21,970	23,545	601,857	625,402
Real estate construction and development	289		538	—	47,257	48,084	156,738	204,822
One-to-four-family residential:
Bank portfolio	3,457		798	444	7,685	12,384	119,086	131,470
Mortgage Division portfolio	7,582		5,925	—	15,987	29,494	491,031	520,525
Home equity	3,816		1,110	621	8,101	13,648	343,275	356,923
Multi-family residential	223		306	—	4,786	5,315	98,565	103,880
Commercial real estate	4,886		780	—	25,775	31,441	1,029,335	1,060,776
Consumer and installment	178		57	—	34	269	18,123	18,392
Loans held for sale	—		—	—	—	—	58,241	58,241
Total	$	21,432	10,029	1,124	131,595	164,180	2,916,251	3,080,431
December 31, 2011:
Commercial, financial and agricultural	$	1,602	2,085	1,095	55,340	60,122	665,008	725,130
Real estate construction and development	170		3,033	—	71,244	74,447	175,540	249,987
One-to-four-family residential:
Bank portfolio	4,506		2,577	362	14,690	22,135	143,443	165,578
Mortgage Division portfolio	5,994		1,571	—	16,778	24,343	342,572	366,915
Home equity	3,990		2,151	856	6,940	13,937	356,008	369,945
Multi-family residential	—		118	—	7,975	8,093	119,263	127,356
Commercial real estate	3,888		7,092	427	47,262	58,669	1,166,869	1,225,538
Consumer and installment	396		192	4	22	614	21,777	22,391
Loans held for sale	—		—	—	—	—	31,111	31,111
Total	$	20,546	18,819	2,744	220,251	262,360	3,021,591	3,283,951

Under the Company’s loan policy, loans are placed on nonaccrual status once principal or interest payments become 90 days past due. However, individual loan officers may submit written requests for approval to continue the accrual of interest on loans that become 90 days past due. These requests may be submitted for approval consistent with the authority levels provided in the Company’s credit approval policies, and they are only granted if an expected near term future event, such as a pending renewal or expected payoff, exists at the time the loan becomes 90 days past due. If the expected near term future event does not occur as anticipated, the loan is then placed on nonaccrual status.

Credit Quality Indicators. The Company’s credit management policies and procedures focus on identifying, measuring and controlling credit exposure. These procedures employ a lender-initiated system of rating credits, which is ratified in the loan approval process and subsequently tested in internal credit reviews, external audits and regulatory bank examinations. The system requires the rating of all loans at the time they are originated or acquired, except for homogeneous categories of loans, such as residential real estate mortgage loans and consumer loans. These homogeneous loans are assigned an initial rating based on the Company’s experience with each type of loan. The Company adjusts the ratings of the homogeneous loans based on payment experience subsequent to their origination.

The Company includes adversely rated credits, including loans requiring close monitoring that would not normally be considered classified credits by the Company’s regulators, on its monthly loan watch list. Loans may be added to the Company’s watch list for reasons that are temporary and correctable, such as the absence of current financial statements of the borrower or a deficiency in loan documentation. Loans may also be added to the Company’s watch list whenever any adverse circumstance is detected which might affect the borrower’s ability to comply with the contractual terms of the loan. The delinquency of a scheduled loan payment, deterioration in the borrower’s financial condition identified in a review of periodic financial statements, a decrease in the value of the collateral securing the loan, or a change in the economic environment within which the borrower operates could initiate the addition of a loan to the Company’s watch list. Loans on the Company’s watch list require periodic detailed loan status reports prepared by the responsible officer which are discussed in formal meetings with credit review and credit administration staff members. Upgrades and downgrades of loan risk ratings may be initiated by the responsible loan officer. However, upgrades

13

of risk ratings associated with significant credit relationships and/or problem credit relationships may only be made with the concurrence of appropriate regional credit officers.

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

The following tables present the credit exposure of the loan portfolio by internally assigned credit grade and payment activity as of September 30, 2012 and December 31, 2011:

Commercial Loan Portfolio Credit Exposure by Internally Assigned Credit Grade	Commercial and Industrial		Real Estate Construction and Development	Multi-family	Commercial Real Estate	Total
			(dollars expressed in thousands)
September 30, 2012:
Pass	$	568,532	46,725	66,559	888,233	1,570,049
Special mention	12,850		9,935	223	100,078	123,086
Substandard	18,111		89,012	29,213	29,418	165,754
Performing troubled debt restructuring	3,939		11,893	3,099	17,272	36,203
Nonaccrual	21,970		47,257	4,786	25,775	99,788
	$	625,402	204,822	103,880	1,060,776	1,994,880
December 31, 2011:
Pass	$	606,933	57,594	68,748	973,553	1,706,828
Special mention	25,742		11,977	18,678	119,478	175,875
Substandard	32,851		97,158	28,789	60,876	219,674
Performing troubled debt restructuring	4,264		12,014	3,166	24,369	43,813
Nonaccrual	55,340		71,244	7,975	47,262	181,821
	$	725,130	249,987	127,356	1,225,538	2,328,011

One-to-Four-Family Residential Mortgage Bank and Home Equity Loan Portfolio Credit Exposure by Internally Assigned Credit Grade	Bank Portfolio		Home Equity	Total
	(dollars expressed in thousands)
September 30, 2012:
Pass	$	104,337	344,951	449,288
Special mention	11,549		621	12,170
Substandard	6,288		3,250	9,538
Performing troubled debt restructuring	1,611		—	1,611
Nonaccrual	7,685		8,101	15,786
	$	131,470	356,923	488,393
December 31, 2011:
Pass	$	131,973	358,801	490,774
Special mention	12,797		954	13,751
Substandard	6,118		3,250	9,368
Nonaccrual	14,690		6,940	21,630
	$	165,578	369,945	535,523

14

One-to-Four-Family Residential Mortgage Division and Consumer and Installment Loan Portfolio Credit Exposure by Payment Activity	Mortgage Division Portfolio		Consumer and Installment	Total
	(dollars expressed in thousands)
September 30, 2012:
Pass	$	415,032	18,358	433,390
Substandard	8,411		—	8,411
Performing troubled debt restructuring	81,095		—	81,095
Nonaccrual	15,987		34	16,021
	$	520,525	18,392	538,917
December 31, 2011:
Pass	$	263,079	22,369	285,448
Substandard	4,429		—	4,429
Performing troubled debt restructuring	82,629		—	82,629
Nonaccrual	16,778		22	16,800
	$	366,915	22,391	389,306

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

The following tables present the recorded investment, unpaid principal balance, related allowance for loan losses, average recorded investment and interest income recognized while on impaired status for impaired loans without a related allowance for loan losses and for impaired loans with a related allowance for loan losses by loan classification at September 30, 2012 and December 31, 2011:

15

	Recorded Investment		Unpaid Principal Balance	Related Allowance for Loan Losses	Average Recorded Investment	Interest Income Recognized
	(dollars expressed in thousands)
September 30, 2012:
With No Related Allowance Recorded:
Commercial, financial and agricultural	$	12,404	31,959	—	19,579	162
Real estate construction and development	44,172		95,321	—	50,729	420
Real estate mortgage:
Bank portfolio	1,611		1,690	—	2,112	18
Mortgage Division portfolio	7,190		16,789	—	7,311	—
Home equity portfolio	1,382		1,507	—	1,279	—
Multi-family residential	7,291		9,714	—	8,328	131
Commercial real estate	27,333		38,763	—	37,040	968
Consumer and installment	—		—	—	—	—
	101,383		195,743	—	126,378	1,699
With A Related Allowance Recorded:
Commercial, financial and agricultural	13,505		18,806	991	21,316	—
Real estate construction and development	14,978		33,116	3,276	17,202	88
Real estate mortgage:
Bank portfolio	7,685		9,383	382	10,076	—
Mortgage Division portfolio	89,892		98,984	11,400	91,402	1,574
Home equity portfolio	6,719		7,597	1,620	6,219	—
Multi-family residential	594		594	302	679	—
Commercial real estate	15,714		20,050	2,206	21,295	—
Consumer and installment	34		34	1	57	—
	149,121		188,564	20,178	168,246	1,662
Total:
Commercial, financial and agricultural	25,909		50,765	991	40,895	162
Real estate construction and development	59,150		128,437	3,276	67,931	508
Real estate mortgage:
Bank portfolio	9,296		11,073	382	12,188	18
Mortgage Division portfolio	97,082		115,773	11,400	98,713	1,574
Home equity portfolio	8,101		9,104	1,620	7,498	—
Multi-family residential	7,885		10,308	302	9,007	131
Commercial real estate	43,047		58,813	2,206	58,335	968
Consumer and installment	34		34	1	57	—
	$	250,504	384,307	20,178	294,624	3,361

16

	Recorded Investment		Unpaid Principal Balance	Related Allowance for Loan Losses	Average Recorded Investment	Interest Income Recognized
	(dollars expressed in thousands)
December 31, 2011:
With No Related Allowance Recorded:
Commercial, financial and agricultural	$	20,494	53,140	—	25,294	336
Real estate construction and development	62,524		113,412	—	80,230	72
Real estate mortgage:
Bank portfolio	3,274		5,030	—	3,291	—
Mortgage Division portfolio	10,250		22,541	—	11,352	—
Home equity portfolio	196		198	—	210	—
Multi-family residential	7,961		8,378	—	8,358	92
Commercial real estate	45,452		61,766	—	59,613	435
Consumer and installment	1		1	—	2	—
	150,152		264,466	—	188,350	935
With A Related Allowance Recorded:
Commercial, financial and agricultural	39,110		64,867	5,475	48,270	—
Real estate construction and development	20,734		39,832	3,432	26,605	183
Real estate mortgage:
Bank portfolio	11,416		12,926	796	11,473	—
Mortgage Division portfolio	89,157		98,118	15,324	98,739	2,306
Home equity portfolio	6,744		7,657	1,388	7,212	—
Multi-family residential	3,180		5,281	335	3,339	—
Commercial real estate	26,179		34,073	3,875	34,335	168
Consumer and installment	21		21	4	60	—
	196,541		262,775	30,629	230,033	2,657
Total:
Commercial, financial and agricultural	59,604		118,007	5,475	73,564	336
Real estate construction and development	83,258		153,244	3,432	106,835	255
Real estate mortgage:
Bank portfolio	14,690		17,956	796	14,764	—
Mortgage Division portfolio	99,407		120,659	15,324	110,091	2,306
Home equity portfolio	6,940		7,855	1,388	7,422	—
Multi-family residential	11,141		13,659	335	11,697	92
Commercial real estate	71,631		95,839	3,875	93,948	603
Consumer and installment	22		22	4	62	—
	$	346,693	527,241	30,629	418,383	3,592

Recorded investment represents the Company’s investment in its impaired loans reduced by cumulative charge-offs recorded against the allowance for loan losses on these same loans. At September 30, 2012 and December 31, 2011, the Company had recorded charge-offs of $133.8 million and $180.5 million, respectively, on its impaired loans, representing the difference between the unpaid principal balance and the recorded investment reflected in the tables above. The unpaid principal balance represents the principal amount contractually owed to the Company by the borrowers on the impaired loans.

Troubled Debt Restructurings. In the ordinary course of business, the Company modifies loan terms across loan types, including both consumer and commercial loans, for a variety of reasons. Modifications to consumer loans may include, but are not limited to, changes in interest rate, maturity, amortization and financial covenants. In the original underwriting, loan terms are established that represent the then current and projected financial condition of the borrower. Over any period of time, modifications to these loan terms may be required due to changes in the original underwriting assumptions. These changes may include the financial covenants of the borrower as well as underwriting standards.

Loan modifications are generally performed at the request of the borrower, whether commercial or consumer, and may include reduction in interest rates, changes in payments and maturity date extensions. Although the Company does not have formal, standardized loan modification programs for its commercial or consumer loan portfolios, it addresses loan modifications on a case-by-case basis and also participates in the U.S. Treasury’s Home Affordable Modification Program (HAMP). HAMP gives

17

qualifying homeowners an opportunity to refinance into more affordable monthly payments, with the U.S. Treasury compensating the Company for a portion of the reduction in monthly amounts due from borrowers participating in this program. At September 30, 2012 and December 31, 2011, the Company had $76.1 million and $75.9 million, respectively, of modified loans in the HAMP program.

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

The determination of whether a modification should be classified as a TDR requires significant judgment after taking into consideration all facts and circumstances surrounding the transaction. No single characteristic or factor, taken alone, is determinative of whether a modification should be classified as a TDR. The fact that a single characteristic is present is not considered sufficient to overcome the preponderance of contrary evidence. Assuming all of the TDR criteria are met, the Company considers one or more of the following concessions to the loan terms to represent a TDR: (1) a reduction of the stated interest rate, (2) an extension of the maturity date or dates at a stated interest rate lower than the current market rate for a new loan with similar terms or (3) forgiveness of principal or accrued interest.

Loans renegotiated at a rate equal to or greater than that of a new loan with comparable risk at the time the contract is modified are excluded from TDR classification in the calendar years subsequent to the renegotiation if the loan is in compliance with the modified terms for at least six months.

The Company does not accrue interest on any TDRs unless it believes collection of all principal and interest under the modified terms is reasonably assured. Generally, six months of consecutive payment performance by the borrower under the restructured terms is required before a TDR is returned to accrual status. However, the period could vary depending upon the individual facts and circumstances of the loan. TDRs accruing interest are classified as performing TDRs. The following table presents the categories of performing TDRs as of September 30, 2012 and December 31, 2011:

	September 30, 2012		December 31, 2011
	(dollars expressed in thousands)
Performing Troubled Debt Restructurings:
Commercial, financial and agricultural	$	3,939	4,264
Real estate construction and development	11,893		12,014
Real estate mortgage:
One-to-four-family residential	82,706		82,629
Multi-family residential	3,099		3,166
Commercial real estate	17,272		24,369
Total performing troubled debt restructurings	$	118,909	126,442

The Company does not accrue interest on TDRs which have been modified for a period less than six months or are not in compliance with the modified terms. These loans are considered nonperforming TDRs and are included with other nonaccrual loans for classification purposes. The following table presents the categories of loans considered nonperforming TDRs as of September 30, 2012 and December 31, 2011:

	September 30, 2012		December 31, 2011
	(dollars expressed in thousands)
Nonperforming Troubled Debt Restructurings:
Commercial, financial and agricultural	$	793	1,344
Real estate construction and development	28,545		25,603
Real estate mortgage:
One-to-four-family residential	4,770		6,205
Commercial real estate	3,687		7,605
Total nonperforming troubled debt restructurings	$	37,795	40,757

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Both performing and nonperforming TDRs are considered to be impaired loans. When an individual loan is determined to be a TDR, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral less applicable selling costs. The impairment amount is either charged off as a reduction to the allowance for loan losses or provided for as a specific reserve within the allowance for loan losses. The allowance for loan losses allocated to TDRs was $9.9 million and $12.8 million at September 30, 2012 and December 31, 2011, respectively.

The following tables present loans classified as TDRs that were modified during the three and nine months ended September 30, 2012 and 2011:

	Three Months Ended September 30, 2012					Three Months Ended September 30, 2011
	Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
	(dollars expressed in thousands)
Loan Modifications as Troubled Debt Restructurings:
Commercial, financial and agricultural	1	$	640	$	640	—	$	—	$	—
Real estate construction and development	2	5,460		5,280		2	7,372		6,354
Real estate mortgage:
One-to-four-family residential	13	2,069		2,065		22	4,374		3,930
Multi-family residential	—	—		—		1	4,964		3,209
Commercial real estate	2	4,947		4,947		1	259		250

	Nine Months Ended September 30, 2012					Nine Months Ended September 30, 2011
	Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
	(dollars expressed in thousands)
Loan Modifications as Troubled Debt Restructurings:
Commercial, financial and agricultural	1	$	640	$	640	3	$	1,945	$	1,945
Real estate construction and development	4	6,263		5,670		2	7,372		6,354
Real estate mortgage:
One-to-four-family residential	42	7,496		7,443		94	17,187		16,094
Multi-family residential	—	—		—		1	4,964		3,209
Commercial real estate	3	9,965		9,965		3	9,246		6,022

The following tables present TDRs that defaulted within 12 months of modification during the three and nine months ended September 30, 2012 and 2011:

	Three Months Ended			Three Months Ended
	September 30, 2012			September 30, 2011
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(dollars expressed in thousands)
Troubled Debt Restructurings That Subsequently Defaulted:
Real estate construction and development	—	$	—	—	$	—
Real estate mortgage:
One-to-four-family residential	11	2,155		7	1,213

19

	Nine Months Ended			Nine Months Ended
	September 30, 2012			September 30, 2011
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(dollars expressed in thousands)
Troubled Debt Restructurings That Subsequently Defaulted:
Real estate construction and development	3	$	1,364	—	$	—
Real estate mortgage:
One-to-four-family residential	39	8,049		29	6,819

Upon default of a TDR, which is considered to be 90 days or more past due under the modified terms, impairment is measured based on the fair value of the underlying collateral less applicable selling costs. The impairment amount is either charged off as a reduction to the allowance for loan losses or provided for as a specific reserve within the allowance for loan losses.

Allowance for Loan Losses. Changes in the allowance for loan losses for the three and nine months ended September 30, 2012 and 2011 were as follows:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2012			2011		2012		2011
	(dollars expressed in thousands)
Balance, beginning of period	$	120,227		161,186		137,710		201,033
Loans charged-off	(13,927		)	(26,074	)	(48,327	)	(112,237	)
Recoveries of loans previously charged-off	7,902			3,612		22,819		16,928
Net loans charged-off	(6,025		)	(22,462	)	(25,508	)	(95,309	)
Provision for loan losses	—			19,000		2,000		52,000
Balance, end of period	$	114,202		157,724		114,202		157,724

The following table represents a summary of changes in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2012:

	Commercial and Industrial			Real Estate Construction and Development		One-to- Four-Family Residential		Multi- Family Residential		Commercial Real Estate		Consumer and Installment		Total
	(dollars expressed in thousands)
Three Months Ended September 30, 2012:
Allowance for loan losses:
Beginning balance	$	22,015		21,829		43,702		4,816		27,471		394		120,227
Charge-offs	(2,475		)	(2,495	)	(6,178	)	(143	)	(2,636	)	—		(13,927	)
Recoveries	4,907			534		1,579		1		827		54		7,902
Provision (benefit) for loan losses	(3,179		)	(37	)	3,311		388		(440	)	(43	)	—
Ending balance	$	21,268		19,831		42,414		5,062		25,222		405		114,202
Nine Months Ended September 30, 2012:
Allowance for loan losses:
Beginning balance	$	27,243		24,868		50,864		4,851		29,448		436		137,710
Charge-offs	(12,708		)	(8,918	)	(15,094	)	(1,312	)	(10,026	)	(269	)	(48,327	)
Recoveries	10,651			4,253		4,054		44		3,673		144		22,819
Provision (benefit) for loan losses	(3,918		)	(372	)	2,590		1,479		2,127		94		2,000
Ending balance	$	21,268		19,831		42,414		5,062		25,222		405		114,202

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The following table represents a summary of changes in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2011:

	Commercial and Industrial			Real Estate Construction and Development		One-to- Four-Family Residential		Multi- Family Residential		Commercial Real Estate		Consumer and Installment		Total
	(dollars expressed in thousands)
Three Months Ended September 30, 2011:
Allowance for loan losses:
Beginning balance	$	28,938		35,768		52,609		5,287		38,061		523		161,186
Charge-offs	(9,248		)	(5,944	)	(8,589	)	(60	)	(2,144	)	(89	)	(26,074	)
Recoveries	1,559			575		710		485		219		64		3,612
Provision (benefit) for loan losses	9,298			2,380		7,014		85		266		(43	)	19,000
Ending balance	$	30,547		32,779		51,744		5,797		36,402		455		157,724
Nine Months Ended September 30, 2011:
Allowance for loan losses:
Beginning balance	$	28,000		58,439		60,762		5,158		47,880		794		201,033
Charge-offs	(31,992		)	(25,630	)	(25,076	)	(2,990	)	(26,165	)	(384	)	(112,237	)
Recoveries	5,525			4,958		3,331		528		2,323		263		16,928
Provision (benefit) for loan losses	29,014			(4,988	)	12,727		3,101		12,364		(218	)	52,000
Ending balance	$	30,547		32,779		51,744		5,797		36,402		455		157,724

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The following table represents a summary of the impairment method used by loan category at September 30, 2012 and December 31, 2011:

	Commercial and Industrial		Real Estate Construction and Development	One-to- Four-Family Residential	Multi- Family Residential	Commercial Real Estate	Consumer and Installment	Total
	(dollars expressed in thousands)
September 30, 2012:
Allowance for loan losses:
Ending balance: impaired loans individually evaluated for impairment	$	—	1,014	3,038	—	559	—	4,611
Ending balance: impaired loans collectively evaluated for impairment	$	991	2,262	10,364	302	1,647	1	15,567
Ending balance: all other loans collectively evaluated for impairment	$	20,277	16,555	29,012	4,760	23,016	404	94,024
Financing receivables:
Ending balance	$	625,402	204,822	1,008,918	103,880	1,060,776	18,392	3,022,190
Ending balance: impaired loans individually evaluated for impairment	$	13,335	53,379	15,100	7,759	36,369	—	125,942
Ending balance: impaired loans collectively evaluated for impairment	$	12,574	5,771	99,379	126	6,678	34	124,562
Ending balance: all other loans collectively evaluated for impairment	$	599,493	145,672	894,439	95,995	1,017,729	18,358	2,771,686
December 31, 2011:
Allowance for loan losses:
Ending balance: impaired loans individually evaluated for impairment	$	4,276	1,752	3,170	110	2,430	—	11,738
Ending balance: impaired loans collectively evaluated for impairment	$	1,199	1,680	14,338	225	1,445	4	18,891
Ending balance: all other loans collectively evaluated for impairment	$	21,768	21,436	33,356	4,516	25,573	432	107,081
Financing receivables:
Ending balance	$	725,130	249,987	902,438	127,356	1,225,538	22,391	3,252,840
Ending balance: impaired loans individually evaluated for impairment	$	40,527	76,475	16,836	11,141	64,190	—	209,169
Ending balance: impaired loans collectively evaluated for impairment	$	19,077	6,783	104,201	—	7,441	22	137,524
Ending balance: all other loans collectively evaluated for impairment	$	665,526	166,729	781,401	116,215	1,153,907	22,369	2,906,147

NOTE5–GOODWILLANDOTHERINTANGIBLEASSETS

Goodwill and other intangible assets, net of amortization, were comprised of goodwill of $122.0 million at September 30, 2012 and December 31, 2011. First Bank did not record goodwill impairment for the three or nine months ended September 30, 2012 and 2011. Amortization of intangible assets was zero for the three and nine months ended September 30, 2012. Amortization of intangible assets was $712,000 and $2.3 million for the three and nine months ended September 30, 2011, respectively. Core deposit intangibles became fully amortized in 2011.

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

22

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

1)	Project future cash flows for a certain discrete projection period;
2)	Discount these cash flows to present value at a rate of return that considers the relative risk of achieving the cash flows and the time value of money;
3)	Estimate the residual value of cash flows subsequent to the discrete projection period; and
4)	Combine the present value of the residual cash flows with the discrete projection period cash flows to indicate the fair market value of invested capital on a marketable basis.

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

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

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

Ø

The Income Approach utilizing the Discounted Cash Flow Method; and

Ø

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

As of December 31, 2011, the Income Approach utilizing the Discounted Cash Flow Method and applying a discount rate of 23.0% to the projected cash flows was weighted at 60.0% and each of the two Market Approaches was weighted at 20.0%. The Market Approach was given a relatively lower weighting primarily as a result of the Company’s previous lack of profitability, which required price to the last-twelve-months earnings multiples to be applied to longer-term projected future earnings.

Taking into account this independent third party valuation, the Company concluded that the carrying value of its reporting unit exceeded its estimated fair value by approximately $35.5 million at December 31, 2011. Because the carrying value of the reporting unit exceeded the estimated fair value at December 31, 2011, the Company engaged the same independent valuation firm to assist management in computing the fair value of the reporting unit’s assets and liabilities in order to determine the implied fair value of the reporting unit’s goodwill at December 31, 2011, as required by Step 2 of the two-step goodwill impairment test.

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

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The material assumptions utilized in the annual goodwill impairment testing for purposes of calculating the implied fair value of the reporting unit’s goodwill at December 31, 2011 were as follows:

Ø

Determination of the estimated fair value of loans – The estimated fair value assigned to loans significantly affected the determination of the implied fair value of the reporting unit’s goodwill at December 31, 2011. The implied fair value of a reporting unit’s goodwill will generally increase if the estimated fair value of the reporting unit’s loans is less than the carrying value of the reporting unit’s loans. The estimated fair value of the reporting unit’s loans was derived from discounted cash flow analyses. Loans were grouped into loan pools based on similar characteristics such as maturity, payment type and payment frequency, and rate type and underlying index. These cash flow calculations include assumptions for prepayment estimates over the loan’s remaining life, considerations for the current interest rate environment compared to the weighted average rate of the loan portfolio, a credit risk component based on the historical and expected performance of each loan portfolio stratum and a liquidity adjustment related to the current market environment. The estimated fair value of loans held for portfolio was $303.6 million and $263.0 million less than the carrying value at December 31, 2011 and 2010, respectively. The increase in the estimated discount on loans held for portfolio was primarily attributable to a decrease in the estimated fair value of home equity loans as a result of the home equity portfolio’s weighted average rate compared to market and economic conditions. To the extent any of these assumptions change in the future, the implied fair value of the reporting unit’s goodwill could change materially. A decrease in the discount rate utilized in deriving the estimated fair value of the reporting unit’s loans would decrease the implied fair value of goodwill.

Ø

Determination of the estimated fair value of deposits, including the core deposit intangible – The estimated fair value assigned to the core deposit intangible, or the reporting unit’s deposit base, also significantly affected the determination of the implied fair value of the reporting unit’s goodwill at December 31, 2011. The implied fair value of a reporting unit’s goodwill will generally decrease by the estimated fair value assigned to the reporting unit’s core deposit intangible. The estimated fair value of the core deposit intangible was derived from discounted cash flow analyses with considerations for estimated deposit runoff, cost of the deposit base, interest costs, net maintenance costs and the cost of alternative funds. The resulting estimate of the fair value of the core deposit intangible represents the present value of the difference in cash flows between maintaining the existing deposits and obtaining alternative funds over the life of the deposit base. There were no significant changes in the estimate of fair value of the core deposit intangible at December 31, 2011 as compared to December 31, 2010. To the extent any of these assumptions used to determine the estimated fair value of the core deposit intangible change in the future, the implied fair value of the reporting unit’s goodwill could change materially.

Management then compared the implied fair value of the reporting unit’s goodwill, taking into account the analyses of the independent valuation firm, of $231.2 million as of December 31, 2011 with its carrying value of $122.0 million as of December 31, 2011. Taking into account the results of the goodwill impairment analyses performed for the year ended December 31, 2011, the Company did not record goodwill impairment, primarily reflecting the estimated discount on loans held for portfolio (i.e. excess of carrying value over estimated fair value) exceeding the amount by which the carrying value of the reporting unit exceeded its fair value.

The Company believes the estimates and assumptions utilized in the goodwill impairment test are reasonable. However, further deterioration in the outlook for credit quality or other factors could impact the estimated fair value of the reporting unit as determined under Step 1 of the goodwill impairment test. A decrease in the estimated fair value of the reporting unit would decrease the implied fair value of goodwill as further determined under Step 2 of the goodwill impairment test.

Due to the current economic environment and the uncertainties regarding the impact on the Company, there can be no assurance that the Company’s estimates and assumptions made for the purposes of the goodwill impairment testing will prove to be accurate predictions in the future. Adverse changes in the economic environment, the Company’s operations, or other factors could result in a decline in the implied fair value of the reporting unit, which could result in the recognition of future goodwill impairment that may materially affect the carrying value of the reporting unit’s assets and its related operating results.

NOTE6–SERVICINGRIGHTS

Mortgage Banking Activities. At September 30, 2012 and December 31, 2011, First Bank serviced mortgage loans for others totaling $1.25 billion. Changes in mortgage servicing rights for the three and nine months ended September 30, 2012 and 2011 were as follows:

24

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2012			2011		2012		2011
	(dollars expressed in thousands)
Balance, beginning of period	$	8,959		11,739		9,077		12,150
Originated mortgage servicing rights	1,329			617		3,322		2,230
Change in fair value resulting from changes in valuation inputs or assumptions used in valuation model (1)	(1,484		)	(3,497	)	(2,283	)	(4,572	)
Other changes in fair value (2)	(616		)	(470	)	(1,928	)	(1,419	)
Balance, end of period	$	8,188		8,389		8,188		8,389

____________________

(1) The change in fair value resulting from changes in valuation inputs or assumptions used in valuation model primarily reflects the change in discount rates and prepayment speed assumptions, primarily due to changes in interest rates.

(2) Other changes in fair value reflect changes due to the collection/realization of expected cash flows over time.

Other Servicing Activities. At September 30, 2012 and December 31, 2011, First Bank serviced United States Small Business Administration (SBA) loans for others totaling $164.9 million and $178.5 million, respectively. Changes in SBA servicing rights for the three and nine months ended September 30, 2012 and 2011 were as follows:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2012			2011		2012		2011
	(dollars expressed in thousands)
Balance, beginning of period	$	6,223		7,087		6,303		7,432
Originated SBA servicing rights	—			—		—		—
Change in fair value resulting from changes in valuation inputs or assumptions used in valuation model (1)	148			107		437		333
Other changes in fair value (2)	(465		)	(510	)	(834	)	(1,081	)
Balance, end of period	$	5,906		6,684		5,906		6,684

____________________

(1) The change in fair value resulting from changes in valuation inputs or assumptions used in valuation model primarily reflects the change in discount rates and prepayment speed assumptions, primarily due to changes in interest rates.

(2) Other changes in fair value reflect changes due to the collection/realization of expected cash flows over time.

NOTE7–DERIVATIVEINSTRUMENTS

The Company utilizes derivative instruments to assist in the management of interest rate sensitivity by modifying the repricing, maturity and option characteristics of certain assets and liabilities. Derivative instruments held by the Company at September 30, 2012 and December 31, 2011 are summarized as follows:

	September 30, 2012			December 31, 2011
	Notional Amount		Credit Exposure	Notional Amount	Credit Exposure
	(dollars expressed in thousands)
Interest rate swap agreements	$	25,000	—	50,000	—
Customer interest rate swap agreements	13,289		148	47,240	441
Interest rate lock commitments	92,700		4,282	38,985	1,381
Forward commitments to sell mortgage-backed securities	127,050		—	58,800	—

The notional amounts of derivative instruments do not represent amounts exchanged by the parties and, therefore, are not a measure of the Company’s credit exposure through its use of these instruments. Credit exposure on interest rate swaps, which represents the loss the Company would incur in the event the counterparties failed completely to perform according to the terms of the derivative instruments and the collateral held to support the credit exposure was of no value, is limited to the net fair value and related accrued interest receivable reduced by the amount of collateral pledged by the counterparty. The Company had not pledged any assets as collateral in connection with its interest rate swap agreements at September 30, 2012 and December 31, 2011. Collateral requirements are monitored on a daily basis and adjusted as necessary.

25

Interest Rate Swap Agreements. The Company entered into four interest rate swap agreements with an aggregate notional amount of $125.0 million, which were designated as cash flow hedges prior to August 2009, with the objective of stabilizing the long-term cost of capital and cash flow and, accordingly, net interest expense on junior subordinated debentures to the respective call dates of certain junior subordinated debentures. These swap agreements provide for the Company to receive an adjustable rate of interest equivalent to the three-month London Interbank Offering Rate (LIBOR) plus a range of 1.65% to 2.25%, and pay a fixed rate of interest. The terms of the swap agreements provide for the Company to pay and receive interest on a quarterly basis.

The amount receivable by the Company under these swap agreements was $26,000 and $36,000 at September 30, 2012 and December 31, 2011, respectively, and the amount payable by the Company under these swap agreements was $54,000 and $72,000 at September 30, 2012 and December 31, 2011, respectively.

In August 2009, the Company reclassified a cumulative fair value adjustment of $4.6 million on its interest rate swap agreements designated as cash flow hedges on its junior subordinated debentures from accumulated other comprehensive income to loss on derivative instruments as a result of the discontinuation of hedge accounting following the announcement of the deferral of interest payments on the underlying trust preferred securities. In conjunction with the discontinuation of hedge accounting, the net interest differential on these interest rate swap agreements was recorded as a reduction of noninterest income effective August 2009.

The maturity dates, notional amounts, interest rates paid and received and fair value of the Company’s remaining interest rate swap agreements, previously designated as cash flow hedges on certain junior subordinated debentures, as of September 30, 2012 and December 31, 2011 were as follows:

	Notional		Interest Rate		Interest Rate
Maturity Date	Amount		Paid		Received		Fair Value
	(dollars expressed in thousands)
September 30, 2012:
December 15, 2012	$	25,000	5.57	%	2.64	%	$	(163	)
December 31, 2011:
March 30, 2012	$	25,000	4.71	%	2.19	%	$	(159	)
December 15, 2012	25,000		5.57		2.80		(648		)
	$	50,000	5.14		2.50		$	(807	)

Customer Interest Rate Swap Agreements. First Bank offers interest rate swap agreements to certain customers to assist in hedging their risks of adverse changes in interest rates. First Bank serves as an intermediary between its customers and the financial markets. Each interest rate swap agreement between First Bank and its customers is offset by an interest rate swap agreement between First Bank and various counterparties. These interest rate swap agreements do not qualify for hedge accounting treatment. Changes in the fair value are recognized in noninterest income on a monthly basis. Each customer contract is paired with an offsetting contract, and as such, there is no significant impact to net income (loss). The notional amount of these interest rate swap agreement contracts at September 30, 2012 and December 31, 2011 was $13.3 million and $47.2 million, respectively.

Interest Rate Lock Commitments / Forward Commitments to Sell Mortgage-Backed Securities. Derivative instruments issued by the Company consist of interest rate lock commitments to originate fixed-rate loans to be sold. Commitments to originate fixed-rate loans consist primarily of residential real estate loans. These net loan commitments and loans held for sale are hedged with forward contracts to sell mortgage-backed securities, which expire in December 2012. The fair value of the interest rate lock commitments, which is included in other assets in the consolidated balance sheets, was an unrealized gain of $4.3 million and $1.4 million at September 30, 2012 and December 31, 2011, respectively. The fair value of the forward contracts to sell mortgage-backed securities, which is included in other assets in the consolidated balance sheets, was an unrealized loss of $2.3 million and $729,000 at September 30, 2012 and December 31, 2011, respectively. Changes in the fair value of interest rate lock commitments and forward commitments to sell mortgage-backed securities are recognized in noninterest income on a monthly basis.

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The following table summarizes derivative instruments held by the Company, their estimated fair values and their location in the consolidated balance sheets at September 30, 2012 and December 31, 2011:

	September 30, 2012				December 31, 2011
	Balance Sheet Location	Fair Value Gain (Loss)			Balance Sheet Location	Fair Value Gain (Loss)
	(dollars expressed in thousands)
Derivative Instruments Not Designated as Hedging Instruments Under ASC Topic 815:
Customer interest rate swap agreements	Other assets	$	118		Other assets	$	370
Interest rate lock commitments	Other assets	4,282			Other assets	1,381
Forward commitments to sell mortgage-backed securities	Other assets	(2,322		)	Other assets	(729		)
Total derivatives in other assets		$	2,078			$	1,022
Interest rate swap agreements	Other liabilities	$	(163	)	Other liabilities	$	(807	)
Customer interest rate swap agreements	Other liabilities	(118		)	Other liabilities	(307		)
Total derivatives in other liabilities		$	(281	)		$	(1,114	)

The following table summarizes amounts included in the consolidated statements of operations for the three and nine months ended September 30, 2012 and 2011 related to non-hedging derivative instruments:

	Three Months Ended					Nine months ended
	September 30,					September 30,
	2012			2011		2012		2011
	(dollars expressed in thousands)
Derivative Instruments Not Designated as Hedging Instruments Under ASC Topic 815:
Interest rate swap agreements – subordinated debentures:
Other income	$	(8	)	7		(49	)	(214	)
Customer interest rate swap agreements:
Other income	—			—		3		—
Interest rate lock commitments:
Gain on loans sold and held for sale	1,192			2,021		2,901		2,431
Forward commitments to sell mortgage-backed securities:
Gain on loans sold and held for sale	(1,165		)	(1,473	)	(1,593	)	(3,107	)

NOTE8–NOTESPAYABLE ANDOTHERBORROWINGS

Notes Payable. On March 24, 2011, the Company entered into a Revolving Credit Note and a Stock Pledge Agreement (the Credit Agreement) with Investors of America Limited Partnership (Investors of America, LP), as further described in Note 16 to the consolidated financial statements. The agreement provides for a $5.0 million secured revolving line of credit to be utilized for general working capital needs. This borrowing arrangement, which has a maturity date of December 31, 2012 and an interest rate of LIBOR plus 300 basis points, is intended to supplement, if necessary, the parent company’s overall level of unrestricted cash to cover the parent company’s projected operating expenses. There were no balances outstanding with respect to the Credit Agreement as of and for the nine months ended September 30, 2012 or since its inception.

Other Borrowings. Other borrowings were comprised solely of daily securities sold under agreement to repurchase of $28.4 million and $50.9 million at September 30, 2012 and December 31, 2011, respectively.

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NOTE9–SUBORDINATEDDEBENTURES

As of September 30, 2012, the Company had 13 affiliated Delaware or Connecticut statutory and business trusts (collectively, the Trusts) that were created for the sole purpose of issuing trust preferred securities. The trust preferred securities were issued in private placements, with the exception of First Preferred Capital Trust IV, which was issued in a publicly underwritten offering. The following is a summary of the junior subordinated debentures issued to the Trusts in conjunction with the trust preferred securities offerings at September 30, 2012 and December 31, 2011:

Name of Trust	Issuance Date	Maturity Date	Call Date(1)	Interest Rate(2)	Trust Preferred Securities		Subordinated Debentures
					(dollars expressed in thousands)
Variable Rate
First Bank Statutory Trust II	September 2004	September 20, 2034	September 20, 2009	205.0 bp	$	20,000	$	20,619
Royal Oaks Capital Trust I	October 2004	January 7, 2035	January 7, 2010	240.0 bp	4,000		4,124
First Bank Statutory Trust III	November 2004	December 15, 2034	December 15, 2009	218.0 bp	40,000		41,238
First Bank Statutory Trust IV	March 2006	March 15, 2036	March 15, 2011	142.0 bp	40,000		41,238
First Bank Statutory Trust V	April 2006	June 15, 2036	June 15, 2011	145.0 bp	20,000		20,619
First Bank Statutory Trust VI	June 2006	July 7, 2036	July 7, 2011	165.0 bp	25,000		25,774
First Bank Statutory Trust VII	December 2006	December 15, 2036	December 15, 2011	185.0 bp	50,000		51,547
First Bank Statutory Trust VIII	February 2007	March 30, 2037	March 30, 2012	161.0 bp	25,000		25,774
First Bank Statutory Trust X	August 2007	September 15, 2037	September 15, 2012	230.0 bp	15,000		15,464
First Bank Statutory Trust IX	September 2007	December 15, 2037	December 15, 2012	225.0 bp	25,000		25,774
First Bank Statutory Trust XI	September 2007	December 15, 2037	December 15, 2012	285.0 bp	10,000		10,310
Fixed Rate
First Bank Statutory Trust	March 2003	March 20, 2033	March 20, 2008	8.10%	25,000		25,774
First Preferred Capital Trust IV	April 2003	June 30, 2033	June 30, 2008	8.15%	46,000		47,423

____________________

(1) The junior subordinated debentures are callable at the option of the Company on the call date shown at 100% of the principal amount plus accrued and unpaid interest.

(2) The interest rates paid on the trust preferred securities are based on either a variable rate or a fixed rate. The variable rate is based on the three-month LIBOR plus the basis point spread shown.

The Company’s distributions accrued on the junior subordinated debentures were $3.7 million and $11.1 million for the three and nine months ended September 30, 2012, respectively, and $3.4 million and $10.0 million for the comparable periods in 2011, and are included in interest expense in the consolidated statements of operations. The structure of the trust preferred securities currently satisfies the regulatory requirements for inclusion, subject to certain limitations, in the Company’s capital base, as further discussed in Note 11 to the consolidated financial statements.

On August 10, 2009, the Company announced the deferral of its regularly scheduled interest payments on its outstanding junior subordinated debentures relating to its $345.0 million of trust preferred securities beginning with the regularly scheduled quarterly interest payments that would otherwise have been made in September and October 2009. The terms of the junior subordinated debentures and the related trust indentures allow the Company to defer such payments of interest for up to 20 consecutive quarterly periods without triggering a payment default or penalty. Such payment default or penalty would likely have a material adverse effect on the Company’s business, financial condition or results of operations. The Company has deferred such payments for 13 quarterly periods as of September 30, 2012. During the deferral period, the respective trusts will suspend the declaration and payment of dividends on the trust preferred securities. During the deferral period, the Company may not, among other things and with limited exceptions, pay cash dividends on or repurchase its common stock or preferred stock nor make any payment on outstanding debt obligations that rank equally with or junior to the junior subordinated debentures. Accordingly, the Company also suspended the payment of cash dividends on its outstanding common stock and preferred stock beginning with the regularly scheduled quarterly dividend payments on the preferred stock that would otherwise have been made in August and September 2009, as further described in Note 10 to the consolidated financial statements. The Company has deferred $40.6 million and $31.0 million of its regularly scheduled interest payments as of September 30, 2012 and December 31, 2011, respectively. In addition, the Company has accrued additional interest expense of $3.3 million and $1.9 million as of September 30, 2012 and December 31, 2011, respectively, on the regularly scheduled deferred interest payments based on the interest rate in effect for each junior subordinated note issuance in accordance with the respective terms of the underlying agreements.

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Under its agreement with the Federal Reserve Bank of St. Louis (FRB), the Company agreed, among other things, to provide certain information to the FRB, including, but not limited to, prior notice regarding the issuance of additional trust preferred securities. The Company also agreed not to make any distributions of interest or other sums on its outstanding trust preferred securities without the prior approval of the FRB, as further described in Note 11 to the consolidated financial statements.

NOTE10–STOCKHOLDERS’EQUITY

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

Preferred Stock. The Company has four classes of preferred stock outstanding. The Class A preferred stock is convertible into shares of common stock at a rate based on the ratio of the par value of the preferred stock to the current market value of the common stock at the date of conversion, to be determined by independent appraisal at the time of conversion. Shares of Class A preferred stock may be redeemed by the Company at any time at 105.0% of par value. The Class B preferred stock may not be redeemed or converted. The holders of the Class A and Class B preferred stock have full voting rights. Dividends on the Class A and Class B preferred stock are adjustable quarterly based on the highest of the Treasury Bill Rate or the Ten Year Constant Maturity Rate for the two-week period immediately preceding the beginning of the quarter. This rate shall not be less than 6.0% nor more than 12.0% on the Class A preferred stock, or less than 7.0% nor more than 15.0% on the Class B preferred stock. Effective August 10, 2009, the Company suspended the declaration of dividends on its Class A and Class B preferred stock.

On December 31, 2008, the Company issued 295,400 shares of Class C Fixed Rate Cumulative Perpetual Preferred Stock (Class C Preferred Stock) and 14,770 shares of Class D Fixed Rate Cumulative Perpetual Preferred Stock (Class D Preferred Stock) to the United States Department of the Treasury (U.S. Treasury) in conjunction with the U.S. Treasury’s Troubled Asset Relief Program’s Capital Purchase Program (CPP). The Class C Preferred Stock has a par value of $1.00 per share and a liquidation preference of $1,000 per share. The holders of the Class C Preferred Stock have no voting rights except in certain limited circumstances. The Class C Preferred Stock carries an annual dividend rate equal to 5% for the first five years and the annual dividend rate increases to 9% per annum on and after February 15, 2014, payable quarterly in arrears beginning February 15, 2009. The Class D Preferred Stock has a par value of $1.00 per share and a liquidation preference of $1,000 per share. The holders of the Class D Preferred Stock have no voting rights except in certain limited circumstances. The Class D Preferred Stock carries an annual dividend rate equal to 9%, payable quarterly in arrears beginning February 15, 2009. The Class C Preferred Stock and the Class D Preferred Stock qualify as Tier 1 capital. Effective February 17, 2009, the Class C Preferred Stock and the Class D Preferred Stock may be redeemed at any time without penalty and without the need to raise new capital, subject to the U.S. Treasury’s consultation with the Company’s primary regulatory agency. The Class D Preferred Stock may not be redeemed until all of the outstanding shares of the Class C Preferred Stock have been redeemed. In addition, the U.S. Treasury has certain supervisory and oversight duties and responsibilities under the CPP and, pursuant to the terms of the agreement governing the issuance of the Class C Preferred Stock and the Class D Preferred Stock to the U.S. Treasury (Purchase Agreement), the U.S. Treasury is empowered to unilaterally amend any provision of the Purchase Agreement with the Company to the extent required to comply with any changes in applicable federal statutes. As a result of the Company’s deferral of dividends to the U.S. Treasury for an aggregate of six quarters, the U.S. Treasury had the right to elect two directors to the Company’s Board. On July 13, 2011, the U.S. Treasury elected two members to the Company’s Board of Directors.

The Company allocated the total proceeds received under the CPP of $295.4 million to the Class C Preferred Stock and the Class D Preferred Stock based on the relative fair values of the respective classes of preferred stock at the time of issuance. The discount on the Class C Preferred Stock of $17.3 million is being accreted to retained earnings on a level-yield basis over five years. Accretion of the discount on the Class C Preferred Stock was $893,000 and $2.7 million for the three and nine months ended September 30, 2012, respectively, compared to $874,000 and $2.6 million for the comparable periods in 2011.

The redemption of any issue of preferred stock requires the prior approval of the Federal Reserve. Furthermore, the Purchase Agreement that the Company entered into with the U.S. Treasury contains limitations on certain actions of the Company, including, but not limited to, payment of dividends and redemptions and acquisitions of the Company’s equity securities. In addition, the Company, under its agreement with the FRB, has agreed, among other things, to provide certain information to the FRB including, but not limited to, notice of plans to materially change its fundamental business and notice to raise additional equity capital. Furthermore, the Company agreed not to pay any dividends on its common or preferred stock without the prior approval of the FRB, as further described in Note 11 to the consolidated financial statements.

In conjunction with the deferral of it regularly scheduled interest payments on its outstanding junior subordinated debentures on August 10, 2009, as further described in Note 9 to the consolidated financial statements, the Company also began suspending the payment of cash dividends on its outstanding preferred stock beginning with the regularly scheduled quarterly dividend payments on the preferred stock that would otherwise have been made in August and September 2009. The Company has deferred such payments for 13 quarterly periods as of September 30, 2012. Consequently, the Company has suspended the declaration of dividends

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on its Class A and Class B preferred stock, but continues to declare and accumulate dividends on its Class C Preferred Stock and its Class D Preferred Stock. The Company has declared and deferred $52.3 million and $40.2 million of its regularly scheduled dividend payments on its Class C Preferred Stock and Class D Preferred Stock at September 30, 2012 and December 31, 2011, respectively, and has declared and accrued an additional $4.8 million and $2.8 million of cumulative dividends on such deferred dividend payments at September 30, 2012 and December 31, 2011, respectively.

On June 30, 2012, the Company reclassified certain of its available-for-sale investment securities to held-to-maturity investment securities at their respective fair values, which totaled $729.1 million, in aggregate, as further described in Note 3 to the consolidated financial statements. The gross unrealized gain on these available-for-sale investment securities at the time of transfer was $11.7 million. The unrealized gain included as a component of accumulated other comprehensive income was $6.8 million at June 30, 2012, net of tax of $4.9 million. The fair value adjustment at the time of transfer of $11.7 million was recorded as additional premium on the investment securities, and is being amortized as an adjustment to interest income on investment securities over the remaining lives of the respective securities. The amortization of the unrealized gain reported in stockholders’ equity is also being amortized as an adjustment to interest income on investment securities over the remaining lives of the respective securities. Consequently, the combined amortization of the additional premium and the unrealized gain have no net impact on interest income on investment securities.

NOTE11–REGULATORYCAPITAL AND OTHER REGULATORY MATTERS

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

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

The Company did not meet the minimum regulatory capital standards established for bank holding companies by the Federal Reserve at September 30, 2012 and December 31, 2011. The Company must maintain minimum total regulatory, Tier 1 regulatory and Tier 1 leverage ratios as set forth in the table below in order to meet the minimum capital adequacy standards.

First Bank was categorized as well capitalized at September 30, 2012 and December 31, 2011 under the prompt corrective action provisions of the regulatory capital standards. First Bank must maintain minimum total regulatory, Tier 1 regulatory and Tier 1 leverage ratios as set forth in the table below in order to be categorized as well capitalized. In addition, First Bank is currently required to maintain its Tier 1 capital to total assets ratio at no less than 7.00% in accordance with the provisions of its informal agreement entered into with the State of Missouri Division of Finance (MDOF), as further described below. First Bank’s Tier 1 capital to total assets ratio of 9.08% and 8.37% at September 30, 2012 and December 31, 2011, respectively, exceeded the 7.00% minimum level required under the terms of the informal agreement with the MDOF.

At September 30, 2012 and December 31, 2011, the Company and First Bank’s required and actual capital ratios were as follows:

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											To be Well Capitalized Under Prompt Corrective Action Provisions
	Actual								For Capital Adequacy Purposes
	September 30, 2012				December 31, 2011
	Amount		Ratio		Amount		Ratio
	(dollars expressed in thousands)
Total capital (to risk-weighted assets):
First Banks, Inc.	$	97,320	2.57	%	$	73,830	1.88	%	8.0	%	N/A
First Bank	620,841		16.40		588,860		14.98		8.0		10.0	%
Tier 1 capital (to risk-weighted assets):
First Banks, Inc.	48,660		1.29		36,915		0.94		4.0		N/A
First Bank	572,674		15.13		538,592		13.70		4.0		6.0
Tier 1 capital (to average assets):
First Banks, Inc.	48,660		0.76		36,915		0.56		4.0		N/A
First Bank	572,674		8.96		538,592		8.19		4.0		5.0

As noted above, the Company’s capital ratios are below the minimum regulatory capital standards established for bank holding companies, and therefore, the Company could be subject to additional actions by regulators that could have a direct material effect on the operations and financial condition of the Company and First Bank.

Regulatory Agreements. On March 24, 2010, the Company, SFC and First Bank entered into a Written Agreement (Agreement) with the FRB requiring the Company and First Bank to take certain steps intended to improve their overall financial condition. Pursuant to the Agreement, the Company prepared and filed with the FRB a number of specific plans designed to strengthen and/or address the following matters: (i) board oversight over the management and operations of the Company and First Bank; (ii) credit risk management practices; (iii) lending and credit administration policies and procedures; (iv) asset improvement; (v) capital; (vi) earnings and overall financial condition; and (vii) liquidity and funds management.

The Agreement requires, among other things, that the Company and First Bank obtain prior approval from the FRB in order to pay dividends. In addition, the Company must obtain prior approval from the FRB to: (i) take any other form of payment from First Bank representing a reduction in capital of First Bank; (ii) make any distributions of interest, principal or other sums on junior subordinated debentures or trust preferred securities; (iii) incur, increase or guarantee any debt; or (iv) purchase or redeem any shares of the Company’s stock. Pursuant to the terms of the Agreement, the Company and First Bank submitted a written plan to the FRB to maintain sufficient capital at the Company, on a consolidated basis, and at First Bank, on a standalone basis. In addition, the Agreement also provides that the Company and First Bank must notify the FRB if the regulatory capital ratios of either entity fall below those set forth in the capital plans that were accepted by the FRB, and specifically if First Bank falls below the criteria for being well capitalized under the regulatory framework for prompt corrective action. The Company must also notify the FRB before appointing any new directors or senior executive officers or changing the responsibilities of any senior executive officer position. The Agreement also requires the Company and First Bank to comply with certain restrictions regarding indemnification and severance payments. The Agreement is specifically enforceable by the FRB in court.

Prior to entering into the Agreement on March 24, 2010, the Company and First Bank had entered into a memorandum of understanding and an informal agreement, respectively, with the FRB and the MDOF. Each of the agreements were characterized by regulatory authorities as informal actions that were neither published nor made publicly available by the agencies and are used when circumstances warrant a milder form of action than a formal supervisory action, such as a written agreement or cease and desist order. The informal agreement with the MDOF is still in place and there have not been any modifications thereto since its inception in September 2008.

Under the terms of the prior memorandum of understanding with the FRB, the Company agreed, among other things, to provide certain information to the FRB including, but not limited to, financial performance updates, notice of plans to materially change its fundamental business and notice to issue trust preferred securities or raise additional equity capital. In addition, the Company agreed not to pay any dividends on its common or preferred stock or make any distributions of interest or other sums on its trust preferred securities without the prior approval of the FRB.

First Bank, under its informal agreement with the MDOF and the FRB, agreed to, among other things, prepare and submit plans and reports to the agencies regarding certain matters including, but not limited to, the performance of First Bank’s loan portfolio.

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In addition, First Bank agreed not to declare or pay any dividends or make certain other payments without the prior consent of the MDOF and the FRB and to maintain a Tier 1 capital to total assets ratio of no less than 7.00%.

While the Company and First Bank intend to take such actions as may be necessary to comply with the requirements of the Agreement with the FRB and informal agreement with the MDOF, there can be no assurance that the Company and First Bank will be able to comply fully with the requirements of the Agreement or that First Bank will be able to comply fully with the provisions of the informal agreement, that compliance with the Agreement and the informal agreement will not be more time consuming or more expensive than anticipated, that compliance with the Agreement and the informal agreement will enable the Company and First Bank to maintain profitable operations, or that efforts to comply with the Agreement and the informal agreement will not have adverse effects on the operations and financial condition of the Company or First Bank. If the Company or First Bank is unable to comply with the terms of the Agreement or the informal agreement, respectively, the Company and First Bank could become subject to various requirements limiting the ability to develop new business lines, mandating additional capital, and/or requiring the sale of certain assets and liabilities. Failure of the Company and First Bank to meet these conditions could lead to further enforcement action by the regulatory agencies. The terms of any such additional regulatory actions, orders or agreements could have a materially adverse effect on the Company’s business, financial condition or results of operations.  

Capital Plan. On August 10, 2009, the Company announced the adoption of a Capital Plan designed to improve its regulatory capital ratios and financial performance through certain divestiture activities, asset reductions and other profit improvement initiatives. The Capital Plan was adopted in order to, among other things, preserve and enhance the Company’s regulatory capital.

The successful completion of all or any portion of the Capital Plan is not assured, and no assurance can be made that the Capital Plan will not be materially modified in the future. The decision to implement the Capital Plan reflects the adverse effect that the severe downturn in the commercial and residential real estate markets has had on the Company’s financial condition and results of operations. If the Company is not able to complete substantially all of the Capital Plan, its business, financial condition, including regulatory capital ratios, and results of operations may be materially and adversely affected and its ability to withstand continued adverse economic conditions could be threatened.

NOTE12–FAIRVALUEDISCLOSURES

In accordance with ASC Topic 820, “Fair Value Measurements and Disclosures,” financial assets and financial liabilities that are measured at fair value subsequent to initial recognition are grouped into three levels of inputs or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the reliability of assumptions used to determine fair value. The three input levels of the valuation hierarchy are as follows:

Level 1 Inputs – Valuation is based on quoted prices in active markets for identical instruments in active markets.

Level 2 Inputs – Valuation is based on quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 Inputs – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

The following describes valuation methodologies used to measure financial assets and financial liabilities at fair value, as well as the general classification of such financial instruments pursuant to the valuation hierarchy:

Available-for-sale investment securities. Available-for-sale investment securities are recorded at fair value on a recurring basis. Available-for-sale investment securities included in Level 1 are valued using quoted market prices. Where quoted market prices are unavailable, the fair value included in Level 2 is based on quoted market prices of comparable instruments obtained from independent pricing vendors based on recent trading activity and other relevant information.

Loans held for sale. Mortgage loans held for sale are carried at fair value on a recurring basis. The determination of fair value is based on quoted market prices of comparable instruments obtained from independent pricing vendors based on recent trading activity and other relevant information. Other loans held for sale are carried at the lower of cost or market value, which is determined on an individual loan basis. The fair value is based on the prices secondary markets are offering for portfolios with similar characteristics. The Company classifies mortgage loans held for sale subjected to recurring fair value adjustments as recurring Level 2. The Company classifies other loans held for sale subjected to nonrecurring fair value adjustments as nonrecurring Level 2.

Impaired loans. The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans are considered impaired when, in the judgment of management based on current information and events, it is probable that payment of all amounts due under the contractual terms

32

of the loan agreement will not be collected. Acquired impaired loans are classified as nonaccrual loans and are initially measured at fair value with no allocated allowance for loan losses. An allowance for loan losses is recorded to the extent there is further credit deterioration subsequent to acquisition date. In accordance with ASC Topic 820, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. Once a loan is identified as impaired, management measures the impairment in accordance with ASC Topic 310-10-35, “Receivables.” Impairment is measured by reference to an observable market price, if one exists, the expected future cash flows of an impaired loan discounted at the loan’s effective interest rate, or the fair value of the collateral for a collateral-dependent loan. In most cases, the Company measures fair value based on the value of the collateral securing the loan. Collateral may be in the form of real estate or personal property, including equipment and inventory. The vast majority of the collateral is real estate. The value of the collateral is determined based on third party appraisals as well as internal estimates. These measurements are classified as nonrecurring Level 3.

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

Derivative instruments. Substantially all derivative instruments utilized by the Company are traded in over-the-counter markets where quoted market prices are not readily available. Derivative instruments utilized by the Company include interest rate swap agreements, interest rate lock commitments and forward commitments to sell mortgage-backed securities. For these derivative instruments, fair value is based on market observable inputs utilizing pricing systems and valuation models, and where applicable, the values are compared to the market values calculated independently by the respective counterparties. The Company classifies its derivative instruments as Level 2.

Servicing rights. The valuation of Mortgage and SBA servicing rights is performed by an independent third party. The valuation models estimate the present value of estimated future net servicing income, using market-based discount rate assumptions, and utilize assumptions based on the predominant risk characteristics of the underlying loans, including principal balance, interest rate, weighted average life, and certain unobservable inputs, including cost to service, estimated prepayment speed rates and default rates. Changes in the fair value of servicing rights occur primarily due to the realization of expected cash flows, as well as changes in valuation inputs and assumptions. Significant increases (decreases) in any of the unobservable inputs would result in a significantly lower (higher) fair value of the servicing rights. The Company classifies its servicing rights as Level 3.

Nonqualified Deferred Compensation Plan. The Company’s nonqualified deferred compensation plan is recorded at fair value on a recurring basis. The unfunded plan allows participants to hypothetically invest in various specified investment options such as equity funds, international stock funds, capital appreciation funds, money market funds, bond funds, mid-cap value funds and growth funds. The nonqualified deferred compensation plan liability is valued based on quoted market prices of the underlying investments. The Company classifies its nonqualified deferred compensation plan liability as Level 1.

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Items Measured on a Recurring Basis. Assets and liabilities measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011 are reflected in the following table:

	Fair Value Measurements
	Level 1		Level 2		Level 3	Fair Value
	(dollars expressed in thousands)
September 30, 2012:
Assets:
Available-for-sale investment securities:
U.S. Government sponsored agencies	$	—	308,272		—	308,272
Residential mortgage-backed	—		1,576,744		—	1,576,744
Commercial mortgage-backed	—		924		—	924
State and political subdivisions	—		4,957		—	4,957
Corporate notes	—		189,606		—	189,606
Equity investments	1,032		—		—	1,032
Mortgage loans held for sale	—		58,241		—	58,241
Derivative instruments:
Customer interest rate swap agreements	—		118		—	118
Interest rate lock commitments	—		4,282		—	4,282
Forward commitments to sell mortgage-backed securities	—		(2,322	)	—	(2,322	)
Servicing rights	—		—		14,094	14,094
Total	$	1,032	2,140,822		14,094	2,155,948
Liabilities:
Derivative instruments:
Interest rate swap agreements	$	—	163		—	163
Customer interest rate swap agreements	—		118		—	118
Nonqualified deferred compensation plan	6,289		—		—	6,289
Total	$	6,289	281		—	6,570
December 31, 2011:
Assets:
Available-for-sale investment securities:
U.S. Government sponsored agencies	$	—	341,817		—	341,817
Residential mortgage-backed	—		1,924,920		—	1,924,920
Commercial mortgage-backed	—		910		—	910
State and political subdivisions	—		5,410		—	5,410
Corporate notes	—		183,813		—	183,813
Equity investments	1,017		—		—	1,017
Mortgage loans held for sale	—		31,111		—	31,111
Derivative instruments:
Customer interest rate swap agreements	—		370		—	370
Interest rate lock commitments	—		1,381		—	1,381
Forward commitments to sell mortgage-backed securities	—		(729	)	—	(729	)
Servicing rights	—		—		15,380	15,380
Total	$	1,017	2,489,003		15,380	2,505,400
Liabilities:
Derivative instruments:
Interest rate swap agreements	$	—	807		—	807
Customer interest rate swap agreements	—		307		—	307
Nonqualified deferred compensation plan	6,531		—		—	6,531
Total	$	6,531	1,114		—	7,645

There were no transfers between Levels 1 and 2 of the fair value hierarchy for the three and nine months ended September 30, 2012 and 2011.

34

The following table presents the changes in Level 3 assets measured on a recurring basis for the three and nine months ended September 30, 2012 and 2011:

	Servicing Rights
	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2012			2011		2012		2011
	(dollars expressed in thousands)
Balance, beginning of period	$	15,182		18,826		15,380		19,582
Total gains or losses (realized/unrealized):
Included in earnings (1)	(2,417		)	(4,370	)	(4,608	)	(6,739	)
Included in other comprehensive income	—			—		—		—
Issuances	1,329			617		3,322		2,230
Transfers in and/or out of level 3	—			—		—		—
Balance, end of period	$	14,094		15,073		14,094		15,073

____________________

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

Items Measured on a Nonrecurring Basis. From time to time, the Company measures certain assets at fair value on a nonrecurring basis. These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis as of September 30, 2012 and December 31, 2011 are reflected in the following table:

	Fair Value Measurements
	Level 1		Level 2	Level 3	Fair Value
	(dollars expressed in thousands)
September 30, 2012:
Assets:
Impaired loans:
Commercial, financial and agricultural	$	—	—	24,918	24,918
Real estate construction and development	—		—	55,874	55,874
Real estate mortgage:
Bank portfolio	—		—	8,914	8,914
Mortgage Division portfolio	—		—	85,682	85,682
Home equity portfolio	—		—	6,481	6,481
Multi-family residential	—		—	7,583	7,583
Commercial real estate	—		—	40,841	40,841
Consumer and installment	—		—	33	33
Other real estate and repossessed assets	—		—	110,353	110,353
Total	$	—	—	340,679	340,679
December 31, 2011:
Assets:
Impaired loans:
Commercial, financial and agricultural	$	—	—	54,129	54,129
Real estate construction and development	—		—	79,826	79,826
Real estate mortgage:
Bank portfolio	—		—	13,894	13,894
Mortgage Division portfolio	—		—	84,083	84,083
Home equity portfolio	—		—	5,552	5,552
Multi-family residential	—		—	10,806	10,806
Commercial real estate	—		—	67,756	67,756
Consumer and installment	—		—	18	18
Other real estate and repossessed assets	—		—	129,896	129,896
Total	$	—	—	445,960	445,960

35

Non-Financial Assets and Non-Financial Liabilities. Certain non-financial assets measured at fair value on a non-recurring basis include other real estate (upon initial recognition or subsequent impairment), non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, and intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment.

Other real estate and repossessed assets measured at fair value upon initial recognition totaled $21.8 million and $52.6 million for the nine months ended September 30, 2012 and 2011, respectively. In addition to other real estate and repossessed assets measured at fair value upon initial recognition, the Company recorded write-downs to the balance of other real estate and repossessed assets of $1.7 million and $7.9 million to noninterest expense for the three and nine months ended September 30, 2012, respectively, compared to $1.6 million and $8.4 million for the comparable periods in 2011. Other real estate and repossessed assets were $110.4 million at September 30, 2012, compared to $129.9 million at December 31, 2011.

Fair Value of Financial Instruments. The fair value of financial instruments is management’s estimate of the values at which the instruments could be exchanged in a transaction between willing parties. These estimates are subjective and may vary significantly from amounts that would be realized in actual transactions. In addition, other significant assets are not considered financial assets including deferred income tax assets, bank premises and equipment and goodwill and other intangible assets. Furthermore, the income taxes that would be incurred if the Company were to realize any of the unrealized gains or unrealized losses indicated between the estimated fair values and corresponding carrying values could have a significant effect on the fair value estimates and have not been considered in any of the estimates.

The following summarizes the methods and assumptions used in estimating the fair value of all other financial instruments:

Cash and cash equivalents and accrued interest receivable. The carrying values reported in the consolidated balance sheets approximate fair value.

Held-to-maturity investment securities. The fair value of held-to-maturity investment securities is based on quoted market prices where available. If quoted market prices are not available, the fair value is based on quoted market prices of comparable instruments. The Company classifies its held-to-maturity investment securities as Level 2.

Loans. The fair value of loans held for portfolio uses an exit price concept and reflects discounts the Company believes are consistent with liquidity discounts in the market place. Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial and industrial, real estate construction and development, commercial real estate, one-to-four-family residential real estate, home equity and consumer and installment. The fair value of loans is estimated by discounting the future cash flows, utilizing assumptions for prepayment estimates over the loans’ remaining life and considerations for the current interest rate environment compared to the weighted average rate of the loan portfolio. The fair value analysis also included other assumptions to estimate fair value, intended to approximate those factors a market participant would use in an orderly transaction, with adjustments for discount rates, interest rates, liquidity, and credit spreads, as appropriate. The Company classifies its loans held for portfolio as Level 3.

FRB and FHLB stock. The carrying values reported in the consolidated balance sheets for FRB and FHLB stock represent redemption value and approximate fair value.

Assets of discontinued operations. The carrying values reported in the consolidated balance sheets for assets of discontinued operations approximate fair value. The Company classifies its assets of discontinued operations as Level 2.

Deposits. The fair value of deposits generally payable on demand (i.e., noninterest-bearing and interest-bearing demand, and savings and money market accounts) is considered equal to their respective carrying amounts as reported in the consolidated balance sheets. The fair value of demand deposits does not include the benefit that results from the low-cost funding provided by deposit liabilities compared to the cost of borrowing funds in the market. The fair value disclosed for time deposits was estimated utilizing a discounted cash flow calculation that applied interest rates currently being offered on similar deposits to a schedule of aggregated monthly maturities of time deposits. If the estimated fair value is lower than the carrying value, the carrying value is reported as the fair value of time deposits. The Company classifies its time deposits as Level 3.

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

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

36

Liabilities of discontinued operations. The fair value of liabilities of discontinued operations reflects the negotiated purchase price at which the liabilities could be exchanged in a transaction between willing parties, as further described in Note 2 to the consolidated financial statements. The Company classifies its liabilities of discontinued operations as Level 2.

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

The estimated fair value of the Company’s financial instruments at September 30, 2012 and December 31, 2011 were as follows:

	September 30, 2012									December 31, 2011
				Estimated Fair Value
	Carrying Value			Level 1	Level 2	Level 3		Total		Carrying Value		Estimated Fair Value
	(dollars expressed in thousands)
Financial Assets:
Cash and cash equivalents	$	289,006		289,006	—	—		289,006		472,011		472,011
Investment securities:
Available for sale	2,081,535			1,032	2,080,503	—		2,081,535		2,457,887		2,457,887
Held to maturity	682,748			—	687,433	—		687,433		12,817		13,424
Loans held for portfolio	2,907,988			—	—	2,601,457		2,601,457		3,115,130		2,811,538
Loans held for sale	58,241			—	58,241	—		58,241		31,111		31,111
FRB and FHLB stock	26,712			26,712	—	—		26,712		27,078		27,078
Derivative instruments	2,078			—	2,078	—		2,078		1,022		1,022
Accrued interest receivable	20,534			20,534	—	—		20,534		21,050		21,050
Assets of discontinued operations	20,203			—	20,203	—		20,203		21,009		21,009
Financial Liabilities:
Deposits:
Noninterest-bearing demand	$	1,272,660		1,272,660	—	—		1,272,660		1,209,759		1,209,759
Interest-bearing demand	931,511			931,511	—	—		931,511		884,168		884,168
Savings and money market	1,835,525			1,835,525	—	—		1,835,525		1,893,560		1,893,560
Time deposits	1,292,932			—	—	1,294,961		1,294,961		1,464,343		1,467,548
Other borrowings	28,370			28,370	—	—		28,370		50,910		50,910
Derivative instruments	281			—	281	—		281		1,114		1,114
Accrued interest payable	44,935			44,935	—	—		44,935		34,285		34,285
Subordinated debentures	354,114			—	—	244,631		244,631		354,057		204,502
Liabilities of discontinued operations	326,146			—	319,855	—		319,855		346,282		339,527
Off-Balance Sheet Financial Instruments:
Commitments to extend credit, standby letters of credit and financial guarantees	$	(2,779	)	—	—	(2,779	)	(2,779	)	(2,785	)	(2,785	)

NOTE13–INCOMETAXES

The realization of the Company’s net deferred tax assets is based on the expectation of future taxable income and the utilization of tax planning strategies. The Company has a full valuation allowance against its net deferred tax assets at September 30, 2012 and December 31, 2011. The deferred tax asset valuation allowance was recorded in accordance with ASC Topic 740, “Income Taxes.” Under ASC Topic 740, the Company is required to assess whether it is “more likely than not” that some portion or all of its deferred tax assets will not be realized. Pursuant to ASC Topic 740, concluding that a deferred tax asset valuation allowance is not required is difficult when there is significant evidence which is objective and verifiable, such as the lack of recoverable taxes, excess of reversing deductible differences over reversing taxable differences and cumulative losses in recent years. If, in the future, the Company generates taxable income on a sustained basis, management may conclude the deferred tax asset valuation allowance is no longer required, which would result in the reversal of a portion or all of the deferred tax asset valuation allowance, which would be reflected as a benefit for income taxes in the consolidated statements of operations.

37

A summary of the Company’s deferred tax assets and deferred tax liabilities at September 30, 2012 and December 31, 2011 is as follows:

	September 30, 2012			December 31, 2011
	(dollars expressed in thousands)
Gross deferred tax assets	$	407,175		412,155
Valuation allowance	(380,208		)	(393,034	)
Deferred tax assets, net of valuation allowance	26,967			19,121
Deferred tax liabilities	34,107			26,261
Net deferred tax liabilities	$	(7,140	)	(7,140	)

The Company’s valuation allowance was $380.2 million and $393.0 million at September 30, 2012 and December 31, 2011, respectively. At September 30, 2012 and December 31, 2011, for federal income tax purposes, the Company had net operating loss carryforwards of approximately $554.5 million and $539.2 million, respectively. At September 30, 2012 and December 31, 2011, for state income tax purposes, the Company had net operating loss carryforwards of approximately $735.5 million and $702.8 million, respectively, and a related deferred tax asset of $62.7 million and $58.3 million, respectively.

At September 30, 2012 and December 31, 2011, the Company’s unrecognized tax benefits for uncertain tax positions, excluding interest and penalties, were $1.3 million and $1.2 million, respectively. At September 30, 2012 and December 31, 2011, the total amount of unrecognized tax benefits that would affect the provision for income taxes, prior to the consideration of the deferred tax asset valuation allowance, was $881,000 and $784,000, respectively. It is the Company’s policy to separately disclose any interest or penalties arising from the application of federal or state income taxes. Interest related to unrecognized tax benefits is included in interest expense and penalties related to unrecognized tax benefits are included in noninterest expense. At September 30, 2012 and December 31, 2011, interest accrued for unrecognized tax positions was $187,000 and $136,000, respectively. The Company recorded interest expense of $15,000 and $51,000 related to unrecognized tax benefits for the three and nine months endedSeptember 30, 2012, respectively, compared to $18,000 and $56,000 for the comparable periods in 2011. There were no penalties for uncertain tax positions accrued at September 30, 2012 and December 31, 2011, nor did the Company recognize any expense for penalties during the three and nine months endedSeptember 30, 2012 and 2011.

The Company continually evaluates the unrecognized tax benefits associated with its uncertain tax positions. It is reasonably possible that the total unrecognized tax benefits as of September 30, 2012 could decrease by approximately $271,000 by December 31, 2012 as a result of the lapse of statutes of limitations or potential settlements with the federal and state taxing authorities, of which the impact to the provision for income taxes, prior to the consideration of the deferred tax asset valuation allowance, is estimated to be approximately $176,000. It is also reasonably possible that this decrease could be substantially offset by new matters arising during the same period.

The Company files consolidated and separate income tax returns in the U.S. federal jurisdiction and in various state jurisdictions. Management of the Company believes the accrual for tax liabilities is adequate for all open audit years based on its assessment of many factors, including past experience and interpretations of tax law applied to the facts of each matter. This assessment relies on estimates and assumptions. The Company’s federal income tax returns through 2008 have been examined by the IRS. Years subsequent to 2008 could contain matters that could be subject to differing interpretations of applicable tax laws and regulations as they relate to the amount, timing or inclusion of revenue and expenses. The Company has recorded a tax benefit only for those positions that meet the “more likely than not” standard. The Company’s current estimate of the resolution of various state examinations, none of which are in process, is reflected in accrued income taxes; however, final settlement of the examinations or changes in the Company’s estimate may result in future income tax expense or benefit.

The Company is no longer subject to U.S. federal tax examination for the years prior to 2009 and is no longer subject to Florida, Illinois and Missouri income tax examination by the tax authorities for the years prior to 2008, and prior to 2007 for California and Texas.

The Company recorded a benefit for income taxes of $11.6 million during the third quarter of 2011 related to an intraperiod tax allocation between other comprehensive income and loss from continuing operations, primarily driven by market appreciation in the Company's investment securities portfolio.

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NOTE14–EARNINGS(LOSS)PERCOMMONSHARE

The following is a reconciliation of basic and diluted earnings (loss) per share (EPS) for the three and nine months endedSeptember 30, 2012 and 2011:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2012			2011		2012		2011
	(dollars in thousands, except share and per share data)
Basic:
Net income (loss) from continuing operations attributable to First Banks, Inc.	$	10,802		910		30,212		(16,376	)
Preferred stock dividends declared and undeclared	(4,753		)	(4,506	)	(14,070	)	(13,341	)
Accretion of discount on preferred stock	(893		)	(874	)	(2,660	)	(2,593	)
Net income (loss) from continuing operations attributable to common stockholders	5,156			(4,470	)	13,482		(32,310	)
Net loss from discontinued operations attributable to common stockholders	(2,329		)	(2,984	)	(7,333	)	(8,895	)
Net income (loss) available to First Banks, Inc. common stockholders	$	2,827		(7,454	)	6,149		(41,205	)
Weighted average shares of common stock outstanding	23,661			23,661		23,661		23,661
Basic earnings (loss) per common share – continuing operations	$	217.91		(188.89	)	569.81		(1,365.48	)
Basic loss per common share – discontinued operations	$	(98.43	)	(126.12	)	(309.92	)	(375.94	)
Basic earnings (loss) per common share	$	119.48		(315.01	)	259.89		(1,741.42	)
Diluted:
Net income (loss) from continuing operations attributable to common stockholders	$	5,156		(4,470	)	13,482		(32,310	)
Net loss from discontinued operations attributable to common stockholders	(2,329		)	(2,984	)	(7,333	)	(8,895	)
Net income (loss) available to First Banks, Inc. common stockholders	2,827			(7,454	)	6,149		(41,205	)
Effect of dilutive securities:
Class A convertible preferred stock	—			—		—		—
Diluted income (loss) available to First Banks, Inc. common stockholders	$	2,827		(7,454	)	6,149		(41,205	)
Weighted average shares of common stock outstanding	23,661			23,661		23,661		23,661
Effect of dilutive securities:
Class A convertible preferred stock	—			—		—		—
Weighted average diluted shares of common stock outstanding	23,661			23,661		23,661		23,661
Diluted earnings (loss) per common share – continuing operations	$	217.91		(188.89	)	569.81		(1,365.48	)
Diluted loss per common share – discontinued operations	$	(98.43	)	(126.12	)	(309.92	)	(375.94	)
Diluted earnings (loss) per common share	$	119.48		(315.01	)	259.89		(1,741.42	)

NOTE15–BUSINESSSEGMENTRESULTS

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

39

geographic areas, which include eastern Missouri, southern Illinois, southern and northern California, and Florida’s Manatee, Pinellas, Hillsborough and Pasco counties. Certain loan products are available nationwide.

The business segment results are consistent with the Company’s internal reporting system and, in all material respects, with GAAP and practices predominant in the banking industry. The business segment results are summarized as follows:

	First Bank			Corporate, Other and Intercompany Reclassifications				ConsolidatedTotals
	September 30, 2012		December 31, 2011	September 30, 2012		December 31, 2011		September 30, 2012	December 31, 2011
	(dollars expressed in thousands)
Balance sheet information:
Investment securities	$	2,764,283	2,470,704	—		—		2,764,283	2,470,704
Loans, net of net deferred loan fees	3,080,431		3,283,951	—		—		3,080,431	3,283,951
FRB and FHLB stock	26,712		27,078	—		—		26,712	27,078
Goodwill and other intangible assets	121,967		121,967	—		—		121,967	121,967
Assets of discontinued operations	20,203		21,009	—		—		20,203	21,009
Total assets	6,499,354		6,593,515	13,773		15,398		6,513,127	6,608,913
Deposits	5,335,943		5,454,664	(3,315	)	(2,834	)	5,332,628	5,451,830
Other borrowings	28,370		50,910	—		—		28,370	50,910
Subordinated debentures	—		—	354,114		354,057		354,114	354,057
Liabilities of discontinued operations	326,146		346,282	—		—		326,146	346,282
Stockholders’ equity	741,491		680,625	(442,456	)	(416,954	)	299,035	263,671

	First Bank					Corporate, Other and Intercompany Reclassifications				Consolidated Totals
	Three Months Ended					Three Months Ended				Three Months Ended
	September 30,					September 30,				September 30,
	2012			2011		2012		2011		2012		2011
	(dollars expressed in thousands)
Income statement information:
Interest income	$	50,436		56,666		100		30		50,536		56,696
Interest expense	3,345			6,616		3,745		3,405		7,090		10,021
Net interest income (loss)	47,091			50,050		(3,645	)	(3,375	)	43,446		46,675
Provision for loan losses	—			19,000		—		—		—		19,000
Net interest income (loss) after provision for loan losses	47,091			31,050		(3,645	)	(3,375	)	43,446		27,675
Noninterest income	16,385			16,635		106		110		16,491		16,745
Amortization of intangible assets	—			712		—		—		—		712
Other noninterest expense	48,666			55,166		391		(119	)	49,057		55,047
Income (loss) from continuing operations before provision (benefit) for income taxes	14,810			(8,193	)	(3,930	)	(3,146	)	10,880		(11,339	)
Provision (benefit) for income taxes	666			(11,572	)	(804	)	(9	)	(138	)	(11,581	)
Net income (loss) from continuing operations, net of tax	14,144			3,379		(3,126	)	(3,137	)	11,018		242
Loss from discontinued operations, net of tax	(2,329		)	(2,984	)	—		—		(2,329	)	(2,984	)
Net income (loss)	11,815			395		(3,126	)	(3,137	)	8,689		(2,742	)
Net income (loss) attributable to noncontrolling interest in subsidiary	216			(668	)	—		—		216		(668	)
Net income (loss) attributable to First Banks, Inc.	$	11,599		1,063		(3,126	)	(3,137	)	8,473		(2,074	)

40

	First Bank					Corporate, Other and Intercompany Reclassifications				Consolidated Totals
	Nine Months Ended					Nine Months Ended				Nine Months Ended
	September 30,					September 30,				September 30,
	2012			2011		2012		2011		2012		2011
	(dollars expressed in thousands)
Income statement information:
Interest income	$	154,360		177,770		121		84		154,481		177,854
Interest expense	11,483			23,767		11,109		10,068		22,592		33,835
Net interest income (loss)	142,877			154,003		(10,988	)	(9,984	)	131,889		144,019
Provision for loan losses	2,000			52,000		—		—		2,000		52,000
Net interest income (loss) after provision for loan losses	140,877			102,003		(10,988	)	(9,984	)	129,889		92,019
Noninterest income	48,783			45,531		287		91		49,070		45,622
Amortization of intangible assets	—			2,278		—		—		—		2,278
Other noninterest expense	147,798			165,267		1,100		(541	)	148,898		164,726
Income (loss) from continuing operations before provision (benefit) for income taxes	41,862			(20,011	)	(11,801	)	(9,352	)	30,061		(29,363	)
Provision (benefit) for income taxes	447			(11,412	)	(369	)	(45	)	78		(11,457	)
Net income (loss) from continuing operations, net of tax	41,415			(8,599	)	(11,432	)	(9,307	)	29,983		(17,906	)
Loss from discontinued operations, net of tax	(7,333		)	(8,895	)	—		—		(7,333	)	(8,895	)
Net income (loss)	34,082			(17,494	)	(11,432	)	(9,307	)	22,650		(26,801	)
Net loss attributable to noncontrolling interest in subsidiary	(229		)	(1,530	)	—		—		(229	)	(1,530	)
Net income (loss) attributable to First Banks, Inc.	$	34,311		(15,964	)	(11,432	)	(9,307	)	22,879		(25,271	)

NOTE16–TRANSACTIONSWITHRELATEDPARTIES

First Services, L.P. First Services, L.P. (First Services), a limited partnership indirectly owned by the Company’s Chairman and members of his immediate family, including Mr. Michael Dierberg, Vice Chairman of the Company, provides information technology, item processing and various related services to the Company and First Bank. Fees paid under agreements with First Services were $4.9 million and $16.2 million for the three and nine months ended September 30, 2012, respectively, and $6.2 million and $18.5 million for the comparable periods in 2011. First Services leases information technology and other equipment from First Bank. First Services paid First Bank rental fees for the use of such equipment of $322,000 and $1.0 million during the three and nine months ended September 30, 2012, respectively, and $459,000 and $1.5 million for the comparable periods in 2011. In addition, First Services paid $435,000 and $1.4 million for the three and nine months ended September 30, 2012, respectively, and $462,000 and $1.4 million for the comparable periods in 2011, in rental payments to First Bank for occupancy of certain First Bank premises from which business is conducted.

First Services entered into an Affiliate Services Agreement with the Company and First Bank effective January 2009. The Affiliate Services Agreement relates to various services provided to First Services, including certain human resources, payroll, employee benefit and training services, insurance services and vendor payment processing services. Fees accrued under the Affiliate Services Agreement by First Services were $44,000 and $133,000 for the three and nine months ended September 30, 2012, respectively, and $39,000 and $117,000 for the comparable periods in 2011.

First Brokerage America, L.L.C. First Brokerage America, L.L.C. (First Brokerage), a limited liability company indirectly owned by the Company’s Chairman and members of his immediate family, including Mr. Michael Dierberg, Vice Chairman of the Company, received $914,000 and $3.3 million for the three and nine months ended September 30, 2012, respectively, and $1.2 million and $4.1 million for the comparable periods in 2011, in gross commissions paid by unaffiliated third-party companies. The commissions received primarily resulted from sales of annuities, securities and other insurance products to customers of First Bank. First Brokerage paid $100,000 and $325,000 for the three and nine months ended September 30, 2012, respectively, and $96,000 and $392,000 for the comparable periods in 2011, to First Bank in rental payments for occupancy of certain First Bank premises from which brokerage business is conducted.

Dierbergs Markets, Inc. First Bank leases certain of its in-store branch offices and automated teller machine (ATM) sites from Dierbergs Markets, Inc., a grocery store chain headquartered in St. Louis, Missouri that is owned and operated by the brother of the Company’s Chairman and members of his immediate family. Total rent expense incurred by First Bank under the lease obligation contracts was $129,000 and $373,000 for the three and nine months ended September 30, 2012, respectively, and $120,000 and $357,000 for the comparable periods in 2011.

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First Capital America, Inc. / FB Holdings, LLC. The Company formed FB Holdings, a limited liability company organized in the state of Missouri, in May 2008. FB Holdings operates as a majority-owned subsidiary of First Bank and was formed for the primary purpose of holding and managing certain nonperforming loans and assets to allow the liquidation of such assets at a time that is more economically advantageous to First Bank and to permit an efficient vehicle for the investment of additional capital by the Company’s sole owner of its Class A and Class B preferred stock. First Bank contributed cash of $9.0 million and nonperforming loans and assets with a fair value of approximately $133.3 million and FCA contributed cash of $125.0 million to FB Holdings during 2008. As a result, First Bank owned 53.23% and FCA owned the remaining 46.77% of FB Holdings as of September 30, 2012. The contribution of cash by FCA is reflected as a component of stockholders’ equity in the consolidated balance sheets and, consequently, increased the Company’s and First Bank’s regulatory capital ratios under then-existing regulatory guidelines, subject to certain limitations.

FB Holdings receives various services provided by First Bank, including loan servicing and special assets services as well as various other financial, legal, human resources and property management services. Fees paid under the agreement by FB Holdings to First Bank were $27,000 and $105,000 for the three and nine months ended September 30, 2012, respectively, and $44,000 and $152,000 for the comparable periods in 2011.

Investors of America Limited Partnership. On March 24, 2011, the Company entered into a $5.0 million Credit Agreement with Investors of America, LP, as further described in Note 8 to the consolidated financial statements. Investors of America, LP is a Nevada limited partnership that was created by and for the benefit of the Company’s Chairman and members of his immediate family. There were no balances outstanding with respect to the Credit Agreement as of and for the nine months ended September 30, 2012 or since its inception.

Loans to Directors and/or their Affiliates. First Bank has had in the past, and may have in the future, loan transactions in the ordinary course of business with its directors and/or their affiliates. These loan transactions have been made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unaffiliated persons and did not involve more than the normal risk of collectability or present other unfavorable features. Loans to directors, their affiliates and executive officers of the Company were $5.3 million and $20.7 million at September 30, 2012 and December 31, 2011, respectively. First Bank does not extend credit to its officers or to officers of the Company, except extensions of credit secured by mortgages on personal residences, loans to purchase automobiles, personal credit card accounts and deposit account overdraft protection under a plan whereby a credit limit has been established in accordance with First Bank’s standard credit criteria.

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

NOTE17–CONTINGENTLIABILITIES

In the ordinary course of business, the Company and its subsidiaries become involved in legal proceedings, including litigation arising out of the Company’s efforts to collect outstanding loans. It is not uncommon for collection efforts to lead to so-called “lender liability” suits in which borrowers may assert various claims against the Company. From time to time, the Company is party to other legal matters arising in the normal course of business. While some matters pending against the Company specify damages claimed by plaintiffs, others do not seek a specified amount of damages or are at very early stages of the legal process. The Company records a loss accrual for all legal matters for which it deems a loss is probable and can be reasonably estimated. Management, after consultation with legal counsel, believes the ultimate resolution of these existing proceedings is not reasonably likely to have a material adverse effect on the business, financial condition or results of operations of the Company and/or its subsidiaries and the range of possible additional loss in excess of amounts accrued is not material.

The Company and First Bank have entered into agreements with the FRB and MDOF, as further described in Note 11 to the consolidated financial statements.

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ITEM2–MANAGEMENT’SDISCUSSION ANDANALYSIS OFFINANCIALCONDITION ANDRESULTS OFOPERATIONS

Forward-Looking Statements and Factors that Could Affect Future Results

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

Ø	Our ability to raise sufficient capital, absent the successful completion of all or a significant portion of our Capital Plan, as further discussed under “—Overview – Capital Plan;”
Ø	Our ability to maintain capital at levels necessary or desirable to support our operations;
Ø	The risks associated with implementing our business strategy, including our ability to preserve and access sufficient capital to continue to execute our strategy;
Ø	The increased cost of maintaining or our ability to maintain adequate liquidity and capital, based on the requirements adopted and proposed by the Basel Committee on Banking Supervision and U.S. regulators;
Ø	Regulatory actions that impact First Banks, Inc. and First Bank, including the regulatory agreements entered into among First Banks, Inc., First Bank, the Federal Reserve Bank of St. Louis and the State of Missouri Division of Finance, as further discussed under “—Overview – Regulatory Agreements;”
Ø	Our ability to comply with the terms of an agreement with our regulators pursuant to which we have agreed to take certain corrective actions to improve our financial condition and results of operations;
Ø	The effects of and changes in trade and monetary and fiscal policies and laws, including, but not limited to, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the interest rate policies of the Federal Open Market Committee of the Federal Reserve Board of Governors and the U.S. Treasury’s Capital Purchase Program and Troubled Asset Relief Program authorized by the Emergency Economic Stabilization Act of 2008;
Ø	The risks associated with the high concentration of commercial real estate loans in our loan portfolio;
Ø	The decline in commercial and residential real estate sales volume and the likely potential for continuing lack of liquidity in the real estate markets;
Ø	The uncertainties in estimating the fair value of developed real estate and undeveloped land in light of declining demand for such assets and continuing lack of liquidity in the real estate markets;
Ø	Negative developments and disruptions in the credit and lending markets, including the impact of the ongoing credit crisis on our business and on the businesses of our customers as well as other banks and lending institutions with which we have commercial relationships;
Ø	The appropriateness of our allowance for loan losses to absorb the amount of actual losses inherent in our existing loan portfolio;
Ø	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;
Ø	Credit risks and risks from concentrations (by geographic area and by industry) within our loan portfolio including certain large individual loans;
Ø	Possible changes in the creditworthiness of customers and the possible impairment of collectability of loans;
Ø	Liquidity risks;
Ø	Inaccessibility of funding sources on the same or similar terms on which we have historically relied if we are unable to maintain sufficient capital ratios;
Ø	The ability to successfully acquire low cost deposits or alternative funding;
Ø	The effects of increased Federal Deposit Insurance Corporation deposit insurance assessments;
Ø	Changes in consumer spending, borrowings and savings habits;
Ø	The ability of First Bank to pay dividends to its parent holding company;
Ø	Our ability to pay cash dividends on our preferred stock and interest on our junior subordinated debentures;
Ø	High unemployment and the resulting impact on our customers’ savings rates and their ability to service debt obligations;

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Ø	Possible changes in interest rates may increase our funding costs and reduce earning asset yields, thus reducing our margins;
Ø	The impact of possible future goodwill and other material impairment charges;
Ø	The ability to attract and retain senior management experienced in the banking and financial services industry;
Ø	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;
Ø	The impact on our financial condition of unknown and/or unforeseen liabilities arising from legal or administrative proceedings;
Ø	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;
Ø	Possible changes in general economic and business conditions in the United States in general and particularly in the communities and market segments we serve;
Ø	Volatility and disruption in national and international financial markets;
Ø	Government intervention in the U.S. financial system;
Ø	The impact of laws and regulations applicable to us and changes therein;
Ø	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;
Ø	The impact of litigation generally and specifically arising out of our efforts to collect outstanding customer loans;
Ø	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;
Ø	Our ability to control the composition and growth of our loan portfolio without adversely affecting interest income and risk underwriting;
Ø	The geographic dispersion of our offices;
Ø	The impact our hedging activities may have on our operating results;
Ø	The highly regulated environment in which we operate; and
Ø	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 2011 Annual Report on Form 10-K, as filed with the United States Securities and Exchange Commission on March 23, 2012. 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 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 will not 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

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 Business Capital, Inc.; FB Holdings, LLC, or FB Holdings; Small Business Loan Source LLC, or SBLS LLC; ILSIS, Inc.; FBIN, Inc.; SBRHC, Inc.; HVIIHC, Inc.; FBSA Missouri, Inc.; FBSA California, Inc.; NT Resolution Corporation; and LC Resolution Corporation. First Bank’s subsidiaries are wholly owned at September 30, 2012 except for 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, as further described in Note 16 to our consolidated financial statements.

First Bank currently operates 146 branch banking offices in California, Florida, Illinois and Missouri. 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.

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Regulatory Agreements. On March 24, 2010, the Company, SFC and First Bank entered into a Written Agreement, or Agreement, with the Federal Reserve Bank of St. Louis, or the FRB, requiring the Company and First Bank to take certain steps intended to improve their overall financial condition. Pursuant to the Agreement, the Company prepared and filed with the FRB a number of specific plans designed to strengthen and/or address the following matters: (i) board oversight over the management and operations of the Company and First Bank; (ii) credit risk management practices; (iii) lending and credit administration policies and procedures; (iv) asset improvement; (v) capital; (vi) earnings and overall financial condition; and (vii) liquidity and funds management.

The Agreement requires, among other things, that the Company and First Bank obtain prior approval from the FRB in order to pay dividends. In addition, the Company must obtain prior approval from the FRB to: (i) take any other form of payment from First Bank representing a reduction in capital of First Bank; (ii) make any distributions of interest, principal or other sums on junior subordinated debentures or trust preferred securities; (iii) incur, increase or guarantee any debt; or (iv) purchase or redeem any shares of the Company’s stock. Pursuant to the terms of the Agreement, the Company and First Bank submitted a written plan to the FRB to maintain sufficient capital at the Company, on a consolidated basis, and at First Bank, on a standalone basis. In addition, the Agreement also provides that the Company and First Bank must notify the FRB if the regulatory capital ratios of either entity fall below those set forth in the capital plans that were accepted by the FRB, and specifically if First Bank falls below the criteria for being well capitalized under the regulatory framework for prompt corrective action. The Company must also notify the FRB before appointing any new directors or senior executive officers or changing the responsibilities of any senior executive officer position. The Agreement also requires the Company and First Bank to comply with certain restrictions regarding indemnification and severance payments. The Agreement is specifically enforceable by the FRB in court.

The Company and First Bank must furnish periodic progress reports to the FRB regarding compliance with the Agreement. As of the date of this filing, the Company and First Bank have provided progress reports and other reports, as required under the Agreement. The Company and First Bank have received, or may receive in the future, additional requests from the FRB regarding compliance with the Agreement, which may include, but are not limited to, updates and modifications to the Company’s Asset Quality Improvement, Profit Improvement and Capital Plans. Management has responded promptly to any such requests and intends to do so in the future. The Agreement will remain in effect until stayed, modified, terminated or suspended by the FRB.

Prior to entering into the Agreement, the Company and First Bank had entered into a memorandum of understanding and an informal agreement, respectively, with the FRB and the State of Missouri Division of Finance, or the MDOF. Each of the agreements were characterized by regulatory authorities as informal actions that were neither published nor made publicly available by the agencies and are used when circumstances warrant a milder form of action than a formal supervisory action, such as a written agreement or cease and desist order. The informal agreement with the MDOF is still in place and there have not been any modifications thereto since its inception in September 2008.

Under the terms of the prior memorandum of understanding with the FRB, the Company agreed, among other things, to provide certain information to the FRB including, but not limited to, financial performance updates, notice of plans to materially change its fundamental business and notice to issue trust preferred securities or raise additional equity capital. In addition, the Company agreed not to pay any dividends on its common or preferred stock or make any distributions of interest or other sums on its trust preferred securities without the prior approval of the FRB.

First Bank, under its informal agreement with the MDOF and the FRB, agreed to, among other things, prepare and submit plans and reports to the agencies regarding certain matters including, but not limited to, the performance of First Bank’s loan portfolio. In addition, First Bank agreed not to declare or pay any dividends or make certain other payments without the prior consent of the MDOF and the FRB and to maintain a Tier 1 capital to total assets ratio of no less than 7.00%. As further described in Note 11 to our consolidated financial statements, First Bank’s Tier 1 capital to total assets ratio was 9.08% at September 30, 2012.

While the Company and First Bank intend to take such actions as may be necessary to comply with the requirements of the Agreement with the FRB and informal agreement with the MDOF, there can be no assurance that the Company and First Bank will be able to comply fully with the requirements of the Agreement or that First Bank will be able to comply fully with the provisions of the informal agreement, that compliance with the Agreement and the informal agreement will not be more time consuming or more expensive than anticipated, that compliance with the Agreement and the informal agreement will enable the Company and First Bank to maintain profitable operations, or that efforts to comply with the Agreement and the informal agreement will not have adverse effects on the operations and financial condition of the Company or First Bank. If the Company or First Bank is unable to comply with the terms of the Agreement or the informal agreement, respectively, the Company and First Bank could become subject to further enforcement actions by the regulatory agencies which could mandate additional capital and/or require the sale of certain assets and liabilities. The terms of any such additional regulatory actions, orders or agreements could have a materially adverse effect on our business, financial condition or results of operations.

Capital Plan. We have been working since the beginning of 2008 to strengthen our capital ratios and improve our financial performance. Additionally, on August 10, 2009, we announced the adoption of our Capital Optimization Plan, or Capital Plan, designed to improve our capital ratios and financial performance through certain divestiture activities, asset reductions and expense

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reductions. We adopted our Capital Plan in order to, among other things, preserve our regulatory capital. We have completed, or are in the process of completing, a number of initiatives associated with our Capital Plan. A summary of the primary initiatives completed as of September 30, 2012 with respect to our Capital Plan are shown in the table below. See Note 2 to our consolidated financial statements for a discussion of initiatives associated with our Capital Plan that were completed, or are in the process of completion, during the nine months ended September 30, 2012 and 2011.

	Gain (Loss) on Sale			Decrease in Intangible Assets	Decrease in Risk-Weighted Assets	Total Regulatory Capital Benefit(1)
	(dollars expressed in thousands)
Reduction in Other Risk-Weighted Assets	$	—		—	147,000	12,900
Total 2012 Capital Initiatives	$	—		—	147,000	12,900
Sale of Remaining Northern Illinois Region	$	425		1,558	33,800	4,900
Sale of Edwardsville Branch	263			500	1,400	900
Reduction in Other Risk-Weighted Assets	—			—	877,900	76,800
Total 2011 Capital Initiatives	$	688		2,058	913,100	82,600
Partial Sale of Northern Illinois Region	$	6,355		9,683	141,800	28,500
Sale of Texas Region	4,984			19,962	116,300	35,100
Sale of MVP	(156		)	—	800	(100	)
Sale of Chicago Region	8,414			26,273	342,600	64,700
Sale of Lawrenceville Branch	168			1,000	11,400	2,200
Reduction in Other Risk-Weighted Assets	—			—	2,111,400	184,700
Total 2010 Capital Initiatives	$	19,765		56,918	2,724,300	315,100
Sale of WIUS loans	$	(13,077	)	19,982	146,700	19,700
Sale of restaurant franchise loans	(1,149		)	—	64,400	4,500
Sale of asset-based lending loans	(6,147		)	—	119,300	4,300
Sale of Springfield Branch	309			1,000	900	1,400
Sale of ANB	120			13,013	1,300	13,200
Reduction in Other Risk-Weighted Assets	—			—	1,580,400	138,300
Total 2009 Capital Initiatives	$	(19,944	)	33,995	1,913,000	181,400
Total Completed Capital Initiatives	$	509		92,971	5,697,400	592,000

____________________

(1) Calculated as the sum of the gain (loss) on sale plus the reduction in intangible assets plus 8.75% of the reduction in risk-weighted assets.

In addition to the action items identified above with respect to our Capital Plan, we are also focused on the following actions which, if consummated, would further improve our regulatory capital ratios and/or result in a reduction of our risk-weighted assets:

Ø	Successful implementation of the action items contained within our Profit Improvement Plan;
Ø	Reduction in the overall level of our nonperforming assets and potential problem loans;
Ø	Sale, merger or closure of individual branches or selected branch groupings;
Ø	Sale and/or aggressive reduction of the retained assets and liabilities associated with our Chicago, Texas and Northern Illinois Regions; and
Ø	Exploration of possible capital planning strategies to increase the overall level of Tier 1 regulatory capital at our holding company.

We believe the successful completion of our Capital Plan would substantially improve our capital position. However, no assurance can be made that we will be able to successfully complete all, or any portion, of our Capital Plan, or that our Capital Plan will not be materially modified in the future. Our decision to implement the Capital Plan reflects the adverse effect that the severe downturn in the commercial and residential real estate markets has had on our financial condition and results of operations. If we are not able to successfully complete substantially all of our Capital Plan, our business, financial condition and results of operations may be materially and adversely affected and our ability to withstand continued adverse economic uncertainty could be threatened.

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Regulatory Capital – Proposed Basel III Regulatory Capital Reforms. On June 7, 2012, the Board of Governors of the Federal Reserve System approved proposed rules that would substantially amend the regulatory risk-based capital rules applicable to the Company and First Bank. The proposed rules implement the Basel III regulatory capital reforms, or Basel III, and changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, or 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 extended comment period for the proposed rules ended on October 22, 2012.

The proposed rules include new risk-based capital and leverage ratios, which would be phased in from 2013 to 2019, and would refine the definition of what constitutes “capital” for purposes of calculating those ratios. The proposed new minimum capital level requirements applicable to the Company and First Bank under the proposals would be: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The proposed rules would also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital and would result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement would be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase by that amount each year until fully implemented in January 2019. An institution would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations would establish a maximum percentage of eligible retained income that could be utilized for such actions.

The proposed rules also implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses, as well as certain instruments that will no longer qualify as Tier 1 capital, some of which, such as trust preferred securities, would be phased out over time.

The federal bank regulatory agencies also proposed revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, including First Bank, if their capital levels begin to show signs of weakness. These revisions would take effect January 1, 2015. Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository institutions would be required to meet the following increased capital level requirements in order to qualify as “well capitalized:” (i) a new common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8% (increased from 6%); (iii) a total capital ratio of 10% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 5% (increased from 4%).

The proposed rules set forth certain changes for the calculation of risk-weighted assets, which we would be required to utilize beginning January 1, 2015. The standardized approach proposed rule utilizes an increased number of credit risk exposure categories and risk weights, and also addresses: (i) a proposed alternative standard of creditworthiness consistent with Section 939A of the Dodd-Frank Act; (ii) revisions to recognition of credit risk mitigation; (iii) rules for risk weighting of equity exposures and past due loans; (iv) revised capital treatment for derivatives and repo-style transactions; and (v) disclosure requirements for top-tier banking organizations with $50 billion or more in total assets that are not subject to the “advance approach rules” that apply to banks with greater than $250 billion in consolidated assets.

We continue to evaluate the potential impact that regulatory proposals may have on our liquidity and capital management strategies, including Basel III and those required under the Dodd-Frank Act, as they continue to progress through the final rule-making process.

Discontinued Operations. 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 assets and liabilities associated with our Florida Region as of September 30, 2012 and December 31, 2011, and to the operations of our 19 Florida retail branches and three of our Northern Illinois retail branches for the three and nine months ended September 30, 2012 and 2011, as applicable. All financial information in this Quarterly Report on Form 10-Q is reported on a continuing operations basis, unless otherwise noted. On January 25, 2012, we entered into a Branch Purchase and Assumption Agreement to sell certain assets and transfer certain liabilities of our Florida franchise, or Florida Region, to an unaffiliated financial institution. We terminated this agreement on April 4, 2012 when the potential buyer failed to meet certain conditions of the agreement. We continue to apply discontinued operations accounting to the assets and liabilities and related operations of our Florida Region as of and for the quarter ended September 30, 2012 as we continue to actively market the Florida Region for sale. See Note 2 to our consolidated financial statements for further discussion regarding discontinued operations.

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RESULTS OFOPERATIONS

Overview. We recorded net income, including discontinued operations, of $8.5 million and $22.9 million for the three and nine months ended September 30, 2012, respectively, compared to a net loss, including discontinued operations, of $2.1 million and $25.3 million for the comparable periods in 2011. Our results of operations reflect the following:

Ø	Net interest income of $43.4 million and $131.9 million for the three and nine months ended September 30, 2012, respectively, compared to $46.7 million and $144.0 million for the comparable periods in 2011, which contributed to a decline in our net interest margin to 2.82% and 2.86% for the three and nine months ended September 30, 2012, respectively, compared to 2.88% and 2.91% for the comparable periods in 2011;
Ø	A provision for loan losses of zero and $2.0 million for the three and nine months ended September 30, 2012, respectively, compared to $19.0 million and $52.0 million for the comparable periods in 2011;
Ø	Noninterest income of $16.5 million and $49.1 million for the three and nine months ended September 30, 2012, respectively, compared to $16.7 million and $45.6 million for the comparable periods in 2011;
Ø	Noninterest expense of $49.1 million and $148.9 million for the three and nine months ended September 30, 2012, respectively, compared to $55.8 million and $167.0 million for the comparable periods in 2011;
Ø	A benefit for income taxes of $138,000 and a provision for income taxes of $78,000 for the three and nine months ended September 30, 2012, respectively, compared to a benefit for income taxes of $11.6 million and $11.5 million for the comparable periods in 2011;
Ø	A net loss from discontinued operations, net of tax, of $2.3 million and $7.3 million for the three and nine months ended September 30, 2012, respectively, compared to a net loss from discontinued operations, net of tax, of $3.0 million and $8.9 million for the comparable periods in 2011; and
Ø	Net income attributable to noncontrolling interest in subsidiary of $216,000 and a net loss attributable to noncontrolling interest in subsidiary of $229,000 for the three and nine months ended September 30, 2012, respectively, compared to a net loss of $668,000 and $1.5 million for the comparable periods in 2011.

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Net Interest Income and Average Balance Sheets. The primary source of our income is net interest income. The following table sets forth, on a tax-equivalent basis, certain information on a continuing operations basis relating to our average balance sheets, and reflects the average yield earned on our interest-earning assets, the average cost of our interest-bearing liabilities and the resulting net interest income for the three and nine months ended September 30, 2012 and 2011:

	Three Months Ended September 30,										Nine Months Ended September 30,
	2012					2011					2012					2011
	Average Balance		Interest Income/ Expense	Yield/ Rate		Average Balance		Interest Income/ Expense	Yield/ Rate		Average Balance		Interest Income/ Expense	Yield/ Rate		Average Balance		Interest Income/ Expense	Yield/ Rate
	(dollars expressed in thousands)
ASSETS
Interest-earning assets:
Loans (1)(2)(3)	$	3,001,978	34,888	4.62	%	$	3,618,913	43,098	4.72	%	$	3,102,675	109,685	4.72	%	$	3,945,231	143,062	4.85	%
Investment securities (3)	2,895,814		15,290	2.10		2,248,848		12,977	2.29		2,723,204		43,560	2.14		1,926,283		32,609	2.26
FRB and FHLB stock	26,518		290	4.35		27,163		340	4.97		26,475		850	4.29		27,814		1,075	5.17
Short-term investments	214,763		137	0.25		550,918		347	0.25		314,203		596	0.25		726,567		1,359	0.25
Total interest-earning assets	6,139,073		50,605	3.28		6,445,842		56,762	3.49		6,166,557		154,691	3.35		6,625,895		178,105	3.59
Nonearning assets	412,211					415,341					413,776					406,467
Assets of discontinued operations	20,551					21,387					20,849					41,317
Total assets	$	6,571,835				$	6,882,570				$	6,601,182				$	7,073,679
LIABILITIES AND
STOCKHOLDERS’
EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand	$	930,213	140	0.06	%	$	961,770	240	0.10	%	$	915,414	420	0.06	%	$	941,613	803	0.11	%
Savings and money market	1,846,616		754	0.16		1,958,250		1,854	0.38		1,869,376		2,616	0.19		1,992,087		6,584	0.44
Time deposits of $100 or more	471,749		911	0.77		579,350		1,683	1.15		495,194		3,109	0.84		645,146		6,214	1.29
Other time deposits	844,521		1,522	0.72		1,026,259		2,800	1.08		882,993		5,274	0.80		1,097,035		10,056	1.23
Total interest-bearing deposits	4,093,099		3,327	0.32		4,525,629		6,577	0.58		4,162,977		11,419	0.37		4,675,881		23,657	0.68
Other borrowings	32,492		16	0.20		52,704		36	0.27		35,845		57	0.21		45,009		102	0.30
Subordinated debentures	354,105		3,747	4.21		354,029		3,408	3.82		354,086		11,116	4.19		354,010		10,076	3.81
Total interest-bearing liabilities	4,479,696		7,090	0.63		4,932,362		10,021	0.81		4,552,908		22,592	0.66		5,074,900		33,835	0.89
Noninterest-bearing liabilities:
Demand deposits	1,303,791					1,125,090					1,273,363					1,116,129
Other liabilities	165,119					135,225					155,348					125,911
Liabilities of discontinued operations	332,270					383,886					340,421					451,490
Total liabilities	6,280,876					6,576,563					6,322,040					6,768,430
Stockholders’ equity	290,959					306,007					279,142					305,249
Total liabilities and stockholders’ equity	$	6,571,835				$	6,882,570				$	6,601,182				$	7,073,679
Net interest income			43,515					46,741					132,099					144,270
Interest rate spread				2.65					2.68					2.69					2.70
Net interest margin (4)				2.82	%				2.88	%				2.86	%				2.91	%

____________________

(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 approximately $69,000 and $210,000 for the three and nine months ended September 30, 2012, respectively, and $66,000 and $251,000 for the comparable periods in 2011.

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

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Our balance sheet is presently asset sensitive, and as such, 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 level of our nonperforming assets, the increased level of average lower-yielding short-term investments and investment securities, the lower level of average loans and the additional interest expense accrued on our regularly scheduled deferred interest payments on our junior subordinated debentures 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 reduce nonperforming and potential problem loans and 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 to offset the impact of the decrease in nonaccrual loans, problem loans and other loan relationships.

Net interest income, expressed on a tax-equivalent basis, decreased to $43.5 million and $132.1 million for the three and nine months ended September 30, 2012, respectively, compared to $46.7 million and $144.3 million for the comparable periods in 2011. Our net interest margin decreased to 2.82% and 2.86% for the three and nine months ended September 30, 2012, respectively, compared to 2.88% and 2.91% for the comparable periods in 2011.

We attribute the decrease in our net interest margin and net interest income to a lower average balance of interest-earning assets in addition to a significant change in the mix of our interest-earning assets, which has shifted from loans to investment securities, partially offset by a decrease in interest-bearing liabilities and a decrease in deposit and other borrowing costs. The average yield earned on our interest-earning assets decreased 21 and 24 basis points to 3.28% and 3.35% for the three and nine months ended September 30, 2012, respectively, compared to 3.49% and 3.59% for the comparable periods in 2011, while the average rate paid on our interest-bearing liabilities decreased 18 and 23 basis points to 0.63% and 0.66% for the three and nine months ended September 30, 2012, respectively, compared to 0.81% and 0.89% for the comparable periods in 2011. Average interest-earning assets decreased $306.8 million and $459.3 million to $6.14 billion and $6.17 billion for the three and nine months ended September 30, 2012, respectively, compared to $6.45 billion and $6.63 billion for the comparable periods in 2011. Average interest-bearing liabilities decreased $452.7 million and $522.0 million to $4.48 billion and $4.55 billion for the three and nine months ended September 30, 2012, respectively, compared to $4.93 billion and $5.07 billion for the comparable periods in 2011.

Interest income on our loan portfolio, expressed on a tax-equivalent basis, decreased $8.2 million and $33.4 million for the three and nine months ended September 30, 2012, respectively, as compared to the comparable periods in 2011. Average loans decreased $616.9 million and $842.6 million to $3.00 billion and $3.10 billion for the three and nine months ended September 30, 2012, respectively, from $3.62 billion and $3.95 billion for the comparable periods in 2011. The decrease in average loans primarily reflects a substantial level of loan payoffs and principal payments, reduced loan demand within our markets, loan charge-offs, transfers of loans to other real estate and repossessed assets, and the exit of certain of our problem credit relationships. The yield on our loan portfolio decreased 10 and 13 basis points to 4.62% and 4.72% for the three and nine months ended September 30, 2012, respectively, compared to 4.72% and 4.85% for the comparable periods in 2011. The yield on our loan portfolio continues to be adversely impacted by the historically low prime and LIBOR interest rates, as a significant portion of our loan portfolio is priced to these indices. Furthermore, the yield on our loan portfolio continues to be adversely impacted by the higher levels of average nonaccrual loans, as further discussed under “—Loans and Allowance for Loan Losses.” Our nonaccrual loans decreased our average yield on loans by approximately 23 and 25 basis points during the three and nine months ended September 30, 2012, respectively, compared to approximately 39 and 49 basis points during the comparable periods in 2011. We are continuing to focus on loan growth initiatives to offset the impact of the decrease in nonaccrual loans, problem loans and other loan relationships in future periods.

Interest income on our investment securities, expressed on a tax-equivalent basis, increased $2.3 million and $11.0 million for the three and nine months ended September 30, 2012, respectively, as compared to the comparable periods in 2011. Average investment securities increased $647.0 million and $796.9 million for the three and nine months ended September 30, 2012, respectively, as compared to the comparable periods in 2011. The increase in average investment securities reflects the continued utilization of a portion of our cash and short-term investments to fund gradual and planned increases in our investment securities portfolio in an effort to maximize our net interest income and net interest margin while maintaining appropriate liquidity levels and diversification within our investment securities portfolio. The yield earned on our investment securities portfolio decreased 19 and 12 basis points to 2.10% and 2.14% for the three and nine months ended September 30, 2012, respectively, compared to 2.29% and 2.26% for the comparable periods in 2011, reflecting purchases of investment securities at lower market rates.

Interest income on our short-term investments decreased $210,000 and $763,000 for the three and nine months ended September 30, 2012, respectively, as compared to the comparable periods in 2011. Average short-term investments decreased $336.2 million and $412.4 million for the three and nine months ended September 30, 2012, respectively, as compared to the comparable periods in 2011. The yield on our short-term investments was 0.25% for the three and nine months ended September 30, 2012 and 2011, 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%. The decrease in our average short-term investments reflects the utilization of such funds, coupled

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with funds available from the decline in our loan portfolio, to fund increases in our investment securities portfolio, divestitures associated with our Capital Plan in 2011, and decreases in our average total deposits. We built a significant amount of available balance sheet liquidity throughout 2009, 2010 and 2011 in anticipation of the expected completion of certain transactions associated with our Capital Plan, as further discussed under “—Liquidity Management.” The high level of short-term investments, while necessary to complete certain transactions associated with our Capital Plan and to maintain significant balance sheet liquidity in light of economic conditions during these periods, has negatively impacted our net interest margin and will negatively impact our net interest margin in future periods until we have the opportunity to further reduce our short-term investments through deployment of such funds into other higher-yielding assets.

Interest expense on our interest-bearing deposits decreased $3.3 million and $12.2 million for the three and nine months ended September 30, 2012, respectively, as compared to the comparable periods in 2011. Average total deposits decreased $253.8 million and $355.7 million for the three and nine months ended September 30, 2012, respectively, as compared to the comparable periods in 2011. Average interest-bearing deposits decreased $432.5 million and $512.9 million for the three and nine months ended September 30, 2012, respectively, as compared to the comparable periods in 2011. The decrease in average interest-bearing deposits primarily reflects anticipated reductions of higher rate certificates of deposit and promotional money market deposits, partially offset by organic growth through deposit development programs, including marketing campaigns and enhanced product and service offerings. The mix in our deposit portfolio volumes for the three and nine months ended September 30, 2012, as compared to the comparable periods in 2011, primarily reflects a shift from time deposits, savings and money market deposits, and interest-bearing demand deposits to noninterest-bearing demand deposits. Decreases in our average time deposits, savings and money market deposits and interest-bearing demand deposits of $364.0 million, $122.7 million and $26.2 million, respectively, for the first nine months of 2012, as compared to the comparable period in 2011, were partially offset by an increase in our average noninterest-bearing demand deposits of $157.2 million. The aggregate weighted average rate paid on our interest-bearing deposit portfolio decreased 26 and 31 basis points to 0.32% and 0.37% for the three and nine months ended September 30, 2012, respectively, from 0.58% and 0.68% for the comparable periods in 2011, reflecting the re-pricing of certificate of deposit accounts to current market interest rates upon maturity and our efforts to reduce deposit costs across our deposit portfolio, in particular promotional money market deposits. The weighted average rate paid on our time deposit portfolio decreased 37 and 44 basis points to 0.74% and 0.81% for the three and nine months ended September 30, 2012, respectively, from 1.11% and 1.25% for the comparable periods in 2011; the weighted average rate paid on our savings and money market deposit portfolio decreased 22 and 25 basis points to to 0.16% and 0.19% for the three and nine months ended September 30, 2012, respectively, from 0.38% and 0.44% for the comparable periods in 2011; and the weighted average rate paid on our interest-bearing demand deposits declined to 0.06% for the three and nine months ended September 30, 2012, from 0.10% and 0.11% for the comparable periods in 2011, respectively. Assuming that the prevailing interest rate environment remains relatively stable, we anticipate continued reductions in our deposit costs.

Interest expense on our junior subordinated debentures increased $339,000 and $1.0 million for the three and nine months ended September 30, 2012, respectively, as compared to the comparable periods in 2011. Average junior subordinated debentures were $354.1 million for the three and nine months ended September 30, 2012, compared to $354.0 million for the three and nine months ended September 30, 2011. The aggregate weighted average rate paid on our junior subordinated debentures increased 39 and 38 basis points to 4.21% and 4.19% for the three and nine months ended September 30, 2012, respectively, compared to 3.82% and 3.81% for the comparable periods in 2011. The aggregate weighted average rates and the level of interest expense reflect the LIBOR rates and the impact to the related spreads to LIBOR during the periods, as approximately 79.4% of our junior subordinated debentures are variable rate. The aggregate weighted average rates also reflect additional interest expense accrued on the regularly scheduled deferred interest payments on our junior subordinated debentures of $537,000 and $1.5 million for the three and nine months ended September 30, 2012, respectively, compared to $339,000 and $882,000 for the comparable periods in 2011, as further discussed in Note 9 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 approximately 60 and 55 basis points for the three and nine months ended September 30, 2012, respectively, compared to 38 and 33 basis points for the comparable periods in 2011.

Rate / Volume. The following table indicates, on a tax-equivalent basis, the changes in interest income and interest expense on a continuing basis that are attributable to changes in average volume and changes in average rates, for the three and nine months ended September 30, 2012, as compared to the three and nine months ended September 30, 2011. 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.

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	Increase (Decrease) Attributable to Change in:
	Three Months Ended September 30, 2012 Compared to 2011							Nine Months Ended September 30, 2012 Compared to 2011
	Volume			Rate		Net Change		Volume		Rate		Net Change
	(dollars expressed in thousands)
Interest earned on:
Loans (1) (2) (3)	$	(7,260	)	(950	)	(8,210	)	(29,692	)	(3,685	)	(33,377	)
Investment securities (3)	3,388			(1,075	)	2,313		12,724		(1,773	)	10,951
FRB and FHLB stock	(8		)	(42	)	(50	)	(50	)	(175	)	(225	)
Short-term investments	(210		)	—		(210	)	(763	)	—		(763	)
Total interest income	(4,090		)	(2,067	)	(6,157	)	(17,781	)	(5,633	)	(23,414	)
Interest paid on:
Interest-bearing demand deposits	(8		)	(92	)	(100	)	(22	)	(361	)	(383	)
Savings and money market deposits	(99		)	(1,001	)	(1,100	)	(388	)	(3,580	)	(3,968	)
Time deposits	(719		)	(1,331	)	(2,050	)	(2,938	)	(4,949	)	(7,887	)
Other borrowings	(12		)	(8	)	(20	)	(18	)	(27	)	(45	)
Subordinated debentures	1			338		339		2		1,038		1,040
Total interest expense	(837		)	(2,094	)	(2,931	)	(3,364	)	(7,879	)	(11,243	)
Net interest income	$	(3,253	)	27		(3,226	)	(14,417	)	2,246		(12,171	)

____________________

(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%.

Net interest income, expressed on a tax-equivalent basis, decreased $3.2 million and $12.2 million for the three and nine months ended September 30, 2012, respectively, as compared to the comparable periods in 2011, and reflects a decrease due to volume of $3.3 million and $14.4 million, respectively, partially offset by an increase due to rate of $27,000 and $2.2 million, respectively. The decrease for the nine months ended September 30, 2012, as compared to the comparable period in 2011, was primarily driven by a decrease in the volume of loans, partially offset by an increase in the volume of investment securities and a decrease in the rate and volume of interest-bearing deposits. We have been utilizing cash proceeds resulting from loan payoffs to fund gradual and planned increases in our investment securities portfolio in an effort to maximize net interest income and net interest margin while maintaining appropriate liquidity levels and diversification within our investment securities portfolio and closely monitoring key risk metrics within the investment securities portfolio. Because loans generally have a higher yield than investment securities, the change in our interest-earning asset mix has had a negative impact on our net interest income. The decrease in loans is further discussed under “—Loans and Allowance for Loan Losses.” The increase in net interest income due to rate was primarily driven by a decline in the cost of our interest-bearing deposits, partially offset by a decrease in our loan and investment securities yields, reflective of overall market conditions and competition during these periods.

Provision for Loan Losses. We recorded a provision for loan losses of zero and $2.0 million for the three and nine months ended September 30, 2012, respectively, compared to $19.0 million and $52.0 million for the comparable periods in 2011. The decrease in the provision for loan losses for the three and nine months ended September 30, 2012, as compared to the comparable periods in 2011, was primarily driven by the significant decrease in our overall level of nonaccrual loans and potential problem loans, a decrease in net charge-offs, and less severe asset migration to classified asset categories during the first nine months of 2012 as compared to the migration levels experienced during the first nine months of 2011.

Our nonaccrual loans decreased to $131.6 million at September 30, 2012, from $150.4 million at June 30, 2012, $185.1 million at March 31, 2012, $220.3 million at December 31, 2011 and $270.5 million at September 30, 2011. The decrease in the overall level of nonaccrual loans was driven by resolution of certain nonaccrual loans, gross loan charge-offs, and transfers to other real estate and repossessed assets exceeding net additions to nonaccrual loans, as further discussed under “—Loans and Allowance for Loan Losses,” and reflects our continued progress with respect to the implementation of our Asset Quality Improvement Plan initiatives, designed to reduce the overall balance of nonaccrual and other potential problem loans and assets.

Our net loan charge-offs decreased $16.4 million and $69.8 million to $6.0 million and $25.5 million for the three and nine months ended September 30, 2012, respectively, from $22.5 million and $95.3 million for the comparable periods in 2011. Our annualized net loan charge-offs were 0.80% and 1.10% of average loans for the three and nine months ended September 30, 2012, respectively, compared to 2.46% and 3.23% of average loans for the comparable periods in 2011. Loan charge-offs were $13.9 million and $48.3 million for the three and nine months ended September 30, 2012, respectively, compared to $26.1 million and $112.2 million

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for the comparable periods in 2011, and loan recoveries were $7.9 million and $22.8 million for the three and nine months ended September 30, 2012, respectively, compared to $3.6 million and $16.9 million for the comparable periods in 2011.

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 was $16.5 million and $49.1 million for the three and nine months ended September 30, 2012, respectively, compared to $16.7 million and $45.6 million for the comparable periods in 2011. The increase in our noninterest income for the nine months ended September 30, 2012, as compared to the comparable period in 2011, was primarily attributable to higher gains on loans sold and held for sale, reduced declines in the fair value of servicing rights and increased other income, partially offset by lower service charges on deposit accounts and customer service fees, decreased gains on sales of investment securities and lower loan servicing fees. The following table summarizes noninterest income for the three and nine months ended September 30, 2012 and 2011:

	Three Months Ended									Nine Months Ended
	September 30,					Increase (Decrease)				September 30,					Increase (Decrease)
	2012			2011		Amount		%		2012			2011		Amount		%
	(dollars expressed in thousands)
Noninterest income:
Service charges on deposit accounts and customer service fees	$	8,877		9,904		(1,027	)	(10.4	)%	$	26,511		29,003		(2,492	)	(8.6	)%
Gain on loans sold and held for sale	4,325			2,520		1,805		71.6		10,308			3,928		6,380		162.4
Net gain on investment securities	789			4,165		(3,376	)	(81.1	)	1,306			5,282		(3,976	)	(75.3	)
Decrease in fair value of servicing rights	(2,417		)	(4,370	)	1,953		(44.7	)	(4,608		)	(6,739	)	2,131		(31.6	)
Loan servicing fees	1,741			2,035		(294	)	(14.4	)	5,659			6,404		(745	)	(11.6	)
Other	3,176			2,491		685		27.5		9,894			7,744		2,150		27.8
Total noninterest income	$	16,491		16,745		(254	)	(1.5	)	$	49,070		45,622		3,448		7.6

Service charges on deposit accounts and customer service fees decreased $1.0 million and $2.5 million for the three and nine months ended September 30, 2012, respectively, as compared to the comparable periods in 2011, primarily reflecting reduced non-sufficient funds and returned check fee income on retail and commercial accounts coupled with changes in our deposit mix and certain product modifications designed to enhance overall product offerings to our customer base during these periods.

Gains on loans sold and held for sale increased $1.8 million and $6.4 million for the three and nine months ended September 30, 2012, respectively, as compared to the comparable periods in 2011. The increase was primarily attributable to an increase in the volume of mortgage loans originated for sale in the secondary market during the first nine months of 2012 associated with an increase in refinancing volume in our mortgage banking division in addition to higher margins on the loans originated for sale in the secondary market. The gain on sale of mortgage loans was $4.3 million and $10.3 million for the three and nine months ended September 30, 2012, respectively, compared to $2.5 million and $3.9 million for the comparable periods in 2011. For the nine months ended September 30, 2012 and 2011, we originated residential mortgage loans for sale totaling $325.8 million and $177.5 million, respectively, and sold residential mortgage loans totaling $299.8 million and $196.9 million, respectively.

Net gains on investment securities decreased $3.4 million and $4.0 million for the three and nine months ended September 30, 2012, respectively, as compared to the comparable periods in 2011. Proceeds from sales of available-for-sale investment securities were $107.6 million and $315.2 million for the three and nine months ended September 30, 2012, respectively, as compared to $156.2 million and $283.7 million for the comparable periods in 2011. We sold $106.8 million of mortgage-backed securities at a gain of $786,000 during the third quarter of 2012 to partially fund the purchase of $141.0 million of seasoned, performing one-to-four-family residential real estate loans. We sold $148.5 million of mortgage-backed securities at a gain of $4.1 million during the third quarter of 2011.

Net losses associated with changes in the fair value of mortgage and SBA servicing rights decreased $2.0 million and $2.1 million for the three and nine months ended September 30, 2012, respectively, as compared to the comparable periods in 2011. The changes in the fair value of mortgage and SBA servicing rights during the periods reflect changes in mortgage interest rates and the related changes in estimated prepayment speeds, as well as changes in cash flow assumptions underlying SBA loans serviced for others.

Loan servicing fees decreased $294,000 and $745,000 for the three and nine months ended September 30, 2012, respectively, as compared to the comparable periods in 2011. Loan servicing fees are primarily comprised of fee income generated from the servicing of real estate mortgage loans owned by investors and originated by our mortgage banking division, as well as SBA loans originated to small business concerns, in addition to unused commitment fees received from lending customers. The level of such fees is primarily impacted by the balance of loans serviced and interest shortfall on serviced residential mortgage loans. Interest

53

shortfall represents the difference between the interest collected from a loan servicing customer upon prepayment of the loan and the full month of interest that is required to be remitted to the security owner. The level of fees was also impacted by a decrease in loan servicing fees associated with declining volumes of SBA loans serviced for others.

Other income increased $685,000 and $2.2 million for the three and nine months ended September 30, 2012, respectively, as compared to the comparable periods in 2011. The increase in other income for the first nine months of 2012 primarily reflects the following:

Ø	The receipt of a litigation settlement of $561,000 in the first quarter of 2012;
Ø	Income recognized on CRA investments of $169,000 and $955,000 for the three and nine months ended September 30, 2012, respectively, compared to $387,000 and $891,000 for the comparable periods in 2011;
Ø	Net gains on sales of other real estate and repossessed assets of $1.1 million and $1.4 million for the three and nine months ended September 30, 2012, respectively, compared to net losses of $404,000 and $1.1 million for the comparable periods in 2011; and
Ø	Loss on sale of certain bank-owned properties of $841,000 and $1.1 million for the three and nine months ended September 30, 2012, respectively.

Noninterest Expense. Noninterest expense decreased $6.7 million and $18.1 million to $49.1 million and $148.9 million for the three and nine months ended September 30, 2012, respectively, from $55.8 million and $167.0 million for the comparable periods in 2011. The decrease in our noninterest expense was primarily attributable to reductions in most expense categories attributable to our profit improvement initiatives and the reduction in our overall asset levels. The following table summarizes noninterest expense for the three and nine months ended September 30, 2012 and 2011:

	Three Months Ended							Nine Months Ended
	September 30,			Increase (Decrease)				September 30,			Increase (Decrease)
	2012		2011	Amount		%		2012		2011	Amount		%
	(dollars expressed in thousands)
Noninterest expense:
Salaries and employee benefits	$	18,990	19,557	(567	)	(2.9	)%	$	56,797	58,407	(1,610	)	(2.8	)%
Occupancy, net of rental income, and furniture and equipment	8,340		8,407	(67	)	(0.8	)	23,557		26,418	(2,861	)	(10.8	)
Postage, printing and supplies	641		695	(54	)	(7.8	)	2,055		2,211	(156	)	(7.1	)
Information technology fees	5,219		6,452	(1,233	)	(19.1	)	17,130		19,560	(2,430	)	(12.4	)
Legal, examination and professional fees	2,240		2,828	(588	)	(20.8	)	7,700		9,095	(1,395	)	(15.3	)
Amortization of intangible assets	—		712	(712	)	(100.0	)	—		2,278	(2,278	)	(100.0	)
Advertising and business development	522		459	63		13.7		1,569		1,386	183		13.2
FDIC insurance	3,322		3,550	(228	)	(6.4	)	10,037		12,212	(2,175	)	(17.8	)
Write-downs and expenses on other real estate and repossessed assets	2,922		2,551	371		14.5		11,204		12,970	(1,766	)	(13.6	)
Other	6,861		10,548	(3,687	)	(35.0	)	18,849		22,467	(3,618	)	(16.1	)
Total noninterest expense	$	49,057	55,759	(6,702	)	(12.0	)	$	148,898	167,004	(18,106	)	(10.8	)

Salaries and employee benefits expense decreased $567,000 and $1.6 million for the three and nine months ended September 30, 2012, respectively, as compared to the comparable periods in 2011. The overall decrease in salaries and employee benefits expense is reflective of the continued decline in the overall level of our full-time equivalent employees, or FTEs, due to profit improvement initiatives. Our FTEs, excluding discontinued operations, decreased to 1,148 at September 30, 2012, from 1,171 at December 31, 2011 and 1,209 at September 30, 2011, representing decreases of 2.0% and 5.0%, respectively.

Occupancy, net of rental income, and furniture and equipment expense decreased $67,000 and $2.9 million for the three and nine months ended September 30, 2012, respectively, as compared to the comparable periods in 2011. The decrease reflects reduced furniture, fixture and technology equipment expenditures associated with prior expansion and branch renovation activities and certain branch closures completed in conjunction with profit improvement initiatives. In addition, occupancy expense, net of rental income, includes a $787,000 decrease in rent expense during the first quarter of 2012 associated with the transfer of a lease obligation to an unaffiliated third party and the related reversal of the corresponding straight-line rent liability.

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Postage, printing and supplies expense decreased $54,000 and $156,000 for the three and nine months ended September 30, 2012, respectively, as compared to the comparable periods in 2011, primarily reflecting decreases in office supplies expenses as a result of profit improvement initiatives.

Information technology fees decreased $1.2 million and $2.4 million for the three and nine months ended September 30, 2012, respectively, as compared to the comparable periods in 2011. The decrease in information technology fees is primarily due to the implementation of certain profit improvement initiatives and related fee reductions with First Services, L.P. As more fully described in Note 16 to our consolidated financial statements, First Services, L.P., a limited partnership indirectly owned by our Chairman and members of his immediate family, including Mr. Michael Dierberg, Vice Chairman of the Company, provides information technology and various operational support services to our subsidiaries and us. Information technology fees also include fees paid to outside servicers associated with our mortgage lending, trust and small business lending divisions as well as our payroll processing department.

Legal, examination and professional fees decreased $588,000 and $1.4 million for the three and nine months ended September 30, 2012, respectively, as compared to the comparable periods in 2011. The decrease in legal, examination and professional fees reflects a decrease in legal expenses associated with loan collection activities, divestiture activities and litigation matters in comparison to the level of such expenses during the first nine months of 2011. We anticipate legal, examination and professional fees to remain at higher-than-historical levels in the near term, primarily as a result of elevated levels of legal and professional fees associated with ongoing collection efforts on commercial and consumer problem loans as well as ongoing matters associated with our Capital Plan.

Amortization of intangible assets was $712,000 and $2.3 million for the three and nine months ended September 30, 2011, respectively, and reflects the amortization of core deposit intangibles associated with prior acquisitions. Our core deposit intangibles became fully amortized during 2011.

Advertising and business development expense increased $63,000 and $183,000 for the three and nine months ended September 30, 2012, respectively, as compared to the comparable periods in 2011, reflecting increased advertising during the first nine months of 2012 as compared to the comparable periods in 2011. We expect these expenses to increase over time as we further market our products and services throughout our geographic market areas.

FDIC insurance expense decreased $228,000 and $2.2 million for the three and nine months ended September 30, 2012, respectively, as compared to the comparable periods in 2011. Prior to April 1, 2011, the FDIC's assessment base for the calculation of insurance premium assessments was an institution's average deposits. The Dodd-Frank Wall Street Reform and Consumer Protection Act required the FDIC to establish rules setting insurance premium assessments based on an institution's average consolidated assets minus its average tangible equity instead of its deposits. The change in the assessment base had the impact of reducing the level of our FDIC insurance expense beginning with the second quarter of 2011. The decrease in FDIC insurance expense is also reflective of our reduced level of deposits and total assets during the first nine months of 2012 as compared to the first nine months of 2011. We expect our FDIC insurance expenses will decline in future periods as the financial performance of First Bank continues to improve.

Write-downs and expenses on other real estate and repossessed assets increased $371,000 and decreased $1.8 million for the three and nine months ended September 30, 2012, respectively, as compared to the comparable periods in 2011. Write-downs related to the revaluation of certain other real estate properties and repossessed assets were $1.7 million and $7.9 million for the three and nine months ended September 30, 2012, respectively, as compared to $1.6 million and $8.4 million for the comparable periods in 2011. Other real estate and repossessed asset expenses, exclusive of write-downs, such as taxes, insurance, and repairs and maintenance, were $1.2 million and $3.3 million for the three and nine months ended September 30, 2012, respectively, as compared to $947,000 and $4.6 million for the comparable periods in 2011, reflecting a year-over-year decrease in the balance of other real estate and repossessed assets and the sale of certain properties that required higher operating expenditures. The balance of our other real estate and repossessed assets decreased to $110.4 million at September 30, 2012, from $129.9 million at December 31, 2011 and $131.3 million at September 30, 2011. The overall higher-than-historical level of expenses on other real estate and repossessed assets is associated with ongoing foreclosure activity, including current and delinquent real estate taxes paid on other real estate properties, as well as other property preservation related expenses. We expect the level of write-downs and expenses on our other real estate and repossessed assets to continue to remain at elevated levels in the near term as a result of the high level of our other real estate and repossessed assets and the expected future transfer of certain of our nonaccrual loans into our other real estate portfolio.

Other expense decreased $3.7 million and $3.6 million for the three and nine months ended September 30, 2012, respectively, as compared to the comparable periods in 2011. Other expense encompasses numerous general and administrative expenses including communications, insurance, freight and courier services, correspondent bank charges, loan expenses, miscellaneous losses and recoveries, memberships and subscriptions, transfer agent fees, sales taxes, travel, meals and entertainment, overdraft losses and other nonrecurring expenses. The overall level of other expense reflects the following:

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Ø	Amortization expense and losses associated with CRA investments of $156,000 and $1.0 million for the three and nine months ended September 30, 2012, respectively, compared to $1.4 million and $2.0 million for the comparable periods in 2011;
Ø	Accruals and cash payments associated with repurchase losses in our Mortgage Division, resulting in expense of $1.1 million and $2.3 million for the three and nine months ended September 30, 2012, respectively, compared to $129,000 and $419,000 for the three and nine months ended September 30, 2011. Our reserve for mortgage repurchases was $2.0 million at September 30, 2012;
Ø	Loan expenses related to collection matters of $1.3 million and $2.5 million for the three and nine months ended September 30, 2012, respectively, compared to $1.2 million and $3.9 million for the comparable periods in 2011;
Ø	A reduction in overdraft losses, net of recoveries, to $172,000 and $445,000 for the three and nine months ended September 30, 2012, respectively, compared to $314,000 and $864,000 for the comparable periods in 2011; and
Ø	Write-downs of bank-owned facilities to estimated fair value less costs to sell of $150,000 for the nine months ended September 30, 2012, compared to $2.3 million for the three and nine months ended September 30, 2011, associated with space consolidation initiatives.

(Benefit) Provision for Income Taxes. We recorded a benefit for income tax of $138,000 and a provision for income taxes of $78,000 for the three and nine months ended September 30, 2012, respectively, compared to a benefit for income taxes of $11.6 million and $11.5 million for the comparable periods in 2011. The (benefit) provision for income taxes during the three and nine months ended September 30, 2012 and 2011 reflects the establishment of a full deferred tax asset valuation allowance during 2008 and the resulting inability to record tax benefits on our net loss due to existing federal and state net operating loss carryforwards on which the realization of the related tax benefits is not presently “more likely than not.” The deferred tax asset valuation allowance was primarily established as a result of our three-year cumulative operating loss for the years ended December 31, 2008, 2007 and 2006, after considering all available objective evidence and potential tax planning strategies related to the amount of the deferred tax assets that are “more likely than not” to be realized. The benefit for income taxes during the three and nine months ended September 30, 2011 also reflects a benefit for income taxes of $11.6 million related to an intraperiod tax allocation between accumulated other comprehensive income and loss from continuing operations, and was primarily driven by market appreciation in our investment securities portfolio. The level of our (benefit) provision for income taxes and the deferred tax asset valuation allowance are more fully described in Note 13 to our consolidated financial statements.

Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expenses. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and results of recent operations. In projecting future taxable income, we begin with historical results adjusted for the results of discontinued operations and changes in accounting policies and incorporate assumptions including the amount of future state and federal pre-tax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts and future taxable income and are consistent with the plans and estimates we are using to manage the underlying business. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income (loss).

After analysis of all available positive and negative evidence, we believe it is reasonably possible in the next 12 months to reverse a significant portion, or all, of our deferred tax asset valuation allowance. Historical and forecasted positive evidence includes: pre-tax operating income for the nine months ended September 30, 2012; forecasted cumulative operating income for the three years ending December 31, 2013; continued improvement in asset quality metrics; and certain other relevant factors.

Loss from Discontinued Operations, Net of Tax. We recorded a loss from discontinued operations, net of tax, of $2.3 million and $7.3 million for the three and nine months ended September 30, 2012, respectively, compared to a loss from discontinued operations, net of tax, of $3.0 million and $8.9 million for the comparable periods in 2011. The loss from discontinued operations, net of tax, for the three and nine months ended September 30, 2012 and 2011 is reflective of net income (loss) from all discontinued operations during the respective periods, as further described in Note 2 to our consolidated financial statements. The loss from discontinued operations, net of tax, for the nine months ended September 30, 2011 reflects a gain of $425,000 during the second quarter of 2011 associated with the sale of our remaining Northern Illinois Region on May 13, 2011, after the write-off of goodwill and intangible assets allocated to the Northern Illinois Region of $1.6 million.

Net Income (Loss) Attributable to Noncontrolling Interest in Subsidiary. Net income attributable to noncontrolling interest in subsidiary was $216,000 and net loss attributable to noncontrolling interest in subsidiary was $229,000 for the three and nine months ended September 30, 2012, respectively, compared to net losses attributable to noncontrolling interest in subsidiary of $668,000 and $1.5 million for the comparable periods in 2011, and were comprised of the noncontrolling interest in the net income (losses) of FB Holdings. The reduction in the net loss attributable to noncontrolling interest in subsidiary for the nine months

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ended September 30, 2012, as compared to the comparable period in 2011, is primarily reflective of increased gains on the sale of other real estate properties and reduced expenses and write-downs on other real estate properties associated with the reduction of loan and other real estate balances in FB Holdings. Noncontrolling interest in subsidiary is more fully described in Note 1 and Note 16 to our consolidated financial statements.

FINANCIALCONDITION

Total assets decreased $95.8 million to $6.51 billion at September 30, 2012, from $6.61 billion at December 31, 2011. The decrease in our total assets was primarily attributable to decreases in our short-term investments, loans, bank premises and equipment and other real estate and repossessed assets, partially offset by an increase in our investment securities portfolio.

Cash and cash equivalents, which are comprised of cash and short-term investments, decreased $183.0 million to $289.0 million at September 30, 2012, from $472.0 million at December 31, 2011. The majority of funds in our short-term investments were maintained in our correspondent bank account with the FRB, as further discussed under “—Liquidity Management.” The decrease in our cash and cash equivalents was primarily attributable to the following:

Ø	A net increase in our investment securities portfolio of $266.9 million, excluding the fair value adjustment on available-for-sale investment securities, as further discussed below;
Ø	The purchase of $141.0 million of seasoned, performing one-to-four-family residential real estate loans on September 28, 2012;
Ø	A decrease in our deposit balances of $119.2 million; and
Ø	A net decrease in our other borrowings of $22.5 million, consisting of changes in our daily repurchase agreements utilized by customers as an alternative deposit product.

These decreases in cash and cash equivalents were partially offset by:

Ø	A decrease in loans of $274.4 million, exclusive of the loan purchase transaction discussed above, loan charge-offs and transfers of loans to other real estate and repossessed assets;
Ø	Recoveries of loans previously charged off of $22.8 million; and
Ø	Sales of other real estate and repossessed assets resulting in the receipt of cash proceeds from these sales of approximately $33.4 million.

Investment securities increased $293.6 million to $2.76 billion at September 30, 2012, from $2.47 billion at December 31, 2011. The net increase in our investment securities during 2012 reflects the utilization of excess cash and cash equivalents to fund gradual and planned increases in our investment securities portfolio in a continued effort to maximize net interest income and net interest margin while maintaining appropriate liquidity levels, and an increase in the fair value adjustment of our available-for-sale investment securities of $15.8 million during the first nine months of 2012 primarily resulting from a decrease in market interest rates during the period, partially offset by the sale of $106.8 million of mortgage-backed securities during the third quarter of 2012 to partially fund the purchase of the one-to-four-family residential mortgage loans (as further described below). On June 30, 2012, we reclassified $729.1 million of available-for-sale investment securities to held-to-maturity investment securities, as further described in Note 3 to our consolidated financial statements and under “—Liquidity Management.”

Loans, net of net deferred loan fees, decreased $203.5 million to $3.08 billion at September 30, 2012, from $3.28 billion at December 31, 2011. The decrease reflects loan charge-offs of $48.3 million, transfers of loans to other real estate and repossessed assets of $21.8 million and $274.4 million of other net loan activity, including significant principal repayments and/or payoffs on nonperforming, potential problem and other loans, and overall continued low loan demand within our markets, partially offset by the purchase of $141.0 million of seasoned, performing one-to-four-family residential real estate loans in September 2012, as further discussed under “—Loans and Allowance for Loan Losses.”

Bank premises and equipment, net of depreciation and amortization, decreased $6.2 million to $121.7 million at September 30, 2012, from $127.9 million at December 31, 2011. The decrease is primarily attributable to depreciation and amortization of $8.9 million and write-downs of certain bank-owned facilities of $1.2 million, partially offset by net purchases of premises and equipment of $3.9 million.

Other real estate and repossessed assets decreased $19.5 million to $110.4 million at September 30, 2012, from $129.9 million at December 31, 2011. The decrease in other real estate and repossessed assets was primarily attributable to the sale of other real estate properties and repossessed assets with a carrying value of $32.0 million at a net gain of $1.4 million, and write-downs of other real estate properties and repossessed assets of $7.9 million primarily attributable to declining real estate values on certain properties. These decreases were partially offset by foreclosures and additions to other real estate and repossessed assets aggregating $21.8 million, as further discussed under “—Loans and Allowance for Loan Losses.”

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Other assets decreased $7.3 million to $65.7 million at September 30, 2012, from $73.0 million at December 31, 2011, and are primarily comprised of accrued interest receivable, servicing rights, derivative instruments and miscellaneous other receivables.

Assets and liabilities of discontinued operations were $20.2 million and $326.1 million, respectively, at September 30, 2012, as compared to assets and liabilities of discontinued operations of $21.0 million and $346.3 million, respectively, at December 31, 2011, and represent the assets and liabilities of our Florida Region, as further discussed in Note 2 to our consolidated financial statements.

Deposits decreased $119.2 million to $5.33 billion at September 30, 2012, from $5.45 billion at December 31, 2011. The decrease reflects reductions of higher rate certificates of deposit and money market deposits, partially offset by an increase in demand deposits of $110.2 million attributable to organic growth through our deposit development programs and seasonal fluctuations. Time deposits and savings and money market deposits decreased $171.4 million and $58.0 million, respectively, reflecting our efforts to exit unprofitable relationships to reduce overall deposit costs and improve First Bank's leverage ratio.

Other borrowings, which are comprised of daily securities sold under agreements to repurchase (in connection with cash management activities of our commercial deposit customers), decreased $22.5 million to $28.4 million at September 30, 2012, from $50.9 million at December 31, 2011, reflecting changes in customer balances associated with this product segment.

Accrued expenses and other liabilities increased $22.8 million to $138.7 million at September 30, 2012, from $115.9 million at December 31, 2011. The increase was primarily attributable to an increase in dividends payable on our Class C Fixed Rate Cumulative Perpetual Preferred Stock, or Class C Preferred Stock, and Class D Fixed Rate Cumulative Perpetual Preferred Stock, or Class D Preferred Stock, of $14.1 million to $57.1 million at September 30, 2012, and an increase in accrued interest payable on our junior subordinated debentures of $11.1 million to $44.2 million at September 30, 2012, as further discussed in Notes 9 and 10 to our consolidated financial statements.

Loans and Allowance for Loan Losses

Loan Portfolio Composition. Loans, net of net deferred loan fees, represented 47.3% of our assets as of September 30, 2012, compared to 49.7% of our assets at December 31, 2011. Loans, net of net deferred loan fees, decreased $203.5 million to $3.08 billion at September 30, 2012 from $3.28 billion at December 31, 2011. The following table summarizes the composition of our loan portfolio by category at September 30, 2012 and December 31, 2011:

	September 30, 2012			December 31, 2011
	(dollars expressed in thousands)
Commercial, financial and agricultural	$	625,402		725,130
Real estate construction and development	204,822			249,987
Real estate mortgage:
One-to-four-family residential	1,008,918			902,438
Multi-family residential	103,880			127,356
Commercial real estate	1,060,776			1,225,538
Consumer and installment	18,752			23,333
Loans held for sale	58,241			31,111
Net deferred loan fees	(360		)	(942	)
Loans, net of net deferred loan fees	$	3,080,431		3,283,951

The following table summarizes the composition of our loan portfolio by geographic region and/or business segment at September 30, 2012 and December 31, 2011:

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	September 30, 2012		December 31, 2011
	(dollars expressed in thousands)
Mortgage Division	$	585,111	404,761
Florida	73,613		85,305
Northern California	415,270		497,434
Southern California	936,853		998,976
Chicago	170,034		190,610
Missouri	544,936		613,417
Texas	55,815		99,873
First Bank Business Capital, Inc.	—		19,496
Northern and Southern Illinois	221,007		278,541
Other	77,792		95,538
Total	$	3,080,431	3,283,951

We attribute the net decrease in our loan portfolio during the first nine months of 2012 primarily to:

Ø

A decrease of $99.7 million, or 13.8%, in our commercial, financial and agricultural portfolio, reflecting gross loan charge-offs of $12.7 million, low loan demand within our markets and our efforts to reduce the overall level of our special mention, potential problem and nonaccrual loans within this portfolio segment, including the sale of a $10.2 million nonaccrual loan in our First Bank Business Capital, Inc. subsidiary resulting in a charge-off of $601,000 during the first quarter of 2012;

Ø

A decrease of $45.2 million, or 18.1%, in our real estate construction and development portfolio, primarily attributable to gross loan charge-offs of $8.9 million, transfers to other real estate and repossessed assets of $8.9 million and other loan activity reflective of our efforts to reduce the overall level of our special mention, potential problem and nonaccrual loans within this portfolio segment. The following table summarizes the composition of our real estate construction and development portfolio by region as of September 30, 2012 and December 31, 2011:

	September 30, 2012		December 31, 2011
	(dollars expressed in thousands)
Northern California	$	40,224	51,968
Southern California	93,577		99,517
Chicago	25,863		30,105
Missouri	10,863		18,096
Texas	14,619		24,850
Florida	691		1,398
Northern and Southern Illinois	12,230		17,210
Other	6,755		6,843
Total	$	204,822	249,987

We have experienced significant asset quality deterioration within all geographic areas of our real estate construction and development portfolio over the past several years. As a result of this asset quality deterioration, we focused on reducing our exposure to this portfolio segment and decreased the portfolio balance by $1.94 billion, or 90.4%, from $2.14 billion at December 31, 2007 to $204.8 million at September 30, 2012. Of the remaining portfolio balance of $204.8 million, $47.3 million, or 23.1%, of these loans were on nonaccrual status as of September 30, 2012, including an $18.9 million loan in our Northern California Region, and $89.0 million, or 43.5%, of these loans were considered potential problem loans, including a $71.6 million loan relationship in our Southern California Region, as further discussed below;

Ø An increase of $106.5 million in our one-to-four-family residential real estate loan portfolio primarily attributable to the purchase of $141.0 million of seasoned, performing one-to-four-family residential real estate loans from another financial institution on September 28, 2012 and new loan production, partially offset by gross loan charge-offs of $15.1 million, transfers to other real estate of $6.3 million and principal payments. The following table summarizes the composition of our one-to-four-family residential real estate loan portfolio as of September 30, 2012 and December 31, 2011:

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	September 30, 2012		December 31, 2011
	(dollars expressed in thousands)
One-to-four-family residential real estate:
Bank portfolio	$	131,470	165,578
Mortgage Division portfolio, excluding Florida	433,270		269,097
Florida Mortgage Division portfolio	87,255		97,818
Home equity portfolio	356,923		369,945
Total	$	1,008,918	902,438

Our Bank portfolio consists of mortgage loans originated to customers from our retail branch banking network. The decrease in this portfolio of $34.1 million, or 20.6%, during the first nine months of 2012 is primarily attributable to principal payments primarily resulting from an increasing volume of loan refinancings and the low mortgage interest rate environment. As of September 30, 2012, approximately $9.3 million, or 7.1%, of this portfolio is considered impaired, consisting of nonaccrual loans of $7.7 million and performing troubled debt restructurings, or performing TDRs, of $1.6 million.

Our Mortgage Division portfolio, excluding Florida, consists of both prime mortgage loans and Alt A and sub-prime mortgage loans that were originated prior to our discontinuation of Alt A and sub-prime loan products in 2007. The increase in this portfolio of $164.2 million, or 61.0%, during the first nine months of 2012 is primarily attributable to the purchase of $141.0 million of seasoned, performing one-to-four-family residential real estate loans from another financial institution on September 28, 2012 and the addition of approximately $51.1 million of new loan production into this portfolio, consisting of jumbo adjustable rate and 10 and 15-year fixed rate mortgages; partially offset by principal payments, gross charge-offs of $6.8 million and transfers to other real estate. As of September 30, 2012, approximately $87.6 million, or 20.2%, of this portfolio is considered impaired, consisting of nonaccrual loans of $13.7 million and performing TDRs of $73.9 million, including loans modified in the Home Affordable Modification Program, or HAMP, of $66.5 million.

Our Florida Mortgage Division portfolio, the majority of which was acquired in November 2007 through our acquisition of Coast Bank, consists primarily of prime mortgage loans and Alt A mortgage loans. The decrease in this portfolio of $10.6 million, or 10.8%, is primarily attributable to principal payments, gross charge-offs of $2.2 million and transfers to other real estate. As of September 30, 2012, approximately $9.5 million, or 10.9%, of this portfolio is considered impaired, consisting of performing TDRs of $7.2 million, including loans modified in HAMP of $5.4 million, and nonaccrual loans of $2.3 million. Our Mortgage Division portfolio, excluding Florida, and our Florida Mortgage Division portfolio are collectively defined as our Mortgage Division portfolio unless otherwise noted.

Our home equity portfolio consists of loans originated to customers from our retail branch banking network. As of September 30, 2012, approximately $8.1 million, or 2.3%, of this portfolio is on nonaccrual status. The decrease in this portfolio of $13.0 million, or 3.5%, during the first nine months of 2012 is primarily attributable to gross loan charge-offs of $4.3 million, in addition to principal payments and ordinary and seasonal fluctuations experienced within this loan product type;

Ø A decrease of $23.5 million, or 18.4%, in our multi-family residential real estate portfolio primarily attributable to reduced loan demand within our markets as well as our efforts to reduce the overall level of our special mention, potential problem and nonaccrual loans within this portfolio segment, including the payoff of a $15.4 million special mention credit in our Southern Illinois Region in the third quarter of 2012. As of September 30, 2012, approximately $7.9 million, or 7.6%, of this portfolio is considered impaired, consisting of nonaccrual loans of $4.8 million and performing TDRs of $3.1 million;

Ø A decrease of $164.8 million, or 13.4%, in our commercial real estate portfolio primarily attributable to gross loan charge-offs of $10.0 million, transfers to other real estate of $6.5 million, reduced loan demand within our markets, our efforts to reduce the overall level of our special mention, potential problem and nonaccrual loans within this portfolio segment, including the payoff of a $17.0 million non-owner occupied performing TDR in our Northern California Region in the second quarter of 2012, and our efforts to reduce our exposure to non-owner occupied commercial real estate in the current economic environment. The following table summarizes the composition of our commercial real estate portfolio by loan type as of September 30, 2012 and December 31, 2011:

	September 30, 2012		December 31, 2011
	(dollars expressed in thousands)
Farmland	$	19,978	19,322
Owner occupied	605,250		686,081
Non-owner occupied	435,548		520,135
Total	$	1,060,776	1,225,538

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Within our commercial real estate portfolio, we have experienced the most distress in our non-owner occupied portfolio, which constitutes approximately 41.1% of our commercial real estate portfolio at September 30, 2012. As of September 30, 2012, $17.1 million, or 3.9%, of our non-owner occupied segment is considered impaired, consisting of performing TDRs of $5.8 million and nonaccrual loans of $11.3 million. The following table summarizes the composition of our non-owner occupied loan portfolio by region as of September 30, 2012 and December 31, 2011:

	September 30, 2012		December 31, 2011
	(dollars expressed in thousands)
Northern California	$	117,515	146,808
Southern California	195,082		213,394
Chicago	18,706		19,918
Missouri	60,077		77,449
Texas	16,830		27,639
Florida	9,032		10,233
Northern and Southern Illinois	16,717		22,803
Other	1,589		1,891
Total	$	435,548	520,135

Ø A decrease of $4.6 million, or 19.6%, in our consumer and installment portfolio, reflecting portfolio runoff and reduced loan demand within our markets; and

Ø An increase of $27.1 million, or 87.2%, in our loans held for sale portfolio primarily resulting from an increase in origination volumes and the timing of subsequent sales into the secondary mortgage market.

Nonperforming Assets. Nonperforming assets include nonaccrual loans, other real estate and repossessed assets. The following table presents the categories of nonperforming assets and certain ratios as of September 30, 2012 and December 31, 2011:

	September 30, 2012			December 31, 2011
	(dollars expressed in thousands)
Nonperforming Assets:
Nonaccrual loans:
Commercial, financial and agricultural	$	21,970		55,340
Real estate construction and development	47,257			71,244
One-to-four-family residential real estate:
Bank portfolio	7,685			14,690
Mortgage Division portfolio	15,987			16,778
Home equity portfolio	8,101			6,940
Multi-family residential	4,786			7,975
Commercial real estate	25,775			47,262
Consumer and installment	34			22
Total nonaccrual loans	131,595			220,251
Other real estate and repossessed assets	110,353			129,896
Total nonperforming assets	$	241,948		350,147
Loans, net of net deferred loan fees	$	3,080,431		3,283,951
Performing troubled debt restructurings	$	118,909		126,442
Loans past due 90 days or more and still accruing	$	1,124		2,744
Ratio of:
Allowance for loan losses to loans	3.71		%	4.19	%
Nonaccrual loans to loans	4.27			6.71
Allowance for loan losses to nonaccrual loans	86.78			62.52
Nonperforming assets to loans, other real estate and repossessed assets	7.58			10.26

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Our nonperforming assets, consisting of nonaccrual loans, other real estate and repossessed assets, decreased $108.2 million, or 30.9%, to $241.9 million at September 30, 2012, from $350.1 million at December 31, 2011. Our nonperforming assets at September 30, 2012 included $6.2 million, comprised of $2.5 million of nonaccrual loans and $3.7 million of other real estate, held by FB Holdings, a subsidiary of First Bank which is 46.77% owned by FCA, an entity owned by our Chairman of the Board and members of his immediate family, including Mr. Michael Dierberg, Vice Chairman of the Company.

We attribute the $88.7 million, or 40.3%, net decrease in our nonaccrual loans during the nine months ended September 30, 2012 to the following:

Ø	A decrease in nonaccrual loans of $33.4 million, or 60.3%, in our commercial, financial and agricultural portfolio, primarily driven by gross loan charge-offs of $12.7 million, the sale of a $10.2 million nonaccrual loan in our First Bank Business Capital, Inc. subsidiary resulting in a charge-off of $601,000 during the first quarter of 2012 and payments received, partially offset by additions to nonaccrual loans during the year;
Ø	A decrease in nonaccrual loans of $24.0 million, or 33.7%, in our real estate construction and development loan portfolio driven by gross loan charge-offs of $8.9 million, transfers to other real estate of $8.9 million and payments received, partially offset by additions to nonaccrual loans during the year. Nonaccrual real estate construction and development loans at September 30, 2012 include a single loan in our Northern California region with a recorded investment of $19.7 million;
Ø	A decrease in nonaccrual loans of $6.6 million, or 17.3%, in our one-to-four-family residential real estate loan portfolio driven by gross loan charge-offs of $15.1 million, transfers to other real estate of $6.3 million and payments received, partially offset by additions to nonaccrual loans during the year;
Ø	A decrease in nonaccrual loans of $3.2 million, or 40.0%, in our multi-family residential loan portfolio primarily driven by gross loan charge-offs of $1.3 million and payments received, partially offset by additions to nonaccrual loans during the year; and
Ø	A decrease in nonaccrual loans of $21.5 million, or 45.5%, in our commercial real estate portfolio primarily driven by gross loan charge-offs of $10.0 million, transfers to other real estate of $6.5 million and payments received, partially offset by additions to nonaccrual loans during the year.

The decrease in other real estate and repossessed assets of $19.5 million, or 15.0%, during the first nine months of 2012 was primarily driven by the sale of other real estate properties and repossessed assets with an aggregate carrying value of $32.0 million at a net gain of $1.4 million and write-downs of other real estate and repossessed assets of $7.9 million attributable to declining real estate values on certain properties, partially offset by foreclosures and other additions to other real estate aggregating $21.8 million. Of the $110.4 million balance of other real estate and repossessed assets at September 30, 2012, $66.9 million consisted of properties with the most recent appraisal date being in 2012. The remaining $43.5 million of other real estate and repossessed assets at September 30, 2012 consisted of properties with the most recent appraisal date being in 2011, 2010 and 2009 of $38.3 million, $4.9 million and $4,000, respectively, in addition to $248,000 with the fair value estimated by management or by broker’s price opinions.

The following table summarizes the composition of our nonperforming assets by region / business segment at September 30, 2012 and December 31, 2011:

	September 30, 2012		December 31, 2011
	(dollars expressed in thousands)
Mortgage Division	$	19,457	22,137
Florida	4,991		5,819
Northern California	36,379		42,370
Southern California	70,064		85,233
Chicago	26,492		37,760
Missouri	43,738		60,578
Texas	14,299		40,025
First Bank Business Capital, Inc.	—		11,411
Northern and Southern Illinois	13,595		28,931
Other	12,933		15,883
Total nonperforming assets	$	241,948	350,147

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During the first nine months of 2012, we experienced a decline in nonperforming assets in all of our regions as a result of payment activity, sales of other real estate properties, charge-offs of loans and write-downs of other real estate properties. The decrease in our Texas Region of $25.7 million primarily resulted from a significant loan payoff received during the first quarter of 2012 and other activity, including the sale of several other real estate properties and payoffs of certain nonperforming loans during the first nine months of 2012. The decrease in First Bank Business Capital, Inc.’s nonperforming assets of $11.4 million primarily resulted from the sale of a $10.2 million commercial and industrial loan resulting in a charge-off of $601,000 during the first quarter of 2012. We have been successful in reducing our overall level of nonperforming assets as a result of the completion of several initiatives in our Asset Quality Improvement Plan.

As of September 30, 2012 and December 31, 2011, loans identified by management as TDRs aggregating $37.8 million and $40.8 million, respectively, were on nonaccrual status and were classified as nonperforming loans.

Performing Troubled Debt Restructurings. The following table presents the categories of performing TDRs as of September 30, 2012 and December 31, 2011:

	September 30, 2012		December 31, 2011
	(dollars expressed in thousands)
Commercial, financial and agricultural	$	3,939	4,264
Real estate construction and development	11,893		12,014
Real estate mortgage:
One-to-four-family residential	82,706		82,629
Multi-family residential	3,099		3,166
Commercial real estate	17,272		24,369
Total performing troubled debt restructurings	$	118,909	126,442

The decrease in performing TDRs of $7.5 million, or 6.0%, during the first nine months of 2012 was primarily attributable to the payoff of a $17.0 million commercial real estate loan in our Northern California region during the second quarter of 2012, partially offset by the modification of the contractual terms of two commercial real estate loans in our Southern California region with recorded investments of $5.0 million and $4.3 million during the first and third quarters of 2012, respectively.

Potential Problem Loans. As of September 30, 2012 and December 31, 2011, loans aggregating $183.7 million and $233.5 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 loans having an internally assigned grade of substandard and loans in the Mortgage Division which are 30-89 days past due. The following table presents the categories of our potential problem loans as of September 30, 2012 and December 31, 2011:

	September 30, 2012		December 31, 2011
	(dollars expressed in thousands)
Commercial, financial and agricultural	$	18,111	32,851
Real estate construction and development	89,012		97,158
Real estate mortgage:
One-to-four-family residential	17,949		13,797
Multi-family residential	29,213		28,789
Commercial real estate	29,418		60,876
Total potential problem loans	$	183,703	233,471

Potential problem loans decreased $49.8 million, or 21.3%, during the first nine months of 2012. The decrease in commercial, financial and agricultural potential problem loans of $14.7 million, or 44.9%, is primarily attributable to loan payoffs, including the payoff of a $6.1 million credit relationship in our First Bank Business Capital, Inc. subsidiary during the second quarter of 2012, and other loan activity, including certain upgrades to special mention or pass status. The decrease in real estate construction and development potential problem loans of $8.1 million, or 8.4%, is primarily attributable to loan payoffs and other loan activity, including certain upgrades to special mention or pass status. The decrease in commercial real estate potential problem credits of $31.5 million, or 51.7%, is primarily attributable to the payoff of an $8.3 million credit relationship in our Southern California region during the first quarter of 2012, upgrades of certain potential problem loans to special mention status and transfers to nonaccrual status, in addition to payment activity. Potential problem loans at September 30, 2012 include a $71.6 million real estate construction and development credit relationship in our Southern California region and a $28.3 million multi-family residential real estate loan in our Chicago region. We are continuing to closely monitor these loan relationships. Based on recent valuations of the underlying collateral securing these loans, we believe these loan relationships are adequately secured. While

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facts and circumstances are subject to change in the future, the borrowers continue to service these obligations in accordance with the existing terms and conditions of the respective credits.

The following table summarizes the composition of our potential problem loans by region / business segment at September 30, 2012 and December 31, 2011:

	September 30, 2012		December 31, 2011
	(dollars expressed in thousands)
Mortgage Division	$	8,411	4,429
Florida	4,464		8,100
Northern California	2,666		3,507
Southern California	93,899		113,682
Chicago	37,224		41,720
Missouri	12,677		28,349
Texas	5,190		3,359
First Bank Business Capital, Inc.	—		6,114
Northern and Southern Illinois	18,264		20,922
Other	908		3,289
Total potential problem loans	$	183,703	233,471

During the first nine months of 2012, we experienced a decline in potential problem loans in most of our regions as a result of payment activity, upgrades of certain loans to special mention status from potential problem status and transfers to nonaccrual status. The decline of $19.8 million, or 17.4%, in our Southern California region during the first nine months of 2012 reflects the payoff of an $8.3 million commercial real estate loan during the first quarter of 2012 and other loan activity during the year. The decline of $15.7 million, or 55.3%, in our Missouri region during the first nine months of 2012 reflects certain upgrades to special mention status and other loan activity during the period. The decline of $6.1 million in our First Bank Business Capital, Inc. subsidiary is attributable to the aforementioned payoff of a $6.1 million commercial and industrial credit relationship. We have been successful in reducing the overall level of our potential problem loans as a result of the completion of several initiatives in our Asset Quality Improvement Plan.

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 severely 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. In the current economic environment, 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

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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 they determine new appraisals are prudent based on many different factors, such as a rapid change in market conditions in a particular region.

We continue our efforts to reduce nonperforming and potential problem loans and re-define our overall strategy and business plans with respect to our loan portfolio as deemed necessary in light of ongoing and dramatic changes in market conditions in the markets in which we operate.

Allowance for Loan Losses. Our allowance for loan losses decreased to $114.2 million at September 30, 2012, compared to $137.7 million at December 31, 2011. The decrease in our allowance for loan losses of $23.5 million during the first nine months of 2012 was primarily attributable to the decrease in nonaccrual loans of $88.7 million, the decrease in potential problem loans of $49.8 million and the $203.5 million decrease in the overall level of our loan portfolio.

Our allowance for loan losses as a percentage of loans, net of net deferred loan fees, was 3.71% and 4.19% at September 30, 2012 and December 31, 2011, respectively. The decrease in the allowance for loan losses as a percentage of loans, net of net deferred loan fees, during the first nine months of 2012 was primarily attributable to the decrease in our nonaccrual and potential problem loans during the period, 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 for the nine months ended September 30, 2012 and year ended December 31, 2011, as compared to the years ended December 31, 2010, 2009 and 2008.

Our allowance for loan losses as a percentage of nonaccrual loans was 86.78% and 62.52% at September 30, 2012 and December 31, 2011, respectively. The increase in the allowance for loan losses as a percentage of nonaccrual loans during the first nine months of 2012 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.

Changes in the allowance for loan losses for the three and nine months ended September 30, 2012 and 2011 were as follows:

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	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2012			2011		2012		2011
	(dollars expressed in thousands)
Allowance for loan losses, beginning of period	$	120,227		161,186		137,710		201,033
Loans charged-off:
Commercial, financial and agricultural	(2,475		)	(9,248	)	(12,708	)	(31,992	)
Real estate construction and development	(2,495		)	(5,944	)	(8,918	)	(25,630	)
Real estate mortgage:
One-to-four family residential loans:
Bank portfolio	(346		)	(2,186	)	(1,788	)	(3,750	)
Mortgage Division portfolio	(4,355		)	(4,641	)	(8,998	)	(15,349	)
Home equity portfolio	(1,477		)	(1,762	)	(4,308	)	(5,977	)
Multi-family residential loans	(143		)	(60	)	(1,312	)	(2,990	)
Commercial real estate loans	(2,636		)	(2,144	)	(10,026	)	(26,165	)
Consumer and installment	—			(89	)	(269	)	(384	)
Total	(13,927		)	(26,074	)	(48,327	)	(112,237	)
Recoveries of loans previously charged-off:
Commercial, financial and agricultural	4,907			1,559		10,651		5,525
Real estate construction and development	534			575		4,253		4,958
Real estate mortgage:
One-to-four family residential loans:
Bank portfolio	191			88		835		490
Mortgage Division portfolio	1,259			455		2,781		2,401
Home equity portfolio	129			167		438		440
Multi-family residential loans	1			485		44		528
Commercial real estate loans	827			219		3,673		2,323
Consumer and installment	54			64		144		263
Total	7,902			3,612		22,819		16,928
Net loans charged-off	(6,025		)	(22,462	)	(25,508	)	(95,309	)
Provision for loan losses	—			19,000		2,000		52,000
Allowance for loan losses, end of period	$	114,202		157,724		114,202		157,724

Our net loan charge-offs were $6.0 million and $25.5 million for the three and nine months ended September 30, 2012, respectively, as compared to $22.5 million and $95.3 million for the comparable periods in 2011. Our annualized net loan charge-offs as a percentage of average loans were 0.80% and 1.10% for the three and nine months ended September 30, 2012, respectively, compared to 2.46% and 3.23% for the three and nine months ended September 30, 2011, respectively.

The decrease in our net loan charge-off levels for the three and nine months ended September 30, 2012, as compared to the comparable periods in 2011, is primarily attributable to the following:

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Ø	A decrease in net loan charge-offs of $10.1 million and $24.4 million associated with our commercial, financial and agricultural portfolio for the three and nine months ended September 30, 2012, respectively, as compared to the comparable periods in 2011. Net loan charge-offs for the three and nine months ended September 30, 2011 included charge-offs of $4.9 million on a First Bank Business Capital, Inc. loan and $2.6 million on a loan in our Texas region;
Ø	A decrease in net loan charge-offs of $3.4 million and $16.0 million associated with our real estate construction and development portfolio for the three and nine months ended September 30, 2012, respectively, as compared to the comparable periods in 2011. Net loan charge-offs for the nine months ended September 30, 2011 included a charge-off of $5.7 million during the first quarter of 2011 on a loan in our Missouri region. Although the overall level of charge-offs has declined with the significant decrease in the balance of loans in our real estate construction and development portfolio, we continue to experience significant distress and unstable market conditions throughout certain of our market areas, resulting in continued high levels of developer inventories, slower lot and home sales and declining real estate values;
Ø	A decrease in net loan charge-offs of $3.3 million and $10.7 million associated with our one-to-four-family residential loan portfolio for the three and nine months ended September 30, 2012, respectively, as compared to the comparable periods in 2011. Net loan charge-offs in our Mortgage Division portfolio decreased $1.1 million and $6.7 million for the three and nine months ended September 30, 2012, respectively, as compared to the comparable periods in 2011. The decrease in net loan charge-offs in our Mortgage Division is primarily reflective of the declining portfolio balance of Alt A and subprime loans and the decrease in nonaccrual loans throughout 2011 and the first nine months of 2012, in addition to improving delinquency trends; and

Ø A decrease in net loan charge-offs of $116,000 and $17.5 million associated with our commercial real estate portfolio for the three and nine months ended September 30, 2012, respectively, as compared to the comparable periods in 2011, primarily attributable to the declining portfolio balance, in particular our non-owner occupied commercial real estate portfolio, and decreases in nonaccrual and potential problem loans. We recorded a charge-off of $5.3 million on a loan in our Southern California region during the second quarter of 2011.

The following table summarizes the composition of our net loan charge-offs (recoveries) by region / business segment for the three and nine months ended September 30, 2012 and 2011:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2012			2011		2012	2011
	(dollars expressed in thousands)
Mortgage Division	$	3,098		4,186		6,217	12,947
Florida	780			785		1,775	3,337
Northern California	1,035			3,853		4,146	12,453
Southern California	1,240			2,716		4,164	18,992
Chicago	759			1,086		694	4,429
Missouri	(2,829		)	4,560		1,771	17,807
Texas	(17		)	3,158		974	12,139
First Bank Business Capital, Inc.	(8		)	(63	)	1,180	4,258
Northern and Southern Illinois	971			601		2,848	4,772
Other	996			1,580		1,739	4,175
Total net loan charge-offs	$	6,025		22,462		25,508	95,309

As discussed above, the decrease in net loan charge-offs in our Mortgage Division is reflective of the declining portfolio balance and the decrease in nonaccrual loans throughout 2011 and the first nine months of 2012, in addition to improving delinquency trends. The decrease in net loan charge-offs in our Northern California region was primarily attributable to a charge-off of $2.6 million on a commercial real estate loan during the first quarter of 2011. The decrease in net loan charge-offs in our Southern California region was primarily attributable to the resolution and declining balance of nonaccrual loans in this region and a charge-off of $5.3 million on a commercial real estate loan during the second quarter of 2011. The decrease in net loan charge-offs in our Missouri region was primarily attributable to a recovery of $3.2 million on a commercial, financial and agricultural loan during the third quarter of 2012 and a charge-off of $5.7 million on a real estate construction and development loan during the first quarter of 2011. The decrease in net charge-offs in our Texas Region was primarily attributable to charge-offs of $2.6 million on a commercial and industrial loan and $2.1 million on a real estate construction and development loan during the second quarter of 2011 in addition to the declining portfolio balance and decrease in nonaccrual loans throughout 2011 and the first nine months of 2012.

We continue to closely monitor our loan portfolio and address the ongoing challenges posed by the severely weakened economic environment that has directly impacted and continues to impact many of our market segments. Specifically, we continue to focus

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on loan portfolio segments in which we have experienced significant loan charge-offs, such as real estate construction and development and one-to-four-family residential, and on loan portfolio segments that could generate additional loan charge-offs in the future, such as commercial real estate and commercial and industrial. We consider these factors in our overall assessment of the adequacy of our allowance for loan losses.

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 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 operations.

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:

Ø	Changes in the aggregate loan balances by loan category;
Ø	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;
Ø	Changes in historical loss data as a result of recent charge-off experience by loan type; and
Ø	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.

A summary of the allowance for loan losses to loans by category as of September 30, 2012 and December 31, 2011 is as follows:

	September 30, 2012		December 31, 2011
Commercial, financial and agricultural	3.40	%	3.76	%
Real estate construction and development	9.68		9.95
Real estate mortgage:
One-to-four-family residential loans	4.20		5.64
Multi-family residential loans	4.87		3.81
Commercial real estate loans	2.38		2.40
Consumer and installment	2.20		1.95
Total	3.71		4.19

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.

INTERESTRATERISKMANAGEMENT

The maintenance of a satisfactory level of net interest income is a primary factor in our ability to achieve acceptable income levels. However, the maturity and repricing characteristics of our loan and investment portfolios may differ significantly from those within our deposit structure. The nature of the loan and deposit markets within which we operate, and our objectives for business

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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, potentially 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:

Ø	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;
Ø	Employing a financial simulation model to determine our exposure to changes in interest rates;
Ø	Coordinating the lending, investing and deposit-generating functions to control the assumption of interest rate risk; and
Ø	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, Executive Vice President of Retail Banking, Director of Risk Management and Audit, and certain other senior officers. The Asset Liability Management Group, which monitors interest rate risk, supports the ALCO, prepares analyses for review by the ALCO and implements actions that are either specifically directed by the ALCO or established by policy guidelines.

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

We are “asset-sensitive,” indicating that our assets would generally re-price with changes in interest rates more rapidly than our liabilities, and our simulation model indicates a loss of projected net interest income should interest rates decline. While a decline in interest rates of less than 50 basis points was projected to have a relatively minimal impact on our net interest income, an instantaneous parallel decline in the interest yield curve of 50 basis points indicates a pre-tax projected loss of approximately 6.4% of net interest income, based on assets and liabilities at September 30, 2012. At September 30, 2012, 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, and the overall level of our nonperforming assets, has negatively impacted our net interest income and is expected to continue to impact the level of our net interest income throughout the near future.

We also prepare and review a more traditional interest rate sensitivity position in conjunction with the results of our simulation model. The following table presents the projected maturities and periods to repricing of our rate sensitive assets and liabilities as of September 30, 2012, adjusted to account for anticipated prepayments:

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	Three Months or Less			Over Three through Six Months		Over Six through Twelve Months		Over One through Five Years	Over Five Years	Total
	(dollars expressed in thousands)
Interest-earning assets:
Loans (1)	$	1,695,670		224,967		345,761		727,357	86,676	3,080,431
Investment securities	128,728			161,411		295,647		1,387,046	791,451	2,764,283
FRB and FHLB stock	26,712			—		—		—	—	26,712
Short-term investments	193,435			—		—		—	—	193,435
Total interest-earning assets	$	2,044,545		386,378		641,408		2,114,403	878,127	6,064,861
Interest-bearing liabilities:
Interest-bearing demand deposits	$	344,658		214,248		139,727		102,466	130,412	931,511
Money market deposits	1,571,755			—		—		—	—	1,571,755
Savings deposits	44,841			36,928		31,652		44,841	105,508	263,770
Time deposits	403,226			286,187		351,397		252,021	101	1,292,932
Other borrowings	28,370			—		—		—	—	28,370
Subordinated debentures	282,480			—		—		—	71,634	354,114
Total interest-bearing liabilities	$	2,675,330		537,363		522,776		399,328	307,655	4,442,452
Interest-sensitivity gap:
Periodic	$	(630,785	)	(150,985	)	118,632		1,715,075	570,472	1,622,409
Cumulative	(630,785		)	(781,770	)	(663,138	)	1,051,937	1,622,409
Ratio of interest-sensitive assets to interest-sensitive liabilities:
Periodic	0.76			0.72		1.23		5.29	2.85	1.37
Cumulative	0.76			0.76		0.82		1.25	1.37

____________________

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

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

Ø	Loans will repay at projected repayment rates;
Ø	Mortgage-backed securities, included in investment securities, will repay at projected repayment rates;
Ø	Interest-bearing demand accounts and savings deposits will behave in a projected manner with regard to their interest rate sensitivity; and
Ø	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.

We were in an overall asset-sensitive position of $1.62 billion, or 24.9% of our total assets, and $1.52 billion, or 22.9% of our total assets, at September 30, 2012 and December 31, 2011, respectively. We were in an overall liability-sensitive position on a cumulative basis through the twelve-month time horizon of $663.1 million, or 10.2% of our total assets, and $284.0 million, or 4.3% of our total assets at September 30, 2012 and December 31, 2011, respectively.

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.

As previously discussed, we utilize 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 also sell interest rate swap agreement contracts to certain customers who wish to modify their interest rate sensitivity. We offset the interest rate risk of these swap agreements by simultaneously purchasing matching interest rate swap agreement contracts with offsetting pay/receive rates from other financial institutions. Because of the matching terms of the offsetting contracts, the net effect of the changes in the fair value of the paired swaps is minimal.

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The derivative instruments we held as of September 30, 2012 and December 31, 2011 are summarized as follows:

	September 30, 2012			December 31, 2011
	Notional Amount		Credit Exposure	Notional Amount	Credit Exposure
	(dollars expressed in thousands)
Interest rate swap agreements	$	25,000	—	50,000	—
Customer interest rate swap agreements	13,289		148	47,240	441
Interest rate lock commitments	92,700		4,282	38,985	1,381
Forward commitments to sell mortgage-backed securities	127,050		—	58,800	—

The notional amounts of our derivative instruments do not represent amounts exchanged by the parties and, therefore, are not a measure of our credit exposure through our use of these instruments. The credit exposure represents the loss we would incur in the event the counterparties failed completely to perform according to the terms of the derivative instruments and the collateral held to support the credit exposure was of no value.

The earnings associated with our derivative instruments reflect the interest rate environment during these periods as well as the overall level of our derivative instruments throughout these periods. We recorded net losses on derivative instruments, which are included in noninterest income in the consolidated statements of operations, of $8,000 and $46,000 for the three and nine months ended September 30, 2012, respectively, compared to net gains on derivative instruments of $7,000 and net losses on derivative instruments of $214,000, respectively, for the comparable periods in 2011. The net losses and gains on derivative instruments are attributable to changes in the fair value and the net interest differential of our interest rate swap agreements.

Our derivative instruments are more fully described in Note 7 to our consolidated financial statements.

LIQUIDITYMANAGEMENT

First Bank. Our liquidity is the ability to maintain a cash flow that is adequate to fund operations, service debt obligations and meet obligations and other commitments on a timely basis. First Bank receives funds for liquidity from 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 unstable 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 continue to seek opportunities to improve our overall liquidity position, and have expanded and implemented a more efficient collateral management process that allows us to maximize our overall collateral position related to our alternative borrowing sources. In conjunction with our liquidity management process, 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.

First Bank has built a significant amount of available balance sheet liquidity since 2009 in anticipation of the expected completion of certain transactions associated with our Capital Plan, as further described under “Overview – Capital Plan.” Our cash and cash equivalents were $289.0 million and $472.0 million at September 30, 2012 and December 31, 2011, respectively. The majority of funds were maintained in our correspondent bank account with the FRB. The decrease in our cash and cash equivalents of $183.0 million is further discussed under “—Financial Condition.”

Our unpledged investment securities increased $163.6 million to $2.41 billion at September 30, 2012, compared to $2.24 billion at December 31, 2011, and are mostly comprised of highly liquid and readily marketable available-for-sale securities. The combined level of cash and cash equivalents and unpledged investment securities provided us with total available liquidity of $2.69 billion and $2.71 billion at September 30, 2012 and December 31, 2011, respectively. As such, despite significant cash outflows to support transactions associated with our Capital Plan, we have maintained available liquidity of $2.69 billion, or 41.4% of total assets, at September 30, 2012. Our ability to maintain strong liquidity was achieved by a substantial shift in our balance sheet from loans to short-term investments and investment securities. Our loan-to-deposit ratio decreased to 57.8% at September 30, 2012 from

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60.2% at December 31, 2011, while the ratio of our cash and cash equivalents and investment securities to total assets increased to 46.9% at September 30, 2012 from 44.5% at December 31, 2011.

On September 28, 2012, we purchased $141.0 million of seasoned, performing one-to-four-family residential real estate loans from another financial institution in an effort to deploy a portion of our substantial on-balance sheet liquidity into higher earning alternatives that will contribute to net interest margin beginning in the fourth quarter of 2012. The loan purchase was partially funded through the sale of certain available-for-sale investment securities.

On June 30, 2012, we reclassified certain of our available-for-sale investment securities to held-to-maturity investment securities at their respective fair values, which totaled $729.1 million in aggregate, as further described in Note 3 to the consolidated financial statements. The net gross unrealized gain on these available-for-sale investment securities at the time of transfer was $11.7 million, in aggregate, and was recorded as additional premium on the investment securities and is being amortized over the remaining lives of the respective securities. The unrealized gain included as a component of accumulated other comprehensive income was $6.8 million at June 30, 2012, net of tax of $4.9 million. The amortization of the unrealized gain reported in stockholders’ equity is being amortized as an adjustment to interest income on investment securities over the remaining lives of the respective securities. Consequently, the combined amortization of the additional premium and the unrealized gain have no impact on interest income on investment securities. The determination of the reclassification was made by management based on our current and expected future liquidity levels and the resulting intent to hold those investment securities to maturity.

During the first nine months of 2012, we reduced our aggregate funds acquired from other sources of funds by $80.5 million to $492.1 million at September 30, 2012, from $572.6 million at December 31, 2011. 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 $57.9 million and a decrease in our daily repurchase agreements of $22.5 million. The reduction in certificates of deposit of $100,000 or more was primarily attributable to a planned reduction of higher rate single-service certificate of deposit relationships in an effort to utilize a portion of our current available liquidity and improve First Bank’s leverage ratio. The following table presents the maturity structure of these other sources of funds at September 30, 2012:

	Certificates of Deposit of $100,000 or More		Other Borrowings	Total
	(dollars expressed in thousands)
Three months or less	$	144,957	28,370	173,327
Over three months through six months	102,714		—	102,714
Over six months through twelve months	126,212		—	126,212
Over twelve months	89,869		—	89,869
Total	$	463,752	28,370	492,122

In addition to these sources of funds, First Bank has established a borrowing relationship with the FRB. This borrowing relationship, which is secured primarily by commercial loans, provides an additional liquidity facility that may be utilized for contingency liquidity purposes. Advances drawn on First Bank’s established borrowing relationship require the prior approval of the FRB. First Bank did not have any FRB borrowings outstanding at September 30, 2012 or December 31, 2011.

First Bank also has a borrowing relationship with the FHLB. First Bank’s borrowing capacity through its relationship with the FHLB was approximately $376.8 million and $370.7 million at September 30, 2012 and December 31, 2011, respectively. The borrowing relationship is secured by one-to-four-family residential, multi-family residential and commercial real estate loans. The reduction in First Bank’s borrowing capacity with the FHLB during the first nine months of 2012 primarily resulted from the corresponding decrease in the loan portfolio during this period, as further described under “—Loans and Allowance for Loan Losses.” First Bank requests advances and/or repays advances from the FHLB based on its current and future projected liquidity needs. All borrowing requests require approval from the FHLB. First Bank did not have any FHLB advances outstanding at September 30, 2012 or December 31, 2011.

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. Exclusive of the CDARS program, First Bank does not currently 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 and dividends on debt and equity instruments issued by the Company (all of which are presently suspended or deferred), capital

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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 $3.3 million and $2.8 million at September 30, 2012 and December 31, 2011, respectively. The Company had restricted cash of $2.0 million at December 31, 2011, which became unrestricted in February 2012.

In March 2011, the Company entered into a Revolving Credit Note and a Stock Pledge Agreement with Investors of America Limited Partnership, or Investors of America, LP, as further described in Note 8 and Note 16 to our consolidated financial statements. The agreement provides for a $5.0 million secured revolving line of credit to be utilized for general working capital needs. This borrowing arrangement, which has a maturity date of December 31, 2012 and an interest rate of LIBOR plus 300 basis points, is intended to supplement, if necessary, the parent company’s overall level of unrestricted cash to cover the parent company’s projected operating expenses. There have not been any advances outstanding on this borrowing arrangement since its inception. We cannot be assured 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 conditions in the capital markets, economic conditions and a number of other factors, many of which are outside of our control, and on our financial performance.

Additional long-term funding is provided by our junior subordinated debentures, as further described in Note 9 to our consolidated financial statements. As of September 30, 2012, we had 13 affiliated Delaware or Connecticut statutory and business trusts that were created for the sole purpose of issuing trust preferred securities. The sole assets of the statutory and business trusts are our junior subordinated debentures.

We agreed, among other things, not to pay any dividends on our common or preferred stock or make any distributions of interest or other sums on our trust preferred securities without the prior approval of the FRB, as previously discussed under “Overview – 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. Such payment default or penalty would likely have a material adverse effect on our business, financial condition or results of operations. During the deferral period, we may not, among other things and with limited exceptions, pay cash dividends on or repurchase our common stock or preferred stock nor make any payment on outstanding debt obligations that ranks 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 10 to our consolidated financial statements.

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

Ø	First Bank continues to be unable or prohibited by its regulators to pay a dividend 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 regulatory approval, as further described above and under “—Overview – Regulatory Agreements;”
Ø	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;
Ø	First Bank fails to remain “well-capitalized” and, accordingly, First Bank is required to pledge additional collateral against its borrowings and is unable to do so. As discussed above, First Bank has no outstanding borrowings at September 30, 2012, with the exception of $28.4 million of daily repurchase agreements utilized by customers as an alternative deposit product, and has substantial borrowing capacity through its relationship with the FHLB; or
Ø	The Company has difficulty raising cash through the future issuance of debt or equity instruments or by accessing additional sources of credit.

The Company’s financial flexibility may 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 likely be materially adversely affected. A lack of liquidity and/or cost-effective funding alternatives could materially adversely affect our business, financial condition and results of operations.

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Other Commitments and Contractual Obligations. We have entered into long-term leasing arrangements and other commitments and contractual obligations in conjunction with our ongoing operating activities. The required payments under such leasing arrangements, other commitments and contractual obligations at September 30, 2012 were as follows:

	Less Than 1 Year		1-3 Years	3-5 Years	Over 5 Years	Total (1)
	(dollars expressed in thousands)
Operating leases (2)	$	9,399	13,201	7,675	12,753	43,028
Certificates of deposit (3)	1,040,167		230,795	21,868	102	1,292,932
Other borrowings	28,370		—	—	—	28,370
Subordinated debentures (4)	—		—	—	354,114	354,114
Preferred stock issued under the CPP (4) (5)	—		—	—	310,170	310,170
Other contractual obligations	504		23	3	—	530
Total	$	1,078,440	244,019	29,546	677,139	2,029,144

____________________

(1) Amounts exclude ASC Topic 740 unrecognized tax liabilities of $1.3 million and related accrued interest expense of $187,000 for which the timing of payment of such liabilities cannot be reasonably estimated as of September 30, 2012.

(2) Amounts exclude operating leases associated with discontinued operations of $1.4 million, $2.6 million, $2.2 million and $3.6 million for less than 1 year, 1-3 years, 3-5 years and over 5 years, respectively, or a total of $9.8 million.

(3) Amounts exclude the related accrued interest expense on certificates of deposit of $589,000 as of September 30, 2012.

(4) Amounts exclude the accrued interest expense on junior subordinated debentures and the accrued dividends declared on preferred stock issued under the CPP of $44.2 million and $57.1 million, respectively, as of September 30, 2012. As further described under “Overview – Regulatory Agreements,” we currently may not make any distributions of interest or other sums on our junior subordinated debentures and related underlying trust preferred securities without the prior approval of the FRB.

(5) Represents amounts payable upon redemption of the Class C Preferred Stock and the Class D Preferred Stock issued under the CPP of $295.4 million and $14.8 million, respectively.

EFFECTS OFNEWACCOUNTINGSTANDARDS

In May 2011, the FASB issued ASU 2011-04 –Fair Value Measurement (ASC Topic 820)–Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU provides a consistent definition of fair value and common fair value measurement and disclosure requirements between GAAP and International Financial Reporting Standards, or IFRS. This ASU eliminates wording differences used to describe the requirements for measuring fair value and for disclosure information about fair value measurements between GAAP and IFRS, clarifies the application of existing fair value measurement requirements, and changes certain principles or requirements for measuring fair value or for disclosing information about fair value measurements. The provisions of this ASU are effective for interim and annual periods beginning on or after December 15, 2011, and should be applied prospectively. We adopted the requirements of this ASU on January 1, 2012, 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 June 2011, the FASB issued ASU 2011-05 –Comprehensive Income (ASC Topic 220)–Presentation of Comprehensive Income. This ASU requires companies to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments of this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and should be applied retrospectively. We adopted the requirements of this ASU on January 1, 2012 and presented the components of net income and other comprehensive income in two separate but consecutive statements.

In December 2011, the FASB issued ASU 2011-12 –Comprehensive Income (ASC Topic 220)–Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-05. This ASU defers those provisions in ASU 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income to allow the FASB time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. This ASU reinstates the requirements for the presentation of reclassifications out of accumulated other comprehensive income that were in place before the issuance of ASU 2011-05. The adoption of this ASU is not expected to have a material impact on our consolidated financial statements or results of operations.

In September 2011, the FASB issued ASU 2011-08 –Intangibles–Goodwill and Other (ASC Topic 350)–Testing of Goodwill for Impairment. ASU 2011-08 amends ASC Topic 350 to give entities the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a

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reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. ASU 2011-08 is effective for annual and interim impairment tests beginning after December 15, 2011. We adopted the requirements of this ASU on January 1, 2012, which did not have a material impact on our consolidated financial statements or results of operations.

In July 2012, the FASB issued ASU 2012-02 – Intangibles – Goodwill and Other (Topic 350) –Testing Indefinite-Lived Intangible Assets for Impairment. The provisions of this ASU permit an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform a quantitative impairment test in accordance with Subtopic 350-30, Intangibles – Goodwill and Other – General Intangibles Other Than Goodwill. This ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of this ASU is not expected to have a material impact on our consolidated financial statements or results of operations.

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ITEM3–QUANTITATIVE ANDQUALITATIVEDISCLOSURES ABOUTMARKETRISK

The quantitative and qualitative disclosures about market risk are included under “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations — Interest Rate Risk Management,” appearing on pages 68 through 71 of this report.

ITEM4–CONTROLS ANDPROCEDURES

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

PART II – OTHER INFORMATION

ITEM1–LEGALPROCEEDINGS

The information required by this item is set forth in Part I, Item 1 – Financial Statements, under Note 17, Contingent Liabilities, to our consolidated financial statements appearing elsewhere in this report and is incorporated herein by reference.

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

The Company and First Bank entered into agreements with the FRB and MDOF, as further described under “Item 2 —Management’s Discussion and Analysis of Financial Condition and Results of Operations —Regulatory Agreements” and in Note 11 to our consolidated financial statements.

ITEM1A–RISKFACTORS

Readers of our Quarterly Report on Form 10-Q should consider certain risk factors in conjunction with the other information included in this Quarterly Report on Form 10-Q. Refer to “Item 1A — Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011 for a discussion of these risks.

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ITEM6–EXHIBITS

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

Exhibit Number	Description
31.1	Rule 13a-14(a) / 15d-14(a) Certifications of Chief Executive Officer – filed herewith.
31.2	Rule 13a-14(a) / 15d-14(a) Certifications of Chief Financial Officer – filed herewith.
32.1	Section 1350 Certifications of Chief Executive Officer – furnished herewith.
32.2	Section 1350 Certifications of Chief Financial Officer – furnished herewith.
101	Financial information from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012, formatted in XBRL interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Comprehensive Income (Loss); (iv) Consolidated Statements of Changes in Stockholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements – furnished herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 2, 2012

FIRST BANKS, INC.
By:	/s/	Terrance M. McCarthy
		Terrance M. McCarthy
		President and Chief Executive Officer
		(Principal Executive Officer)
By:	/s/	Lisa K. Vansickle
		Lisa K. Vansickle
		Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

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